Category Archives: Retirement

2013 IRA and Retirement Plan Contribution Limits

The Internal Revenue Service (IRS) recently published the new rules for contributions into retirement plans and IRAs for 2013. Some of these numbers have increased. They are good for you to know if you participate in IRAs (individual retirement accounts) or retirement plans such as 401(k)s sponsored by employers.

The most an individual can contribute to any kind of IRA, whether it be deductible, non-deductible or a Roth IRA, is $5,500 or $6,500 if you are age 50 or older. The amount that you can deduct or contribute to Roth depends on your income and whether or not you are eligible to participate in a retirement plan through your employer. For the current income tables, go to for IRAs and go to for Roths. This does not cover contributions to spousal IRAs.

Retirement plans

  • 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan: employees contribution increased from $17,000 to $17,500. The catch-up contribution limit for employees aged 50 remains unchanged at $5,500.
  • Defined benefit plans commonly referred to as pension plans: maximum benefit increased from $200,000 to $205,000
  • SEP IRA annual contributions the employer makes to an employee’s account can’t exceed the lesser of 25% of compensation or $51,000 for 2013, up $1,000 from 2012.
  • Simple 401k limit is 12,000, up from $11,500 in 2012.
  • Total contributions (employer and employee) for 401k and Profit Sharing plans can’t exceed lesser of participant’s income or $51,000 (or $56,500 including catch-up contributions), up from $50,000 in 2012.

There are many other types of retirement plans. The ones listed above are probably the most common types, but the information provided doesn’t compare exactly to those other plans. Go to the document for other plan limits.

Some of these limitations are subject to IRS updates, changes in interpretation, and actual plan type and design. Refer to and your plan description for complete information.

How to Withdraw Needed Funds from and IRA or Inactive 401(k)

Question: I lost my job several months ago, and have exhausted my savings. However, I have some money in a 401(k) Plan from an old employer. I need to get to some of it to pay my rent, but I don’t want to pay tax on the entire amount in the Plan. What is the best way for me to get to a portion of it? I am under the age of 59 1/2 and would be faced with the 10% withdrawal penalty in addition to income tax.

Answer: The first thing you should do is to make sure that you are living on a minimalist budget, so that you take out only the small amount that you really need. Next, contact your investment professional and ask him/her to open an IRA account for you, and to execute a trustee-to-trustee transfer of your funds into the new IRA. Tell the investment person you need to have some money sent to you right away after the funds clear and are deposited into your IRA. Doing it this way will ensure that their is no automatic tax withholding to your 401(k) Plan, as there would be if you asked your Plan’s provider to just send your money to you in check form. Also, this way gives you control of when to take money out, and how much to take–just based on your needs. Also, as the year end approaches, this gives you a way to spread the tax due over a couple of tax years.

Question:  How should I invest the money?

Answer:  If you are having financial difficulty and are not sure if you will need more of the money, then you don’t want to invest the money for the long-term nor pay any sales charges to invest or contingent deferred sales charges (CDSC) to pull the money out. Short term investments such as savings accounts or FDIC-money market accounts are suitable because the principal is guaranteed by the FDIC not to lose any value. Avoid annuities or mutual funds until your situation is more stable, you have adequate savings, and you can resume planning for the future.

Question: Is there any way around paying the 10% pre-age 591/2 penalty?

Answer: Some expenses of your family may be deemed to be immediate and heavy, including certain medical expenses, costs relating to the purchase of a principal residence, tuition and related educational fees and expenses, payments necessary to prevent eviction from or foreclosure on a principal residence, burial or funeral expenses, and certain expenses for the repair of damage to your principal residence.  For more information, go to

Question: What are some other issues to be aware of?

Answer: There are too many to cover in this article; however, be sure to ask your financial professional about all of the issues that pertain to you, including the tax issues. Be sure to plan for the extra tax that you will owe on the IRA or 401(k) distribution. If you need the money very quickly, you might ask the current 401(k) Plan to send you some money now, but to execute the trustee-to-trustee rollover on the balance.

