Before Retiring, Take This Simple Test

By Shlomo Benartzi & Martin Weber, Oct. 26, 2016, Wall Street Journal

For some people, the prospect of getting an immediate reward is simply too difficult to resist. One of the most important financial decisions people make is when to retire. It’s also one of the worst decisions many people make. Specifically, they retire too early, resulting in serious financial shortfalls in old age.

The good news is that, according to a new study by Philipp Schreiber and Martin Weber at the University of Mannheim in Germany, there’s a simple two-question quiz that can help predict whether you’ll regret the timing of your own retirement. Here are the questions:

Question 1: You just learned that you are due a tax refund. If you’d like, you can get the $1,000 refund right away. Alternatively, you can get a $1,100 refund in 10 months. Which do you prefer?

Question 2: You just learned that you are due a tax refund. If you’d like, you can get a $1,000 refund in 18 months. Alternatively, you can get a $1,100 refund in 28 months? Which do you prefer?

The two questions are nearly identical. Each poses the same kind of choice. But the second question postpones the two options for delivery by 18 months, while the first offers an option for immediate delivery.

Time will tell

The point of the exercise is to measure the consistency of a person’s time preferences. Someone with consistent time preferences should answer both questions the same way—choosing the early option both times, or the delayed option both times. Such consistency is a requirement for making financial plans that you stick with.

Some people, however, choose inconsistently. They will take the larger tax refund if both refunds require a delay, as in the second question. But they choose to accept the smaller amount when it is available immediately, as it is in the first question. For these people, the prospect of getting an immediate reward is simply too difficult to resist.

The respondents with inconsistent answers exhibit a tendency known as present bias, or hyperbolic discounting. They strongly prefer rewards that arrive right away. While previous research has linked present bias to a lack of retirement savings, this new study, which tallied results from more than 3,000 Germans, shows that present bias can also lead people to retire before they are financially ready.

The researchers found that people who give the most inconsistent answers tend to retire significantly earlier (about 2.2 years on average) than those with consistent preferences. This leads to a roughly 13% reduction in their monthly benefits. Over time, these people are also far more likely to say they regretted the timing of their retirement.

Help steering

This research helps us better understand why people choose to retire early. It can also help us find ways to stop people from retiring too early. For instance, many workers now benefit from automatic savings programs that rely on default payroll deductions to help them save for retirement. These programs generally use a one-size-fits-all approach, recommending the same savings rate for all workers.

While these defaults have boosted savings for many Americans, they could be even more effective if they were personalized according to the results of the two-question quiz. Consider a person who exhibits a strong bias for receiving rewards in the present. Given the likelihood that she’ll be tempted by an early retirement, she might want to be defaulted to a higher savings rate during her working years. This will help her avoid future regret over the timing of her retirement decision, since she will have sufficient savings.

We can also redesign the Social Security enrollment process to minimize the possibility of regret. The program is structured so that you can start receiving payments at any time after the age of 62. However, the monthly payments will be larger for every month you delay signing up to receive benefits, at least until you turn 70. For instance, a person who can expect to receive $1,000 per month if they retire at 62 will see his benefits increase to approximately $1,750 per month if he can wait until he’s 70 before collecting.

A number of economists have argued that waiting for the larger payment is usually a much better deal. Nevertheless, most people aren’t willing to wait. According to an analysis by Alicia Munnell and Anqi Chen at Boston College, the most popular age, by far, to start Social Security is 62.

Fewer regrets

With the new research from Germany, we can come up with strategies to encourage better decisions. One approach is to ask people to estimate their preferred retirement age when they are still working. Because retirement benefits are far off, they probably won’t be tempted by the smaller/sooner amount and will likely predict an age well past 62. While this estimated age isn’t binding, it will allow Social Security to personalize communication with that person in a way that might reduce their future regret. (The monetary amount itself won’t change, just the way the options are presented.)

Let’s say, for instance, that a person stated a preferred retirement age of 70 during his working years. When presenting his retirement options, Social Security could describe the benefits he’d collect at 62 as a relative loss of approximately $750 per month, at least compared with the benefits he’d receive if he waited until his preferred retirement age. Such framing could make the possibility of starting benefits right away far less appealing.

