The 401(K) is a private-sector retirement saving and investment plan offered by US employers. It is a defined and tax-deferred contribution retirement plan relied upon by nearly half of workers in the retirement sector, who, amongst other things, enjoys the relative flexibility it offers.

As an employee who is 21 years or older and has completed a minimum of 12 months of service, your 401(K) can be one of the most powerful retirement security tools at your disposal. 

According to Fidelity (a brokerage firm that manages retirement plan services), a record of 441,000 accounts, mostly 401(K) under its care, have balances of $1 million or more. This high index of millionaires signals the towering saving rate of employees in the 401(K), IRA, and other employer-sponsored plans.

Like every other retirement plan, starting early with the 401(k) plan and staying consistent can result in a million dollars or more in your retirement plan balance by the end of your career.

Along with all the other data that this table reveals, the following is true that while saving up to $1 million may sound herculean, an early start with a monthly investment of as low as $150 and the best annual returns can make it happen. While this discovery is thrilling and encouraging, it also raises the question, "Why is every 401(k) account holder not a millionaire at retirement?"

The simplest answer to this is “life happens.” The plan to hit the $1 million is set; you are committed to seeing it to fruition, but then you get laid off, an emergency medical expense comes up, or a severe injury renders you incapable of working.

When one’s only source of savings and investment is the 401(k) and an unexpected need that requires urgent attention arises, the only line of action would be resorting to this retirement plan. Unfortunately, any withdrawal from the 401(k) account by a holder below 59 ½  years attracts high taxes and a 10% penalty; this is the other side of the coin that usually chokes the $1 million or more retirement plan dream.

While the benefits of using the 401(k) account are enormous, it allows flexibility, easy payment (through direct-payroll deductions), amazing investment returns, and, paramountly, a tax advantage, as the contributions are taken out of your paycheck before the income tax. 

However, channeling all savings and investments into this retirement plan while relying on the rest of their monthly income for day-to-day sustenance is risky, as there are too many uncertainties in life to bank on survival and retirement plans.

For ages now, uncertainties have been accepted as an integral element of simply staying alive. Unforeseen circumstances like a chronic disease, an accident, a court case, and even a child's lofty ambition might require more funds than the rest of your monthly paycheck can provide. 

If all you have is split between your pocket and the 401(k), you are probably setting yourself up for a monumental financial collapse.

By preparing for uncertainties and other priorities outside your 401(k), you are better positioned to let your 401(k) grow throughout your career to reach that 1 million dollar milestone.

Retirement security is amongst the best investments any employee can make. For a 21-year-old who is just starting his career journey, 40 or more years might seem a far way off. This is why planning for retirement is usually procrastinated by many until the "rush hour." 

However, since "the easiest way to make your dream come true is to start early," an early start with an investment plan like the 401(k) will enable you to achieve your retirement goals. For those who are yet to start, "it's never too early to begin," hence starting today and staying committed to the goal will equally guarantee a secured retirement. 

Nevertheless, to make the 401(k) plan work best for you, have it as part of a balanced financial plan; have a supplemental retirement savings account, and your journey to retiring a millionaire will be smooth.

Just like every other year, Social Security recipients are expected to get a cost-of-living adjustment (COLA) next year. And with the steep rise in the price of everything from gasoline to cars and bacon, the adjustment may be higher than most we’ve seen in the past few years.

CNBC estimates that the 2022 COLA could be as high as 5.3%, which would be a huge increase from the 1.2% for 2021.

The 5.3% 2022 COLA estimate was calculated by a non-partisan seniors’ organization, ‘The Senior Citizens League’ using the Bureau of Labor Statistics Consumer Price Index data up until May this year. However, the possibility of such an increase depends on several factors, including how the economy performs until October and whether the federal reserves will raise interest rates to counter the inflation.

The Social Security cost-of-living adjustment (COLA) for 2022 would typically be announced in October, and based on the current inflation rate, a 5.3% increase is quite feasible. If it happens, it would be the largest since 2009 (after the 2008 depression) when the COLA was 5.8%.

In a recent FedSmith.com column by an author and human resources expert, Ralph Smith, the inflation, which has risen 5% over the past year, is the most significant jump in over 12 years. He noted that the May inflation rate was way higher than anticipated and would likely rise again by the end of June.

 “While we can’t certainly predict the exact percentage of adjustment retirees would receive in 2022, we know that there would certainly be an increase.” It will be different from most recent years when there was no increase.

Preparing for retirement is the goal of everyone who has the wits to plan for the future. However, setting up a personal retirement plan and sticking to it can be a monumental task. Thankfully, several tools can help you achieve your saving plans, such as Indexed Universal Insurance (IUL) and an employer-sponsored 401(k).

Both retirement plans possess similarities; however, they offer distinct advantages in helping you prepare for your retirement. This article provides an insight into both plans and how they benefit saving towards your retirement.

Indexed Universal Insurance is an insurance policy provided by an insurance company; here, the insurance policy covers your entire lifetime as long as you continue to make your payments. With the Indexed Universal Insurance, the insurance company pays a death benefit to your beneficiaries in the event of your demise.