Life After Foreclosure, Other Personal Finance Headlines

Interesting articles worth checking out: Homeowners qualifying for new mortgage after short sale. Auto purchasing and the various fine print costly add-ons. Estate planning: Naming a trustee for your trust, and living wills. Roth IRA escape hatch, for those that already converted, but now regret it.


Roth IRA Withdrawal Rules

Roth IRAs which I wrote about a few days ago are good for supplementing one’s retirement and growing tax-deferred until retirement. This article doesn’t cover the rules regarding IRAs that were converted into Roths.

The rules are quite a bit different, than they are for traditional IRAs withdrawals. The differences compel many to seriously consider Roth IRAs, since they have many tax advantages over them at retirement, h0wever their are rules. Careful planning is important, so if someone wants to use the money for retirement or other needs they want to avoid tax penalties. Let me say at the outset that since planning for IRA distributions is tricky, obtaining advice from a qualified financial expert would be a good idea.

At retirement, if the owner wishes to withdraw money from their non-tax-deductible, tax-deferred Roth IRA, all of the monies received are tax free. If they pull any funds out of the Roth IRA account before their age of 59½ or within 5 years of the contribution, they will have to pay a 10% tax penalty, there are exceptions and I will cover them in a moment.

Money can be left in the Roth IRA indefinitely until death, and then specific rules apply affecting the distribution, so unlike traditional IRAs (and most other accounts like 403b and 401k) the owner is NOT forced to make Minimum Required Distributions (RMD) by April 1st of the year following the year they reach 70 ½. Also, since ROTHs have no RMDs, there isn’t a 50% penalty for monies left in the account, again unlike traditional IRAs.

Withdrawal prior to retirement can be done at any time, however there may be a tax hit. If someone wants to get to their Roth IRA prior to their age of 59 1/2 there is a 10% penalty on the growth only, and no tax on your contribution, since you made it with after tax/non-deductible payments. There are a few ways to avoid the penalty according to the IRS website:

  1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit
  2. Made because you are disabled
  3. Made to a beneficiary or to your estate after your death
  4. One that meets the requirements under first time home under exceptions (up to a $10,000 lifetime limit).

IRA Withdrawal Rules

Traditional IRAs which I wrote about a few days ago are good for supplementing ones retirement, providing current tax deductions, and growing tax-deferred until retirement. However, when someone wants to use the money for retirement or other needs they should be conscious of the rules and limitations to avoid tax penalties. Let me say at the outset that planning for IRA distributions can be tricky so obtaining advice from a qualified financial expert would be a good idea. Roth IRA withdrawals work a little different, and I covered them in a separate article.

If the owner wishes to withdraw money from their traditional tax-deductible IRA, all of the monies received are taxed at income tax rates, unless they make a special arrangement to donate them to a qualify charity. If they pull any funds out of the IRA account before their age of 59½ they will have to pay an additional 10% tax penalty, there are exceptions and I will cover them in a moment).

Money can be left in the IRA, so the owner is not forced to take it out, but they must begin making ‘Required Minimum Distributions (RMD)’ by April 1st of the year following the year they reach 70 ½. Failure to withdraw the RMD has a 50% tax ramification on the amount that should have been taken out. The RMD calculation considers all of money held in deductible IRAs, qualified plans, 403b and several other types of accounts.

The tax penalty for early withdrawal prior to the age of 59½ is punitive, encouraging people to leave the money in until they are older and retired. There are a few ways to avoid the penalty:

  • First time home purchase
  • Qualified education expenses
  • Death or disability
  • Unreimbursed medical expenses
  • Health insurance if you’re unemployed
  • 72t withdrawals

72t withdrawal regulations permit IRA holders to take out some or all of their accounts balances and avoid the 10% penalty if  substantially equal periodic payments are withdrawn, over a minimum of 5 years or until age 591/2, whichever is longer. The rules are a little complicated and there are 3 different methods; the amortized method of level payments based on life expectancy and an assumed interest rate, similarly the annuitization method using the annuitant’s and beneficiary’s age and an interest rate, and the RMD method of dividing the account balance by the life expectancy each year.