Nobody wants to regret his or her retirement choices; many of these decisions cannot be undone. By identifying those workers who are planning for a late retirement but are likely to succumb to the temptation of an early one, we can take steps to prevent mistakes before they occur.

 To Your Successful Retirement!

 Michael Ginsberg, JD, CFP®


Your Fellow Passenger: Meet the Senior Traveler

By Airlines.org, October 20, 2016

Today’s air travel is more accessible than ever and our skies have never been more diverse. From first-time fliers to seasoned veterans, your next flight is sure to bring together different people from all over the world headed toward their next destination. We’d like to help you get to know a few of your fellow passengers. Throughout the year, we introduced you to the Road Warrior, the Family Travelers and the Millennial Travelers. Finally, we’d like to introduce you to the Senior Traveler.

People dream about it their entire lives—when the average workweek is no longer a factor, the world can be your oyster. And whether it’s the vacation to Italy they’ve always dreamed of or a trip to see their granddaughter’s first soccer goal, retirees depend on air travel to get them there. Sixty-six percent of Senior Travelers are enrolled in a frequent flyer program, so they can earn miles on every trip.

With a lifetime of adventure waiting around every corner, retired travelers are always looking forward to their next adventure. Almost a third of Senior Travelers were likely to fly for personal international travel in 2016 while 76 percent planned to fly for domestic personal travel.

With airfares down 6 percent in 2016 alone, on top of dropping 5 percent in 2015, there has never been a better time for retired travelers to take to the skies. That’s one of the reasons why almost 80 percent of travelers over the age of 55 are satisfied with their overall air travel experience.

Today’s Senior Travelers are a technologically savvy bunch, with more than 60 percent checking in for their flight on a desktop or mobile device.

With fewer time commitments, retirees are discovering their love for travel all over again. U.S. airlines give Senior Travelers the freedom to explore the world and experience the new adventures they’ll find there—especially if that new adventure includes being there to help your grandson take his very first steps.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


Looking For A Fun Job After Retiring

By Marie G. McIntyre, October 23, 2016, Tribune News Service

Q. Like many baby boomers, I plan to continue working after I retire. However, I would like to do something completely different. For example, I recently met a retired executive who found a job working for a boat dealership. He delivers new boats to their owners and demonstrates all the features.

Although starting over will undoubtedly be difficult, I am very energetic and have a lot of useful experience. I’m also prepared to take a significant pay cut. My problem is that I don’t know how to convey all this in a job application. How can I convince potential employers that I would be an asset to their business?

A. With compensation being less important, you are now in the enviable position of doing work for fun. Therefore, the first step is to determine what type of work you find appealing. Start by making a list of all your interests and hobbies and then brainstorm related employment possibilities.

Next, develop a plan for learning about jobs in your desired field. For example, your boat delivery buddy might have done research by attending boat shows, visiting dealerships or chatting with employees at a marina. Eventually, the people you meet along the way will become part of your job search network.

With a radical career change, networking will be your most valuable tool. Randomly submitting applications won’t be helpful because your background has no apparent connection to the jobs you want. On the other hand, a personal conversation will allow you to convey your character, motivation and sincere desire to learn.

Since your ultimate goal is to get hired, be prepared to provide a concise career summary, highlighting any relevant skills and experience. If it’s been awhile since you looked for work, take time to refresh your interviewing skills. And since this is part of your retirement, please remember to relax and enjoy the process.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


Older Workers and the Search for “Good” Jobs

By Steve Vernon, September 22, 2016, CBS Money Watch

Working longer is becoming the go-to retirement plan for millions of older Americans who report they expect to keep working well into their retirement years. Many say they need the money and benefits, and most likely they’re right.

How many older workers are working at “good” jobs, compared with those who are desperately holding on for purely financial reasons? It turns out that defining “good” and “bad” jobs can have many subtleties, and it’s highly individualized to people’s goals and circumstances.

