Retirement Misconceptions  
July 29th, 2008

There has been significant study recently on the outlook for retirement and the growing list of misconceptions is interesting to say the least.  A 2008 study released by the non-profit MetLife Mature Market Institute highlighted some critical issues that those in the retirement planning mindset need to consider:

1. 69% of pre-retirees responding overestimate how much they can draw down from their savings.  Of further concern is that 43% believe that they can take 10% or more while still preserving their principal.  This is in stark contrast to the 4% annual withdrawal level that most retirement experts suggest for retirement.
2. Despite increased life expectancy, the study also found that 60% underestimate life expectancy which is further concerning aligned with number 1 above.
3. There also is an underestimate as it relates to income needs in retirement with 49% missing the mark on this projection.
4. The study also finds that men and women differ on their outlooks with 65% of men and 50% of women somewhat or very confident that they will have enough money to live comfortably until age 85.

Retirement planning is more than just funding your 401k or other retirement accounts.  It is essential that planning be put in place to augment the accumulation side of the equation in order to create goals that make sense.  In all of the above cases, the challenge is that the respondents are being too aggressive (or naïve) with their assumptions and the result is that they run the risk of “blowing up” their retirement income stream earlier than they estimate.  It is critical to take the time to use realistic assumptions, and in most cases, to use more conservative assumptions, enabling you some flexibility as you move through retirement.  By having this flexibility, it puts you in a position to proactively address your retirement income relative to changing lifestyle, rising healthcare costs, investment performance and volatility challenges, extended longevity, inflation and so forth.  If you are operating with absolutes in planning that are pushing the envelope so to speak, you are opening yourself up to greater challenges as you head towards retirement. 

Will Your Lifestyle Dip in Retirement?
April 14th, 2008

A recent study showed that 61% of American workers may not be able to maintain their standard of living after they retire. The report from the Center for Retirement Research went on to state the primary reason is the rising cost of healthcare. This is an issue which started in 1988 with the reduction in Medicare benefits. When the original bill was passed it was seen as a way to reduce the tax burden. As with most things they sound good when they are done, but the reality is never known until later. We are now seeing the complete ramifications of these shifts in payment for healthcare. While the cost of care itself has escalated tremendously it is the cost of health insurance that is causing the real damage. Premium costs continue to rise disproportionately to income in retirement.

The study went on to show that even if workers continue until age 65, more than 40% will not be able to maintain their desired lifestyle. So what does this mean to you? Planning is essential for successful retirement. Over the last 20 years the design for retirement has change dramatically. Individuals have to be more creative in how they approach their retirement years. It used to be we could work 30 plus years for a company and retire with a pension and healthcare benefits. That picture has changed significantly. The burden has shifted to the individual almost entirely. The reduction in pension plans continues to expand as fewer corporation offer defined benefit plans. They have substituted them with 401k plans. Since these plans are not mandatory for employees to contribute, retirement savings are being delayed. This is a big negative to the outcome 30-40 years down the road. The miracle of compound interest works best by starting early. This is where the real challenge lies for retirees. The change in how retirement benefits/money is accumulated has to be addressed in their minds. In other words, all that will be there, when you get there, is what you send on ahead.

A quick example is starting at the age of 22 putting away $250 per month for retirement in a 401k plan. Remember this is pre-tax money so the cost is only $200 per month or less. Using 62 as a projected retirement age you would accumulate $2,941,000 assuming a 12% rate of return. If you wait ten years or age 32 to start you would need to save $841 per month accomplish the same thing. The cost of procrastination is steep. My favorite response when discussing this savings issue with individuals is, yeah, but what will it be worth in 40 years? My response is simple…more than if you don’t save the money. The purchasing power of the money is a completely different issue. The challenge is getting people to start now. The earlier the better.

If you are planning on having a comfortable lifestyle in retirement, there is no better time to start than now. In fact, the longer you wait the less likely you will be able to retire early or at all, based on what you are currently saving.
 

Getting Good Information
April 4th, 2008

Some historians have coined this the information age. While there is more truth to that than we know, the challenge comes in filtering through the trash. In our office we get information everyday from investment companies to review on their various products and services. Most of it is placed in our round filing system, the trash can. How do we sort through the proliferation of data to find what applies to us and is useful and appropriate for our individual situation? With the invention of the internet, thank you Al Gore, the amount of information has only magnified enormously. We now use the common phrase, “Google it”. You can type your question or phrase into Google and a list of websites that will provide you data is listed. Your job now becomes that of filtering through to find what you want or need to know. That can become a tedious job at best. From my perspective the best information comes from a result of knowing what you want. What do you want to know and why? For example: let’s say you want to retire at the age of 55 and know if you can get money out of your 401k plan early (prior to 59½). This is a common question and one that should be simple to answer. You can go to Google and type it in and filter through the results to find the answer is yes. But, Oh the infamous BUT! There are rules that accompany the simple answer of yes. So you decide to go to IRS.gov and get the facts. Wow, do they have facts. I’m not sure they understand the rules and options they have explained on how to do this simple process of taking money prior to the age of 59½. Here in lies the problem, getting help. That is why we created 401k Help on our website. So you can access information by reading or by simply sending us an email with your question and we will answer it or point you in the right direction to find it.