Roth IRA Review and 2012 Contribution Limits

The old or traditional Individual Retirement Accounts or IRAs came on the investment scene with the enactment of the Employee Retirement Security Act (ERISA) in 1974. These individual retirement plans provided a reduction in taxable income, the IRS doesn’t tax the growth on the monies while they are accumulating, however upon withdrawal, all amounts disbursed are taxed at income tax rates.

Roth IRAs came on the scene as a result of the Tax Payer Relief Act of 1997, and like traditional IRAs, Roth’s accumulate without tax on their gain, interest or dividends that investments held in the account might have. However unlike traditional tax-deductible IRAs, Roth IRAs are not tax-deductible and money withdrawn from Roth IRAs after the age of 591/2 are not taxed, (a later article will discuss early withdrawal penalties as well as exceptions to the rules).

2012 Roth IRA Contribution Limits

  • $5,000
  • Additional $1,000 if over age 50
  • IRA Roth Contribution amount is limited based upon income, from

Roth IRAs have been attractive to both those in low and high tax brackets planning for retirement; on one hand those in very low brackets realize very little tax savings if they invested in a regular tax-deductible IRA, and would appreciate a large tax-free accumulation until retirement, and tax-free income when they retire. Those in very high tax brackets, might indeed save a few thousand dollars on their tax returns if they invested in a tax-deductible IRA, yet if they were investing say for 20 or 30 years or longer, because they are now young, when they reach retirement the total tax savings they might have enjoy could pale in comparison to a large hundreds of thousand dollar or million dollar account, and would prefer tax-free access a Roth IRA would afford. Of course it is always good to talk to a tax advisor first before making a financial decision like this.

Traditional IRA Review and 2012 Contribution Limits

Individual Retirement Accounts or IRAs came on the investment scene with the enactment of the Employee Retirement Security Act (ERISA) in 1974. These individual retirement plans provided a reduction in taxable income, but contribution maximums were only $1,500 per year then. To further enhance IRAs, the IRS doesn’t tax the growth on the monies while they are accumulating, however upon withdrawal, all amounts disbursed are taxed at income tax rates, (a later article will discuss early withdrawal penalties as well as exceptions to the rules).

They were not entirely popular in the 1970’s since ERISA restricted contributions to only those that didn’t have an employer-provided retirement plan, or also known as a qualified plan. In 1981 the Economic Recovery Act removed that restriction and increased contribution maximums to $2,000, regardless how much money someone earned. In 1986 the Tax Reform Act limited or eliminated altogether the tax deduction, if someone had a qualified plan and had incomes over certain amounts. In the 1980’s sales of IRAs took off, and millions of people opened IRA accounts at their bank or credit union, insurance company, and investment firm and the investment landscape hasn’t been the same since.

There have been new IRAs such as  the Roth and Education ones, since the 1980’s and various tweaks to them, but except for changes to contribution amounts, and income limitations, the basics of IRAs remain the same since then.

As a review…

  • Contributions to IRAs reduce taxable income
  • The amount of the contribution that someone can deduct from their income depends upon their income, if they have a qualified plan at work
  • Individuals can still contribute to IRAs even if they are not able to deduct contributions, and they still maintain tax deferred growth

2012 Contribution Limits

  • $5,000
  • Additional $1,000 if over age 50
  • IRA deduction if covered by a retirement at work from

  • IRA deduction if spouse is covered by a retirement plan at work:

Not Well Known Veteran’s Benefit

If you are a veteran who served in active duty, you may be eligible for a monthly VA pension. This is a benefit that I just heard about, and a lot of people are eligible for it, and since it isn’t widely know, many who are eligible don’t apply for it.