A 401(k) is an insurance policy provided by your employer, which lets you make tax-advantaged contributions for retirement. With a 401(k) retirement plan, deductions are made through a salary deferral. The IRS regulates the 401(k) insurance policy; they limit the contribution made towards your retirement plan.

Indexed universal insurance allows you to build up savings that you can borrow against alongside securing a death benefit for your family and loved ones. A 401(k), on the other hand, offers you the option of investing on a tax-deferred basis; you also get to enjoy tax deductions for your contributions.

Both insurance policies are effective in helping you plan your retirement. Nevertheless, there are a few differences and benefits that separate one from another.

A 401(k) plan offers the benefit of free money, thanks to an employer matching contribution, which aids in growing your retirement savings. However, with an indexed universal insurance plan, all premiums must be paid by you.

A 401(k) plan also offers you the option of investing in index mutual funds or exchange-traded funds; however, you are not limited to those choices. Alternatively, you can invest in other securities and time-based funds with respect to your risk tolerance and saving goals. 

It gets even better; with a 401(k) plan, there is no cap on your return rate as the performance of those investments backs it. 

However, this is not the case with an Indexed Universal Insurance plan. Here, the returns are determined by the underlying index’s performance, which means that you earn a higher or lower interest rate based on the index’s performance. Furthermore, the insurance company places a cap on the returns of investment every year, irrespective of the performance of the underlying index.

It is important to note that one of the significant advantages of the Indexed Universal Insurance plan over the 401(k) plan is that it provides a death benefit to your loved ones. In a 401(k) plan, the money saved during your working years can only be accessed upon retirement, specifically when you are 72 years of age.

With the 401(k) plan, unless you are 60 years of age, you cannot take loans from saved-up funds without a penalty unless it is for medical emergencies, and you would still owe an income tax on the distribution.

The 401(k) plan is designed so that if you still work for the same employer at age 72, you are required to withdraw minimum amounts or face a tax penalty of up to 50% of your expected withdrawal.

However, with the Indexed Universal Insurance plan, a percentage of your insurance premiums is paid to a cash-value account, which you can borrow at any time. However, any unpaid loan is deducted from the death benefit at the time of your death; compared to a 401(k) plan, your beneficiary would inherit any outstanding loan.

While indexed universal insurance and 401(k) are retirement plans that help you save for the future, they are not entirely similar and cannot be substituted for one another. A 401(k) might be an excellent place to start preparing for retirement, as your workplace provides it. 

However, you may still opt for the Indexed universal insurance in addition to your workplace retirement plan, as a 401(k) plan includes investment fees as well as fees on the 401(k) plan. Moreover, the Indexed universal insurance helps you access life insurance and a guarantee of income for your loved ones in case of your demise.

Nevertheless, if you are unsure what plan is best for you, kindly consult a financial advisor to help you make the most of your 401(k) plan and help you decide if the indexed universal insurance is right for you.

The thrift savings plan (TSP) is arguably the most extensive contribution plan available. It is the go-to plan for Americans who want a secure and dependable retirement plan. 

For many years, federal employees have trusted the TSP with their retirement savings for almost their entire professional life: enjoying the flexibility, low service fees, and convenience of using this savings plan.

However, upon retirement, these employees can transfer all the funds to an eligible employer plan or an individual retirement account (IRA). 

Nevertheless, many have chosen to keep their retirement savings in the Thrift Savings Plan because of the length of years and trust of using the TSP. 

However, the question to be answered remains: Is leaving your money in the TSP the best decision? Is there a guarantee that things would remain the same as it borders reliability and safety? This article gives answers to the above questions.

It is important to note that funds cannot remain indefinitely in the TSP account after retirement. Every April 1st, federal retirees at the age of 72 are required by law to take the Required Minimum Distribution (RMDs) from their TSP accounts. 

By extension, taking RMDs means federal retirees at the age of 72 will now be required to pay for deferred taxes over the years.

This new policy changes the question automatically from: “Should I leave my money in the TSP?” to “What Will My Tax Bill Look Like Upon Retirement?”

The answer to this question is uncertain; however, one thing is sure about future tax rates: they will not be constant. Hence, while the idea of leaving money in the thrift savings plan seems like a good idea, the thought of unpleasant future taxes is one that federal retirees must consider before going along with the TSP. 

Nevertheless, the beacon of hope is that federal retirees can reduce the risk of future tax by putting money in Roth TSP accounts, which allow taxes to

 be paid on money saved towards your retirement, to the end that all future withdrawals would be tax-free. 

Furthermore, the TSP has limited investment opportunities compared to other tax-favored retirement accounts. For instance, IRAs permit you to invest in various assets, including stocks, bonds, mutual funds, and REITs. However, TSP has only five core funds, four of which are indexed.

The Thrift Savings Plan (TSP) is one of the most prominent retirement accounts, with countless benefits and profound flexibility. Its unbeatable bonds and low-cost funds are a few of the numerous benefits that its users enjoy. 

However, it also has a few disadvantages, which may cause federal retirees to question their decision to leave their money in the TSP. 

