Retirementology, Re-tire-men-to-logy, definition, the study of retirement
We get questions all of the time about retirement plans. The good news is that despite the alphabet soup of the names of different plans, they are often quite similar. While it appears that the job market is improving it is worthy of note that just 7 years ago, in 2007, 70% of surveyed retirees were “very” or “somewhat confident” that they would have a “comfortable” retirement, while 67% of retirees feel that way this year, according to Employee Benefit Institute.
In USA Today we learn that 36% of Americans have nothing saved for retirement. Drilling further we can see from the same source that 14% of those 65 and older have no retirement savings, as is the case for 26% of those age 50-64; 33% for those from 30-49 and 69% of people 18-29, according to the survey of 1,003 adults, conducted for Bankrate.com. As Bankrate.com Chief Financial Analyst, Greg McBride stated, “These numbers are very troubling because the burden for retirement savings is increasingly on us as individuals with each passing day.”
I found it interesting in The Economist that in 39 of the 50 US states, the highest paid state employee is a college basketball coach or football coach. If the coach works for a non-profit organization he or she may be eligible for a 403(b) account. The IRS code simply relates to the source of income. The ability to set aside funds on a tax deferred basis is the same for all retirement accounts, no matter what they are called.
In Thousand Oaks, biotechnology firm Amgen comes to mind as another example. With Amgen being a corporation employees there are eligible to participate in the company’s 401(k) account. One advantage here is companies often offer a matching program of some kind that encourages employees to participate in the plan. In all cases three things are true:
- If the money is spent before age 59 1/2 there are income taxes and early withdrawal penalties that must be paid.
- Second, the premature withdrawal penalty go away after 70 ½ , but income taxes are always paid on withdrawals . In addition, there can be a 50% penalty applied after 70 ½ when account holders do not take their Required Minimum Distributions. Retirees also need to know that the withdrawal rate is 3.65% at 70 1/2 and the percentage increases every year.
- Third, once employment is terminated, the employee has the ability to transfer from the employer sponsored plan to an IRA without paying income taxes on the transfer.
Despite the myriad of investment options, many retirement plans are limited to stocks, bonds and cash in mutual funds. IRAs, on the other hand, offer far more investment vehicle options so that investors can have broader a diversification and choose between firms that offer active management strategies that may offer some reduction in downside participation. If you can limit your losses, you don’t need to swing for the fences to get back to even.
Qualified and non-qualified retirement plans are created by employers with the intent of benefiting employees. Under the Department of Labor, the Employee Retirement Income Security Act (ERISA), enacted in 1974, defines qualified and non-qualified plans. Qualified plans are designed to offer individuals added tax benefits on top of their regular retirement plans, such as IRAs. Employers deduct an allowable portion of pretax wages from the employees, and the contributions and the earnings then grow tax-deferred until withdrawal.
Non-qualified plans are those that are not eligible for tax-deferral benefits. As a result, deducted contributions for non-qualified plans are taxed when income is recognized. Interest income from a savings or mutual fund account, held in the name of an individual, for example, is added to the taxpayer’s earned income regardless of whether or not the income was spent or stayed in the account.
Plan for 20 years or more
Under the assumption that a retiree stops working at age 67, the average person should plan for a 20 year retirement, according to US News & World Report. It would be more conservative, however, to plan on living to age 100, in spite of our habits, which means the time frame becomes 33 years. If one were to run out of money at age 87 it might be difficult to get a job at Wal-Mart . Only 17% of employees indicate they are on track to replace 80% of their current income (or their own goal) , from the study “2011 Research Year in Review” by Financial Fitness Inc 2012
7 Sins of Investor behavior
- Greed - Swing for the fences investing in the hot sector of the day
- Panic – Reacting without thought or strategy in an untimely fashion
- Conformity – The herd mentality can often cause people to invest based on stories
- Naivete - Lack of experience or knowledge can leave investors taking on more risk than they assessed.
- Apathy - Lack of interest or indifference can cause people to try to learn or attempt to save
- Arrogance – People believing they know more than they actually do, causing them to avoid forms of help.
- Passivity or Inertia - Investors tend to rarely change their allocations even though investment markets or their goals may have changed.
What can you do?
1. For every $40k you want out to spend in a year may require you to invest $1M today. What’s your number?
2. Just say Yes to a retirement plan whether through work or on your own.
3. Find out where you can have your retirement plan managed with discipline so you can avoid worry and water cooler chatter.
by John L. Grace
Neither diversification or a broader investment strategy can guarantee a profit or protect against a loss. Securities licensed associates at Investors Advantage are Registered Representatives & Investment Adviser Representatives. Securities and investment advisory services offered through NATIONAL PLANNING CORP. (NPC), NPC of America in FL & NY, Member FINRA/SIPC, and a Registered Investment Adviser.
Investors Advantage and NPC are separate and unrelated companies.