Financial Fails in Retirement Planning

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 financial adviser, 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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5 Consequences of an Early 401(k) Withdrawal

5 Consequences of an Early 401(k) Withdrawal

5 Consequences of an Early 401(k) Withdrawal

Compare the options available before taking funds early from a retirement account.

Taking money out of a 401(k) plan before age 59 1/2 often results in taxes and penalties. Investors who take early 401(k) withdrawals also miss out on the investment returns they could have earned if they left the money in the account.

Here’s what happens if you withdraw money from your 401(k) account early:

  • You could trigger a higher tax bill.
  • You may have to pay a penalty.
  • Your request might be denied.
  • The withdrawn funds won’t earn interest.
  • The distribution might not be protected from creditors.

Read on to find out how a 401(k) withdrawal before age 59 1/2 could impact your taxes and future investment returns.

You Could Trigger a Higher Tax Bill

Money withdrawn from a traditional 401(k) is considered taxable income for the year it is taken out. “Consider how a distribution will affect your taxable income, along with how that additional income might affect any other tax matters that phase out based on income,” says Steven J. Weil, president of RMS Accounting in Fort Lauderdale, Florida. For instance, if the withdrawal increases your income to the point that you are in a higher tax bracket, your tax rate could increase. The higher income could also lead to fewer deductions and credits, as some don’t apply to people with income above a certain level. Child tax credits, education deductions and passive real estate loss deductions are all based on income.

However, if you are taking the withdrawal due to a financial hardship, such as a job loss, the withdrawal’s impact on taxes may be different. “If income is low due to a change in your financial circumstances, it may make sense to take a withdrawal at the lower tax rate,” says Joseph Guyton, principal and founder of the Guyton Group in Portsmouth, New Hampshire.

You May Have to Pay a Penalty

Many 401(k) plans allow you to withdraw money for a financial need that is considered immediate and heavy, such as high medical care expenses, costs related to a home purchase or repair, higher education expenses or funeral expenses. You’ll need to meet certain criteria to be eligible to take a distribution while working for the company that provides the 401(k) plan, and you’ll only be able to withdraw an amount that satisfies the need. If you withdraw funds from a 401(k) before age 59 1/2, you will likely have to pay an early withdrawal penalty. “Distributions are subject to a 10% penalty prior to 59 1/2,” Guyton says. For example, taking out $10,000 would result in a 10% penalty of $1,000.

The IRS has additional rules that occasionally allow for penalty-free hardship withdrawals. Employees who are laid off, fired or quit a job between ages 55 and 59 1/2 can take money out of their 401(k) without penalty. “Another obscure IRS rule is the 72(t) rule, which allows for an individual to take at least five substantially equal periodic payments from a retirement account over five years or until the individual reaches age 59 1/2, whichever is earlier,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan. You can also avoid the 401(k) early withdrawal penalty if you have large medical expenses, you are totally and permanently disabled or you are a member of the military reserve and take a distribution during active duty that exceeds 179 days.

Your Request May Be Denied

Some plans have restrictions on when withdrawals can be made. If you are still working, check with your employer to see if early withdrawals are allowed. “Not all plans allow employees to remove funds while still employed,” says Isaiah Goodman, chief financial advocate at Becoming Financial in Minneapolis.

Many 401(k) plans allow you to access your retirement savings as a 401(k) loan. You might be able to take out a 401(k) loan of up to 50% of the current value or $50,000, whichever is less. The money is generally paid back at set times through automatic paycheck deductions. “This could be an option to cover an immediate need without depleting funds for your retirement future,” Goodman says. However, if you leave your employer, the full amount of the remaining balance will usually need to be paid back by the due date of your federal tax return. If you don’t pay the amount owed, it will be treated as a taxable withdrawal.

The Withdrawn Funds Won’t Earn Interest

Retirement accounts are designed with the idea that you may earn a return on your investment over time. When you remove funds, the money that was invested in the account no longer has a chance to increase.

Retirement savers can defer paying income tax on the money they contribute to a 401(k). The funds can grow tax-free until you take them out. You miss out on the tax deferral benefit when you take money out of the account early.

In addition, if you withdraw 401(k) funds before retirement, you might be reducing the overall amount available to you in the future. It could take several years or longer, depending on the amount withdrawn, to rebuild the retirement fund and plan for future income needs. “This could cause a delay in the start date of retirement,” Guyton says.

The Distribution Might Not Be Protected From Creditors

If you owe a significant amount in debt, taking an early withdrawal could lead to creditors claiming the amount. In some states, money in qualified plans “is protected from the claims of creditors, which can be valuable for those with substantial debt or personal liability,” Weil says. In these cases, you might decide to look for other ways to access cash or pay off debt rather than taking the money out of a 401(k). “Consult a qualified tax advisor before taking any action,” Weil says.

