A 401(k) plan is among the best plans for your retirement savings, and it will give you more money in the future. Your employer sets one up and then matches your contributions to keep it full of money that can grow when investments do well. If you are lucky enough to contribute pre-tax dollars into this account, then all the better because those savings won't get taxed until later after withdrawal. This gives you more money in the long run.

A 401(k) is an excellent way to Save for Retirement, but not everyone has access to one. If you're able to contribute to this plan, it's wise to do so. There are many benefits of a 401(k), such as tax-deferred growth and employer matching. However, it can be tricky to make sure you get the most out of your account with all those different investment options available. With these five strategies, you'll know how much money from your paycheck goes into each option in your 401(k), whether or not there are any fees associated with that option and the types of investments available with the chosen 401(k) investment option.

STEPS TO MAXIMIZING YOUR 401(K).

1. Employer Match

Matched contributions are just one of the many perks that make 401(k)s superior to other retirement accounts. Not only do they come with a bit of free money, but they’re also devoid of taxes until you withdraw your funds. Suppose you have any interest in owning shares or bonds, then this is where all your investments should be.

A significant advantage of 401ks over IRAs is its matched contributions, where every dollar up to a specific limit gets an employer match. Besides, there is no tax on withdrawal and shareholding abilities.

Suppose you earn $60,000 annually, and your employer matches up to 3% of your earnings? This implies that you could have an extra $1,800. If you are not contributing reasonably, then you may be missing out on this great benefit.

2. Increasing Your Contribution Cap

 An additional benefit of the 401(k) is that it has elevated contribution thresholds than many other accounts. In 2021, the maximum amount you can pay into your 401(k) is $19,500 every year (or $26,000 annually for those aged 50 and above). Compared with 401(k), IRAs have a lower annual limit of  $6,000 per year and only increase up to $7,000 annually if one turns 50. 

Not everyone will max out their contributions, yet you need to try as much as possible to increase your contribution cap. The more you save now while your income allows for higher contribution, the better you will be in retirement when money might not come relatively easy. Saving more now will make you financially buoyant. You will enjoy those times you get off work with less worry about how financially secure you will be in the coming years.

3. Enable Automatic Transfers

By enabling automatic transfers, it will be straightforward to track and maintain your savings. This money moves directly into your 401(k) account without entering your bank account, which can make saving more easier before the funds are withdrawn for other purposes.

 The idea of including automatic transfers as part of the monthly budget is also helpful because individuals know how much will go into their 401(k) every month. It encourages them to set aside some cash each month from their income or paycheck that would otherwise not have been directed into an already established retirement fund.

4. Invest Your Money

Suppose you have opened up a 401(k) account? In that case, the next step is to make sure that you are maximizing your account benefit by investing in it.

The first thing you need to do with your new 401 (k) account is to find out how and where those funds are going. If they are still there in cash, then that money won’t grow over time, and when retirement comes, you will have less money than you should have if you invested in the stock market.

You are probably one of those people who have money in their 401(k) account but don’t know what to do with it. Before you go further and keep putting more money into your 401(k) account, you need to know about the stock market.

"Investing in the stock market can be intimidating," says Alexia Vernon-Smith from The Financial Samurai, "but it is one way to generate wealth over a lifetime." Stocks are so important because they provide income and future retirement benefits like pensions or Social Security (both of which cannot cover your expenses when you retire).

It's surprisingly simple to invest in stocks. You can start by opening an account with a company like Fidelity, Schwab, or Vanguard and then invest your money into mutual funds that best suit your needs. Most 401(k) plans offer investment options such as target-date funds, which are hands-off investments, where the fund automatically adjusts the amount of risk it takes based on when you want to retire. Therefore, you don’t have to worry about stock selection since this has been taken care of for you.

5. Reduce Your Fees

Instead of just leaving your retirement account to charge high fees, it's worthwhile to see whether you can lower those fees. Some plans charge higher rates than others. This is a good reason why people who are retiring or about to retire from their jobs might consider looking into other options that could potentially save them money in the long run.

A typical 401(k) offers various investment options. Still, the fees you pay will vary depending on the plan and fund selections you make. The average annual cost is about 1% for total assets under management. Suppose your 401(k) account has $100,000 under management? You will pay fees of $1,000 per year.

Your 401(k) is a powerful tool when it comes to saving for retirement. By taking full advantage of your company's matching contribution and making contributions within the maximum permissible limit, you can make use of this opportunity to grow your money exponentially over time.

 

Choices are what make up the entirety of life as federal or state workers approach their retirement period. Issues, such as decisions about the best retirement date, determining when to start filing for Social Security, and agreeing on how much money to keep, start to arise.

 

Medicare Part B is a critical decision to be made during this period, which sometimes confuses several people. The majority of people usually have a hard time deciding whether they should subscribe to the scheme or not. These life choices are just a preamble of the difficulties involved in Medicare Part B.

 

THE NEED FOR MEDICARE PLAN B.

 

To determine whether you need Medicare Plan B or not, we will be outlining some reasons that may justify your decision below:

 

Suppose you prefer the Medicare Part B program. In that case, you need to worry about whether other benefits, such as the Federal Employees Health Benefits Program, will remain intact.

 

Suppose you decide to choose the Part B plan? In that case, you should be ready to pay the accompanying charges. For example, the significant expense in the year 2021 is $148.50 for each person in a month. Assuming you and your partner are subscribers to this program, there is an additional cost to be made, which accumulates up to $297 per month taken from your retirement savings plan. Don’t forget that all of these deductions will be added to the payment of your FEHBP premium account. IRMAA or income-related monthly dues will be paid only by people who earn high.

 

Then what should you do while keeping all of this in mind?

 

First Choice: Stop your subscription to Medicare Part B and choose FEHBP since you will still have the Medicare benefit of Part A, also known as the hospital insurance, without any additional charges.

 

Second Choice: Subscribe to the Medicare Part B plan and purchase the premium account, which excludes any new modifications to the FEHBP plan. You should note that to enjoy your TRICARE gains, you must possess a Medicare Part B plan. Refer to Section 9 of your FEHBP scheme handout to catch a glimpse of how your subscription relates to Medicare.

 

Third Choice: Subscribe to Part B and differ your FEHBP range. Find an FEHBP scheme that compensates some or all of your Part B dividend and delivers a "wraparound" range with Medicare. That implies that you will have minimal out-of-pocket costs when Medicare is the primary source of your medical maintenance payment. You might conserve more money rather than signing up in Part B or at least spend less in fixed costs than you would spend had you agreed not to enlist in Part B.

 

Fourth Choice:  Part B enrollment can be impeded without worrying about fines since you are already under a current employee health insurance scheme. You may decide to subscribe to a particular enrollment time that falls within your retirement age and your partner's retirement age if both of you are still covered under the health insurance plan.

 

Fifth Choice: Delay Part B for more than a year or the same year. Thus, protecting every expense involved in Part B while reimbursing the taxation of 10 percent of the basic premium for every 12 months that you postpone registration. Suppose you are a subscriber to a costly health program and have gotten a health savings record? In that case, you can proceed with your health program even before the age of 65 if you are not an enrollee under Medicare Part A or B.

 

If you decide to choose this option, you have to note two critical things: the first one entails that you will be required to pay extra costs all through your life. There wouldn't be any consideration even if your revenue drops. The other point is that if there's a critical dip in your health and there was a significant delay in enrollment, MEDICARE would have paid the fee for your Part B premium.

 

There are challenges at every stage of life, whether you’re trying to work out your life, raising a family, growing your career, or preparing for retirement. But while each life stage may be unique, it is essential to ensure that your loved ones are taken care of financially all along. This article discusses life insurance needs in the various stages of life.

Early Career

The best time to get a life insurance policy is when you are young and at the best of your health. Since you’re young and healthy, the contract will cost less depending on your needs. Having life insurance will help you provide for your family and dependents when you aren’t there.

It even becomes more critical when you get married and have kids. Kids bring a lot of joy to families and come with the responsibility of taking care of them. You can take term life insurance early in life to provide affordable coverage for your loved ones. The coverage can be enhanced with riders to ensure the protection remains sufficient as your family grows.

 

Legacy and Retirement Planning

As you enter the peak of your earning days and draw closer to retirement, you’ll likely face several health risks. It will be a great time to convert your term life insurance to permanent coverage.

Unlike term life, permanent life insurance guarantees coverage for the rest of your life, provided you keep paying your premiums and the insurance company remains in business. This is why it’s essential to only buy policies from organizations with a track record of financial strength and stability.

Permanent life insurance policies are also a great way to start planning your legacy. The policy may come with the option of including a charity or cause as a beneficiary to ensure your generosity lives on after you.

 

Peak Earning Years

A life insurance policy can be a viable tool to protect your life, family, and assets. It can be used for tax-advantaged growth and can be an incremental stream of income in retirement. Speaking to a financial professional will help you optimize your coverage, minimize your overall tax burden, and maximize your asset protection level.

Retirement

There’s a need to have a retirement strategy as you draw closer to retiring. These days, it’s essential if you have the resources to work on multi-generational planning to ensure your children and grandchildren are well taken care of in your absence.

Life insurance, like life itself, has various stages and options you can choose from. It’s, however, an invaluable tool that helps ensure you leave behind money for those who rely on you financially. It also allows you to leverage several other benefits aside from death benefits.

There are several options to choose from when buying a life insurance policy, so much so that it can be confusing to decide which one is right for you. Indexed life insurance is one of the options you’ll be offered.

If you consider yourself an aggressive investor with confidence in the stock market or want growth-based life insurance coverage, then indexed life insurance would be perfect for you.

Here’s all you need to know about indexed life insurance, including how much it will cost you.

 

What is Indexed Life Insurance?

An indexed life insurance policy is a permanent life insurance package. This means that it offers coverage for an entire lifetime, provided you keep paying your premiums. An indexed life insurance offers higher cash value growth as it’s tied to the market index. Hence, the account can grow significantly over the years if market performance is strong. This, however, comes with the risk of the value falling drastically during a bad market year.

 

How Indexed Life Insurance Works?

Indexed life insurance, like all other permanent life insurance policies, has a death benefit. The policyholder will make monthly premium payments to keep the policy running, so when they pass away, their beneficiary will receive a payout. Indexed life insurance also has a cash value that is similar to a savings account. When you make premium payments, a portion of it goes towards your death benefit, administrative fees, riders, and others. The remaining portion goes to a savings account.

What makes indexed insurance policy different from others is that its cash value is tied to the index market. The insurance firm invests the money in your savings account in the stock exchange market to grow its value and earn interest. As the balance grows over time, you can use it to supplement your premium payments instead of paying out of your pocket. You can also use the money to increase your death benefits or borrow it to cover emergency financial issues.

Upon purchasing an indexed life insurance policy, you’ll be required to choose the type of index you want to invest in, like the S&P 500 or Dow Jones. Most indexed policies have a cap, which is the maximum interest you can earn. Some also have the floor, which stipulates the lowest interest an account can earn.

 

Who Needs Indexed Life Insurance?

Indexed life insurance is a great option for anyone confident in the stock market and wants to use it as a vehicle to grow their insurance policy. You need to know how the stock market works, so you can choose the best funds to invest in.

 

The Pros and Cons Of Indexed Life Insurance Policy

Pros

• Flexible death benefit

• Cash value account (to pay premiums)

• Higher growth potential (based on stock market performance)

Cons

• Quite expensive

• Cap on interest earned

• Risk of losing your money

• Higher premiums (additional fees for managing stock market investments)

 

How Much Will Indexed Life Insurance Cost?

Indexed life insurance is one of the most expensive life insurance options out there. Your premium would depend on various factors like your health, age, lifestyle, and gender. Most insurance companies will require that you undergo a medical exam which will be used in calculating the amount of premium you should pay. Your premium will also be higher if you need more coverage. For instance, if you want a death benefit of $2 million, you’ll pay a higher premium than someone who wants a $500,000 death benefit.

