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Income Annuities Take Risk Out of Retirement

Income Annuities Take Risk Out of Retirement

When used properly, income annuities provide invaluable security, so why aren’t more people going for them?

A new Brookings Institution study has some insights, and some strong recommendations for consumers.

Few adults would go without auto, home, life or health insurance. But the kind of insurance that protects against the risk of running out of money in old age is still greatly underutilized.

It’s called a deferred income annuity or a longevity annuity.

Most people planning for retirement should strongly consider an income annuity, and a new Brookings Institution study out in June of 2019 confirms that.

Annuities 101: How They Work

The concept behind income annuities is simple. The buyer deposits a lump sum or series of payments with an insurer. In return, the insurer guarantees to pay you a stream of income in the future. That’s why it’s known as a deferred income annuity.

You can choose when your payments will begin. Most people choose lifetime payments starting at age 80 or older. Guaranteed lifetime income is a cost-effective way to insure against the risk of running out of money during very old age.

The main disadvantage is that the annuity has no liquidity. You’ve transferred your money to an insurance company in exchange for a guarantee of future income. People who can’t afford to tie up any of their money shouldn’t buy a deferred income annuity.

Why Consumers Aren’t Buying

Given that traditional company pensions have largely gone away, there should be great demand for income annuities, Martin Neil Baily of Brookings and Benjamin Harris of the Kellogg School of Management write in their new study. But there isn’t, for a number of reasons.

  • People overestimate their ability to invest money wisely.
  • They’re also concerned that if they don’t live long enough, the annuity won’t be worth the cost. But that’s a wrong-headed view, because it’s the insurance that’s the most valuable aspect of the annuity, according to Baily and Harris. The value is in the stability and guarantee of lifetime income offered by the product. If your house never burns down, you wouldn’t think that you wasted money on homeowners insurance. A lifetime income annuity insures us for the possibility of a longer-than-average lifespan.
  • And the topic is confusing to consumers, in part because of the terminology. Annuities include both income annuities as well as fixed, indexed and variable annuities that are primarily savings or investment vehicles, the study authors point out.

What Annuities Do Well

Why do deferred income annuities work so well? Income deferral is a key part of the equation. The insurer invests your money so it grows until you begin receiving income. For instance, if you buy an annuity at age 55 and don’t start income payments until 85, you reap the advantage of 30 years of compounded growth without current taxes.

How They Fit into a Retirement Plan

A deferred income annuity provides unique flexibility in retirement planning. Suppose you plan to retire at 65. You can use part of your money to buy a deferred income annuity that will provide lifetime income starting at 85, for example. Then, with the balance of your retirement money, you only need to create an income plan that gets you from 65 to 85 instead of indefinitely.

You don’t have to deal with the uncertainty of trying to make your money last for your entire lifetime.

The Brookings study makes a similar point. An income annuity can substitute for bonds in a portfolio. For instance, suppose a couple’s allocation is 60% equities and 40% bonds. The couple could safely sell all their bonds and use the proceeds to buy an income annuity.

Holding an annuity provides stability in a retirement portfolio … making it unnecessary to hold bonds, or hold the same amount in bonds.

Also, since you know you’ll have assured lifetime income later on, you can feel less constrained about spending money in the early years of your retirement.

If you’re married, you and your spouse can each buy individual longevity annuities. Or you can purchase a joint payout version, where payments are guaranteed as long as either spouse is living.

The Risk of Dying Before You Break Even

What happens if you die before you start receiving payments or only after a few years, when the total amount of payments received is less than the original deposit? To deal with that risk, most insurers offer a return-of-premium option that guarantees your beneficiaries will receive the original deposit premium.

This is a popular option, but it does reduce the payout amount slightly when compared to the payout amount without the return-of-premium guarantee.

If you don’t have a spouse or anyone else you want to leave money to, you won’t need this option.

Source: Kiplinger
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Six-Step Plan to Your Retirement Income Questions

Six-Step Plan to Your Retirement Income Questions

Many retirees don’t set up a retirement income plan, and that oversight often comes back to hurt them. Fortunately, you can get a good handle on this by answering two questions and taking six steps.

Discussed here is a very simple approach to retirement income for a simple retirement roadmap for allocating retirement savings for a 30-year income.

Question 1 – Have I Saved Enough?

Whether you have enough to retire depends almost entirely on how much you expect to spend in retirement.

Step 1 – Figure out how much you expect to spend in the first year of retirement by itemizing your expenses. Take care to be accurate as possible with respect to your expected retirement lifestyle. Break down your expenses into two categories: basic expenses and desired expenses. Generally, basic expenses are between 60% and 80% of total expenses.

Step 2 – Take stock of guaranteed income sources. Add up the annual expected income from pensions, Social Security, and any annuities. Do not include income from stocks, bonds, or real estate since none of this is guaranteed. The total is your annual guaranteed income in the first year of retirement.

Step 3 – Find the gap with a little more math. Subtract your annual guaranteed income from your total expenses (basic plus desired). This is your annual expense gap. Multiply your gap by 28. This is your required retirement portfolio value.

Step 4 – Now that you know what you need, go ahead and identify all investments and assets that you intend to use for retirement income. Leave out your emergency fund, any health care assets, long-term care or an inheritance, as well as any assets you wouldn’t liquidate for additional retirement income. The total is your expected retirement portfolio value.

To be retirement-ready, your expected retirement portfolio must be greater than your required retirement portfolio. If you don’t have enough in your portfolio, you need to take another look at your plan and assets.

But assuming you’re happy with your portfolio, what’s next?

Question 2 – How Should I Allocate My Retirement Portfolio Assets?

Step 5 – Cover your basics. Your basic expenses should be completely covered by guaranteed income. If your basic expenses are more than your guaranteed income in the first year of retirement, consider delaying the start of these income streams or use some of your portfolio assets to purchase an annuity to increase your guaranteed income to at least match these expenses.

