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March 29, 2024

Federal Employee Retirement and Benefits News

Category: Articles

Articles

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How to Maximize Your Social Security Benefits. By: Rick Viader

As you approach retirement, you may wonder how much you’ll have available to spend on the goods and services that you need. One of the primary sources of income in retirement for many people is their Social Security benefits. 

There are literally thousands of ways that people can take their Social Security retirement benefits. Often, the difference between a good decision and a not-so-good decision about Social Security can amount to a difference of $100,000 or more in benefits received (or not received) over a lifetime.

When are You Eligible for Social Security Retirement Income Benefits?

Qualifying for Social Security retirement benefits depends on several factors. One is whether or not you have earned income in a job that pays into the Social Security system. In addition, you need to compile a total of 40 work credits over your lifetime. You can earn up to four of these credits per year. In 2020, you received one credit for each $1,410 of earnings you have.

You also have to be at least age 62 to be eligible for Social Security retirement benefits. However, claiming your benefits before you have reached your “full retirement age,” or FRA, will result in a permanently reduced dollar amount.

When the Social Security program was initially created, those who had reached age 65 were considered to have reached their full retirement age, and were, therefore, eligible to receive their full amount of retirement benefit from the system – provided that they qualified. 

In order to ease some of the funding strain on the Social Security system, the full retirement age was later changed in 1983, gradually raising to age 67, depending on the year of the recipient’s birth. 

Social Security Full Retirement Age

Year of Birth

Minimum Retirement Age for Full Benefits

1937 or Before

65

1938

65 + 2 months

1939

65 + 4 months

1940

65 + 6 months

1941

65 + 8 months

1942

65 + 10 months

1943 to 1954

66

1955

66 + 2 months

1956

66 + 4 months

1957

66 + 6 months

1958

66 + 8 months

1959

66 + 10 months

1960 or Later

67

Source: Social Security Administration

Instead of filing for your Social Security retirement benefits at your FRA or before, you could instead opt to wait. By delaying the receipt of your benefits, you can permanently increase the dollar amount you receive going forward.

In this case, the longer you wait to receive your benefits, the more “delayed retirement credits” you will receive – until you reach age 70. (You can continue to delay the receipt of your benefits beyond age 70, but you will not be able to build up any more delayed retirement credits). The amount of this benefit increase is 8% per year for anyone who was born in 1943 or later.

Social Security Spouse’s Benefits

Spouses of Social Security recipients may also be eligible to receive retirement benefits, as long as they are at least age 62 and the worker-spouse is either currently receiving Social Security, or is eligible to receive it (but has not yet filed). 

If a spouse waits until his or her own full retirement age to start receiving their Social Security spousal benefits, then the benefit amount that they receive will be equal to one-half of his or her worker-spouse’s full benefit amount. (Otherwise, if the spouse files early, the dollar amount of their benefits will be reduced permanently).

In addition, even though most people are aware that spouses of Social Security recipients may receive benefits based on their husband or wife’s earning record, few are familiar with the fact that you can also obtain benefits based on a former spouse’s record. But you can.

If you’re divorced, you may be able to receive benefits based on your ex-spouse’s record – even if he or she has remarried – provided that the following factors apply:

  • Your marriage to your ex-spouse lasted at least 10 years
  • You are age 62 or older
  • You are unmarried
  • Your ex-spouse is entitled to Social Security benefits (although, they do not have to actually be receiving those benefits yet), and
  • The benefits that you are entitled to receive based on your own work record are less than the benefits you would receive based on your ex-spouse’s record.

Social Security Survivor’s Benefits

When someone receiving Social Security income passes away, his or her surviving dependents may be eligible to receive survivor’s benefits – as long as the original benefit recipient had at least the minimum amount of work credits.

The amount that can be received as survivor’s benefits is based on the amount of retirement benefit that the deceased individual is either receiving in retirement benefits, or the amount that they would have received in retirement benefits if he or she had reached their full retirement age. 

Taxation of Social Security Retirement Income

In some cases, Social Security retirement benefits may be taxable. This is true if you are receiving Social Security before your full retirement age and you are also receiving income from various other sources.

For instance, you may be taxed on Social Security if:

  • You file a federal tax return as an individual and your combined income is:
  • Between $25,000 and $34,000 (up to 50% of your benefits may be taxable)
  • More than $34,000 (up to 85% of your benefits may be taxable)
  • You file a joint tax return, and you and your spouse have a combined income that is:
  • Between $32,000 and $44,000 (up to 50% of your benefits may be taxable)
  • More than $44,000 (up to 85% of your benefits may be taxable)
  • You are married, and you file a separate tax return.

Your combined income equals your adjusted gross income plus any non-taxable interest earned, plus one-half of your Social Security benefits. 

When Should You Start Taking Your Social Security Retirement Income Benefits?

There is no single best answer for when to start receiving Social Security benefits. What works for one person or couple may not be the right strategy for another. Because of that, before you move forward with filing for these benefits, it is recommended that you first discuss your objectives, as well as your income options, with a financial advisor who understands the Social Security system.

Common Retirement Mistakes Made by Federal Employees. Sponsored By: Aaron Steele

If you and/or your spouse are an employee of the federal government, you have access to a wide array of benefits – including a retirement savings plan, life insurance protection, and health insurance coverage.

But even though these benefits can equate to financial security – both now and in the future – they can also be somewhat confusing. So, it is important that you have a good understanding of what you have access to, and that you maximize all of your coverage options.

 

Understanding Your Federal Employee Insurance and Retirement Benefits

Among your government benefits are programs that can directly affect your – and possibly even your spouse and other loved ones’ – financial future. These include the Federal Employees Retirement System (FERS) and/or the Civil Service Retirement Service (CSRS).

 

Federal Employees Retirement System(FERS)

Congress created the Federal Employees Retirement System in 1986 and it became effective on January 1, 1987. Since that time, new Federal civilian employees who have retirement coverage are covered by FERS.

FERS provides retirement benefits from three different sources. These include:

These three components of FERS can all work together in order to provide you with a strong financial foundation for your retirement years. 

Both the Basic Benefit plan and Social Security will require that you pay into the system each payday. Agencies withhold the cost of these plans as payroll deductions, plus your agency pays its share, too. After you retire, you are entitled to a monthly annuity income for life. 

If you leave Federal service before you reach your full retirement age and you have a minimum of five years of FERS service, you can elect to take a deferred retirement. Two of the three parts of FERS – Social Security and the TSP – can remain with you if you leave your federal government job before you retire. 

In other words, while FERS is offered through your government employer, many of the features of this plan are “portable,” meaning that even if you leave federal employment, you may still be able to qualify for these benefits. 

Employees who are enrolled in FERS and who were first hired before 2013 contribute 0.8 percent of their pay to the CSRDF. Employees who were enrolled in FERS and who were first hired in 2013 or later contribute 3.1 percent of pay to the CSRDF. Also, all employees who are enrolled in FERS contribute 6.2 percent of wages – up to the Social Security taxable wage base – to the Social Security Trust Fund. 

The Minimum Retirement Age, or MRA, for FERS participants who were born before 1948 is age 55. The MRA for employees who were born between 1953 and 1964, is 56. The MRA increases to the age of 57 for those who were born in 1970 or later. 

FERS allows retirement with an unreduced pension at the age of 60 for employees who have 20 or more years of service, and at the age of 62 for employees with at least five years of service. 

 

When FERS Participants Can Retire

When you were born:

Your MRA is:

Before 1948

55

Between 1953 and 1964

56

In 1970 or Later

57

Source: OPM.gov

 

Civil Service Retirement Service (CSRS)

The Civil Service Retirement Act became effective on August 1, 1920. Through this act, a retirement system for certain federal employees was established – the Civil Service Retirement System, or CSRS. This plan was later replaced by the Federal Employees Retirement System, or FERS, for federal employees who initially entered into their covered service either on or after January 1, 1987. 

When FERS was first created, all federal workers at that time had the option to convert from CSRS to FERS. Now, all federal employees are automatically enrolled in FERS and they do not have the option to choose CSRS. Therefore, CSRS is only available to federal workers who were in the plan before 1987, and who choose to remain with CSRS in lieu of switching over to FERS. 

The Civil Service Retirement System, or CSRS, is a defined benefit, contributory system. This means that the amount of retirement benefit you receive is a set, known amount, and also that employees share in the expense of the retirement annuities to which they will become entitled. 

Those who are participants in this classic pension plan contribute a percentage of their pay, and when they retire, they can receive an annuity that may help to maintain a certain standard of living throughout their retirement years. 

Several different types of retirement may trigger the need for CSRS benefits. The U.S. Office of Personnel Management will work with your specific agency's personnel to process your annuity claim. To help in reducing or eliminating delays, it is important to ensure that your Official Personnel Folder is complete. You can also submit your paperwork early, if applicable. 

Overall, the types of retirement may include:

  • Early Retirement
  • Voluntary Retirement, or 
  • Deferred Retirement

You may also be able to receive CSRS benefits due to a qualifying disability.

 

The Most Common Retirement Mistakes that are Made by Federal Employees

Even though federal retirement benefits are fairly comprehensive, employee participants may still make mistakes – both before and after retirement – that can impact what is received through these plans.

Some of the most common mistakes that are made by federal employees include:

 

Not Regularly Reviewing Your Personnel File

Knowing what is in your personnel file can help you to better ensure that you’re prepared for retirement – especially if it is determined that there are some mistakes. Although the Office of Personnel Management (OPM) handles a lot of data regularly, it is never a good idea to simply assume that yours is correct.

With that in mind, make sure that you regularly review your Official Personnel Folder, or OPF, and in particular Form SF 50 (the Notice of Personnel Action) to make sure that everything matches up. 

This information can include details regarding which retirement plan(s) you are enrolled in, as well as important dates like when you officially began employment with the federal government. 

 

Not Maximizing Contributions to the Thrift Savings Plan (TSP)

The Thrift Savings Plan can encompass a large portion of your retirement savings. So, it makes sense to maximize these benefits. You can do so by contributing as much money as possible – up to the annual maximum limit – each year.

This can give you a bigger “base” from which to generate tax-deferred growth. In addition, because your government agency may offer a matching program, you will want to make sure that you are eligible to receive this “free money.” 

 

Not Keeping Track of and Managing Health Insurance Coverage

As we get older, one of the biggest expenses that can be faced is healthcare. As a government employee, you (and your spouse and children, if applicable) will have access to a comprehensive health insurance program. This coverage can also remain after you have retired.

With that in mind, make sure that you meet all of the eligibility criteria for taking the coverage with you when you retire. Otherwise, you may miss out on keeping this protection and in turn, having to pay a much larger out-of-pocket sum when you require healthcare in retirement. 

 

 Not Updating the Beneficiary Information

While most people do not like to think about the unexpected, it is still essential to plan for it. Therefore, you should name one or more beneficiaries on your government retirement plan, as well as on your government-provided life insurance coverage. 

It is also important to make sure that your beneficiary information is always up-to-date – especially if you have had any major changes take place in your life, such as marriage or divorce, death of a spouse, and/or the birth or adoption of a child. 

Regularly reviewing your beneficiary(ies) means that funds won’t be paid out to someone for whom they are no longer intended.It can also help you to ensure that you aren’t unintentionally disinheriting someone who you want to provide these funds to. 

 

Is Your Retirement Plan Up-to-Date?

Making sure that your retirement plan and other related benefits are up-to-date is essential for living a worry-free future. That’s because when you know that you’re covered financially, you can spend your time focusing on other things, like doing things you enjoy with the people you love and care about.

If you would like to make sure that your federal retirement plan is on track with your objectives – or if you’d simply like to get a second opinion – feel free to reach out to us. Our retirement income professionals are well-versed in designing cash flow plans for retirees – in particular, those who are FERS and CSRS participants.

 

Is Your Income Strategy on the Right Track? By: Flavio “Joe” Carreno

While saving and investing are certainly big parts of planning a successful retirement, the reality is that retirees live on income, not assets. With that in mind, is your income strategy on the right track?

If not, there are some retirement income strategies that you could consider.