The Schwartz Center for Economic Policy Analysis (SCEPA) publishes a monthly report on unemployment for workers age 55 and over. Its August “older worker at a glance” brief noted that the unemployment rate for these older workers, as reported by the U.S. Bureau of Labor Statistics (BLS), is 3.5 percent, a historical low. This low rate is often cited as evidence that older people can continue working if their retirement income falls short. But simply focusing on this rate can be misleading. Note that this particular measure counts those who are unemployed as people without jobs who’ve been actively looking for work in the past four weeks.

The SCEPA brief also reports a total unemployment rate of 8.7 percent for workers age 55 and older. This rate is the sum of the BLS unemployment rate, workers who are working part-time but would rather work full-time and unemployed people who’ve recently given up looking for work. When you add jobless older workers who gave up looking after more than four weeks, the resulting unemployment rate is actually 12 percent. For these 12 percenters, just about any job might be considered a good one.

The SCEPA brief goes on to report that an increasing share of older workers are in “bad” jobs – 29.1 percent in July 2016 compared to 27 percent in July 2006. SCEPA defines a “bad” job strictly in financial terms. It’s a job for people working 30 hours per week or more that pays less than two-thirds of the median wage for such workers. In July, this median wage was $880 per month.

Other considerations can be used to define good and bad jobs. “Finding work that fulfills a sense of purpose is a major theme for older workers,” said journalist and author Mark Miller, who is also the editor of retirementrevised.com​. “Many people who have found themselves stuck in unfulfilling careers are looking for that second chance to get it right, and the research tells us they are happier, healthier and more likely to ultimately enjoy a successful retirement.”

Among the many other aspects for defining a good job are a harmonious work environment, friendly colleagues, flexible schedules or a short commute. A recent report by Merrill Lynch and Age Wave​ looked at the reasons retirees cited as motivation for working:

  • Staying mentally active (62 percent)
  • Staying physically active (46 percent)
  • Maintaining social connections (42 percent)
  • Keeping a sense of self-worth (36 percent)
  • Needing the money (32 percent)

Note that financial need ranked well below other considerations. As a result, it’s possible that many older workers may intentionally accept lower-paying jobs in exchange for increasing their fulfillment and freedom. In fact, many retirees report that they’re happy even though they have less income​ compared to when they were working previously.

What does all this mean if you’re approaching your retirement years? Spend the time doing the math and determine how much money you really need to support the life you want. Figure in how much income you’ll receive from Social Security, prudent withdrawals from savings and a pension if you have one. This exercise can help you find work that’s best for your unique goals and circumstances.

You’re much more likely to enjoy life in your retirement years if you’re working because you want to and not because you need the money. And if you really need the money, you might enjoy life more if your work keeps you mentally, physically and socially active. Work that’s flexible or part-time might also give you the freedom to pursue your hobbies, interests and travel.

If you’re in your mid-50s or early 60s, now’s the time to start planning for your retirement years​, including estimating your sources of income and determining how much you’ll be relying on work. If you need to continue working in your retirement years, it will take some planning and effort​, including taking care of your health, updating your skills and nurturing your contacts. But doing so will increase the odds that you’ll find good work and have a good life in retirement.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


You Got a Pay Raise, Here’s How Not to Blow It

By Jeff Reeves, September 26, 2016, USA Today

Congratulations, you’re (probably) getting a raise!

According to Aon Hewitt’s 2016 U.S. Salary Increase Survey of more than 1,000 companies, base pay will rise 2.8% on average in 2016 and is expected to rise 3.0% in 2017. And that’s on top of the 5.2% boost in median household income — up to $56,516 in 2015 — that the U.S. Census Bureau recently reported.

Of course, that’s the average. Unsurprisingly, the report from talent firm Aon Hewitt indicated that “low performers” will typically get nothing in the way of raises.

And bigger picture, certain industries are looking better for employees than others. Aon Hewitt found the 2016 budget for salary increases at property and casualty insurers was the brightest, with a 3.3% bump on average, while the outlook for workers in the oil and gas industry was the bleakest, with just a 1.5% increase in overall salary budgeted.

Getting a bigger paycheck is always good news. But finance experts say running right out and spending that extra cash may not be the best idea.