Nevertheless, a clear assessment of your intended post-retirement lifestyle and some advice from a financial professional will help you answer the question: "Is Leaving Your Money In The TSP A Good Idea?"

Contact Information:
Email: [email protected]
Phone: 3604642979

Bio:
After entering the financial services industry in 1994, it was a desire to guide people towards their financial independence that drove Aaron to start Steele Capital Management in 2013. Armed with an extensive background in financial planning and commercial banking coupled with a sincere passion for helping people, Aaron has the expertise and affinity for serving the unique needs of those in transition. Clients benefit from his objective financial solutions and education aligned solely with
helping them pursue the most comfortable financial life possible.

Born in Olympia, Washington, Aaron spent much of his childhood in Denver, Colorado. An area outside of Phoenix, Arizona, known as the East Valley, occupies a special place in Aaron’s heart. It is where he graduated from Arizona State University with a Bachelor of Science degree in Business Administration, started a family, and advanced his professional career.

Having now returned to his hometown of Olympia, and with the days of coaching his sons football and baseball teams behind him, he now has time to pursue his civic passions. Aaron is proud to serve on the Board of Regents Leadership for Thurston County as the Secretary and Treasurer for the Morningside area. His past affiliations include the West Olympia Rotary and has served on various committees for organizations throughout his community.

Aaron and his beautiful wife, Holly, a Registered Nurse, consider their greatest accomplishment having raised Thomas and Tate, their two intelligent and motivated sons. Their oldest son Tate is following in his father’s entrepreneurial footsteps and currently attends the Carson College of Business at Washington State University. Their beloved youngest son, Thomas, is a student at Olympia High School.

Focused on helping veterans and their families navigate the maze of long-term care solutions, Aaron specializes in customized strategies to avoid the financial crisis that care related expenses can create. Experience has shown him that many seniors are not prepared for the economic transition that takes place as they reach an advanced age.

With support from the American Academy of Benefit Planners – an organization with expertise and resources on the intricacies of government benefits – he helps clients close the gap between the cost of care and their income while protecting their assets from depletion.

Aaron can help you and your family to create, preserve and protect your legacy.

That’s making a difference.

Disclosure:
Disclosure:
Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice filed, or is excluded from notice filing requirements. BWM does not accept or take responsibility for acting on time-sensitive instructions sent by email or other electronic means. Content shared or published through this medium is only intended for an audience in the States the Advisor is licensed in. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this transmission is strictly prohibited. If you receive this communication in error, please immediately notify the sender. The information included should not be considered investment advice. There are risks involved with investing which may include market fluctuation and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making an investment decision.

Confidential Notice and Disclosure: Electronic mail sent over the internet is not secure and could be intercepted by a third party. For your protection, avoid sending confidential identifying information, such as account and social security numbers. Further, do not send time-sensitive, action-oriented messages, such as transaction orders, fund transfer instructions, or check stop payments, as it is our policy not to accept such items electronically. All e-mail sent to or from this address will be received or otherwise recorded by the sender’s corporate e-mail system and is subject to archival, monitoring or review by, and/or disclosure to, someone other than the recipient as permitted and required by the Securities and Exchange Commission. Please contact your advisor if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Additionally, if you change your address or fail to receive account statements from your account custodian, please contact our office at [email protected] or 800-779-4183.

Saving for retirement will always be the right thing to do. A thrift savings plan is one of the most secure retirement plans a federal employee can employ in saving towards retirement. 

The TSP is one of the three sources of income of the Federal Employee Retirement System alongside Social Security and FERS annuity. 

However, it is the only income source amongst the three that allows complete control of the contribution to the employee. Hence, it's regarded as the most flexible federal employee retirement system.

The power of choice the TSP affords federal employees is second to none. However, many of these employees are left in the dark, not knowing how to get the most value from their savings in the thrift savings plan and guarantee a better retirement. 

Suppose you fall under the category mentioned above. In that case, you can maximize your TSP and get the most value if you pay attention to the following tips:

PUT SAVINGS IN ROTH TSP: 

Roth TSP allows you to make savings after tax deductions. This means that all money in the Roth can be withdrawn after retirement without paying future taxes. It is advisable to put money in Roth, as it holds more value because it is tax-free. 

START CONTRIBUTING EARLY: 

The importance of saving towards retirement cannot be overemphasized. Moreover, it is important to start early. While in the early stages of a federal job, the income might be small; committing a part of it to your retirement plan will always pay off in the long run.

CONSTANTLY INCREASE YOUR CONTRIBUTION: 

This should be like an automatic response to every raise in salary. To make the most of your TSP, you need to make constant increases in contributions yearly. It does not have to be every cent of the extra income; however, a minor increase in your savings towards retirement will make a significant difference. 

AVOID THE TEMPTATION TO BORROW FROM YOUR TSP: 

Unforeseen circumstances, an unchecked appetite for flashy things, and the like can spur anyone to borrow from his TSP account. The TSP is designed to make money work for you, and sadly, borrowing defeats that course. Although we understand the case of borrowing for medical emergencies; however, if you can avoid it, do not borrow from the fund. 