Source: U.S. & World Report News
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Take the Retirement Income Security Evaluation

Take the Retirement Income Security Evaluation

Take the Retirement Income Security Evaluation

Want to know how prepared you are for retirement? There’s a score for that.

You know you need to put money away for retirement. But how much do you really need to save?

It’s a question that confounds many individuals. And not knowing can contribute to one big fear: that they will run out of money in their later years.

A new tool aims to help you understand just how close you are to meeting your goals.

A score called RISE — Retirement Income Security Evaluation — evaluates just where you fall in terms of having steady income in retirement, much like a credit score, on a zero to 850 scale.

The tool is provided by the Alliance for Lifetime Income, a nonprofit backed by the financial services industry. It was developed by Milliman, a provider of actuarial products and services.

Consumers can access the tool online. After inputting factors such as the Social Security income you expect, any pension income you may have, how much you have saved and your monthly living and medical expenses, you can see how well you will fare financially in retirement.

“Based on what you put in, this is your score and means you’re going to run out of money if you live past a certain age,” said Jean Statler, executive director at the Alliance for Lifetime Income.

The information you input in is anonymous, meaning it will not be shared with other parties. The tool is also intended to be flexible, so you can adjust certain data to see how that affects your score.

The alliance advocates that consumers consider annuities to generate guaranteed income. However, the tool itself does not steer consumers to specific investment products.

“Sometimes the answer is not an annuity,” Statler said. That goes particularly for individuals who already have a high RISE score through other income sources.

Instead, the organization hopes that consumers will take away one key message: “Go talk to your financial advisor,” according to Statler.

The tool is aimed at individuals ages 45 and up with investable assets of $75,000 to $2 million.

There are both consumer-facing and advisor-facing versions of the tool. The professional version takes more details of an individual’s financial picture into account, such as portfolio allocations and different kinds of annuities.

Both versions are free.

Source: CNBC

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Medicare Enrollment Deadlines You Shouldn't Miss

Medicare Enrollment Deadlines You Shouldn’t Miss

Medicare Enrollment Deadlines You Shouldn't Miss

If you sign up for Medicare late, you could face higher premiums for the rest of your life.

Most people become eligible for Medicare during the months around their 65th birthday. If you don’t sign up for Medicare during this initial enrollment period, you could be charged a late enrollment penalty for as long as you have Medicare.

Take care to meet these Medicare deadlines:

  • You can initially enroll in Medicare during the seven-month period that begins three months before you turn age 65.
  • If you continue to work past age 65, sign up for Medicare within eight months of leaving the job or group health plan to avoid penalties.
  • The six-month Medicare Supplement Insurance enrollment period begins when you are 65 or older and enrolled in Medicare Part B.
  • You can make changes to your Medicare coverage during the annual open enrollment period, from Oct. 15 to Dec. 7.
  • Medicare Advantage Plan participants can switch plans from Jan. 1 to March 31 each year.

Here’s a look at when you need to sign up for Medicare and the penalties you could be charged for late enrollment.

Medicare Parts A and B Deadline

Individuals who are receiving Social Security benefits may be automatically enrolled in Medicare parts A and B, and coverage begins the month they turn 65. But those who haven’t claimed Social Security will need to take action to sign up for Medicare. You can first sign up for Medicare Part A hospital insurance and Medicare Part B medical insurance during the seven-month period that begins three months before the month you turn 65. Your coverage can begin as early as the first day of the month you turn 65, or the first day of the prior month if your birthday falls on the first of the month.

If you don’t enroll in Medicare during the initial enrollment period around your 65th birthday, you can sign up during the general enrollment period between Jan. 1 and March 31 each year for coverage that will begin July 1. However, you could be charged a late enrollment penalty when your benefit starts. Monthly Part B premiums increase by 10% for each 12-month period you delay signing up for Medicare after becoming eligible for benefits. “The idea behind the penalty is to give people a financial incentive to enroll in insurance from the get-go as opposed to waiting until they have some kind of negative health event,” says Mark Duggan, an economics professor at Stanford University.

If you or your spouse is still working after age 65 for an employer that provides group health insurance, you need to sign up for Medicare within eight months of leaving the job or the coverage ending to avoid the penalty. “You could (sign up) at any time after you turn 65 and are actively working, or when you retire they give you eight months to sign up for Medicare Part B without having to pay a premium penalty,” says David Santana, a health insurance specialist for the Centers for Medicare and Medicaid Services. Retiree health insurance and COBRA coverage are not forms of health insurance that allow you to avoid Medicare’s late enrollment penalty.