Additionally, the riders you include in your policy can also increase your premium.  

 

Buying an Indexed Life Insurance

Buying indexed life insurance isn’t difficult as long as you pass the medical exams. Numerous insurance companies offer indexed life insurance policies, including AIG, Nationwide, Prudential, John Hancock, and Transamerica. Here’s how to go about buying one.

1. Meet with an agent: they will provide all the information you need to know about the policy, including the growth projections, past performance, fees, and caps.

2. Take the medical exams: you’ll undergo medical exams where a medical professional will take your vitals, look through your medical records and ask you questions about your lifestyle.

3. Structure your policy: once approved, you can work with an agent to structure your coverage as you want. You’ll choose the riders you want, the death benefit, and the investment index before signing the policy.

 

Frequently Asked Questions (FAQs) About Indexed Life Insurance

 

What factors affect the cost of indexed life insurance?

Like any other insurance policy, factors like health age, gender, lifestyle, and the riders and payout you choose will affect the price. The most significant factor, however, is health, followed by age.

Is indexed life insurance right for me?

Indexed life insurance is ideal for people of all ages. Though it’s pricier, it has growth potential.

Who benefits the most from indexed life insurance?

People who are knowledgeable about the workings of the stock market can choose the suitable investment that will grow their cash value. Otherwise, you stand the risk of losing your cash value.

There are currently over 84,000 TSP millionaires. This figure consists of retired as well as active federal workers. The figure is especially impressive since the number of TSP millionaires before March 2020 was 27,212 TSP. That figure is even more impressive than the 208 TSP millionaires there were in 2011. But we also have to look at others who are yet to hit the $1 million mark. Currently, there are about 5,649,736 TSP account balances that are below that mark. The figure easily trumps the number of accounts with balances between $1 million to $9.3 million. 

With consistent and considerable savings, many of the over five million accounts will also hit the $1 million mark. But what next after you become a TSP millionaire? What changes, and what are the things you have to do before hitting that mark? To answer these questions, here are first-hand accounts from other TSP millionaires and what they feel everyone should do if they are lucky enough to hit the mark. These TSP millionaires are from different regions: Pennsylvania, Florida, California, and the D.C metropolitan area. 

Some of these millionaires said they relaxed better in retirement after they hit the mark. Others said they have learned how to care for themselves better. Everyone agreed that having such a heavy sum in their TSP accounts and knowing they would still get more from the FERS and Social Security benefits made life easier and more beautiful. Though they didn't expect to hit the mark when they started the contributions, some of them have suggestions for others trying to hit the $1 million thresholds. 

One of the millionaires, who wishes to be addressed as James, said he became a federal employee in 1996, two years after he got married and had a one-year-old child. James said he knew he had to start saving immediately because of his family, and he did just that. He started saving 10% of his salary into his TSP account. James also started a mutual fund, saving $50 every month. He added that serving overseas made things pretty easy. He invested half of his TSP balance into the G Fund and the other half into the C Fund. The reason for the investment choice, according to James, was to balance the risk between the stable G Fund and the highly volatile but favorable C Fund. 

The young family also learned to live within the means of James' $29,000 per year starting salary. A few years later, James said he added about 20% to his C Fund to make it 70% of his investments, while his G Fund became about 30% of his investment.  He also raised his contribution to 14%. Finally, after a few years, James decided to go all in. He switched to the C and S Funds and didn't let plunges in the stock market shake his resolve. By 2016, James contributed 16% of his pay to his TSP account and still took hits from the unstable stock market. James explained that he lost $300,000 last year but still didn't get upset. He added that despite it all, his TSP balance is now over $1.2 million, and he still has about five years before retiring. 

Above all, James was able to see two kids through college, put a down payment on a house after returning to the country, and leave his TSP balance intact. He is also still below sixty, so he looks forward to having a lot of fun with his wife before they grow too old. James warns that it is not a race for people who are still trying to build their TSP balance. The best investment decision, James says, is playing the long game instead of selling during highs and buying during lows. He also counsels the need to maximize contributions and have alternative investments and savings. 

Another TSP millionaire who wants to be known as "E" said reaching the millionaire mark is good but not as good as being healthy. E said a near-death situation resulting from the consumption of sugary drinks and food had taught him to value his health above everything. He also points out the effects of the COVID-19 pandemic, urging people to worry less about becoming TSP millionaires and more about their health and treating others right. 

Most life insurers have redesigned their permanent life insurance products due to the new calculations introduced via the Consolidated Appropriations Act, 2021 (H.R. 133). While the Act was mainly about spending and the stimulus check, it also included a provision that changed how the minimum interest rate used in specific life insurance contracts is calculated. This led to the determination of a new rate for the first time since 1984.

The Moody’s Investors Service sees this as a credit positive for insurance companies, as they’ll experience an increase in permanent life insurance product sales because of the new calculations.

The CAA provision lowers the minimum rates used in determining whether a permanent life insurance product meets the requirements under the IRS Code section 7702 to qualify for tax treatment as insurance instead of an investment.

Lowering the rates would result in a higher cash value relative to the death benefit. It would also allow policyholders to put more money into it without triggering modified endowment contract status, which would attract adverse tax consequences.

As stated in Section 7702, for a contract to qualify as a life insurance policy contract for federal income tax purposes, it must be a life insurance contract under applicable law and must satisfy either of the following:

1. The cash value accumulation test.

2. The guideline premium and corridor test (which limits the amount of premium that one can pay to a life insurance relative to the policy’s death benefit).

 

Mutual Insurance Benefits

However, the new rates are only applicable to life insurance contracts issued from Dec. 31, 2020. For contracts issued in 2021, the initial interest rates would be set at 2% and will adjust prospectively with the market rate.

The new calculations for life insurance policies would enable insurers to offer more flexible pricing in the current low-rate environment. The calculation is mostly favorable to mutual life insurance firms that sell life insurance products. Before the CAA resulted in a change in section 7702, whole life insurance policies needed a 4% minimum guarantee to avoid triggering the MEC status upon making premium payments.

Mutual life insurers faced high pressure to provide guarantees as market rates plummeted over the past decade, especially last year. Further decline in rates would have placed insurers in a difficult position where they’ll need to provide a guarantee above the rates that they can earn on fixed income securities.

With the new law, the guarantees are reduced from 4% to 2% in 2021, which will give mutual insurers the flexibility to sell life insurance products even in low-interest environments. It also allows for more flexibility in product design.

 

Modest Credit Positive for Universal Life Writers

Insurance firms that sell accumulation-focused (as against death benefit-focused) permanent life insurance like universal life insurance, variable universal life, and indexed universal life would benefit from the new regulations. Policyholders would be able to put more dollars in premiums to their death benefits without triggering the MEC and attracting high taxes.

 

Implementation Concerns

While some of these options are already being implemented, most would require some time for life insurance firms to reevaluate their product offerings. Many insurance companies would need to review their product pricing and obtain necessary regulatory approvals. Insurers would also need to update their systems. So not every company would be in a position to implement the new regulations immediately.

The regulations may also have some unintended consequences, one being the impact on agent compensation. Agents are paid a specified percentage based on the target premium. Assuming a consumer must pay a fixed amount into their policy, the new regulation can lower the required death benefit needed to retain the policy. The low death benefit would lead to a lower target premium and ultimately reduce the commission.

Additionally, there are several price discounts insurers give for bands of more significant face insurance amounts. A lower death benefit would result in lower lead and lower costs of insurance. Moreover, if the policy crosses over to the lower threshold without being given preferential treatment, it could increase COI charges.

Millennials are both the most educated and ethnically diverse generation in the history of the United States. Unfortunately, they may also be the generation that's most unprepared for retirement.

The Center for Retirement Research at Boston College compared millennials born between 1981 through 1999 with previous generations, using data from the 2019 Federal Reserve's Survey of Consumer Finances.

The results showed that aside from the current pandemic affecting people of all generations, millennials are facing specific challenges, including;

• Student debts: Many millennials left school with substantial student debts and started their careers in a job market affected by the recession.

• Social security will provide fewer benefits relative to pre-retirement earnings. Their 401(k) savings are meager, and about half of the working population don't have access to a workplace retirement plan.

• They'll likely spend more years in retirement due to rising life expectancy, increasing healthcare costs, inflated healthcare product prices, and historically low-interest rates. These factors lead to a delay in significant life milestones like accumulating substantial wealth, getting married, or owning a home.

 

The fact that Millenials entered the labor market during such hard times as the great recession or the bursting of dot.com could have impacted the successes they made. It would have been particularly hard on most millennial men, who had to work under labor force participation rates below what was obtainable for older generations.

Fortunately, by their late 30s, the participation rates for millennial men had increased. On the other hand, millennial women appear to be less affected by the weak economy early in their careers.

Similarly, the millennials' homeownership pattern is increasing, looking comparable to older generations. Buying a home is often correlated with marriage, so it's no surprise that as millennials' marriage rates increased, the homeownership rate also soared. By age 38, over 60 percent of millennials owned homes, just like people from earlier generations.

However, one aspect millennials haven't made up for is in their retirement planning. The average ratio of net wealth to income is significantly lower for millennials than older generations, even millennial households in their late 30s.

A significant reason for this wealth difference is student loans. Outstanding student debts burden 40% of millennial households between the ages of 28 to 38. Amongst other household income, these debts take up about 40% of their income.

When you take out student loans, the average wealth to income ratio for millennials will look identical to those for older generations.

So the major area millennials are doing poorly in is wealth accumulation. They are saving for retirement at a lower rate than older generations, as student loans constantly take off a huge chunk of their income. The millennials' low wealth in their 30s should be an issue of concern, given that they're likely to live longer than previous generations and may receive less support from Social Security.

In your retirement savings plan, a 401(k) can be a useful tool. If you constantly take full advantage of its benefits, you should be in good shape when you reach your golden years. Employers who provide such accounts will be able to contribute up to $19,500 in 2021.

Over the years, the government has steadily increased the yearly 401(k) contribution limit, and it is likely to do so in the future. However, presuming the maximum individual contribution in 2021 of $19,500, here is how much you may amass in the long term by maximizing your contributions to this tax-advantaged retirement plan.

 

How it could increase 

If you contributed the maximum amount allowed by law to your 401(k) for 30 years and had an average yearly rate of return of 7%, your account balance at the end of that time would be $1,970,924.

With an annualized rate of return of 8%, that would increase to $2,385,744, and with a rate of return of 9%, it would increase to $2,897,217. A ten percent average rate of return would bring you $3,528,397.

Investors should not be surprised to see such high rates of return. According to a model developed by the investing firm Vanguard, portfolios made up of 20% stocks and 80% bonds gained an average of 7.2 percent per year between 1926 and 2020. A 40 percent stock allocation increased the annual return to 8.2 percent, a 60 percent stock/40 percent bond split increased it to 9.1 percent, and an aggressive 100 percent stock allocation returned 10.1 percent on average. However, the more your portfolio's stock exposure, the greater the risk. Increasing the percentage of stock in addition to the number of years in which the average portfolios lost value increased the amount of the losses during their worst years.

 

 

Tolerance of Risk

 

Many factors determine how comfortable you are with financial risks. However, one of the most significant factors to take into account is your time horizon or when you intend to start using the money you're investing. The closer you get to withdrawing money from your retirement accounts, the less time they have to recover from potential market downturns and bear markets. As a result, investing largely in stocks in your 401(k) later in life may force you to sell beaten-down securities to pay your obligations, thereby locking in your losses.

