09/19/16

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®

09/12/16

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®

09/6/16

The Best Argument Yet for Delaying Your Retirement

By Motley Fool, July 3, 2016

Given that the average American is woefully financially underprepared for retirement, it’s no surprise that more than 16% of Americans aged 65 and older are delaying retirement and still working.

It turns out there could be a substantial benefit to doing so: Delaying your retirement could help you live longer. No, seriously.

According to research recently published in the Journal of Epidemiology and Community Health, delaying retirement by a year, from age 65 to 66, resulted in an 11% lower chance of death among a group of 2,956 participants who were tracked from 1992 to 2010.

The researchers controlled for various outside factors, including education, income, and health. The last of those three is particularly interesting, because people who retire early often cite poor health. Previous studies have been unable to tease out whether the fact that folks working later in life are healthier because they’re still working — or working because they’re still comparatively healthy.

That’s why this study is so interesting: Even among those who said they had health problems, delaying retirement by a year decreased the chance of mortality by 9%. It appears, to quote the study authors, that the “beneficial effect of retiring late may be universal across different sociodemographic profiles.”

So working longer helps you live longer. But there are other potential benefits, too. Since we’ve been talking about physical health, let’s also consider mental health. We’ve known for a while that between 15% and 20% of retirees suffer from poor mental health, most commonly depression. Initially upon retirement, mental health improves because of reduced work-related stress and more leisure time — but over the longer term, many retirees see their mental health decline in part because of isolation and reduced activity, both of which are probably tied to leaving the workforce. Delay leaving the workforce, and there may be less chance of seeing those mental declines.

Delaying retirement also increases your likelihood of a financially secure retirement. No one likes the idea of outliving his or her nest egg. It’s harder to do so if you delay retirement, for four reasons. First, you’ll have fewer years when you’re living off your savings. If you have, say, $250,000 in retirement funds, it’s easier to make that stretch over 10 years than over 20.

Second, consider that those extra years of working should mean extra years of saving. If you’re able to sock away, say, $500 a month for the five years from the ages of 65 to 70, that’d work out to an extra $30,000 in savings.

Third, don’t forget the power of compounding. If you have additional long-term retirement savings stashed in equity markets via a 401(k), IRA, or brokerage account, those savings will have additional time to compound, hopefully growing your savings even more.

Finally, there are the benefits of delaying taking Social Security until age 70. For every year beyond your full retirement age that you delay taking Social Security benefits, the Social Security Administration will increase your monthly benefit by 8%.

No matter when you decide to retire, the most important thing is that you get the lifestyle you want. For different people that means different things. (My wife and I spend extra on travel — maybe you’d save money there but really like nice cars. You get the idea.) The easiest way to get there is to estimate your monthly expenses in retirement — my colleague Brian Stoffel has a collection of averages that should be a useful starting point for you. You’ll then want to estimate how much you’ll receive from Social Security. Once you’ve subtracted the amount you’ll get from Social Security from those monthly expenses, you have the amount of cash you plan to spend monthly that you won’t get from Social Security. Multiply by 12 to get a yearly amount, multiply that number by 25 — a commonly used rule of thumb — and you have the total many experts believe you need to save. From there, it’s simply a matter of working and saving.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP®