Podcasts Business Retirement Starts Today Should Private Equity Funds Have a Place in Your 401K? Ep # 147

Should Private Equity Funds Have a Place in Your 401K? Ep # 147

Published: July 6, 2020, 8 a.m.

Would you consider adding private equity funds to your 401K? We\u2019ll weight the pros and cons of this interesting idea as we explore the retirement headlines. No listener questions today, instead, this episode is all about the headlines. We have news about RMD\u2019s, private equity funds, tax strategy in retirement, and a shocking Fidelity study. Make sure to listen until the end to hear the surprise twist.

Outline of This Episode
  • [1:22] All unwanted RMD\u2019s taken in 2020 can be returned\xa0
  • [2:16] Including private equity funds in your 401K
  • [8:08] Many Retirees forget to plan for taxes in the long term
  • [10:35] A Fidelity study stated that \u2153 of investors over 65 moved their money out of stocks
What are private equity funds?

You may have heard of private equity funds before but many people aren\u2019t exactly sure what they are. So before we explore this retirement headline I want to define the term. Private equity funds are an investment class of their own which consists of capital that isn\u2019t listed on the public exchange. Whereas public equity involves buying shares on the stock exchange, private equity funds invest directly in private companies.\xa0

Do Private equity funds belong in your 401K?

Recently changes were made that opened the door to allow private equity funds into 401K plans. There are pros and cons to this idea. One positive is that they can provide added diversification to your investments. Another positive is the potential for increased returns.

However, there are 3 serious downsides you need to consider before adding private equity funds to your 401K.\xa0

  1. A lack of transparency - It\u2019s difficult to understand what you own when you own a private equity fund. Mutual funds are designed to be transparent, but with private equity, you won\u2019t have that same clarity.\xa0
  2. A lack of liquidity - With mutual funds, if you need cash out of your retirement account you could sell and have the funds within 3 days. However, it could take months to get your money out of a private equity fund.\xa0
  3. High fees - Private equity funds can charge 2 & 20 which means that they have a 2% annual fee and take 20% of your profits. This is a huge difference when compared to the ever-lowering fees of mutual funds.

Listen in to hear my opinion about private equity funds in your 401K.

Many Retirees forget to plan for taxes in the long term

The pandemic has caused many of us to reevaluate a number of things in our lives. One of those considerations was taxes. 59% of Americans surveyed said that they are more worried about taxes now than before. And 63% responded that it\u2019s more important to develop a tax strategy in retirement. I am a proponent of long-term tax strategy in retirement in conjunction with your yearly tax planning. My takeaway from this article is that it is important to get professional tax advice early on so that the taxman doesn\u2019t sneak up on you.\xa0

The importance of accurate reporting

The Wall Street Journal published an article that stated that \u2153 of investors over age 65 moved their money out of stocks. But the article published inaccurate data. Although the article was corrected, it took 3 days for the correction, an eternity in this time of instant news. Mistakes in reporting will inevitably happen which is why it is important to read news surrounding statistics and investing with a grain of salt. It\u2019s also important to be conscious of your own bias when reading news articles.\xa0

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