As the adage goes, “a life without regrets is a life not lived,” but it is also “better to regret what you have done than what you haven’t.” The three biggest regrets of retired baby boomers center on the things they have not done and teach the next generation to make more informed choices.
- Not Saving for Retirement Earlier
A rare absolute rule of finance is that people should start saving for retirement as early as possible, with the best time to start being in one’s twenties. Life expectancies are growing and show no signs of slowing down, so more money is needed to be stretched out for a longer period of time. Starting to save and invest as soon as one enters the full-time workforce can make a dramatic difference in the amount of money that accumulates by the time a person is ready to retire.
Many baby boomers failed to start saving on time and properly because they did not understand just how much money would be needed for their retirement. Some also did not know that receiving social security benefits or taking money out of retirement accounts before it is needed can have tax consequences that can substantially lower savings. Finally, many people tend to forget to adjust for inflation when considering whether they are satisfied with the rate of return on their investments.
- Not Working Less and Traveling More
A study of 2,000 baby boomers commissioned by British Airways revealed that one out of five boomers regrets not doing more traveling around the world. The survey data also indicate that only 9% of American workers get more than nine vacations days per year and that only 37% of Americans took all of their vacation days in 2015, suggesting that working too much may be an issue whose scope extends far beyond just the baby boomer generation.
A 10-year research project conducted by Karl Pillemer, Professor of Human Development at Cornell University, into the lives of 1,200 people aged 65 and older also revealed that lack of travel during one’s youth is a common regret. He writes, “To sum up what I learned in a sentence: When your traveling days are over, you will wish you had taken one more trip.”
- Not Working More
It might sound surprising given the decades of work they’ve done, but more than two-thirds of middle-income baby boomer retirees wish they had worked longer, and not for expected reasons. One might assume that people would want to continue working to keep earning their salaries, but for many baby boomers, wanting to keep working is about the work. People who are passionate about their careers and enjoy their work want to keep doing it. For this reason, many baby boomers return to the workforce on a part-time basis or as consultants. A number of baby boomers also enjoy working during their later years because they find that it keeps them mentally sharp, physically fit, and gives them a sense of purpose.
According to the Investment Company Institute, 401K plan assets reached $4.8 trillion dollars at the end of the first quarter in 2016. That’s nearly 20% of total retirement assets in America (which was at $24.1 trillion).
For 401K plan holders heading into retirement, changing jobs, or leaving a company, a big question looms: what should be done with this type of retirement savings account? Essentially, investors have to choose whether or not to roll the money over into a new account.
Options for rolling the 401K over include putting the cash into a self-directed IRA or transferring it to a new employer’s 401K plan. If workers decide against a rollover, the other options are to leave the account alone or cash out. Before making a decision, investors should look at the pros and cons and choose based on their unique situation.
Rollover Options and Advantages
There are significant advantages to rolling the 401K over to a new employer’s plan or IRA. Most investment professionals advise choosing an IRA, but it’s important for workers to also examine the quality of the new company’s 401K plan (if going to another job).
Pros of the Rollover into a Traditional IRA
Dr. Don Taylor, a retirement advisor and contributor at Bankrate, says that the rollover to a traditional individual retirement account from a former company’s 401K plan can provide “wider investment choices and potentially reduced annual fees and other expenses.” This flexibility makes the IRA an attractive selection, as investors can choose among mutual funds, stocks, bonds, and exchange-traded funds.
Like with a traditional 401K employer plan, money can continue to grow tax-deferred in a traditional IRA. That way, investors won’t have to worry about capital gains and dividend taxes each year.
This also allows workers to shop for plans with lower fees, and, if desired, select an IRA with more access to investing tools and management guidance. The IRA can also be withdrawn without penalty for specific purposes, like college tuition or a first-time home purchase (up to $10,000).
Pros of the Rollover into a Roth IRA
Unlike traditional IRAs, Roth IRA contributions are made after income is taxed—with the benefit that earnings are not taxed when withdrawn later. Because contributions are made after income taxation, investors have the ability to withdraw those contributions (not earnings) from the account without fees.
