Category Archives: Retirement

Young people, don’t let this happen to you. Plan for retirement now!

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Young people, a.k.a. “Millennials,” have the time horizon that should allow them to save well, and thus avoid the need to save much more in later years. Otherwise, they will end up like those now nearing retirement that Theresa Ghilarducci describes in her 2012 article on retirement:

Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. The specter of downward mobility in retirement is a looming reality for both middle- and higher-income workers. Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day. See Our Ridiculous Approach to Retirement.

Acting now is crucial, but what do you do?

Step 1 – As a Millennial, accept that you need to start saving now and commit to acting. For encouragement, remember that:

The 35-year-old would need to boost her contribution rate to 9 percent to achieve the same result as the 25-year-old starter who was saving 6 percent. (from Retirment Saving for Young People) See You can Ignore Most Financial Planning Rules.

Step 2 – Identify how much you need to save by using a retirement calculator. There are many calculators you can use – see what we listed in The results from retirement calculations on different websites vary. Why?

Step 3 – Follow this hierarchy for how to set up accounts for your savings:

Start with your employer plan, 401(k), 403(b) or if you are self-employed, SEP-IRA. The contributions you make to a 401(k) or 403(b) are made from payroll deductions, so you never get a chance to spend this money. The deductions reduce your taxable income now, so the government is effectively helping you to save. Also, the amounts invested grow “tax sheltered,” meaning that you pay no tax on any interest, dividends and capital gains. However, when you retire and withdraw from the plan, you are taxed on that amount as regular income.

If you save more, use a Roth IRA next. Set up an auto debit from your checking to fund your Roth IRA, so contributing works like payroll deductions. The amount contributed to a Roth IRA is not deductible, but amounts withdrawn at retirement are not subject to income tax. The amounts invested grow tax sheltered.

Finally, if you still need to save more, set up a “taxable account,” meaning an account with no tax sheltering benefit. You can use auto-debit to add to this account.

Note: for the Roth IRA, you must qualify and have earned income from which to make contributions to the account. Also note that, for any of these tax sheltered plans, withdrawing funds before age 59½ may subject you to a 10% penalty in addition to income taxes, so do not fund any plan when you expect to need withdraw the money before retirement.

Step 4 – Invest. And when you invest, stick to the plan you set in place (this cannot be over-emphasized). The time to retirement is decades away so you can afford to take risks, some of which will take many years to pay off. If you panic and sell, you only lock in a loss; but if you weather the ups and downs, you will be far ahead. (see Don’t Let This Happen to You, Plan for Retirement Now)

Creating an asset allocation, where you diversify among stocks, bonds, real estate and cash. Include large cap, mid-cap and small-cap stocks, as well as international stocks. You man also include invest in real estate investment trusts (“REITs”) and hard assets. You can use exchange traded funds (“ETFs”). The low fees of ETFs leave more invested to grow, compared to high fee and load funds.

If you on-going advice, you may want to check out alternatives such as LearnVest and the new Future Advisor website.

5 Things Every Young Person Should Know About Retirement – You’ve got time, so use that time well!

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If you are young, you’ve got time, and if you use that time well, you may even make up for the possibility of no pension and no Social Security benefits.

1. You won’t have what your parents had – no pension and no social security. Millennials are the first post-war generation to face retirement with virtually no pension. Fewer than 7% of Fortune 500 companies offer pension plans to new hires. Also, the way that the Social Security system is currently funded, there will be no reserves by 2033. Social security benefits are paid to retirees from the tax withholdings of the current workforce and also from the Social Security Reserves. Once the reserves are depleted, it is estimated the tax revenues the collected at that time will only be enough to pay out three quarters of the scheduled benefits. There are measures Congress could take to head off this eventual depletion, like changing the benefit formulas, raising payroll taxes or increasing the cap on taxable wage income. Until any changes are actually implemented, don’t count on any benefits!