ALWAYS CONSULT AN EXPERT: 

A poorly calculated move in your TSP account could prove damaging to your past efforts. To minimize the chances of this, always consult a professional before making any major decision, as some mistakes may prove too costly and are sometimes irredeemable. 

Life after retirement could be exciting or challenging. It all depends on the choices you make today. Make the most of your thrift savings plan and follow the tips mentioned in the article. 

The Thrift Savings Plan is a contribution plan designed for retired and active staff of the US federal civil service & uniformed services. It is currently the most extensive defined contribution plan globally, relied upon by its users for a financially secured senior adulthood. 

Unfortunately, public sector retirement plans, including the TSP, could be facing some uncertainties in the coming months. The news making headlines is not a pessimistic guess but a gloomy prediction signaled by a surprising factor – climate change. 

In the last few weeks, record-breaking temperatures have been registered across the United States. Within the last month, the Pacific Northwest has experienced an alarming wave of rising temperatures, with the primary concern being the rate at which the temperatures increased.

While temperatures have cooled on the east coast, climate change discussions are heating up with average temperatures returning.

Various climate-related agencies have raised concerns, shockingly notable retirement savings organizations like the 401(k) social security administration and the Federal Retirement Thrift Investment Board (FRTIB): responsible for managing the thrift savings plan has also raised several concerns about the financial risks posed by this level of climate change. 

The impacts of climate change could extend to TSP investments. Factors like economic loss, shifts in consumer preferences, technology changes, and government policy, all of which may result from climate change, are likely to influence investments.

In response, the House and Senate Democrats have introduced legislation that would establish an advisory panel within the Federal Retirement Thrift Investment Board, tasked with analyzing how climate change may impact employee benefits.

The White House and Labor will also assess the FRTIB's approach to climate-related economic risks.

Following these growing concerns, every responsible institution and organization has jumped into action to reassure TSP account holders, and more so, protect these investments. 

The Presidency: 

In response to these growing concerns, the US president, Joe Biden, has issued an executive order directing the labor department to protect US workers’ life savings and pensions from climate-related financial risks. He further instructed the FRTIB to take environmental & climate-related financial risks into account and report on their findings within the next few months.

The Government Accountability Office: 

The investigation arm of the government has consulted with environmental experts from Japan, Sweden, the United Kingdom, and other countries that have taken measures to protect retirement plans in the public sector from climate change. The GAO also reinforced the president's directive on assessing the dimension of this relationship and providing a detailed report.

The Federal Retirement Thrift Investment Board:

This is the TSP's administrative body. Through its executive director Rave Deo, the Federal Retirement Thrift Investment Board has reassured participants that there is no course for alarm. The agency's executive director highlighted that TSP has a broad set of market opportunities with a strict indexing discipline, pointing out that risk in one sector affected by climate change will not necessarily translate into trouble for all. 

Toward the end of the previous administration, the FRTIB pushed a plan to use the China-inclusive benchmark for their investment. This move was intended to give TSP participants access to stocks from more than 6,000 companies in 48 developed and emerging markets. 

If this move had been approved, experts believe it would have improved the anticipated TSP returns and reduced the dependence on investing in sectors that can be easily affected by climate change. 

However, this plan was not approved at the time due to the administration's unwillingness to allow federal employees to invest in China. Nevertheless, given the current climate change concerns, all fingers are crossed, awaiting the final decision when the plan is reviewed – hopefully soon.

In a bid to minimize climate change, the Restructuring Environmentally Sound Pensions In Order to Negate Disaster (RESPOND) advocates divestment from fossil fuel companies. However, withdrawing investments from them would drain four of the five TSP funds. 

The FRTIB objects, stating that "it is currently not feasible. However, setting up a 'climate change' fund would be a good start." The FRTIB has also advanced to offer a mutual fund window, which will start operation by next summer. This new fund will give TSP participants a chance to withdraw a portion of their accounts and invest in a mutual fund of their choice, allowing the option of investing in other funds besides the plan's core five.

Although the TSP and climate change are supposedly linked, the relationship is rather complex. Nevertheless, further investigation is being conducted to unearth this unpopular tie ultimately: with the FRTIB promising to work with the labor department and independent consultants to review climate-related financial risks and complete a new investment review in fiscal 2022.

Typically when people hear about fixed annuities, they usually think of retirement. But you can do so much more with annuities. It can come in handy if you want to give money to charity, delay your Social Security, or leave money for your dependents.

Compared to other financial tools, annuities are not particularly flashy. In exchange for premium payments or a lump sum, fixed annuity contracts generates a moderate return, currently about 1.5% to 3% annually, delivering a stable and guaranteed income stream for the rest of your life and even that of your spouse. It’s like having a pension plan, and you can set up an immediate annuity with a large sum and start earning straight away. There’s also the option of paying a series of premiums (either monthly or annually) over a specific period for a deferred annuity that starts paying you at a later date. Once you start withdrawing the annuity payments, you’ll stop paying the premiums.

Some annuities can be set up with as little as $5,000, but that will also impact the returns you get. Typically, the higher you pay for an annuity, the higher your income would be. For instance, if a 67-year-old man purchases a $250,000 fixed immediate annuity, he can earn up to $1,252 monthly for the rest of his life. To generate the same amount of monthly annuity earning at retirement, a 55-year old would have to contribute about $1,800 monthly for the next ten years leading up to retirement.