 

Investors approaching retirement might avoid this by progressively increasing the portion of their portfolios devoted to safer investments, such as bonds, while decreasing their stock exposure. However, the lowered risk will almost certainly come at the cost of a lower return on investment. It's critical to account for the slower growth in your long-term strategy to avoid falling short of your financial goals.

 

If you are unable to max out your 401(k) each year

Surely, for most people, reaching the yearly 401(k) contribution limit every year will be an unattainable ambition. Many people may never reach the level of financial flexibility to do it even once in their working life.

Still, if you do it for as long as you can, you might be able to retire in a reasonably comfortable position.

For instance, if you don't begin investing for retirement till you’ve reached the middle of your career, but then contribute the maximum amount to your 401(k) every year for twenty years at a 7% annual rate of return, you'll end up with a portfolio with a value of $855,371. That would rise to $963,747 with an 8% rate of return. Your account would increase to $1,087,408 with a 9% annualized return and to $1,228,549 with a 10% annualized return.

 

Retirement objectives that are attainable (and a vital bonus)

Even if you reach the limit for your 401(k), it's a good idea to contribute to it as much as possible for as long as you can. Regardless of how much you put aside, it will still undoubtedly enhance your financial status in retirement when compared to setting nothing aside. Relying only on Social Security will not provide a comfortable standard of living.

And, as you're presumably aware, most 401(k) plans include company match programs, which match your contributions up to a certain percentage of your pay. For example, if you earn $60,000 per year, and your workplace offers a 4% dollar-for-dollar matching program, your employer will pay up to $2,400 to your 401(k) each year if you match. That means you might have a total contribution of $4,800 for the year. If you do that each year during a 30-year period at a 7 percent annualized rate of return, your portfolio would have a value of $485,152. That amount would increase to $587,260 at an 8% rate of return, $713,161 at a 9% rate of return, and $868,528 at a 10% rate of return.

Finally, there's an advantage that these accounts provide that can assist you if you got a late start on your retirement planning. The IRS allows you to contribute an extra $6,500 to your 401(k) after you reach 50. That can help make up for years when you weren't able to save as much as you would have liked. Seizing the opportunity that the catch-up contribution offers every year they meet the criteria would contribute an additional $214,494 to the value of their portfolio at a 7 percent average rate of return. Further, $236,927 at 8%, $261,959 at 9%, and $289,895 at ten percent for someone aiming to retire at 67.

 

Even if you can't max out your 401(k) every year, if you have one, it could be one of the most effective ways for you to save for your retirement. By regularly contributing as much as you can to this tax-advantaged account, it might become your most valued asset by the time of your retirement.

Millions of Americans rely on pension plans to maintain track of their hard-earned benefits to ensure a comfortable retirement. However, investigations conducted by the United States Department of Labor in 2020 revealed that more than $1.4 billion in retirement benefits were separated from their lawful owners merely because employers lost contact with their former employees.

 

To address this issue and assist employers in reducing the likelihood of losing retirement plan participants, the Labor Department has released guidance on recommended practices for pension plans with missing plan participants.

 

The department's most recent recommendations are based on data from well-managed plans with a low percentage of absent or non-responsive plan participants. These plans have a strong compliance culture and use methods to maintain accurate records.

 

Employer-sponsored pension plans are controlled by the Employee Retirement Income Security Act of 1974 (ERISA), which was enacted to ensure the financial security of U.S. workers in retirement. ERISA governs a wide range of employer-sponsored benefit plans, like traditional pension plans, 401(k)-type plans, and additional benefits such as health insurance, vacation, and education. The law puts several requirements on these plans and their fiduciaries to guarantee that benefit plans are fair, adequately financed, and reliable.

 

Under ERISA, companies with more than 100 employees are required to conduct yearly plan audits. For many years, Labor Department plan audits have revealed plans with many missing participants, although no regulations mandate plans to do anything about missing participation. As a result, pension plans and their fiduciaries have long sought guidance from the government on keeping track of participants and remaining compliant.

 

According to the Labor Department's long-awaited guidelines, pension plans should use the four recommended practices listed below to guarantee that pension benefits are distributed to their rightful owners.
 

First, plans must maintain accurate census data. The guidance proposes various methods for maintaining accurate information, such as regularly asking participants for an update on their contact information, reporting undeliverable mail and uncashed checks for follow-up, analyzing census information, and correcting data mistakes. Furthermore, the guideline advises fiduciaries to pay attention to plan information transfer in the event of a merger, acquisition, or change of recordkeepers.

 

Second, more effective communication techniques should be used in planning. The guidance urges fiduciaries to provide help in both plain English and non-English where necessary. It recommends that fiduciaries promote ongoing communication with participants through websites and toll-free lines. Also, procedures requiring participants to update and confirm contact information are built into onboarding and departure processing for new or retiring members. For participants who left their jobs before the plan's name or sponsor changed, as may occur as a result of a merger or acquisition, communication from the plan should include the name of the previous plan or sponsor.

 

Third, plans should strengthen the search for lost participants. The Labor Department recommends using beneficiary and next-of-kin contact information to identify the most current contact information for the missing participant and reach out to coworkers or other members of the same plan to try to contact missing retirees. The pension plan fiduciary may consider cross-referencing other employment plan documents for more recent contact information, like healthcare plan documents.

 

The guidance also recommends collaborating with other organizations or firms, such as commercial locator services, credit-reporting agencies, social networking websites, USPS certified mail, or the Social Security death index, in order to contact the participant or confirm whether they’re still alive.

 

Finally, plans should include documentation of their procedures and activities. The Labor Department advises plan fiduciaries to have a paper record of all policies and procedures. Additionally, to ensure consistency, they should document critical decisions and the measures taken to apply their policies. For plans with third-party recordkeepers, the plan fiduciaries should closely oversee the third party to verify whether it’s performing the agreed-upon services and properly detecting and correcting any deficiencies in the plan's recordkeeping and communication processes.

 

Although not legally enforceable, the Labor Department's new guidelines are a step in the right direction toward ensuring that more pension plans keep in touch with their participants. Following these recommended practices may aid in the preservation of plan assets so that they’re available and deliverable to their proper owners at retirement.

 

Question: I'm a 27-year-old with a major investment dilemma. At my job, the firm matches 401(k) contributions up to 9 percent, which is excellent because I contribute enough to qualify for the match. I have around $60,000 in my 401(k). I also have a Roth IRA and a brokerage account for stocks. Due to the limited investment options in my 401(k), I'd prefer to roll it over into another IRA. Diversification of investment funds is something I strongly believe in. Is this a viable choice, or is it a ridiculous concept with no merit? I'm aware of the tax implications but still ready to take the risk in exchange for greater investing possibilities.

Answer: You should be proud of yourself for being so committed to saving for retirement. Your early start should provide you with a wide range of possibilities as you get older.

For the time being, there is an easy answer to your question. Usually, you won’t be able to roll a 401(k) account into an IRA while employed at the company that offers the 401(k).

There are a few exceptions to this rule. Some plans enable such rollovers when you reach the age of 59 1/2. A few plans now provide "giant back entrance Roths," which let you contribute after-tax money to a 401(k) and subsequently convert to a Roth IRA "in service." That allows high-earning people to contribute to a Roth IRA despite the income limit that would normally restrict them from doing so.

When you quit your job, you'll have the option of transferring your funds to an IRA, but this isn't always the greatest option.

Most 401(k) plans provide enough alternatives for diversity, and you might be able to take advantage of low-cost institutional funds that aren't available through an IRA. You're also protected by federal law, which mandates that companies that sponsor 401(k) plans operate as fiduciaries or put your interests first. You can usually roll your 401(k) balance into a new company’s plan allowing you to borrow money from it. With an IRA, you can't do that.

401(k) rollovers, by the way, are tax-free. Only if you convert the funds to a Roth IRA will you have to pay taxes.  A conversion may make sense, but you should consult with a tax professional first.

 

Shielding home sales proceeds from taxes

Question:  My acquaintance has Alzheimer's disease and is currently residing in a secure assisted care home. After a year in that home, his sister ultimately sold his condo. Her tax advisor claims he will get a huge tax hit. I think it's completely medically necessary, and he'll need the money to pay his existing rent ($5,000 each month) until he passes away. I also wonder if some of the $5,000 should be deducted because it was only required due to his illness. What are your thoughts on the subject?

Answer: Your friend may not be able to safeguard all of the earnings from his home sale from taxation, but he will almost certainly be able to safeguard some of them.

Your acquaintance will be able to avoid paying taxes on up to $250,000 in-home sale earnings if he resided in his condo for at least two of the preceding five years before the sale. Even if he didn't make it to the two-year threshold, he'd probably be able to take advantage of IRS rules that enable partial exemptions when a sale is caused by "unforeseen circumstances."

Medical costs, including some long-term care costs, may be deducted if they exceed 7.5 percent of an individual's AGI. When a resident is considered chronically ill, assisted living costs can be deducted as medical expenses. That indicates they are unable to conduct at least two day activities (eating, bathing, getting dressed, getting into and out of bed, using a toilet, and remaining continent). Or they require supervision due to cognitive impairment, like Alzheimer's or other types of dementia. Personal care services have to be arranged in line with a licensed healthcare provider's care plan. Assisted living facilities typically prepare these care plans for their patients.

 

A life insurance policy is a contract between an insurance company and the policyholder. In essence, the contract mandates that in exchange for an agreed-upon insurance premium, the insurance company makes a payout to the insured’s beneficiaries when they die.

The benefit payout can be paid as a lump sum or in increments, depending on what was specified by the policyholder. The payout amount is determined by the premiums made by the policyholder over the lifetime of the insurance policy.

The primary reason people get life insurance is to ensure their dependents get financial support to make ends meet in the event of their death.  

 

Types of Life Insurance

Life insurance is generally categorized into four types: whole life insurance, term life insurance, universal life insurance, and variable life insurance. The difference between the various types of life insurance is centered on the timeframe the policyholder enjoys the coverage and how the premiums are paid.

Events like marriage, childbirth, and significant purchases may impact the long-term needs of your beneficiaries. So it’s important to continuously reassess your life insurance coverage to ensure it adequately provides for the needs of your beneficiaries.

 

Who Needs A Life Insurance Policy?

The essence of taking a life insurance policy is to provide for your dependents when you pass away. So life insurance is only a good investment if you do have dependents. Assuming you don’t have dependents, then the policy is not worth the money.

If you have dependents, these questions will help you know whether you need to invest in life insurance, and if so, how much payout you should aim for.

1. How long would it take for your dependents to be self-sufficient, and how much do they need to carter for themselves?

2. Do you have any assets that your dependents may inherit to help them carter for themselves?

3. Do you have any friend(s) or relative(s) who you can count on to take care of your dependents when you are no longer around?

In answering these questions, you need to establish how much your dependents need to be taken care of. This would help you decide on how much you should contribute to your life insurance policy.

 

How to Buy a Life Insurance Policy

It’s essential to first learn about the various options available to you before diving into buying a life insurance policy. Also, understand the advantage and cons of each type of life insurance and whether they offer permanent or term life coverage.

Once you establish the type of coverage you need and the kind of insurance to choose, you can start requesting quotes from various insurance companies that meet your specifications.

When you compare prices, you’ll be able to identify and choose the most attractive offer on the table or use specific offers as leverage to get a better deal from other providers. Finally, once you’ve identified the ideal insurance provider for you, start the application process.

This typically involves submitting necessary personal documents, completing application forms, and undergoing a medical examination.

Not all insurance companies require a medical exam, so you can ask the insurer upfront about their application process if you don’t want to undergo one.

Once you are approved, you can then structure your coverage how you want. You’ll have to set a payout amount and choose riders before signing the document. After that, you start paying your premiums when the time comes.

Have you ever wondered why your 401(k) plan's investment options include low-performing or pricey mutual funds?

No need to wonder anymore.

