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Saving early enough?

I attended a brief seminar last week that featured a former Department of Labor investigator.  As current trends in the qualified retirement plan area were discussed, the following statistic came up among pre-retirees: “the largest regret about my retirement is that I didn’t save enough (or at all) during the first five years I worked” – Did you know that by beginning to save when you get your first job, especially during the first 5 years, you can dramatically increase your retirement success rate?  Two key factors come into play: 1) your investments have longer to compound and grow, and 2) most who do so develop a positive habit of disciplined saving.  If this window has passed by, do you have loved ones you need to encourage to start investing now?  And if you are late, why not start now anyway?  Call us and we can help.

A look back

A look back reveals how far we have come since 2008 – consider these eight event-driven headlines that were seen in the 4th quarter of 2008:

  1. Dow falls below 10,000 (Oct. 6)
  2. Dow finishes worst weekly slide (Oct. 10)
  3. U.S. to buy preferred stake in 9 Financial Institutions (Oct. 13)
  4. Obama Elected President (Nov. 4)
  5. Auto Execs ask Congress for help (Nov. 18)
  6. Madoff charged with fraud (Dec. 11)
  7. Fed cuts Fed Funds rate to a range of 0%-0.25% (Dec. 16)
  8. Oil closes at $30.28 per barrel (Dec. 23)

Considering these and other major headwinds we have recovered from since the crash of 2008, we’ve survived some major events.  Sometimes it’s beneficial to look back can consider what we’ve been through as we continue to look ahead and plan for the future. [Source: Morningstar, Inc.]

Well-equipped for retirement?

According to the Population Reference Bureau, 76.4 million Americans were born in the period 1946–1966.  For retirement, a majority of these Baby Boomers must rely on the 401(k) system or equivalent defined-contribution plans (where the worker does a majority of the savings and, in many cases, may receive matching contributions from their employer).  This is because the key retirement predecessors, “defined-benefit” plans (such as pensions), have increasingly become a thing of the past.

What’s troubling is the Quantitative Analysis of Investor Behavior 2014 DALBAR survey results indicate that investors are not very effective in managing their own investment portfolios.  And among other things, the survey shows that workers aren’t saving enough for retirement.  To quote Dr. Olivia Mitchell, Executive Director of Wharton’s Pension Research Council “more than half of U.S. retirees will rely on Social Security for more than 50% of their total income.”  This will sadly leave them with the painful choice of a significant drop in their standard of living, or even more concerning, the risk of outliving their retirement savings.  One simple conclusion, workers should seek help to review and plan for their retirement – a second set of eyes to help them get, or even stay, on track.

Unused 529 Contributions

From time to time concerned parents share that they don’t want to save toward college in a tax-free 529 savings plan because they don’t want to incur any penalties if their child gets a full scholarship or doesn’t use all of the savings in the plan account.  Many times the potential penalties are misunderstood.  Below are a few things to consider regarding unused 529 account savings that may help you determine if the 529 plan is appropriate for you:

  • Federal law imposes a 10% penalty on “earnings” (not principal) for non-qualified withdrawals.  These distributions are allocated between principal and earnings on a pro-rata basis.
  • If you withdraw funds not needed for college because the beneficiary has received a scholarship, you may be able to qualify for an exception to the IRS penalty on non-qualified distributions.
  • There is an exception on non-qualified distributions if you terminate the account because the beneficiary has died or is disabled.
  • Remember that any earnings portion of non-qualified distributions come back to the 529 account owner (typically the parent) as ordinary income and taxed at the owner’s tax rate.
  • When the original beneficiary (the student) doesn’t need the funds in the account, don’t forget that you can change the “beneficiary” to another qualifying family member in order to maintain the account and avoid or delay taking a non-qualified withdrawal.