Medicare Part D Deadline

Medicare Part D prescription drug coverage has the same initial enrollment period of the seven months around your 65th birthday as Medicare parts A and B, but the penalty is different. The late enrollment penalty is applied if you go 63 or more days without credible prescription drug coverage after becoming eligible for Medicare. The penalty is calculated by multiplying 1% of the “national base beneficiary premium” ($33.19 in 2019) by the number of months you didn’t have prescription drug coverage after Medicare eligibility and rounding to the nearest 10 cents. This amount is added to the Medicare Part D plan you select each year. And as the national base beneficiary premium increases, your penalty also grows.

Medicare Supplement Insurance Plan Deadline

Medicare Supplement Insurance plans can be used to pay for some of Medicare’s cost-sharing requirements and sometimes services traditional Medicare doesn’t cover. The Medicare Supplement Insurance plans enrollment period is different than the other parts of Medicare. It’s a six-month period that begins when you are 65 or older and enrolled in Medicare Part B. During this open enrollment period, private health insurance companies are required by the government to sell you a Medicare Supplement Insurance plan regardless of health conditions. “That’s when you’re entitled to get a Medigap plan without substantial underwriting,” says Ronald Kahan, a medical doctor and author of “Medicare Demystified: A Physician Helps Save You Time, Money, and Frustration.”

After this enrollment period, insurance companies are allowed to use medical underwriting to decide how much to charge for the policy and can even reject individuals they don’t want to cover. If you miss the open enrollment period, you are no longer guaranteed the ability to buy a Medicare Supplement Insurance plan without underwriting, or you could be charged significantly more if you have any health conditions. You might not be able to switch to a new Medicare Supplement Insurance plan later, so choose carefully during the open enrollment period. “Once you have been on a supplemental plan for a while, and let’s say you get sick, the plan that you are on must keep you, but another plan does not have to take you,” Kahan says.

Medicare Open Enrollment Deadline

You can make changes to your Medicare coverage during the annual open enrollment period from Oct. 15 to Dec. 7. During this period, you can switch to a new Medicare Part D prescription drug plan, join a Medicare Advantage Plan or drop a Medicare Advantage Plan and return to original Medicare. Changes made during this period will take effect on Jan. 1 of the following year.

[ READ: Medicare Fall Open Enrollment Advice ]

Medicare Advantage Open Enrollment Deadline

Medicare Advantage Plan participants can switch to a another Medicare Advantage Plan or drop their Medicare Advantage Plan and return to original Medicare, including purchasing a Medicare Part D plan, from Jan. 1 to March 31 each year. You can only make one change per year during this period, and the new plan will begin on the first of the month after your request is received.

Source: U.S. & World Report News
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Why Working Has Become the New Retirement

Why Working Has Become the New Retirement

Why Working Has Become the New Retirement

The gap has narrowed between planning to work in retirement and actually doing so.

For years, many workers nearing retirement have professed plans to work part-time during retirement. But few retirees have actually continued working part time. Things are changing.

A recent survey of pre-retirees and retirees shows that the gap between planning to work in retirement and doing so has narrowed. I have to confess I was a little bit surprised and more than a little pleased to see the results. Let me share with you what the researchers found and what retirement analysts say is going on.

Findings of a survey of retirees and pre-retirees

The LIMRA Secure Retirement Institute surveyed recent retirees and pre-retirees (ages 55 to 71) who’ve retired within the past two years or plan to retire in the next two years and had at least $100,000 in assets. Among the pre-retirees, 27% said they plan to work part-time in retirement and 17% said they expect to gradually reduce their hours before stopping work entirely. Among the retirees, 19% are working part time and 17% have reduced their working hours.

The study found an interesting gender distinction, too: a quarter of the female recent retirees phased into retirement, while just 16% of male recent retirees did. Men may be less likely to phase into retirement than women because it’s harder to do so due to their preretirement job functions, the LIMRA researchers noted; 23% of the retired men surveyed worked in managerial job functions before retirement compared with 13% of women.

There are, I think, three big reasons why previous studies showed a much higher percentage of pre-retirees planning to work in retirement than the percentage of retirees who were working part time.

First, pre-retirees have been overly confident and optimistic about their desire or ability to work part-time in retirement. Second, health challenges frequently prevent retirees from working in retirement. Third, people in their 60s and 70s have typically had a hard time getting hired due to age discrimination.

So, what’s going on now?

“The numbers are in good alignment because the pre-retirees were two years or less from retirement. So they had a pretty good idea what they were going to be doing,” said Alison Salka, director of LIMRA and LIMRA Secure Retirement Institute Research. “The closer you are to retirement, the more accurately you can predict what you are going to do. You’re also more likely to have been planning for it.”