Revenue-sharing has been determined to be the culprit, according to researchers.

 

A recently published paper states that defined contribution pension plans’ recordkeepers are frequently compensated indirectly through revenue-sharing from third-party money on the investment menu.

 

The researchers, Veronika Pool of Vanderbilt University, Clemens Sialm of the University of Texas at Austin, and Irina Stefanescu of the Federal Reserve Board of Governors, demonstrate that these arrangements have an impact on the 401(k) investment menu.

What does that mean? Researchers claim that revenue-sharing funds have a greater chance of being added to the available investment choices rather than removed.

Basically, the recordkeeper for the 401(k) is the bookkeeper of the plan. As per David Ramirez’s blog, the recordkeeper handles employee enrollment, maintains employee investments, monitors if the contributions are pre-tax, Roth, or employer pre-tax match, and so on, administers and records 401(k) loans and hardship withdrawals, and delivers account statements to participants.

 

Although, Ramirez says that the recordkeeper does not, for example, advise on investments and doesn’t educate or integrate employees.

Today there are various recordkeepers’ types. Sometimes, the fund corporation that oversees the 401(k) investments may have a side recordkeeping business. Among the fund providers that offer recordkeeping services are MassMutual, Vanguard, Schwab, Fidelity, and TIAA. In other circumstances, recordkeeping will be handled by payroll firms such as Gusto, Paychex, and ADP.

An insurance firm (like Boya, Empower, John Hancock, and Prudential) could be the recordkeeper.

Finally, as stated by Ramirez, there are independent recordkeepers. They don't sell funds or insurance products and don't offer extra payroll products.

Reviewing 401(k) fees: a primer

What are the opinions of professionals on this study? First, some background information.

All fees (direct and indirect) have to be reported per ERISA Section 408(b)(2). The most important cost is the upfront "fee notice." The service providers have to submit this fee to plan participants. The many sorts of direct or indirect compensation owed to the provider are spelled out in that fee notice.

If someone would actually read those fee disclosures, they’d find out the following:

Bonnie Yam, a principal with Pension Maxima Investment Advisory, says recordkeepers are compensated in three ways.

1. Fees charged by investment firms for listing their items on their platform;

2. Services for actual recordkeeping; and

3. Their proprietary funds’ investment fees.

According to Yam, recordkeepers also split some of these payouts by providing one-time and ongoing refunds to third-party administrators or TPAs. Some TPAs neutralize their costs with the revenue, while others do not. When a recordkeeper does not undertake administrative work for your plan, a TPA is employed.

It's hard to decipher each level of revenue-sharing because there are so many ways of compensation. According to Yam, “The easiest way is to check out the total cost.”

Some of these costs may be covered by employers. Still, in most of the plans, participants are responsible for all of them.

The elements of the total cost are as follows:

1. Fees for recordkeeping (asset-based, headcount-based, or direct billing);

2. Extra TPA fees (direct-billing);

3. Fees for advisors (direct fees);

4. Fund cost (since this is a net of fund performance, a higher fund cost will mean a lower investment return).

Is the paper still valid?

In light of this, Mike Webb, a senior financial adviser at CAPTRUST, stated that the paper’s findings are usually congruent with the real-world experience; essentially, the less revenue-sharing there is in a retirement plan, the better.

That is true, he added, for the reasons outlined in the research and because it leads to fee structures that are significantly less transparent to plan participants.

Webb pointed out that the researchers used old data and that their claim that revenue-sharing funds have less chance of being removed from a menu is a little out of date.

In general, employer resentment of revenue-sharing has sparked a drive to fund zero-revenue-share lineups, especially among the bigger plan sponsors covered in the research, according to Webb.

However, revenue-sharing is still quite frequent among small and mid-sized plans.

OneDigital plan consultant Joe DeBello stated he's still stunned at the number of plan sponsors post-408(b)(2) who still have no idea what revenue-sharing is and whether it is in their plan.

According to DeBello, one of the most typical difficulties is that revenue-sharing is in place – usually on top of a stated/direct fee for recordkeeping – and the amounts generated by the numerous funds are uneven. He added that this develops a scenario in which, based on fund selection – at times simply by defaulting into the QDIA – one participant may be subsidizing the expense of running and recordkeeping the plan for their mates without them realizing it.

Furthermore, according to DeBello, many recordkeepers still oblige plan sponsors to choose from a restricted funds menu. And the requirement of being on that restricted menu is the existence of a specific minimum revenue-sharing threshold inside the fund. “This one step severely limits sponsors' ability to choose what is best for their plan members rather than what is best for their recordkeeper,” he said. Although many legacy problem plans still exist, the number of 'open architecture' providers is increasing.

What should plan participants do regarding revenue-sharing, considering that it still exists today? What are employees’ options to save money on their 401(k) fees?

Check fee disclosure forms.

Participants in 401(k) plans should first check their 404(a)(5) fee disclosure form, which breaks down the fees on an administrative plan level as well as on an individual basis (i.e., fees for loan administration, distribution, etc.), according to Yam.

DeBello advises looking for any wording that describes revenue-sharing and how it is used, such as offsetting other fees or being rebated to you. “Revenue-sharing isn't always an issue; it's how it's handled that causes inequities,” he said.

Webb explained that recordkeeping fees are usually expressed as an annual basis-point charge (e.g., 20 basis points = 0.20% = $20 per $10,000 of your account balance). However, they can also be the same irrespective of account balance size (e.g., $60 per year per account, no matter the size), especially in larger plans.

He said that this fee is critical since it often raises the total costs of plan investments because sponsors often utilize revenue-sharing to offset such fees instead of directly charging participants with it.

Note that, according to Webb, if your account has a fee deducted right now, don't assume it's the recordkeeping fee – account fee deductions can happen due to several reasons.

In most cases, plan participants should receive 404(a)(5) disclosure paperwork once a year.

If you haven't received your documents, DeBello suggests contacting your HR department, or your provider, to ask for them.

Some employers, mainly major ones, have professionals in their organization who can explain the fee disclosure. However, usually, your employer might redirect you to professionals who work at their recordkeeper’s organization. They are required to provide the info on this, according to The Retirement Advisor University’s founder, Fred Barstein.

According to CAPTRUST's Webb, it's worth mentioning that it should be considered a red flag when your staff benefits department can't state the recordkeeping fee.

Review direct fees and costs of funds

You should check your direct fees on your account statement too. Yam says that it should be specified how much is being deducted.

“Figuring how much the plan investments cost is more straightforward than you would expect,” according to Webb. In the investment segment of most participant websites, there is a page that lists all funds and their costs.

Expenses are frequently expressed in basis points, which is a fraction of a percent. If you're in a big plan, anticipate few, if any, investments to surpass 100 basis points (or 1% or $100 every $10,000 invested in the fund every year), with the majority of investments falling between 30-80 basis points ($30-$80 every $10,000), according to Webb.

Examine Form 5500

Yam also suggests looking at your company's Form 5500 on the Labor Department's website. The Form 5500 is a yearly report submitted with the Labor Department that details the financial state, investments, and activities of a 401(k) plan. In addition to other information, in the Form 5500 report, you may look into your plan's direct and indirect administrative fees, according to Yam.

 

Not all plans have to give information about the 5500 fee. For instance, small plans with fewer than 100 participants are excluded, and other plans do not submit a 5500 at all. However, many are still required to provide information about this fee, according to Webb.

In Yam's experience, indirect payouts are not a concern because the fund expenditure entirely covers them. And if the fund expenditure is too high, the performance would suffer.

According to Webb, when an employer pays a plan's expenditure directly in rare cases, the expenditure will not show up on the 5500.

Contact the Human Resources department.

If the fee disclosure paperwork isn’t clear, DeBello suggests contacting your HR department to learn who is in charge of the plan's supervision. Also, inquire about the presence of revenue share and the plan's policy for using it.

“Who knows, you could be helping your plan sponsor by bringing it up,” added DeBello.

On the subject of fees, Webb has the same viewpoint. He said to tell your employee benefits representative if you don’t like your fees. Most plans are governed by the Employee Retirement Income Security Operate of 1974 (ERISA), which obliges plan sponsors to conduct plan business in a way that’s of best interest to the plan members and beneficiaries. Even non-ERISA plans, like governmental and most church-sponsored plans, follow identical procedures. That implies that many people at your workplace are fiduciaries for the plan and must behave in your and other plan members' best interests. As a result, if fees are expensive, they must, at least, be able to explain why and what they are doing to reduce them.

That is a viewpoint shared by Wipfli Financial Advisors’s principal, Nate Wenner.

Wenner said that participants must be attentive to their employer plan's annual fee report. In addition, you should ask the plan provider and their employer inquiries if the investing alternatives appear to be biased towards pricey solutions.

According to him, employers are sometimes unaware of the expense structure of the funds in their plan. However, they typically want their workers to participate. So, if it’s brought to their attention that costly options are making participants hesitant to participate in the plan, they will likely act accordingly, he added.

Ask your plan’s fiduciary for assistance.

Barstein also advises contacting the 401(k) or 403(b) plan's fiduciary retirement plan adviser or consultant for fee information and a better insight into how fees are paid, as well as how to best use the resources provided by the employer, recordkeeper, and adviser for best results. In all probability, the member is paying that adviser (or consultant) through a portion of the plan's investment asset management fees. “Behave as though they're working for you because they are,” he explained.

Examine the costs and performance of target-date funds

Webb suggests, for a target-date fund (TDF), comparing the performance of a zero-revenue share TDF to your self-selected investment portfolio net of investment costs for the longest possible time horizon.

He says that most online recordkeeper websites now let users see their own portfolio's specific rate of return for at least a year, allowing for a direct comparison.

Also, if the target-date fund’s performance is the same or better, switch to it.

“If you don't have a revenue-share-free target-date fund and want to self-select assets, Webb recommends looking into revenue-share-free possibilities in the asset classes you want to invest in. If that's the case, compare the revenue-sharing and zero-revenue-sharing options' longest-term performance available net of fees. Then, go for the superior performance one,” said Webb. Of course, previous success is no guarantee of future results. Still, the cost is a good indication of future performance, and the fund with the superior past performance is frequently the lower-cost fund at any rate.

“Then,” said Webb, “keep track of your outcomes over time and make adjustments as needed.” He also said that if your plan has no revenue-sharing alternatives or inadequate amounts to form a well-diversified portfolio, press your plan sponsor for zero-revenue share funds.

Seek low-cost investments and complain about funds that don't perform well

It's also a good idea to go over your investment results. Yam explained that we attempt to locate low-fee options, which are funds that perform similarly or better but have lower fees. As a result, you'll get your well-deserved savings back.

Look for index investments with low fees. According to Webb, they are available in most major plans, and their cost typically is 15 basis points ($15 per $10,000) or less.

He explained that in contrast to recordkeeping fees, there is not a flat dollar option here, so your dollar fees will rise in lockstep with your investments. Suppose your investment costs are higher (especially if you have a larger plan). In that case, it might be a clue that revenue-sharing is integrated into those investment fees and covers the plan's recordkeeping expenses.

According to Webb, that doesn’t have to be a bad thing. However, if the recordkeeping charge were deducted from your account rather than being "buried" in the investments’ costs, the fee structure would be considerably more transparent to you and other participants.

Yum also says you should avoid low-performing funds. She also advises you to examine your plan's fiduciary low-performing funds. “Plan fiduciaries are required to replace underperforming funds, and those who don’t do that are not fulfilling their fiduciary responsibilities,” she added.

Accept personal accountability                                                                                                       

Plan sponsors cannot pass on all fiduciary duty to third parties but have an obligation to employ qualified providers and make sure they are performing well. “So, participants also have to take personal responsibility to understand better how fees are paid and if they're reasonable considering the provided service's type and quality,” said Barstein.  