Step 6 – This step assumes all basic expenses are covered in the first year of retirement by guaranteed income. With your remaining investable assets, you can implement this three-bucket strategy I personally like to use to provide income while keeping pace with inflation over the coming decades. Each year, you will withdraw funds from one or more of your buckets to meet these expenses, which is known as your annual withdrawal amount (AWA).

Bucket 1: (Three Times Your AWA)

This bucket is for short-term savings and where you will withdraw funds from each year. This bucket is intended to keep up with inflation utilizing CD laddering, online savings accounts, or other cash equivalent options. The balance in Bucket 1 should always be between one to four times your AWA. If the balance strays out of this range, pull from Bucket 2 or push funds into Bucket 2.

Bucket 2: (20 Times Your AWA)

This bucket is invested for stable income. This is typically a 60/40 equity/fixed-income mix with high-dividend and high-interest investments. All earnings (interest and dividends) should flow into Bucket 1. You should not expect this bucket to produce enough income to meet all your desired expenses. Because of this, you should plan to shift one-third of your AWA into Bucket 1 each year. This will keep Bucket 1 healthy. The balance in Bucket 2 should stay between three and 25 times your AWA and should naturally decrease as you proceed through retirement. If the balance strays out of this range, move the extra (or shortage) to (or from) Bucket 3.

Bucket 3: (Remainder >5x AWA)

Bucket 3 is for growth investments and should be invested aggressively. Typically, this means a 90/10 equity/fixed-income mix. This is the remainder of your retirement assets and starts at least five times your AWA. Any interest or dividends should be paid into Bucket 1. If the total return in any year exceeds 10%, transfer the excess return into Bucket 2.

Going through this exercise should give you a better perspective on how to approach your retirement income needs. It is common to go through this process multiple times before it feels comfortable.

There are many other more complex withdrawal strategies that may produce more income with fewer assets, but this simple retirement income plan is designed to give you a realistic amount to work with and a clear method for investing your retirement assets.

Before making any changes to your retirement plan, consult with a retirement financial advisor who focuses in retirement planning. This could help you take your retirement plan to the next level and allow you to sidestep potential landmines you may not be focused on.

Source: Forbes
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Is Working in Retirement Worth It?

Is Working in Retirement Worth It?

Nearly 19%, or 9 million, Americans ages 65 and over are working part-time or full-time, according to a recent Pew Research Center analysis.

This is consistent with a steady increase dating back to 2000. Whether you need additional income or not, you might be thinking about working in retirement too. But there are a few things to keep in mind, like what it means for your taxes, whether it could impact your Social Security benefits and how you would continue to build savings. Weighing the pros and cons can help you decide if working in retirement is worth it.

The Benefits of Working in Retirement

Working in retirement can provide much more than a paycheck. The key benefits include:

  • Income that supplements your retirement savings and boosts your quality of life
  • The opportunity to continue saving for retirement in a 401(k) or Roth IRA
  • Increased Social Security benefits if your job enables you to delay payments
  • Employer-sponsored health insurance and retirement plans (with exceptions)
  • Structure, stimulation and social interaction

It can also fulfill a sense of purpose or help you pursue a lifelong goal. You might not have time to do everything you wanted, such as mentoring or starting your own business, during your peak working years. You could also use this time to try a new role or completely different career path. No matter what your motivation, keeping it in mind can help you make the most of the experience.

The Physical and Mental Challenges of Working in Retirement

Unretiring has its appeal, but there could be some things complicating your decision. Your health is one of the biggest considerations. Even if you want to work in retirement, an illness or injury could throw a wrench in your plans. And ongoing health conditions may require you to cut back on the number of hours you’re working or force you to step away completely.

On the other hand, work could raise your stress levels or put your heath at risk. It will also cut into time you probably plan to spend with family or pursuing hobbies. Before you make your decision, you should weigh the benefits of working against any trade-offs you might be making.

How Working Longer Can Impact Social Security

Working in your golden years can give your household income a boost, which is helpful if you didn’t save for retirement as much as you would have liked. But it could impact other sources of income. Let’s start with Social Security, which you can begin taking at age 62. You can continue to draw benefits while working, but collecting a paycheck and Social Security at the same time could directly affect your benefit amount.

Here’s how the Social Security rules for taking benefits while working read:

  • If you’re under your full retirement age for the entire year, $1 is deducted from your benefit payments for every $2 you earn above the annual limit. (The limit for 2019 is $17,640.)
  • In the year you reach full retirement age, $1 in benefits is deducted for every $3 you earn above a different limit for each month before reaching full retirement age. (For 2019, the limit is $46,920.)

That money will be added back to your checks when you reach full retirement age, but your total payment will be lower. The Social Security Administration will recalculate your benefit amount to exclude the months when your benefits were reduced or withheld because your earnings from work were over the allowed limit.

If your income from working is enough to cover your household expenses, delaying your Social Security benefits might be the better option. For each year you delay your benefits beyond your normal retirement age, up to age 70, your benefit amount increases. If you’re able to wait until age 70, you’d receive 132% of your benefit amount.

Additional Financial Implications

Other retirement income works the opposite way. For a traditional 401(k) and IRA, you have to start taking minimum distributions at age 70.5. These plans also restrict contributions once you reach a certain age. However, you could continue make contributions to a Roth 401(k) or Roth IRA as long as you have earned income for the year.

You may want to think about your earning potential while working in retirement, too. If you’re staying on with your current employer, you can probably expect to continue earning the same amount. However, if you retire and then return to the workforce, you may find it difficult to get a job with your former salary. At that point, you would be competing with workers who might be willing to fill an opening for less money.

How to Decide if Working in Retirement is Worth It

Your decision ultimately depends on what you need financially and what you want your retirement to look like. Asking the right questions can help you get some clarity on whether continuing to work really makes sense.

