retirement plan

Aging America – Americans Expect to Retire Later

Aging America: Poll shows retirement coming later in life

Associated Press

Stung by a recession that sapped investments and home values, but expressing widespread job satisfaction, older Americans appear to have accepted the reality of a retirement that comes later in life and no longer represents a complete exit from the workforce. Some 82 percent of working Americans over 50 say it is at least somewhat likely they will work for pay in retirement, according to a poll released Monday by the Associated Press-NORC Center for Public Affairs Research.

The survey found 47 percent of working survey respondents now expect to retire later than they previously thought and, on average, plan to call it quits at about 66, or nearly three years later than their estimate when they were 40. Men, racial minorities, parents of minor children, those earning less than $50,000 a year and those without health insurance were more likely to put off their plans.

“Many people had experienced a big downward movement in their 401(k) plans, so they’re trying to make up for that period of time when they lost money,” said Olivia Mitchell, a retirement expert who teaches at the University of Pennsylvania.

(read the entire article here)

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The “Lost Generation” of Retirement Planning

The “Lost Generation” of Retirement Planning

(originally published on on 10/4/13)

by Michael K. Stanley

Despite dour prognostications regarding baby boomers’ retirement preparedness post financial crisis, a recent research report finds that there are other segments of the population who are in deeper trouble when it comes to retirement planning — like Millennials.

In its third annual research report on the state of U.S. employee retirement preparedness, Financial Finesse, an unbiased financial education company that offers counseling programs, found that Millennials have a significant risk of not being able to achieve retirement security.

With just 17 percent of Millennial employees surveyed stating that they anticipate being able to retire with 80 percent of their income goal, there is ample need for concern. Although baby boomers had the curveball of the financial crisis thrown at them as they were approaching retirement, Millennials will have to deal with myriad other issues that may pose an even greater challenge.

Systemic issues, such as rising health care costs and a possibly insolvent Social Security system will acutely impact Millennials. Couple that with the fact that many Millennials can expect to live longer than older generations and the prospect becomes even more unsettling.

Drawing a link between the generation that arrived home after World War I only to have to contend with the difficulties of a shifting cultural, political and financial climate, the research paper invokes “lost generation” when discussing the retirement challenges Millennials face.

The report finds that 87 percent of Millennials are saving for retirement through their employer-sponsored retirement plan, which the research suggests can be attributed to the fact that many employers utilize an automatic enrollment strategy. The concern is that Millennials could be taking a “set it and forget it” approach to retirement planning which could give them a false sense of security.

The report cites a Mercer study which found that individuals in automatic enrollment retirement plans defer on average 3.5-4.4 percent of their income into their plan compared to 7 percent of individuals who proactively contribute. Millennials are a generation, the report points out, that use automation to pay their bills, and similar systems could work well for them when it comes to retirement planning, but it would behoove them to take a more proactive approach.

The report also identified other groups who are at risk when it comes to retirement preparedness, among them, women and lower-income employees.

Just 17 percent of women surveyed were confident that they would be able to reach their income-replacement goal in retirement — an increase from 13 percent in 2012 — but still a number far too low, the report warns. Due to the fact that, on average, women both live longer and earn less than men, they need to make retirement preparedness a top priority.

Lower-income employees, defined in the report as those with total annual household income of $60,000 or less, experience setbacks in retirement preparedness compared to the previous year. A lesser percent reported:

  • Participating in 401(k) plans — 84 percent in 2013 compared to 86 percent in 2012;
  • Feeling confident in their retirement income-replacement goal — 10 percent versus 11 percent in 2012; and
  • Having calculated a retirement projection plan, 33 percent compared to 36 percent last year.

On a positive note, the report found that the overall state of retirement planning among employees has improved since 2011.

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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 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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