2. Learn how to save and spend – now! It’s never too late to adopt good spending and saving habits, and the sooner you do it, the better. The more you can set aside that is invested now, the better off you will be. Also, avoid accruing any high interest rate debts. You can make your coffee at home if that is what allows you to max-out contributions to your 401(k) plan, especially if your employer matches what you contribute. If you do not have employer-sponsored plan, open a Roth IRA or even a traditional IRA. It’s a lot easier to put money aside now than it is to play catch-up in your 40s. And you can set up auto-debits so the investments are made as soon as your paycheck hits your bank account – keeping it out of your shopping slush fund!

3. We’re living longer, healthier lives. Longer, healthier lives are good, but they also require more investments at retirement. If you hit the Social Security full retirement of 67 now, the Center for Disease Control estimates you will live to around 86. That’s 19 years of retirement that you need to fund. But, if you are younger, living a longer, healthier life, then you will likely live longer, requiring more funds, unless you choose to work later in your life.

4. The good news is you have time. The Center for Retirement Research at Boston College suggests that, by setting aside money at age 25, you will need to save only about 10% of your annual income to retire at 65. If you wait to save, the percentage you need each year increases. If you wait ten years, starting at age 35, your target savings increases to 15%. Wait until you’re 45 and you’ll need to save 27% of your annual income. Imagine if you were 55 today and wanted to retire at age 67? The message is: don’t wait!

5. You also have great resources. With smartphone apps and do-it-yourself trading services, investing is more accessible and less costly than ever. Also, there are more affordable investment products available like ETFs (see our post), so you avoid high fund manager fees. Saving on fees means more to grow for your retirement. Over the course of 40 years, those fund manager fees add up to real money.

In sum, start saving now. Set up a simple portfolio and adjust it as you go along. The time you’ve got now will reward you later!

Achieving a Better Life Experience Act – first look

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President Barack Obama recently signed the Achieving a Better Life Experience Act (ABLE Act). The ABLE Act allows individuals and families to open tax-free savings accounts to save for long-term needs associated with an individual’s disability.

These accounts are modeled after 529 college savings accounts. To qualify, a person must be diagnosed with a disability resulting in “marked and severe functional limitations” by the age of 26. An account can be established for an individual without jeopardizing that person’s eligibility for federal programs such as Medicaid. The funds saved in these accounts can be used for a variety of expenses including transportation, housing, employment support and health care.

Like 529 plans, earnings in these accounts grow tax-free, but contributions are made with after-tax dollars. Accounts can be set up at financial institutions and the annual contribution limit is $14,000. ABLE accounts are allowed to accrue up to $100,000 in savings without affecting a person’s eligibility for government aid such as Social Security. This is a great improvement for ABLE account holders over the current asset limit of $2,000. Medicaid coverage would continue no matter how much money is in the accounts.

These accounts can be a useful planning tool for those living with or caring for someone with a physical or developmental disability.

The real problem facing retirement plans? Not saving enough

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Recently, two debates have been brewing over 401(k) plans. Specifically, are they too expensive and should we cap the amount Americans can accumulate in the total balance of their defined benefit and defined contribution plans as well as IRAs. Is that really where the debate should be?
A recent PBS.org retirement study revealed some alarming statistics about Americans’ retirement savings habits. Specifically 30% of workers have $0.00 in retirement savings and 40% are currently not saving anything for retirement. Even factoring in Social Security, the average savings shortfall of a U.S. household will be $250,000 at retirement.
For many, if they are contributing to their retirement plans, they are contributing too little. The current belief that contributing just enough to maximize an employer’s contribution will fund your retirement is irresponsible. Only a small number of Americans will amass $1million in their retirement plans by the time they retire. According to Don Phillips in his recent Morningstar article, Fighting the Wrong War, “At a 4% withdrawal rate, $1 million in savings will provide just $40,000 a year.”
While the cost of the plans and amount we can accumulate in our retirement plans can be interesting debates, they don’t address the real issue. Will we, as future retirees, be able to fund our own retirement?