Why people work part-time in retirement

Salka said the three primary reasons for continuing to work among employed recent retirees are: for spending money, because they enjoy their work and to stay intellectually engaged.

Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies (and a Next Avenue Influencer in Aging), told me she found it “encouraging that the gap between pre-retirees’ vision of transitioning into retirement compared with the experience of recent retirees is finally starting to close.”

Working at least part-time in retirement is a good thing for many retirees, Collinson said. “It enables them to earn income, continue saving for retirement and bridge savings shortfalls — with more free time for personal pursuits,” she noted.

The savings shortage

Many 50+ workers haven’t saved enough to fully retire at the traditional retirement age of 65, Collinson explained. According to Transamerica, the estimated median total household savings in all retirement accounts among the semiretired is $216,000. “It will be difficult, if not impossible, to make these savings last a retirement of twenty-five or more years,” Collinson said. And with every passing year, the percentage of retirees with pensions is shrinking, adding to the need by some new retirees to work part-time.

Collinson’s theory on why the working-in-retirement gap of wish and reality narrowed in the LIMRA report: “The labor environment is becoming more conducive to workers extending their working lives and pre-retirees planning a transition to retirement.” In today’s tight labor market, employers are increasingly hiring older Americans to work part-time in retirement.

The gig economy and retirees

By 2026, the Bureau of Labor Statistics estimates, the labor-force participation rate of Americans age 65 to 74 will grow to about 30%, compared with roughly 17% in 1996.

“With the proliferation of the gig economy and the digital marketplace, it’s easier than ever for experienced professionals to do freelance and consulting work, although it still requires careful planning and preparation,” Collinson said.


In fact, demographer Peter Francese recently told Barron’s that he believes the current figures on boomers in the labor force are understated. Many people in their 60s and 70s, he said, are working part time off-the-books, so they’re not counted in the government’s labor force figures.

Advice for working part time in retirement

My bottom line: if you plan to work in retirement, don’t wing it.

You need to start planning a few years ahead of time. You might need to add some employment skills, or at least keep yours up-to-date.

It’s a good idea to network with people you know at employers where you’d like to work in retirement and that hire part-time workers.

If you want to start your own business as a consultant or launch an entrepreneurial effort, you’ll want to gear up gradually by doing your market research, getting financially fit and laying the necessary groundwork. (Shameless plug: My new book on midlife entrepreneurship, Never Too Old to Get Rich, includes stories of people who’ve launched businesses as their second acts, with their advice for others.)

Source: MarketWatch
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5 Times to Revisit Your Retirement Plan

5 Times to Revisit Your Retirement Plan

5 Times to Revisit Your Retirement Plan

Your goals change. Your retirement plan needs to as well.

There’s a tendency to see your retirement plan as a static document — a map that you follow throughout your working life leading you toward the finish line.

But maps can become outdated, and so can your retirement plan. You have to update it periodically to ensure that it’s still in alignment with your shifting goals, savings, and priorities. Here are five times you should review it and consider updates.

1. When you start a new job

With a new job comes a new retirement plan, new investment options, and possibly a new 401(k) match. All of these can affect how easy it is to save for retirement.

A greater 401(k) match may reduce the amount you have to put away on your own, while higher fees could eat into your growth, forcing you to save even more to overcome this loss. Your new job may also have restrictions on when you’re eligible to participate in the 401(k), and you might have to save on your own in an IRA during the interim.

Ask about your new employer’s 401(k) and review your plan summary and the prospectus for your investments. Compare this against your old 401(k) and adjust your savings up or down as needed to hit your monthly goals.

You also have to think about your old 401(k). If you left the job before you were fully vested in the plan, you could lose some or all of your former employer’s 401(k) match, forcing you to increase your savings at your new job to stay on course. You may also want to consider rolling your old 401(k) over into your new one or into an IRA. This makes it easier to keep track of your retirement savings, and it may help you save on fees, versus leaving your money in your old 401(k).

2. When you experience a major life event

Adding or losing a member of your family, experiencing a major health crisis, or buying a new home can affect how much you need to or are able to save. You might have to divert some of those funds toward new living expenses, requiring a whole new retirement plan.

You may have to delay retirement to give yourself extra time to save if you can’t meet your monthly target. Or if you don’t want to do that, consider slashing spending on discretionary purchases, like dining out, to free up more cash for retirement.

3. When you turn 50

Adults 50 and older are allowed to make catch-up contributions to their retirement accounts. These can be up to $25,000 to a 401(k) in 2019 and $7,000 to an IRA, compared with $19,000 and $6,000, respectively, for adults under 50. If you weren’t able to start saving for retirement as early as you’d hoped, you can make up for it now. Consider increasing your retirement contributions if you have the extra cash, and be mindful of the changing contribution limits each year.