 

The Key Components of a Retirement Income Plan

To retire comfortably, you will have to evaluate your expenses, as well as the income sources that you’ll have available to you in the future. Some other parameters can dictate how and when you implement your retirement income plan. These can include your:

  • Time frame until retirement
  • Risk tolerance
  • Marital status 
  • Health
  • Anticipated life expectancy

 

Although some financial advisors believe you can live on  70% or 80% of your pre-retirement earnings in the future, this is not necessarily the case. In fact, depending on how you plan to spend your retirement, it is possible that your expenses may be more than they are now.

Given that, it is important to create a retirement budget that outlines your essential and your non-essential expenses. For example, essential costs will typically include the following:

  • Housing 
  • Utilities (electric, natural gas, water, sewer, trash)
  • Transportation and fuel
  • Insurance
  • Maintenance 
  • Food 
  • Healthcare and prescriptions

Non-essential expenses may encompass some or all of the following items:

  • Travel
  • Entertainment
  • Property and/or vehicles (such as a second home, RV, boat, etc.)
  • Dining out 

 

Once you have added up your estimated expenses, you should determine where your retirement income will be generated from, as well as project the amount(s) from each. Typically, retirees generate income from more than just one source. These could include:

  • Employer-sponsored pension plan
  • Social Security
  • Interest / Dividends from personal savings or investments
  • Annuity
  • Reverse mortgage
  • Rental property income 

 

After you have added up the total amount of your estimated expenses, as well as the total amount of monthly income being generated, you will be able to determine whether there will be enough, or alternatively, if there will be an income “gap.” 

If it appears that your future costs will exceed your estimated income, you may need to revise your retirement income plan. There are several options for doing so, such as:

  • Working for a longer period of time (which can help to increase the amount of money you have saved, as well as the amount you could generate from Social Security)
  • Reduce your expenses (such as doing away with some or all of the non-essential items)

 

Other Items to Consider with Your Retirement Income Strategy

There are some other important items to consider when it comes to your retirement income strategy. For instance, today’s life expectancy is longer than it was in the past. This means that your retirement income must last for a longer period of time.

Because of this, not only can you require income to keep paying out, but you must also ensure that you have protected this income from various risks, such as:

  • Stock market volatility 
  • Low interest rates
  • Inflation
  • Sequence (or order) or returns risk

 

One of the biggest risks to your retirement income – and to your retirement lifestyle – is longevity. In fact, because people are living longer now, you can face more financial risks. One of the biggest fears on the minds of many retirees is that of running out of income while it is still needed.

There are, however, some financial tools that can help you to alleviate this fear. One such option is an annuity. These financial vehicles are designed for paying out income for a specified period of time, such as ten or twenty years, or even for the remainder of your lifetime – regardless of how long that may be. 

 

Is Your Retirement Income Strategy on the Right Track?

There are many components that need to be addressed when it comes to creating a good, solid retirement income strategy. Because of this, it is recommended that you discuss your specific short- and long-term financial objectives with a retirement income specialist who can offer you suggestions and strategies.

 

Creating a Retirement Safety Net for More Financial Security. By: Brad Furges

Have you built a “safety net” around your portfolio so that you can better ensure your current and future financial security?

If not, this should likely be on your To-Do list – particularly if you are getting closer to retirement. Otherwise, even a slight market “correction” could end up reducing your funds, and your lifestyle, in the future.

 

What is a Financial Safety Net and Why Do You Need One?

Most anything of value should be protected. This includes the funds that you have built up over time for retirement. In fact, the closer you are to your ideal retirement date, the more important it is to make sure that nothing can reduce or eliminate your savings because it could have a significant impact on your future lifestyle. 

A financial safety net has the goal of protecting you and your loved ones – at least in part – from losing financial security and/or derailing your long-term financial goals due to an unexpected event such as a(n):

  • Stock market/investment loss
  • Catastrophic illness or injury
  • Need for long-term care services 
  • Personal tragedy 
  • Costly emergency 

 

What are the Key Elements of a Strong Retirement Safety Net?

There can be several key components that are needed for building a strong financial safety net. These should ideally include the following items:

  • Building an emergency fund
  • Protecting loved ones 
  • Keeping income safe
  • Preparing for retirement
  • Insuring against large financial losses 

 

Building an Emergency Fund

One of the most important elements of a financial and retirement safety net is to build an emergency fund that may be used for paying the cost of uninsured medical needs, costly car or home repairs, and/or income in the event of a job loss.

Many financial advisors recommend that you have at least six to twelve months of living expenses in your emergency fund. In addition, these funds should be placed in low-risk, highly-liquid financial vehicles like a bank savings or money market account. 

Using the money in your emergency fund for unexpected financial-related events can prevent you from having to dip into your retirement funds and/or put these expenses on a high-interest credit card.  

 

Protecting Loved Ones

Another primary component of your financial safety net is to protect your loved ones from financial hardship. For instance, if a family income-earner suddenly dies or becomes disabled, his or her income will disappear – but funds are still needed for paying housing costs, as well as for utilities, transportation, food, and other needs. 

Life insurance coverage can help. If the insured passes away, the proceeds from a life insurance policy are received income tax-free to the beneficiary(ies). This money may be used for paying off debts, replacing income, and various other needs of the survivors. 

 

Keeping Income Safe

Becoming ill or injured is much more common than most people believe – even if you are currently young and in good health. According to statistics from the Council for Disability Awareness, more than one in four 20-year-olds can expect to be out of work for at least a year before reaching retirement age due to a disabling condition.

What would happen to your income and lifestyle if you were suddenly unable to work?

Nearly half of American adults would be unable to pay an unexpected bill for $400 or more without having to take out a loan or sell something to generate the money. Some of the most common reasons for long-term disability claims include:

  • Musculoskeletal disorders
  • Cancer
  • Pregnancy
  • Mental health issues (such as depression or anxiety)
  • Injuries like sprains, fractures, and strains of ligaments and muscles 

Unfortunately, many people assume that they will be automatically covered by Social Security or workers’ compensation if they are unable to work and earn an income. But this is not necessarily the case. 

This program has a strict set of requirements for benefit qualification that includes being unable to perform any job, based on your education and skills – regardless of whether or not it is in your current industry. 

To determine whether or not you would qualify for Social Security disability benefits, you can visit the website for the Social Security Administration at: https://ssa.gov/benefits/disability/qualify-html

Disability insurance could be a viable solution. A disability insurance policy can pay a regular income stream to an insured who is unable to work due to a qualifying illness or injury. This incoming cash flow can help with the continued payment of bills in the household. This type of coverage may be offered through an employer’s benefit package and/or bought directly by the insured individual. 

 

Preparing for Retirement 

A financial safety net should also include a good solid retirement plan that ideally includes a method of generating one or more streams of ongoing, lifetime income that will continue to flow in regardless of what happens in the stock market, or even in the economy overall. 

If you qualify for Social Security retirement benefits, this could provide you with at least some of the income you will need. However, based on information from the Social Security Administration, an average wage earner will only replace about 40% of his or her pre-retirement earnings from these benefits.

So, where will the rest come from? 

One option is through an annuity. These financial vehicles are designed to pay out income for either a set period of time – such as ten or twenty years – or even for the remainder of your lifetime, no matter how long that may be. 

Annuities can also provide you with other benefits, too, depending on the type you own. For instance, the funds that are inside of an annuity are allowed to grow on a tax-deferred basis. An annuity could also include a death benefit, as well as waivers for accessing funds in the event of an illness and/or the need for long-term care. 

All annuities are not exactly the same, though. So, it is essential that you have a good understanding of how annuities work before you make a long-term commitment to purchasing one.  

As we age, we also tend to require more healthcare and long-term care services. These can be expensive – even with health insurance or Medicare coverage. Based on a survey from Fidelity Investments, an average 65-year-old couple who retired in 2020 will require approximately $295,000 in out-of-pocket healthcare costs throughout their remaining lifetime. 

This figure does not include the cost of a long-term care need, though – and this could add a significant amount of expense…one that could quickly deplete even a nice sized retirement portfolio.

In 2020, the average monthly expense of a private room at a skilled nursing facility was over $8,800. This equates to more than $105,000 per year. Receiving care at home could cost less, but this really is dependent on the type and the duration of the services received. 

 

Monthly Median Cost of Long-Term Care Services (in 2020)

Homemaker Services – $4,481

Adult Day Health Care – $1,603

Nursing Home Facility – Semi-Private Room – $7,756

Home Health Aide – $4,576

Assisted Living Facility – $4,300

Nursing Home Facility – Private Room – $8,821

Source: Genworth Cost of Care Survey 2020 

https://www.genworth.com/aging-and-you/finances/cost-of-care.html

 

Medicare pays very little for long-term care needs. This program also has strict criteria regarding how to qualify for the benefits. Therefore, many people must find other ways to pay these expenses. 

One option is to purchase a long-term care insurance policy. Alternatively, a combination life insurance/long-term care plan or annuity/long-term care plan could provide the necessary safety net for the cost of care. But, if care is never required, the policy would still pay benefits for other needs. 

 

Insuring Against Large Financial Losses

Because accidents can and do occur, another key part of your financial safety net should include insuring against potentially large financial losses. Just some of the coverage that can help to prevent losses to your savings, investments, and/or other assets include:

  • Homeowners insurance
  • Auto coverage
  • Liability insurance
  • Business insurance (if you are the owner or partner in a company)
  • Identity theft protection 

 

Are You Ready to Build a Safety Net for Your Financial Security?

Given all of the potential threats to your savings and retirement assets, it is imperative to have some protection in place. Not all asset safety measures will be right for all investors and retirees across the board. Therefore, it is best to discuss your specific needs with a retirement income specialist. That way, the plan that you ultimately choose can be more custom-designed for your objectives.

 

Let’s Talk: Generational Habits and Conversations About Money and Retirement Planning. By: Kathy Hollingsworth

The famed song, My Generation, by the WHO was named the 11th greatest song by Rolling Stone magazine on its list of the 500 greatest songs of all time. It was also inducted into the Grammy Hall of Fame for “historical, artistic and significant” value – and rightly so.

Different generations of people have differing viewpoints on a whole host of matters – including money. Because the people who encompass different generations in the United States have been shaped by a wide range of social, economic, and financial events throughout their lives, individuals in the various groups have differing thoughts, opinions, and concerns about retirement.  

 

Understanding Each Generation and Their Concerns

To more clearly understand why each generation in the U.S. doesn’t always agree on how to prepare for retirement, as well as how to live during that time, it can help to take a closer look at the age and demographics of each of the following groups:

  • Silent Generation
  • Baby Boomers
  • Generation X
  • Millennials

 

Many in the Silent Generation formed conservative financial opinions, as they learned from their parents who lived through the depression and struggled to provide for their families. In addition, a fair percentage of the Silent Generation lost their fathers and/or older siblings who fought in the Second World War. 

Similar to their parents before them, many in the Silent Generation married and started families at younger ages. The majority of this group is already retired. It is the children of the Silent Generation that make up a significant percentage of the 70+ million Baby Boomers.   

The Baby Boomers encompass those who were born between 1946 and 1964. Touted as the largest generation in U.S. history, the Boomers have changed the face of the country in many ways. 

For example, as more Boomers were born in the late 1940s and throughout the 1950s, the country saw a significant need for additional housing, transportation options, and educational institutions. Most members of the Boomer cohort came of age during the Vietnam war and the Reagan eras. 

As of 2011, the older Baby Boomers started turning age 65, and in turn, became eligible for Medicare. Shortly thereafter, these individuals began to reach their full retirement age for Social Security

 

U.S. Living Adult Generations (in 2020)

Source: Pew Research Center (2020) (https://en.wikipedia.org/wiki/Silent_Generation#

*Note: Some of the cohort sizes are greater than the number born due to immigration.

 

Generation X, or the Gen Xers, were born between 1965 and 1980. This group comes directly after the Baby Boomers and its members are currently (in 2020) between the ages of 40 and 55. The earning power and savings of the Gen Xers have been challenged by many events, including the:

  • Dot.com bust
  • Financial crisis of 2008
  • Great Recession 

These financial debacles have led more than 50% of Generation Xers to carry credit card debt. Given these hurdles, many in the Generation X group feel that they will have a more difficult time attaining financial security – especially as compared to their Baby Boomer parents. 

The Millennial generation encompasses roughly 62 million people who were born between 1981 and 1996. This generation is continuing to grow, especially as young immigrants make their way to the U.S. and it is expected to peak in the year 2033, at just under 75 million. Many of the Millennials came of age during the era of Barack Obama’s presidency. 