“If you have more money coming your way, I recommend you siphon it off,” said Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. “Continue to spend at your current levels, and use the excess to save and invest.”

So where, exactly, should you put that cash instead of buying a new flat screen or a tropical vacation?

Here are some ideas:

Build emergency savings: A staggering 66 million Americans have zero saved up for an emergency like car repairs or a broken fridge. “An ideal savings cushion is enough to cover six months of expenses,” said Greg McBride, chief financial analyst at Bankrate.com. “Getting to this goal will certainly take time, but it is important to have a direct deposit from your paycheck into a dedicated savings account and increase the amount of that deposit with each pay increase.” This fund won’t just help you replace a broken appliance, but also help you avoid troublesome financing options, such as payday lenders or credit cards that can charge high fees or interest.

Increase your retirement fund. After a rainy day fund, the next must-have to finance is your retirement fund. That means taking advantage of a tax-deferred account like a 401(k) — particularly if your employer matches the funds you contribute. “In addition to building a nest egg for the future, you’re getting a tax break today,” said Sizemore, since contributions to a 401(k) lower your total taxable income and IRA deductions are tax deductible.

Pay down debt: If you have a high-interest-rate loan that’s outstanding, either for credit card debt or a car or tuition, then zeroing out that balance can be one of the most effective investments you can make. “Paying down a 16% credit card balance is a risk-free return of 16%,” said McBride.

To Your Successful Retirement

Michael Ginsberg, JD, CFP®


Use of Online Tools, Advice Boosts Savings

By Lee Barney, Sept. 26, 2016, editors@assetinternational.com

Mobile banking apps are the most commonly used online tool.  Investors who frequently use online tools and consult with a financial adviser have higher savings than those who do not, according to a survey by The PNC Financial Services Group, Inc.

The most digitally connected investors have the highest average household income and highest total investable assets. They spend an average of three hours and forty-two minutes a week reviewing their finances or looking up financial information on a computer or mobile device. Of the 45% of survey participants who say they are “very connected” to their finances, 50% look at financial headlines every day and 50% use a mobile application to access their accounts. More than one-third of these “very connected” investors would like even more information.

“The most digitally connected investors tend to be better informed, which contributes to their success and positions them well for the future,” says Rich Ramassini, director of strategy for PNC Investments. “For instance, they are more likely to know about the fiduciary standard for investment advisers, and are more likely to consult with an adviser who follows the standard. The information and advice they access should give them an advantage as they save and invest for retirement.”

The survey also found that 60% of the “very connected” investors rely on an adviser. Two-thirds of investors would like to hear from their financial advisers, particularly during an economic downturn.

“Making a change in a portfolio during periods of market volatility is the chief source of regret among investors,” Ramassinin says. “A financial adviser can be a steady hand in times of stress and help avoid panic selling or buying. When it comes to successful saving, information—particularly information gained through a combination of digital resources and expert advice—is powerful.

The most commonly used app is for mobile banking, which 58% of respondents have used in the past year. However, only 37% have used mobile apps to access their investment accounts, which indicates, PNC says, that firms could do more to promote these resources.

Artemis Strategy Group conducted the survey for PNC among 1,002 adults between the ages of 35 and 75 in May. Those age 45 or older had investable assets of $100,000 or more, and those between the ages of 35 and 44 had investable assets of $50,000 or more.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


Are Clients In Denial About Retirement Readiness?

What Americans don’t know about their retirement needs could hurt them—but what they think they know could hurt them more, according to a new survey.

Almost two-thirds of Americans say they’re not concerned about running out of money in retirement, according to the 2016 TIAA Lifetime Income Survey.

The survey reflects a general optimism among U.S. households—65 percent of the respondents were unconcerned about a retirement shortfall—but TIAA’s chief income strategist, Diane Garnick,  says the results likely reflect a population in denial about their personal finances.

“That means that only 35 percent are concerned about running out of money in retirement, and we think those numbers should be completely opposite—two-thirds of us should be worried while one-third of us shouldn’t be,” Garnick says. “There’s a huge disconnect. Because we’re living longer and because the do-it-yourself saving strategy isn’t working like it was expected to, I think it’s more likely that 65 percent of Americans are living in denial.”