  • What’s your main reason for wanting to work in retirement?
  • If your main motivation is financial, how much money will you need to earn from working?
  • When do you plan on taking Social Security benefits? Is there a chance your benefits may be reduced because you’re still working?
  • If you’re married, when would your spouse plan on taking Social Security?
  • At what point would you begin taking withdrawals from your retirement accounts?
  • How might those withdrawals (required minimum distributions or otherwise), coupled with what you earn from working, affect your tax liability?
  • Would you be able to continue making retirement plan contributions while working?
  • How long do you plan to work in retirement?

If you have a family, you may want to include them in the discussion. Your spouse, for instance, might be envisioning a retirement full of traveling or relaxing. At the very least, you will probably want the flexibility to spend more quality time with one another and your children. It can be helpful to get on the same page about what retirement means well before either of you reaches retirement age.

Finally, think about what you’ll gain from working in retirement beyond money. Working longer may be much more enjoyable for you if your mental and emotional needs are being met, versus just fattening up your bank account.

The Takeaway

Working in retirement isn’t for everyone. It may sound good on paper, but can be a very different experience in practice. Consider your relationship with work and what your ideal retirement would be like. If you’re considering working in retirement purely for financial reasons, you might want to review your savings strategy. Taking advantage of employer match and catch-up contributions could help you avoid working in retirement if it isn’t right for you.

Tips for Working in Retirement

  • Run the numbers to understand how much money you’ll need to cover your expenses in retirement. Then, look into what kind of job can help make your budget work. Estimate your Social Security benefits and decide when could be the right time to start taking them.
  • Our financial advisors can talk through the tax implications of taking Social Security payments or retirement plan withdrawals while working in retirement. They can also review your portfolio’s asset allocation to make sure your investments align with your risk tolerance and goals.

Source: Yahoo Finance
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3 New Retirement Rules That May Change Retirement As We Know It

3 New Retirement Rules That May Change Retirement As We Know It

A successful retirement plan is one that must be not only created and written but also revisited annually to account for changes we can and cannot control.

There are three pending proposals being considered in Congress that may change the landscape of retirement savings and distributions. The goals are to increase the flexibility of retirement savings, correct the Social Security solvency, and added protection for those receiving pensions. There are many advantages and a few drawbacks that will come at a cost to the working class, small business owners, and beneficiaries.

It’s important to keep an eye on the progression of these bills so that you will have adequate time to adjust your cash flow in your personal retirement plan and determine the impact on your projected retirement date and savings. There will also be considerations for revised tax and estate planning for non-spouse inheritances of retirement plans.

The SECURE Act (Setting Every Community Up for Retirement Enhancement Act)

The first bill passed earlier this year in the U.S. House of Representatives with a 417-3 vote. There has been little progress in the Senate since then. The main objective for this Tax Act is to expand an individual’s access to their retirement savings. Here is a summary of the key provisions:


Required minimum distributions (RMDs) will change from 70 1/2 to age 72 for mandatory distributions from your IRAs, 401(k), 403(b) and other employer-sponsored retirement plans. This can be helpful when you don’t need the additional income. It also allows for tax-efficiency planning during the lower income years in retirement, which can range from age 60 to age 72. Consider making Roth IRA conversions during this 1 1/2 year time frame, collecting your distributions to fund life insurance, and pursuing planned charitable giving options.


It will allow an inclusion of annuities and other lifetime income options to 401(k) plan participants. This can advantageous where there continues to be a reduction of employer-provided pensions, resulting in the need to create your own personal pension. Another change will allow qualified contributions to individual retirement accounts beyond age 70 1/2. Traditional IRAs will become like Roth IRAs without an age restriction. In order to make qualified contributions, other IRS requirements must be met and remain unchanged at this time.


Some of the extended provisions will also cost business owners, with additional matching contributions and increased professional fees for revisions in the plan documents, to maintain compliance with federal and state laws.

Increased tax credits will be available for startup costs up to 50% of a small business’s new retirement plan. This increases from $500 annually to $5,000 maximum tax credit.


The bill proposed a major change in reducing the ability for an inherited stretch IRA for beneficiaries, which can be a disadvantage for estate planning. There will be a 10-year time limit for a non-spouse beneficiary to defer the distributions and income taxes on an inherited IRA. It will force taxation of retirement plans that are inherited in the first year or no later than 10 years from the inheritance. There are exceptions for non-spouse beneficiaries who are disabled, a minor, or chronically ill. Distributions for these exceptions would be over their life expectancy, although the exception for minors would end once they reach the age of majority with the final distribution to be taken within 10 years.

Spousal beneficiaries continue to be able to stretch and delay the inherited account’s required minimum distributions (RMDs) until the end of the 72nd year of the deceased spouse. The delay was allowed until age 70 1/2 before this new proposed law.

Social Security 2100 Act

This new bill was introduced by Rep. Larson, D-Conn., in July 2019 and the objective of this tax act is to fix the solvency of the Social Security program into the next century. If no changes are made, it is projected that in 2035, the trust funds of Social Security will run out. If this happens, the promised amounts to be paid are 80% of current benefits. This would have an adverse lifelong impact on the retirement income of Americans, many of whom rely solely or partially on Social Security retirement benefits to cover their necessary living expenses.

Employees and Employers

The bill requires raising payroll taxes to pay for the solvency correction. Increased Social Security taxes will be paid by current workers and the employers. The Social Security rates currently paid by an employee and matching paid by an employer is 6.2% up to maximum earnings each year of $132,900. The proposed increase is 7.4% for employees and employers up to a maximum annual salary of $400,000. For example, if an employee is making $250,000 in wages, their additional Social Security taxes will increase by $10,260 annually. The employer’s expense will increase by this same amount. The additional cost will likely result in lower wage increases and lower retirement plan contributions by employees.

