You’ve probably spent years, even decades, diligently contributing to your 401(k) plan. You’ve taken advantage of employer matching contributions, managed your investments and possibly even made catch-up contributions after age 50. Now retirement is quickly approaching, and you’ve started to wonder what you should do with your 401(k) after you leave the working world.
Many workers view their 401(k) plan as an accumulation vehicle. That’s a correct perspective while you’re working, but after you retire, the 401(k) may be a distribution tool. If you’re like many retirees, you’ll need income from your 401(k) and other investments to fund your lifestyle. The question is how to best utilize your plan to manage those distributions.
You have a few options available. Before you choose the option that’s best for you, though, you should ask yourself some questions about your risks, concerns and goals. Below are a few questions to consider. Your answers should give you guidance on how best to manage your 401(k) plan after retirement.
Should you roll your 401(k) funds into an IRA?
There’s nothing saying you have to do anything with your 401(k) funds. In fact, in many cases you can leave your funds in the plan indefinitely even if you are no longer with the employer. If you’re comfortable with the investment options and the plan’s service capabilities, you may wish to stay in the plan.
However, you may find that rolling your 401(k) funds into an IRA is a preferable strategy. With an IRA you can often choose from a wide range of investment options, far beyond what is usually available in a 401(k). An IRA may give you the flexibility and capability to find investments that better align with your risk tolerance and growth needs.
What’s the right allocation for you?
When you were working and contributing to your 401(k), you may not have been as sensitive to risk. In retirement, that could change. After all, you will likely be dependent on your retirement distributions to fund your lifestyle to some degree. As you begin to withdraw money, you may become more risk-averse.
The challenge is to find investments that not only limit your downside exposure but also provide growth opportunities. Many investments that have little risk also have little growth potential. That can be an issue, because you will likely need growth to combat inflation and support your withdrawals.
There are some financial tools, such as fixed indexed annuities, that offer protection against loss but also offer upside opportunity. However, those tools often aren’t available in 401(k) plans. To access those tools, you may need to roll your funds into an IRA.
What level of withdrawals should you take?
Another important decision point is in what level of withdrawals you should take from your 401(k) funds after you retire. It’s a tricky decision. Take too little, and you may not have enough to support your desired lifestyle. Take too much, and you may drain your 401(k) funds, putting yourself in a challenging position later in retirement.
It’s hard to determine the appropriate withdrawal level without first developing a retirement budget and a projected income plan. Once you understand your expenses and your estimated income, you can then make an accurate and informed decision about potential distribution
According to recent research from Fidelity, many parents are off track to fund their child’s college education. The study found that 70 percent of parents want to fully fund their child’s tuition and education costs. On average, however, parents are on track to cover only 29 percent of the costs by the child’s freshman year.1
College is a major financial challenge for many families, especially those who have multiple children. It’s only getting more expensive. From 1988 to 2018 the tuition for a private, nonprofit college rose 129 percent. Tuition for public college rose 213 percent over the same period.2
Fortunately, you have options available. Below are three different tools you can use to save for your child’s education. Each offers its own benefits and considerations. Your financial professional can help you choose the strategy that’s right for you.
The 529 plan has been around for years and has quickly become a popular choice for saving for college. These plans allow you to make tax-deductible contributions to an account for your child’s benefit. You can invest them as you like, and growth is tax-deferred. If you take distributions for qualified educational expenses, the withdrawals are tax-free.
Each state offers its own 529 plan, but you don’t have to use the plan in your state. You may get a deduction on your state income taxes if you use your state’s plan, but that’s not always the case. You also may find that another state’s plan has features and investment options that better fit your needs.
Keep in mind that 529 plan distributions are tax-free only if the funds are used for higher education. If your child doesn’t go to college, you may face taxes on your withdrawals. You can change the plan beneficiary to a different child. To take advantage of the tax break, however, you must ultimately use the funds for education.
These plans may be a better fit if you want more flexibility with regard to your child’s options. These are general savings accounts for minors. When your child reaches the age of majority in your state—usually either 18 or 21—the accounts transfer to their ownership. Your child can then use the funds as they wish.