I am far from an expert in this topic, but as a quick review, of the many benefits that veterans and those in active military are eligible, a few of them are:

  • Military Pension for those who have 15 to 20 years or more of service
  • VA disability benefit for those injured as a result of active duty
  • VA pension or non-service connected disability

The VA pension or non-service connected disability, pays a monthly benefit, but there are tests for service, such as honorable discharge and 90 or more days of active duty with at least 1 day during a period of war-time of WWII, Korean Conflict, Vietnam Era or Gulf War. There are additional tests for disability, income, and assets. To file a claim application form 21-526 “Veterans Application for Compensation and/or Pension.” Surviving spouses may be eligible too, and would file 21-534 for death pension.  Applicants may have to provide financial information, such as income, but may be able to meet the tests considering some deductions such as for things like health care.

If you are a veteran with an honorable discharge and 90 or more days of active duty with at least 1 day during WWII, Korean Conflict, Vietnam Era or Gulf War, you may want to look into this, or if a friend or relative may qualify, be sure to pass this information on.

Retiree Health Care Costs Increasing

According to a study by Fidelity Investments a couple retiring this year will incur $250,000 in costs not covered by Medicare Parts A and B. Those with medi-gap or employer based retiree health insurance will have less expenses. Many companies today either do not provide or are cutting back on retiree health care, so they probably should include high estimates when calculating their financial needs during retirement.

Social Security Will Go Broke in 21 years

Source: Wall Street Journal 4/24/12

Reported yesterday that earlier estimates were 24 years, but now 21 years. If reserves for disability benefits were combined with retirement, reserves would be exhausted by 2033. Social Security and Medicare account for 1/3 of the federal budget. If the trust funds are not replenished, then benefits would be reduced by 25%.

Everyone should be concerned about this, even those that are already retired, since people are living much longer these days. 

Year of birth Full retirement age (FRA) Your Age this Year Years to retirement FRA Year of Retirement Age Soc Sec Reserves Exhausted (2033) & benefits could be reduced
1941 65 71 0 2006 92
1942 65 70 0 2007 91
1943 66 69 0 2009 90
1944 66 68 0 2010 89
1945 66 67 0 2011 88
1946 66 66 0 2012 87
1947 66 65 1 2013 86
1948 66 64 2 2014 85
1949 66 63 3 2015 84
1950 66 62 4 2016 83
1951 66 61 5 2017 82
1952 66 60 6 2018 81
1953 66 59 7 2019 80
1954 66 58 8 2020 79
1955 66 & 2 m 57 9 2021 78
1956 66 & 4 56 10 2022 77
1957 66 & 6 m 55 11 2023 76
1958 66 & 8 m 54 12 2024 75
1959 66 & 10 m 53 13 2025 74
1960 67 52 15 2027 73
1961 67 51 16 2028 72

A lot of people wonder if Social Security will actually go broke, and not be able to provide them with benefits. I am doubtful this will happen, given that seniors represent the largest voting block, so politicians are always very concerned about their votes. We will have to see either rapid growth in GDP or most likely  increased taxes, reduced benefits, lower or no the inflation increases and older Full Retirement Ages for younger workers, to secure these benefits. Due to the recession, declined stock portfolios, many people have much lower retirement savings and will be depending upon Social Security for a major part of their retirement. This issue is going to continue to be a hot one.

Is Your Pension Secure

Pensions are a little rare today, so rare most people don’t really know how they work.  Pensions also known as Defined Benefit retirement plans, pay someone a percentage of their income when they retire, based upon age, years of service, wage history and the design of the plan.  Millions of people still have them, typical if you work for a large company like IBM, or are a public employee of the federal, state or local government. Social Security Retirement Income also kind of works the same way.

The nice thing is that the employee/participant doesn’t have to worry about the plan’s investments like they would with a 401k, just your long-term employment which is necessary to get much from them. Long-term employment is rarer these days too. These plans are costly to administer and fund, therefore many employers have done away with them, or switched to a less costly and risky plan (for the employer), called Cash Balance plans.