Social Security Recipients

Those currently receiving Social Security benefits may receive a reduction in federal taxes paid on their Social Security income. Currently, taxation of up to 85% of Social Security benefits begins when non-Social Security income exceeds $25,000 for individuals and $32,000 for couples. The amounts would increase under this proposed bill to $50,000 for individuals and $100,000 for couples.

Rehabilitation for Multi-Employer Pensions Act

This bill passed in the House of Representatives on July 24, 2019, in a 264-169 vote. The objective of this new bill is to allow pension plans to borrow money in order to remain solvent and continue paying retirees. If passed, the new legislation would create a trust fund that lends money to the pension plans as financial solvency remains to be an issue with many private and public pension plans.

If any of these three pending proposals pass, there could be many positive changes for employees, employers, and retirees. The costs of the SECURE Act, Social Security 2100 Act, and Rehabilitation for Multi-Employer Pensions Act will be paid by the working class, small business owners, and beneficiaries. Monitoring the progression of these bills and the ever-changing tax code will be important to allow for timely planning and revisions necessary in your personal retirement saving plan, tax plan, and estate plan.

Source: Forbes
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The Most Reliable Ways to Generate Retirement Income

The Most Reliable Ways to Generate Retirement Income

With over 10,000 Americans turning 65 every day, the question of how to pay bills during retirement is on the minds of many.

I have almost daily conversations with individuals planning for their next stage of life and surprisingly, while each situation is unique, the choices all dovetail into the same five ways that cash flow can be generated to pay for a desired lifestyle. And when I emphasize that these five are the most reliable ways to generate retirement income, they often look at me quizzically and express concern that these choices are too limited. Yes, I remind them, there really isn’t a retirement income fairy.

Here are the five most reliable ways cash flow can be generated in your later years:

Inheritance and Gifts

For most Americans, receiving sizable financial gifts or inheritance is not the norm. Furthermore, in order for these to make a significant dent in your retirement cash flow needs, the amounts would have to be well into the six-figures. For example, if you retire at age 65 and live until age 90, a $100,000 inheritance could pay out about $10,000 per year for (only) ten years plus some interest. So unless your Aunt Margaret is very wealthy and you are one of her only beneficiaries, this shouldn’t be the only strategy you rely on.

Continue Working

This is an increasingly popular choice for a variety of reasons. For some, it is a necessity. For others, it is due to a desire to stay relevant, active, or mentally sharp. And for others, it is a time to get closer to a passion such as being a substitute teacher, an artist, or working for a charity. Working into what would otherwise be retirement is a perfectly fine choice. As a financial advisor, I often advise that this will be more optimal if the work is borne out of choice and not of necessity. So plan accordingly and stay healthy if this is your strategy.

Social Security

I am hearing more cynicism about the future solvency of social security – especially from younger people. I find educated Millennials to be quite savvy at financial planning and many are rightfully concerned about social security. Given the current political winds out of Washington, it is not unreasonable to assume that benefits will be either ‘means tested’ (reduced for higher earners or the wealthy – whatever that definition is deemed to be), or heavily taxed. However, for those near retirement, I don’t expect reductions in benefits for the middle class or those at lower income levels. As a result, social security will remain a mainstay for the vast majority of Americans.


A pension is an annual obligation of your employer to pay you income for life based on a blended formula of income and years of service. Very few private companies offer pensions, and they reserve the right to freeze the plans and stop increasing benefits. There is also the risk that the Company goes bankrupt, and your pension, even if insured by the Pension Benefit Guarantee Corporation (PBGC), may only payout a fraction of the promised amount. There are many reasons for the decline in pensions (longer life expectancies, costs, regulations, global competition, etc.), but for those who are fortunate to still be eligible for a pension, it is a very comforting and valuable. This is why public sector workers fight aggressively to keep these benefits. For now at least, pensions are somewhat common at the state and local level, but as America ages, these may also become less prevalent.

Personal Investments

If you are not expecting a sizable inheritance, are not eligible for a pension, and do not want to work or will be unable to work, then you are left with social security and your savings as your sources of income. This is why it is so important to save as early in life as possible in order to grow and accumulate you own pool of retirement assets. Actually, if you don’t save and social security is your only source of income, you may qualify for government assistance, but I rarely see people excited about this possibility. Therefore you are left with saving money during your working years in order to have personal funds to withdraw later in life.

I wish there were another way for people to have financial freedom, but unfortunately, regular saving, no matter how difficult the circumstances, is usually the best way to accumulate money and grow wealth. I understand the challenge millions of Americans face each day. At the same time, starting early and saving even a small amount can make a big difference later.

Source: Forbes
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3 Retirement Plans for Freelancers and Small Businesses

3 Retirement Plans for Freelancers and Small Businesses

About 31% of American adults work in the gig economy, either full time or as a side hustle.

For those relying entirely on gig income, not having an employer-sponsored retirement plan becomes a “license for the neglect of saving for the future,” says Tim Maurer, a financial advisor at Buckingham Strategic Wealth and Forbes contributor.  Without the pressure of coworkers or HR departments, many side hustlers and freelancers simply forget to save for their retirement.

That difference is becoming even more pronounced, Maurer notes, as more employer 401(k) plans move to “opt-out” enrollment—a process by which new employees are automatically enrolled in the company plan unless they deliberately opt-out. “That means that those who find themselves without this option are faced with several more decisions than the employee with an employer-sponsored plan, and each one of those decisions acts as a behavioral roadblock standing in the way of future financial security,” he observes.

Maurer’s advice for those with gig income: “Find the right bucket for you to save in, and then save.”

Which retirement savings bucket is best for those whose income comes from self-employment or a small business? That depends on how much you earn, how much you want to save, and whether you have—or might hire—employees. Note that if you have a regular job, with a regular 401(k), the best way to sock away some of your side-hustle income for retirement may be different. But read on, since we cover that too, below.