Annuities haven’t always had an endearing reputation, and there are a few reasons for that. At the top of it are the high fees, and commissions annuity insurers charge. There’s almost a fee for everything. For instance, you’ll be charged a surrender fee once you pay a lump sum to an insurer and want it back. So if you later change your mind or need to tap into the money due to unforeseen situations, you'll pay a fee that can be as high as 7% of the withdrawal amount (although it declines by 1% each year until it disappears altogether). Because of its complexity and costs, annuities require more research and guidance from a financial professional who is impartial and wouldn't get a stake in making you buy a contract.

Fixed annuities are simpler, have more predictable returns, and lower costs compared to indexed and variable annuities, which are usually complex and expensive. Fixed annuities are also surprisingly versatile and go beyond generating income for retirement. Annuities generally have become much more consumer-friendly and multipurpose over the last few years. Depending on your setup, you can use annuities to pay for long-term care, simplify your estate planning, or better manage your retirement income. There are also fixed annuities designed for specific purposes like donating to charity and reducing the required minimum distribution (RMD) from a traditional retirement savings account (RSA).

Adopt the Bucket Strategy For Annuities

Since the payment from fixed annuities is static, retirees will know how much they will be earning beforehand. This will be particularly beneficial in helping people manage their retirement income, especially in the early years when retirees typically want to do more.

To keep to your budget, you can divide and invest your money into multiple annuity contracts using the bucket strategy that involves allocating funds for short-term, intermediate-term, and long-term expenses. For instance, if you have just retired, one of the annuity contracts could be set to start paying now, and another contract can be structured for when your spouse retires in a few years. A third contract could be structured to start paying in 15 years when you expect to have higher medical bills. That way, you will receive some money for your immediate needs while the deferred annuity contracts will continue growing to generate higher future payments.

Try A Bond Market Hedge

As a short-term investment, annuities are usually alternatives to certificates of deposits (CDs), bonds, and other fixed-income investments. However, your annuity options aren’t limited to just lifetime payments. You can set up your annuity payments for several years, which offers a unique perspective when investing.

CDs currently pay next to nothing. Although bonds pay more, they come with so much risk when interest rates rise and bond prices fall. I asked a client who has been investing in bonds for over 20 years if he thinks the interest rates will go up in the next 20 years (it was just a rhetorical question). His response was, "Of course they will, and when they do, these bonds will get hammered." That covers the risks with bonds. When interest rates rise, people holding long-term bonds can sell them at market price or for a loss to buy better-paying bonds; so fixed annuities offer a better deal. They pay significantly higher than certificates of deposits (CDs) and don’t have the risks associated with bonds.

You will continue to earn the same amount of returns even if interest rates go up, and at the end of the contract, get your deposit back. If you’re considering a bond market hedge, then structure a fixed immediate annuity to pay out once in two or three years, so if interest rates rise, you’ll get your money back to take advantage of it.

Transferring Wealth to Your Heirs

An annuity contract also comes in handy when you want to transfer wealth to others. There are several ways you can do this. One is to buy an annuity with a death benefit, such that the remaining value of the contract is paid out to your beneficiary. There’s also the option of a joint annuity. You can buy a joint annuity for you and your spouse, child, or just about anyone else. The earnings from the annuity will come to you first and then continue going to your survivor.

It is, however, essential to note that these inheritance strategies may reduce the amount of monthly income you get from an annuity contract. For instance, if a 70-year-old man purchases a $300,000 fixed annuity, he will receive about $1,960 monthly if the payments last for the remainder of his life. However, if he structures the $300,000 fixed annuity with a 20-year guaranteed payment, he will receive around $1,538 monthly. If he dies within 20 years, his heir will get the remaining payments from the annuity. If he takes a joint annuity the annuity will pay $1,142 monthly as long as one of them is still alive.

Annuities have two advantages. One is that it can help rein in on a wasteful heir. A father who is worried about his adult child’s extravagant spending can set up an annuity death benefit to be paid overtime. Instead of one lump sum, the annuity can be paid in moderate sums over 10 years.

The other advantage of using annuities for transferring wealth is that it helps spread the tax impact on your heirs since they will only have to pay taxes on the annuity payments when they receive them. Although an annuity contract bypasses probate and allows the beneficiary to inherit the contract immediately, the value of the contract at the death of the annuitant still counts as part of the estate and is subject to estate taxes.

Delay Social Security

If you are still debating about when best to file for social security, one of the options you have is to buy a fixed annuity so you can delay claiming your benefits for a few more years. Although the minimum age to file for social security is age 62, you can grow your monthly benefits dramatically by waiting a few more years until you are 70 to start taking your benefits.  

This can make a huge difference in your retirement financial stability. For instance, if someone was supposed to get a $708 monthly benefit by filing at age 62, it increases to $1,013 monthly when he or she files at age 67 and $1,253 at 70. This monthly benefit lasts for your entire life and continues for low-earning surviving spouses, who can swap their smaller amounts for bigger benefits when you are no more.

