Is a Large 401k Problematic?

Is a Large 401k Problematic?

As financial advisors one of our primary goals is to coach our clients to save and invest, while directing those savings to the most beneficial accounts possible.

In the modern era that typically means saving as much in your 401k or employer sponsored plan as possible.  While pre-tax 401k contributions can save you significant dollars now while also providing the benefit of tax deferred growth, often times a high contribution rate means making some sacrifices on the spending side now.  So the question arises, can making these deferrals now actually lead to a problem later on?

Is a Large 401k Problematic?

I recently read an article that described one of the issues associated with a very large 401k.

The main problem that can arise is when you turn 70 ½ and Required Minimum Distributions must begin.  If you have other significant sources of retirement income such as pensions and Social Security, you may not even need these RMDs to make ends meet.  Regardless, the IRS requires you to take out a predetermined amount every year and pay tax on it.  This has the potential to push you into a higher tax bracket.  This is true, but for most of us saving in 401k plans today, we will not have a defined pension benefit, so we will be heavily reliant on what we have saved in our 401ks.  The best strategy to reduce taxes in the post 70 ½ years is to plan for them prior to and throughout retirement.

This is why it requires continuous attention to monitor your overall financial situation and tailor strategies accordingly.  Ideally during your working years, you will be saving in multiple different types of accounts:

  • Traditional and Roth IRAs
  • 401ks
  • 403bs
  • Employee Stock Ownership Plans (ESOPs)
  • taxable brokerage accounts
  • deferred compensation arrangements

Having multiple types of accounts with varying tax ramifications gives you the ultimate flexibility for retirement income planning.

Related: 5 Critical Questions You Need to Ask a Potential Financial Advisor

Financial Independence

Saving diligently in your 401k and other accounts may even allow you to retire early or scale back your workload, which can present additional tax savings opportunities.  When retiring prior to drawing Social Security, there is the potential for your tax bracket to plummet.  This is a huge opportunity for long term tax optimization.

These years are an ideal time to convert some of those pre-tax 401k and IRA savings to Roth and/or realize long term capital gains at a lower tax rate.  Roth conversions in these years will reduce the size of those tax deferred accounts which will also reduce the tax implication described above.  Even after age 70 ½, if you still don’t need your full RMD to live on, there may be the opportunity to avoid taxation by directing that amount to a charity through a Qualified Charitable Distribution (QCD).

There are of course some downsides with 401ks which we have pointed out in the past, but I always worry that focusing on the negative aspects of the plans discourages people from saving and investing.  In most cases the 401k plan is the most effective wealth building tool at your disposal.  If you have questions about your savings, investment, or retirement income strategy, please contact us to discuss the best path for your personal situation.

Allison Berger
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Allison utilizes her 10+ years of experience with Financial Symmetry working with clients to provide custom financial strategies to help them achieve their goals. Sh ... Click for full bio

China's Push Toward Excellence Delivers a Global Robotics Investment Opportunity

China's Push Toward Excellence Delivers a Global Robotics Investment Opportunity

Written by: Jeremie Capron

China is on a mission to change its reputation from a manufacturer of cheap, mass-produced goods to a world leader in high quality manufacturing. If that surprises you, you’re not the only one.

For decades, China has been synonymous with the word cheap. But times are changing, and much of that change is reliant on the adoption of robotics, automation, and artificial intelligence, or RAAI (pronounced “ray”). For investors, this shift is driving a major opportunity to capture growth and returns rooted in China’s rapidly increasing demand for RAAI technologies.

You may have heard of ‘Made in China 2025,’ the strategy announced in 2015 by the central government aimed at remaking its industrial sector into a global leader in high-technology products and advanced manufacturing techniques. Unlike some public relations announcements, this one is much more than just a marketing tagline. Heavily subsidized by the Chinese government, the program is focused on generating major investments in automated manufacturing processes, also referred to as Industry 4.0 technologies, in an effort to drive a massive transformation across every sector of manufacturing. The program aims to overhaul the infrastructure of China’s manufacturing industry by not only driving down costs, but also—and perhaps most importantly—by improving the quality of everything it manufactures, from textiles to automobiles to electronic components.

