Retirement Archives - Page 9 of 34

July 1, 2019 By Liz Weston

Q&A:Ready to retire? If you’ve saved 8 times your salary by age 60, maybe

Dear Liz: I keep reading about how much money one should have saved at various ages to comfortably retire. These are usually a multiple of your annual salary. Do these projected amounts factor in whether you are single or married with a single income? Or if you still have a mortgage? What about having to take a lower-paying job in future years because of downsizing? Is Social Security included? It’s tough to know what these suggested amounts assume to know, given that each person’s situation is different.

Answer: Exactly. So it’s smart to do a little digging.

Fidelity Investments, for example, has come up with some salary-based rules that suggest you have an amount equal to:

One time your salary by age 30

Three times your salary by age 40

Six times your salary by age 50

Eight times your salary by age 60 and

10 times your salary by age 67.

Fidelity assumes you’ll want your standard of living to continue basically unchanged in retirement. Its rules are based on a number of factors, including a 1.5% real wage growth throughout one’s working life, a 15% savings rate starting at age 25, claiming retirement and Social Security at age 67 and a portfolio invested at least 50% in stocks that replaces 45% of your individual income in retirement. Fidelity used multiple market simulations “to support a 90% confidence level of success.”

Few people’s lives will follow an idealized trajectory. For example, many people who enter their 50s with full-time jobs will lose them, and only 1 in 10 will find a new one that earns as much, according to a study by ProPublica and the Urban Institute. You can’t know for sure how long you’ll live, what investment returns you’ll get, whether you’ll need long-term care (although that’s likely) or even what your fixed expenses will be, at least until you’re relatively close to retirement.

People also will have vastly different needs and interests in retirement. A thrifty homebody will probably need less than a globe-trotting spender. Working at least part time in retirement also can shift the math in your favor because you’ll need to draw less from your retirement funds.

What we do know is that people who save a lot tend to have more options as they age. And once you reach your 50s, you’d be smart to consult a fee-only financial planner who can give you a second opinion on your retirement plans to ensure you’re on track.

June 3, 2019 By Liz Weston

Q&A: Finding a financial planner

Dear Liz: Your column on delaying Social Security suggests using a certified financial planner on an hourly basis to review one’s retirement plans. I have struggled to find one who charges this way. They almost all want to control your money for a fee. The one I found after some effort charges $500 to $600 an hour. Please make some recommendations. I don’t mind if the CFP is not local. I just want someone who is certified, reputable, with a reasonable hourly fee.

Answer: There are a growing number of options for people who want “advice only” financial planning from a fee-only, fiduciary advisor:

XY Planning Network is a network of planners who offer flat monthly fees in addition to any other options, including hourly or assets-under-management fees. Monthly fees are typically $100 to $200, with some planners requiring an initial or setup fee of $1,000 to $2,000.

Garrett Planning Network represents planners willing to charge by the hour, although many also manage assets for a fee. Members are either certified financial planners, on track to get the designation or certified public accountants who have the personal financial specialist credential, which is similar to the CFP. Hourly fees typically range from $150 to $300, with a consultation on one topic such as Social Security-claiming strategies or a portfolio typically taking two or three hours. A comprehensive financial plan may require 20 hours or more.

Advice-Only Financial is a service started by financial blogger Harry Sit to connect people with fee-only advisors who just charge for advice and don’t accept asset management fees. Sit charges $200 to help people find fiduciary CFPs who are either local or willing to work remotely. The planners typically charge $100 to $400 an hour.

Another option for those who don’t have complex needs would be an accredited financial counselor or financial fitness coach. Those in private practice typically charge $100 to $150 an hour, although many work on a sliding scale, said Rebecca Wiggins, executive director of the Assn. for Financial Counseling & Planning Education.

Filed Under: Financial Advisors, Q&A, Retirement Tagged With: fee-only planner, financial planner, q&a, Retirement, Social Security

May 28, 2019 By Liz Weston

Q&A: How to make retirement saving a priority

Dear Liz: One thing I like about saving for retirement with an IRA is that I can wait until April 15 of the following year and then just contribute a lump sum for whatever I can afford to put in that year. Is there anything similar with 401(k)? Or do I have to have the contributions come out piecemeal with payroll deductions? I keep revising the percentages, but then there is a lag time between when I revise and when that money is taken out. It is a hassle. It would be much easier to just make a lump sum contribution at the end of the year to my 401(k).

Answer: Many people have unpredictable incomes and variable expenses that make planning tough. If you have a steady paycheck, though, you’d be smart to pay yourself first by making your retirement contributions a priority.

It’s generally smart to contribute at least enough to get the full company match, even if that means cutting back elsewhere. Matches are free money that you shouldn’t pass up. If you can contribute more, even better. For many people, retirement plan contributions are one of the few available ways they can still reduce their taxable income.

If you discover after the end of the year that you could have put in more, you can still make a lump sum contribution to an IRA. Since you have a plan at work, your contribution would be fully deductible if your modified adjusted gross income is less than $64,000 for singles or $103,000 for married couples filing jointly. The ability to deduct the contribution phases out so that there’s no deduction once income is above $74,000 for singles and $123,000 for couples.