Pensions, or defined benefit plans sound safer, but are they?  If you work for a private employer, they might not be, consider this recent article: Corporate Pensions Are in Trouble Too – Total Return – WSJ. If you work in the public sector, since they are funded sometimes to a great extent by taxes and not employee contribution, it depends upon their ability to tax and invest the proceeds, and health insurance costs for retirees. In these difficult financial times, this is all the more challenging. Private plans have some insurance provided by the Pension Benefit Guarantee Corporation, and this has helped some plans that have gone under, but it would have difficulty bailing out a rash of plan failures.

Is this cause for panic? No, but it helps make the case for individuals to save for the future, even though they may have these types of plan.

Social Security Retirement, to Be or Not to Be?


Social Security Retirement Benefit, or shortened to SSRB for this article, is a major cornerstone for most Americans. Many people wonder: how it works, whether it will be there for them when they are eligible, will it change, and should their plans include the assumption that it will be there for them. This article addresses these questions.

The Dependability of SSRB is questionable by many younger workers today. Many people wonder if there will be enough in the trust fund for them when they retire. When old-age retirement benefits were originally designed back in the 1930’s, the life expectancy was much shorter than it was today. When someone retired, the Social Security Administration didn’t have to pay out benefits for very long on average. With many workers paying into the system, and these short pay-out periods, it was easy to be financially solvent. Today proportionally fewer people are paying into Social Security and as our population ages, and with people living longer, challenges will be great to make changes. People even wonder if Social Security Retirement Benefits will be there for them and if their financial plans should take into consideration Social Security retirement income.

Social Security will probably survive, because retirees and pre-retirees are one of the largest blocks of voters, so no politician who wants to be re-elected will ever want to see the end of Social Security during his/her watch. In addition, the government can easily print or borrow money, but at the end of the day they will be forced to make changes, especially during long-term economic down turns with tax revenue down.

Changes to Social Security always happen during economic and demographic shifts. If you were born in 1937 or earlier, your Full Retirement Age (FRA) is 65, but you can start receiving SSRB at age 62 with a 20% – 30% reduction in benefits. If you were born after 1937, your FRA is older than 65, as late as age 67 for those born in 1960 or later. Your actual FRA depends upon your date of birth. It is very possible we will see older FRAs being proposed.

The Social Security Tax (also known as FICA Federal Insurance Contributions Act) is made up of Old Age, Survivors and Disability Insurance (OASDI) and Medicare. The FICA tax rate for employees is 7.65% (OASDI 6.2%, Medicare 1.45) and it is 15.3% (OASDI 12.4%, Medicare 2.9%) for those who are self-employed. The taxable wage base for OASDI is $110,100 for 2012, which means your income above this figure is not taxed OASDI, except for Medicare.

If you are not following all of the haggling in Washington, politicians are fighting over the Tax Relief extension from 2011 into the coming year of the OASDI from 6.2% to 4.2%.

As our government looks for ways to reduce expenses and increase revenue, it is considering many solutions, such as increasing the FRA, increasing or eliminating the OASDI wage base, and finding some way to change high income retirees’ benefits. If you think the current battle over temporary tax relief is intense, we have seen nothing yet when politicians and voters fight over benefits and income cap on OASDI.

Supplementing income has always been the original intent of SSRB, not providing more than 50% of a retiree’s income. The original design was to help provide some of the basic necessities of daily living for the elderly. However, today it is often the only source of income for some, or it provides a significant source of income for many. Given that corporate America is cutting back on defined benefit pension plans, and people are losing substantial value of their retirement investments because of a bad stock market, SSRB will continue to play an important part in retirement planning for many people.

Your decision to include Social Security in your retirement calculation is a personal one. When you use financial planning software be aware of this, most provide the choice to or not to include it in your calculation. You may be well advised to use conservative assumptions for Social Security and rates of return when running your calculation.