There are, however, some limitations when using an annuity as a substitute for Social Security. For instance, if you die early in retirement, you won’t have any bucket of Social Security to give to anyone asides from your spouse (spousal benefit). So in search of a higher monthly benefit, you have spent assets that you could have left to your heirs. This strategy is more suitable for retirees in good health that want more reliable retirement income.

Buy Long-Term Care Coverage

Some annuities offer long-term care coverage. So you can buy a long-term care rider, and a portion of the annuity will be set aside for your care; while your heirs get any unspent money. It even gets better. Under the pension acts, long-term care payments are tax-free, including any investment gains from the annuity. So you won’t be burdened by taxes. Another benefit is that the underwriting for annuity contracts with long-term care coverage is easy.

For individuals with healthcare issues, who may not qualify for standalone health insurance coverage, buying this type of annuity can be a great option. If you don’t have any health issues and still want more coverage in addition to the long-term care annuity, you can buy standalone health insurance and use the earnings from the annuity to pay for the premiums. Pure health insurance policies usually have more benefits and cover more health-related expenses.

Qualify for Medicaid Faster

Typically, you’ll need to deplete most of your assets to qualify for Medicaid. While the requirements differ amongst states, you’ll typically need to have spent all your assets to less than $2,000, with exception of the value of your residence and vehicle. Instead of having to spend your money to qualify for Medicaid, you can keep more of it by buying a Medicaid-compliant annuity.

This type of annuity will pay you income for life and doesn’t count towards the Medicaid asset test, which will make you qualify faster. For the annuity contract to be Medicaid-compliant, payment must start immediately, and the state will be named as the beneficiary. So the state will get the remaining payments from the annuity when both you and your spouse die.

Give Money to Charity

If you want to leave some money for a charity while also generating an income for yourself, a charitable annuity can help you achieve that and get a sizable upfront tax deduction. For instance, instead of writing a check, an individual who wants to donate $150,000 to a charity can buy a charitable gift annuity contract for that amount. With this, the annuity will make a lifetime payment to the donor, and another beneficiary. It could be a spouse or any other person.

The donor will also get a partial deduction on the $150,000 contribution in the year the annuity is set up. Only a part of the contribution would be tax-deductible because the IRS considers the rest to be an investment to generate future income.

The annuity provider will calculate the total deduction applicable based on the age of the donor and the beneficiary, and the amount of annuity payment expected. Upon the passing of the donor, the charity will receive the remaining value of the annuity contract.

This strategy is a little bit complicated but makes sense in specific cases. It can be beneficial if you have a larger-than-normal taxable year. Like if you sold your business or a rental property for a large amount. Buying a charitable annuity can help you balance out the tax hits.

Some people also use this charitable gift annuity strategy to donate to charities and minimize their estate taxes since the money used for the annuity will not be part of the taxable estate.

It is, however, essential to note that once you purchase a charitable gift annuity contract, the money is gone; since the contract is irreversible. Additionally, the income from charitable gift annuities is smaller compared to ordinary fixed annuities. This strategy is more suitable and common for large five to six-figure donations. It’s rare to see $5,000 to $10,000 charitable gift annuities.

Regardless, if you have the asset to spare and want to support a charity, it could be an effective way to do that. Not only could you buy the initial charitable gift annuity, but you can also double down by donating any income you don’t need from the annuity contract.

Reduce Your Required Minimum Distribution (RMDs)

Using your retirement savings in IRA and 401(k) accounts to buy an annuity contract held in the retirement account may seem like a complete waste of time. Some people even advise against it. Especially since one of the benefits of such a move is the delay of taxes on annuity gains until the money is taken out, and that benefit is already obtainable from IRAs and 401(k). Another reason why most downplay the need to invest in retirement annuities is that the money is withdrawn from a retirement account, whether through an annuity or any other type of investment, is taxed the same – as ordinary income.

Investing in a fixed annuity inside a retirement account won’t reduce or stop the required minimum distribution either. Once a retiree turns age 72, they must have to make the mandatory RMD, which is calculated by the IRS based on the total value of the retirement account (including annuities).

What you can do is to meet this requirement by collecting annuity payments and cashing out other investments. You can also take out more than the scheduled annuity payments. Some annuity providers can waive any surrender charge that applies when tapping into your account early.

But if you don’t want to make an RMD at all, then you can transfer part of the money in your retirement account to a qualified life annuity contract. By doing so, the amount transferred into the deferred annuity account no longer counts in your RMD calculation, and the income from it, which also doubles as your distribution, can be delayed until you clock 85. So, in essence, you’ll reduce your RMD while also creating a lifetime income.

This can also be done within your retirement account. So instead of making a taxable withdrawal, you can buy the annuity contract and keep deferring your taxable gains until whenever you start receiving payments.

Conclusion

Whatever you choose to achieve with an annuity, it is essential to shop around. There are hundreds of annuity companies, and every one of them has different benefits and rates on their contracts. Shopping around is the only way you can find better terms that can make a huge difference, especially since it's a lifetime purchase.

