07/25/16

Is Early Retirement Right For You?

By Abby Hayes, July 6, 2016, US News and World Report

Many retirement benefits don’t kick in until your 60s, so early retirees face extra hurdles. Early retirement requires a bigger nest egg because you need to pay for more years of retirement.

When you think about early retirement, you might get a dreamy, faraway look in your eyes. Perhaps you envision time spent traveling while you’re still young, or spending more time as a family because you’re no longer working full time. Or maybe you’re picturing walking away from a job you dislike and never dealing with a stressful deadline or boring meeting again.

Early retirement can be an escape from a bad work situation as well as an opportunity to spend time doing the things you truly want to be doing. However, the reality is that early retirement isn’t for everyone. Early retirement is a difficult goal to achieve, and it may not be what makes you happy in the long run. Here are some of the pros and cons of early retirement:

More leisure time. A boost in leisure time earlier in your life is a major bonus of early retirement. You will have more years to enjoy retirement and to tackle all the projects you have wanted to try. You will be able to invest in your family, spend more time with your children and grandchildren.

Less stress. Not working around the clock for an extra 10, 15 or 20 years can significantly reduce your levels of stress each day. You won’t have to rush to get out of the house every morning and sit in traffic during the morning rush hour, or be expected to work late or through the weekend. Now you don’t have to work at all unless you want to.

Finding health insurance. Early retirees often lose their employer-sponsored health insurance, but aren’t yet old enough to sign up for Medicare. If you retire before you’re eligible for government-funded health care at 65, you will need to find another source of health insurance that could cost much more.

Boredom. While relaxing is fun at the beginning of retirement, you might eventually want to find productive ways to fill your time. If you aren’t proactive about setting up social events or volunteering, boredom could creep into your retirement years.

Early withdrawal penalties. It can be difficult to access the money you’ve saved for retirement if you retire early. If you withdraw money from your individual retirement account before age 59 ½ there is typically a 10 percent early withdrawal penalty. While there are a couple of ways around the penalty, not everyone qualifies. This steep penalty can quickly eat into your retirement savings and make it even more difficult to fund a long retirement.

More years to pay for. When you retire early, your retirement savings needs to last longer. If you retire at 50, you may need to fund another 40 years of retirement using your nest egg. A significant amount of savings is often required to pay for several decades of retirement.

Consider a career change. If you’re tired of your career and want a more laid-back and enjoyable lifestyle, consider a career change. If you make a switch to the right new career, you could gain many of the benefits of early retirement, such as a less stressful life and more time with family, without the drawbacks of early retirement. The key is to figure out how to use your current skill set to transition into a new career. Alternatively, you could launch a completely new career. You might be able to return to school and get new credentials while still working at your current job.

Cut back your hours. There’s no reason you have to go cold turkey from full-time work to full-time retirement. Instead, consider transitioning into retirement gradually. You can start slow by cutting back on your work hours and focusing less on moving up in your career. Another option is to shift to working part time by slowly cutting back your hours and adjusting your lifestyle accordingly. Phasing into retirement can also be a more financially savvy option than retiring early because you still have some money coming in which gives your savings more time to grow.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

07/18/16

Opinion: These Four Steps Would Fix Our Retirement-Savings Crisis

By Silvia Scarelli, July 5, 2016, MarketWatch.com

It’s no secret that Americans are lousy at saving for retirement, and many will struggle to live comfortably in old age.

A Vanguard report from 2015 says its clients over age 65 had, on average, about $214,000 in a 401(k) account — and that doesn’t include the many who don’t have access to one, regardless of which money manager is used. Numbers for households with members between 54 and 65 years old are even grimmer.

That’s the bad part. The good part is we have gotten better, thanks to tweaks to 401(k) policies. Most large companies now make participation in the retirement plan the default choice, meaning the real work is to opt out, not to sign up. And most have two other default choices: a 3% savings rate and a target-date fund.

But a few more changes could do more to get people to save more for retirement, says Richard Thaler, a behavioral economist at the University of Chicago.

“The only thing that works is making savings automatic,” he says.

He sat down with MarketWatch and spelled out his wish list…

Change the default savings rate to 6%

Companies use 3% because a letter from the Treasury Department in the 1990s assured them that automatic enrollment was legal and used that figure as an example, he says.

“That stuck,” he says. “It makes no sense.”

Make Annual Increases in the savings rate the default option

Thaler says we’re bad at starting today and good at procrastinating — whether it’s saving more, starting a diet or something else we know we should do. To capitalize on that, some 401(k) plans now allow participants to pre-program annual increases in their savings rate — something he calls “save more tomorrow” — but it’s not widespread.