According to the United States Census Bureau (as of July 2019), as the Baby Boomer generation continues to reach the end of its lifespan, the Millennials have surpassed this group as the largest living adult generation in the United States. 

 

Current Living Generations in the United States (in 2020)

Generation

Born In

Age in 2020

Silent Generation

1928 – 1945

75 – 92

Baby Boomers

1946 – 1964

56 – 74

Generation X

1965 – 1980

40 – 55

Millennials

1981 – 1996

24 – 39

Source: Pew Research Center

 

Getting the Right Financial Plan for Your Specific Needs

Regardless of which generation you are a part of, having a plan in place to ensure that you’re on track financially is essential. This plan should ideally encompass your short- and long-term financial objectives, as well as your age and risk tolerance.

Avoid a Retirement Nightmare with Proper Planning. By: Marvin Dutton

Most strong and stable structures should have a solid foundation. Think about the story of the three little pigs. They each built a house, but only the one with the strongest base withstood the risk of the Big Bad Wolf. 

The same holds true with retirement planning. While you may be saving and investing for the future, without a specific plan in place, your money – and your retirement income – could be at risk of running out at a time when you still need it. 

Then what?

 

The Difference Between Investing and Actual Retirement Planning

People often wonder how much money they need to save for retirement. That is a difficult question to answer, though, at least without knowing the parameters and goals that you’re trying to accomplish. In addition, everyone’s objectives can differ. So, what might work well for someone else may not be the ideal plan for you.

Unfortunately, many financial advisors simply sell “products” to their clients, without any particular objective in mind. So, even if a particular financial vehicle has a good track record, it may or may not be the right tool for the goals you are hoping to accomplish. This is the difference between simply investing and having an actual retirement plan in place.

With that in mind, a well-thought-out retirement plan should have a variety of financial “tools” that work together in moving you towards your short- and long-term goals. For example, if you have a goal of saving $5,000 for the down payment on a new car, placing these funds in a low-risk and liquid account – such as a money market – will typically make more sense than investing in high-risk small-cap stocks that could result in losing all your money. 

As it pertains to longer-term plans, there are several components that should be considered when you’re developing a strategy for your retirement. These can include your:

  • Age
  • Time frame until retirement
  • Risk tolerance
  • Income generation sources 
  • Health
  • Life expectancy

For instance, investors who are in their 20s or 30s may be able to take on a bit more risk – and in turn, attain the opportunity for growth – than someone who is in their 50s or 60s and would have little time to recoup any losses. 

 

Why Your Financial Plan Should Differ Before and After Retirement

Even with the best saving and investment plan(s) in place, everything is different once you have retired. That’s because you will have to convert some or all of the assets you’ve built up into a reliable, ongoing stream of income that will ideally continue for as long as you need it to. 

In other words, when you retire, you will be moving from the “accumulation” phase to the “distribution,” or income, phase of your financial planning. These steps are oftentimes referred to as climbing up and down a mountain.

For example, during your working and saving years, you are essentially “climbing up the mountain.” Many financial advisors stop you there, though, once you have reached your “number,” or your goal.

But this is really just part of the overall “journey,” because a successful retirement also represents climbing back down the mountain – and this can require a whole different set of “tools” and strategies. This is why it is important to work with a retirement income planner – who may or may not necessarily be the same person or firm that helped you during the accumulation phase.  

 

What Should Your Money Be Doing?

Retirement income expert Tom Hegna says that there are two questions you need to ask yourself as you plan ahead for your retirement income. These are: 

  1. What do you need your money to do?
  2. What do you want your money to do?

Regarding the first question, it is important that you have enough retirement income being generated so you can pay your essential living expenses. These will usually include housing, utilities, transportation, food, and healthcare. This could be considered your “income floor.” 

There are strategies that you could put in place that guarantee you a set amount of income on a regular basis so that you know you have the essentials covered. Knowing that you will still be able to pay your necessary expenses – regardless of what happens in the stock market or with interest rates – can lead to a less stressful retirement that allows you to focus more on the things you want to do. 

Once you have the essential expenses covered, you can then determine how much more income you would need for non-essential items, like travel, entertainment, and fun. In this case, it may be possible to place a portion of your assets into higher-risk, but higher-return financial vehicles. 

Then, if the investments perform well, you can use these funds. But if they do not perform well, even though it may be disappointing, it won’t prevent you from paying your necessary living expenses.

 

Where Will Your Retirement Income Come From?

Many retirees have income that is generated from more than just one source. For instance, you may receive income that comes from:

  • Employer-sponsored pension plan
  • Social Security
  • Interest and/or dividends from personal savings and investments
  • Reverse mortgage
  • Rental income 
  • Annuity

While all of these are viable sources of retirement income can also require the proper timing in terms of when to receive them, as well as various maximization strategies so that you generate the most income possible for the longest period of time. 

 

Will Your Current Retirement Plan Withstand the Test of Time?

A truly successful and worry-free retirement will require you to have a plan in place that leads you towards your desired destination yet is flexible enough to revise as your needs change over time.

 

When Planning for Retirement, Expect the Unexpected. Sponsored By: Todd Carmack

It has often been said that “the only constant is change” – and this is true in many areas of life, including when you are planning for retirement. After you retire, you may not have to set your alarm clock every night. But you can still be exposed to a variety of potential risks to your savings and future income. Therefore, you have to be prepared. Otherwise, you could have an unwanted wake-up call!

Unexpected financial incidents in retirement can be particularly detrimental, because if you lose some (or all) of your income generation sources, or if your portfolio is decimated by a correction in the stock market, it can have a substantial impact on how – and how well – you are able to live the remainder of your life. 

With that in mind, it is essential that you determine where the various risks may be lurking and how you can protect yourself, your portfolio, and your financial future if one (or more) of them appears. 

How to Prepare for the Unexpected in Retirement

While nobody has a crystal ball to see into the future, there are some common risks that could have an impact on your retirement. So, it is important to be prepared for them…just in case. Just some of these risks can include:

  • Volatility in the stock market
  • Low interest rates
  • Inflation
  • Emergencies
  • Healthcare needs
  • Long-term care 
  • Increased taxes
  • Longevity

Volatility in the Stock Market

Although the stock market offers the opportunity to generate a substantial gain, it can also pose the risk of loss – and the closer you are to retirement, the more a loss in the stock market can impact your future lifestyle. Further, the more you lose in an investment, the more future return it will require just to get back to even.

Gain Required to Get Back to Even Following a Loss

Amount of Loss

Gain Required to Get Back to Even

10%

11.1%

20%

25%

30%

42.9%

40%

66.7%

50%

100%

60%

150%

70%

233.3%

80%

400%

90%

900%

100%

Broke

One way to reduce your risk in an unexpected market drop is to allocate more of your overall assets to non-equity financial vehicles. While fixed and fixed indexed financial tools might not offer the allure of exponential gains like equities do, they can also allow you to sleep much better at night, knowing that you’ll have no future losses to make up for. 

Low Interest Rates

Ever since the economic recession in 2008, the United States has languished in a historically-low interest rate environment – which has made it difficult for those who are trying to keep their money safe while at the same time allowing it to grow.

As an example, a fixed investment with a 2% return would only generate $20,000 per year in income on an investment of $1 million. Is that enough for you to live comfortably for the rest of your life in retirement?

That’s why over the past decade or so, many individuals and couples have turned to financial vehicles like fixed indexed annuities. These annuities offer the opportunity to earn a higher return that fixed products, while keeping principal safe in any type of market or economic environment. They will also generate an ongoing, reliable income stream for the remainder of your life.

Inflation

Inflation is a risk that can be somewhat sneaky. For example, with some items and services, an increase in price can be gradual over time. Therefore, it is barely noticeable. But it is still necessary to keep your income on pace with rising prices. Otherwise, you may find that you’ll have to cut back on your purchases. 

Average Prices in 2000 versus 2020

2000

2020

Gallon of gas

$1.26

$1.84

U.S. postage stamp

33 cents

55 cents

Loaf of bread

$1.72

$2.08

Dozen eggs

89 cents

$1.58

Sources: https://thepeoplehistory.com/2000.html / https://thepeoplehistory.com/pricebasket.html / 

Using an average inflation rate of just 3.2%, your income would have to double in 20 years in order to just maintain the same lifestyle that you have today. For instance, if you are currently generating $4,000 per month in income right now, that amount would have to increase to $8,000 per month in 20 years in order to keep up with the very same lifestyle you have today. So, in order to prepare for inflation risk, you’ll need to incorporate a way to increase your retirement income on a regular basis in the future.  

Emergencies

At any point in life, whether you’re in retirement or you are still entrenched in the working world, you are at risk of costly emergencies. These could include an uninsured car repair, a leaky roof, or an unexpected trip to help a family member in need. 

Because you won’t likely want to dip into your retirement savings or put these costs on a high-interest credit card, having an emergency fund in place is a recommended solution. Ideally, you should have approximately six months of living expenses in your emergency fund – but any amount is better than being completely unprepared. This money should be kept in a safe, highly liquid, and easily accessible place, such as a savings or money market account at a bank or credit union.

Healthcare Needs

As we age, the need for more healthcare services tends to rise. According to a recent study by Fidelity Investments, a 65-year-old couple who retired in 2020 can expect to spend approximately $295,000 in out-of-pocket healthcare costs – not including long-term care services. 

One way to help combat these expenses is to ensure that you have a good health insurance and/or Medicare plan that provides you with adequate financial protection. It is also recommended that you have a good understanding of where your costs will come from, such as any deductibles, coinsurance, and/or copayment responsibilities. 

Long-Term Care

Another “unexpected” expense in retirement could be the need for long-term care services. While nobody likes to think about it, the reality is that many of us will require assistance – whether it is full-time, around-the-clock care or help with basic daily living activities like bathing and dressing.

According to U.S. government statistics, when someone reaches age 65, they have a 70% chance of requiring long-term care services at some point in their remaining life – and this care can be expensive. 

Based on the Genworth 2020 Cost of Care Survey, the price for just one month in a private room in a skilled nursing home facility was more than $8,800 in 2020. This equates to over $100,000 per year. A semi-private room is less – but at $7,756 per month (on average), it is still extremely costly. 

How long would your savings last if you had a need for long-term care services? Worse yet, what if both you and your spouse required care?

In any case, long-term care services are expensive. So, it is important that you have a plan in place to cover some or all of these potential costs. This could include having a stand-alone long-term care insurance policy, a life insurance policy or annuity with a long-term care rider, and/or other type of payment alternative. 

Increased Taxes

For most people, taxes are a part of everyday life – and this won’t change when you retire. But, while paying taxes isn’t necessarily a big surprise to most people, the amount of tax that is due might be. For example, the top federal income tax rate in the United States over the past 108 years has been as low as just 7%, and as high as 94%. 

Top Federal Income Tax Rates 1913 – 2021

Year

Rate

Year

Rate

2018-2021

37

1950

84.36

2013-2017

39.6

1948-1949

82.13

2003-2012

35

1946-1947

86.45

2002

38.6

1944-1945

94

2001

39.1

1942-1943

88

1993-2000

39.6

1941

81

1991-1992

31

1940

81.1

1988-1990

28

1936-1939

79

1987

38.5

1932-1935

63

1982-1986

50

1930-1931

25

1981

69.125

1929

24

1971-1980

70

1925-1928

25

1970

71.75

1924

46

1969

77

1923

43.5

1968

75.25

1922

58

1965-1967

70

1919-1921

73

1964

77

1918

77

1954-1963

91

1917

67

1952-1953

92

1916

15

1951

91

1913-1915

7

Source: Inside Gov (http://federal-tax-rates.insidegov.com/)

While there will likely always be taxes to pay, there are some strategies that you could use to reduce – or even to eliminate – your share. One option is to take advantage of Roth IRAs and retirement plans. 

With these accounts, the contributions that you make have already been subject to income tax. So, unlike with traditional IRAs and retirement plans, you are not able to make pre-tax deposits. However, the growth in a Roth account takes place tax-free, as do the withdrawals. Therefore, no matter how high the income tax rates are in the future, a Roth account will allow you to access – and spend – 100% of your withdrawals. 

