You’ve worked hard. You’ve saved your pennies and watched every cent. Yet now that retirement is just around the corner, you’re second guessing whether you’re truly ready.
We see this often at Merriman. Near-retirees get cold feet not because they’re unprepared for retirement but because they’re unsure how to manage their retirement income. There’s less room for mistakes without a salary coming in. At the same time, retirement is full of financial uncertainties, ranging from personal health to the economy.
The solution isn’t to delay the retirement you’ve worked hard to secure. If you want to feel financially secure heading into retirement, start by learning the ins and outs of your retirement income.
How Much Income Do You Need in Retirement?
Outliving your savings is a top fear for retirees. Rather than letting worry consume you, do the math to understand your retirement budget. Account for major budget items like housing, transportation, and healthcare along with variable expenses. Then, take stock of your retirement benefits to see how they stack up.
Is there a big gap? Consider how you can reduce living expenses in retirement. Housing is a major expense, and many older adults are paying for more housing than they need. Downsizing saves money and cashes out home equity to put towards retirement savings. However, this only works if you have enough equity to make selling worthwhile. To estimate home equity, subtract the mortgage balance from the home’s current market value.
After housing, recurring bills and lifestyle expenses have the biggest impact. Rather than assuming small expenses don’t make a dent, use a budget to see how it all adds up and then adjust as needed.
Understanding Retirement Income Sources
Now that you understand the expenses side of the equation, let’s examine retirement income.
How to calculate Social Security benefits
Social Security retirement income depends on two main factors: lifetime earnings and the age you claim benefits. Filing early reduces benefits whereas delaying past full retirement age increases Social Security payments. Estimate your Social Security benefits online.
What about pensions?
Workers with a pension enjoy a second fixed income source in retirement. Pension plans distribute monthly payments according to a vesting schedule. Making the most of a pension requires understanding minimum distributions, age requirements, and other fine print to maximize your payout.
Other fixed income sources in retirement
In addition to Social Security and pension plans, retirees rely on fixed-income investments for income generation and capital preservation.
Fixed income investments include:
Bonds and bond funds
Certificates of deposit
Preferred stock or securities
How to Supplement Fixed Retirement Income
Fixed-income sources provide stability and peace of mind. They don’t, however, keep up with rising costs of living. To maintain their standard of living over time, retirees need diversified income.
Building a balanced investment portfolio
It’s standard for near-retirees to shift asset allocation towards low-risk investments. However, stocks are still an essential part of a balanced portfolio due to the return potential. An experienced financial advisor can determine the right asset allocation for your goals. They’ll also develop a withdrawal strategy to maximize retirement savings. Common approaches include the 4% withdrawal rule, fixed-dollar withdrawals, fixed-percentage withdrawals, systematic withdrawal plans, and withdrawal “buckets.”
Working in retirement
Many older adults are starting businesses for flexible retirement income. The best businesses for retirees are low-risk and low-cost, such as consulting in a field where you have niche experience. Beyond less financial risk, consulting businesses are easy to start: Simply file a “doing business as,” also known as a DBA, with the Washington Secretary of State to operate as a sole proprietor under your brand.
Retirement shouldn’t feel like the great unknown. If you feel like you’re walking into retirement without a plan, contact Merriman to learn how we can help. Merriman’s fee-only services will help you clarify your retirement goals and understand your options for achieving them. Contact us toll-free at 800-423-4893 or email email@example.com to learn how you can invest wisely and live fully.
Written exclusively for Merriman.com by Katie Conroy. Katie Conroy is the creator of Advice Mine. She enjoys writing about lifestyle topics and created the website to share advice she has learned through experience, education and research.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.
Whether you recently transitioned to being self-employed or have been a business owner for years, you may have wondered what the best way is to save for retirement. While it is commonplace for established companies to offer a retirement plan to their employees, many self-employed individuals may not realize the potential for significant retirement savings by establishing their own plan.
However, the decision as to which type of plan to choose is far from simple. There are a multitude of questions a business owner must ask themselves before they can identify the best fit for their goals and preferences. To assist in this decision, the following flowchart poses the most pertinent of these questions.
Whether you are considering a SIMPLE IRA or are curious how a defined benefit plan can help you achieve your savings goals, Merriman’s team of knowledgeable advisors are here to help you make the most optimal selection. Please don’t hesitate to contact us if you have questions about your unique situation.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation, which we recommend reading prior to this series.
We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries. Here is our second of six installments.
In light of the SECURE Act, should I convert my IRA to a Roth IRA, and if so, how much of it should I convert?