By 50, you’re probably not too far off from retirement, so that’s also a good time to make any necessary course corrections if you’re way off your retirement goals. You might plan to work longer if you’re not going to have enough saved, or reduce your planned spending in retirement so you’ll have enough for basic living expenses.

4. When you’re ready to retire

Before you exit the workforce for good, look over your plan again to make sure you’ve met your savings goals and that you’re comfortable with your withdrawal strategy. Quitting your job without doing this could cause problems later if you realize you don’t have enough money. If you’re not on track, you may have to go without some things that are important to you or reenter the workforce until you can save enough.

5. Once a year

Ideally, you should look over your retirement plan annually. You may not have to make any changes, but if you do, it’s easier to make these small adjustments once a year than it is to make larger adjustments as you near retirement and realize you don’t have enough savings.

If you’re not sure how much you need to save for retirement or how to make adjustments to your retirement plan to keep yourself on track, consider bringing in a financial adviser, who can help you identify your goals and figure out how much you must save in order to reach them. Just be sure to choose a fee-only financial adviser instead of a fee-based adviser who earns commissions, which can create a possible conflict of interest.

Your retirement plan needs to be as alive and dynamic as you are. Don’t just assume you’re on track. Do the math and verify it. Review your retirement plan when one of the above scenarios applies to you.

Source: USA Today
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The Secret to Retirement Income Drawdowns

The Secret to Retirement Income Drawdowns

The Secret to Retirement Income Drawdowns

If you’re like most pre-retirees, retirement planning starts by asking if you’ll have enough income during your retirement.

If it appears you’ll generate adequate income, the focus shifts to tax and investment techniques that will maximize this income. In other words, “given my income, how can I retain more of it?” However, if you’re upper middle-income or affluent, your retirement planning is best addressed by using a different approach. The better retirement planning method for this demographic is to create an efficient retirement drawdown strategy. Instead of starting with income, focus in its place on how to efficiently decumulate or “drawdown” your assets and benefits.

Retirement Drawdown Goals

There are three basic financial goals most affluent consumers share in creating their drawdown strategies:

  • Retirees target a monthly cash flow during retirement years to maintain their desired standard of living. This cash flow may derive from principal or interest in an investment, an employer benefit program, or a government program. Whatever the source, the measure is after-tax cash flow. So, whether you withdraw $10,000 after-tax monthly income from a Roth IRA or $13,000 from a taxable IRA, your target is to have $10,000 after-tax cash in hand.
  • Maximizing returns on capital remains crucial. Because you may be in retirement 30 years or more, you’ll want your decumulating investments to generate income and/or capital gain. The more return these assets generate, the slower the pace of decumulation.
  • Making full use of retirement benefits is a goal among all income groups. Whether the benefit is from an employer (e.g. a pension plan) or the government (e.g. Social Security), retirees see these benefits as earned. With affluent retirees, however, there are typically more challenges and opportunities with the timing of the receipt of these benefits. Taking too early may lessen your longevity protection; taking too much may cause waste due to unnecessary taxation. If you can maximize the timing and taxation of benefits to create additional after-tax cash flow, you can slow the pace of decumulation of your other retirement assets.

Key Drawdown Strategies

How can you accomplish these financial goals with your drawdown strategies? There are three basic ways to maximize efficiencies.

1. Tax efficiency in withdrawals is a primary strategy, and typically one that becomes increasingly important the greater your wealth.

The techniques are numerous and varied. For example, it may involve timing of Roth IRA versus IRA withdrawals to limit taxes, directing IRA funds to a charity to save on required minimum distributions (RMDs), and avoiding the Social Security tax torpedo through delayed filing. It often encompasses targeting taxable withdrawals to stay under income thresholds for Medicare Part B, the net investment income (NII) surtax, and qualified business income (QBI) deduction. In sophisticated planning, it entails calculating how much of an IRA to convert to a Roth IRA to stay just under your next marginal tax bracket.

2. Portfolio efficiency during decumulation is also crucial.

This involves the juggling of three factors in such a way as to maximize the overall after-tax efficiency of retirement capital: the tax status of accounts, the tax status of assets, and the growth potential of assets.

Here’s how it works. Some assets are tax efficient (e.g. tax-exempt bonds), and some are tax inefficient (e.g. REITs, mutual funds). At the same time, some retirement accounts are tax-free (e.g. Roth IRAs), while others are tax-deferred (e.g. IRAs), and yet others are after-tax (e.g. saving and investments). Finally, some assets have growth potential (e.g. stocks) while others do not (e.g. CDs, money markets). Portfolio efficiency involves locating the right kind of asset in the right account to leverage these attributes.