Longevity

Yet another “unexpected” risk is longevity. Although nobody knows exactly how long they will live, the overall average life expectancy in the United States has risen significantly over time. Because of this, it is not uncommon for retirement to last for 20 or more years.

Although that may be positive in many ways, it will require your savings and your retirement income to last for a much longer period of time. Given that, you must take advantage of financial vehicles like annuities that can guarantee an income stream for the remainder of your lifetime – regardless of how long that may be. 

Otherwise, without at least one or more guaranteed streams of income to rely on, you could run the very real risk of depleting your assets, as well as your incoming cash flow, while it is still needed. 

Are You Ready for the Unexpected in Retirement?

There can be a long list of unexpected financial pitfalls in retirement – and without proper preparation, even a seemingly “small” emergency could have a significant impact on your finances, and your lifestyle, going forward.

That being said, are you ready for the unexpected in retirement?

If not – or if you have a plan in place but would like to get a second opinion – feel free to contact us and set up a time to chat with a retirement income specialist. 

How Much Should I Save Each Month to Have $1 Million for Retirement?

If you’ve ever been a fan of the famous, long-running game show, “Who Wants to Be a Millionaire,” you are likely familiar that contestants can walk away with a cool million by correctly answering a series of questions – either on their own or with the help of a “lifeline.” 

Unfortunately, saving $1 million isn’t that easy – and the later you get started, the more money it can take to save and invest every month to reach your goal. But the good news is that there are strategies available that could still get you there, regardless of how old you are when you get started.

 

Monthly Savings Needed to Reach $1 Million

There can be a wide range of answers to the question, “How much do I need to save to have a million dollars in retirement.” That is because everyone’s ideal time frame until they retire, as well as their risk tolerance can differ. 

So, even though saving a certain amount of money each month can help, how long it takes to reach a certain goal can depend in large part on how much your money earns – and your return can be based on a wide range of different criteria, such as:

  • Interest rate (either fixed or variable)
  • Market performance 
  • Principal protection
  • Various “caps,” or limits on the earnings 

In other words, if you plan to retire in 10 years, and the regular up and downswings of the stock market don’t cause you to lose sleep at night, you may not have to save as much each month as someone else who doesn’t plan to retire for 15 or 20 years and who also gets queasy any time the stock market trades in negative territory.

There can be other factors involved, too, in terms of how fast it takes you to accumulate $1 million. One of the biggies here is whether your money is invested in a taxable or a tax-advantaged account. 

For instance, many employer-sponsored retirement plans – such as the 401(k) – as well as IRAs (Individual Retirement Accounts) offer tax-deferred growth. This means that there is no tax due on the gain until the time of withdrawal. This, in turn, can allow your money to grow and compound faster than it would if it were in a taxable account (with all other factors being equal). 

 

Taxable versus Tax-Deferred Growth

Just for the sake of example, though, let’s say that you already have $100,000 saved, and you plan to retire in 20 years. If your money earned a 5% return (compounded annually), it would require you to set aside $1,851.53 each month in order to reach your goal.

Given these same parameters, if you were able to increase your return, you could set less aside on monthly. The same is true if you were to lengthen your time frame from retiring in 20 years to 25. 

 

Source: Investor.gov

 

Source: Investor.gov

 

Using a savings calculator can help you to better determine the amount of money you would have to save on a regular basis to reach a particular goal. To get an idea of what you need to save in order to reach a particular dollar amount, you can go to our savings calculator HERE: 

 

How Much Should You Really Save for Retirement?

While $1 million is certainly a large sum of money, it may not be enough to generate enough for many people to live comfortably in retirement. Given the volatile stock market, coupled with low interest rates, some economists believe that today’s “safe” withdrawal rate is under 3%. 

This means that if you draw 3% each year from a $1 million portfolio, you would generate less than $30,000 annually, which equates to under $2,500 per month. Is that enough to live on in the future?

If not, how much more should you save?

The answer to that is, it depends. In fact, when it comes to planning a successful retirement, the truth is that a much heavier focus should be placed on income, not savings or overall net worth.

One reason for this is because a high net worth or account value doesn’t necessarily mean that an adequate amount of income will be generated that can go towards paying your living expenses. 

Assets can also be subject to a long list of risks, such as stock market volatility, low interest rates, and inflation. Plus, drawing down too much from a portfolio could end up depleting much sooner than intended, and while you still require money to live on during retirement. 

Then what?

If your goal is to live worry-free in retirement, a key step is to ensure that you’ll have income arriving on a regular basis, regardless of what is happening with the stock market, or even in the economy overall.

Knowing that you have enough income for covering your essential living expenses (as well as possibly some extra for non-essentials, like travel, entertainment, and fun) can allow you to focus on more important things in retirement, like spending time with family and friends. 

 

How to Make Sure You Have Steady, Reliable Income in the Future

Do you have a retirement income plan in place that will continue to produce incoming cash flow for the remainder of your (and your spouse’s) lifetime – even in a volatile stock market and low interest rate environment?

If not, it is recommended that you talk over your short- and long-term financial objectives with a retirement income specialist. Doing so can help you with building a plan that best meets your specific goals and needs.

 

Find Out the Difference Between Retirement Income and Retirement Savings. Sponsored By: Todd Carmack

What most individuals want to do with their retirement funds is save, grow, make income, and pay as minimal income taxes as possible.

Many people do a good job when saving, even increasing savings in their retirement accounts annually. Growing such funds over time usually becomes difficult. Aside from the market’s ups and downs, there’s also the emotional rollercoaster that follows. When the markets are rising, everything appears to be OK. On the other hand, a downturn might cause many people to reconsider their investments and the level of risk they’re taking. Then, when the funds accumulate and the time comes to consider retirement, there are issues of transforming this accumulated money into income. With that comes the likelihood of having to pay income taxes on the retirement income.

There are ways that can help you in continuing the savings process while considering a re-alignment of your savings to build income-tax-free funds eventually. This might be achieved by simply relocating your savings over time rather than adjusting the amount you save. Market volatility and emotional plays, as well as trying to build your savings over time, can be addressed by considering active money and risk management. It’s possible to increase money by limiting downturns and having non-emotional choice triggers. That might then lead to considering strategies to generate retirement income, converting savings into income while reducing the income tax effect.

The savings and accumulation phase is referred to as “climbing up the mountain.” As an example, consider Mount Everest. You’re doing your best, attempting to save as much as you can while climbing the mountain. Your goal is to achieve a specific rate of return on your investment and see it increase over time. The emphasis is on increasing your money and asset allocation; this is your Accumulation Phase. That is where you might consider repositioning your savings, or a portion of them, to accumulate funds that’ll be tax-free when withdrawn.

You can also explore the use of Roth accounts and cash value in adequately designed life insurance plans. Discussions would revolve around your current income tax situation and where you expect it to be in the future. The distinctions between tax deferral and tax-free can also be explored. For instance, if you’re saving $10,000 each year in your retirement account on a pre-tax basis (your regular 401(k), 403(b), TSP, and so on) and you are in a federal and state tax rate of, let’s say, 25%, you’re ‘deferring’ $2,500 per year in taxes. That is not to say that taxes won’t be due. They’ll be due when you begin taking money from your accumulated savings and its growth. That income tax may easily exceed your deferred tax of $2,500. Of course, a time value of money estimate would be required. However, as you may have heard, the general question is whether you would prefer to pay taxes now on the seed or later on the products grown from that seed?

As you go up the mountain and get closer to the top, the peak, you may begin to wonder, “What will my retirement income be?” You can do a good, if not a great, job of saving money and have a better understanding what your number is or will be. The next stage is to figure out how to transform that number into income.

You want to keep your money coming into the house. But where will it come from? This is your Distribution Phase as you make your way down the mountain. This period of time can last as long as, if not longer than, your climb up. You wish to survive (more people have died on the descent of Mount Everest than the climb up). You’ll prepare for this by exploring your income sources and recognizing the risks involved.

Social Security income (perhaps a pension) and withdrawals from accumulated savings accounts are all sources of retirement income. The risks to consider are the following:

  • Longevity risk – people now live longer and don’t want to outlive their savings and run out of money. This also results in the possibility of health concerns in the long run.
  • Stock and bond market risk – the investments’ volatility and the market’s ups and downs.
  • Sequence of returns risk – how your assets perform over time, not simply as you accumulate, but also when you take income from them.
  • Withdrawal rate risk – how much or what proportion of your savings can you withdraw each year (5%, 4%, 3%) and still have your money last.
  • Inflation risk – the risk that the cost of products and services may rise over time and your capacity to generate enough income to keep up.
  • Tax risk – understanding the income taxes payable on your retirement income, as well as taking into account any potential estate taxes due.

 

Now, you’ll want to think about your legacy. Will income keep coming into your household if something happens to you? What is it going to be for your partner? Do you want to keep your money in the family and see it increase over time?

You can take control of your savings and retirement income, regardless of your age or where you are on the mountain while trying to reduce your taxes.

Retirement Planning for Women


While most everyone works towards saving for the future, retirement planning for women can oftentimes be a bit more challenging. Some of the reasons for this include women having longer life spans, earning lower pay (as compared to men), and in many cases, having fewer years in the workforce (which can equate to less time for saving and investing). 

But at some point, many women will be in charge of their financial responsibility – due to divorce, the death of their spouse, or never having been married. So, it is essential for women to have a good understanding of how to grow and protect assets, as well as how to maximize and protect retirement income in the future. 

 

The Financial Challenges Faced by Women When Planning for Retirement

Saving for the future is an essential component of creating a good, solid retirement plan. There are numerous challenges that can derail anyone’s planning, though, such as:

  • Market volatility
  • Inflation
  • Low interest rates

 

But while some financial risks are faced by both males and females alike, there are other obstacles that will typically pertain only to women. These can include:

  • Earning lower wages than men
  • Leaving the workforce, either temporarily or permanently, to have and raise children
  • Providing care to a parent or other loved one
  • Living longer (on average) than men
  • Investing more conservatively than men 

 

Earning Less than Men

Although women now make up roughly half of the total workforce, on average, they still earn less than men – even in the same occupations. For instance, in 2018, full-time female workers made only 82 cents for every dollar that their male counterparts earned. This equates to a gender wage gap of 18%. 

Lower earnings mean less in retirement plan contributions, and less in tax-deferred growth over time. Even just a few years of missed retirement savings can add up to a significant amount of lost accumulation. 

 

Leaving the Workforce to Have (and Raise) Children

Having – and raising – children can take women out of the workforce, in some cases for many years. Stay-at-home moms especially struggle to catch up. By missing out on retirement plan contributions – particularly at a young age – women can often lose out on the momentum that compounded savings can provide. This can also lead to less Social Security benefits, as well as a lower amount of employer matching and/or profit-sharing contributions. 

 

Providing Care to a Parent or Other Loved One

In most family situations, women play the role of the primary caregiver. Not only does this encompass child raising, but it often also includes assisting parents, parents-in-law, or other aging loved ones who need support. 

Unfortunately, as noble as it may be to provide care for someone you love, doing so can be costly from a financial standpoint. As an example, caregivers will oftentimes have to reduce the number of hours that they work – which in turn leads to:

  • Lower income
  • Less money to save and invest
  • Lower amount of Social Security retirement income benefits in the future 

 

Providing care for a friend or family member could also cause the caregiver to incur a substantial amount of out-of-pocket expenses. These can include the purchase of personal care items (like soap, toiletries, and clothing for the care recipient), as well as medical expenses (i.e., copayments and deductibles for the receiver’s healthcare needs), and other miscellaneous expenses like modifying the care receiver’s home with grab bars and other necessary supplies and equipment. 

All told, the average caregiver spent more than $7,400 out-of-pocket in 2019 – and even more if they lived an hour or more away from the person they’re caring for. Because of the added expense, caregivers will oftentimes have to cut back on some of their own expenses, including:

  • Vacations and trips
  • Dining out
  • Personal doctor visits
  • Groceries
  • Household supplies
  • Personal medications
  • Children’s education 

 

Caregiving can also take a physical and emotional toll on the provider of the care. For instance, muscle strains are common when lifting another individual into or out of a bed or a chair. Likewise, social isolation can lead to depression and other cognitive issues for the care provider. 

 

Living Longer (on average) than Men

On average, women tend to live longer than men. The current life expectancy for the U.S. (in 2020) is 78.93 years. But when you separate out men and women, males come in at 76 years and 2 months, while women average 81 years and 2 months. 