The Roth IRA does not have minimum required distributions after reaching age 70½, unlike 401Ks and Traditional IRAs. This makes it a potentially lucrative investment vehicle into old age and a good option for those looking to set up future generations.
Since the Roth IRA rollover requires a tax payment before transfer, Dr. Don Taylor attests that a Roth IRA rollover makes sense only if investors can come up with the tax fees from a source other than the 401K funds and “expect to be in a lower tax bracket now than when (they) start tapping retirement funds.” This makes paying the taxes now financially beneficial in the long run.
Pros of the Rollover into the New Employer’s 401K Plan
Most employers offer new employees the chance to roll over their old company’s plan. Getting all retirement plans into one place can make saving much more convenient and cheaper.
Investors should compare fees between the two company’s plans, and only roll over their old 401K’s cash if the new employer’s plan has lower fees and/or better investment options. The new company’s plan may even have lower fees than IRA accounts do.
For those that do choose to transfer to the new company’s fund, understand those earnings will continue to grow tax-deferred, and while those funds can be withdrawn after 59½ years old without penalty, workers may have the option to delay required minimum distributions (RMDs) beyond 70½ years old (if still employed at that company).
Traditional benefits of the old 401K still apply at the new company too. Investors are given more protection under federal law, as 401K assets are better protected from claims from creditors than IRA assets are. Many 401K plans provide investors the benefit of being able to borrow against the plan as well.
Options for Those Choosing Against the Rollover
While rolling the account over is traditionally the best choice, everyone’s personal situation is different. In some circumstances, one of the following two options may be the most ideal—or necessary—choice.
Leave the 401K Alone
The first and most common choice is simply to leave the 401K account with the old employer and let earnings continue to rise tax-free. For investors that like their current plan, aren’t paying a lot in fees, and are happy with its performance, this may be the best—and easiest—choice. Prior to doing this, do compare fee charges with other fund options, like the new business’ 401K plan and traditional and Roth IRAs.
In addition to having the benefits mentioned above for 401K plans, there is also a specific benefit for not touching the 401K. For those that leave their employer between the ages of 55 and 59½, they can enjoy penalty-free withdrawals before reaching 59½ (the typical starting withdrawal age).
Before doing this, ex-employees should check to see if their employers allow the money to stay in their old account. Most companies require at least a balance of $5,000
A final choice is the cashout. Most investors don’t suggest this route, as paying taxes on the withdrawal alone could easily cut into 35% of the total amount (depending on the tax bracket). A withdrawal penalty of 10% would also be assessed if younger than 59½.
Additionally, savings would no longer grow tax-deferred, which means investors robbing their future selves. For example, take the case of a worker making $75,000 per year who has a traditional 401K with $50,000 in assets. This worker decides to withdraw it all after quitting the company. In this case, 25% of that amount would be taxed and a 10% penalty would be implemented, leaving the worker with 35% less, or just $32,500. If this money was simply just left in the 401K and continued to grow at a decent rate for one or two decades, this easily turns into a six-figure mistake.
The cash-out option is mostly seen as a last resort for those experiencing a legit financial emergency and can’t access cash from other sources, such as lenders, savings accounts, and family. Only do it if absolutely necessary. Nearly every time, borrowing from other sources makes more financial sense than cashing out retirement savings.
Making the Best Decision with the 401K
While the traditional IRA is commonly seen as the best rollover option for 401K plans with an old employer, everyone’s personal situation is different. Ideally, workers should always research and choose retirement savings plans with low fees and high returns. They should make choices that set them up for long-term financial success.
Thus, it’s advised to also analyze the financial advantages and disadvantages of rolling over to the Roth IRA, transferring to another company’s 401K plan, and leaving the money with the old 401K. Once workers have a clear picture of what makes the most financial sense, they can go through with the decision—and watch their nest egg grow to its highest potential.
