When you determine your retirement income needs, you make your projections based on the type of lifestyle you plan to have and the desired timing of your retirement. However, you may find that reality is not in sync with your projections, and it looks like your retirement income will be insufficient to meet your estimated expenses during retirement. This is called a projected income shortfall.
There are many reasons why women, on average, are more likely than men to face a retirement income shortfall. Because women’s careers are often interrupted to care for children or elderly parents, they may spend less time in the workforce. When they’re working, women tend to earn less than men in similar jobs, and they’re more likely to work part-time. As a result, their retirement plan balances and Social Security benefits are often smaller. Compounding the problem is the fact that women often start saving later, save less, and invest more conservatively than men, which decreases their chances of having enough income in retirement.1 And because women tend to live longer than men, retirement assets may need to last longer.
If you (or you and your spouse) find yourself facing a shortfall, the best solution will depend on several factors, including the severity of your projected deficit, the length of time remaining before retirement, and how long you need your retirement income to last. In general, you have five options–save more now, delay retirement, find new sources of retirement income, spend less during retirement, and/or seek to increase the earnings on your retirement assets (but by doing so you could also increase your risk of loss).
Save more, spend less now
Save as much as you can. Take advantage of IRAs, employer plans like 401(k)s, and annuities, where investment earnings can potentially grow tax deferred (or, in the case of Roth accounts, tax free). Utilize special “catch-up” rules that let you make contributions over and above the normal limits once you’ve reached age 50 (you can contribute an extra $1,000 to IRAs, and an extra $6,000 to 401(k) plans in 2017). If your employer matches your contributions, try to contribute at least as much as necessary to get the maximum company match–it’s free money.
If you don’t have enough discretionary income to save more for retirement, try adjusting your spending habits to free up more cash. Depending on how many years you have before retirement, you may be able to get by with only minor changes to your spending habits. However, if retirement is only a few years away, or you expect to fall far short of your retirement income needs, you may need to change your spending patterns drastically to save enough to cover the shortfall. You should create a written budget so you can easily see where your money goes and where you can reduce your spending.
Delay retirement
One way of dealing with a projected income shortfall is for you (or your spouse, or both of you) to stay in the workforce longer than you had planned. This may allow you to continue supporting yourself with a salary rather than dipping into your retirement savings.
Delaying retirement might allow you to delay taking Social Security benefits (which may increase your benefit) and/or delay taking distributions from your retirement accounts. The longer you can delay tapping into your retirement accounts, the longer the money will last when you do begin drawing down those funds. Plus, the longer you delay retirement, the longer you may be able to contribute to an employer-sponsored retirement plan, or earn additional pension benefits.
While you might hesitate to start on a new career path late in life, there may actually be certain unique opportunities that would not have been available to you earlier in life. For example, you might consider entering the consulting field, based on the expertise you have gained through a lifetime of employment.
Consider investing more aggressively
If you are facing a projected income shortfall, you may want to revisit your investment choices, particularly if you’re still at least 10-15 years from retirement. If you’re willing to accept more risk, you may be able to increase your potential return. However, there are no guarantees; as you take on more risk, your potential for loss (including the risk of loss of principal) grows as well.
It’s not uncommon for individuals to make the mistake of investing too conservatively for their retirement goals. For example, if a large portion of your retirement dollars is in low interest earning fixed-income investments, be aware that the return on such investments may not outpace the rate of inflation. By contrast, equity investments–i.e., stocks and stock mutual funds2–generally expose you to greater investment risk, but may have the potential to provide greater returns.
Your investment portfolio will likely be one of your major sources of retirement income. As such, it is important to make sure that your level of risk, your choice of investment vehicles, and your asset allocation are appropriate considering your long-term objectives. While you don’t want to lose your investment principal, you also don’t want to lose out to inflation. A review of your investment portfolio is essential in determining whether your current returns are adequate to help you meet your goals.
Use your home
There are a number of ways you can use your home to help you spend less, and free up cash to save more. Consider using home equity financing to consolidate outstanding loans and reduce your interest costs or monthly payment (but be careful–increasing your debt could put you at risk of losing your home if you can’t make the increased payments). If you’re still paying off your home mortgage, consider refinancing your mortgage if interest rates have dropped since you took the loan.