Still, most respondents, 58 percent, felt confident that they could successfully generate income from their savings during their retirement. Other survey responses suggest that these respondents are also in denial. Just 46 percent of respondents knew how much they have saved in their retirement accounts, and fewer, 35 percent, know how much income they’ll be able to generate each month in retirement.

“We kind of saw this at the end of the financial crisis in 2008, people were suffering from the five stages of economic grief and stage one was denial,” Garnick says. “How many people decided that they didn’t even want to open their retirement account statements anymore? They didn’t even want to know what the balance is.”

Americans seem to harbor mistaken assumptions about retirement, according to TIAA. Most of the survey’s respondents, 63 percent, assumed that they’re going to need less than 75 percent of their current income to live comfortably in retirement, yet TIAA claims that most experts believe that retirees will need to replace 70 to 100 percent of their retirement income.

“I think people are able to intellectually recognize that they have a personal retirement problem, but until they are able to emotionally acknowledge that this is a problem that needs an immediate fix, they’re able to remain in denial,” Garnick says. “People are naturally afraid of complexity, so they take mental shortcuts.”

When asked what they were looking for from a retirement plan, nearly half of the respondents, 49 percent, said lifetime income to cover their costs of living and another 24 percent said protection from market volatility.

TIAA also found a lack of awareness of annuities as products that could provide a retirement income stream. Just one-in-10 Americans have purchased an annuity, according to TIAA. Two-thirds of the survey respondents, 66 percent, say they are unfamiliar with annuities, and only 23 percent of the respondents said they have a favorable opinion of them.

That unawareness comes through when TIAA’s respondents were asked about where their retirement income would come from—annuities fell behind defined benefit plan payments, retirement account withdrawals and Social Security as a plan’s income source.

The survey was conducted by telephone among a random sample of 1,000 U.S. adults in June.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Majority of Today’s Retirees Have a Pension

By Lee Barney, September 26, 2016, editors@assetinternational.com

Eighty-one percent of today’s retirees receive some income from a pension plan. For 42% of these people, their pension provides half or more of their retirement income, according to a study by the Insured Retirement Institute (IRI). However, for those not yet retired, only 24% have a defined benefit (DB) plan.

IRI estimates that as many as 56 million Baby Boomers will not receive retirement income from a pension, and that future retirees will need upwards of $400,000 to make up for this income shortfall. “Replacing pensions and achieving financial security these plans provide to retirees will be a key issue for future generations,” says IRI President and CEO Cathy Weatherford. “As Baby Boomers retire in greater numbers over the next decade, and as Gen Xers begin to leave the workforce, financial professionals have an historic opportunity to help Americans create their own pensions, through Social Security optimization and the use of lifetime income strategies, to help their clients attain the same security, lifestyles, confidence and positive outlooks as the participants in this study.”

The study also discovered that nearly 60% of retirees have worked with a financial adviser, and 93% of these people say the advice they received has been effective. Seventy-two percent of retirees who own an annuity are satisfied with it. Retirees also face unexpected expenses; 40% have suffered a major health event, such as a heart attack or stroke, and 25% have faced a major non-medical event, such as a major home repair.

More than one-quarter, 27%, have relocated their primary residence in retirement, and of these people, 60% did so for lifestyle reasons, and 30% in order to lower their cost of living. While 67% of retirees think their chance of requiring long-term care is less than a 25% chance, the Department of Health and Human Services (HHS) believes that 70% of those turning 65 today will need such services. Sixty-percent think that Medicare will pay for their long-term care expenses.

Greenwald & Associates conducted the survey among 806 retirees between the ages of 65 and 80 who retired with at least $50,000 in investable assets and have been retired for at least five years.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


What Millennials Are Doing Right, and Wrong—About Retirement

By Suzanne Woolley, June 29, 2016, Bloomberg.com

Millennials may be overly confident about their investing skills, but many are handling their 401(k)s with savvy, a new study by Wells Fargo Institutional Retirement & Trust suggests.