Social Security Retirement Benefit estimates can be calculated within your software, which bases your estimated income on your age and income. Your actual benefit will be based on your earning history and eligibility; the Social Security Administration provides this more accurate estimate at That website instantly calculates your benefit after you input your name, Social Security number, income and state of residence. They track your earnings history so they can provide you a more accurate estimate of retirement income at 62 and at your full retirement age.

People wonder when they should start receiving SSRB: take the reduced benefit at age 62, full benefit at the Full Retirement Age (FRA), or delay it, thus increasing the benefit. The answer to this is a little difficult; it depends on the life-span of the person receiving benefits, the inflation rates for both SSRB increases and the cost of goods in the future, and rates of return earned on investments. Financial planning software will help you make these calculations, because you can enter different retirement ages and income amounts, and you can compare the growth of your investments. Then you can determine which scenario allows your assets to last longer or to be larger.

Break even analysis can also be used to help you make your decision. For example, assume someone was eligible for $24,000 in SSRB at FRA (age 65) or could wait until age 70 and receive $31,800, but the person decides to retire 3 years early and receive $19,200. For this example comparing Age 62 to FRA, the BEY (Break Even Analysis) is 12 years for age 62, compared to 12.19 years for age 70. Comparing FRA to age 70, the BEY is 15.38 years. There are several Web sites I found that can run the breakeven analysis for you.

Other considerations: if you continue to work and receive SSRB benefits prior to FRA, your benefits may be reduced. In addition, a portion of SSRB may be taxed as well for beneficiaries with income above $25,000 for a single individual and $32,000 for a married couple filing jointly. Also, don’t forget that Medicare health insurance doesn’t start until age 65, so your plans must consider the cost and issues related to individual health insurance.

Your trusted professional tax and financial advisors should be consulted before making final decisions about the best way for you to receive income; they can also help you with some of the other related issues.

Consolidate 401k, 403b and 457 accounts

Have you always worked for the same company? Most people answer no to this question. In fact, people change jobs much more frequently today than in previous generations. There are a whole host of reasons, from corporate downsizing to finding a better opportunity. Perhaps you have an employer-sponsored retirement plan with one or several previous employers. These accounts are Qualified because they are tax-qualified and they usually are 401k, 403b and 457 plans.

Do you have IRAs with financial institutions with which you have no contact? It is not uncommon for some people to have IRAs with several mutual fund companies, banks and credit unions, insurance companies and other investment firms.

Consolidate: Talk with your investment advisor about transferring or rolling over those accounts to one firm. By having them invested at one or a couple of places, you will find it much easier to keep track of investment performance and beneficiary arrangements, and it will be easier to change addresses if you move. You are your investment advisor will be better able to manage the proper allocation in the different types of investment accounts you choose that match your risk and reward expectations.

Make sure you know what the fees are to close the old accounts and set up new ones. Know what your new ongoing fees are going to be. Do not “liquidate and ship” (sell investments and transfer) each account without analysis; your investment advisor should complete a review of each investment. Some may be very good investments that you should keep. Often the new investment firm can transfer the account ‘in kind‘ or change the servicing advisor or firm on the account. Lastly, make sure that you are informed about surrender charges, if any, that you will pay to make the transfer.

9 Steps to Master Your 401(k)

Your employer-provided retirement plan (e.g., 401k) is one of the most important pieces of your financial plan — yet it is often misunderstood and under-utilized. Master your retirement plan to retire early, on time, and achieve financial success. During this time of year, either 4th quarter or the 1st quarter of next year, your company will have their annual 401k meeting. These 9 steps will help to prepare you for making good decisions.

