Whether you are just getting started or fine-tuning your retirement plan, there are several things you can do today to boost your chances of being financially secure in your retirement years.
Not only do economic changes affect us from year to year, but personal situations can greatly influence how we save for our retirement years. Regardless of these unpredictable factors, there are certain ways to maximize our results, if we just play it smart.
Sure, it’s obvious. Nevertheless, too few workers are setting aside money for their golden years. “It’s never too late to start retirement savings, and never too late to beef it up,” says Dee Lee, a Certified Financial Planner and author of “Women & Money.”
If you’re fortunate to receive a raise or bonus in your job, perhaps you can set aside all or part of your extra earnings, or a regular portion of your paycheck, for retirement. But even if you don’t have extra cash to stow away, small changes in your daily life can reap big rewards.
Cut back on the number of times you order take-out dinners or go out to eat each month. Be creative in ways to reduce your spending on a daily basis, thereby adding extra savings in the long run.
In recent years, employers have been backing away from providing pensions, lifetime health insurance and other benefits that had been valuable safety nets to employees long after they leave work.
Companies are putting the onus on workers by adopting 401(k) plans and other plans that are funded by employees’ salaries, rather than company largesse. The number of employers offering old-style pension plans has been dropping steadily, according to Hewitt Associates.
If you have a 401(k) plan at work and aren’t putting as much as you can in it, increase your contributions. In 2008 individuals can stash up to $15,500 of pretax earnings in a 401(k). For those 50 or older by year’s end, the limit is $20,500. The overall contribution cap to a 401(k) (including employer matching funds) is $46,000.
If funding caps seem out of reach for you right now, make sure to at least pack away enough of your earnings to trigger so-called matching funds. These are free contributions employers make to 401(k) plans on employees’ behalf, as long as those workers save a minimum amount. Generally, most companies require individuals to save 6 percent of their salary to receive matching funds, according to Profit Sharing/401(k) Council of America, or PSCA.
Employers are increasingly offering Roth 401(k) plans, a twist on the 401(k). With a Roth 401(k), contributions are made with pay that’s already been taxed, so you won’t be taxed at a later date. For this reason, experts say they’re a good choice for employees with lower salaries or anyone else who expects to pay higher taxes in the future.
When you fund an IRA, whether traditional or Roth, you aren’t just putting money aside, you’re capitalizing on a chance to let your assets grow without being eroded by taxes. With a traditional IRA, earnings grow tax-deferred, meaning you pay the folks at the IRS only when they’re taken out, usually at retirement. Plus, depending on your income, you may also qualify to claim tax deductions for any contributions you made to the plan. A traditional IRA allows an annual contribution of up to $5,000 per person, or $6,000 for those over 50.
With a Roth IRA (contributions already taxed), you do not pay taxes on earnings. Because there’s no required date to start taking withdrawals, you can fund a Roth for as long as you like. It can even be passed along to your heirs, untouched. That’s not true with a traditional IRA or 401(k). To qualify for a Roth IRA in 2008, a married couple filing a joint return can not have income that exceeds $169,000. For a single person, the limits max out at $116,000.
A nonworking spouse is also eligible for an IRA and can add to your retirement bundle. “Opening an IRA for a nonworking spouse is good tax planning as well as retirement planning,” says Dee Lee, a Certified Financial Planner. “Money in that IRA will compound tax-deferred.”
“If this is in a Roth, it will all be tax free forever,” says Ed Slott, an IRA expert and author of “Your Complete Retirement Planning Road Map.” For that reason, Slott says the Roth IRA wins hands-down when it comes to picking an IRA for anyone, whether they work on not.
Reallocating your assets to stay on track may seem daunting. But if you don’t tend to this financial housekeeping at least once a year, retirement funds may inevitably grow out of whack.
You’ll want to make sure that you own the right mix of stocks, bonds, mutual funds, cash and other assets to help meet your retirement goals. As the economy and your personal situation may very well change each year, you’ll want to regularly assess your needs and strategy.
Target-date funds also help employees maintain a diversified mix of assets because they automatically shuffle and remix their holdings to reflect age and retirement target date. As you get older, the funds become more conservatively invested.