A majority of America’s small business owners are not saving for retirement. Many know they should, but feel that saving will hurt their business. According to David Deeds, Schulze Professor of Entrepreneurship at the University of St. Thomas in Minneapolis, small business owners do not save because they consider the business their retirement plan. “The plan is that when they retire, they are either going to transfer the business to a family member in exchange for a share of future wealth or a buyout or they are going to sell it off and turn that into cash.”
However, many circumstances may prevent the sale of a small business. Even if the business can be sold, the sale may not provide enough income to cover one’s entire retirement. Entrepreneurs may also have to retire earlier than they expected due to health problems or other unforeseen events.
Having a well-rounded retirement plan can help protect entrepreneurs against these and other risks. Here are five things small business owners need to know to plan their retirement effectively.
First, know the numbers. Small business owners should calculate how much money they will need to live on in retirement. Factors such as where they want to live (a pricier home or a modest apartment), how they want to spend their time (traveling or working part-time), and healthcare costs play an important role in this assessment.
Once they have an idea of how much they will need, entrepreneurs should get a valuation of their business to see if its sale or transfer is a viable retirement option. As part of their valuation, small business owners should consider whether the business can operate without their involvement. If it cannot, it may be difficult to sell or generate income from it once the business owner retires.
Next, determine a goal. This might seem elementary, but the power of having a firm vision for the future of a small business and retirement cannot be overstated. Entrepreneurs who set firm goals take steps to make sure their goals are met. This helps them find the best tools to save and also prepares them to wind down the business when it is actually time to retire.
Know the best tools. Business owners do not need to move significant amounts of money from their business in order to start saving for retirement. Investing just a little bit can help entrepreneurs save on their present-day taxes until they make withdrawals in retirement. There are four main instruments to choose from.
SEP-IRA: Like a traditional IRA, this retirement plan is tax-deductible. For returns filed this year, small business owners can contribute up to 25% of their income or $54,000. A SEP-IRA is a great retirement plan for sole proprietors because it is self-directed, but the 401(k) described below offers similar benefits but may be more cost effective due to lower administration fees.
Simple IRA: This plan is designed for entrepreneurs who employ 100 or fewer employees. Like for a 401(k), contributions are taken directly from employee paychecks and are pre-tax. Contributions cannot exceed $12,500 in 2017, but employees who are 50 or older may contribute up to $15,500.
Solo 401(k): This plan is for sole proprietors but may include the proprietor’s spouse. Proprietors may contribute up to 25% of their salary plus up to $18,000 ($24,000 for people aged 50 or older), but the total contribution may not exceed $54,000. A spouse who works in the business may also contribute the same amounts.
Simple 401(k): Small businesses with 100 or fewer employees may utilize this plan. Owners and employees have the option to contribute up to $12,500 this year, or $15,500 for people aged 50 and older. This plan also allows for borrowing against it and making penalty-free withdrawals to cover financial hardship.
A sole proprietorship, a partnership, limited liability company, or corporate can qualify for every plan except the SEP-IRA.
Keep investments simple. Most small business owners should probably invest in a globally diverse collection of low-cost index funds. An index fund invests broadly across entire markets like the U.S. stock market, U.S. bond market, and developed foreign stock markets.
Another option for simple investment is a target-date fund, which automatically adjusts the balance of fixed-income investments based on age and the selected date.
Diversify all investments. Diversification does not apply only to the retirement plans described above but to any asset a small business owner may choose to invest in. Getting all of one’s savings or investments caught in one basket can be risky.
This is especially true of home ownership. The real estate market is cyclical, so it can yield high returns or unexpectedly big losses. Small business owners who place most of their net worth in their home are cautioned to spread their wealth around.
Put it all together. With their numbers as their foundation and their goals in mind, small business owners have terrific opportunities to save for retirement. By utilizing the tools we describe to invest in a diverse portfolio, more small business owners can effectively build their wealth without hurting their present-day business growth.
The holidays are a time for festivity and joy. Families who gather want to catch up and spend quality time together, talking about work, kids, favorite TV shows, and so on.
