Smart Money Moves to Make If You’re Worried About Depleting Your Savings in Retirement

Smart Money Moves to Make If You’re Worried About Depleting Your Savings in Retirement

Retirement should be a time to finally relax, but concerns about depleting savings can cast a shadow over your golden years. In this article, we’ll delve into smart money moves that can help ensure a more secure and comfortable retirement.

Set Up a Safe Withdrawal Rate

A safe withdrawal rate is the percentage of your retirement savings that you can tap into annually without risking running out of money during your lifetime. A common strategy is the 4% rule, which suggests withdrawing 4% of your retirement savings each year, creating a sustainable income stream while preserving your principal. This approach takes into account market fluctuations and adjusts your withdrawals accordingly. For example, in thriving market conditions, you might withdraw a bit more, while in downturns, you might cut back.

Diversifying your investments is another key factor in managing the safe withdrawal rate. A well-balanced portfolio can help mitigate risks and generate returns, ensuring that your retirement savings remain resilient over time.

Delay Social Security

You are eligible to receive your full Social Security benefit, determined by your individual earnings history, upon reaching full retirement age (FRA), which varies depending on your birth year. However, opting to postpone your application beyond FRA offers the advantage of increasing your monthly benefits by 8% annually, up to the age of 70.

While an increased Social Security benefit doesn’t necessarily ensure your savings won’t deplete, the extra funds each month would contribute to preserving your savings and maximizing your overall retirement income.

Annuities

Annuities are financial products designed to provide a steady income stream during retirement. They can be an excellent option for those worried about outliving their savings. Annuities come in various forms, such as immediate annuities and deferred annuities, each offering distinct advantages.

Immediate annuities involve a lump-sum payment in exchange for guaranteed monthly payments for life. This can be a reliable way to secure a fixed income stream, regardless of market fluctuations. Deferred annuities, on the other hand, allow you to invest a sum of money that grows over time and is converted into periodic payments later in retirement.

Annuities provide a predictable cash flow, but be sure to carefully evaluate the terms and conditions, fees, and potential risks associated with them before making a decision. Also keep in mind that, unlike Social Security, annuities work on a fixed amount and don’t adjust with inflation. Consulting with a financial advisor can help you navigate the complexities and choose an annuity that aligns with your financial goals.

Securing a worry-free retirement requires thoughtful planning and smart financial strategies that are tailored to your unique circumstances. Consult with a financial professional to ensure that your retirement plan aligns with your long-term goals.

Here’s What to Do with Your 401(k) if You Leave Your Job or Get Laid Off

Here’s What to Do with Your 401(k) if You Leave Your Job or Get Laid Off

At some point in your employment journey, you’re going to find yourself at a crossroads – whether you voluntarily quit a job for a new position or face an unexpected layoff. Amidst the emotional and logistical challenges of these changes, one crucial aspect that requires attention is your 401(k) plan with your former employer. Here’s how to manage your 401(k) plan when employment changes.

Assess Your Options

When you leave your current job, you need to evaluate your available options for your 401(k). Typically, these are your main options:

  1. Leave it be: In some cases, leaving your 401(k) with your former employer may be a viable option, especially if you’re content with the plan’s performance and fees. This option is often convenient and allows you to maintain the tax-advantaged status of your retirement savings. However, you won’t be able to make additional contributions, and you’ll need to manage the account independently.
  2. Roll it over into your new employer’s plan: If your new employer offers a 401(k) plan and allows rollovers, transferring your 401(k) to your new employer’s plan would allow you to consolidate your retirement savings, making it easier to manage. Be sure to research the fees and investment options of the new plan before making a decision.
  3. Roll it over into an Individual Retirement Account (IRA): Transferring your 401(k) funds to an IRA provides more control over your investments and may offer a broader range of investment options compared to employer-sponsored plans. IRAs are not tied to your employer, offering flexibility and portability. Be mindful of fees and investment choices when selecting an IRA provider.
  4. Cash Out: While it’s possible to cash out your 401(k) when you leave a job, it’s generally not advisable. Cashing out comes with tax consequences, including penalties for early withdrawal if you’re under 59 ½. Additionally, you’ll miss out on the potential long-term growth of your investments.
  5. Convert it to a Roth IRA: If you’re willing to pay taxes upfront, you can convert your traditional 401(k) into a Roth IRA. You will pay income taxes on the amount converted, but qualified withdrawals in retirement are tax-free. This option may be beneficial if you expect to be in a higher tax bracket in the future.

Understand Tax Implications

When contemplating what to do with your 401(k), it’s important to understand the tax implications that could be triggered. Cashing out, as mentioned, may trigger taxes and penalties. On the other hand, transferring your funds without a direct rollover may result in mandatory withholding. To avoid unexpected tax bills, consider consulting with a financial advisor who can offer guidance based on your personal situation.

Stay Informed About Deadlines

The different options available for your 401(k) are all subject to different deadlines. Missing these key deadlines could limit your choices. Some plans may require you to take action within a certain timeframe, so it’s imperative to stay informed about these deadlines to make the most informed decision possible.

Seek Financial Advice

Navigating the management of a 401(k) plan on top of a job transition can be stressful. A financial advisor will be able to offer valuable insights tailored to your specific circumstances. They can help you weigh the pros and cons of each option and guide you toward a move that aligns with your long-term financial goals.

How Social Security’s COLA Predicted for 2024 Could Affect Retirees

How Social Security’s COLA Predicted for 2024 Could Affect Retirees

Every October, retirees and individuals planning for their retirement expect the Social Security Administration to announce the cost-of-living adjustment (COLA) for the following year. The COLA aims to counteract the eroding effects of inflation on retirees’ purchasing power. In this article, we go over how the anticipated COLA for 2024 could affect American retirees.