For example, you might place higher expected return assets in your tax-free account while locating lower expected return assets in your tax-deferred accounts. This helps avoid taxation on potentially high yielding assets. In other cases, you may put your least tax efficient assets in your tax-deferred accounts while keeping your tax efficient assets in your taxable accounts. This helps delay taxes on higher taxed assets.

3. An efficient order of withdrawals is a lifetime aspect of drawdown strategies.

It’s not just a matter of setting up your withdrawal schedule on the date you retire and then going on autopilot. The ordering of withdrawals is where efficiency can be maximized.

Here’s how a typical order of withdrawal strategy might work. At retirement, you start withdrawing from your IRA until your taxable income is a few dollars below your next marginal tax bracket. Any additional needed cash flow would then come from your after-tax assets, such as your investments. Once you reach age 70, you generate part of your income by filing for Social Security, and this cash flow lessens the withdrawals you need to take from your other accounts. Finally, upon reaching age 70 ½, you begin to withdraw from your Roth IRA funds in order to minimize the tax burden of RMDs.

What’s the Secret?

You may look at your personal situation and be wondering how you can possibly sort through these strategies and come up with the right drawdown approach. The myriad ideas are a witch’s brew of confusing and seemingly contradictory tactics. Is there a secret drawdown strategy?

Despite the challenges, it is possible to create a workable drawdown strategy. It doesn’t involve secrets. It just calls for some work and a lot of planning. The following steps can help get you where you want to be with retirement drawdown strategies.

1. Accept that there is no one right strategy.

The fact is that withdrawal strategies are not only complex, but also inexact. If you don’t believe this, Google the question “what is the maximum retirement income withdrawal rate?” A quick scan will provide you with opinions that range from 3.5% to over 8% of retirement capital. The reality is that every individual’s profile is unique, and the best you can do is come up with a strategy that maximizes the efficiency of your withdrawals.

2. Adjust and adapt your strategy.

Getting to retirement involves enough shocks and deviations; but retirement itself has its own set of surprises. Drawdowns will need to be adjusted to account for returns on investments, changes in taxes and, most importantly, your personal fluctuations in needed cash flow. Your drawdown plan should be monitored and tweaked on an ongoing basis.

3. Get some help.

With affluence comes complexity, and you’ll likely find that taking a DIY approach to determining your drawdown strategy isn’t efficient or even plausible. Consider the example of just one tactic used in the drawdown process: arranging your income to stay under key thresholds. For the NII surtax, the threshold is based on “marginal adjusted gross income;” for QBI it’s measured by “taxable income;” and to avoid the Social Security tax torpedo, it involves a “base amount” calculation unique to Social Security. There are experts who can help you with these complexities, as well as investing, portfolio management, and benefit maximization. In most cases, the expense for this kind of expertise is worth it in order to maximize the efficiency of your drawdowns.

4. Be informed.

Outside experts, while beneficial, won’t be effective unless they understand your personal situation. And you won’t be able to explain your situation unless you are informed. In theory, you can gather up your benefit statements, brokerage accounts, and tax returns and hand them over to your advisor to sort through. In reality, this still leaves your advisor in the dark. Only you know your goals, your longevity prospects, your income needs, and your expected retirement outcomes. The more you learn about retirement planning as well as drawdown strategies, the more likely you are to succeed in retirement.

Retirement income drawdown strategies is an increasingly important topic for upper middle-income and affluent Americans. With wealthy individuals, tax efficient drawdown strategies are also important, but there are added challenges and opportunities. For example, a multi-millionaire may intentionally pay a 37% income tax on a withdrawal in order to avoid a 40% gift tax on that same amount. 

Source: Forbes
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Why You Should Consider a 5% Rule in Retirement

Why You Should Consider a 5% Rule in Retirement

Why You Should Consider a 5% Rule in Retirement

A long term investing strategy can lend itself to an annual withdrawal of more than 4%.

Retirees often follow what is known as the 4% rule.

Established in 1994 by financial advisor William Bengen, the rule stipulates that you should be able to withdraw 4% of your retirement savings each year without running out of money during your lifetime.

But if you are a long-term investor who has maintained a diversified portfolio throughout your accumulation years, you might instead consider increasing your withdrawals to 5% each year.

Drawing down 5% will still maintain financial security and help you ride through any market cycle without overreaching, as your portfolio will be able to make up any losses that are incurred during a downturn when the markets recover.

Here are some key steps for an investor to take to determine whether to follow a 5% withdrawal rate in retirement:

Calculate How Much Would Be Needed

A key step is to determine how much money you will need in retirement to draw down 5% each year.

