retirement income

Workers Not Ready To Retire

(this article was originally published on latimes.com)

Most U.S. workers unprepared to meet retirement expenses, survey says

By Stuart Pfeifer, December 4, 2013

More than half of U.S. workers aren’t saving enough money to be able to cover essential living expenses in retirement, according to a survey by Fidelity Investments.

The savings survey found that 55% of people will have trouble covering housing, healthcare and food expenses, Fidelity said.

The online survey of 2,200 households, performed from June through October, measured whether workers were on track to cover their estimated post-retirement expenses.

Of those who responded to the survey, 33% were on pace to cover 95% or more of their estimated expenses, including discretionary expenditures such as travel and entertainment; 12% would be able to cover living but not discretionary expenses; 14% were not on pace to cover living expenses and would have to make modest adjustments to their retirement plans; and 41% were so underfunded for retirement they’d have to make significant lifestyle changes when they quit working.

“When you factor in the expectations many have of an early retirement, along with increasing longevity and sometimes overly conservative asset mixes for investments, you can see why many people are not as prepared as they need to be to cover their expected expenses in retirement,” said John Sweeney, Fidelity’s executive vice president of retirement and investment strategies.

Fidelity said workers can take several steps to improve their preparation for retirement, including: increasing the amount they’re saving, better allocating how their money is invested and deferring retirement.

“Although it requires discipline and some trade-offs, there are important steps people can take to accelerate their retirement savings and get closer to where they need to be in the long run, no matter what their age or income level,” Sweeney said.

The survey found that baby boomers (born between 1946 and 1964) were best prepared for retirement, on pace to save 81% of what they’ll need in retirement and those from Generation Y (born between 1978 and 1988) were least prepared. On average, the younger workers were on pace to have just 61% of the money they’ll need to cover retirement expenses.

“This number is a concern, since the survey indicated many anticipate retiring early, despite the fact they probably won’t have the benefit of a pension, as their parents did,” Fidelity said in a news release. “The good news for this generation: time is on their side, which means they can improve their situation by increasing their savings rate and investing for growth.”

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Not Saving Enough For Retirement?

This article was originally printed at latimes.com/business/money/la-fi-mo-wealthy-in-la-plan-to-save-a-lot-for-retirement-but-havent-yet-20131028,0,7495879.story

Wealthy in L.A. plan to save a lot for retirement, but haven’t yet

By Walter Hamilton, 11:24 AM PDT, October 28, 2013

Wealthy people in Los Angeles plan to save more money for retirement than the national average, while women are stowing away more than men, according to a new survey.

L.A. residents with $50,000 to $250,000 in household investable assets plan to save an average of $909,400 for retirement, more than the $736,200 national average, according to Merrill Edge, a consumer banking unit of Bank of America Corp.

Women are outpacing men, according to the report. They plan to squirrel away a bit more than $1 million versus $814,000 for men.

However, as with Americans of all income levels, they’ve put away only a fraction of that amount. The average L.A. resident has saved only $150,300, according to the report.

And they don’t have much time left to meet those lofty financial goals: The average L.A. poll respondent is 54 years old.

Perhaps not surprising, nearly two-thirds of L.A. residents — 64% — intend to retire later than anticipated. That’s an 18 percentage-point jump from Merrill’s last report six months ago.

In an apparent sign of growing retirement awareness, L.A. residents anticipate saving $377,400 more than they did six months ago.

As for college savings, the average wealthy Angeleno has saved, or plans to save, $62,000. However, one in three Los Angeles parents has saved nothing for their child’s education, according to the report.

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Today’s Economy May Make Tax-Deferred 401(k) Plans A Bad Deal

(The article below was published on the website FA-Mag.com today.  While I agree with the author’s description of the problem, I believe he ignored one valuable solution.  My response is shown below the article.)

Today’s Economy May Make Tax-Deferred 401(k) Plans A Bad Deal

June 19, 2013 • Gary A Borowiec

For decades, advising your clients to invest as much as possible in tax-deferred, employee-sponsored 401(k) plans seemed to make great sense. Designed to reduce taxable income in pre-retirement years when participants’ tax brackets are typically at their highest, this convenient savings vehicle enables investors to pay taxes on their assets in post-retirement when tax brackets are likely to be lower than in earning years. But in today’s economic climate, many of your clients face a new challenge: one in which the bulk of their pre-retirement years are taking place in a time of historically low tax brackets. Suddenly this “no brainer” investment approach may need some serious rethinking.