Best for: Self-employed individuals, small business owners with few employees and side-hustlers who are already contributing to a 401(k) at work.

Eligibility: Self-employed individuals, small business owners and employees of those small businesses who are 21 or older, have worked for the employer in at least three of the last five years and have received at least $600 a year from the employer for each of those years.

This retirement plan is often referred to as a “profit sharing contribution,” says Maura Cassiday, Fidelity vice president of retirement and small business products. Employers are typically the sole contributors to a SEP IRA.

Employers can contribute up to 25% of each employee’s compensation up to $56,000 in 2019, and each employee must receive the same percentage. With a SEP IRA, earnings grow tax deferred and contributions are tax-deductible. You are able to withdraw these earnings at any time, but a 10% penalty may apply if you are under the age of 59 ½.

If you’re self-employed—meaning you report your earnings on Schedule C of your 1040—the contribution is 25% of your “adjusted net earnings,” or your net profit, minus one half of the Social Security and Medicare taxes you pay.

A SEP IRA offers a lot of flexibility, as you can contribute different amounts every year – or nothing at all. It’s important to note that, like traditional IRAs and 401K(s), participants age 70½ or over must take required minimum distributions from a SEP IRA.

Solo 401(k)

Best for: Self-employed individuals and businesses run by a married couple, with no other full-time employees.

Eligibility: Self-employed individuals and those running businesses that have no full-time employees, other than a spouse.

A solo-401(k) is very similar to a traditional 401(k), where you can both defer a portion of your salary and have a company match. But it’s a simplified version of a 401(k) plan that—as the “solo” name suggests—is designed for a single self-employed individual. It can also be used by spouses who run a business together, but without other employees.

In a solo-401(k) plan, you wear two hats (one for the employer and one for the employee), and you can contribute under each of those hats. That allows you to save significantly more money than with other plans for the self-employed, particularly at lower income levels.

As an “employee,” in 2019 you can contribute up to $19,000 in salary deferrals yearly, or $25,000 (including a $6,000 catch-up contribution) if you will be 50 or older this year.

As a self-employed “employer,” you can also contribute up to 25% of your “earned income,” which the IRS defines as net earnings from self-employment after deducting both one-half of your Social Security and Medicare tax and the 401(k) contributions you’re making as an employee. (Here’s an example from the IRS of how this is calculated.) You can make total employer and employee contributions combined of up to $56,000 (or $62,000 if you’re 50 or older).

The big benefit of the solo 401(k) over other plans for the self-employed is that you can make big pre-tax contributions at lower income levels because of the employee contribution, which can equal up to 100% of your earnings—meaning you’re not limited to the 25% of earnings of a SEP IRA.

Another advantage is that you can choose to make some of your employee contributions into a Roth account within the solo 401(k). You get no upfront deduction for money going into the Roth, but all growth and withdrawals from the account in retirement are tax free.

As with most other plans, early withdrawals are subject to a 10% tax penalty if you are under the age of 59 ½, although there are a few exceptions.

Warning for moonlighters: If you have a 401(k) at your main job, a Solo 401(k) probably isn’t the best choice for you. That’s because a single contribution limit applies to both plans—meaning you can’t make more than $19,000 in employee contributions (or more than $25,000 in employee contributions if you’re 50 or older), to both plans combined.


Best for: Self-employed individuals or small business owners with 100 or fewer employees

Eligibility: Employees must have earned at least $5,000 from the employer in any two preceding years and expect to receive at least $5,000 during the current year.

Both employees and employers can contribute to this plan. However, employers are required to contribute either a matching contribution of up to 3% of compensation (matching meaning, the employee must contribute to get it) or 2% of all eligible employees’ compensation, regardless of whether they contribute.

Employees can contribute up to 100% of their compensation, with a maximum of $13,000 for 2019 (or $16,000 if age 50 or older).

Like a SEP IRA, early withdrawals are subject to a 10% penalty if you are under the age of 59 ½. If you withdraw within the first two years of your plan participation, you’ll incur a 25% penalty instead. Your investments grow tax deferred until you make a withdrawal, and employer contributions are tax deductible as business expenses.

Roth IRA vs. Traditional IRA

If you can’t contribute a large amount to a retirement plan yet, fear not. It’s better to go with the simpler Roth or traditional IRA options if you don’t intend to save more than $6,000 per year, says Maurer. (The limit is $7

The best vehicle for most without an employer sponsored plan is going to be the Roth IRA, Maurer opines. With a Roth IRA, you are making after-tax contributions that should grow, and eventually be distributed, tax-free. (Note that if you’re a retiree with some earnings from part-time work, you can fund a Roth IRA, whereas contributions to a traditional IRA can’t be made once you turn 70 ½.)

“Essentially, for younger people, the Roth makes more sense because they’ve got a lot longer to build up that accumulated program,” says Bob Mauterstock, a veteran financial planner. “But, if your income is high, you probably want to get the tax deduction now.”

Enter the traditional IRA, which allows you to claim a tax-break up-front—if, that is, you don’t have an employer retirement plan. (If you’ve got an employer plan, then there are strict income limits on who can claim a deduction.)  With a traditional IRA, growth is tax deferred (not tax free) and you must begin taking taxable withdrawals at 70 ½.

In 2019, total annual contributions to your traditional and Roth IRAs combined cannot exceed $6,000 if you are under 50 and $7,000 if you are over 50, or will turn 50 by the end of the year.

What about those aforementioned income limits? If you’ve got a workplace plan and you’re single, then the deduction for a traditional IRA is phased out at modified adjusted gross income between $64,000 and $74,000. If you’re married and both have workplace plans, the phase out is between $103,000 and $123,000. If your spouse has a workplace plan and you don’t, then the deduction is allowed at much higher income levels, with the phase-up occurring between $193,000 and $203,000 in 2019.

