by Pete McAllister | Accounting News, IRS, News, Retirement, Tax, Tax Planning - Individual
Depending on where you are in life, trying to anticipate your financial needs in retirement and determining how exactly to get to that point could feel like a daunting task, or even a task that doesn’t need tackling yet. In fact, according to a study completed by The Alliance for Lifetime Income, only 28% of non-retired Americans have attempted to estimate their retirement income. Not as intimidating as it sounds, read on to learn how to estimate those needs.
Start with Your Current Income
If you’re living within your means and not depending on credit cards to maintain your lifestyle, using your paycheck as a benchmark is a sufficient starting point. This, of course, excludes contributions to a traditional 401(k) account as well as health insurance premiums that are deducted from your gross pay. A common and simple approach, then, is to set your desired annual retirement income at 60% to 90% of your current income. However, it doesn’t take a financial expert to note potential flaws with this approach. What if, for example, you plan to travel extensively during retirement? Planning for 60% to 90% of your current income might not be enough to fulfill your jet setting goals.
Forecast Retirement Expenses
Your annual retirement income should be more than enough to meet your daily living expenses. Keep in mind that the cost of living will increase over time, and insurance and health care could fluctuate. Having said that, some common retirement expenses to estimate include:
- Food and clothing
- Housing (mortgage, homeowners insurance, rent, property updates, repairs, etc.)
- Utilities
- Transportation (car payments, insurance, maintenance, gas, repairs, public transportation)
- Insurance (medical, dental, life, etc.)
- Health care costs not covered by insurance (deductibles, copayments, etc.)
- Taxes
- Debts and loans
- Recreation such as travel, hobbies, and dining out
What to Do with Your Projected Retirement Income Needs?
A standard rule of thumb when talking about estimating retirement income needs is to have 25 times your anticipated annual expenses saved up by the time you retire. This is assuming you’re planning for a 30-year retirement. Theoretically, you could then withdraw 3% to 4% of your nest egg each year.
If you’re lacking additional sources of protected lifetime income, such as pensions or annuities, you may need to tap into savings in order to bridge the gap between social security checks and what you’ll need to live on. You could also buy a simple income annuity to cover part of that funding gap. These payments continue for life, thereby removing some of the guesswork of estimating retirement income needs and providing peace of mind.
by Daniel Kittell | News, Retirement, Tax Planning - Individual
“Set it and forget it” is a common approach when it comes to a workplace 401(k), yet it likely will play a substantial role in the financial security of your future. Consistently contributing to your 401(k), and learning how to manage it, will set you on the course to living golden in your retirement years. Below are some tips to help you make the most of your workplace 401(k).
Contribute to the Match
Employers often match contributions up to a certain point, which means you’re getting free money for participating in the program. You should contribute at least up to this point. Beyond this, a typical rule of thumb is to add about 15% to your 401(k) plan each year, including company contributions (i.e. if your company matches 3%, plan to contribute 12%).
Boost Your Investment Savvy
Expense Ratio? Risk Tolerance? Whether you’re going it alone or recruiting the help of a financial professional, you need to have a basic knowledge of investing. Before filing away the information sent to you by your plan, be sure to read through it and look up any terms you don’t understand.
Get Help with Account Management
Of course, having a basic understanding of investment terms will take you only so far. If your investment knowledge is shaky, it might be worth it to recruit the help of a professional. Some 401(k) plans even offer free advice from a professional, or they will provide model portfolios to follow.
Save with a Target Date Fund
The simplest approach to a 401(k) plan is to allocate savings to the target date fund with the date that corresponds to the year closest to the year you reach age 65. With this low maintenance approach, the fund automatically adjusts as you get closer to retirement.
Learn to Rebalance
If you’re not partaking in the target date fund, you will need to perform routine maintenance on your 401(k), which is what “rebalancing” means. Provided you have a mix of stocks and bonds, you will have to buy and sell assets as they move up or down in value. Generally, participants have the option to automatically rebalance through your plan’s website, typically with a quarterly or annual rebalancing.