 

If the plan is not adequate, engage an independent consultant to roll assets out of the plan into an IRA (if such a rollover is allowed; most plans do not allow such rollovers while still employed). “But, continue to contribute to earning the match and higher contribution limits,” added Barstein.

Thrift Savings Plan account balances have helped many people hit the $1 million mark. In 2020 alone, almost 26,000 TSP account owners hit the $1 million mark, going from 49,620 to 75,420 TSP account owners with at least $1,000,000 account balances. This figure is even more exceptional given that the short-lived bear market had reduced the number of TSP millionaires to 27,212 by March 31, 2020. Thus, the millionaires were most likely not far above the $1 million marks at the beginning of the year. 

A recent biography of billionaire Warren Buffett talked about a specific phenomenon. "The Snowball Effect," as the biography puts it, refers to the effects of time on the value of money. TSP has been around for about 34 years. So, it is not very unusual that there are lots of heavy account balances under the plan. 

It is safe to assume that many TSP account owners that have reached the $1 million mark have been in service since the late 80s. Most of the people in that category are either about to retire or have retired already. Another thing the TSP millionaires have in common is that they began saving in their TSP as soon as they started service, and they contributed the maximum amount every year without fail. For some of the millionaires, fortune came from previous enormous 401(k) balances. 

Recall that 401(k) accounts came into existence in 1980 and had circulated significantly by 1983. As a result, workers who were formerly in private employment started contributing between 4 to 7 years before people who have always been Feds. 

Let's examine the "rule of 72." The rule states that dividing a rate of return by 72 will result in the number of years it will take for a dollar to double. For example, with a 7.2% rate, it will take a decade for money to double. The C Funds and S Funds have had return rates of 10% and 11%, meaning a dollar will double in about seven years. With an average of 4.2% returns rate, the G Fund has the lowest annual returns rate. 

From the analysis above, it is clear that time and consistency are helpful tools to build your TSP account balance. You can hit and surpass the $1,000,000 threshold if you start saving early and remain consistent with it. However, saving abysmal amounts for a long time will not yield the results you want. Instead, you have to contribute large amounts to your TSP account consistently. Doing this, along with favorable stock returns, can help you surpass the $1 million threshold. 

 

Arizona, Michigan, and Texas are demonstrating how to build robust systems for government retirees. Since 2000, state and municipal debt has tripled, primarily due to unfunded public pension liabilities. State and local government pension systems are currently $1.5 trillion in debt after 20 years of poor funding policies, inability to fulfill excessively optimistic investment return objectives, and other issues.

Taxpayers ultimately carry that debt, and as with any debt, the costs of servicing it grow as unfunded pension liabilities increase. As pension debt payments begin to divert funds away from other government priorities like education and infrastructure, some politicians are increasingly advocating for much-needed reforms.

In Texas, the state legislature enacted a substantial pension reform measure that addresses the Employees Retirement System of Texas' nearly $15 billion pension debt. More than 300,000 current and retired Texas government employees are served by the ERS. However, the system's unfunded liabilities have soared, owing primarily to optimistic investment-return expectations and a history of underfunding by the state. According to the ERS's consultant actuary, the plan will be insolvent by 2061, even if it reaches its ambitious long-term investment return targets, and as early as 2047 if it does not.

 

The reform law commits Texas to pay the bill for promised worker retirement benefits by converting the ERS to actuarially based funding and a fixed payment schedule. Additionally, the new law enrolls all future workers in a new low-risk “cash balance” retirement plan that offers a guaranteed minimum 4% return on investment as well as the portability of a 401(k). Simply put, the reforms would allow Texas to keep promises made to current and retired workers while ceasing to make unsustainable pension promises to workers moving forward.

If Gov. Greg Abbott doesn’t veto the pension reform bill, which he has not indicated he would do, it will become law this weekend. Texas would then join a growing list of states – among them Michigan, Arizona, Pennsylvania, and Colorado – that have established or expanded retirement plans to decrease governments' financial risks and to avoid burdening future taxpayers with more unfunded obligations.

Over the last five years, Arizona and Michigan have approved more than a dozen significant pension reform bills. Credit-rating agencies and national retirement experts have highlighted Arizona's public-safety pension reforms. Moody's Investors Service assigned a "credit positive" rating to Michigan's teacher retirement reform because the state and participating local governments "will no longer bear the whole weight of investment performance risk for new employee pensions."

 

Pension reform does not have to be political. New Mexico Gov. Michelle Lujan Grisham, a Democrat, modified her state's public-employee pension plan for workers who aren't teachers after receiving feedback and buy-in from unions for police officers, firefighters, and other public employees. “We have to make changes now – the alternative is to expose New Mexicans to unacceptable risk,” Ms. Grisham said, pushing her Democratic colleagues to adopt reforms. 

 

In 2018, Colorado legislators overcame differences across divided governments to pass comprehensive reforms that boosted both employee and employer contributions, lowered cost-of-living adjustments, raised the retirement age, and broadened the use of defined-contribution plans for future employees to deal with the state's main public pension system's chronic structural underfunding.

Reforming public pensions is not an easy political task. With Republicans controlling Florida's state government and the $36 billion debt of the Florida Retirement System, the state Senate passed legislation to shut the state pension plan to new recruits. The bill, however, failed in the House because legislators couldn't agree on how to pay down the pension debt of the state.
 

Significant pension reforms are difficult to implement, but they’ll become more important as state and local pension debt service consumes greater portions of government budgets. Texas, Arizona, and Michigan should be looked to by state and municipal officials looking to achieve long-term improvements to government finances. These states demonstrate that it’s feasible to build robust retirement systems that provide long-term financial stability for both taxpayers and public employees.

In the financial literature, there are a lot of rules of thumb. Who can argue with the adage "buy low, sell high" or "diversify your portfolio to reduce risk exposure"? According to author and retirement planner Dana Anspach, CFP®, RMA®, these kinds of thumb rules may be helpful to point the way. However, they may lose their meaning after that. In her Great Courses series on retirement, she mentions that heading west from New York to California is a valid rule of thumb. However, once you've decided on a route, you'll need something more precise to get you there, such as GPS, road map, or atlas.

Another issue is that several financial rules of thumb are more opinions or guesses; plus, some are obsolete or simply incorrect. They could lead you down the wrong path.

There are a variety of rules of thumb that often appear in articles and seminars about retirement planning. Let's put four of the most popular recommendations to the test to see how useful they are for retirement planning.

Rule of Thumb #1: After you retire, you'll need 80% of your pre-retirement income to live on.

This rule has been around for decades, and its age has started showing. One of the main factors in this alleged 20% reduction in required income is that after you retire, you will no longer have work expenses, such as commuting and business attire. For many people, this assumption is obviously outdated. Another part of the 20% retirement income cut is that you will not be paying for Social Security, and the mortgage will be paid off. It's possible that the presumption that your mortgage will be paid off at the same time you retire might be incorrect. According to some estimates, the number of people entering retirement with a mortgage has nearly doubled in the last 30 years. However, the rule of thumb holds some weight because you will no longer be contributing to your 401(k) account, which means you will have a lower need for income. Employers used to finance defined benefit plans for their workers, but now most employees fund their own retirement through 401(k) contributions. That drain on your income will stop once you retire.

As it ignores most retirees' dynamic spending, the 80 percent rule has been fraught with problems since its inception. Many retirees would spend as much as or more than they did during their working years when they first retire. These newly minted retirees, like the recent surge in travel prompted by the easing of the pandemic, feel liberated from their 9-to-5 work schedules and want to travel and enjoy their free time. That costs money. In contrast, once retirees are really elderly, they are less likely to spend their retirement money on travel and entertainment, and they may need less income, barring unexpected medical expenses. When a retirement can last up to 30 years, aiming for an overall income target of 80% of pre-retirement income seems inflexible and not very useful.

Rule of Thumb #2: You should retire at age 65

This rule of thumb is only useful in the context of health insurance. Even the wealthiest seniors plan to delay retirement so they can lock in their medical benefits via Medicare at the age of 65. Although this is an incentive to postpone retirement, it should not be construed as a justification to retire sooner. If you don't want to, there's no need to quit working at 65. You can continue working after the age of 65 and still be eligible for (and should sign up for) Medicare.

The 65-year-old rule of thumb is also losing relevance, as retirement has evolved into being a process rather than an event. The days of a retirement party, a new watch, and a trip to the rocking chair are long gone for many people. Retirement can be leaving your full-time job but taking on part-time work. It's not unusual for people to choose benefits like Social Security and Medicare on dates other than their work retirement. For many people, the line between work and retirement is blurred. So, 65 is just that: a number.

Rule of Thumb #3: Withdrawing 4% of your retirement savings per year would provide you with a steady stream of income that you won't outlive.

That can be a good place to start when answering the question of "how much can I take each year" – which is as often quoted as it is misunderstood. Aspiring experts tout "the four percent rule" as a talisman for securing a comfortable retirement. Unfortunately, there’s no simple fix when it comes to retirement planning, and Bill Bengen, its creator, never intended for it to be used like this. The basic principle behind this rule of thumb is that if the past market experience is any indicator (which is debatable), you can withdraw 4% from your retirement account annually, adjusted for inflation, and still have money for at least 30 years if you start at age 65. This is a good set to think about as a starting point, but the exceptions in some ways overshadow the norm.

To begin with – the math behind this rule is based on past market results and provides little insight into what the future holds. Second, it is not supposed to be used to determine the optimal amount to withdraw; rather, it should be used as a minimum safe withdrawal. Depending on when you retire and how the market performs in the future, sticking to this strategy too closely could result in taking too little income in retirement and unintentionally leaving a substantial legacy to your heirs. Perhaps the most overlooked aspect of this rule of thumb is that it assumes a specific investment policy – one in which you have more than half of your retirement funds invested in equities. Some risk-averse investors may lack the discipline or stomach to invest like this in retirement.

More recently, questions have been posed about the feasibility of using 4% as a bogey withdrawal rate. According to some experts, the target percentage rate should be lower under current conditions. First, in recent market cycles, such as the tech bubble and the Great Recession, success using four percent has not been checked. Furthermore, with bond yields consistently low, many financial planners are questioning whether taking 4% out of retirement accounts makes sense when treasury bonds pay just half that. But the most important question is whether this withdrawal rate can be sustained for a period that’s long enough, particularly for the retiree's lifetime. It's been over 25 years since this term was first proposed, and life expectancies have risen during that period. When calculating a secure withdrawal rate, a 30-year retirement might no longer be a realistic assumption.

Rule of Thumb #4: You should have a percentage of stocks equal to 100 minus your age when you retire

The number of times a rule of thumb is said, the more credible it becomes. The “hundred minus your age" rule is right up there with the "do not go swimming for a half-hour after you eat" rule. It doesn't mean it's right only because it's often quoted.

The basic principle behind this rule of thumb is that when you get older, you should reduce your exposure to equities because you might not live to see the market recover. As a result, this rule says, deduct your current age from 100, and you'll know how much of your retirement funds should be invested in stocks. The problem is that the underlying theory of this rule has no foundation. Your portfolio's risk level is determined by factors other than your age. Fixed income from different sources, such as Social Security from the government, a pension from your employer, and an individually acquired annuity, is common in a traditional retirement portfolio. The amount of retirement income you will get from these sources can help you decide how much risk you will take with your remaining retirement funds. In general, the more locked-in retirement income you have as a base, the more risk you will take with your remaining savings. And it has nothing to do with the ‘100 minus your age’ rule.

Another problem is that your legacy objectives will have an important role when deciding the amount of equity you should have in your retirement capital. If leaving a legacy is important to you, you can allocate a larger portion of your savings to equities. Stocks have a greater chance of keeping up with inflation, so you'll definitely see more long-term growth with them than you will with a certificate of deposit (CD). If you don't want to leave a legacy, put your money in annuities and say goodbye to portfolio management.