  1. Obtain a written financial plan: Call a financial planner or obtain a written plan online to organize all of your financial affairs and plan for the future. People don’t plan to fail, they fail to plan! The best way to make financial decisions is in the context of a financial plan, which will help guide you simultaneously through all the moving parts of your finances. That way you will make more informed decisions about when you can retire and how much you should contribute, while still making good decisions about all of the other areas of your plan. A plan helps you avoid neglecting one area because you focused too much on another area. A financial plan will also help you spot trouble areas, such as too much debt, and will provide suggestions to improve your overall situation.
  2. Obtain information: Round up all available information and put it into a file folder, such as current account statement, investment account information describing what you have chosen and options that are available to you, contribution information that describes how much money your employer will contribute (match) and how much you can contribute, and beneficiary information.
  3. Know your employer contribution amount. Some employers contribute a set dollar amount on your behalf to your retirement plan; they may also contribute based on a matching formula. For example, they may match 50% of your contribution up to 5% of your income. Some employers may do both.
  4. Sign Up Now. Participation rates are only about 70% — down about 5% from a few years ago. If you have passed the waiting period and are eligible to sign up, do so today.
  5. Contribute enough to receive the full match. Only ¼ of employees take advantage of their employers’ matches. Doing so leaves money on the table. Your employer has a several thousand dollar raise waiting for you, so take advantage of it.  At the very least, contribute the minimum amount so as to fully exhaust your employer’s match. After you have done this, begin contributing more than the match minimum.
  6. Don’t borrow or withdraw from your plan.
  7. Start early. The average 401(k) participant with 11 years of tenure and 20 years until retirement (65) has accumulated only about $60,000, and the median total average plan balance is only about $27,000. Many workers in their 20’s do not take advantage of employer-sponsored retirement plans, thinking that retirement is too far off to think about. However the earlier you start, the longer you have to take advantage of the magic of compound interest.
  8. Make wise investment decisions. You may have done all of these things, but don’t neglect this vital issue. Many people invest all or a large percentage into a fixed or money market account, either out of fear of risk, lack of investment knowledge or procrastination. Review the investment information provided by your plan. Determine an asset allocation that matches the level of risk that you are comfortable with and appropriate for your age and expected retirement age.  If you have a financial plan check the investment section for the asset allocation model that fits your level of risk. Also discuss this with your investment advisor or Plan Representative regarding account selection.
  9. Don’t give up. You may feel that even after doing all of these things your plans for retirement are still off track. Don’t worry. Feel good that you have completed as many of these steps as you could. Stay focused on your overall financial plan; by making improvements each year, you will accelerate your progress.

A New Twist on Selling Structured Settlements

A structured settlement is money that is owed to you in a monthly stream of income for many years, such as a lottery winning, large law suit or a payment from an annuity that has been annuitized. In exchange for the income, the owner of the structured settlement recieves a lump sum amount of money. These have existed for quite some time, investors or companies like to purchase them. The latest development in this market is people selling all or a portion of their retirement pension, often called a defined benefit plan, as featured in the article Investing in a Stranger’s Retirement – In my opinion sellers often financially desperate to get the lump sum, are anxious to sell them, perhaps not consulting advisors or getting quotes from numerous carriers. Also I fear that the lump sum will not be used wisely, and then shortly be destitute. People considering these, should have someone like an accountant estimate the tax ramifications, and the real cost of the transaction, before making a decision. Lastly, they should meet with a financial planner to help them plan their affairs and invest the lump sum wisely, if they decide to do it.

Will America Grow Up Before It Grows Old?

The economics of America and the world are closely tied to our aging populations and to the entitlement programs designed to provide for their income and health care. Politicians of all colors talk out of both sides of their mouths, and it is hard to find truth in what they all say. Lately the AARP has been running national advertising threatening politicians they’ll lose votes if they even think about changing Social Security, Medicare and Medicaid. Before you make up your mind about what is being said, you might want to read this fascinating two-part article from The Atlantic Magazine: Will America Grow Up Before It Grows Old?

Fund 401k or Pay-Off Debt?

Dave Ramsey in his Financial Peace University class advocates that in order for people to pay off their non-mortgage debt like credit cards, car and student loans, that they should get the Gazelle mentality: temporarily cut back on all expenses, get second jobs, and stop funding their 401k and devote all disposable income to repaying all debt as soon as possible.