The answer is maybe. First, some old Roth conversion strategies may still hold true. If you are in an especially low tax bracket for a few years (e.g. you are retired and no longer bringing in employment income, but you haven’t started taking social security yet), then a Roth conversion may make sense for you. It would likely be a good idea to convert as much as possible during those lower income years without pushing yourself into the next bracket. The idea is to pay the least amount of tax possible on that tax-deferred money so more makes it into your pocket. In light of the SECURE Act, there are now additional considerations due to the elimination of the stretch IRA for most non-spouse beneficiaries. These beneficiaries will now have to withdraw inherited IRAs down completely within 10 years, which could have major tax ramifications for them. A Roth conversion might make sense if all the following criteria are met:
You will not need your IRA for your own retirement needs.
You can afford to pay the tax bill out of pocket or with non-retirement assets.
You want to leave the money to someone other than your spouse, your minor child, someone not more than 10 years younger than you, or someone who is chronically ill.
The beneficiary will likely be in a higher tax bracket than you are now.
Example: Gertrude dies in 2020 and leaves her IRA to designated beneficiary Suzie, her granddaughter. Suzie is not an eligible designated beneficiary because she is more than 10 years younger than Gertrude and not her minor child. The balance in the inherited IRA must be paid out within 10 years after Gertrude’s death, which means a large tax bill for Suzie as she is in her prime working years. Had Gertrude converted that IRA money to a Roth, the taxes would have been paid at Gertrude’s much lower bracket, and thus Suzie would have received more money when all is said and done. With the Roth IRA, Suzie must still abide by the 10-year withdrawal rule, but now she can let that money grow tax free in the Roth until year 10 and then withdraw it without paying taxes.
I’m still working. Should I be contributing to a Roth IRA / Roth 401(k) / taxable account instead of a pre-tax account now?
It depends, and there are a lot of factors to consider. To start, please see the question and answer directly above and consider whether an IRA or Roth account makes more sense for you today. The analysis will consider your current tax bracket, your estimated future tax bracket, whether or not you will need the money for your own retirement, and who your beneficiaries are.
If you are nearing retirement while in your prime working years, it likely makes sense to contribute to a pre-tax account versus a post-tax account. You are potentially in your highest tax bracket now, so getting the tax break with a pre-tax contribution is generally more valuable. After retirement, when you are in a lower tax bracket, you may decide to make Roth conversions at that time to take advantage of the lower rates.
Taxable accounts are another story completely. Due to their flexibility, having a taxable account is beneficial whether you are also contributing to an IRA or a Roth. If you plan on leaving money to non-spouse heirs, then a taxable account can be a great way to do so. There is no contribution limit on these accounts and there will be a step up in basis upon your death. This will eliminate capital gains as the account passes on to your heirs and they will not have to deal with the forced 10-year withdrawal rule.
Again, this is a loaded question with many moving parts and will be very specific to each individual. It would be best to speak your advisor about which type of account makes the most sense in your situation.
As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.
Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.
As we reach the end of 2019, it’s time to start thinking about your finances for 2020. Many employers will begin open enrollment over the next few weeks, and this is a great time to review your retirement plan contributions.
The IRS announced earlier this month that employees will be able to contribute up to $19,500 to their 401(k) plans in 2020. They also raised the catchup limits (for those over age 50) from $6,000 to $6,500. Lastly, the 2020 contribution limitation for SIMPLE retirement accounts increased to $13,500, up from $13,000. Note that the annual contribution limit to an IRA remains unchanged at $6,000.
Summary of Changes for 2020
The new 2020 retirement contribution limits are as follows:
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If, during the year, either the taxpayer or spouse was covered by a retirement plan at work, the deduction may be reduced (phased out) or eliminated, depending on filing status and income. If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply. Here are the phase-out ranges for taxpayers making contributions to a traditional IRA in 2020:
For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000.
For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA in 2020 are:
For single taxpayers and heads of household, $124,000 to $139,000.
For married couples filing jointly, the income phase-out range is $196,000 to $206,000.
For a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The 2020 income limits for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) are:
$65,000 for married couples filing jointly, up from $64,000
$48,750 for heads of household, up from $48,000
$32,500 for singles and married individuals filing separately.
It is important to note that the IRS has raised the 401(k) and 403(b) contribution limits in 4 of the last 5 years. These have been fantastic opportunities to contribute more into these retirement investment vehicles. So please make sure to adjust your recurring contribution amounts to better take advantage of this increase in limit. If you have any questions, feel free to reach out to us!
What could be the cost of ignorance? For some mistakes it could be a couple of dollars; for others, it could run into hundreds or thousands of dollars every year. Not paying attention to your enrollment benefits falls under the latter.
Recent research indicates that more than half of employees spend 30 minutes or less reviewing their enrollment benefits and 93% of people make the same enrollment selection without evaluating their options. While it may be easy to re-enroll in the same options every year, I recommend grabbing a cup of coffee or a glass of wine and setting aside a couple of hours to consider your options thoroughly. With the open enrollment deadline approaching soon for many, consider this essential advice to help you take full advantage of your employer benefits.
Medical, Dental & Vision
Many employers offer different medical plans to choose from. With insurance premiums, deductibles, and out-of-pocket costs on the rise, it’s crucial to evaluate your choices every year and make sure your plan still makes sense for you. If your spouse has coverage that will cover you or your dependents, don’t forget to compare these options with your employer’s plans as well.