Already, China has become what is arguably the most exciting robotics market in the world. The numbers speak for themselves. In 2016 alone, more than 87,000 robots were sold in the country, representing a year-over-year increase of 27%, according to the International Federation of Robotics. Last month’s World Robot Conference 2017 in Beijing brought together nearly 300 artificial intelligence (AI) specialists and representatives of over 150 robotics enterprises, making it one of the world’s largest robotics-focused conference in the world to date. That’s quite a transition for a country that wasn’t even on the map in the area of robotics only a decade ago.

As impressive as that may be, what’s even more exciting for anyone with an eye on the robotics industry is the fact that this growth represents only a tiny fraction of the potential for robotics penetration across China’s manufacturing facilities—and for investors in the companies that are delivering or are poised to deliver on the promise of RAAI-driven manufacturing advancements.

Despite its commitment to leverage the power of robotics, automation and AI to meet its aggressive ‘Made in China 2025’ goals, at the moment China has only 1 robot in place for every 250 manufacturing workers. Compare that to countries like Germany and Japan, where manufacturers utilize an average of one robot for every 30 human workers. Even if China were simply trying to catch up to other countries’ use of robotics, those numbers would signal immense near-term growth. But China is on a mission to do much more than achieve the status quo. The result? According to a recent report by the International Federation of Robotics (IFR), in 2019 as much as 40% of the worldwide market volume of industrial robots could be sold in China alone.

To understand how the country can support such grand growth, just take a look at where and why robotics is being applied today. While the automotive sector has historically been the largest buyer of robots, China’s strategy reaches far and wide to include a wide variety of future-oriented manufacturing processes and industries.

Related: Smooth Tomorrow's Market Volatility With a Smart Approach to Robotics & AI

Electronics is a key example. In fact, the electrical and electronics industry surpassed the automotive industry as the top buyer of robotics in 2016, with sales up 75% to almost 30,000 units. Assemblers such as Foxconn rely on thousands of workers to assemble today’s new iPhones. Until recently, the assembly of these highly delicate components required a level of human dexterity that robots simply could not match, as well as human vision to help ensure accuracy and quality. But recent advancements in robotics are changing all that. Industrial robots already have the ability to handle many of the miniature components in today’s smart phones. Very soon, these robots are expected to have the skills to bolster the human workforce, significantly increasing manufacturing capacity. Newer, more dexterous industrial robots are expected to significantly reduce human error during the assembly process of even the most fragile components, including the recently announced OLED (organic light-emitting diode) screens that Samsung and Apple introduced on their latest mobile devices including the iPhone X. Advancements in computer vision are transforming how critical quality checks are performed on these and many other electronic devices. All of these innovations are coming together at just the right time for a country that is striving to create the world’s most advanced manufacturing climate.

Clearly, China’s trajectory in the area of RAAI is in hyper drive. For investors who are seeking a tool to leverage this opportunity in an intelligent and perhaps unexpected way, the ROBO Global Robotics & Automation Index may help. The ROBO Index already offers a vast exposure to China’s potential growth due to the depth and breadth of the robotics and automation supply chain. As China continues to improve its manufacturing processes to meet its 2025 initiative, every supplier across China’s far-reaching supply chains will benefit. Wherever they are located, suppliers of RAAI-related components—reduction gears, sensors, linear motion systems, controllers, and so much more—are bracing for spikes in demand as China pushes to turn its dream into a reality.

Today, around 13% of the revenues generated by the ROBO Global Index members are driven by China’s investments in robotics and automation. Tomorrow? It’s hard to say. But one thing is for certain: China’s commitment to improving the quality and cost-efficiency of its manufacturing facilities is showing no signs of slowing down—and its reliance on robotics, automation, and artificial intelligence is vital to its success.

Want all the details? Download the ROBO Global Investment Report - Summer Brings Best ROBO Earnings in Six Years or visit us here.

ROBO Global
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ROBO Global LLC is the creator of the ROBO Global® Robotics and Automation Index series, which provides comprehensive, transparent and diversified benchmarks representing the ... Click for full bio