It might sound surprising then, but the holidays are also a great time to have some important financial conversations with your family members, especially if you live far away from one another and are spread out during the year. While the topic of whether you’re planning to see this season’s latest Star Wars movie might be more appealing in the short run, taking time to map out your family’s financial future will help you better enjoy many more holidays to come.
Here are six topics to discuss that can leave everyone in your family feeling better prepared for the future.
- Where do you keep important documents?
This is a straightforward topic from which the rest of your conversations can spring. Knowing where important documents are kept can help keep you organized and on-task in the event of a future emergency.
Important documents can include wills, documents estate plans such as trusts, life insurance policies, living wills, power-of-attorney, and so on.
Also, consider discussing computer passwords if they will be required to access some of this necessary information.
- Do you have a properly executed will?
A properly executed will means that it was written when the testator (the person making the will) had the proper mental capacity and that he or she signed it in the presence of two witnesses who also signed it. A will allows a testator to direct how his or her assets will be divided after death. Alternatively, if someone dies without leaving a properly executed will (intestate), that person’s assets will be divided according to the laws of the state in which the person lived, which may significantly differ from the decedent’s intentions.
- Is your life insurance up-to-date?
Life insurance can help families cover out-of-pocket costs for end-of-life care and funeral expenses. But life insurance policies differ from one another. A key consideration is whether your family member has a term or whole life policy. Just like it sounds, a whole life policy lasts for the entire life of the insured, whereas a term policy lasts for only the limited duration of time specified in the policy. Make sure that a term policy is still in effect.
Additionally, regardless of which policy your family member may have, consider whether the beneficiary is up-to-date. Perhaps your family member initially named another relative as a beneficiary who is no longer alive, or with whom the relationship has changed.
- What would you want done if you suffered a medical emergency?
This may be the most difficult topic for people to address, so sensitivity is important when discussing medical emergencies or end-of-life questions. To help frame the conversation, make it a discussion about the oldest generation’s wishes for the future instead of a morbid dialogue about the end of life.
Consider working with older family members to establish advance directives so that hospitals and doctors will be cognizant of their wishes. These include a living will, designation of a proxy with durable power-of-attorney, or a medical directive arrived at with a physician. Issues to consider when making these decisions include the choice between prolonging life or improving the quality of life over a shorter time span, providing care or withdrawing it, activating life support or not, and so on.
However, these discussions may not always be appropriate. According to April Masini, an etiquette and relationship expert, it is sometimes best to steer clear of these conversations altogether. She says that, “If someone in the family has a terminal illness or is the partner of someone with a terminal illness, it’s inappropriate to discuss wills, estate plans and anything that has to do with death and money. The topic is too raw and should be conducted very privately and with specific sensitivity.”
- What are your funeral wishes?
Knowing your family members’ funeral wishes can help you create a financial plan to cover the expenses, as funerals are pricey. Knowing them in advance can also help you shop around ahead of time, instead of being forced to pay more when you’re grieving and time is of the essence once a family member has passed. Of course, even more importantly, discussing funeral wishes in advance will help you say goodbye to your family member with respect and dignity while honoring his or her wishes.
If you’re worried about money for retirement, you’re not alone. 64% of Americans say they are moderately or very worried about having enough money in retirement. In fact, they’re more worried about retirement than yearly medical bills.
What’s the best way to prepare for retirement? Spending more time thinking about your portfolio. After all, you want to get the most out of your retirement investments.
Two products you may decide between are fixed annuities and bonds. Let’s take a look at which is better.
What are fixed annuities and bonds?
Usually purchased from life insurance companies, fixed annuities are insurance products that provide owners with lifetime income. Life insurance companies provide a fixed interest rate in exchange for a lump sum of capital.
Bonds, which are purchased from municipalities, governments, or corporations, are debt securities in which a fixed rate of interest is paid to the lender throughout the life of the loan. You are paid the principal back when the loan matures, or is due.
While fixed annuities and bonds have their similarities, they are some key differences when it comes to taxes, fees, risk, and liquidity. Let’s dig deeper.