Whether you are planning for retirement or are already retired you need to have a source of information for dealing with your questions on how to approach your retirement money. The details involved in getting money out of your account are more complex than the rules for getting money into the account. Doesn’t it seem that is the way things always go? When you signed up for a 401k plan they simply asked how much do you want to contribute and what investment you want the money put into. The plan administrator took care of the rest. Then comes the time to take the money out, and low and behold the choices are endless, with each one having its own ramifications and tax consequences. Don’t even get into the issue surrounding passing the asset on to your heir or heirs. That becomes another bag of questions and answers. Then there are the rollover rules when you leave your place of employment and on and on the list goes. Wow, no wonder everyone is so confused about these retirement plans. Every situation creates different questions and solutions.

So what do you do? Plan, Plan, Plan! Too often I see individuals sign up for a 401k, IRA, Roth IRA, 403b, etc. and never give any thought to why they are doing it other than to avoid taxes on the contributions. There is more to these plans than tax avoidance. Remember tax avoidance is temporary. Eventually you will have to pay the taxes on most of these retirement plans and without planning you may end up paying more in taxes than if you had done something different (that’s for another article). This is the importance of planning before you invest in one of these plans. If you have already started and you still don’t have a plan in place, there is no better time to start than now. We have available on our site a data sheet for planning. You can download it in PDF format and print it. Then take the time to fill it out and answer the questions. This will get you on the road to planning. If you have questions along the way you can email them to info@401khelp247.com. We will answer them or point you in the right direction. The key is getting good information that will help you accomplish your financial goals allowing you to live the life you have always dreamed.

Need Your Retirement Assets to Last?
Strategy Can Make the Difference

During their working years, investors are typically focused on the accumulation of retirement assets as their primary goal.  But, as they near and subsequently enter retirement, they need to shift their focus to how they will use their wealth to afford the most comfortable retirement possible.  In this process, they need to look to minimize their lifetime tax obligations and, if so desired, retain wealth to pass on to their heirs.  By design and planning, they must convert their mindset and their portfolios from accumulation and into distribution portfolios.

A critical element in this process is recognizing the importance of a solid exit strategy.  Generally speaking, retirement assets are in a variety of investment accounts or vehicles which may include Traditional IRA’s, Roth IRA’s, and 401(k) Plans, tax-deferred annuities and taxable investment accounts.  From a tax prospective, the order in which these accounts are accessed can make a significant difference.  So in the planning phase, there are three key considerations:

Obviously, since the trend is for investors to favor tax-favored investment vehicles (e.g. IRA’s / 401ks) the distribution portfolio will usually include both tax-favored and taxable investments / accounts.  When looking at an income goal, your simple formula is (Income Goal – Taxable Income = Amount to come from retirement assets.).  For our purposes, taxable income is defined as non-qualified earnings, business income / wages, social security and the like.

There are important considerations when looking at your withdrawal strategy.  If the taxable income is smaller than the 15% tax bracket + standard deduction + personal exemption, then the order to consider in the withdrawal of assets is 1) tax-deferred 2) taxable and 3) tax-free.  On the other hand, if taxable income is larger than that level, the withdrawal order of assets to consider would be 1) taxable 2) tax-deferred and 3) tax-free.

The key issue is that withdrawals should be taken to minimize income tax, taking into account the tax brackets for a married couple or single individual, and determining how to best balance these brackets with your long-term strategies goals.

Another area that needs to be reviewed is social security benefits.  If your modified adjusted gross income (MAGI) exceeds $25,000 as a single filer or $32,000 when married filing jointly (and $0.00 for married filing separately), the IRS will tax a portion of the social security benefits.  Depending on your income, the taxable portion cab range from 50 – 85%.  As a result, taking a larger withdrawal from a Traditional IRA or other qualified plan in a given year should be weighed carefully for the ‘spillover’ impact it may have.

Keeping tax rules in mind when investing is important as well.  What type investment going in an account can impact tax efficiency?  For example, if you have a portfolio that in comprised of 50% stocks and 50% bonds, you should consider putting the taxable bonds in the Traditional IRA, and put the stocks (especially potential high appreciators) into the Roth account.  This serves to create cleaner tax management given the difficult rules and also investment objectives.  On the other side, investments which generate capital gains, where possible, should generally be in a Roth or taxable account under the current capitol gains rate structure.

Some general guidelines are in the table below.  This is by no means to be construed as tax guideline or advice for a specific individual situation.

As you can see from this brief overview, preparation for retirement is a lifelong activity.  This simply does not go away at retirement.  Post-retirement planning is as important as the strategies employed to accumulate assets during the working years.

*Proper planning is critical in making decisions as it relates to 401k and other retirement plans.  Before making any decisions regarding tax planning or changes to your plan, including issues related to a job change, you should consult the proper department of your employer, a tax professional and your financial advisor.