Yet, while living a nice long life can certainly have its benefits, from a financial standpoint, it can also be quite expensive. One reason for this is because living longer forces you to face all of the other financial-related risks – like market volatility and inflation – for a longer period of time. Plus, your income for everyday living expenses must also be stretched out for many additional months or years. 

In addition, a longer life doesn’t necessarily mean that those additional years are spent in good health. Therefore, by living longer than men, women will oftentimes have to face paying more in healthcare and long-term care expenses, as well as the cost of prescription medications.

A recent study found that a 65-year-old couple who retired in 2019 can expect to pay $285,000 in out-of-pocket healthcare costs – and this figure does not include the price of a long-term care need. 

When long-term care is added to the overall equation, it can add (on average) $7,500 per month to expenses for a semi-private room in a nursing home facility, or more than $8,500 per month for a private room.

Across the board, one of the biggest fears on the minds of retirees today – as well as those who are preparing for retirement – is running out of money while they still need it. Due in large part to their longer life expectancy, this fear is higher in women than it is in men. 

A longer life expectancy can also be the culprit for additional fears that are faced by women, as well, such as:

  • The reduction – or possibly even the elimination – of Social Security retirement income benefits
  • Lack of access to affordable and adequate healthcare
  • Feeling alone or isolated
  • Finding meaningful ways to spend time and stay involved 
  • Facing cognitive impairment, dementia, or Alzheimer’s disease

 

 

Investing More Conservatively than Men

Oftentimes, women are more conservative investors than men. This adversity to risk could be because women don’t want to lose what they have worked so hard to attain. Unfortunately, though, while fixed investments won’t necessarily be impacted by a stock market drop, “playing it safe” can end up backfiring due to less growth – particularly during the “accumulation” phase of their investing years. 

 

Feelings of Financial Inadequacy

As compared to men, many women have a difficult time discussing their finances – even with a financial professional. In fact, research shows that more than 50% of women refrain from discussing their finances because they feel that the subject is too personal. Many women also feel that they are not able to discuss financial matters intelligently.

But this fear of talking about money matters can lead to inadequate planning – especially if a financial advisor does not have all of the pertinent information that they need regarding a client’s goals, risk tolerance, and other key parameters around which to build a plan. 

 

Do You Feel Financially Prepared for the Future?

Financial planning can seem a bit overwhelming. There are many different factors that need to be considered – and many of today’s financial tools and products have a lot of “moving parts.” So, if you are concerned about whether or not you will be ready for retirement, you are not alone. 

According to research from the Transamerica Center for Retirement Studies, or TCRS, only about 12% of women in the workforce are “very confident” that they will enjoy a comfortable retirement lifestyle. Yet, twice as many men feel that way. 

Based on the results of this same study, 16% of the women who were surveyed are “not at all confident” in their ability to retire with a comfortable lifestyle, followed by another 30% who are “not too confident in the ability to retire with a comfortable lifestyle.” This can be quite telling. But financial and retirement planning does not have to be out of reach for women. 

 

How Women Can Put a Solid Retirement Plan in Place

Working with a retirement income specialist can help you to put a viable financial plan in place to help secure your financial future – regardless of where you are starting from right now.

 

5 Pre-Retirement Blunders Even Retirement-Savvy Investors Make

As you get closer to retirement, you want to make sure that you keep your principal safe, and that you have a good solid income plan in place so that you can comfortably pay your living expenses.

But unfortunately, there are some common blunders that people make that could end up throwing your retirement off track. So, it is important to understand what these mistakes are, and how you can avoid making them. 

5 Biggest Mistakes Made Before Retirement

Even if you have been a good saver all of your life, you still could be making some mistakes as you get closer to retirement. The most common pre-retirement blunders that even retirement savvy investors make include:

  1. Withdrawing money too early from retirement plan(s).
  2. Not discussing – and coordinating – retirement goals with a spouse or partner.
  3. Not maximizing Social Security benefits.
  4. Using the same financial advisor who helped you to grow your assets.
  5. Not planning for the unexpected.

Withdrawing Money Too Early from Retirement Plans

For many people, the money that is in their retirement plan(s) is their most valuable asset. So, it can make sense to consider using these funds for various needs – even if those needs are not related to your retirement income.

But accessing money too early from retirement plans can be costly. One reason for this is because you will likely owe taxes on some – or even all – of your withdrawals. Plus, the amount of tax could be substantial. 

Even though income tax rates are currently considered low, no one knows what these rates will be in the future. We do know, however, that the top federal income tax rate has been more than 70% forty-nine times in the past 107 years. 

Top Federal Income Tax Rates 1913 – 2020

Year

Rate

Year

Rate

2018-2020

37

1950

84.36

2013-2017

39.6

1948-1949

82.13

2003-2012

35

1946-1947

86.45

2002

38.6

1944-1945

94

2001

39.1

1942-1943

88

1993-2000

39.6

1941

81

1991-1992

31

1940

81.1

1988-1990

28

1936-1939

79

1987

38.5

1932-1935

63

1982-1986

50

1930-1931

25

1981

69.125

1929

24

1971-1980

70

1925-1928

25

1970

71.75

1924

46

1969

77

1923

43.5

1968

75.25

1922

58

1965-1967

70

1919-1921

73

1964

77

1918

77

1954-1963

91

1917

67

1952-1953

92

1916

15

1951

91

1913-1915

7

Source: Inside Gov (http://federal-tax-rates.insidegov.com/)

In addition to being taxed on your withdrawals, you could also incur an additional 10% “early withdrawal” penalty from the IRS if you do so before you turn age 59 ½. Plus, depending on the type of investments you have, there may also be an early withdrawal penalty.

For instance, if you take money out of most bonds and CDs (certificates of deposit) before the maturity date, you will likely have to face an early withdrawal penalty. Likewise, most annuities will also impose a surrender charge if you withdraw all of the money and “surrender” the contract, or even if you take out more than a certain amount each year. (In many cases, you are allowed to access up to 10% per year penalty-free, even during the surrender period). 

On top of all that, there are other financially harmful effects that could be faced. For instance, if money is withdrawn from an IRA or qualified employer-sponsored retirement account, you will lose any future tax-deferred gains on the money you take out. Over time, this lost return could be substantial.  

So, unless it is a last resort, it is not advisable that you access money from your retirement account(s) until you can at least avoid any of the early withdrawal or surrender penalties that you could face. 

Not Discussing – and Coordinating – Retirement Goals with a Spouse or Partner

If you have a spouse or partner, it is essential that you include him or her in your retirement planning. That way, you can both work towards a similar goal. In some cases, two people may have very different spending and saving habits – which can make planning for short- and long-term financial objectives difficult. 

Working with a retirement income planning professional can help you to develop viable strategies for coordinating your plan. He or she can also assist you in other areas, too, such as the timing of when you retire, along with estimated future expenses, and tax reduction or elimination. 

Not Maximizing Social Security Benefits

While most people are aware that they will have Social Security retirement income in the future, what many do not realize is that there are multiple ways you can access this income – and not maximizing these benefits could end up costing 5- or even 6-figures in lost income over time. 

Qualified Social Security recipients can file for this income as early as age 62. But accessing Social Security any time before your full retirement age will permanently reduce the dollar amount of your benefit.

Social Security Full Retirement Age

Year of Birth

Minimum Retirement Age for Full Benefits

1937 or Before

65

1938

65 + 2 months

1939

65 + 4 months

1940

65 + 6 months

1941

65 + 8 months

1942

65 + 10 months

1943 to 1954

66

1955

66 + 2 months

1956

66 + 4 months

1957

66 + 6 months

1958

66 + 8 months

1959

66 + 10 months

1960 or Later

67

Source: Social Security Administration

The amount of the reduction in Social Security benefits will depend on your age when you file and your full retirement age. So, based on just how early you start receiving Social Security, your benefit could be reduced as much as 30%. 

Cost of Taking Social Security Income Before Your Full Retirement Age

Age

Full Retirement Age 66

Full Retirement Age 67

62

25% reduction

30% reduction

63

20% reduction

25% reduction

64

13.3% reduction

20% reduction

65

6.7% reduction

13.3% reduction

66

Full Benefits

6.7% reduction

67

Full Benefits

 

On the other hand, if you wait until after your full retirement age to claim Social Security, you could increase your benefits going forward. For instance, each year that you delay can result in an 8% rise in the dollar amount of your income from Social Security. 

So, based on your full retirement age and the time that you file, you could see as much as a 32% increase in the dollar amount. As an example, if your full retirement age for Social Security is 66, and your benefit amount at that time is $2,000 per month, you could increase your benefit to $2,640 by waiting until age 70 to collect. 

If you take benefits at age:

Monthly benefit amount:

66

$2,000

67

$2,160

68

$2,320

69

$2,480

70

$2,640

(This example uses simple increases of 8% per year, based on an original dollar amount of benefit of $2,000. It does not factor in any cost-of-living-adjustment, or COLA, that the benefit recipient may be eligible for). 

Some other items to consider when you file for Social Security include whether or not your spouse is also eligible, as well as any of the other retirement income streams that you may have. 

Not Planning Ahead for the Unexpected

Although nobody likes to think about it, the reality is that accidents and illnesses can – and do – occur…and when they do, it is best to already have a plan in place. For instance, if you are unable to work for a while due to a disability, you may have to dip into your savings to pay the bills. 

Likewise, the need for long-term care can be extremely costly. On average, the monthly price tag for a semi-private room in a skilled nursing facility can be over $7,500. But, long-term care coverage and a disability insurance plan can help you to keep your savings and assets in place for their intended purpose.

The same holds true with life insurance protection. The funds from a policy can help your survivors move forward, but without having to struggle financially if your income is replaced with these funds. 

Using the Same Financial Advisor Who Helped You to Grow Your Assets

While it may sound strange, using a financial advisor who helped you to grow your savings and investments may not necessarily be the same person you should work with on your retirement income planning.

This is because converting assets into a reliable, ongoing income stream takes a different strategy. So, if you need advice regarding how you can turn your savings into a lifetime retirement income, talking with a specialist in this area of planning is a must.

If you would like more information on how to set up a retirement income stream, as well as on how you can reduce the chances of making a mistake in your overall planning strategy, please feel free to contact us. 

Do You Actually Understand Thrift Saving Plan (TSP) Investments? By: Aaron Steele

How well do you understand the TSP fund options? Here’s a quick rundown.

As the world’s largest employer-sponsored savings plan, the Thrift Savings Plan (TSP) plays a role in the retirement plans of every FERS federal employee.

Every year, many people become millionaires simply by making good use of their TSP account.

However, without at least a basic understanding of the TSP funds, it’s extremely difficult to be successful in the TSP over the long term.

This article will quickly bring you up to speed on the essentials of the TSP fund options.

 

The Fundamentals

The TSP offers only five core fund options. Here they are, along with a brief description of what they invest in:

    • G Fund: Investments in U.S. Treasury Bonds.
    • F Fund: Investments in several types of U.S.-based bonds.
    • C Fund: Investments in 500 of some of the biggest U.S. companies (Follows the S&P 500).
    • S Fund: Investments in most other major U.S. companies (aside from the S&P 500).
    • I Fund: Investments in the major companies in Europe, Australasia, and the Far East.

Note: There’re also L Funds in the TSP, but these are simply a mix of the core five funds. 

 

The Conservative TSP Funds

The G and F Funds are the most conservative of the five funds because they are less volatile than the others. However, as a trade-off for being more stable, they lack the potential to grow as much as the other funds.

Although the G Fund guarantees that any money invested in it won’t lose value, it has only averaged about a 2% annual return over the last ten years.

The F Fund’s value can fall, but it remains very stable compared to the other funds. Over the last ten years, it has averaged a 3.6% annual return.

 

The Issue with the G and F Funds

As they near retirement, many people will invest the majority of their TSP assets in a combination of the G and F Funds. While investing a part of your money in conservative funds might be a wise decision, many individuals overdo it.

The G and F Funds are unlikely to lose value, but they’re also unlikely to grow much. This lack of significant growth, as well as inflation, can have a substantial impact on your money over time.

For example, if the prices of goods and services rise every year (inflation) and your investments don’t increase quickly enough to compensate, you may deplete your TSP far faster than you had planned.