401(k) plans were first introduced back in 1978 when the top tax bracket was a mind-boggling 70%. In that environment, deferring taxes created a significant advantage since it was unlikely high-income earners would be taxed at an equivalent tax rate in post retirement. But 2013 presents a very different picture. Today’s top tax rate is 39.6%—nearly 30% less than in 1978. But this rate is unlikely to remain for long. The January 1 enactment of the American Taxpayer Relief Act (ATRA) was the first sign of an upward shift. Historically, tax rates have increased substantially in the decade following every major U.S. war. The U.S. has been engaged in the War Against Terror since 2001 at a cost of more than $1.5 trillion. As government debt continues to mount, increases in tax rates are inevitable. For today’s investors, this means tax rates may very well rise during their retirement years, reversing the assumed value of a tax-deferred savings plan.

Changing tax rates aren’t the only stumbling block for 401(k) investors. As tax rates have decreased over the past decade, stock values have plummeted. While inflation-adjusted stock values generally rose between 1978 and 1997, stock values are lower today than in the prior decade. With 401(k) plans performing at the worst levels in history, “wise” investors who diligently poured their savings into 401(k)s during that period saw their account values steadily decline for a decade. And while it is assumed that stock values will climb again, no one can say how much and how soon, or when yet another bear market may jolt the market again.

So what’s the answer? There is no simple solution, but guiding your clients toward an approach that hedges against the risk of both tax rate increases and decreased stock values may give them a much safer path toward protecting their retirement savings.

To begin, it may make sense to forgo the small deduction that comes with deferring taxes on savings today in favor of much larger tax benefits later. In other words, it may be better to pay tax on the “seed” instead of paying tax on the “harvest”—especially when taxes are likely to be considerable higher when that harvest is reaped. The good news is many employers have recently added one or both of the following enhancements to their company-sponsored 401(k) plans:

Roth Provision 401(k)—This new option allows participants to choose from the same investment options and choices in their company plan. Rather than deferring taxes, the employee pays current taxes on all income earned, making the Roth 401(k) portion of the account tax free during retirement—including both contributions and growth. Unlike the Roth IRA, there is no income limit for participation or mandatory distribution cycle, and building this large, tax-free nest egg greatly simplifies retirement income planning during the distribution phase.

Company Plan In-Service Withdrawals—In the past, money saved in a 401(k) plan was held captive until the employee left the company. The in-service withdrawal option allows participants to rollover existing 401(k) savings into an IRA (which can then be converted to a Roth if desired) while still working for the employer. This flexibility helps investors by opening the door for greater investment diversification, while also taking advantage of tax diversification.

Both of these options can provide significant benefits by enabling your clients to take full advantage of their employee-sponsored 401(k) plans—including company match programs when available—while also making smarter choices about how and when to pay taxes on their savings. Both options also provide the opportunity for much greater portfolio diversification.

No one can see the future. You and your clients know the direction of tax rates and stock values in the coming decades is fixed only by speculation. The rules have certainly changed, but by carefully considering the role these new company plan options play in each clients’ financial plan, you can help them make smarter choices that accurately reflect today’s economic landscape and help support a more comfortable, tax-efficient retirement.

Gary A Borowiec, CLU, ChFC, RFC, LUTCF, CLTC, is managing partner of Atlas Advisory Group LLC, an independent planning firm based in Cranford, NJ. A member firm of M Financial Group, Atlas Advisory Group specializes in investment tax planning and wealth transfer for executives. Independently owned and operated, Atlas Advisory Group  is a registered broker-dealer and investment advisor (RIA). Member Finra/SIPC.

 

Michael’s Response to this article:  For many people, a better solution to the problem mentioned is to stop funding their 401k (or never start one) and put the money into an indexed universal life insurance policy instead.  The premiums paid into an IUL (which do not have the annual restrictions of a Roth) will not offer an immediate tax deduction, but the cash value may build faster, can be accessed without penalties or income taxes before age 59 1/2 using zero-rate or low-cost policy loans, and can be used as a tax-free retirement income supplement at any time you choose to retire.  Whenever the worker dies, his heirs will receive a large tax-free estate instead of the balance in the account and a tax bill.  Do you agree or disagree?  Please let me know by clicking on the Comments section.

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