More than a quarter of younger workers—28 percent—have at least 10 percent deducted from their paychecks, according to the study. It analyzed the behavior of 4 million employees in the plans the company administers, from 2011 to 2016. Among the older generations, 35 percent of Gen X-ers and 44 percent of boomers were at the 10 percent contribution mark.

Boomers get their own shout-out. If you assume they are the ones earning $100,000 or more, which they likely are, they are the “most improved” group over the study’s five years among those who contribute at least 10 percent. There was a 15.3 percent increase among those making $100,000 or more hitting the 10 percent rate. At the same time, there is a lost opportunity for boomers. Just 7.7 percent of participants 50 and older make the additional $6,000 “catch-up contributions” allowed by the IRS.

Efforts to get employees to start saving earlier and a widespread trend to auto-enroll employees in retirement plans have helped put more people of all ages in the most popular default investments, target-date funds. These funds are widely diversified and automatically adjust asset allocations between stocks, bonds, and other assets based on a person’s age, leading up to a more conservative portfolio at retirement. The survey found that 85 percent of millennials use a managed investment such as a target-date fund, compared with 77 percent of Gen X-ers and 73 percent of boomers.

“We’re seeing the first generation that had the full, out-of-the-gate use of tools like auto-enrollment and target-date funds, and it’s really getting people into plans early and getting them diversified,” said Joseph Ready, head of Wells Fargo Institutional Retirement & Trust. “Whether they’re astute about the market or not, these things will help people take advantage of, hopefully, longer-term returns from the equity market over the next 35 to 40 years.”

When younger savers do fiddle with their 401(k) accounts, some of them are making smart tax moves. Sixteen percent of millennials elected to use a Roth 401(k), compared with 12 percent across all generations. Contributions that go into a Roth are after-tax, so starting one when you’re young and in a low tax bracket is a good strategy.

For all that, there’s room for improvement among millennials. If 28 percent are deferring at least 10 percent of their pay, seven out of 10 aren’t. Employers can help by automatically escalating employee contributions each year and doing so at a higher rate. Employers have been concerned about being too aggressive with this strategy, and those that do it typically increase the contribution rate by 1 percent annually.

Wells Fargo’s Ready urges employers that use auto escalation to bump employees up by 2 percent a year to get them up to that 10 percent savings goal faster. Wells Fargo data show that if employers bump the auto-increase rate from 1 percent to 2 percent, there’s no big difference in the rate of employees who opt out of the increase. And it makes a huge difference in how prepared they are to retire, Ready said.

Employees can take matters into their own hands, of course. Every time a raise or a promotion comes along, make it a point to increase your savings rate, whether through your 401(k) or in a separate savings account. That use of today’s rewards will yield a far more meaningful return tomorrow.

To Your Successful Retirement!

 Michael Ginsberg, JD, CFP®


5 Huge Roth IRA Advantages You Need to Know

By Motley Fool, June 3, 2016

Saving for retirement isn’t easy, but I probably don’t need to tell you that. We’ve been hearing it on a pretty consistent basis from every survey and study published by finance-based firms.

For example, according to GOBankingRates, a third of Americans have absolutely nothing in retirement savings, and another 23% have between $1 and $1,000. On the flipside, its survey showed that fewer than 1 in 5 Americans has in excess of $200,000 set aside for retirement.

A separate study conducted by the Insured Retirement Institute showed that a whopping 45% of baby boomers hadn’t yet begun saving, which is very scary given that their leverage to grow their nest eggs is substantially reduced by waiting.

And if you still don’t believe this data, all you have to do is look at the published personal savings rates in the U.S. from the St. Louis Federal Reserve for confirmation. As of May 2016, personal savings rates were just 5.3%. Comparatively, consumers in most developed nations save in the high single digits to mid-double digits.

Roth IRA advantages you need to know

But, arguably the greatest retirement tool available is within reach of nearly all Americans: the Roth IRA. Roth IRAs have inherent advantages that very well could help get Americans of all ages on the right track for retirement, assuming you fall under the income requirements that allow you to contribute. You can find these requirement on the IRS website, but the rough gist is that only about the top 10% of income earners will be excluded from opening or contributing to a Roth IRA — although upper-income earners are probably more likely to have saved a decent amount toward their retirement, anyway.

