If you are already retired or are approaching retirement, you may feel overwhelmed that you didn’t start saving earlier or set aside enough to last through your golden years. Those are the two most common concerns for retirees. However, there are other financial regrets that you can take steps today to avoid.
Taking Social Security Too Early Into Your Retirement
According to the Social Security Administration, about 1 out of 3 people apply for benefits at the earliest possible age. That age is 62. If you can be patient and wait to file for benefits, you will be able to collect a much higher monthly amount. That is because benefits grow by a guaranteed 5% to 8% each year that you delay your claim. According to the SSA, you can wait until age 70 to claim your monthly benefits. This could result in a payment that is 75% bigger than if you had claimed at age 62.
Delia Fernandez, a certified financial planner from Los Alamitos, California, says many retirees look back and wish they had waited to collect a larger payment.
“They look back and say, ‘I should have waited, I would have had so much more Social Security coming in right now.’”
Not Putting Enough Money In A Roth IRA
The money going to “pre-tax” makes retirement contributions to 401(k)s and IRA while you are working more appealing. Also, doing so reduces the amount of taxes you pay since the money is taken out before taxes. But eventually, you will be withdrawing the money and paying taxes on just like regular income.
Presidential nominee Joe Biden has already announced he will increase taxes should he win the November election. With this, the tax rates can go higher. It may make more sense to put money into a Roth IRA and let the money grow tax-free. With a Roth IRA, you are putting in “after-tax” money, so when the time comes to start withdrawing money in retirement, you can take out the money tax-free – instead of tax-deferred like with a 401(k) or traditional IRA.
Not Investing Enough In The Stock Market
Many retirement plans recommend starting with a 60/40 mix between stocks and bonds and then decreasing stock exposure and increasing bond exposure as you age. However, many retirees may find that advice is too conservative to grow their nest egg. While the stock market can gyrate wildly, there’s still no other way to consistently generate returns that can outpace inflation.
Elizabeth Muldowney, a financial adviser with Savant Capital Management in Rockford, Ill. says, “Conventional wisdom may indicate the stock market is ‘risky’ and therefore should be avoided if your goal is to keep your money safe. However, this comes at the expense of low returns and, in fact, you have not eliminated your risk by avoiding the stock market, but rather shifted your risk to the possibility of your money not keeping up with inflation.”
Not Having A Retirement Plan
A care-free retirement is something we all dream about. Setting a financial plan to reach retirement is a great first step. But without planning how you will spend down your nest egg in retirement, you leave the door open to anxiety and worries.
Matt Wilson, a certified financial planner from Overland Park, Kansas, had a couple with a tremendous amount of anxiety about their investments and whether their money would last.
“They did not have a spending plan, tax plan or investment strategy. They had been pulling money from the investments in a haphazard way because they did not know what they did not know,” said Wilson.
“The level of stress and anxiety was reduced significantly after our meetings because they now had a plan,” Wilson says.
You can better predict your financial stability in retirement, making it possible to alleviate unneeded stress and worry. This can be done with a plan in place. It outlines how much money you will withdraw from your retirement accounts each month to live on,
If you are looking to create a retirement plan to make sure your golden years are enjoyable and free from worries, consult with a financial planner or financial advisor to discuss your specific wants and needs.
4 Ways To Get Your Retirement Plans Back On Track
Whether you are nearing retirement or already enjoying your golden years, the recent market correction – and subsequent rally – has millions of Americans reconsidering their retirement plans.
If you’ve found that your retirement accounts aren’t quite where you would like them to be, don’t worry, there’s still time – and steps you can take – to improve your financial situation.
Play “Catch Up” In Your Retirement Accounts
If your nest egg isn’t as sizable as you had hoped it would be by this stage, there is some good news. If you are over the age of 50, you can make what are called “catch-up contributions to your retirement accounts. These allow you to put more money into your retirement account each year than is permissible for those under the age of 50.
For example, the 401(k) contribution limit for those 50-and-under in 2020 is $19,500. But for those over 50 years of age, you can contribute an extra $6,500 this year as a “catch-up” contribution, for a total of of $26,000.
The same thing goes for a traditional IRA. The typical limit for 2020 is $6,000 per person. But for those over 50, you can contribute an additional $1,000 to catch up, for a total of $7,000.
Convert Your IRA To a Roth IRA
As Suze Orman recommended a few weeks ago, if you have a traditional IRA, it might make sense to convert over to a Roth IRA this year. With a traditional IRA, your money is invested pre-tax and you don’t pay any taxes until you start withdrawals.
With a Roth IRA, your deposits are after-tax, so you don’t pay any taxes when you withdraw money in retirement. Given the massive budget deficits our country is running, there’s a very strong likelihood that taxes will be much higher in the future than they are today.
So while it may be appealing to let your money grow tax-deferred in a traditional IRA, you could end up paying a higher tax rate in the future. If you convert your IRA to a Roth IRA, you would pay your taxes in the year you convert. This could be extra-beneficial if you will fall into a lower tax bracket this year due to job losses or retirement. Pay the taxes this year at a lower tax rate and let the money grow tax-free going forward.
Review Your Social Security Blanket
Social Security is a major part of every retiree’s monthly income. Fortunately, that monthly income won’t ever decrease, and is automatically adjusted for inflation every year. So it makes the decision of when to start collecting Social Security very important.
You can start collecting as early as age 62, but your benefits will be permanently reduced as much as 30%. If you were born between 1943 and 1954, your full retirement age is 66, and for those born between 1955 and 1960 the full retirement age is 67 – and is also 67 for everyone born after 1960.