There are many factors that determine the way you should invest your retirement funds. However, the difference between the conveniently easy-to-remember number 100 and your age is not one of them.

 

Bottom Line

Think of rules of thumb in retirement planning as easy-to-calculate guidelines that help you steer your plans in the right direction. They're essentially a numerically dependent heuristic that uses a mental shortcut to decide with minimal cognitive effort. And that's fine for as long as the rule is founded in reality and is applied as a starting point rather than a conclusion in resolving the problem at hand.

So about the four rules mentioned above? 

Rule 1: The 80 percent rule of thumb, which states that you should aim for a retirement income that is 80% of your pre-retirement income, is out of date. When retirees used to have a defined benefit pension package and lived in their paid-for home for the rest of their lives, it worked well. This rule of thumb doesn’t provide much guidance in today's economy. A better strategy will be to look at the current expenditures and determine which ones will continue in retirement and which will be eliminated. Also, consider the course of your anticipated expenses. Will there be go-go years with higher costs followed by no-go years with lower costs? When you project these costs, you'll have a better idea of what you'll need in retirement.

Rule 2: The magic retirement age of 65 has never been especially magical, and it is certainly not a requirement for determining when to retire. Although it is the Medicare qualifying age (an important consideration), it is no longer the maximum retirement age for Social Security (think age 67 for most pre-retirees) and has little bearing on how much money you will earn from your defined benefit plan. Years of service aren't taken into account in 401(k)s; instead, they focus on the contributions and how they've been invested. Assessing your potential retirement-income opportunities at different ages and then working backward to ascertain what age you can afford to retire is much more useful in retirement planning. There are plenty of retirement calculators available to make the process easier than it seems. These calculators will become the latest retirement planning rule of thumb. To put it another way, begin by plugging your information into a retirement calculator to figure out when you'll be able to afford to retire. It may be 67 or 61, but it gives you a starting point.

Rule 3: Scholarly publications have long discussed the benefits and drawbacks of the "4% rule." The sheer amount of scholarly debate on the subject supports the idea that this general rule of thumb has some validity. If your withdrawal strategy starts at 4%, be sure to fine-tune it as you progress through retirement to reflect reality.

– Four percent might be less of a “sure thing” than it has been in the past. That might be acceptable, but what happens if markets do not perform well?

– How you spend your money would have a huge impact on the strategy's feasibility. Prepare to preserve a well-balanced equity and fixed-income portfolio.

– Consider implementing guardrails and other strategies to help you properly navigate unpredictable financial markets. During difficult times, you might need to adjust your withdrawals. Think of 4% as a guideline rather than a goal.

Rule 4: The argument that 100 minus your age would tell you how much to invest in stocks isn't real just because it's a catchy one. Asset allocation should be at the heart of your retirement planning activities, particularly in a world where your retirement security is determined by how you spend your retirement capital rather than the fixed benefit provided by your employer. Instead of using the 100-minus-your-age rule of thumb, make sure you have a good investment plan. Do your research, seek assistance, and keep your strategy up-to-date.

As a rule of thumb, these suggestions will assist in ensuring a more secure retirement income.

Many Americans spend their lives working and fantasizing about the day they will be able to retire. However, planning for retirement involves more than just daydreaming; it necessitates being strategic and concentrating on saving money, among other things. A Gallup survey has reported that the average retirement age for Americans is 66, up from age 60 in the 1990s. With an average life expectancy of 78.7 years in the U.S., that's a solid twelve or more years to enjoy life after a career, ideally at a slower pace.

The U.S. Census reported that the average income of the 47.8 million Americans aged 65 and older is $38,515, and they have an average net worth of $170,516. Saving for retirement might be challenging with such numbers. Here are some more startling facts on the state of retirement in the United States.

Young people believe they’ll retire early… until they get older

According to a Gallup survey research, when asked about retirement, 18- to 29-year-olds expressed confidence that they’d be able to retire early, closer to their early sixties. However, as they reach age 30, their optimism fades, maybe owing to the reality of earning a living catching up with them.

Retirement could last longer than expected.

Average life expectancy is not a proper way to plan how much money you'll need in retirement; many Americans live far longer than the average of 78.7 years, reaching their eighties or nineties. As per the Social Security Administration, a healthy 65-year-old woman has a very good probability of reaching age 86, while a healthy 65-year-old man has a good chance of living to age 84. Older individuals should plan for a 20-year retirement.

More Americans are preparing for a longer retirement

Fortunately, Americans appear to be taking the prospect of living a longer life seriously. A T.D. Ameritrade study found that 81% of Americans are moving assets in anticipation of living longer than their ancestors did by cutting spending, purchasing secured life insurance, and increasing their contributions to retirement plans.

Many Americans are withdrawing retirement funds early.

On the other end of the spectrum, there’s a growing trend of Americans withdrawing from their retirement accounts early from individuals preparing ahead for a longer life. According to the T.D. Ameritrade study, 44% of Americans aged 40 to 79 have pulled money out of a retirement plan, while 46% of those aged 40 to 49 have done so too, as well as 53% of those aged 70 to 79.

Early withdrawals from a retirement plan are generally subject to financial penalties; therefore, financial experts advise against it.

Not every American has a retirement plan.

According to a TransAmerica Center poll, 77% of American workers save for retirement through employer-sponsored retirement plans and other alternatives. The average age at which workers begin saving for retirement is 27. However, that means that 33% of workers don’t have a real retirement savings plan.

Americans are missing out on savings.

Even though 77% of Americans have retirement plans, many haven’t saved enough to finance their after-retirement life at the same level as their working years. According to a 2017 Government Accountability Office (GAO) report, the average retirement savings for Americans between the ages of 55 and 64 was slightly over $107,000. The GAO points out that while this sum may appear substantial, it would convert into a monthly payment of only $310, and that's if put in an inflation-protected annuity.

You can't rely on Social Security.

According to Business Insider, if you rely on Social Security to support your after-retirement life, you should be aware that it’s only guaranteed to be funded until 2035, after which it may only be three-quarters funded. That implies that those who are currently receiving payments from it may experience a decrease in payments, while new retirees may have difficulty receiving any money at all. Part of the reason for this is a rise in the number of older adults. By 2035, the number of Americans aged 65 and over will have risen from around 56 million today to more than 78 million. As a result, more people will withdraw funds from the total fund, while fewer would be contributing to it.

You could be forced to retire before you're ready.

While it's good to have a retirement plan in place, life has its own agenda. According to the T.D. Ameritrade poll, the most prevalent reasons for retiring are health and employment changes. Fifty percent of people retired earlier than they would have wanted due to factors such as layoffs, caregiving obligations, an unforeseen change in their financial situation, and health difficulties.

You need more money than you think for retirement

Experts estimate that you would need between $500,000 and $1 million saved to maintain your current standard of living during your retirement years. This is a hefty amount of money that will take years to accumulate.

Assisted living is expensive.

There's a 70% probability that an American aged 65 or older will require long-term care at some time, as reported by the U.S. Department of Health and Human Services. If you need to use an assisted living facility, the expenses might be extremely high, and Medicare won’t cover them. The average monthly cost of an assisted living facility is $4,051, which is more than double the cost of a nursing home. That’s without including other healthcare expenses. This is why many older individuals choose long-term care insurance in their sixties.

With the increasing incidence of cost-cutting measures in jurisdictions, hybrid retirement packages have become increasingly popular. The National Institute on Retirement Society (NIRS) recently published a book to educate public workers on the types of hybrid retirement packages. The book titled “Hybrid Handbook | Not All Hybrids Are Created Equal” dwells on the kinds of hybrid packages. It also contains some helpful pointers for plan sponsors who would like to add hybrid packages to their available plans. The purpose of educating sponsors, the NIRS said, is to ensure that the harmful practice of just adopting hybrid packages without proper consideration ends. It also added that careful consideration of packages would better benefit retirees. 

According to the NIRS, hybrid plans differ in benefit employees and how cost-effective they are. Here are the five basic types of hybrid retirement packages and the strong suits of each package, as the NIRS stipulates. 

1. Cash balance plans

 

This type of hybrid plan started with the Texas Municipal Retirement System in 1947. It is the oldest of its kind. Cash Balance Plans have the attributes of both Defined Benefit and Defined Contribution plans. Under this system, employees and employers pay a part of the retirement benefit. The system takes the payments and accrues them to a notional account for every employee under the scheme. The accrual continues over the years in addition to the interest that helps grow the account until retirement. At retirement, an employee could decide to collect the accruals and interest as a lump sum or change the money to an annuity. 

The NIRS stated that the accrual system that CBPs use is similar to the design of DC plans. It also added that the system favors young professionals more than public workers already in their mid-years. For workers in the latter category, DB plans are more suitable. Also, annuitization and interest crediting plans go a long way to decide how valuable the cash balance plan will be in securing the retirement years of workers. 

2. Vertical hybrids

 

As a hybrid package, vertical hybrids also blend DB and DC plans. Vertical hybrids begin with DB plans, which continue to a specific level, and then switch to DC plans. The point of switch, known as the integration level, is sometimes fixed. At other times, it fluctuates. The NIRS explained that vertical hybrids are not as common as other hybrid packages. It also listed the City of Philadelphia’s Plan 16 for employees that joined service after August  20, 2016, as the only example in the United States. 

The downside to this plan is that workers will switch to DC plans at a point where they can no longer take as many financial risks. They also have a small window to grow their retirement funds since they will only receive interest for a short period. 

3. Horizontal hybrids

 

Here, both DB And DC plans are in play at the same time. But only a portion of both programs is in play, meaning you won't be getting all the benefits of DB and DC plans. According to the NIRS, if a horizontal hybrid plan affects DB more, the plan's sponsor takes less risk since employees bear more financial obligations under DC plans. The horizontal hybrid plan is advantageous for workers who retire before attaining their full retirement age as their benefits remain considerate and significant. 

According to the NIRS, horizontal hybrids are the most popular hybrid plans in the United States. 

4. Choice schemes

 

As the name suggests, choice schemes are based solely on participants' desires. A participant can decide to go for a DB or DC plan. Members must choose the right plan that applies to their situation to get the best out of this hybrid package. The NIRS said that the major drawback of the plan is that participants are making the wrong decisions. The agency added that employers could remedy the situation by educating members about their options and allowing them to make changes after the first year in service. 

5. Risk-sharing defined benefit plans

 

There are different types of risk-sharing plans. However, they have certain things in common. First, they pool members just like DB plans. They also provide lifetime benefits for participants. However, each type has specific features. These features are usually about risk-sharing between sponsors and participants. The risks, such as mode of contribution, COLAs, and accrual of benefits, are shared instead of left to the sponsors alone, as is tradition. 

Life insurance means many things for most people. For some, it’s a source of income for their dependents to live on, cover outstanding debts, pay for their kid’s education or cover their burial costs upon their demise. A life insurance policy is a must-have for anyone who wants to leave an inheritance for their dependents when they pass away.

 

How life Insurance Works

There are various life insurance types and they all work the same way. You make premium payments in exchange for the company to pay your beneficiaries what’s known as a death benefit upon your passing. Life insurance is a great way to protect your beneficiaries’ financial future. A beneficiary can be a person, individual, an estate, a trust, or an organization.

In rare cases, like when diagnosed with a terminal illness, the policyholder may access the insurance funds while still alive.

 

Life Insurance Payout Options

There are various payout options insurers adopt in compensating beneficiaries of an insurance policy:

1. Lump sum: with a lump sum, the beneficiary will receive all the policy payout at once.

2. Installments or annuities: Installments or annuities imply the beneficiary will receive the payout and accumulated interest over time.