Tax Planning – take the IRA distribution or defer?

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Here is another year-end tax planning issue for people taking the required minimum IRA distributions:

Do you defer as the 2009 law allows or do you take it now because tax rates will be going up?

Input from Kiplingers is reprinted below.

For me the issue is alternate sources of cash flow. If you can defer, even against rising rates, that usually pays off because of the compounding of sheltered growth

However, this depends on how you have invested as well as your cash flow needs so everyone has to review

Thanks,

Steven Contact

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To Tap or Not to Tap Your IRA

You can skip your distribution this year and save on taxes.
By Mary Beth Franklin, Senior Editor, Kiplinger’s Personal Finance
November 25, 2009

If you are at least 70½ years old, you normally must take a taxable distribution from your traditional IRA or employer-provided retirement plan by the end of the year — whether you need the money or not — or face a stiff penalty equal to half of the amount you failed to withdraw. But this year is different. Uncle Sam says you can skip your required minimum distribution for 2009. (Employees who continue working past age 70½ are not subject to mandatory distributions from their company plans until they retire, but they still must take distributions from their IRAs.)

IRA owners who turned 70½ between July 1 and December 31 would normally have to take their first distribution by April 1, 2010. But thanks to the waiver, they can skip that, too, delaying their first mandatory-distribution deadline until December 31, 2010.

Related Links

* The New Roth Rollover Rules

And if you tapped your IRA earlier in the year and now regret it, the usual 60-day rollover period, which allows you to redeposit the money tax- and penalty-free, has been extended to November 30. But there’s a catch: You are allowed to put one IRA withdrawal back into the account within 365 days. So if you received regular distributions every month, for example, then you can put only one of the withdrawals back in. If you received the money in a lump sum, however, then you can put it all back (including any taxes withheld from the distribution; otherwise it will be considered a distribution and will be taxed as ordinary income).

The one-year moratorium on mandatory distributions also applies to owners of inherited IRAs and other retirement accounts. For example, if you inherited your mother’s IRA and planned to take annual distributions based on your own life expectancy, you can forgo this year’s withdrawal. Or if you follow another set of distribution rules that require you to empty an inherited IRA by the end of the fifth year after the owner’s death, you now have an additional year to do so.

Although there are no required minimum distributions for Roth IRA owners — regardless of age — nonspouse beneficiaries who inherit a Roth are subject to the mandatory distributions. They can skip this year’s withdrawal, too.

Of course, you can tap your traditional IRA this year if you wish and pay taxes at your ordinary rate on the entire amount you withdraw. But if you don’t need the money, there are several advantages to skipping a distribution for 2009. Keeping your money invested in a tax-deferred IRA will give your account even more to time to recover from the worst market collapse since the Great Depression. Plus, not taking an IRA distribution this year could reduce the tax bill on your other income. You might be able to trim the amount of your Social Security benefits that are taxed, and with a lower income, you may be eligible for other tax breaks that you normally can’t use, such as deducting medical expenses in excess of 7.5% of your adjusted gross income.

You can still opt to send up to $100,000 of your IRA distribution directly to a charity. While you can’t double-dip and deduct the donation as a charitable contribution, the amount will not be added to your taxable income.

Another option: Because you aren’t required to withdraw the money this year, you may want to roll some of it into a Roth IRA. (See more on Roth IRA choices here.) You’ll have to pay taxes when you make the switch, but you can take tax-free withdrawals after five years, you never have to take required minimum distributions, and you can create a tax-free inheritance for your heirs. You don’t need earned income to convert a traditional IRA to a Roth, but to qualify, your income — not counting converted amounts — can’t top $100,000 in 2009.

Tags: Roth IRAs and Roth 401(k)s Making Your Money Last, Saving for Retirement, Tax Breaks, Tax Planning

Let us know if you have questions or comments. Thanks,

Steven