Understanding the COLA

The COLA for Social Security benefits is determined each year by using a specific formula that takes into account changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is a measure of inflation that reflects the average change in prices paid by urban consumers for a predetermined “market basket” of goods and services. The goal of COLA is to ensure that Social Security benefits keep up with the rising cost of living, so that the purchasing power of beneficiaries is maintained over time.

Anticipated COLA for 2024

The exact COLA for 2024 will not be officially announced until October, but early predictions suggest a raise of 3% for 2024. That would boost the average Social Security retirement benefit by about $55 a month in 2024.

COLA Fluctuation

A 3% raise would be a significant shift from the previous two years, which saw COLA adjustments at 5.9% and 8.7%. These adjustments raised the average retirement benefit by $92 in 2022 and $146 this year. Compared to these percentages, some might consider a 3% raise a disappointment, but it’s important to remember that annual COLA calculations are meant to offset the price increases consumers have faced since the previous year’s COLA was determined. Therefore, a 3% raise would be a sign that inflation is cooling.

It’s also important to point out that a 3% raise is still above average. Looking at the last two decades, the average inflation adjustment for Social Security benefits was 2.6%, and three of those years – 2010, 2011, and 2016 – saw no adjustment at all. Even so, when comparing this year’s 8.7% hike to the projected 3% for next year, retirees on a tight budget will feel the difference.

How Social Security Beneficiaries Can Still Benefit

Retirees may be temporarily profiting from the COLA raises in these latter years, and those who are able to increase savings for the remainder of 2023 are in a position to benefit. With 15-year highs in interest rates on certificates of deposit and money market savings accounts, retirees may want to think about transferring available assets to these safe saving vehicles as they offer a better rate of return than traditional savings accounts.

The Secure Act 2.0 Delayed the Starting Age for Required Minimum Distribution, but is This a Good Move?

The Secure Act 2.0 Delayed the Starting Age for Required Minimum Distribution, but is This a Good Move?

The passage of the Secure Act 2.0 in December of 2022 pushed back Required Minimum Distribution (RMDs) from age 72 to age 73 in 2023 (and age 75 in 2033). While proponents of this move argue that it provides advantages, such as allowing individuals more time to accumulate wealth in their retirement accounts, others warn that it could be a tax trap. Below we explore the potential pitfalls and drawbacks of this delay.

More Income Tax and Higher Medicare Premiums

While proponents argue that individuals will have more time to accumulate wealth in their retirement accounts without being required to withdraw a specific amount each year, it’s important to remember that RMDs are subject to income tax. By delaying the distributions, you risk ending up with significantly larger distributions in the future, resulting in higher tax liabilities when you eventually begin taking withdrawals. This could potentially push you into a higher tax bracket, increasing your overall tax burden and possibly negatively impacting what you pay for your Medicare premium as this is always based on your taxable income from two years prior.

Higher Tax on Social Security Benefits

If you have taxable income as well as Social Security benefits, such as your RMD, that can affect how much your Social Security benefit is taxed. If your adjusted gross income is more than $25,000 for single filers ($32,000 for joint filers), your Social Security payments can be taxable. If an eventual RMD will trigger that tax, an earlier withdrawal from your account may be the better move.

Consequences for Beneficiaries

Delaying RMDs could have unintended consequences for beneficiaries of inherited retirement accounts. Under current rules, non-spouse beneficiaries must withdraw the funds within ten years of the account owner’s death. This means that heirs who inherit the deceased owner’s account must distribute the entire account in 10 years. If those heirs are in their prime working years, they could likely pay a federal tax rate of 24% to 37%, plus another 3% to 12% in state income taxes. And the distributions could push their “other income” above the income thresholds ($200,000 for single filers and $250,000 for joint filers). By delaying RMDs, you could be dumping a hefty tax bill on your heirs.

Times in Life When You Should Pause or Slow Down on Saving for Retirement

Times in Life When You Should Pause or Slow Down on Saving for Retirement

Saving for retirement is an essential financial goal, but there are certain circumstances in life when it may be best to push pause on retirement contributions. By recognizing these situations, you can better allocate resources and make informed decisions. Below we discuss the times in life when slowing or pausing retirement savings goals could be the right call.

Debt and Financial Stability

If you are burdened with high-interest debt, such as credit card debt or student loans, it’s important to allocate more funds towards debt repayment before saving for retirement. Reducing debt obligations will improve your financial stability and free up resources for retirement savings in the future.

Job Loss or Career Transition

If you’ve lost your job, it’s a good idea to pause retirement contributions temporarily until your financial situation has improved and you are once again steady in the workforce. When you decide to restart retirement savings, be sure to take advantage of any 401(k) matches that your new employer may provide.

Likewise, when you are in a career transition, whether that be changing your career path or starting a new business venture, it might be necessary to redirect funds to supporting your career goals or acquiring new skills in your industry.

The above situations might call for a pause on retirement savings, but not a full stop. If you are in a position of needing to pause retirement savings, it’s essential to have a plan to resume saving once the transition is complete and you are back on your feet.

Major Life Events and Unforeseen Circumstances

Life happens, and sometimes we’re faced with a financial hardship. Unexpected medical expenses and major life events, such as having a child or making a cross-country move, can impact your finances. During these times you may need to adjust your retirement savings strategy to meet these needs. Pausing or slowing down retirement savings temporarily can provide flexibility while protecting some financial stability. Once you’re back on your feet, you can revisit your retirement savings strategy and make adjustments accordingly.

The above examples are all valid reasons to readjust your financial priorities and push pause on saving for retirement. By recognizing these situations and making informed decisions, you can maintain a financial balance and step up your retirement savings game once you’re in a less financially tumultuous phase of life.