Rethink Withdrawals
Though you may be able to take a loan from your 401(k), they usually have to be paid back within five years, with interest. The risks of borrowing from your 401(k) come when you lose your job or change employers, because the loan will be due almost immediately. If you can’t repay the loan, you’ll be taxed and burdened with a 10% penalty for early withdrawal. Not to mention, by taking out a loan on your 401(k), you are shortchanging your retirement savings in a way that could be extremely difficult to catch up.
Mix It Up
Your 401(k) should be only one prong in your retirement plan. Your home and other assets, funds from a side hustle, and other investment accounts like an IRA might be additional prongs that make a complete picture of your financial future. Spreading your assets over multiple income streams will yield better returns, so if you switch jobs at some point, consider whether rolling your 401(k) into your new employer’s plan makes the most sense for your situation, or if you should put those funds into an IRA, which may give your more investment options.
by Stephen Reed | Accounting News, News, Retirement, Tax, Tax Planning - Individual
The House of Representatives recently voted to approve the Setting Every Community Up for Retirement Enhancement or SECURE Act, which would expand access to retirement savings programs for part-time workers and people employed by small business owners.
If the SECURE Act Passes…
If the bill passes the Senate, which it’s expected to do, it will be placed on President Trump’s desk. If signed into law, the SECURE Act would implement the most significant changes to retirement plans since 2006.
The bill aims to entice non-savers to participate in workplace retirement programs, such as a 401(k), so some of the provisions include:
- Raising the age that American workers must start withdrawing from retirement savings, known as the required minimum distribution age, from 70 ½ to 72. This is to reflect the fact that more Americans are working longer, and in this vein, the bill also stipulates more years for people to contribute to retirement accounts.
- Increasing tax incentives for small business employers to offer retirement plans by increasing the tax credit for new plans from the current cap of $500 to $5,000, or $5,500 for plans that automatically enroll new workers.
- Allowing part-time workers to participate in 401(k) plans. The current minimum requirement for part-time employees is 1,000 hours in a 12-month period, but the SECURE Act would amend this requirement to 500 hours, effective January 2021. However, this isn’t mandatory, so it would be at the discretion of the employer.
The SECURE Act would also permit parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses. Parents could also withdraw up to $10,000 from 529 plans to repay student loans.
What Does the Federal Reserve Say?
According to the Federal Reserve’s annual study, only 36% of Americans feel that their retirement savings are on track, while 25% of Americans have no retirement savings to speak of. Part of this is due to the fact that, because of the cost and complexity of putting retirement savings plans in place, many small businesses don’t offer such plans to their employees. The SECURE Act aims to incentivize small business owners to offer retirement plans by making it easier for small businesses to implement multi-employer retirement plans—where two or more employers join together to offer a plan. This would potentially give small businesses access to lower cost plans with better investment options, thereby possibly giving millions more workers an opportunity to save at work.
In short, this legislation is important because it would remove some barriers that have kept American workers from saving for retirement, specifically through employer-provided plans and incentives. If you have questions or would like to talk about how the information in this article may impact you personally, please reach out to me at [email protected] and we’ll schedule a time to talk.
by Pete McAllister | News, Retirement, Tax Planning - Individual
You don’t need a high-bracket income when it comes to saving more for retirement. What you need, regardless of income level, is discipline. The following tips can help average workers save more and build the kind of wealth that will support them after leaving the workforce.
Automate the Process
A lot of employers offer the option of diverting a percentage of your paycheck directly into your 401(k) account. This takes the guesswork and mental energy out of saving for retirement and puts the process on autopilot. And employers will often match your contribution up to a certain percentage.
Contribute to an IRA
If you don’t have access to an employer-sponsored account, or want something in addition to your 401(k) account, you might think about opening an individual retirement account. You can contribute up to $6,000 per year ($7,000 for those 50 years and older) to an IRA. Keep in mind, while single employees are able to contribute the maximum to a 401(k) and an IRA in the same year, married couples may have some limitations if both participate in a work-sponsored plan. The rules may also be slightly different for a Roth IRA account.