Remember to review current tax law with your financial advisor, CPA or accountant prior to making any non-qualified withdrawals from a 529 account to help determine what penalty or negative tax consequences you may incur.  Source: IRS.gov

Improving your Retirement Picture

In a recent national retirement plan survey conducted by Matthey Greenwald & Associates of Washington, D.C., employer retirement plan participants shared some interesting facts. Here is a clip of some of the key findings provided by American Century Investment Services: 

  • A majority of participants, particularly older participants, have at least some regret about not doing a better job saving for retirement. In fact, participants gave themselves roughly a C+ on putting money away for retirement and on investing. 
  • The large majority of participants across all age groups wish they had saved more in the first five years of their working lives. 
  • Only one in ten strongly agrees that they knew what they were doing with their investments. 
  • Seven in ten are at least fairly interested in having a program that would increase their savings by 1%. 
  • Roughly two-thirds in each age group expect the financial advisor to play a major role going forward when it comes to preparing for retirement. 

Does all this make sense to you?  If we can help you or someone you know have enough for retirement please give us a call now.  We are ready to help.

Keeping the summer financially sound

The summer months typically include vacation, a little time off from work, or hopefully some time to just relax.  You can use these moments to refuel and even travel a bit.  However, the summer can also lead to increased expenditures, and for many, a time when they prefer to “take a break” from their finances.  Here are some practical tips that can help you stay the course with your finances during the summertime:  1) utilize automatic bank drafts to invest regularly, 2) set up automatic bill pay to avoid late charges or missing bills, and 3) avoid making unnecessary impulse purchases.  It’s also a good time to review your semi-annual statements and call ahead to schedule a future appointment with your advisor or Certified Financial Planner™ to review your accounts after the break.

When to start Social Security

This is a question many people are struggling with today.   And in terms of making the key decision, surveys show many Americans today don’t understand their alternatives.  We are finding the smartest path to take depends on many factors.  One of the key factors is marital status.  Another key factor is one’s age.  But when it comes to a retiree making their Social Security decision, several issues make the decision complicated.  For instance, quoting T. Rowe Price research, “Retirees have two competing goals: maximizing Social Security benefits, which means delaying benefits to age 70, and minimizing savings withdrawals in the early years of retirement, which means taking benefits as early as possible.”

In short, we strongly suggest retirees get professional help before they make their choice.  More specifically–a married couple should seek professional help before the spouse, who has been the “lower wage earner”, starts their Social Security benefits.

Life expectancy and retirement

There are a lot of factors to consider when it comes to retirement planning.  If you’ve ever plugged in assumptions on a retirement calculator to try to determine “your number” then you know what I’m talking about.  One thing you want to avoid underestimating is your average life expectancy.  This is a key number telling you how many years your retirement income will need to last.  You will need to take into consideration factors such as your family medical history, your current health, etc.  While people are generally living longer, your family history plays a primary role in how you should view your life expectancy.  Remember, if you live into your 90’s you may need to plan for a lower investment withdrawal rate over your golden years.

Are you maximizing your income?

In May we blogged about your retirement income stream, specifically the potential benefits of delaying your Social Security if you are able to do so.  Did you also know that your Social Security is permanently reduced if you claim your benefits early?  Remember, it is important to maximize any source of income during retirement.  This includes Social Security, as well as other potential income streams like pensions and annuities.

For those who are willing to wait, or who can work a little longer, there are additional strategies you can consider in order to “maximize” the benefits you receive from Social Security.  To help determine this, there are three key factors to consider:  1) how long you are planning to work, 2) your marital status and age differences, and 3) your health and family medical history.  By sorting through these key points and working with a professional, you should be able to determine if strategies such as “file & suspend”, “switch strategies”, or “filing a restricted application” can benefit you by increasing the amount you receive over your lifetime.  The benefits can be significant.

A common, costly Retiree mistake

A common mistake by retirees is to underestimate their costs of Medicare, Medicare supplements, and out-of-pocket medical expenses.  For instance, it’s not uncommon for a retiree couple to pay $9,000 per year on Medicare premiums and also thousands of dollars out-of-pocket on medical bills.  And don’t forget about annual inflation.  Underestimating these expense items can ruin a good day and maybe someone’s retirement years.