If your intention is to preserve your assets to pass them down to your children or other beneficiaries in the future, withdrawing 5% each year will ensure a secure retirement so long as your nest egg is large enough to allow it.

During your accumulation years (or those prior to retirement) consider what lifestyle you will want to maintain in retirement and how much you will need each year to achieve it.

This would be the time to factor in travel plans, the future purchase of vacation homes, ongoing financial support of family members and any other significant expenses.

Proper financial planning throughout your life is required to ensure you have an adequate nest egg and that following the 5% percent rule will be effective.

Work with a trusted financial advisor who can help determine that your investment strategy can accumulate enough savings by the time you plan to retire to allow for a 5% distribution each year.

For example, if you conclude that you want to have $50,000 to spend each year, you will need to have $1 million dollars saved in order to retire.

On the other hand, if you have a retirement portfolio of $5 million, you can draw down $250,000 each year while still preserving your assets.

Make Sure You Are Not in Debt

To follow the 5% rule in retirement correctly, you cannot be carrying any debt.

If you have a mortgage, credit card, or any other debt that you need to pay off, those payments will eat into the 5% you’re taking out each year and prohibit you from affording the lifestyle you determined you wanted to have.

Work with your financial advisor to make sure you are completely debt free before adhering to the 5% draw down rule.

Drawing Down More Money May Be An Option

If you don’t have children or other beneficiaries and want to spend your hard-earned money, consider withdrawing more. Some people are adamant that they want to spend most of their money before they pass away, and then distribute whatever is left to their favorite charitable causes.

If you and your financial advisor agree that you truly have more than enough money to last for what is an increasingly long life expectancy in the United States, and you are not concerned about drawing down your portfolio’s assets, you can consider increasing your annual withdrawal to 7% or even 8% based on your level of wealth, lifestyle and expenses.

Just be sure to have regular check-ins with your financial advisor to confirm you are not overspending and are still on track.

This strategy is not, however, recommended for people who want to pass on their estate to others or have other circumstances that would make 7% or 8% far too high of an annual distribution.

Whichever percentage you choose to withdraw from your retirement savings each year, it is critical to make the decision alongside a financial professional who knows your portfolio, lifestyle and estate plan.

A secure retirement strategy is most certainly always the best one.

Source: U.S. & World Report News
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This is a Retirement Surprise You're Probably Not Planning For

This is a Retirement Surprise You’re Probably Not Planning For

This is a Retirement Surprise You're Probably Not Planning For

Early retirement may sound like a dream. However, if today’s retirees are any indication, you may want to rethink how you plan financially.

A new survey from NerdWallet finds that today’s retirees stopped working at 59, on average.

That is much lower than the traditional retirement age, which many still consider to be 65. Because full Social Security retirement benefits don’t kick in until as late as 67 for many, a number of experts recommend pushing retirement off even later.

Some of those retirees — 36% — said they didn’t have a choice as to when they retired. What’s more, 18% said they had to stop working because of their health, and 9% said a job loss forced them into retirement.

While you may think of retirement as far off in the future, planning for the fact that you may be forced into early retirement would have a dramatic impact on how you save.

Take a 25-year-old with pre-tax income of $40,000 and $10,000 in savings who expects to live to 95.

Assuming a 6% return, that 25-year-old needs $483 in savings per month in order to retire at 67, according to NerdWallet’s retirement calculator. Changing that retirement date to 59 — eight years earlier — would bump their savings target up to $883 per month.

The savings hurdles are even higher for a 35-year-old because they have less time until retirement.

Take an individual who is making $80,000 in pre-tax income with $87,000 in savings who also expects to live to 95.

To retire at 67, they would need $1,267 a month in savings, assuming a 6% return, according to NerdWallet’s retirement calculator. That gets kicked up to $2,767 a month in savings if they instead retire at 59.

The key takeaway: Even if you don’t plan to retire early, you should save like you may have to.

If you’re in your 20s, putting more money away now means that you will have to save less over time, noted Arielle O’Shea, investing and retirement specialist at NerdWallet.

Even if the idea of retirement itself doesn’t motivate you, the flexibility that having those funds will give you should.

“You’re giving yourself options,” O’Shea said, including the ability to pursue a different career if you choose to.

If you’re in your 30s or 40s, do not get discouraged, O’Shea said.

Take advantage of any changes to your expenses, like children switching from private day care to public school, to invest that extra money toward your retirement.

Bottom line: “Save as much as you can,” O’Shea said.

One thing all retirement savers should do: Calculate how much you need to save for based on multiple retirement ages. Non-retired survey respondents most commonly said they expect to retire between 60 and 66.