Filed Under: Q&A, Retirement Tagged With: 401(k), q&a, Retirement, retirement savings

May 20, 2019 By Liz Weston

Q&A: Here’s a case where taking retirement funds early might make sense

Dear Liz: My wife and I are both retired and receiving annuity payments. In addition, we have about $1.3 million in traditional IRAs and $350,000 in another annuity that will pay us each about $1,000 per month. We are moving from Texas to Arkansas sometime in the next year. Texas has no state income tax and pretty high property taxes, while Arkansas has lower property taxes but about 6% income tax. We plan to put down about $200,000 on a new home and obtain a mortgage for about $350,000 at about 4% interest.

Does it make sense to withdraw money from the IRA to pay down the amount we need to borrow for the mortgage? I can withdraw about $90,000 without putting us into the next higher federal tax bracket, if that makes any difference, and end up saving $5,400 in Arkansas income tax at the same time.

By my calculations, the return on the $90,000 would be almost $8,000 every year in reduced mortgage payments if we took out a 15-year mortgage. If we did the 30-year loan, that savings would be over $5,000. I don’t think we’ll achieve the same returns on $90,000 leaving those funds invested as they are in bonds or cash.

Answer: It usually doesn’t make sense to tap retirement funds to pay down a mortgage, but your case may be one of the exceptions. You have enough saved that the withdrawal won’t claim a big chunk of your available funds and leave you cash-poor.

We’ll assume you’re over 59½ and won’t face penalties for early withdrawal. If that’s the case, then you’ll also be facing required minimum distributions within a few years. These mandatory withdrawals, which must start after you turn 70½, would subject at least some of this money to taxation. The question is whether you want to pay those taxes now or later, and you’re making a pretty good case for now.

Before you withdraw any money from a retirement fund, however, you should consult with a tax pro or a fee-only financial planner, or both. Mistakes made in early retirement often have irreversible consequences, so you want an objective second opinion before you proceed.

Filed Under: Q&A, Retirement Tagged With: mortgage, q&a, real estate, Retirement, retirement savings

February 11, 2019 By Liz Weston

Q&A: Nearing retirement and in debt? Now isn’t the time to tap retirement savings

Dear Liz: I’m 60 and owe about $12,000 on a home equity line of credit at a variable interest rate now at 7%. I won’t start paying that down until my other, lower-interest balances are paid off in about two years. I have about $130,000, or about 20%, of my qualified savings sitting in cash right now as a hedge against a falling stock market. Should I use some of that money to pay off the HELOC? I know I would pay tax on what I pull out of savings, but I’m not sure what the driving determinant is: the tax rate now while I’m working versus tax rate later after retirement? I don’t think there’s going to be a 7% difference in that calculus but please provide your recommendation.

Answer: There are enough moving parts to this situation, and you’re close enough to retirement, that you really should hire a fee-only financial planner.

Getting a second opinion is especially important when you’re five to 10 years from retirement because the decisions you make from this point on may be irreversible and have a lifelong effect on your ability to live comfortably.

In general, it’s best to pay off debt out of your current income rather than tapping retirement savings to do so. You’re old enough to avoid the 10% federal penalty on premature withdrawal, but the decision involves more than just tax rates. Many people who tap retirement savings haven’t addressed what caused them to incur debt in the first place and wind up with more debt, and less savings, a few years down the road.

That might not describe you, as you seem to be on track paying off other debt. But it’s usually best to tackle the highest-rate debts first, which you don’t seem to be doing. It’s also not clear if you’re saving enough for retirement. That will depend in large part on when you plan to retire, when you plan to claim Social Security, how much your benefit will be and how much you plan to spend.

A fee-only financial planner could review your circumstances and give you the personalized advice you need to feel confident you’re making the right choices. You can get referrals from a number of sources, including the National Assn. of Personal Financial Advisors, Garrett Planning Network and XY Planning Network.

Filed Under: Credit & Debt, Q&A, Retirement Tagged With: financial planner, home equity loan, q&a, retirement savings

January 21, 2019 By Liz Weston

Q&A: Is it smarter to save for retirement or pay off debt first?

Dear Liz: I graduated from college in May and began a full-time job in October making $36,000. I also do freelance work and receive anywhere from $500 to $1,000 a month from that. I live at home, so I don’t have to pay for rent or groceries, which really helps. Currently, I have just over $18,800 in student loans at an average interest rate of 4.45%. I have also opened a Roth IRA.

My plan currently is to contribute $500 a month to my IRA in order to max it out, and pay $700 a month to my student loans in order to get them out of the way quickly. Or is it better to skip the Roth and put that extra $500 toward my student loans? That way, I would be debt free when I move out of my parents’ house next year. The stock market has done nothing but fall since I opened my account, and I am reading that it could do the same this year as well. But I have also read that it’s good to just keep consistently contributing to an IRA when your debt isn’t high-interest to reap the rewards of compounded returns.

Answer: It’s generally a good idea to start the habit of saving for retirement early and not stop. What the market is doing now doesn’t really matter. It’s what the market does over the next four or five decades that you should care about, and history shows that stocks outperform every other investment class over time.

