Objective information about financial planning, investments, and retirement plans

Am I on Track for Retirement?

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Financial advisors are frequently asked some version of the question “Can I Retire?”  The Employee Benefit Research Institute (EBRI) recently released its 2018 Retirement Confidence Survey. The latest survey offered several key findings:

  • Only 32% of retirees surveyed felt confident that they will be able to live comfortably throughout their retirement.
  • Retiree confidence in their ability to over basic expenses and medical expenses in retirement dropped from 2017 levels.
  • Less than one-half of the retirees surveyed felt confident that Medicare and Social Security would be able to maintain benefits at current levels.

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It is essential that Baby Boomers and others approaching retirement take a hard look at their retirement readiness to determine any gaps between the financial resources available to them and their desired lifestyle in retirement. Ask yourself a few questions to determine if you can retire.

What kind of lifestyle do you want in retirement?

You’ll find general rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. Look at your individual circumstances and what you plan to do in retirement.

  • Will your mortgage be paid off?
  • Do you plan to travel?
  • Will you live in an area with a relatively high or low cost of living?
  • What’s your plan to cover the cost of healthcare in retirement?

Remember spending during retirement is not uniform. You will likely be more active earlier in your retirement.  Though you may spend less on activities as you age, it is likely that your medical costs will increase as you age.

How much can you expect from Social Security?

Social Security benefits were never designed to be the sole source of retirement income, but they are still a valuable source of retirement income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes.

Recent news stories indicating that the Social Security trust fund is in trouble is not welcome news for those nearing retirement or for current retirees.

What other sources of retirement income will you have?

Other potential sources of retirement income might include a defined-benefit pension plan; individual retirement accounts (IRAs); your 401(k) plan, and your spouse’s employer-sponsored retirement plans. If you have other investments, it is important to have a strategy that maximizes these assets for your retirement.

If you are fortunate enough to be covered by a workplace pension, be sure to understand how much you will receive at various ages.  Look at your options in terms of survivor benefits should you predecease your spouse.  If you have the option to take a lump-sum distribution it might make sense to roll this over to an IRA.  Also determine if your employer offers any sort of insurance coverage for retirees. 

Where does this leave me? 

At this point let’s take a look at where you are.  We’ll assume that you’ve determined that you will need $100,000 per year to cover your retirement needs on a gross (before taxes are paid) basis.  Let’s also assume that your combined Social Security will be $30,000 per year and that there will be $20,000 in pension income.  The retirement gap is:

Amount Needed

$100,000

Social Security

30,000

Pension

20,000

Gap to be filled from other sources

$50,000

 

Where will this $50,000 come from?  The most likely source is your retirement savings.  This might include 401(k)s, IRAs, taxable accounts, self-employment retirement accounts, the sale of a business, and inheritance, earnings during retirement, or other sources. 

To generate $50,000 per year you would likely need a lump sum in the range of $1.25 – $1.67 million at retirement.

Everybody’s circumstances are different.  Many retirees do not have a pension plan available to them, some don’t have a 401(k) either.

Look at where you stand and take action 

Some steps to consider if you feel you are behind in your retirement savings:

  • Save as much as possible in your 401(k) or other workplace retirement plan while you are still employed
  • Contribute to an IRA
  • If you are self-employed start a retirement plan for yourself
  • Keep your spending in check
  • Scale back on your retirement lifestyle if needed
  • Plan to delay your retirement or to work part-time during retirement

Providing for a comfortable retirement takes planning. Don’t be lulled into thinking your 401(k) plan alone will be enough. If you haven’t put together a financial plan, don’t be afraid to enlist the aid of a professional if you need help.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Wikipedia

Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

Photo by Aidan Bartos on Unsplash

You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2018 the maximum contribution to a 401(k) plan is $18,500 plus an additional $6,000 catch-up contribution for individuals who are age 50 and older at any point during the year.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Stock Market Highs and Your Retirement

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The Dow Jones Industrial Average closed above 25,000 for the first time ever last week. The Nasdaq closed about the 7,000 mark for the first time as well. The S&P 500 Index closed above 2,700 to round out one of the best weeks ever for the stock market.

Perhaps this is due to the new tax laws passed at the end of last year. Perhaps this is a continuation of the very solid gains in the stock market that we saw in 2017. These gains were in spite of the hurricanes in Texas, Florida and Puerto Rico, as well questions and issues surrounding the Trump administration and the situation with North Korea.