By moving your target retirement date higher and lower, you can see how that changes your retirement savings targets, O’Shea said.

[READ: Retire in Your 40s Instead of Your 60s: 12 Effective Early Retirement Strategies]

“Americans aren’t saving enough for retirement, and we’re hoping to open their eyes about that and do whatever they can to boost those numbers,” O’Shea said.

NerdWallet’s online survey was conducted by the Harris Poll in July. It included 2,027 individuals ages 18 and up, 1,605 of whom are not currently retired.

Source: CNBC
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How to Make Your Retirement Savings Last Forever

How to Make Your Retirement Savings Last Forever

How to Make Your Retirement Savings Last Forever

New research explores various adjusted withdrawal rates strategies for retirement.

Do you expect to spend the same amount in each and every year in retirement?

Of course not. Yet many financial plans nevertheless assume that you will. The famous 4% rule, for example, grew out of research about what steady withdrawal rate you could maintain throughout retirement and never run out of money—even if the markets perform as terribly as they have in the worst periods in U.S. history.

By definition, of course, avoiding the worst-case scenario ends up, in most cases, leaving a lot of money on the table. New research shows that there is a better way.

This new research, which began circulating in academic circles earlier this month, was conducted by Javier Estrada, a professor of finance at IESE Business School in Barcelona. His new study is entitled: “Managing to Target (II): Dynamic Adjustments for Retirement Strategies.”

In it, Estrada measured the success rates of various strategies that adjusted withdrawal rates depending on whether your portfolio in any given year is ahead or behind of what your retirement financial plan had assumed it should be. It will be ahead, needless to say, if your investments perform better than had been assumed by your financial plan—and behind if your investments have performed more poorly.

Estrada refers to strategies that adjusted withdrawal rates as “dynamic,” in contrast to the “static” strategy implicitly assumed by many financial planners.

To illustrate: Let’s say you retire with a $1 million portfolio, want to fund a 30-year retirement, and your investments grow at an annualized rate of 5% above inflation. Assuming you do not intend to leave a bequest, and assuming your portfolio’s investment return is 5% in each year along the way, you can withdraw the equivalent of $61,954 in today’s dollars in each and every one of those 30 years.

In fact, of course, that italicized assumption is unrealistic. Given the inevitable variability of yearly returns along the way—some good and some bad, it’s not unlikely that, at some point along the way, your portfolio’s performance would be insufficient to support that rate of steady withdrawals. You’d run out of money, in other words.

Estrada wanted to know if it would be a better idea, at the first sign of trouble, to temporarily reduce your withdrawals—rather than wait until your portfolio is completely depleted. He found that doing that significantly increased the likelihood of achieving your retirement financing goals. And increasing your chances of success didn’t require overwhelmingly large adjustments. Even reducing your withdrawals by 10% or 20% had a significant impact—meaning, in the above example, that your annual withdrawal would be no lower than $55,759 or $49,563 (for a 10% or 20% temporary reduction, respectively).

You might find such a reduction intolerable, of course. But bear in mind several things. First, the required reduction wouldn’t come as an immediate surprise, since it would be obvious nearing the end of a particular year that your portfolio was falling short—giving you time to plan for the reduction. Secondly, there aren’t any great alternatives when your retirement portfolio falls short. Not reducing your withdrawals only postpones your pain, since eventually you will have to reduce your spending.

[READ: A New Approach to Financing Retirement]

Thirdly, the dynamic strategies Estrada explored also allow for increased withdrawals following years in which your retirement portfolio is ahead of its targeted value. There is no requirement that you spend that extra amount, of course, and you could put it in a rainy-day fund to support you in those years in which withdrawals are lower.

Estrada also explored another type of dynamic retirement financing strategy, which involved adjusting your equity allocation according to whether your retirement portfolio is ahead or behind its targeted value. Though he found that these strategies also helped, they were not nearly as helpful as those dynamic strategies that adjusted withdrawal rates.

Estrada’s new study complements an earlier one that focused on strategies during the preretirement phase of your life when you’re saving and investing. You may recall that I devoted another column to that earlier study, which also found that dynamic strategies are superior to static ones: A willingness to adjust the amount you save and invest, depending on the performance of your portfolio, increases the chances you will achieve whatever goal you have set for how big you portfolio should be when you retire.

This new study extends that conclusion, allowing us to conclude generally that being dynamic—a willingness to adjust investment or withdrawal amounts—increases your chances of reaching your goals.

The even broader implication is that the world is profoundly uncertain, and no amount of good planning can possibly deal with ever eventuality. So it behooves all of us to plan for flexibility.

Source: MarketWatch
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