However, a lot of people ask 2 questions: “we have funded our $1,000 emergency fund (Ramsey’s Baby Step #1), and have debt to yet to re-pay.  Should we forego all of our 401k contributions, and miss out on the employer match?  Secondly after we have paid off all of our debt, and begin to fund our 3 – 6 months of emergency savings, wouldn’t it make more sense to resume funding our 401k that provides a nice company match (which equates to an instant 100% return) and invest it in the 401k plan’s mutual funds, instead of a savings account that earns hardly anything.”

Debt is bondage, and the sooner the better for getting out of debt; so that people can enjoy the freedom of being debt free. There is also a behavioral angle, even though it might make more sense to keep contributing to the 401k mathematically, some people might not be able to stay on track to becoming debt free as easily if they don’t stop the 401k. This makes sense, however I think it also is important to analyze the mathematical outcome, so that someone can make an informed decision. How do you analyze this? The actual calculation is complex, because you have to take into consideration such things as taxes, rates of return, debt interest rates, time-value of money, and long-term accumulations on the 401k. I don’t know of any software that will run this, shy of buying incredibly complex cash-flow software. However, I think you can still make an educated estimate. Start by first running 2 debt-snowball analyses; one with the amount that would have gone into the 401k and one without it.  Comparing the two will show you how many years it takes to be debt free, how much money you would save if you didn’t wait, and when you can resume funding the 401k. Then calculate how much the employee’s and employer contribution into the 401k would have been had you stopped funding the 401k, plus the growth on the money you expect to have. For one individual I ran the analysis for, if he would have funded the 401k instead, the difference in interest savings on the debt versus accumulation in the 401k was about 1,600 more in the 401k in 5 years. This does not take into consideration the lost income tax savings of not funding the 401k or the long-term accumulation on the 401k. Also, for this person the debt amount was very large (over $100,000), and the loans were mainly low-interest rate student loans. This kind of analysis is just a start, the individual should also examine their tax situation and talk to any other financial advisors that you may have before making a decision.

The second question, is should we fund the 3 – 6 months of emergency savings (Baby Step #3) that earns no interest, and wait to fund the 401k? Financial Planners recommend putting savings into accounts that are low risk and easy to get to like Money Market Accounts, for emergencies like long-term job loss, even though it earns hardly any interest. If you take money out of the 401k there will be income tax + 10% pre-59/12 tax penalty (sometimes waived if hardship), the other risk is pulling money out the 401k might occur during an inconvenient time when the market is down, and experience an investment loss. Some 401k plans though provide access to some of the funds without penalties, through loans if you are working for the employer that provided the 401k.

Retirement: Times are a changing?

Have we entered an era where we question if the concept of conventional retirement is a myth? To be fair to history, retirement is a marketing idea created by Arizona retirement communities and picked up as the main marketing focus for investment firms.  Working until around age 60, then being on permanent vacation wasn’t even possible until the last century when life expectancies increased from the late 50’s to the 60’s and 70’s.

Who is going to be able to retire these days? Anyone that has an old-fashioned pension plan, known in the industry as a defined benefit plan. Who has these today?  Most large corporations have either eliminated them or cut them back substantially, but you have to work there a long time for them to provide much income. So with massive layoffs over the last decade, fewer and fewer ‘private’ sector employees have them. Employees of state and federal governments still have them, so teachers, firefighters, politicians and the military are set as long as our financial system remains strong.  Unions still have them; they are safe too, as long as they are managed well. What about everyone else that works in private industry?  They must save enough to supplement their Social Security. However a large percentage of individuals over 50 have less than $50,000 in their 401(k). Some people have not been good money managers, while many have just faced unfortunate circumstances, such as extended job loss, career setbacks, health care crises, declining stock market values, and real estate debacles, to name a few.

21st century retirement is going to see many people working longer, because they just won’t have enough money to survive until their 80’s and 90’s, just on savings and investments alone, if they stop working in their 50’s and early 60’s.