This does not suggest that the G and F Funds are bad investments. They are excellent funds that do exactly what they’re supposed to do. However, you’ll want to ensure that you also have investments to help you maintain your usual lifestyle during retirement.

 

The Aggressive TSP Funds

The C, S, and I Funds are the aggressive TSP funds. 

They are dubbed “aggressive” because they have a far higher probability of sustaining significant growth over time. However, as a result, they can be significantly more volatile than the G and F Funds.

For instance, the C Fund lost more than 35% in 2008 but recovered it all and more in the next several years.

It is advised you not put any money into these funds that you’ll require in the coming years. These funds will perform better in the long run but are less predictable in the short term.

 

The L Funds

The most crucial thing to remember about the L Funds is that they’re not independent funds. They’re essentially various combinations of the main five funds that we have discussed.

What distinguishes them is that each L Fund is designed to gradually grow more conservative over time. In principle, one might invest in a single L Fund and never have to modify their investment allocation for the remainder of their career.

 

Final Thoughts

We hope you have a better knowledge of the various TSP funds and what they’re meant to accomplish. Now, you’ll be much more prepared to understand when you read about investing strategies.

What Should You Do if Your Company is Cutting Your 401(k) Match? By: Joe Carreno

For the first time, unemployment has reached its peak after the incident of the Wall Street crash in 1929. Up till now, millions of people have lost their jobs, as employers claim that they do not have enough money to pay their employees. Meanwhile, only the positions of the people are not getting affected by the COVID-19. Due to the termination of businesses and the lockdown, employers are also unable to pay for their due part in the 401(k) plan of their employees.

As millions of people have become unemployed, their 401(k) plan has automatically gone down. But, those who are at their jobs also do not know how long they will keep on serving at that position—even being the employee under a specific employer. Still, thousands of people have had their 401(k) plan hit.

In reality, the termination of the 401(k) plan is a big issue, as this is one of the most significant sources of income that avoids employees’ threats of outliving money in their retired life. But now, those who have got their 401(k) plan hit by this pandemic are truly vulnerable to the stressed circumstances of the economy.

Moreover, those employees whose retirement is near or who are thinking of taking early retirement will be the weakest people who will be adversely affected by the interruptions in their 401(k) plan.

So, if any one of you is worried due to these prevailing crises, they must not make themselves suffer, as we here have a plan that can reduce the intensity of this damage. Abiding by the following steps, you will have ample relief regarding your 401(k) plan.

But, before we go into the details of those, we would like to add some words about 401(k) plan.

 

401(k) Plan:

Most of the employees rely on their savings after retirement, and to avoid any financial uncertainty, employees need to tap into some savings plan that could provide them with the accumulated money at the end of their service. So, there are different saving plans to serve employees in this regard.

Thrift Saving Plans and 401(k) plans are the leading plans that provide most employees with the money to spend their retired life respectably. The only difference between these plans is that the Thrift Savings Plan (TSP) is adaptable for federal employees only, and the employees can adopt the 401(k) plan in the private sector.

In reality, a 401(k) plan is a sponsored plan offered by the employer of the employee. According to the set terms and conditions of the policy, a considerable part of the deposited money comes from the employer. Moreover, this installment is either deposited monthly or yearly, according to the conditions of the plan.

Apart from this, a little part of that deposited money goes from the employee, and this part is cut from the salary of every month. So, this is how a small amount is reduced from the wages of employees every month, and the employer pays the more significant part, and in the end, this money is given back to the employees as their retirement income.

But, according to the prevailing situation, employers are unable to pay that more prominent part of the amount that is to be deposited, and in this way, the 401(k) plans of employees have been affected severely.

However, according to the situation, it is tough for employers to maintain the payments for 401(k) plans of their employees. Don’t worry, we have a plan that will help you out in this harsh environment. Following the given instructions, you will match your 401(k) plan payments, and you can conveniently avoid derailing your retirement savings.

 

Increase contributions from your end

As employers are less willing to contribute to the 401(k) plans of their employees, the only way out is to get your savings plan terminated. But, if you do so, you will have nothing in your hand to spend your retired life.

So, the best option to cope with this problem is to contribute maximum in your 401(k) plan saving plan. 

For this purpose, you need to reach out to the HR department of your organization that maintains the record of your saving plan. From there, determine how much part was being contributed by your employer in your saving plan and try to provide that amount on your own.

On the other hand, you may also know about the contributions paid by your employer online from your 401(k) plan portal. There remains a summary of your plan, and you may check that amount from there.

Now, you have to bear the burden of full payment of your savings account, and for this purpose, you have to adjust money from the income you have in your hand. At this point, you will have a question about how you will manage to pay that amount on your own. Here are some practices that could facilitate you in paying the full amount of your savings plan.

 

#1. Use Coupons While Buying Essential Items

 While roaming in the market, you might have seen products along with coupons, and these things are highly recommended in these circumstances because you get something free with the original product. So, by doing this, you can have something extra along with the main thing, and that extra thing will surely reduce your shopping budget, as you will not buy that thing.

  

#2. Cut Your Discretionary Expenses

If you are habitual of visiting the Appalachians every season, and you watch movies every week, you must reconsider your priorities.

These are discretionary expenses, and even without these expenses, you may comfortably live your life. So, abandoning these expenses, you will save considerable money that you can use for paying the installment of your 401(k) plan’s savings account.

So, these are the steps that you can follow to meet the amount paid by your employer. But, still, if you cannot meet that amount, put the money forward that you accumulated and let your plan go with that amount. But, leaving the plan will never be a good option. 

 

Consider Changing the Savings Plan

Of course, the employer puts a great amount in your 401(k) plan, and if the employer takes a step back, there is real trouble for the employee. So, in the first step, we concluded that you could meet that amount by sacrificing your non-necessary expenses. But, if you still cannot match your 401(k) plan, you might think about moving your savings plan.

You can move your savings plan from a 401(k) plan to an Individual Retirement Account (IRA). Being a 401(k) plan holder, you can conveniently shift your savings plan.

Therefore, if you cannot meet the match of the 401(k) plan, you can invest that money in the IRA savings plan. Typically, you move your accumulated cash from your 401(k) plan’s account to your newly opened IRA account. Now, it is up to you how much of an investment you want to make in the IRA account based on your earnings.

This savings plan through an IRA will allow you to invest your money in different kinds of stocks, and the interest that you will earn through that investment will keep on accumulating in your IRA savings account. At the end of the term of your service, you will get this collected money as money for your retirement.

So, changing the savings plan from a 401(K) plan to an IRA savings plan seems to be the best solution; otherwise, you might lose your retirement money. And of course, it will not be possible for any of the people to live their retired life without having their retirement payments.

 

Redraft Your Retirement Plan

So, if you do not match your 401(k) plan, you may change your savings plan. Moving to the IRA will be a good option, as we discussed above. But, the need of the hour is that everyone, either having a 401(k) plan or IRA savings plan, must check the status of their savings plans, as this status will provide them with the bright idea that how much money they will be having at the end of their retirement to spend in their retired life.

Therefore, for this purpose, make a list of expenses that you make at your home every month and estimate the money that you will receive at the end of your service. The estimated retirement money can be seen from the portal whose savings plan you have opted for. So, now you have both estimated expenses and the estimated amount of retirement. And do not forget adding 3% of inflation, which is most likely to rise every year.

Now, compare both of these numbers, and see whether your retirement amount is enough for your estimated expenses or not. If it is sitting right with the expenses, that is good, but if this is not the case, you must take the pain of this thing, and consider how you can eliminate this gap between your expenses and income.

In this situation, you need to explore other options that could provide you with a solution to this problem. For example, if you do not have enough money out of your IRA saving plan, you can go back to your 401(k) plan once your organization restarts that policy. On the other hand, you may also move to the annuities.

However, in short, you have to keep yourself to the safe end by calculating the estimated income and expenses.

 

Final Words:

In the meantime, when the pandemic of COVID-19 is creating chaos all over the world, a vast number of small businesses have shut down forever, and unemployment is also at its peak. Moreover, those who are at their jobs are also uncertain about the security of their career. Meanwhile, the saving plans of the employers got a tight blow due to the abandonment of businesses due to the lockdowns in the USA.

So, the problem becomes even worse when employees face the situation of termination of their 401(k) savings plan. This is because employers are claiming they do not have enough money to put in the savings plans of their employees. Therefore, this service has been temporarily cut from employers. Now, the only option appears to contribute to your plan on your own; otherwise, you might ruin your investment savings. 

TSP Participants Want Changes in the Program, but Majority Are Satisfied with the Savings Scheme. By: Ricardo Viader

The Federal Retirement Thrift Investment Board, in conjunction with Gallup, recently conducted a survey with 36,000 participants. The board aims to evaluate consumer satisfaction with the surveys, which help the agency make suitable changes to its plans and tools. 89% of participants said they liked the savings plan. This figure is slightly higher than the 87% of participants who said they liked the TSP in last year’s survey. 

The increase in the satisfaction rate can be attributed to the service members participating in the Blended Retirement System (BRS). Last year, the satisfaction rate amongst service members had been 77%. That figure rose to 88% in this year’s survey. In addition, 33% of service members who liked the BRS said they were “extremely satisfied” with the system. In last year’s survey, only 22% of service members had chosen this option. 

The FRTIB said its biennial and triennial surveys will now be conducted annually.

In January 2021, the Employee Benefit Research Institute (EBRI) had also conducted a survey that revealed that 84% of workers said they liked the TSP. That survey and the more recent one shows that the retirement saving scheme continues to outshine similar plans of the private sector. 

Another notable thing about the survey is that TSP participants who save less money show lower satisfaction with the program, unlike those who save more. 50% of the participants said they contribute over 5% to the TSP. 94% of these participants said they were satisfied with the system. On the other hand, 29% of the participants said their contribution to the plan was 5%. 90% of these participants said they were satisfied with the system. Of the last group, participants who contribute less than 5%, only 86% said they were satisfied. 

For members of the last group, 43% said they didn’t have enough money to contribute above 5%, 31% said they didn’t increase their savings amounts, and 26% said they didn’t see the need to change their savings amounts. The TSP noted that fewer people cited affordability as a reason for low contribution in 2021 the percentage had been 53% in 2017 and 47% in 2020. 

Participants Requested More Changes to the Plan 

In a 2017 survey, the FRTIB found that 62% of participants wanted more flexible withdrawal options. The agency had made a few changes in 2019. Many participants said they liked the changes, but others had clamored for even more flexible options. 

In this year’s survey, 67% of the participants said they were satisfied with the withdrawal options. The percentage is an improvement on the rate of previous years, but withdrawal options remain the weakest point of the TSP. According to the survey, participants preferred recurring payments, partial payments, and life expectancy installments over other TSP withdrawal options. 

The FRTIB also conducted another survey to discover factors that participants consider when buying an annuity or making a withdrawal. The board has not released the survey results but promised to do so in a few months. 

About 40% of the respondents also plan to take money out of the TSP after retirement. These workers said they would get more and better investment choices outside the TSP. They also hope to get higher returns on their investments and strengthen other investments with the funds from the TSP. About 58% of BRS participants, more compared to other participants, said they would transfer funds from their TSP accounts. 

90% of the respondents want to be able to choose the investment funds they use for withdrawals. The board stated that it would consider adding this option when it completes its modernization projects. The projects will allow the agency to enhance its customer services and internal IT mechanisms and offer participants new tools, such as a mobile app. 

Respondents’ Reactions to TSP Fees 

The vast majority of participants, some 60%, said they knew about the TSP’s fees or had an opinion of them. 

Not many respondents were satisfied with TSP fees. 46% of the respondents want to take money out of the TSP in search of better fees. About 60% of the respondents said they didn’t have much knowledge about the TSP fees. The other 40% who claimed they knew actually believed that the scheme has some of the lowest fees compared to similar plans. Three quarters said the TSP fees are low, 22% said the fees are similar to other defined savings plans, and 4% said the TSP fees are high. 

The board said the agency’s expense ratio is between 0.49% to 0.6%. Steve Huber, the board’s enterprise portfolio management chief, said a majority of similarly defined contribution plans have an expense ratio of less than 2.5%. Huber explained that the board was surprised that most of the respondents didn’t know about the TSP fees and that those that knew felt the fees were higher or at the same level with similar plans. The board said it would seek ways to educate participants about the TSP’s lower fees.