As for the Roth IRA, it too comes with income limits–eligibility to contribute phases out between $122,000 and $137,000 in AGI for a single and between $193,000 and $203,000 for a couple.

Fortunately, there’s no income limit on nondeductible contributions to a traditional IRA. (And, if you want to get really fancy, you can make a nondeductible contribution to a traditional IRA and then convert it to a Roth.

Source: Forbes
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How to Create a Personal Retirement Plan

How to Create a Personal Retirement Plan

Look past cookie-cutter approaches when saving for retirement to build a nest egg that’s right for you.

Your retirement plan needs to be aligned with what you need and want. “As a whole, retirement plans can never be one size fits all, because everybody is very different,” says Ephie Coumanakos, co-founder and managing partner at Concord Financial Group in Wilmington, Delaware.

Finding the right retirement plan involves:

  • Thinking about your values and goals.
  • Identifying your risk tolerance.
  • Considering your age.
  • Projecting your retirement lifestyle.
  • Adjusting your plan as needed.

Follow these strategies to create a customized personal retirement plan that’s best for you.

Understand What’s Important to You

The ideal retirement can vary greatly depending on your priorities and goals. Think through what’s meaningful for you and how you might want to spend funds. “Sit down with your spouse or loved ones and discuss what you would like to do in retirement,” says Logan Allec, a certified public accountant and creator of the personal finance site Money Done Right based in Santa Clarita, California.

During the discussion, map out your values. Try writing down a list of your retirement priorities, such as charity, faith, family and interests. Then narrow down the list to several objectives that are the most important to you and your loved ones. This will help you shape retirement goals and get a realistic picture of how you might spend your time. If traveling is important to you, consider how much touring you would like to do in retirement. If you value living in a cottage on a lake, run the numbers of the cost of living in a location you have in mind.

Set Your Personal Retirement Plan Goals

A generic estimate of how much income you’ll need during retirement may not be accurate for your particular case. “Assuming you will need 80% of pre-retirement income because you will have less expenses in retirement is an incomplete estimation that does not take into account your individual situation,” says Ken Van Leeuwen, managing director and founder of Van Leeuwen & Company in Princeton, New Jersey. Instead, think about what all of your goals will cost. Write down a list of expected expenses or work with an advisor to think through how much income you’ll want annually. In addition to Social Security benefits, calculate the amount you’ll need from other investments and sources to carry out your goals. You may find you’ll be able to live on less than 80% of your current income, or you could realize you’ll want additional income during your retirement years.

Think about the age you’d like to stop working. “When to retire is a personal decision,” Allec says. Talk to your spouse or a loved one about when to step away from your current job. Also take into consideration your health and retirement plans. If you have an active retirement in mind, retiring early might mean you’ll have more years of energy to fulfill your plans. However, keep in mind that retirement could last for decades. “It would not be unreasonable to expect to be in retirement for 30-plus years,” Coumanakos says. Once you know when you want to retire, mark it on a calendar or in your office. “By scheduling your retirement, you are shifting that date from an aspiration to a plan,” Allec says.

Know How Much Risk You’re Comfortable With

Some investments come with high risk, meaning they may help your money grow quickly or you could lose a great deal. Lower risk investments often provide lower rates of return, but also reduce the chance you’ll lose money. If you prefer lower risk, you might plan on a 3% rate of return on your investments. If you have a moderate risk tolerance, budgeting a 5% or 6% rate of return may work. “The risk tolerance of the investor has to come into play because that will define how much money someone needs to save each and every month,” Coumanakos says.

You and your spouse may have different tolerances for risk, and one member of a married couple may prefer lower-risk investments than the other. If it’s difficult to get on the same page, talk to an advisor about your comfort zones. A financial professional could help allocate funds in ways that provide a compromise so you can both sleep at night.

Factor in Your Age

If retirement is several decades away, you might try a 50/30/20 strategy. “Allocate 50% of your after-tax pay toward your needs,” says John O’Rourke III, vice president at First American Bank in Coral Gables, Florida. Of the remaining income, 30% could go toward entertainment and 20% toward saving. And if you can, save more. “Young investors should save as much as they can possibly afford to now,” Coumanakos says.

If you are within a decade of retirement, you might opt to save more than 20% each month to meet your retirement goals. For those who weren’t able to save during their early working years, they may “have to now work past their projected retirement age to make up for the difference,” Coumanakos says. Consider if you plan to continue working part time after stepping away from a full-time job. Bringing in some income during retirement could help you to get by with a modest nest egg.

Reassess Your Personal Retirement Plan Over Time

After setting up an initial retirement savings plan, revisit your budget each year and as you hit milestones. A wedding, new baby or job change could impact how much you save each month. “While building the physical plan is an important first step, the continuous review and maintenance of the plan is even more important,” Van Leeuwen says.

As your life changes, you might also find your goals shifting. If you struggled with a medical condition but are now healthy, you could add more activities into a retirement plan. If you remarry after a divorce, your priorities might switch. “What may be true today may not be in the future,” Van Leeuwen says. “It is important that your plan is updated as material changes occur in your life.”

Source: U.S. & World Report News
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How to Avoid Going Broke in Retirement

How to Avoid Going Broke in Retirement

It’s entirely possible that you could live for 25 to 30 years after you retire.

Planning to be financially secure for the rest of a potentially long life requires making a series of complex decisions, each with high stakes. And you often won’t have a “do-over.”

If you can avoid making these seven common retirement planning mistakes, you’ll be halfway there to living a long, financially secure life.

Mistake #1: Retiring too soon

You can significantly increase your retirement income by delaying your retirement, even if it’s just for a few years. Downshifting – working part time for awhile, just enough to cover your

Mistake #2: Basing your retirement decision on a “magic number”

Some people think that when they attain a target amount of retirement savings, they’ll have enough money to retire. But such a magic number doesn’t give you any guidance on how to manage your finances to last the rest of your life – it’s really just a version of “winging it.”