3. Retained asset account: If the policy is large, the insurance company can allow beneficiaries to write checks against the account’s balance.

 

Choosing Beneficiaries 

When buying a life insurance policy, you will be asked to name one or more beneficiaries. This can be your spouse, children, parents, siblings, estate, trust, business partner, or a charity organization. You can name anyone as your beneficiary, provided you can prove they will struggle financially following your death. You can also name multiple beneficiaries and update them as you go.

 

What Does Life Insurance Cover?

Once disbursed, beneficiaries can use the death payout from a life insurance policy for whatever they want. It can be used to pay for everyday expenses, mortgages, covering funeral costs, putting a kid through college, child-care, and more.

The life insurance company must be contacted upon the individual’s death to start the claim and payout process. As long as the policy is active at the time of your death, your insurer is obligated to make payouts to your beneficiary but with a few exceptions. Insurance companies will make payouts due to natural causes, accidental death, suicide, homicide, etc.

However, the provider’s liability may be limited in cases of expired policy, criminal activity, fraud, or other exclusion like hazardous hobbies.

 

Who Needs Life Insurance?

• Parents with young children or kids with special needs.

• Older adults without savings.

• Young adults who want to lock in low rates.

• Business owners.

• Adult with private student loans.

 

When Should One Start Thinking About Life Insurance?

No age is too early to start thinking about life insurance. You should buy life insurance if:

• You prefer to pay lower premiums

• When you reach specific life milestones

• You are young and healthy

 

Types of Life Insurance

There are two major types of life insurance: term and permanent policies. A term policy covers a specific amount of time, while a permanent policy covers you for life.

The amount for premiums can be as little as a few dollars up to millions.

Whole Life Insurance: A whole life insurance covers you for your entire life. It comes with fixed premiums and guaranteed cash value on top of the death benefit.

Universal Life Insurance: This offers a more flexible life insurance option. The policyholder can reduce their death benefits and reduce or increase their premium. There are various types of universal life insurance, including indexed universal life policy, guaranteed universal life policies, and variable universal life policy. Some universal life insurance options are subject to market fluctuations.

 

How to Get Life Insurance

The eligibility criteria to buy life insurance vary based on the company. Most companies will require you to undergo a compulsory medical checkup before taking out the life insurance. The test helps the insurer determine the premium the person would pay.

They may also require documents like proof of identity, citizenship, birth certificate, driver’s license, valid passport, resident permit, or more. Others may include proof of income and social security number.

 

What Affects Life Insurance Premiums?

Several factors affect the cost of life insurance, including the following:

1. Age: the older one gets, the more expensive it will be to buy a life insurance policy.

2. Gender: Men typically pay more in premium than women due to short life expectancy.

3. Other factors include frequency of cigarette smoking, weight, health, lifestyle, policy type, and amount of coverage.

 

Things You Should Consider When Buying a Life Insurance

• Understand the factors that affect your premiums

• Know the difference between whole life insurance and term life insurance.

• Determine if you can get a no-exam policy.

• Understand your current financial situation

• Know the coverage you need

• Shop around

• Don’t lie in your application

• Don’t focus on premium

 

Americans frequently find themselves with expenses they didn’t anticipate in their golden years, from dealing with unforeseen medical expenses to supporting adult kids. It’s also more challenging to save for retirement now than it was 50 years ago.

According to a 2019 TD Ameritrade poll, more than 30% of Americans want to keep working after retirement. If you're unsure about how long you'll have to work or what to expect once you retire, learn the harsh realities so you can decide when to retire.

1. Some of your investment outcomes will be dependent on luck

What happens in the market in the ten years leading up to and following your retirement date can significantly impact how well-funded your portfolio is.

“It's hard to replace lost money during this critical period, either due to time restrictions or the loss of earned income,” says Patrick Daniels, a financial planner with Precedent Asset Management in Indianapolis.

To protect your retirement funds during the "high-risk window," Daniels recommends that you "take a cautious approach with your investments."

2. However, you may still invest too cautiously

“If you avoid high-potential assets like stocks, you risk making a mistake in retirement and outspending your lifestyle,” according to Joseph Carbone, a certified financial planner and founder of Focus Planning Group (Bayport, New York).

“Retirees should seek total return-type strategies that emphasize stock appreciation – especially dividend-producing stocks – and high-quality bonds with shorter maturities,” says Carbone. “Many of my retired clients or those nearing retirement have a 60% stock/40% bond allocation, focusing on dividend-paying stocks and bonds with a term of fewer than six years.”

3. Maybe you’re not saving enough

A recent GOBankingRates survey found that around 64% of Americans had less than $10,000 saved for retirement. Even if you want to live simply in your retirement years, that sum will not be enough. Questis' Matt Ritt, a licensed financial planner, and investment advisor advised investors to "start saving as soon as possible."

Ritt also encouraged investors to maximize contributions to 401(k), 403b, and IRA whenever possible, taking advantage of those accounts. He said to limit your costs and stick to a reasonable budget.

4. If you’re younger…

More than half of Millennials have no retirement savings, according to the GOBankingRates survey.

That's a pity since the younger you are, the greater your potential to increase your nest egg via the power of compound interest. If you start saving $200 a month at the age of 25, you could have $621,735 by age 65, assuming an 8% annual return.

5. …Or if you’re older

Unfortunately, Baby Boomers, the generation closest to retirement, aren't doing any better.

A GOBankingRates retirement survey found that 30.7% of adults over age 55 had retirement savings of less than $50,000, which is deemed inadequate for those nearing their golden years. Late savers may have to make up for lost time with their retirement contributions – or even postpone retirement for a few years.

6. You will likely live longer than your parents, which will cost more

The average life expectancy in the United States now is 78.6 years, as reported by the Centers for Disease Control and Prevention. And the unfortunate reality of retirement is that the longer we live, the more we have to pay to finance our prolonged golden years.

“With Americans living longer than ever before, it's no wonder that outliving their income is their top concern,” said Jim Poolman, executive director at the Indexed Annuity Leadership Council. However, there are options for outliving income, for example, considering products that provide guaranteed lifelong income, like fixed indexed annuities.

7. You could lose out if you don’t time your Social Security benefits correctly 

If you begin receiving Social Security benefits before reaching full retirement age, your monthly amount will be reduced indefinitely. If you wait until you're age 70, you'll get more money with each check.

However, that doesn’t mean one strategy is always superior, especially when you take into account spousal and survivor benefits. Fortunately, numerous Social Security optimizers available, like the Quicken Social Security Optimizer, can help you determine the ideal timing to begin receiving Social Security benefits.

8. You may regret not making your Roth contributions

“Roth accounts are established with after-tax money, so investment profits grow tax-free throughout the life of the investment. Hence, the younger you are, the more you may benefit from them,” according to Ritt. As a result, they are an excellent choice if you anticipate paying a higher tax rate in retirement than you do today. By withdrawing cash from your Roth account before your taxable account, you reduce the amount of distributed funds you'll have to pay tax on that year.

9. You’ll have to consider several financial issues

“Those approaching retirement and those who have just begun retirement have the challenge of managing cash flows for their new lifestyle,” says Scott Smith, a CFP at Olympia Ridge Personal Financial Advisers in Rochester Hills, Michigan.

Smith advised developing a five-year cash-flow plan before tapping your IRA or brokerage account, which should account for the tax implications of distributing from your pension, annuity, Social Security, retirement savings, and even possible part-time income.

“Frequently, these decisions are made without regard for tax efficiency, and the retiree ends up paying more in taxes than they actually need to,” he said.

10. Your Medicare probably won’t be enough

Medicare doesn’t cover many procedures, such as dental, hearing, vision care, and long-term care in an assisted living or nursing facility. Many retirees are also confronted with surprisingly hefty deductibles and copays.

“The ideal solution is to prepare for unexpected medical expenses while you grow your retirement funds,” says Joshua Zimmelman, founder of Westwood Tax & Consulting. “You may also enroll in a Medicare supplemental insurance plan that can help to pay for co-payments, deductibles, co-insurance, prescription medications, and medical treatment when traveling abroad,” he added.

11. Your healthcare will be more expensive than you think

According to a Fidelity report, the average couple retiring at age 65 in 2019 will spend $285,000 on medical expenses in retirement. And Medicare won’t cover all those expenses.

“When it comes to preparing for those medical expenses in retirement, a health savings account (HSA) may be of great help,” says Jody Dietel, senior vice president, advocacy and government affairs at HealthEquity. According to him, when combined with a high-deductible healthcare plan, HSA contributions are tax-free, the balance accumulates tax-free, and withdrawals are tax-free.

“The account can help you create a healthy nest egg that will save you from having to dip into your 401(k) for unforeseen healthcare expenses,” said Dietel.

12. Most people will require long-term care

According to the US Department of Health and Human Services, around 70% of adults over age 65 will require long-term care at some point in their life. “The cost varies by state, but three years may easily cost $300,000,” said Mark Struthers, a certified financial adviser at Sona Financial in Chanhassen, Minnesota.

As protection against likely costs, Struthers recommended that retirees get long-term care insurance, which was designed to cover long-term expenses such as skilled nursing, assisted living, and hospice care.

13. Your overall health will impact your retirement expenses

According to the CDC, regular physical activity and exercise can help you handle and avoid chronic illness, which is costly to treat. The National Institute on Aging has sample workouts and nutrition information for retirees and those nearing retirement.

14. Inflation can deplete your savings

For the past 25 years, the United States has had very low inflation, owing in large part to strategic decisions by the Federal Reserve. Even so, as anybody who has lived through a period of hyperinflation will tell, 10%-per-year inflation is possible.

Inflation, according to Struthers, may be disastrous for retirees. If we’re in retirement for 30 to 40 years with a fixed income source, our purchasing power can easily be decreased by 60 to 70%.

Struthers advised investing in inflation-sensitive assets such as Treasury inflation-protected instruments (TIPs) and I-Bonds to mitigate the consequences of inflation.

15. You don’t have a clear idea of how much you’re spending

You should have a good sense of how much money you're spending. Still, if you don't, you're not alone.

"More than half of the folks I talk to who are planning for retirement don't have a solid grasp of how much they spend and where it goes," said Daniel P. Johnson, CFP and Forward Thinking Wealth Management's founder, in Akron, Ohio.

Retirees must be aware of this information because they’ll use their assets to bridge the gap between what goes out and what comes in via their pensions and Social Security plans.

“There's a big difference between expecting to require an extra $20,000 a year from your investments to close the gap and actually needing $50,000,” said Johnson.

16. While your child can borrow for college, you cannot borrow for retirement

According to Sally Brandon, senior vice president, client service and counseling at Rebalance IRA, many parents are torn between helping their children pay for college and saving for retirement. “Putting a lot of money into a college fund isn't helpful if your retirement funds suffer as a result,” she explained.

Instead, Brandon advised creating a budget for how much money you can afford to put toward education.

“Tell your child how much you can afford to pay,” she said. “If you have additional money after you've saved what you need for retirement, that's even better.”

17. Your employer may not help you in preparing

“Not every workplace provides a 401(k) or comparable plan. While a 401(k) is a fantastic retirement tool when available,” Brandon added, “other alternatives are also available to you.” She advised those who didn't have an employer-sponsored plan to set up an automatic payment plan to fund a Roth IRA.

“A Roth IRA enables you to save for both emergencies and retirement. Money put in as a contribution can be withdrawn tax-free afterward,” said Brandon. The account can also be used for estate planning and is typically more tax-efficient than a traditional IRA.

18. You can overspend on a home…

A survey conducted by American Financing revealed that 44% of Americans aged 60 to 70 still have a mortgage when they retire, as reported by the Chicago Tribune. “Some retirees even expand their houses,” said Cary Carbonaro, a Goldman Sachs certified financial adviser and author of The Money Queen's Guide: For Women Who Want to Build Wealth and Banish Fear.