It’s common for risk-averse people to choose a plan with a higher monthly premium in order to have a lower deductible and out-of-pocket maximum, but this isn’t always wise. If you are young or in good health, selecting a high-deductible plan and bolstering your emergency cash reserve by at least the amount of your annual deductible can save you money in the long term. This is especially true if you have the ability to contribute to a Health Savings Account (HSA) in combination with the high-deductible plan. All contributions to HSAs are pre-tax and all withdrawals used for eligible medical, dental and vision expenses are tax-free. For people in high income tax brackets this can be a significant savings. If you don’t end up needing the funds for medical expenses you can invest them to grow tax-deferred until needed, which can be a considerable help in retirement.
Flexible Spending Arrangements (FSAs) are another common benefit option that can provide tax savings. Similar to HSA plans, contributions are made pre-tax and withdrawals for eligible healthcare expenses are tax-free. Be sure to check the fine print on these plans, because contributions not used during the calendar year are often forfeited! It’s important to consider your expected medical expenses carefully before enrolling. Some FSA plans can also be used for dependent care expenses, which is a fantastic benefit given that daycare costs are not only expensive, but generally consistent and predictable making the “use it or lose it” feature of FSA plans less daunting.
We generally have fewer choices with our dental and vision plans, but make sure you consider enrolling since the cost of annual coverage is often significantly less than one filling or pair of glasses. If you do have plan choices, compare the copays in addition to the monthly premiums.
With all plan options pay attention to “out-of-network” restrictions and check to see if your favorite doctor is considered “in network” if you are unwilling to make a switch.
At the very least, you want to be sure you are enrolled in your company retirement plan and contributing enough to receive the full benefit of any employer contributions. This is free money, so don’t leave it on the table! If you really want to take advantage of your retirement benefits, it’s best to take a careful look at all of the options, evaluate whether you are contributing enough to provide for your future retirement, and analyze your investment allocation at least once a year. Many people find this process overwhelming, but this is an area where a financial planner can prove their worth, so don’t hesitate to ask for help. Even savvy investors can miss out on significant benefits by overlooking options in their retirement plan such as mega back-door Roth contributions or discounts in an employer stock plan.
Many employers automatically provide a certain amount of life insurance for you, generally a multiple of your salary. For a lot of people this is not enough coverage, but you often have the ability to purchase additional coverage through your employer’s group plan. This insurance is generally less expensive and can make sense for a portion of your insurance needs, particularly for people whose health may preclude them from qualifying for an individual policy. However, it’s important to keep in mind that the premium will likely increase every year as you age and the policy often terminates when you leave the company. It’s therefore important to consider whether you should obtain additional outside coverage, either because you have a long-term need or to lock in a rate while you are young and healthy.
People often protect their loved ones with life insurance, but fail to plan for a disability which is statistically much more likely to occur. Make sure to enroll for both short-term and long-term disability coverage.
As part of your annual benefits evaluation process it’s always a good idea to double-check that your beneficiaries and dependents are correct and up to date.
If you’re working with a financial planner, make sure to bring them your enrollment packet and get their advice before you finalize your enrollment. It’s surprising how many people don’t truly understand or take full advantage of their employer-sponsored benefits, and your financial planner can’t give you proper advice without knowing everything you have access to.
The Bottom Line:
Benefits enrollment might appear to be a trivial task, but it could have substantial financial implications if done incorrectly. Be smart about your choices and do the necessary homework to maximize your benefits.
Like most people, you’ve probably switched jobs at some point in your career. If you’ve done this a few times, you may have several outstanding retirement plans, like a 401(k), 403(b), etc. In the flurry of paperwork between leaving your former employer and starting a new job, you should have been given the option to either leave the retirement plan as-is (default), transfer it to an individual retirement account (IRA), move it to your existing employer retirement plan or cash it out. If these plans aren’t consolidated after each job change, whether to an outside rollover IRA (or Roth IRA if you made after-tax contributions), or to your current employer retirement plan, they can start to accumulate and become more of a frustration later to deal with.
Consolidating your retirement plans has several benefits:
Investments align with the asset allocation your financial plan recommends
When you enroll in a new employer’s retirement plan, they ask how you’d like to invest the proceeds. You may not have even made a choice and were put into the default investment option. In the past, the default option was the stable value or money market fund, which is not designed to help you grow your assets; instead, it preserves the value with minimal interest. Nowadays, the default options are target date retirement funds that at least have a more diversified breakdown of assets between stocks and bonds.
Importantly, your financial plan may require that your investments be more aggressive (stocks) or conservative (bonds) than how your dormant retirement account is invested. Regardless of the account’s size, you want all of your investments functioning in a cohesive manner, as that investment allocation will drive the long-term returns necessary to achieve your financial goals. (more…)