With fixed annuities, not only is there no annual contribution limit (like with IRAs), you also can defer taxes. This makes them very useful to someone approaching retirement or with a large chunk of cash. When you begin to withdraw the money throughout retirement, you only pay taxes on earnings.
With bonds, you can actually make tax-free income. Certain types of municipal bonds are tax-exempt, meaning you don’t have to pay federal taxes on interest income you make. This makes bonds highly attractive to certain investors, especially those with high incomes and/or savings, provided the interest income is actually competitive (often, bond interest is very low).
From a tax standpoint, bonds sometimes offer you the chance to make more tax-free income, but overall earnings aren’t necessarily higher. That’s why it’s important to look at the rates being offered before making the investment. Make proper calculations and get the help of a certified financial advisor to choose the plan that can deliver you the best overall growth.
Though fixed annuities typically come with lower fees (less than 1%) than variable annuities, fees for annuities are still high. Sometimes insurance brokers aren’t entirely transparent about exactly how much you’re paying in fees, either.
There has been progress made to reduce fees, but the cost of owning an annuity is precisely the reason why it’s not as popular as before. It’s worth mentioning that the earnings annuities bring investors, especially in a high-interest rate environment, are more than enough to offset the fees. In some cases, they can be a much better investment vehicles than bonds.
Bonds, which are still praised for their higher yields, are also popular for their lower fees and commissions. This may seem like bonds are a no-brainer, but keep in mind your situation, as lifetime income does offer tremendous peace of mind. Also, think about risk.
Risk and Security
Fixed annuities can be set up for payouts over a lifetime, while bonds are paid in full at maturity. Considering that Americans are now living longer thanks to medical advancements and healthier habits, this makes annuities attractive, as many want the security of knowing their accounts are generating income regardless of how long they live. After all, 43% of Americans fear outliving their investments; fixed annuities are a viable solution.
Another positive development in the annuity world is the income rider. Lifetime annuity income riders provide investors with a guaranteed income account rate, typically around a minimum of 6–7% and sometimes higher. This can potentially allow your annual income to increase, as previous annuities only offered a “flat payout” and may not have actually kept up with inflation.
A fixed annuity does appear to remove market risk from your investment, but remember that payouts can be much lower than bonds, especially for products that have high fees and no inflation protection. In some annuities, If you die early you don’t get the full value of the annuity, and your surviving spouse or children might not be entitled to anything (unless you get a joint life annuity). Private annuity contracts also aren’t guaranteed by a federal agency, so there is a company failure risk as well.
When it comes to risk and security, bonds are seen as a way to preserve capital and earn a predictable rate of return. During any financial crisis, investors from all over the world buy U.S. Treasury Bonds, which are seen as a safe haven during tough times.
In this sense, there doesn’t appear to be much risk, but keep in mind the following:
- Bonds have maturity dates, and you’re at the mercy of whatever rates the “new bonds” are offering when the loan matures. These rates could be negative.
- Bond yields can vary tremendously if you don’t choose governments and corporations with high credit ratings. Always look at credit ratings.
- Municipal bonds do come with a default risk. For example, debt levels in Illinois should make bond investors cautious as to whether the state can fulfill its obligation.
To manage such risk, retirees can invest in short-term bonds for a much more predictable stream of income. Another good idea to avoid risk is to steer clear of bond funds, which can expose you to some bad investments.
Target date funds may also deliver low or negative growth if you’re nearing retirement, and the bond market isn’t good. For instance, due to rising interest rates, there was a bond market pullback in early 2017, which undoubtedly affected those with 2020 target date funds.
Based on your age and timeline for needing retirement money, liquidity may be a factor. Most annuities have a surrender term, usually spanning anywhere from 3–10 years. Many annuities enable you to access 10% of your investment per year, which is arguably more than you’ll need during retirement if you’ve planned well. But if you must access all of it, you will pay a surrender penalty.
Most experts recommend that you wait until maturity to access your bond investment. Early withdrawal puts you at the risk of the bond price rising or falling, and this may not be favorable to you. You could sell the bond at a discount and receive less than the principal. Holding the bond until maturity ensures you get your money back.