Instead, you’ll want to determine how you can generate retirement income solutions that will cover your living expenses for the rest of your life.

Mistake #3: Starting Social Security too early

Social Security is the best retirement income generator hand’s down, and for most retirees, it’s the largest source of their retirement income. Social Security protects you against common retirement risks, including living a long time, stock market crashes, and inflation. So it makes sense to maximize the amount of money you can expect to receive from Social Security over your lifetime, and for your spouse’s lifetime if you’re married. Many people can achieve this with a thoughtful strategy that includes delaying the start of benefits.

Don’t make the mistake of claiming benefits early because you think Social Security will go bankrupt. That’s a losing bet! Instead, do your homework to determine the best date for you to begin benefits that will generate the most income.

Mistake #4: Assuming you can work indefinitely

For many people, their “retirement plan” is to simply keep working as long as they can. While working longer is a common-sense way to improve your finances, there’ll come a time in your life when you’re no longer able or willing to continue working.

As a result, you’ll want to take steps to ensure that you can work as long as you need. You’ll also want to make a financial plan for the time when you can no longer work.

Mistake #5: Assuming Medicare is the only health insurance you need

Many people think that just because Medicare is called “medical insurance,” it’s the same as the insurance they enjoyed while they were working. Bad mistake! Medicare has significant deductibles and copayments, and it doesn’t even pay for many health services that employer-based plans typically cover, such as vision or dental care.

You’ll want to buy a policy that supplements your Medicare coverage, making sure to choose carefully with the rest of your life in mind.

Mistake #6: Automatically assuming you won’t move after you retire

Although you might think you’ll live in the same house you’re living in now, there’s a good reason to investigate a move. Many people might need to reduce their living expenses in retirement, since they won’t have enough retirement income to support their current level of spending. When confronted with this decision, many people start by cutting back on eating out and their cable TV. But those steps aren’t enough to close a large gap between your expected retirement income and living expenses.

The largest living expense for most retirees is housing, so a smart way to close your spending gap is to downsize. In this situation, you have a win-win opportunity to find a place to live that will better meet your needs in retirement.

Mistake #7: Planning just for the “vacation” part of retirement

When people think about retirement, many often fantasize about travelling to exotic locations and walking on the beach at sunset. But those activities will only take up a few weeks of the year. Have you thought about what your daily life will be like in retirement? You’ll want to plan for both the vacation and the “daily life” parts of your retirement.

There are more retirement planning mistakes that it’s possible to make, but working on these is a great start. While it’s straightforward to identify the retirement planning mistakes you should avoid, the steps you might need to take to make your life even better are usually highly personal to your goals and circumstances. Once you’ve taken steps to avoid making these mistakes, turn your attention next to planning for the life that works best for you.

Source: Forbes
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5 Retirement Tips for 2019 and Beyond

5 Retirement Tips for 2019 and Beyond

Retirement should be a wonderful time in your life, but far too many people struggle to save for it.

The good news is, there are simple retirement tips you can take to help get prepared for your golden years.

In fact, if you just follow these retirement tips in 2019 and beyond, you’ll set yourself on the path to a much more secure future when you’re a senior.

1. Take advantage of tax breaks for retirement savings

While the government doesn’t directly provide cash to put into your retirement account, it makes investing for your future much easier by giving you tax breaks.

In 2019, you can invest as much as $19,000 in a 401(k) account with pre-tax dollars, or as much as $25,000 if you’re 50 or over and are eligible to make catch-up contributions. Depending on your income level and whether you or your spouse have access to a retirement plan at work, you may also be entitled to claim a tax deduction for a maximum of $6,000 in contributions made to an individual retirement account — or $7,000 if you’re eligible for catch-up contributions.

If you’re in the 22% tax bracket, just making a $6,000 investment could save you as much as $1,320 on your taxes. Your contribution would effectively reduce your take-home income by just $4,680.

Each tax break is use-it-or-lose-it. So if you don’t invest in 2019, you’ll be forever forgoing the help the government is offering this year. Don’t miss out on this free money.

2. Invest more than the conventional wisdom suggests

You’ve probably heard you should save 10% of income for retirement. The problem is, this likely won’t be enough.

In 2018, the median household income was $40,247, according to the U.S. Census Bureau. If you make the median, you’re 30 when you start saving, you get 2% annual raises, and you earn a 7% return on investment, you’d end up with about $700,000 for retirement at 66, if you followed the 10% suggestion.

While this sounds like a lot, it would produce only around $28,000 in income if you followed the 4% rule, which says you won’t run out of money if you withdraw 4% in year one of retirement and adjust withdrawals for inflation annually.

Most retirement financial advisor suggest you need to replace around 80% of pre-retirement salary when you leave the workforce — which, in this example, would be just over $80,000. Even when you factor in Social Security benefits of around $30,000, you’d be $22,000 short.

And your shortfall would likely be even greater for two reasons. First, most experts believe following the 4% rule is no longer safe and you need to withdrawal less. And second, many seniors end up spending more — not less — than pre-retirement income after leaving work.

To avoid the big financial problems that could result from such a large shortfall, aim to save 15% to 20% of income instead of just 10%.

3. Don’t forget to plan for your biggest retirement expense

When you get to retirement, do you believe Medicare will cover most of your healthcare costs? Unfortunately, this is a common misconception. In reality, Medicare has big coverage gaps, doesn’t pay for lots of things seniors need, and has high coinsurance costs.

There are various estimates for how much seniors should plan to spend on healthcare, but virtually every study shows out-of-pocket expenses totaling hundreds of thousands of dollars. If you aren’t prepared for a substantial portion of your nest egg to go toward medical care, you aren’t preparing properly for retirement.