For the remainder of Americans who qualify, here are the five huge Roth IRA advantages you need to know.

1. Tax-free income in retirement

The clearest advantage of choosing a Roth IRA over any other retirement tool is that any investment gains within a Roth are completely free of taxation for the life of the account. Contributions to a Roth are based on after-tax dollars, meaning you’ll receive no upfront tax deductions for your contributions. By comparison, employer-sponsored 401(k)s and traditional IRAs require you to pay federal taxes once you begin making withdrawals during retirement. In return, these tax-deferred accounts allow you to invest with before-tax dollars, thus reducing your current-year tax liability.

However, the back-end benefits could be enormous with a Roth. Because of time and compounding, you could wind up saving yourself from having to pay five or six digits’ worth of cumulative taxes during your retirement. Furthermore, with a Roth you’ll have less chance of being hit with a Medicare premium surcharge or having your Social Security benefits taxed, since Roth IRA distributions don’t count toward your income. With life expectancies lengthening, and medical costs outpacing inflation and wage growth, being able to keep more of your income in retirement is important.

2. No minimum required distribution

Nearly as important as never having to pay tax on your Roth IRA distributions is the fact that Roth IRAs have no minimum withdrawal requirements once you reach retirement age.

For example, 401(k)s and traditional IRAs mandate that retirees begin making minimum withdrawals after age 70 1/2 (and remember, you’ll pay federal income tax on these withdrawals). A Roth IRA doesn’t require that you begin taking a minimum amount out at any age. In fact, if you’d like, you can allow your account to continue growing in value, thus taking the maximum advantage of the effects of time and compounding. You’ll remain in complete control of the distribution schedule with a Roth.

3. No age restrictions when contributing

A Roth IRA also provides advantages over the traditional IRA when it comes to contribution flexibility. With a Roth, workers and retirees can keep making contributions as long as they’d like. This means millennials, Gen Xers, baby boomers, and even current retirees could all open a Roth and contribute to it right now if they’d like (assuming they fall under the aforementioned income limits). In 2016, contribution limits were $5,500 for those age 49 and under, and $6,500 for persons age 50 and up.

On the other hand, Americans are required to stop making contributions to a traditional IRA in the year they turn 70 1/2. There are no age limits for contributing to a 401(k), but it does require seniors to remain employed in order to keep contributing.

Because people are living longer than ever, being able to contribute into your 70s could still net you, or your heirs, considerable wealth.

4. Access to your contributions

Additionally, Roth IRAs offer a lot of flexibility. Most retirement tools are pretty cut-and-dried when it comes to making contributions and taking distributions. If you take money before you reach the qualifying age, you’ll pay a penalty. Even the Roth IRA has a penalty in place for taking unqualified distributions early.

However, Roth IRAs also have a handful of exemptions that do allow you access to your money completely tax- and penalty-free. For instance, since your contributions to a Roth are in after-tax dollars, you can withdraw the amount you’ve contributed at any time completely penalty-free. This obviously isn’t a great idea given that you could be hampering your ability to grow your nest egg over time, but if you find yourself in a cash crunch, you always have access to the amount you’ve contributed to a Roth.

Other circumstances could also allow for penalty-free withdrawals before reaching age 59 1/2 (the qualifying age for Roth IRA withdrawals). For instance, paying back taxes, being disabled, or covering unreimbursed medical expenses that exceed 10% of your adjusted gross income (or 7.5% for people turning 65 or older in the 2016 tax year) allow for a penalty-free withdrawal.

5. Long-term mindset

Finally — and this isn’t necessarily a unique component of the Roth, but is a big reason why it’s such a great retirement tool — the Roth IRA has a five-year rule in place that encourages a long-term mindset among investors. The five-year rule mandates that five tax years must pass following a contribution before a qualified distribution can be made. This rule discourages account holders from diving in and out of their investments, which over time has proven not to be as successful as buying and holding quality investments over the long term.

If you need to get your retirement on track, arguably the smartest thing you can do is open a Roth IRA.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®