It’s all about balance and diversity
You’ve heard the proverb: Don’t put all your eggs in one basket. It’s especially true with retirement savings. Both annuities and bonds have their pros and cons. The best solution is to diversify and spread your assets into both annuities and bonds, as well as other investment and insurance products (like a Roth IRA and health savings account).
Whatever investments you choose, make sure your portfolio aligns with your comfort level for risk and your goals for retirement. This will help you find a balance that gives you peace of mind during your working years and financial security in retirement.
Social Security is a simple idea with complex administration. Depending on when you start taking your benefits and how you choose to allocate them to your spouse, you can save or scrap tens of thousands of dollars. Below, you will learn the basics of when you can start claiming benefits. You will also discover strategies which can help you maximize benefits over a lifetime.
The Basics of When, Why and How to Claim
There are many ways to collect some, all, or even more than 100 percent of your Social Security benefit, depending on when you start collecting.
To collect your full benefit, you should start claiming at your full retirement age. For people born between 1943 and 1954, the retirement age is 66. For those born in 1955 and beyond, the retirement age is 67.
To claim a partial benefit, you need to be 62. Claimants aged between 62 and retirement age can receive 75 percent of their Social Security benefit. Alternatively, people who do not claim their benefit between retirement age and age 70 receive an 8 percent increase to their benefit for every year they wait to claim.
Married claimants who are of retirement age can also claim up to 50 percent of their spouse’s benefit. If they are between age 62 and retirement age, they can claim their spouse’s benefit at a 30 percent reduction. Widows and widowers can receive a survivor’s benefit in the same amount received by their late spouse.
Divorced spouses can qualify for survivor benefits under certain conditions. It does not matter if your ex-spouse remarried, but if you remarry before age 60 you are disqualified from receiving survivor benefits unless your remarriage ends in death, divorce, or annulment before your ex-spouse dies. You must also be 60 years of age (50 if claiming disability benefits) or care for your ex-spouse’s child aged 16 or less who receives Social Security benefits under your ex-spouse’s record. Finally, if you are already eligible for Social Security benefits that are higher than your ex-spouse’s you are not eligible to collect a survivor benefit.
Recommended Strategies to Maximize Benefits
Waiting until 70 to collect your benefit is the best strategy for maximizing it. Financially, people are in greater danger of living too long instead of dying too soon, so taking Social Security benefits early should not be done unless you genuinely need them at 62 or 66. The Social Security program calculates benefits to cover payments to men’s and women’s expected lifespans, 83 and 85, respectively. However, there is a 61 percent chance that one spouse will live to at least 87. Delaying a claim until 70 yields higher lifetime benefits, which can help protect against inflation after retirement.
Married couples have some additional strategies to maximize their lifetime Social Security wealth. First, they can claim and switch. For example, if one spouse is still working while the other is not, the non-working spouse can start collecting Social Security at 62 if the other spouse is of full retirement age. This is because the retirement-aged spouse is entitled to collect half the other spouse’s Social Security benefit (this is called a restricted application). Meanwhile, because the retirement-aged spouse is not taking his own benefit, it will continue to grow until he reaches 70, at which time his spouse can claim half of his higher benefit, to which she also has survivorship rights to.
Next, they can file and suspend. The basic idea is that when one spouse reaches 66, she can file for benefits and immediately suspend them so they will continue to grow by 8 percent per year. Meanwhile, her spouse can file for spousal benefits on her account and receive 50 percent of them. By the time she reaches 70, her account will still have grown even though it was drawn on by the spouse. Meanwhile, the spouse’s own account has grown, ensuring that they can both collect more money when they switch back to their own benefits. Some people claim their Social Security benefits as early as possible for the pleasure of having extra money each month. While it might be tempting to put that extra money toward a cruise or a new television you have been eyeing, the temptation is not worth all the money you could save with just a few extra years of managing on your normal income, something you have already become accustomed to.