The $6,000 you contribute this year could grow to about $100,000 by the time you’re in your 60s, if you manage an average annual return of around 7%. (The stock market’s long-term average is closer to 8%.) And Roth IRAs are a pretty great way to invest, because withdrawals are tax-free in retirement.

That said, your other option isn’t a bad idea either. You are not proposing to put off retirement savings for years while you pay off relatively low-rate debt, which clearly would be a bad idea. Instead, what you’re losing is the opportunity to fund a Roth for one year. That’s an opportunity you can’t get back — but you could fully fund the Roth next year, and perhaps use some of your freelance money to fund a SEP IRA or solo 401(k) as well.

Either way, you should be fine.

Filed Under: Q&A, Retirement, Student Loans Tagged With: IRA, q&a, retirement savings, Student Loans

January 14, 2019 By Liz Weston

Q&A: Why do 401(k) and IRA contributions have such different rules?

Dear Liz: Can you please explain to me why the IRS allows an employee in a workplace 401(k) to contribute $19,000 but a wage earner without a 401(k) can contribute only $6,000 to an IRA? This seems grossly unfair. Why does one group get to save three times as much for retirement?

Answer: Congress works in mysterious ways, and this is far from the only weird byproduct of tax law.

The 401(k) and the IRA were created through different mechanisms.

The 401(k)’s birth was almost accidental. Benefits consultant Ted Benna created the first 401(k) savings plan in 1981, using a creative interpretation of a section of IRS code. Benna crafted the plan to provide an alternative to cash bonuses, not to replace traditional pensions — although that’s what it ended up doing.

IRAs, by contrast, were created deliberately by Congress in 1974 to provide a way for people to save independent of their employers.

Raising the IRA limit would be costly to the budget, while decreasing 401(k) limits would be unpopular, since so many people rely on them for the bulk of their retirement savings.

You aren’t, however, limited to saving only $6,000 annually for retirement. You can always save more in a taxable account. You wouldn’t get the tax deduction for contributions, but your investments can qualify for favorable long-term capital gains treatment if you hold them for at least one year.

Filed Under: Q&A, Retirement Tagged With: 401(k), IRA, q&a, retirement savings

January 14, 2019 By Liz Weston

Q&A: A required minimum distribution headache

Dear Liz: For more than four years my husband has had to take a required minimum distribution from his 457 deferred compensation plan. We have always chosen when to do that, knowing that it has to be done by Dec. 31.

This year we processed the distribution on Dec. 28 to take advantage of stock market movements. We saw the direct deposit of that transaction hit our savings account as planned. To our astonishment, we got a letter (dated Dec. 27 but received after Jan. 1) from the plan’s trustee informing us that “as a courtesy” it had initiated a required minimum distribution “on our behalf.” The letter even “assisted” us with information on how we can “establish a recurring RMD” in the future. We received a check in the mail Jan. 5 for this unnecessary and unwanted distribution.

Not only is this a duplication of my husband’s RMD for this account, but this distribution also may push us into a higher tax bracket. It also sets me up for a further increase in my Medicare B premiums because of the higher income.

I have searched but could not find any information on how to roll this back or how they could have been so bold, and under what authority they took the liberty to babysit a depositor. Can you provide any information?

Answer: Before any more time passes, put the money into an IRA and keep documentation of the “redeposit,” said Robert Westley, a CPA and personal financial specialist with the American Institute of CPAs’ PFS Credential Committee.

The plan provider likely will send a 1099-R form that includes the second withdrawal, so you’ll need this documentation to avoid taxation on the extra money. If you don’t already have a tax pro to help you, consider hiring one to help you navigate this.

Some retirement plans, including 457s, have language that allow forced distributions, since many people either don’t understand the requirement or choose to ignore it. But your husband clearly was not in that group.

Your husband can call the 457 plan provider to find out what happened and how to prevent it from happening again. Or he might just roll this 457 into an IRA at another provider.

This advice assumes that the plan is a governmental 457, which allows rollovers into an IRA. If it’s a non-governmental 457, however — the kind used for highly paid executives in private companies — the rollover option doesn’t exist and you might be stuck with a higher tax bill.

Filed Under: Q&A, Retirement Tagged With: 457 plan, q&a, required minimum distribution, retirement savings

January 7, 2019 By Liz Weston

Q&A: Retirement planning needs expert help

Dear Liz: I am about to retire and have had to make some very important decisions: How should I receive my company pension, when should we start taking Social Security, should we convert some IRAs to Roths, how to best cover our healthcare needs and what the best ways are to manage our tax bill. I think we are OK and on track, but I worry about people who don’t have a college degree and who have not studied these issues trying to make similar decisions. I think it’s scary and we should do more to help people secure their retirement.

Answer: You’re quite right that retirement involves a number of complex choices, many of which are irreversible. It’s easy to make the wrong decisions, even if you do have a college degree and think you know what you’re doing.

Everyone approaching retirement should realize that they don’t know what they don’t know, and if possible seek out an expert, objective second opinion on their retirement plans to ensure they’re making the best possible choices.

Filed Under: Q&A, Retirement Tagged With: q&a, Retirement, retirement planning

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