TSP Finds that New Workers Are Investing More in Age-Appropriate Lifecycle Funds. By: Kathy Hollingsworth

The agency that oversees the Thrift Savings Plan (TSP) has noticed a difference in the investment patterns of new workers. The agency found that these workers are moving their default investment fund from the government securities (G Funds) to age-appropriate lifecycle funds (L Funds). The TSP recently analyzed investor behavior and found that younger workers are investing more in L Funds. 

The agency found that workers below the age of 30 invest 63% of their assets in L Funds. Those between 30 and 39 invest around 39% of their assets in the funds. In addition, workers between ages 50 and 59 invest 20% of their assets in the funds. Those between age 60 and 69 invest 17%, and those who are 70 and above invest 13%. 

In its report, the agency stated that the 2015 shift of default investment from the G Fund to age-appropriate L Funds had changed the fund-utilization ratio. It also stipulated that the beliefs about the advantages of utilizing the L Funds also constitute a factor. 

The report also stipulated that workers who have been using the TSP for longer have more investments in the G Fund than newer participants. Those between the age of 60 and 69 have 38% investments in the fund. Workers who are 70 and above have more assets in the G Fund, with an investment of 43%. On the contrary, only 9% of those under 30 and 18% of those between 30 and 39 invest in the fund. 

The report stated that participants focus more of their investments on income-producing assets as they approach retirement. This factor, it stated, could be responsible for the new investment patterns. The agency also stated in its reports that fewer young workers are investing in the G Fund. In 2014, the youngest participants invested 42% of their assets in the G Fund. 

The high percentage had prompted the agency to change the default investment fund from the G Fund. The agency explained that the fund is guaranteed against investment losses but has a lower growth potential than other funds. The change has the intended effects, as shown by the recent survey. Fewer younger workers are investing in G Funds, just as the agency wanted. 

Though participants can change their default investment fund and amount, the agency said many participants never bother to do that.

Only FERS employees were considered for this survey.

Inflation and the Timeframe of Your Retirement. By: Brad Furges

With the growing inflation, an increasing number of federal employees are doing the figures to determine the financial benefits of working for another year or two. For many, the answer is startling: much more money in retirement for working a few years longer.

Example:

According to benefits expert, a Federal Employees Retirement System (FERS) employee earning $80,000 per year may increase their starting annuity by over $30,000 by staying on for another two years. That is a lot of money by any standard. Both now and later.

The FERS plan covers the great majority of still-working public workers. While it doesn’t have as generous civil service benefit as the Civil Service Retirement System (CSRS) scheme it replaced, FERS employees are eligible for Social Security benefits as well as a 5% government match to their Thrift Savings Plan (TSP) accounts. Retiring under the FERS program might be more complicated since it has more moving pieces and various requirements. But it’s well worth it if done right. Working longer for a greater pension allows many FERS retirees to put off accessing their TSP savings for years.

FERS employees must maximize their retirement benefits since FERS retirees are subject to the Cost-of-Living Adjustment (COLA) scheme opposite of their CSRS colleagues. In short, when inflation goes beyond 2% (as it’ll this year), retirees receive inflation catchup that is 1% less than the actual increase in inflation. The January 2022 COLA for CSRS, Social Security, and military retirees, for example, is 6%. Those on the FERS program will receive only 5%. Compounding-in-reverse indicates substantially reduced purchasing power over time.

So, aside from the obvious, what are the disadvantages of working longer than planned? 

According to a benefits expert, the $80,000 per year employee may increase their starting annuity by about $30,000 by working two more years, from age 60 to age 62. At the same time, they can also draw a full salary, qualify for pay increases and within-grade increments, and increase their high-3 year average salary.

Interested?

A benefits expert came up with this example of how postponing retirement may benefit you a great deal. Of course, there are several more factors to consider. However, money, as in having enough in your golden years, is a major one. You may use this example of an $80K employee working longer to receive more in retirement. Here’s the example:

Length of Service at 60: 19 years

    • 19 x $80,000 x 1% = $15,200 x .90 = $13,680 (10% reduction under the MRA + 10 retirement as employee didn’t have 20 years of service at age 60 to be eligible for an unreduced retirement)

Length of Service at 61: 20 years

    • 20 x $80,000 x 1% = $16,000 + $12,000 = $28,000 (The additional $12,000 is a FERS supplement of $1,000 a month payable to age 62 when retiree can file for SSA and receive an even greater SSA benefit depending on their lifetime of FICA taxed wages)

Length of Service at 62: 21 years

    • 21 x $80,000 x 1.1% = $18,400 + $24,000 = $42,480 (The $24,000 is the SSA benefit payable at age 62 of $2,000 a month from their lifetime of FICA taxed wages)

 

Of course, the individual who left at 60 may claim their SSA benefit, but the shortfall in their FERS basic retirement income would still be close to $5,000 per year or $600 per month – for life! They would have benefited from adding two more years at their presumably best earning years to their SSA record, as well as two additional years of contributions and growth to their TSP account.

They may withdraw $24,000 per year from their TSP account to get $43,000 per year by deferring SSA claims until age 70 and then taking considerably lower payments from the TSP to fulfill the required minimum distributions at 72.

Definitely one to have in your retirement planning toolbox. Also, don’t forget to forward it to a FERS friend.

TSP Accounts: After the coronavirus has hit the world economy hard, how long is the road to recovery? By: Kathy Hollingsworth

The coronavirus has clobbered the world economy and the people depending on it. Some of the geniuses are working hard to find the vaccine and possible solutions for fighting this deadly virus, but until a controllable solution is available, the stock markets around the globe can fall at historical speeds. TSP account holders are amongst those hit worst by this virus and are now looking forward to recovering their losses due to the current market decline. 

Many investors already know that this type of stock market decline is inevitable. The two main questions that bother our minds when such decline begins are: (1) How harsh will this decline be? (2) How long will it stay?

We can never predict when the stock market decline will happen, or why it happens. Sometimes, the U.S. or world equities never see a declining market, and sometimes they experience multiple declines. For example, in the year 1990, the decade started with a minor drop of over 10% that ended in January 1991, after a small period of recession and just after the collaboration of military operations in Iraq as part of Operation Desert Storm. The subsequent downturns were not seen until 1997 and 1998, and they were too short-lived and not very noticeable. Before that era, in 1987, the U.S. market saw the sharpest one-day drop of 22%. This was just three months before the C Fund came into operations. Soon a $250,000 portfolio was invested in the S&P 500 stock index fund (tracked by C Fund) after that; the day dropped to about $193,000 overnight. During that time, the stock markets declined by almost 1/3rd in totality.

Many investors experienced multiple downturns in 2020. Initially, it was seen in 2000 and continued for three years. Historically, this was the longest downturn followed by a historic bubble in stock market values – the S&P 500 and the C Fund returned at least 20% in each of the five prior years in the late 1990s in addition to the 9/11 terrorist attacks and a recession during that period. The next downturn was observed in 2008-9, and it was one of the worst drops in the U.S. and global stock markets since the Great Depression that started in 1929 and continued until the late 1930s.

From the stock market data of those years, we can analyze how an average investor would have dealt with stocks during those major declines and after the drop. Smart investors not only dealt with that traumatic period but also emerged as successful investors after surviving those downturns.

A recently released book titled, “TSP Investing Strategies: Building Wealth While Working for Uncle Sam, Second Edition” is a good one to analyze every 20-, 30-, 35-, and the 40-year period between 1900 and 2019, to find how average investors survived despite a variety of market declines during those timeframes. Each period has its own characteristics, but it is very important to check that investments in broad U.S. stock indexes (just like C and S Funds) dropped considerably at a certain point during every period that was analyzed, and they were also able to recover and raise enough after that decline. It was examined that in every 30-year period examined since 1900, an all-U.S. stock index portfolio (especially C Fund) outperformed the all-government bond portfolio (especially G Fund), by a noticeable margin. One exception was seen in the period from 1903 to 1932 when the market dropped evenly during the depths of the Depression (the stock fund was able to recover in the next couple of years).

If we know this in advance and analyze how an average investor deals with the market decline, and how they emerge as winners, then a person needs to be mentally prepared, if not emotionally, for the stock market drops as they happen.

Let’s understand this process. Start examining the 35-year period from January 1983 to December 2017. This period includes the sharp drop in 1987, the bubble years of the late 1990s, the longest drop in the U.S. stock market over three consecutive years in the early 2000s, and finally, the biggest decline in the U.S. equities of over 50% in 2008 and early 2009.

Let’s analyze this timeframe as a period for a new employee who contributes 5% of an entry-level salary of $30,000. According to government rules, this would make $250 in monthly contributions in the first year. Let’s assume that the annual salary and the regular contributions of this employee increase by 5% a year. Over 35 years, this employee would have a total contribution of about $271,000, and if we assume that half of this contribution matches the government’s, then that means a federal employee with a TSP account would have invested less than $136,000 of his or her money over the 35-year period.

To understand this clearly, four portfolios were tested. The first one is investing all contributions monthly in the S&P 500, representing the C Fund. The second one is investing all contributions monthly in an account that returns the 10-year U.S. Government Bond interest rate (closely equivalent to G Fund). A third one is investing about 65% in the S&P 500 and 35% in the 10-year bond, without any rebalancing. The fourth one is investing in the same percentage but rebalancing at the end of each year back to the same percentage (65-35) to account for portfolio drift over time.

Here, are the results of the four portfolios of investors who invested monthly from January 1983 to December 2017:

The highest value after investing for the 35-period is seen in the case of the C Fund; during each market drop, the fund also suffered a sharp drop in account value as compared to other funds. As compared to the balanced funds, it took a long time to recover after each decline, depending on our definition of “recover.”

If we define “recover” as the time starting from the month of peak value before the drop took place to the month when the value surpassed that same value, then we can say that all-C Fund account portfolios took five years to recover their losses after the 3-year decline of the early 2000s, and the 65-35 C-G Fund took just four years while the 65-35 annually rebalanced account took 3½ years to recover losses.

During 2008-9, the market decline was for a short duration, but it was sharper where all-C Fund account portfolio took three years to recover, the 65-35 account took three years, and the annually rebalanced 65-35 account took only 29 months to recover.

This thing may not be visible in the chart, but we can clearly see that the fastest recovery during this period came after the major market declines in the late-1987 period. All-C Fund account portfolios recovered to their original value in a year, and the other funds recovered faster than C Funds. The main reason was U.S. equities that recovered relatively quickly despite the market drop of about one-third.

Well, we must say that the 10-Year Government Bond account never declined despite the coronavirus market decline. The G Fund is the only fund in the TSP funds that have never dropped. In terms of total returns, the G Fund was the last one to end the 35-year period.

These were just a few examples from the previous 100+ years of the history of U.S. stock and government bond index. Overall speaking, the total value of a portfolio consisting entirely of U.S. stock indexes (such as the C Fund), can recover losses within a year or even three after experiencing a significant decline. The most severe and lengthiest drops may take another year or a maximum of two years to recover. Accounts recover comparatively quicker after short-term drops. This means that an active TSP participant does not need to sell his or her stock funds and continue investing despite the market decline. There are many planned strategies that investors can suggest during downturns. But we must mention here that the buy-and-hold strategy is the best one to stay in the market over long periods of time.

Over a period of time, we will find a solution to recover from the coronavirus, and the U.S. and world markets will recover after ongoing downturns too. By continuous investment in funds during these difficult times, TSP account holders will be able to recover from the losses as well. No doubt, we are going through challenging times, but there is a way to reduce anxiety — at least when it comes to investing — to focus on the long-term goals. We hope and pray for all to stay safe and healthy as the world fights on the coronavirus and struggles to recover globally. 

Will Your Social Security Benefits be Enough During Retirement? By: Joe Carreno

Social Security benefits have been designed to help you cater for a portion of your daily expenses after retirement. As soon as you attain the eligible age of 62, you can expect to receive monthly checks from the SSA to replace a portion of the monthly paychecks you have just lost. However, your Social Security checks will not be solely responsible for a comfortable life after retirement. On average, experts say Social Security checks only make up for 40% of pre-retirement incomes.

This figure becomes even more insufficient for people whose pre-retirement incomes were above average and thus used to a different lifestyle. If you are in this category, you are likely used to a more comfortable lifestyle, and your Social Security benefits won’t be worth much to you. To avoid any unpleasant surprises upon retirement, you have to calculate how much your Social Security benefits will be worth and what you can do to cover the difference. 