Difference Between Stocks and Bonds

At some point we are bound to see a stock market correction of some magnitude, hopefully not on the order of the 2008-09 financial crisis. As someone saving for retirement what should you do now?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you are at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is an ideal time to review it and see where you are relative to your goals. Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has some upside. Maybe they’re right. However don’t get carried away and let greed guide your investing decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Phillip Taylor PT

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

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One of the best tax deductions for a small business owner is funding a retirement plan.  Beyond any tax deduction you are saving for your own retirement.  As a fellow small business person, I know how hard you work.  You deserve a comfortable retirement.  If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

SEP-IRA vs. Solo 401(k)

SEP-IRA Solo 401(k)
Who can contribute? Employer contributions only. Employer contributions and employee deferrals.
Employer contribution limits The maximum for 2017 is $54,000 and increases to $55,000 for 2018. Contributions are deductible as a business expense and are not required every year. For 2017, employer plus employee combined contribution limit is a maximum of 25% of compensation up to the maximums are $54,000 and $60,000, respectively. For 2018 these limits increase to $55,000 and $61,000. Employer contributions are deductible as a business expense and are not required every year.
Employee contribution limits A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional, Roth, or Non-Deductible based upon their individual circumstances). $18,000 for 2017. An additional $6,000 for participants 50 and over. In no case can this exceed 100% of their compensation. The limits for 2018 increase to $18,500 and $24,500 respectively.
Eligibility Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years. No age or income restrictions. Business owners, partners and spouses working in the business. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

  • While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself.  I generally consider this a plan for the self-employed.
  • Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
  • The SEP-IRA contribution is calculated as a percentage of compensation.  If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
  • By contrast you can defer the lesser of $18,000 ($24,000 if 50 or over) or 100% of your income for 2017 and $18,500/$24,500 for 2018 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
  • Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
  • Roth feature is available for a Solo 401(k) if allowed by your plan document. There is no Roth feature for a SEP-IRA.
  • Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
  • Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
  • Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process.  Whether you go this route or with some other option I urge to start saving for your retirement today 

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit Flickr

401(k) Options When Leaving Your Job

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Retirement Funds over Time

Perhaps you are retiring or perhaps you are moving on to another opportunity. Perhaps you were downsized. Whatever the reason, there are many things to do when leaving a job. Don’t neglect your 401(k) plan during this process.

With a defined contribution plan such as a 401(k) you typically have several options to consider upon separation.  Here is a discussion of several and the pros and cons of each. Note this is a different issue from the decision that you may be faced with if you have a defined benefit pension plan.

Leaving your money in the old plan 

I’m generally not a fan of this approach. All too often these accounts are neglected and add to what I call “financial clutter,” a collection of investments that have no rhyme or reason to them.

In some larger plans, participants might have access to a solid menu of low cost institutional funds. In addition, many of these plans tend to be among the cheapest in terms of administrative costs. If this is the case with your old employer’s plan, it might make sense to leave your account there. However, it is vital that you manage your account in terms of staying on top of changes in the investment options offered and that you reallocate and rebalance your account when applicable.

Unfortunately far too many lousy 401(k) plans are filled with high cost, underperforming investment choices and leaving your retirement dollars there may not be your best option.

Rolling your account over to an IRA 

This route not only allows for the consolidation of accounts which makes monitoring your portfolio easier, but investors often have access to a wider range of low cost investment options than might be available to them via their old employer’s plan.

Even for do it yourselfer investors, rolling over to an IRA is often a good idea for similar reasons. You will want to take stock of your overall portfolio goals in light of your financial plan to determine if the custodian you are using or considering to offers a range of appropriate choices for your needs.

Rolling your account into your new employer’s plan 

If allowed by your new employer’s plan, this can be a viable option for you if you are moving to a new job. You will want to ensure that you consult with the administrator of your new employer’s plan and follow all of their rules for moving these dollars over.

This might be a good option for you if your 401(k) balance is small and/or you don’t have significant outside investments. It might also be a good option if your new employer has an outstanding plan on the order of what was mentioned above.

Before going this route, you will want to check out your new employer’s plan.  Is the investment menu filled with solid, low cost investment options? You want to avoid moving these dollars from a solid plan at your old employer to a sub-par plan at your new company. Likewise you don’t want to move dollars from one lousy plan to another.

Other considerations

A fourth option is to take a distribution of some or all of the dollars in your old plan.  Given the potential tax consequences I generally don’t recommend this route.