However, you retain control of the assets until your child reaches adulthood. Also, while the growth in the accounts isn’t tax-deferred, it also isn’t fully taxable. Some growth is tax-free, and then, at additional levels, growth is taxed at the child’s rate.
Do you use a Roth IRA to save for retirement? If so, you also may be able to use it to pay for your child’s education. Normally, you can’t take out distributions from a Roth before age 59½ without paying a penalty. However, you may be able to get a waiver on the penalty if you’re using the funds to pay for college.
You can also always take out your contributions from a Roth at any time without paying taxes or penalties. If you withdraw your contributions, however, you’ll reduce your balance and limit your growth potential in the future.
The Retirement Peace Project is a “non-commercial” retirement education organization. Classes are supported by local churches, employers and United Way chapters. Call us today (217) 498-7700 for a schedule of an upcoming Retirement Peace University in your area.
17742 – 2018/6/19
Risk management is at the core of any sound financial plan. But it takes on heightened importance in retirement. Once you leave the working world, you don’t have the benefit of a regular paycheck. It could be difficult to bounce back from a market downturn or a costly emergency.
Health care costs can be an especially dangerous risk for retirees. Fidelity estimates that the average married couple will spend $275,000 on out-of-pocket health care expenses.1 That figure doesn’t even include long-term care, which can cost thousands of dollars per month and may be needed for several years.
Fortunately, there are steps you can take to reduce your risk exposure and protect your retirement. Below are three such steps to consider. If you haven’t yet developed your retirement risk management strategy, now may be the time to do so.
Adjust your health care coverage annually to meet your needs.
Medicare is a valuable resource for retirees. In its original form, it provided coverage for hospitalizations. Over time, however, Medicare has been expanded to cover things like doctor visits, prescription drugs and much more. Different plan options come with different protection levels, as well as varying premiums, deductibles and copays. It may be difficult to know which coverage you should choose.
Fortunately, Medicare lets you change your coverage annually. The program offers an annual open enrollment period. During this time, you can make adjustments to your coverage or even switch to a different plan altogether.
Use these periods to align your coverage with your needs. For instance, early in retirement, you may find that a low-premium, high-deductible plan works well for you. As you get older, you may be willing to pay for more robust protection. The enrollment period gives you the chance to make sure your coverage always meets your needs.
Consider purchasing long-term care insurance.
According to the U.S. Department of Health and Human Services, today’s 65-year-olds have a 70 percent chance of needing long-term care at some point in their lives.2 Long-term care is extended assistance with basic living activities, and it’s usually needed because of mobility or cognitive issues.
As you might expect, long-term care can be costly. However, you can use long-term care insurance to cover some or all of the expense. You pay premiums to an insurer, and then the insurer pays your long-term care costs should you ever need assistance. Most policies cover care provided either in a facility or in the home.
If you haven’t yet looked at long-term care insurance, now may be the time to do so. You can choose the coverage, premiums and other options that best fit your needs and budget. A financial professional can help you find the right policy for you.
Keep your permanent life insurance as a backup emergency fund.
Do you have permanent life insurance policies that have accumulated cash value? You may be tempted to surrender the policies and use the cash to fund your retirement. Many people purchase life insurance when they’re young and have kids in the home. In retirement, though, life insurance may seem unnecessary.
However, you can use the cash value in the policy to help pay for emergencies. For example, you can take tax-free loan distributions from your policy’s cash value account. The loan has to be repaid, but the tax-free distribution could help you pay for long-term care or medical bills. If you don’t repay the loan before you pass away, the balance is simply deducted from the death benefit.
The life insurance death benefit could also be helpful to your surviving spouse after your death. He or she may face substantial medical and long-term care bills that accumulated during the final years of your life. The life insurance could help your spouse regain his or her financial footing.