Deciding the ideal time to claim Social Security benefits may seem easy, but it can be nerve-wracking, especially since it’s permanent. If you file for your claim at age 62, your monthly benefits would be 72% lower than if you wait until age 70, and it’s extremely difficult to reverse course once you go all in.

But it’s not entirely impossible. There are certain scenarios where you can get the opportunity for a do-over. Here are the four ways to undo your decision and file later to get a much more significant Social Security benefit.

1. Withdraw Your Application

You can withdraw your Social Security application within the first 12 months you started receiving benefits. To do this, you’ll need written consent from anyone in your family to receive benefits based on your application. Cancellation would also require that you repay all the Social Security benefits you’ve received up until that moment, including any money you withheld from your check for Medicare premiums and taxes.

Once your application is successfully canceled, you can then reapply some other time in the future.

Note that you are only allowed one more withdrawal in your lifetime if you cancel your application. Once you file again for your benefits, you won’t be able to make any cancellations.

Additionally, it’s not easy for most people to pay back a year’s worth of Social Security benefits. So if you’re planning to file for Social Security to get cash for a short-term issue and then withdraw your application later on, then you should think carefully because you may just be stuck with it.

2. Suspend Your Benefits

If you attain full retirement age (FRA), which could be 66 or 67, depending on when you were born and is the age when you qualify for primary Social Security amount, you can still suspend filing for your claims. Doing so would allow you to accrue 8% delayed retirement credits each year until you hit age 70. You can file for your benefits anytime you want within this period or hold out until your 70th birthday. If you still haven’t filed by then, the Social Security administration would automatically restart your benefit.

3. Return to Work

You can file for Social Security benefits even if you’re still working at age 62, but that will significantly reduce your monthly checks. If you start receiving your benefits while still working and before you reach full retirement age (FRA), Social Security will withhold $1 from your benefit for every $2 you earn above $18,960 from employment (in 2021). The year which you reach FRA, Social Security will withhold $1 in every $3 you earn above $50,520.

The good news is that the money withheld isn’t going anywhere. Once you reach the full retirement age (FRA), Social Security will increase your benefit amount to account for the money withheld. So if you want to go back to work when already receiving your benefits, you can do that knowing that the money withheld will eventually be returned to you.

4. Switch To Spousal Benefit

It’s possible to get a higher benefit by switching to the spousal benefit. Typically, this option is only open to individuals whose spouse has not started collecting their benefits yet, and you have to make the switch when your spouse files.

Also, suppose you were born before January 2, 1954, eligible for disability or caring for a disabled child under 16. In that case, you can file for Social Security spouse benefits using your records and get a higher amount of benefits.

With spousal benefit, you can earn up to 50% of your spouse’s primary retirement amount, but only if you’ve reached full retirement age (FRA). You won’t earn any delayed retirement credit by waiting past the FRA. You won’t also receive 50% of any delayed benefit credit your spouse earned. Since 50% is the maximum number, the spousal benefit is only a good option if your spouse earned significantly higher than you.  

By now, there’s no doubt that many people acknowledge the 401(K) plan as a powerful retirement savings vehicle. It offers benefits synonymous only to free money amongst others. Despite the importance of 401(k),  some people do not know about owning their employer's match.

Most employees work for years in an institution before the company's 401(k) match becomes their money; nonetheless, it is essential to note the following baseline reasons why this happens.

BASELINE REASONS FOR EMPLOYEES INABILITY TO FULLY CLAIM THEIR EMPLOYERS MATCH.

For each employer, company, and even employee, the following baseline has been drawn as the reason behind employees not fully earning their company's match: 

Access to the 100% Match. A statistic drawn from the news shows that less than a third (28%) of corporations offer sudden 100% employee ownership of company contributions to 401(k) accounts. 

The Vesting Schedule refers to the duration required of an employee by the employer to stay in service before being eligible to own the company's matching contribution fully. This duration can span from up to one year (13%) to six years (10%).

Employees' Contribution rate. Regardless of the possibly excessive length of investing times, professionals explain the risk and strain of contributing at least enough amount to reach the point of earning your company match.

Employees operating the 401(K) investment plan get a specific value as an employer match for every portion of their contributions, but this does not guarantee immediate ownership of the real money. As shown by researchers, about 82% of companies or employers that offer traditional 401(K) plans affirm that they match the contributions of their employee's working account by a specific rate. A small percentage (28%) of employers entitle their employees to be immediate and full ownership of the match contribution.

The stipulated time a worker is allowed to work in a company before gaining undisputed access to the matching contribution from the company is called the vesting period. Renowned people like Robyn Credico, a managing director at Willis Towers Watson, noted that many organizations do not allow a whole vest immediately because they want to reward the older employees. The latter have stayed longer in the company. At the same time, the extra money from unvested short time workers is used for the long-term employees.

Usually, it would take three years before an employee can have full ownership over an employer's match. Still, vesting either happens gradually or all at once. For example, a 20% match is vested per year for gradual vesting. Still, the all at once vesting occurs after the overall vesting period.

The Bureau of Labor Statistics noted that the average waiting period of an employee is about 4.1 years. According to an Xperts report, it is more than four years for 28% of employers.