If you have a qualifying high-deductible health insurance plan, you can invest in a health savings account to cover medical expenses as a senior. If you aren’t eligible to contribute to an HSA, earmark some of your 401(k) funds for care needs, or consider opening a separate retirement account that serves as your healthcare fund. That way, medical bills won’t make you broke.

4. Don’t sacrifice your retirement savings for your kids

Surveys have shown around three-quarters of parents sacrifice their retirement savings to help cover costs for their kids — including college education expenses. While it may seem helpful to spare your kids from the scourge of student loans, it’s a very bad idea to compromise your own financial security for your children.

Student loans can be paid back over a lifetime, and your kids have their entire careers to set themselves up for the future. If you’re nearing retirement, though, time is of the essence for you. You need to be proactive about achieving your own financial goals — even if that means closing the bank of mom and dad for good.

5. Understand how Social Security works

Social Security benefits are designed to replace only around 40% of pre-retirement income so if you’re counting on living on them as a senior, you’re making a big mistake.

It’s important to not only know that Social Security will play a limited role in retirement. You also need to understand how to maximize benefits. If you claim Social Security before you’ve worked for 35 years, for example, you’ll receive smaller benefits because the Social Security Administration determines your monthly income based on your highest 35 years of earnings, adjusted for inflation. If you haven’t worked 35 years, some years of $0 earnings are factored in.

Claiming Social Security prior to full retirement age — which is between 65 and 67, depending on your birth year — can also result in a permanent reduction to your monthly check. While the system is designed so beneficiaries generally get the same lifetime benefits no matter what age they first claim them, research from Stanford experts suggests you should wait until age 70. This allows you to get the largest possible checks, which protects you from running out of money later in life.

Regardless of when you decide to claim benefits, don’t act until you fully understand how the benefits system works. It can be very hard to undo a claim once it’s made.

Start following these retirement tips today

By keeping these tips in mind in 2019 and beyond, you can maximize your chances of a secure retirement and minimize the likelihood you’ll experience serious financial problems as a senior. You only get one shot at preparing for retirement, so take the right steps today to assure yourself a better tomorrow.

Source: Motley Fool
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Financial Fails in Retirement Planning

Financial Fails in Retirement Planning

From overspending to ignoring our debt, a recent survey found we are making an average of eight financial fails or bad decisions with our money each month.

Big or small, missteps with our money can harm our financial future. Here are some of the most common financial fails, and how to avoid them.

1. Failing to Save

We used to think of retirement planning like a three-legged stool. Retirees could rely on a pension from their employer, Social Security from the government and their own retirement savings. Those three legs created a nice nest egg. Now, with pensions becoming a thing of the past and the future of Social Security uncertain, it’s more important than ever that we control what we can — and that’s our savings.

I recommend at least 10% to 15% of every paycheck goes to your retirement savings. The easiest way to make this happen consistently is by setting up automatic contributions from each paycheck to a retirement savings account. But don’t stop there. Be sure you don’t just go on autopilot. Bump up your savings rate each year or with each raise. A small increase in your contributions won’t be very noticeable from your paycheck, but it will make a big difference in your balance.

2. Failing to Plan

The majority of Americans do not have a written financial plan. It’s a lot harder to save when you don’t have a plan for your money. A financial plan, written in conjunction with a trusted retirement financial advisor, will help keep you on track.

Your plan needs to look at your entire financial picture, both now and in retirement. And it needs to touch upon these core areas:

Income Needs:

When planning for retirement, many people underestimate their income needs. The average person will need to replace 80% to 90% of their pre-retirement income. If you want to look at your income needs more in depth, you can divide your retirement into three phases. 1) During early retirement, your spending will likely be higher. Retirees at this stage are travelling a lot and actively enjoying their free time. Depending on health, this phase is usually ages 55 to 75. 2) Then, spending slows down a bit in the second phase of retirement. Due to health or age, you will likely stay home more and travel less. This phase usually spans the 70 to 85 age range. 3) In your third phase of retirement, health care will likely be your biggest expense, and your spending might increase a bit from the second phase. This is generally true for those 80 and older.


It’s important to consider your tax bracket both now and in retirement. If you have your nest egg saved in tax-deferred accounts like a traditional 401(k) or a traditional IRA, that money is not all yours. When you withdraw money from those accounts in retirement, Uncle Sam is looking to collect. Factor your tax liabilities into your retirement plan.


Between your employer-sponsored retirement account, Social Security and your personal retirement savings accounts, you will need a strategy for how much and from where you will withdraw money in retirement. If you have a mix of tax-deferred and tax-free accounts, you will want to strategize your withdrawals. Remember, you are required to withdraw money from your tax-deferred retirement accounts once you reach age 70½; this is called a required minimum distribution, or RMD. Talk with your financial adviser to find a withdrawal strategy that works best for you.

Too many people are failing to deal with their debt. Older Americans are carrying more debt at higher levels, and more than one-quarter of baby boomers predict they’ll never pay off their debt! We encourage our clients to enter retirement debt-free. That means you need to get serious about paying off debt during your working years; there is more flexibility when you have a paycheck coming in on a regular basis. Once you’re in retirement, your budget is fixed and any debt payments you have need to fit within that budget. If they don’t, you will have to cut back on your lifestyle or you run the risk of running out of money.

4. Failing to Educate Yourself

More than half of baby boomers admit to knowing very little about Social Security benefits, and more than 80% haven’t even tried to guess how much health care will cost them in retirement. There is a lot to learn as you plan for retirement. Take an active role in getting educated. At Drake & Associates, we believe in education first. In order to make the best financial decisions, you need to truly understand your options. As we create financial plans, we make sure to explain every step so our clients feel confident in their financial future.

The bottom line: Recognizing our shortcomings and committing to making a change is the first step to improving our financial situation. When it comes to planning for retirement, our spending and saving habits need to be top priorities.

Source: Yahoo Finance
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