A few additional considerations are listed below (I mention these here to build your awareness but I am not covering them in detail here.  If any of these or other situations apply to you I suggest that you consult with your financial or tax advisor for guidance.):

  • The money coming out of the plan is always taxable, except for any portion in a Roth 401(k) assuming that you have satisfied all requirements to avoid taxes on the Roth portion.
  • You will likely be subject to a penalty if you withdraw funds prior to age 59 ½ with some exceptions such as death and disability.
  • There is also a pretty complex method for those under age 59 ½ to withdraw funds and avoid the penalty called 72(t). Additionally there are complex rules for those who are 55 and older who wish to take a distribution from their 401(k) upon separating from their employer. In either case consult with a financial advisor who understands these complex rules before proceeding.
  • If your old plan offers a match there is likely a vesting schedule for their matching contributions.  Your salary deferrals are always 100% vested (meaning you have full rights to them).  Matching contributions typically become vested on a schedule such as 20% per year over five years. You will want to know where you stand with regard to vesting anyway, but if you are close to earning another year of vesting you might consider this in the timing of your departure if this is an option and it makes sense in the context of your overall situation.
  • If your company makes annual profit sharing contributions, they might only be payable to employees who are employed as of a certain date. As with the previous bullet point, it might behoove you to plan your departure date around this if the amount looks to be significant and it works in the context of your overall situation.
  • Another factor that might favor rolling your old 401(k) to your new employer’s plan would be your desire to convert Traditional IRA dollars to a Roth IRA now or in the future. There could be a tax advantage to be had by doing this, however please consult with your financial advisor here for guidance tailored to your unique situation.
  • If you are 70 ½ or older and still working, you are not required to take annual required minimum distributions from your 401(k) as long as you are not a 5% or greater owner of the company. This might also be a reason to consider rolling your old 401(k) to your new employer’s plan, again consult with your financial advisor.

There are a number of options for an old 401(k) or similar retirement account when leaving your employer.  The right course of action will vary based upon your individual circumstances.  The wrong answer is to ignore this decision.

Approaching retirement and want another opinion on where you stand? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. 

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Investing Seminars – Should You Attend?

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It must be the season for investing and retirement dinner seminars. I’ve received a number of these invitations in the mail recently.

Typical was one from a local investment firm “___ Cordially Invites You to Attend an EXCLUSIVE Dinner Gathering!” Wow, me invited to anything that was exclusive?  The only brokerage sponsored investment “seminar” that I have ever attended featured legendary market guru Joseph Granville who among other things played the piano in his boxer shorts. It was in a movie theater in Milwaukee back in grad school, no food was involved.

Opening the invitation, it was from a well-known brokerage firm. The topic of the seminar is “Strategies for helping build a stronger portfolio.” The areas to be covered include:

  • Outlook for Domestic/International Stock & Bond Markets
  • Focus on distributions:  strategies for managing your retirement income
  • Developing a systematic process to help GET and STAY on the right financial track
  • Strategies to help take advantage of upside market potential while planning for a possible downside

So far this all sounds great. Reading on I noticed that while the session is sponsored by two brokers from the firm, the featured speakers were from a mutual fund company that offers funds that are often sold by commissioned reps while the other speaker was from an insurance company who is big in the world of annuities.

Should you attend? 

Clearly the objective is to sell financial products to the attendees, this is reinforced by the choice of speakers. That said there might be some good information available, the topics are certainly timely especially for Baby Boomers and retirees.

Consider attending one of these seminars only if you feel that you can resist a sales pitch. In the case of this session, the restaurant is a pretty good one that is close to my home. I am often tempted to check out one of these seminars out of professional curiosity, a free meal at a good restaurant would be an added bonus.

What are you hoping to gain from attending? The brokers are likely spending a fair amount of money on this session and expect a return on their investment. There will be a good deal of sales pressure at the very least to schedule a follow-up session with them.

Think about your real objective 

If you want a good meal and perhaps a little bit of knowledge, go ahead and attend.

If you are serious about finding a financial advisor to guide you to and through retirement, perhaps you should forego the meal and try to find someone who is a good fit for you. I strongly urge that you seek a fee-only advisor who sells only their knowledge and advice. NAPFA (a professional organization for fee-only advisors) has published this excellent guide to finding a financial advisor.

A free meal is great, but in the end as they say, there are no free lunches.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

Do you do your own financial planning? Looking to get you all of your finances organized? Want to be sure that you are on the right path for retirement? Check out Personal Capital’s retirement planning tools to be sure you are on track. (Note this is an affiliate link, I receive a fee if you enroll at no extra cost to you)

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Financial advisors are you looking to ramp up your content marketing? Contact me regarding my ghost writing services for advisors.