“A large mortgage payment can severely restrict cash flow, especially for those on a limited income. It's always wise to cut costs by downsizing,” Carbonaro added. Taxes, utilities, and maintenance expenses are usually continuously increasing.

19. …or you can be home poor

However, paying down your home may not be an optimal solution if it leaves you with insufficient retirement funds.

“Suppose the majority of your wealth is tied up in your primary residence as you approach retirement. In that case, it can be challenging to come up with a good solution that’ll allow you to maintain your preferred lifestyle – especially if you want to stay in the home,” said Taylor Schulte, founder, and CEO of Define Financial, a commission-free financial planning firm in San Diego.

Schulte advised reducing and using part of the equity to help finance your retirement. “Many people in this circumstance already have a home that is way too large for their needs anyway,” he added.

20. You might have to relocate

Depending on where you reside, you may want to consider relocating to a region where your retirement funds will go further. For many individuals, especially those concerned about their retirement, it's a cost-cutting measure. It's also an opportunity to move to a more desirable climate or be closer to grandchildren and like-minded ex-pats.

21. Maybe you’ll need to work part-time 

Some senior Americans understand the physical and mental health benefits of keeping one's intellect engaged. Others don’t have the financial means to retire. Whether you work postage  67 because of need or choice, one thing is certain: the extra money can significantly improve your retirement savings.

22. Your adult children could wreck your retirement plans…

If you want to retire, you may need to divorce your children. According to a Merrill Lynch and Age Wave study, 79% of parents continue to support their adult children financially.

Middle age is also the prime income-earning period for many Americans, and it is ideal for savers to have the maximum disposable income available to supplement retirement accounts. Providing financial support to a loved one during those years might seriously affect your retirement funds.

Benjamin Brandt, CFP and president of Capital City Wealth Management in Bismarck, North Dakota, advised incorporating a plan B alternative into a retirement plan. “For example, if you expect your child might return home, being proactive instead of reactive will always lead to better retirement results,” he says.

23. …or by your aging parents

Because most adult children are hesitant to renounce support from a parent, Brandt advised workers to plan ahead of time if they anticipate this cost.

“If a client believes they’ll probably take care of a parent, they may develop a contingency plan,” he said. “They can transition to part-time work sooner than expected, or they may be able to work longer if more finances are required rather than extra time as a caregiver,” added Brandt.

24. Or you might end up in a sandwich between both generations

According to a Nationwide Retirement Institute survey, 38% of older adults said their adult children live or have lived with them, and 16% said their parents lived or have lived with them. Some older adults may find themselves providing financial support and care to two generations at the same time.

"This problem is so widespread that it has a name: the Sandwich Generation," said Brandt.

Many people sacrifice their capacity to save for retirement by supporting loved ones. A Nationwide Retirement Institute survey showed that 21% of older adults are somewhat or very concerned about financially helping their adult children or parents.

25. You’ll need to discuss your end-of-life decisions with your children

No one likes to think about their death, but according to the National Institute on Aging, it's preferable to discuss end-of-life care preferences well before disease strikes.

Individuals should think about when they want to take life-prolonging measures, where they want to get care, as well as what they want to happen if they become physically unable to care for themselves. The unfortunate reality of retirement is that these are the years when such decisions must be made, and it’s best to discuss your preferences with your loved ones – and your doctors.

26. You’ll have to talk about your wealth transfer plans

Even if you have a little inheritance to pass down, it might be tough to start the money talk, especially if you don't know how your future heirs would respond to the news of an upcoming windfall. Some kids feel guilty when they receive something unearned and waste the funds. Others may misinterpret your motives. "Did Mom love my brother more than me?" is a common question among children of the departed.

To prevent misunderstandings, have a sit-down talk with your future heirs so they understand the reasoning behind your decisions and can begin emotionally preparing.

27. You'll need to think about your burial plan

 

“Many individuals are uncomfortable talking about death,” says funeral director Veronica Reyes. Still, ignoring the subject might lead to bigger issues, especially if you wait until your health is in bad shape.

 

“Solidifying your burial or cremation arrangements now, with a calm and clear head allows you to lock in a fixed price,” she said. This way, your loved ones won’t be faced with difficult decisions or unexpected funeral expenses.

An annuity is a type of pension plan that allows you to receive a fixed income for the rest of your life in exchange for a lump-sum investment. The life insurance firm you choose to invest your money in invests it and pays you back the profits.

 

The ultimate aim of comprehensive retirement planning is not to generate a high investment return but to satisfy all financial goals after retirement peacefully. It is critical to have a consistent income source to pay for basic monthly expenses and avoid becoming economically dependent on others.

 

Annuity Types

 

Based on when they’re purchased, annuity plans are classified into two types: Deferred Annuity and Immediate Annuity.

 

Deferred Annuity

 

Deferred annuity plans require you to make a one-time lump-sum payment to acquire an annuity plan and defer the payout until a later date – usually when you retire. When you retire, you begin receiving monthly income from the invested corpus as a pension.

 

When you invest in a deferred annuity plan, you do not have to convert the entire corpus into an annuity – a regular flow of income. One of the most important advantages of investing in deferred annuity plans at the right age is that you may lock in future interest rates without worrying about a decline in interest rates a few years later.

 

A deferred annuity plan requires you to make a one-time payment and wait until you retire or reach age 60 to begin receiving the pension. For example, suppose you are 50 years old and invest a lump sum of INR 50 lakh in a deferred annuity plan. When you turn 60, you’ll begin receiving INR 45,400 as a monthly pension for the rest of your life. Upon your death, your financial dependents will get the purchase price or invested amount as a lump sum, i.e., INR 50 lakh.

 

Immediate Annuity

 

When you invest in an immediate annuity plan, you invest a lump sum payment with the insurer rather than paying a series of premiums over a certain period of time. The plan in which you decide to invest provides you a lifelong regular guaranteed payment. An immediate annuity plan is the best option for someone who recently retired and has enough money to make a one-time investment and begin receiving a monthly income immediately.

 

If you invest INR 50 lakh in an immediate annuity plan to purchase a plan that covers both you and your spouse (joint life cover), you’ll start receiving a pension of INR 25,600 the very next month. You’ll keep receiving this pension for as long as you live.

 

However, if you die, your spouse will begin receiving the same amount until they’re alive. Following your and your spouse’s deaths, your financial dependents will get the whole invested amount, i.e., INR 50 lakh, as a lump sum. Such features are only available in joint life insurance policies with a return of purchase price variant of an immediate annuity plan.

 

Annuities You Can Choose From 

 

Joint Life Annuity with Return of Purchase Price

 

The most popular annuity plan in the pension products category is the joint-life annuity plan with purchase price return. With this plan, the policyholder receives a lifelong fixed monthly income based on the amount invested.

 

Upon the policyholder’s death, the spouse begins receiving the policyholder's monthly income. The pension will continue to be paid until the spouse dies. When both the insured and the spouse die, the policyholder's financial dependents get the entire invested amount as a lump payout with no deductions. However, while purchasing this plan, keep in mind that the pension obtained under joint-life annuity is lower than that of other variants since the pension is split between two people.

 

These plans are ideal for those with low monthly costs and those who want to leave a substantial inheritance to their children.

 

Life Annuity with Return of Purchase Price

 

Another common variant of an immediate annuity plan is life annuity with a return of purchase price. This plan functions similarly to a joint-life annuity plan, with the sole distinction being that only the policyholder receives the pension for life under this plan.

 

Upon the policyholder’s death, the financial dependents – spouse and children – receive the purchase price, i.e., the entire invested amount, in a lump payout. The dependents can use this money to cover everyday costs and other financial obligations, such as the spouse's retirement planning. Furthermore, some plans allow you to receive the purchase price in convenient monthly installments. The monthly pension received under this variant is substantially more than the monthly pension received under joint life cover.

 

Before you invest in an annuity plan, keep in mind that the pension earned from an annuity plan is not tax-free. The policyholder must pay pension tax per federal government rules. Furthermore, because this is a lifelong commitment, you must evaluate your insurer beforehand on numerous key factors.

 

Is Investing in an Annuity Plan a Good Idea?

 

Annuities are one of the most trusted forms of a guaranteed fixed income for retirement for four significant reasons.

 

1. You can purchase annuity plans at any point in your life. While some might purchase when they are near retirement age because they have a ready investment corpus, others, particularly those who wish to secure their assets, might rather invest in annuity plans during their mid-career.
    

2. You could lock in your annuity plan’s interest rate. Annuity plans remove reinvestment risk since you may close in the interest rate for your whole life when you purchase the product. With interest rates constantly fluctuating and the present low-interest rate regime, having a product that guarantees you a lifelong income at the same interest rate becomes crucial. Assume you are 62 years old and intend to purchase an annuity with an annual payout of 5-6% of the invested amount. If interest rates decrease to 3-4% after a few years, say 8-10 years, you will still get the same interest rate as when you first placed your money.

 

This leads to annuity plans outperforming other investing alternatives.

 

For example, when interest rates on most investment products are decreasing dramatically in today's market, the current rate of return on bank fixed deposits (FDs), the most popular investment instrument among Indians considering retirement, is very low by historical standards. The interest rate was 8.5% in 2014 and has reached a record low of 5.4% in 2021. Anyone who held an FD of INR 10 lakh with an interest rate of, say, INR 25,000 per quarter will now receive INR 18,000 per quarter, or possibly less if interest rates fall further in the future.

 

3. Annuity plans have no investment limits. This is in contrast to other schemes, like the Senior Citizens Savings Schemes, in which you may invest up to INR 15 lakh, and the Post Office Monthly Income Scheme, in which the maximum investment is INR 4.5 lakh.

 

4. You can count on a steady stream of income. An annuity plan may be the best option for someone looking to manage the longevity risk. Annuities guarantee a stable income at a rate of interest comparable to most other investment instruments. You might include annuity plans in your retirement portfolio since they provide security and a regular income flow.

 

Where Can I Purchase an Annuity Plan?

 

Numerous life insurance firms provide both immediate and deferred annuity plans. Customers can select one based on their particular needs and requirements. Various insurance firms provide immediate annuity plans, like HDFC Life Insurance, Max Life Insurance, Bajaj Allianz, Tata AIA, ICICI Prudential, PNB MetLife, Canara HSBC OBC, Kotak Life, and SBI Life. All of these plans are available in three variations: "Only Pension," "Pension for Life," and "Pension for Life with Return of Premium." You can select any of these options for yourself or a joint cover for you and your spouse.

 

There are several insurers and plans to select from in the deferred annuity plans category, including Bajaj Allianz, Max Life Insurance, ICICI Prudential, HDFC Life, Tata AIA, Canara HSBC OBC, and IndiaFirst.

 

Buy Online and Earn an Additional Pension

 

When purchasing products and services online, you can easily compare the same products from several companies and select one that best meets your needs and requirements. This reasoning also applies to annuity plans.

 

When you purchase annuity plans online, you have the option of evaluating the products based on a variety of criteria, and you may even make extra money. This is because when consumers invest in annuity plans online or purchase these plans online, they get an additional payout of more than 3% on the whole invested corpus.

 

For example, Harish Goel, age 60, plans to invest INR 75 lakh in an immediate annuity plan that provides a lifelong pension as well as the return of the whole corpus invested to the nominee. Harish purchased this plan online after he compared it with other plans, and he’ll get a monthly pension or income of INR 38,340, totaling INR 4,60,080 per year. If Harish had acquired the same plan offline through an insurance agent or bank, he would have gotten INR 37,090 per month as income/pension, for a total of INR 4,45,080 per year. Now, by investing the money online over a 40-year period, he’ll get an additional payout of INR 6 lakh above investing the money offline.