Here’s where some patience can pay off: if you can afford to wait until age 70 to collect your benefits, your monthly checks will be 8% larger for every year you delay claiming your benefits.
Pay Off Loans Against Your Retirement Savings As Soon As You Can
Pay off any 401(k) loans as soon as possible. A loan against your 401(k) is counter to your goal of saving for retirement. inadequately funded.
Also, the money you are paying your loan back with has already been taxed, so you are paying back pre-tax money with after-tax money. To further frustrate you about taking out the loan, when you eventually retire and start withdrawing from your 401(k) you will be taxed again.
So you will end up paying taxes twice. It’s better to not take a loan against your 401(k). Although, if you must, pay it back as soon as you can.
Are Traditional 401(k) Accounts Bad For Your Retirement Dreams?
If your retirement account is in a traditional 401(k), you might want to consider switching to a Roth IRA, according to personal finance guru Suze Orman.
The reason, says Orman, is the idea that you will be withdrawing funds from your 401(k) in retirement when your personal tax rate is lower than it is today is likely not going to be true.
The amount of debt the country is carrying means tax rates in the future are going to be higher than they are today, not lower.
With a traditional 401(k) account, you put your money in “pre-tax” today and let it grow tax-deferred until you start your withdrawals. Those withdrawals will be at whatever the future tax rate is, which Orman says will be higher than today.
With a Roth IRA, you put in “after-tax” money today, but because you already paid taxes, your withdrawals are tax-free.
“The main thing really is this… please, if you have the ability to do a Roth 401(k), 403(b) or TSP, or a Roth IRA, those are the type of retirement accounts you want to be in,” says Orman. “Stay away from the “traditional” ones, that’s what they are called “traditional” IRAs or 401(k)’s, where you get a tax write-off today, but in the long run when you go to take your money out, you’re going to have to pay taxes on it. A Roth, you pay taxes today, and in the long run when you take it out, it’s tax free.”
Orman says the government can see all the money sitting in individual retirement accounts and knows when the tax-deferred accounts will need to take required minimum distributions, the first time the government will get their chance to tax the money.
“Do you really think that tax brackets aren’t going to have to go up 5, 10, 15-years from now in order to pay for all the debt we are carrying? Of course they are going to have to. When you put money in a retirement account, the government knows exactly how much money you have in there. The government knows you have to start taking required minimum distributions out by the time you are 72,” says Orman.
She suggests we just bite the bullet today and fill our accounts with “after-tax” money so we don’t have to worry about rising tax rates in the future.
“So given everybody’s going to get there soon rather than later, I’m telling you, I would rather pay the taxes today when we’re in the lowest tax brackets of a long time still, and let the money grow tax-free versus tax-deferred.”
Financial Advisers Agree
Mark Beaver, a financial adviser at Keeler and Nadler, agrees with Orman’s preference for a Roth IRA over a traditional 401(k).
As per Market Watch, “Orman is right in that these tax rates are a deal right now. ‘The tax code today is about as favorable as it’s ever been and the likelihood of that changing (to be higher) in the future is pretty good … Because of that, we look to add to Roths directly or do things like backdoor Roth contributions or conversions where it makes sense.’”
Monica Dwyer, vice president at Harvest Financial Advisors, warns that the government can also change the rules at any time about how it taxes retirement accounts, so today’s benefits of a Roth IRA could disappear in the future.
“Congress can get pretty creative about where they are going to collect taxes from and there is no guarantee that they won’t someday go after Roths,” she said.
Have a 401k? You Can Now Invest In Private Equity Funds
There’s good news for investors who are looking to add a little spice to their retirement accounts. For the first time ever, defined contribution plans – like 401ks – have access to private equity investments.
U.S. Secretary of Labor Eugene Scalia said in a statement yesterday that this step “will help Americans saving for retirement gain access to alternative investments that often provide strong returns.”
Typically viewed as a way to outperform the stock market, the average private equity investment has actually underperformed the stock market over the last 10 years. According to a study by Bain & Company, private equity investments returned an average of 15.3% compared to 15.5% for the S&P 500. The study does mention that top-tier private equity funds did manage to outperform the market.
Scalia’s announcement went on to add, “The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”
You won’t be able to invest directly into private equity funds in your 401k. You’ll only have access through specific investment vehicles like target-date funds. Defined benefit plans – like pensions – have had access to private equity investments for some time now. So, as Scalia mentions, this move now levels the playing field for investors.
Securities and Exchange Commissioner Jay Clayton supports the decision to allow defined contribution plans access to private equity investments. He also mentions that the new capital coming in will increase the funding sources available to private businesses.
How It Should Be Perceived
Investors, however, shouldn’t look at the ability to invest in private equity funds as a panacea of retirement riches.
Private equity investments are often much riskier than traditional stocks. As we mentioned earlier, they don’t always provide greater returns.
In an interview with Fox Business, Ed Slott, founder of IRAHep.com, said that investment losses in February and March may have caused a sense of panic among savers who might be searching for larger returns.
“Some of those [private equity] returns are sensational but, with anything, you could lose a boatload too,” Slott said. “It doesn’t mean private equity always makes money.”
You may lose money while investing in private equity funds. When that happens, you’ll likely have no recourse against your broker or fiduciary who put you in those investments.
As part of the announcement, Slott noted that there is a “liability shield” for fiduciaries. As long as they follow the guidelines set out by the Department of Labor, they will be within their fiduciary obligations. This makes it harder for investors to sue over losses.
The ability to invest in a private equity fund is alluring. However, the best advice comes from Alano Massi, the managing director of Palm Capital Management.
“Should that investor not feel comfortable with private equity, or simply does not understand it, then he or she should not participate,” Massi said.
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