You may also be able to use your home as a source of income during retirement. If you’re willing to move, you may be able to free up a large amount of cash by selling your home. How much you’ll realize depends on the amount of equity you have and where you’ll live when the “sold” sign appears in front of your house. You could rent, live with your children, buy a smaller home or a condominium, or move into a retirement community. If you don’t want to sell your home, and you have extra space, you might consider renting out a room.
Reevaluate your expectations
If your projected income shortfall is severe enough or if time is too tight, you may realize that no matter what measures you take, you will not be able to afford the lifestyle you want during your retirement years. You may simply have to accept the fact that your retirement will not be the jet-setting, luxurious, permanent vacation you had envisioned. In other words, you will have to lower your expectations and accept a more realistic standard of living. Recognize the difference between the things you want and the things you need, and you’ll have an easier time deciding where you can make adjustments. Here are a few suggestions:
- Reduce your housing expectations. Perhaps you’ve always planned to live out retirement in a luxury beachfront community. If you are facing a significant income shortfall, you might have to shop around for a more affordable housing option in a less exclusive location.
- Cut down on travel plans. If you’d always planned an extended tour of Europe or a cruise around the world to celebrate your retirement, you may have to downgrade these plans to a driving trip to visit relatives or a train trip across the Rockies. Simple trips can be just as much fun as extravagant vacations, and they don’t put as big a dent in your retirement funds.
- Consider a less expensive automobile. You may dream of driving a shiny new car off the dealer’s lot right after you collect your retirement gift from your employer, but shiny new cars come with big, thick payment books. Consider purchasing a used car of the type you want. If you must have a new car, think about buying a less expensive model.
- Lower household expenses. There are numerous ways to decrease your everyday expenses. You might find that simply cutting back on your spending (for example, eating out less often) will help stretch your retirement dollars.
As a woman, you face special retirement planning challenges, but with careful planning you’ll hopefully be on track to a secure, fulfilling retirement.
Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement
Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp.Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Five Key Benefits for Military Families – by John Jastremski
Military families face plenty of financial challenges. If you’re saving for college or retirement, buying a home, or wondering how to help secure your family’s financial future, don’t overlook these five important benefits.
1. Thrift Savings Plan
Retirement is something you need to plan for, whether it’s far away or just around the corner. Even if you can rely on a military pension because you’ve stayed in the service for 20 years or more, it’s probably not going to provide all the retirement income you’ll need, and neither is Social Security. That’s why it’s important to save for retirement on your own. One option you have is to contribute to the government’s Thrift Savings Plan (TSP).
The TSP is a retirement savings plan for federal employees, including servicemembers. When you make traditional contributions to the TSP, you get the same types of savings and tax benefits as you would if you contributed to a 401(k) plan offered by a private-sector employer. Contributing to the TSP is simple–your regular contributions are deducted from your paycheck before taxes (which can lower your taxable income for the year), and your contributions and any earnings accumulate tax deferred until withdrawn in retirement. You can also opt to make after-tax Roth contributions. They won’t reduce your current tax liability, but qualified withdrawals in retirement will be tax free (assuming IRS requirements are met).
You can enroll, change, or cancel your contributions whenever you’d like. You can contribute as little as 1% or as much as 100% of your basic pay (or a designated dollar amount) each pay period, up to what’s called the elective deferral limit for the year. In 2017, you can contribute up to $18,000; if you’re age 50 or older and are making catch-up contributions, you can contribute up to $24,000.
If you’re contributing a percentage of your basic pay, you can also contribute a percentage of your incentive pay, special pay, or bonus pay (but you can’t make catch-up contributions from these types of pay). And if you’re deployed and receiving tax-exempt pay (i.e., pay that’s subject to the combat zone exclusion), you can also make contributions from that pay, and your contribution limit for the year is even higher; the limit for total contributions from all types of pay is $54,000 for 2017.
When you leave the military, you can’t continue to contribute to the TSP, but you have the option of keeping your money in the TSP or rolling it over to another retirement account, such as a traditional or Roth IRA or an eligible employer plan.