Be Resourceful
Part-time gigs and side hustles are more popular than ever thanks to the internet and smart phones. If you’re diligent with saving the earnings from a secondary income, it can grow over time. You can also use the funds from side gigs to pay off debt, which will open up your budget to allocate more for retirement savings. For example, bringing in an extra $100 a week equals out to $5,200 a year. From selling your possessions on eBay or Facebook Marketplace to offering a service such as dog walking, car detailing, or tutoring, the possibilities of earning extra income are dependent upon your time, talents, and abilities, but the monetary results have real potential to make an impact on your financial future.
Take Control
According to a 2016 study by U.S. Bank, nearly three out of five American families don’t utilize a budget, but a planned budget can cut down on excessive spending and keep your finances in check on a weekly or monthly basis. Impulse buys (no matter how large or small), add up, as do regular dinners out, pressure to keep up with the Joneses, and unforeseen expenses that crop up here and there. Without a budget and a plan for dealing with the unexpected, it won’t take long for your financial grip to unhitch, sometimes leading to seemingly unsurmountable debt. And debt has the power to undermine your retirement savings potential, either temporarily or for much longer.
With free online budgeting plans, myriad ways to earn some extra income, and a commitment to saving, almost anyone can make saving for retirement an attainable goal.
by Jean Miller | Accounting News, News, Retirement, Tax, Tax Planning - Individual
Mismanaged money, investment duds, a blown budget (or no budget), bad habits, the proverbial hole in your pocket. If financial regrets weren’t a thing, we wouldn’t need the Dave Ramseys of the world, but there’s a difference between splurging on an artisan cup of coffee and making a financial blunder that could have ramifications for years to come.
Some red flags that you’re about to jump into a bad financial decision include needing to justify your rationale, a lack of thorough research and homework, depending on a payment you haven’t received, falling for a too-good-to-be-true scheme, and not paying attention to that internal tugging known as instinct. You might say that you’re effectively ignoring these red flags if you’re tempted by any of the following common financial mistakes that could cause long-term consequences.
Taking a Loan from a 401(k)
Yes, you usually have five years to pay it back, and yes, it’s your money after all, but those who borrow from their 401(k) usually reduce or suspend contributions while they’re repaying the loan. This means they’re going months or even years without contributions, missing out on investment growth and company matches. Not to mention the interest on the 401(k) loan. It’s also a gamble because if you leave your company, the loan must be repaid within 60 days.
Claiming Social Security Early
Waiting until age 70 to tap into your Social Security is your best bet, but it’s generally recommended to wait at least until your full retirement age (currently 66-67). The earliest age to withdraw benefits is 62, but your monthly check would be reduced by approximately 25% for the rest of your life.
Making the Minimum Payment on Credit Cards
With mounting interest costs, it can take years to pay off credit card debt, especially if consumers continue to spend with credit cards while only paying the minimum payment. If possible, transfer the balance to a lower-rate card, and always try to pay more than the minimum payment due. Even a small increase in monthly payments can save you on interest.
Not Saving for Retirement
Unless you’re fresh out of college, you should start saving for retirement yesterday. Don’t think you can wait until you start making more money. According to Morningstar, and assuming a 7% annual rate of return, someone who starts saving for retirement at 25 years old would need to save $381 a month to hit $1 million by the time they turn 65. Compare that to someone who starts saving for retirement at 35 ($820 a month) or 45 ($1920).
Foregoing Professional Advice
Do you have a valid will? Have you legally appointed beneficiaries for your retirement accounts? Financial advisors will help with this as well as anything from taxes and insurance to retirement savings and estate planning.
Refraining from Investing
Sure, there’s risk involved, but by diversifying your investment in a mix of large, small, domestic, and foreign stocks, you reduce the possibility of getting hit with a big loss. Perplexed on where to begin? See “Foregoing Professional Advice” above.
And while your nest egg should keep growing after retirement, most financial planners recommend decreasing risk by gradually pulling away from investing in stocks.
Falling for Scams and Raw Deals
According to the FTC, Americans lost a collective $765 million to telephone, text, mail, email and face-to-face scams in 2015. Requests to wire money; or pay fees before receiving anything; or provide personal information, bank information, or sensitive financial information should be met with extreme skepticism. If you suspect a scam, conduct a quick Google search with any information you have on the product or company, including key words like “scam” or “review”. If your suspicion is confirmed, be sure to file a complaint with the FTC and your local consumer protection office.