“People might want to look at them,” says Ed Ferrigno, vice president of Washington Affairs at PSCA. “They’re a convenience so you don’t have to rebalance.”
As helpful as target-date funds are, they’re designed with a cookie-cutter approach to investing. They may, in fact, not be allocated to best suit your personal goals, financial net worth or risk tolerance.
Seek help carefully. You want to hire someone who’s trained in various retirement issues, not just a salesperson who’s going to try to sell you a certain product, be it investments, life insurance or other assets.
But a professional can be extremely valuable in helping you allocate assets and determine if you’ve got the right mix to meet your specific retirement goals. Fee-only planners charge for their time, while fee-based planners earn commissions for investments they sell you.
While word-of-mouth references are a good way to start tracking down help, it may be advisable to seek a professional agency, which requires members to adhere to certain training and other standards. The American Institute of Certified Public Accountants, or AICPA, has a list of CPAs who’ve earned an extra Personal Financial Specialist credential by passing tests on a variety of comprehensive planning topics, including retirement. You can also use Bankrate’s tool to find a CFP.
Certified Financial Planners, or CFPs, are required to pass exams for accreditation; you can look for those who specialize in retirement, through the Financial Planning Association.
If you’re hovering near that magic retirement age, it’s time to start planning how you’ll withdraw retirement assets. That’s because the IRS requires you to start taking required minimum distributions from certain accounts, like 401(k) plans and traditional IRAs, by April 1 of the year after you turn 70½.
Tread lightly. Taking assets from tax-sheltered retirement funds isn’t like driving up to the ATM machine; you trigger taxes when you obtain your money. Generally, the more money you take at once, the bigger and more immediate your tax hit. The trick is to minimize taxes as much as possible.
In fact, you could lose as much as 70 percent of your nest egg to income taxes, estate taxes and state taxes by choosing the wrong distribution method, warns Slott.
That said, there are a variety of methods to help you retain as much of your assets as possible. A trained professional can guide you through the thicket of tax pitfalls to craft the best exit strategy from your retirement accounts.
Spouses and nonspouse heirs — that is, kids or an unmarried partner — who inherit a 401(k) plan can roll them into their own IRA without paying income tax. These transfers allow nonspouse heirs to stretch out distributions of assets they inherit over their lifetimes, instead of being forced to take a huge payout. That, in turn, minimizes taxes and preserves inherited retirement funds so they can continue to grow in value.
Keep your beneficiary forms and other estate-planning documents for retirement assets up-to-date. If you don’t, those hard-earned assets may wind up going to the wrong heirs. When you’re married, the automatic or “default ” beneficiary will be your spouse, says Martin Shenkman, an estate-planning attorney and author of “Funding the Cure.”
If you want that 401(k) to go to your kids, you’ve got to ensure beneficiary forms say so.
Be sure you have documents to protect retirement assets if someone ever has to manage your financial affairs. “You don’t want someone giving away your assets if you’re incapacitated,” says Shenkman. “You want to safeguard assets with a power of attorney that protects you, yet authorizes someone to give you help.”
You may not realize it, but your physical well-being may be one of the most significant factors affecting your financial status in later years.
“Health and health care-related expenses are going to play an increasingly important role in retirement savings,” says Brad Kimler, senior vice president of Fidelity Employer Services Co., a division of Fidelity Investments. “Individuals who make positive lifestyle changes aren’t just improving their health; they’re also potentially improving their long-term financial condition, too.”
Kimler’s advice is borne by recent studies from Fidelity. Among other things, it computed that a couple currently in their mid-60s who aren’t covered by employer-sponsored insurance for retirees could spend roughly $215,000 on out-of-pocket medical expenses, excluding long-term care and over-the-counter medications, by the time they’re 85 years old.
What’s more, when your health fails, so does your ability to earn. Consider that more than half of employees — 55 percent — left their jobs anywhere from one to five years earlier than they expected, and among them, 22 percent had to quit early because of illness or disability.
Quitting smoking, actually using that gym membership (or hitting the running trails), eating right and keeping your weight in check are some of the savviest financial moves you can make.