Regardless of the possibilities of a long vesting schedule, it is deemed a worthy risk to pay your contributions as an employee at a rate that will be just enough to get your company's match, even if you think you will not last so long in that organization as their worker.

Significantly, the amount you pay as your 401(k) investment to get your employer's match is not as much as what you save in a year. Career-wise, you may never know what the future will bring, which could result in you staying in a company longer than expected. For this reason, financial planners constantly emphasize continuous saving for retirement.

According to Fidelity Investment, the usual matching formula to achieve a 100% match goes by contributing the first 3% of your salary with a 50% match for the next 2%. With an annual salary of $50,000, for example, to get a 100% match, you will have to contribute about 5% ($2,500)  in a year, which would earn you $2000 as employers match; therefore, giving you a total of $4,500 contribution in a year. 

Going by this formula and probably a 2% annual increase, an employee with $50,000 pay, as in the example above, would have an income worth $69,000 in 30 years. In 30 years, the 401(K) account would sum up to $202,300, and the amount from the company match would be $89,900 (44%) of this match.

Remember that your installments are paid before taxation. Suppose you own a 401(k) plan. This automatically reduces your available pay (and, thus, the amount you pay as expenses), even though withdrawals during retirement are tax imposed. If you subscribed to a Roth plan instead, your expenditures are made when taxes have been collected and tax-free when you come of age.

Furthermore, whether you subscribe to a traditional or Roth 401(k), the firm's match always belongs to the former and is not a taxable income. Also, company contributions do not amount to something as time goes on.

The examination utilized for the XpertHR explanation was performed from March 30 to April 23. It included answers from 452 U.S. managers of different companies and organizations

Retiring as a millionaire isn't as out-of-reach as it may appear. With a bit of saving, investing, and planning, you might be well on your way to a million dollars – or more – by the time you hit retirement age.

Actually, the number of retired millionaires has hit an all-time high, according to the nation's largest provider of 401(k) savings programs, Fidelity Investments. Retirement savers with $1 million or more in their 401(k) balance jumped to 365,000 in the first quarter of 2021, while those with an IRA balance of $1 million or more increased to 307,600.

Here's how to retire as a millionaire:

Start saving well in advance

Saving is essential for achieving nearly any financial objective, particularly if you want to retire with a million-dollar portfolio. The secret, though, isn’t so much how much you save as it is when you start.

“One of the most important elements to success here is to take advantage of your most valuable asset: time,” said Tony Molina, CPA, and Wealthfront’s senior product specialist.

Most experts advise contributing at least 10% to 15% of your income to your retirement fund. But don't be discouraged if you can't contribute that much. Because of compound interest, saving any amount may put you far ahead of your retirement goals.

Compound interest indicates that the money you initially invest will increase over time, on top of the interest you pay in the future.

That is why getting started early is very important.

“Compounding may lead to enormous wealth accumulation,” Molina added. Even if it's only a few hundred bucks every month, it adds up.

Choose a number based on your age.

The earlier you start, the better, but you must also develop a strategy to achieve your goals.

“I see far too many folks save for retirement without a plan. They are just depositing money into an account without knowing whether they’re saving too much, too little, or exactly the right amount,” said Matthew Fleming, CFP and senior financial counselor at Vanguard Personal Advisor Services.

So, how much should you save? Everything depends on when you begin. Here are a few scenarios for reaching a million dollars in retirement, depending on when you start:

Starting at age 20:

Assuming a monthly compounded return of 6%, you should strive to save $364 per month for retirement to achieve $1 million by the age of 65.

Starting at age 30:

Assuming a monthly compounded return of 6%, you should strive to save $704 per month for retirement to achieve $1 million by the age of 65.

Starting at age 40:

Assuming a monthly compounded return of 6%, you should strive to save $1,444 per month for retirement to achieve $1 million by the age of 65.

Starting at age 50:

Assuming a monthly compounded return of 6%, you should strive to save $3,439 per month for retirement to achieve $1 million by the age of 65.

Invest the money

Saving early and continuously investing is the key to meeting your retirement fund targets, but what you do with the money you save will impact how quickly you build wealth.

According to the FDIC, most bank savings accounts today yield an average of 0.03% APY. If you invest it, it’ll go a lot further. Stocks, for example, can offer the growth required to establish a large enough retirement nest egg. In the previous century, the S&P 500 has returned an annualized average of around 10%. Most financial advisors advise combining stocks and bonds to diversify your retirement portfolio.

Another key consideration is the account type in which you invest.

A tax-deferred account, like a 401(k) or an IRA, allows you to delay paying taxes on the money you've invested until it's taken from the account, usually in retirement. Another advantage of a 401(k) is that your employer may supplement your retirement savings by contributing additional funds. Check to see whether your workplace provides matching contributions, and if it does, make sure you're contributing enough to get a full employer match. A Roth IRA, for example, lets you make contributions that have already been taxed but later grow and take the money tax-free.

However, with any account or investment, the younger you are, the more benefits you may derive from saving and investing your money.

“The longer time you have in the markets, the more you profit from the power of compounding, so getting in early is always recommended,” said Fleming.