“In my ideal plan, we start people at 6%, raise that 1% a year until they hit, say, 12%,” he says. “Those two things would pretty much solve the problem.”

So why don’t more companies do this?

Thaler says one reason may be that it could cost companies more because of the match they offer for some 401(k) savings; according to Vanguard, the most popular company match is 50 cents for every dollar saved for the first 6% of pay. Some might not want to do the programming work involved. Or no one sees it as their job.

“If your employees aren’t saving enough, it’s your fault,” he says he told a gathering of 600 company pension-fund representatives. “We know how to do this. If you have 70% participation rate instead of 90%, that’s your fault. If you have a 3% saving rate, that’s your fault.”

Offer a plan to those without a workplace 401(k)

Roughly 40% of employees don’t have a 401(k) plan offered where they work. Thaler is a backer of the Obama administration’s MyRA idea, a Roth IRA for those without a workplace 401(k). These “starter retirement accounts” were launched late last year but have constraints that 401(k) plans don’t have: They invest only in Treasurys and will be capped at $15,000.

“The irony is this should not be a partisan issue,” he says. “Remember, President George W. Bush wanted to partially privatize Social Security and create what he said was going to be an ownership society. This is really the same thing without touching Social Security. Who would be against facilitating private saving?”

Translate savings into monthly income

This idea borrows from annuities, which turn a pile of money into monthly payments for life. It would add one more line to the monthly statement that shows the resulting monthly income to help people better visualize whether they are saving enough.

“You look at some six-figure number and it looks like a big number,” he says. “You look at what monthly income it would buy and it looks like a small number. That can be highly motivating to get people to save more.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

07/11/16

When Retirees are Forced to Make Withdrawals

By Ray Martin, July 6, 2016, Moneywatch

When it comes to retirement savings plans, the tax code is your friend. The government provides incentives for you to stash money in special tax-deferred accounts, such as IRAs and employer-sponsored 401(k)s. Money saved in these accounts grows sheltered from taxation, including any dividends, interest and capital gains that it earns.

But at the magic age of 70 ½, all that changes. That’s when the IRS springs a trap for everyone who has been programmed to save all of their working careers. They now must begin taking withdrawals from these accounts.

The sole purpose is to make people deplete their savings to generate tax revenue for the government. This perverse requirement goes by the name of ”required minimum distribution” (RMD). Here’s a basic rundown of how these rules work.

First, don’t think you can fly under the radar, not take a distribution and have it go unnoticed by the IRS. Banks, brokerages and other financial firms that serve as the required trustees and custodians for retirement accounts must report to the IRS annually the amount of the RMD for each taxpayer and for each year a distribution is required.

If you don’t follow these requirements, it can really cost you, resulting in a harsh 50 percent excise tax on the amount of the distribution that’s late or insufficient.

The general rule is that if you have a balance in an IRA, you must begin distributions from it no later than April 1 of the year following the year you turn age 70 ½. Those who turn 70 ½ in 2016 can wait until April 1, 2017 to take their first distribution.

But it might be wise to take the first distribution this year because if you wait until the following year, you’ll also be required to take the distribution for 2017 before year-end, causing you to take two distributions in 2017.

Doing this can raise your taxable income and increase the tax you owe on Social Security; it could even disqualify you from claiming some itemized deductions. Check with your tax or financial adviser to see which tax year is best for you to take the first RMD.

The IRS calculates the minimum amount you must withdraw using a factor from the Uniform Lifetime Table, which is specified in IRS Publication 590. The account value as of the most recent year-end is divided by the factor from the table that coincides with your current age.

For example, the factor for individuals age 70 is 27.4. So if you’re 70 in 2016 with IRA whose value is $250,000 on Dec. 31, 2015, your first-year RMD is $9,124. This is about 3.6 percent of your year-end balance.

Each year, the divisor gets smaller, resulting in an increased percentage that you must withdraw. Most financial firms offer a service that will calculate the annual distribution, withhold applicable taxes and deposit the remaining amount into an account of your choosing. I strongly advise signing up for such a service.

A special rule allows people who continue to work to put off distributions from their employer’s retirement plans. If you’re still working and have a balance in your employer’s retirement plan and aren’t an owner of the business that maintains the plan (a “5 percent owner”), you can wait to start withdrawals until the later of April 1 following the year in which you reach age 70 ½ or when you retire.

If you have multiple IRAs, an RMD must be calculated separately for each one. However, these amounts may then be totaled and taken from any one or more of the IRAs.

If you have more than one account in an employer’s retirement plan, you must calculate and withdraw an RMD from each plan. Aggregation isn’t permitted.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®