Ready to develop your risk management strategy? Let’s talk about it. Contact us today at Retirement Peace Project. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
17512 – 2018/3/26
Several of my clients have expressed an interest in getting more aggressive with their investments, based on the recent election. One of my jobs as an advisor is to help my clients take the long view with their money. The stock market has gone up since the election and stocks are near record high valuations based on the earning of the companies they represent. So, what to do? First stay the course of your portfolio allocation. Second, continue to invest monthly to take advantage of dollar cost averaging. And lastly don’t be suckered in! Suckers buy aggressively at the end of an increasing market and sell near the end of a decreasing market. If you have discretionally money to invest, let’s work together and wait until there is blood in the streets and do the opposite of the crowd. After all, that’s what Warren Buffett has been doing for 40 years, with pretty good results.
The average woman could spend an estimated 70 percent of her retirement check on health care costs, according to a recent study by the Nationwide Retirement Institute. The average man fares better, but still uses nearly half of his benefits to cover medical expenses.
Here’s how the Nationwide analysis reached its disturbing estimates: It assumed a woman with a life expectancy of 88 married a man who would live to 85 and they both claimed Social Security at 62, which is the earliest and most popular age to file for retirement benefits, regardless of gender.
More than half of elderly married couples and nearly 75 percent single retirees depend on Social Security for the majority of their income in retirement.
“Women disproportionately rely on Social Security in retirement,” said Nancy Altman, co-director of Social Security Works, which advocates for the expansion of the program. In fact, roughly two-thirds of Social Security beneficiaries age 85 and older are women.
In the Nationwide’s bleak scenario, the man collects a monthly benefit of $1,543 and the woman collects $1,171 per month. (The average monthly benefit for a retired worker is $1,350, according to the Social Security Administration.)
Nationwide projects hefty health costs for the hypothetical couple. The man would pay $214,278 in medical costs in retirement and the woman would pay more than $289,682, because of her longer lifespan. The forecast includes what the couple would have to spend on long-term care at a nursing home or in an assisted living center.
Though medical costs often greatly increase toward the end of life, the expenses average out to $776 per month for a man and $928 per month for a woman in Nationwide’s estimates.
By comparison, Fidelity Investments estimates a 65-year-old couple retiring in 2016 will need $260,000 to cover health care expenses and $130,000 to pay for long-term care for a total retiree medical cost of $390,000.
No matter what your exact health care costs are in retirement, you can take steps now to reduce them:
Delay claiming Social Security
If you are in good health, the easiest way to keep health care costs from devouring your benefits is to wait to take Social Security.
If you claim at 62, your benefit would be about 25 percent lower than it would be at your full retirement age, which varies from 66 to 67 depending on when you are born, for the rest of your life. Most people claim before that age. (See chart below.)
Wait beyond your full retirement age and your benefit grows by roughly 8 percent each year until age 70. Put another way, it means that waiting until from age 62 to age 70 could increase your benefits by 76 percent.
“Women frequently claim Social Security early when their older spouses retire instead of waiting to maximize their benefits,” said Roberta Eckert, vice president of the Nationwide Retirement Institute.
Use a health savings account
Health savings accounts offer three major tax benefits for retirement savers. The contributions are tax deductible and grow tax-free. Plus, account withdrawals are tax-free too if used for qualified medical costs.
The downside is that you have to use a high-deductible plan to get access to an HSA and you may have to tap the account to pay health costs before retirement.
You can contribute up to $3,350 to the HSA in 2016 if you have individual coverage, or $6,750 for family plans. You can add a catch-up contribution of $1,000 if you are at least 55.
Shop for better insurance in retirement
When you collect Social Security, your Medicare Part B premiums, which pays for medical insurance if you are 65 or older, is automatically deducted from your benefits. In 2016, most people pay a $104.90 per month for Part B, but people with incomes above $85,000 for individuals and $170,000 for couples have higher premiums.
Medicare Part D, the drug coverage, can be deducted from your Social Security benefits too. The standard monthly premium is $34.10, but individuals with income above $85,000 and couple with income of $170,000 pay more as well.
Medicare doesn’t cover everything. Part B pays only 80 percent of covered expenses, leaving you to pay the other 20 percent, with no cap on your maximum out-of-pocket spending.
Seniors often use Medicare Advantage and Medigap plans to handle those expenses.