What Will the Social Security Monthly Checks Be Worth?

On average, Social Security benefits are able to replace only 40% of a retiree’s previous paychecks when they used to work. However, this estimate does not apply to all retirees. It only applies to workers whose earnings fall in the category classified as average. Some workers earn above average and spend more money than the average American household. People also have different standards as to what they describe as a “comfortable lifestyle” after retirement. 

For example, the Bureau of Labor Statistics Consumer Expenditure recently estimated that average households headed by someone who is at least 65 years old spend around $50,220 annually. As a result, the $26,355 that these households receive yearly from the SSA amounts to around 52% of their expenses. 

However, the calculation only considers the common household expenses of senior citizens. It doesn’t consider other factors, such as travel expenses, new hobbies, and other activities that some retirees look to embark on after retirement. The number of Social Security recipients in one household also affects the amount of money they can receive from SSA. Experts say families with multiple recipients have problems covering their expenses compared to homes with single recipients. 

In addition, workers earning below the average use their Social Security paychecks to cover more expenses than others. With all these variables, it is impossible to generalize the worth of Social Security benefits for all categories of workers and retirees. 

How to Estimate the Worth of Social Security Benefits for Your Situation?

Since we have ascertained that generalizing the worth of Social Security benefits for all situations is a fruitless venture, it is time to discuss how you can make a personalized estimate. You can start by creating a personal Social Security account. With this SSA resource, you can calculate an estimate of what you will receive from the SSA. You only need to input your current earnings, possible age of retirement, and other personal details. You can also adjust your income and age of retirement if anything comes up in the future. 

Once you’ve got your estimated monthly benefit, you can multiply it by 12 to get your estimated annual benefit. Then, you can divide that by your estimated annual retirement expenses and multiply that by 100 to figure out what percentage of your income Social Security will cover. 

After putting in the necessary details, the resource will give you a close estimate of your expected monthly Social Security benefits. You can use this sum to come up with the percentage of your annual income that you will get from Social Security. To do this, multiply the monthly estimate by 12 and divide the result by your estimated annual retirement expenses, and then multiply by 100. The result of this simple calculation will help you determine the percentage of your post-retirement expenses that Social Security will cover. 

For example, if our fictional employee’s monthly estimate from the online resource is $2,000, and he/she wishes to spend $50,000 every year after retirement, then the calculation will look like this:

$2000 × 12 = $24,000. 

$24,000 × 100 = 48%. 

$50,000

 

Our employee’s Social Security will cater to 48% of their monthly expenses after retirement. It would help if you did your calculation to ascertain what to expect from the SSA after retirement. It is also advisable that you run the calculations at least once in two years because of changes in governmental policies and other factors that can change the figures. 

How Do You Make up the Differences if the Estimate is Lower Than You Expect

There are very slim chances that your Social Security will exceed $25,000 annually. So, it is always important to have a Plan B that will make up the difference. Luckily, we have several options you can call Plab B that will help you live comfortably even after you retire. Your first option is saving money in a 401(k) account if you work with an organization that matches or adds to their workers’ 401(k) contributions. Your 401(k) contribution will be made in pre-tax dollars, so you make the most of every dollar. 

Another option is opening and contributing to an Individual Retirement Account (IRA). IRAs will help you have a little bit more control over your savings and investments. They also come with some tax advantages.

A retirement calculator will help you figure out how much you need to invest in these accounts to cover the difference between your Social Security estimate and your post-retirement expenses. The calculator will request the estimated yearly growth rate of your investments. You should use a 5-6% growth rate. Your investments may do better than that, but it is safer to aim low and have a surplus than aim high and be disappointed later on. 

If you will not be able to meet up with the calculator’s estimates, you may have to make a few changes. You may decide to either work for more years to make up the difference or reduce your post-retirement expenses. You can also look for other sources of income, such as a side job, or seek a better job that would pay you more.

How to Approach Retirement as a Small Business Owner. By: Flavio J. “Joe” Carreno

Running your own business has numerous advantages, including the ability to determine your work schedule and the possibility of raising your income. However, without the benefits usually provided by large employers, saving for retirement is often left up to you.

When you operate a small business, nearly every aspect of it becomes entangled with your personal life. You are your company, and your company is you, says David Burton, a Harness Wealth’s tax consultant.

Having a retirement plan in place and putting money aside early helps guarantees you will have a stable financial cushion when retirement comes.

Let’s look at four tips that’ll help you prepare for your retirement as a small business owner.

  1. Determine your retirement needs

It’s critical to calculate how much money you’ll need to live a comfortable retirement.

Consider your desired retirement age, estimated living costs, and other relevant considerations such as taxes, inflation, and Social Security benefits.

Make sure to account for various possible scenarios, such as selling the firm or ceasing to generate business-related income.

Financial tools, like a retirement calculator, can help you assess your needs. You might also seek the advice of a financial professional who specializes in retirement planning.

In any case, knowing how much money you’ll need early on will help you decide on the best retirement approach to fulfill your financial goals.

  1. Develop an exit plan

You’ll have to decide what to do with your business once you retire. That means having an exit strategy.

The exit plan might be transferring ownership control to someone else, selling the business, or conducting an initial public offering. When deciding about an exit strategy, consider how long you want to remain a part of the business. Also, consider the best way to protect your business assets, and your financial situation and ambitions.

Many business owners don’t always consider their exit strategy or retirement plan regarding their business. According to Kristen Carlisle, Betterment 401(k)’s general manager, it’s never too early to start thinking about it.

In many situations, your business company plan and pitch should include an exit strategy.

  1. Figure out the best retirement savings plan for you

Once you’ve determined your retirement needs and an exit strategy for your business, it’s time to figure out which retirement savings plan is best for you.

Consider the contribution restrictions of the plans, the number of employees you have, and the tax benefits associated with the kind of account you choose.

No matter at what point in your business planning path you’re currently, it’s essential to consider building a retirement plan for yourself. If you have employees, it’s also a good idea to provide them with a retirement benefit to feel financially secure and prepared, Carlisle stated.

The following are the five types of the most popular self-employed retirement plans:

Traditional or Roth IRA

  • An IRA, either traditional or Roth, is a tax-advantaged retirement savings account. With a traditional IRA, you only pay taxes on your money when you withdraw it in retirement. Because taxes are deferred, your investment profits may rise faster. Traditional IRAs can be either deductible or not. A non-deductible IRA doesn’t allow you to deduct your contributions on your tax return, whereas a deductible IRA allows that. A Roth IRA requires you to pay taxes on the money you contribute upfront, enabling your money to grow tax-free, and you pay no taxes when you retire. You or your employees can create and fund their own IRAs. 401(k)s from a former job could also be rolled over into an IRA. 

SEP (Simplified Employee Pension)

  • A SEP IRA is a tax-deductible account for self-employed persons or small business owners, including freelancers. SEPs work similarly to traditional IRAs in that contributions aren’t taxed until withdrawn. This sort of account, which an employer or a self-employed individual may set up, allows the employer to contribute to their employees’ accounts. They provide a more significant contribution maximum, on top of traditional or Roth IRA contributions.

SIMPLE IRA (Savings Investment Match Plan for Employees)

  • Another form of tax-deductible account for self-employed persons or small business owners is a SIMPLE IRA. As opposed to SEP IRAs, employees and not only employers, can contribute to it. SIMPLE IRAs additionally require the employer to make a dollar-for-dollar match of up to 3% of an employee’s salary or a flat 2% of pay, regardless of whether the employee contributes or not.

Solo or Individual 401(k)

  • A solo 401(k) is an individual 401(k) for a self-employed individual or small business owner who doesn’t have any employees. Solo 401(k)s operate similarly to traditional 401(k) plans offered by larger corporations and organizations. They, like IRAs, are available in both traditional and Roth forms. Contributions can be divided equally between the two.

Defined benefit

  • A defined benefit plan, like a pension, is a form of retirement account that the employer sponsors. When you retire, your employer determines a fixed compensation depending on criteria such as your income and time spent at the firm. When retiring, you can choose between a lump-sum payout or a monthly “annuity” payment.
  1. Prioritize retirement planning

It’s all so easy to get caught up in the day-to-day activities of running a small business. But no matter what, Carlisle said, don’t make the mistake of ignoring retirement benefits for yourself or your employees.

Make sure that you’re thinking for your future and the future of your staff, regardless of the size of your business, she said. It doesn’t have to be a big start; you may start small and grow from there, as long as you don’t overlook the benefit.

Learn How to Live a Retirement That’s Worth Saving for

The majority of retirement planning advice focuses on how to save enough money to replace your salary.

However, employment delivers us much more than just money. What we do gives many of us a sense of meaning, achievement, and even identity. Work also provides social ties and a structure in our days.

Losing all of that may be unsettling, which is why experts — including those who have already retired — advise planning ahead of time for how you’ll replace those aspects of employment.

In her book “Flipping a Switch: Your Guide to Happiness and Financial Security in Later Life,” Barbara O’Neill, CFP, claims most adults don’t want a life with total leisure. According to her, they desire a sense of purpose,  filled with meaningful days and healthy relationships, and the freedom to do whatever they want, even if that means to keep working.

PICTURE A TYPICAL DAY

A bustle of activity frequently marks retirement as retirees travel, visit relatives, and engage in their favorite activities. However, retirement experts advise picturing a more regular day once you’ve completed some of your bucket list items. From the moment you wake up, how will you spend every hour? With whom would you spend your time? What will you say if someone asks you, “What do you do?”

O’Neill, for instance, doesn’t describe herself as “retired.” Instead, she says that she retired from Rutgers University after 41 years as a professor and is now the owner of Money Talk Financial Planning Seminars and Publications, where she writes and lectures on personal financing.

Indeed, studies suggest that working in retirement is linked with greater happiness. Part-time work may also help with your gradual transition into retirement, according to CFP Shelly-Ann Eweka, senior director of financial planning strategy at a financial company TIAA.

Some individuals get extremely worried about retiring since it seems final, Eweka says. Think about working part-time to have less work and more leisure time so you can ease into it.

TAKE RETIREMENT FOR A SPIN

Before quitting your job, Eweka suggests taking your retirement vision for a spin. Consider taking a two-week vacation to do something you want to do in retirement, like golfing, traveling, volunteering, or caring for the grandchildren. If you intend to relocate to another area, you should consider renting a property there for a few weeks, if possible. This way, you can find if reality meets or exceeds your expectations. If not, you may change your plans before committing, according to Eweka.

Think about how you’ll replace the social interactions you make at work. People who have strong social connections are usually happier, healthier, and have longer lives. Spending more time with family and friends might help you invest in existing relationships before and after retirement. O’Neill suggests setting aside specific days and times to meet regularly, either in person or by phone or video chat.

However, as you age, you’ll lose connections since people die or move away. According to O’Neill, volunteering, joining community groups, or simply getting to know your neighbors better may help you meet new people. Companionship from a dog, cat, or other pet can also help improve one’s well-being.

LIVE WITH A PURPOSE

Without the framework of employment, some individuals begin to drift, with one day blending into the next. Setting objectives and working toward them can help restore a feeling of purpose and accomplishment, says O’Neill.

O’Neill began her post-Rutgers life with five goals: finishing the book she was working on, remaining active in financial education, cultivating friendships, doing a lot of fun and new things, and staying healthy by walking 10,000 steps daily, consuming nutritious foods, and getting at least seven hours of sleep every night. Taking care of your physical wellbeing is critical, as indicated in 2014 Merrill Lynch research, showing that 81% of retirees named good health as a vital element for a happy retirement.

According to O’Neill, achieving precise, quantifiable objectives can help people reframe their idea of productivity, which is essential to many people’s feeling of self-worth. Goals might also help counter a tendency to procrastinate.

People accustomed to saving and deferred gratification may have difficulty “flipping the switch” to spending and enjoying their life, says O’Neill. However, time, good health, and energy aren’t limitless. Many individuals in her 55+ community in Ocala, Florida, struggled during the pandemic, she says, not just because their plans got canceled but also because they were acutely aware that the clock was ticking.

It wasn’t simply two years gone; it was two good years, adds O’Neill. You can’t know how many of those you have left.

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