“Use an insurance broker to help weed through all of the plans to find one that fits your needs at the best price,” said Kristin Sullivan, a certified financial planner in Denver. “Shop around for better pricing during open enrollment in the fourth quarter.”
Employ advocates and specialists
The health care system is so complex for retirees that many financial advisors recommend their clients turn to experts for help if they can afford it.
“One of the best ways for retired clients to save on health care costs during retirement is to use the services of a health care advocate as well as a personal insurance bill payer specialist,” said Mark LaSpisa, a certified financial planner with Vermillion Financial in South Barrington, Illinois.
A health care advocate is trained to help people avoid unnecessary medical costs, but their services can run as high as $300 per hour.
Billing specialists, which can cost up to $200 per hour or take up to 35 percent of any savings they find, dig into the minutia of medical invoices to make sure you were not overcharged and don’t pay anything that should be covered by your insurance.
If all that sounds too pricey, prevention may be better than a cure.
Prevention- “Keep yourself as fit and healthy as possibly by eating right and doing moderate exercise every day,” said Kathryn Hauer, a certified financial planner with Wilson David Investment Advisors in Aiken, S.C. “Unavoidable health crises can hit hard, but the fitter you are, the better you will be able to weather them.”
Baby boomers are putting their retirements at risk by spending too much on their adult children. With real wages stagnant and unemployment among those age 16 to 24 running above 12 percent, large numbers of households continue to dole out cash to children no longer in school, covering rent, cell phones, cars, and vacations.
Many of you, as am I, are approaching the magic age of 65. Assuming we are not still working and covered by an approved plan, we will have to make a choice between traditional Medicare (TM) parts A, B and C or a Medicare advantage plan. Here are few things to contemplate.
TM covers most hospital costs and 80% of doctor costs with no stop gap. That means with a 1 million dollar event you would owe $200k. Medicare supplement plans are designed to fill that gap. The most expansive supplement option is plan F with costs to a 65 year old male averaging $191 a month. TM is accepted all over the US.
Medicare Advantage (MA) plan are offered by private insurers who are reimbursed by the government. Their coverage typically cover the same as TM A, B and C a along with eliminating the need for a Med sup. which can save dollars. MA plans also might include vision and dental coverage. The drawback is the MA plans operate like a PPO network and require you to use doctors approved in a certain area. If you travel a lot this could prove to be problematic and expensive.
Whichever choice you make, you can change your mind and plan the following year but only during the open enrollment period. So choose wisely grasshopper!
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The third annual Nationwide Retirement Institute survey of nearly 1,000 people 50 or older, approaching retirement or retired, found that 23 percent would change when they started drawing Social Security to a later age. And 24 percent of recent retirees said their benefits were less than expected.
Of those who said they would not change when they started receiving benefits, 39 percent said they were forced to start drawing benefits by a life event.
Thirty-seven percent of current retirees said health problems keep them from living the retirement they expected. And 80 percent of recent retirees say those health problems came earlier than expected. In fact, health care expenses keep one in four current retirees from living the retirement they expected.
- People are waiting longer to take their benefits. In 2016 the average age that men began receiving Social Security is lower than it was in 2014 (60.5 vs. 62.3).
- Those who have yet to collect expect to start at age 66 on average, compared to age 62 for recent retirees.
- Of future retirees who plan to draw Social Security, only 29 percent plan to draw these benefits early.
- The majority of retirees would not change the age they started drawing Social Security. Seventy-seven percent of people who had been retired for 10 or more years say they would not change the age, and 69 percent of recent retirees say they would make the same decision.
Of the people who would not change their decision on when they took benefits, the reasons varied.
- They retired earlier than planned (24 percent of recent retirees, 27 percent of people retired for 10+years)
- They needed the money (19 percent of recent retirees, 27 percent of 10+)
- Forced to by health problems (19 percent recent, 20 percent 10+)
- They didn’t think they would live long enough to optimize benefits (12 percent recent, 16 percent 10+) https://www.washingtonpost.com/news/get-there/wp/2016/07/04/a-quarter-of-recent-retirees-would-delay-social-security-if-they-had-a-do-over