For more information on the TSP, visit tsp.gov.
2. Savings Deposit Program
Are you trying to save money to buy a vehicle or make a down payment on a home? Do you need to set aside money for a rainy day? If you’re deployed to a designated combat zone for at least 30 days, you have a unique chance to save for your goals at a guaranteed interest rate by participating in the Defense Department’s Savings Deposit Program (SDP).
The SDP pays you 10% interest on deposits up to $10,000 while you’re deployed, and you’ll earn this interest rate on your money for up to 90 days after your return. You may deposit all or part of your unallotted pay. Interest compounds quarterly and is taxable.
Generally, you can withdraw funds and close your account only after you leave the combat zone and are no longer eligible to participate in the SDP, although emergency withdrawals while you’re deployed are allowed in some cases.
To find out more or begin participating in the SDP, contact your local military finance office.
3. Post-9/11 GI Bill
Education benefits are one of the most valuable benefits available to servicemembers. If you’re entitled to benefits, the Post-9/11 GI Bill will pay up to the full cost of in-state tuition and fees at public colleges for up to four years, or up to a certain maximum per academic year if you attend a private college or foreign school. The maximum for the 2016 academic year (August 1, 2016 through July 31, 2017) is $21,970.46.
But if you don’t need to use your entitlement, the Post-9/11 GI Bill can provide a great way to pay for your family’s education. Servicemembers who make a long-term service commitment have the opportunity to transfer unused education benefits (up to 36 months’ worth) to their spouses and children.
To transfer your unused benefit entitlement to your spouse, you must have served at least 6 years, and generally commit to serving 4 additional years from the date a benefit transfer is approved (some exceptions to this added service requirement exist). Once the transfer is approved, your spouse may begin using benefits immediately and has 15 years after your last separation from active duty to use up the benefits.
If you opt to transfer your unused entitlement to your dependent children, they can use the benefits only after you’ve completed at least 10 years of service. In addition, they must have attained a secondary school diploma or equivalency certificate or have reached age 18, and they can use the benefit entitlement only until age 26.
If both your spouse and your children are attending school, you can opt to split your benefit entitlement among them.
To learn more about GI Bill benefits for you and your family members, visit benefits.va.gov.
4. VA Home Loan
Saving for a down payment is one of the biggest obstacles to homeownership. Fortunately, military families can often benefit from the no-down-payment requirement of a VA loan. This type of loan, which can only be used to finance a primary residence, also features another money saving benefit: borrowers aren’t required to pay mortgage insurance.
Despite its name, the VA loan isn’t handled by the government. Like other home loans, VA loans are offered by private lenders such as banks, credit unions, and mortgage companies. The VA guarantees a portion of the loan, which may make it easier for you to obtain a loan or qualify for more favorable terms, including lower closing costs and appraisal fees. Not all lenders offer VA loans, so you’ll need to ask potential lenders whether they are VA-approved lending institutions.
One lesser known feature of the VA loan program is the opportunity to do a cash-out refinancing. If you have substantial home equity, this feature allows you to refinance an existing home loan (including a non-VA loan) while borrowing extra money, which you can use to pay off debt or make home improvements, for example.
A VA loan is often a good choice for military families, but it’s not the only game in town. You should compare the terms, interest rate, closing costs, and fees against other mortgage options. One drawback of a VA loan is the funding fee that’s generally required. This funding fee which you pay at closing (it can be financed into the loan) is a percentage of the amount you’re borrowing.
For more information on VA loans, including how to qualify and how to apply, visit benefits.va.gov.
5. Servicemembers’ Group Life Insurance
Knowing that your family will be protected is extremely important, and affordable term life insurance coverage is available through the Servicemembers’ Group Life Insurance (SGLI) program. Eligible servicemembers are automatically enrolled in SGLI, and spouses and dependent children are generally automatically insured through a related program, Family Servicemembers’ Group Life Insurance (FSGLI).
When you leave the military, you can apply to convert your policy to Veterans’ Group Life Insurance (VGLI), which provides renewable term coverage. An SGLI policy may also be converted to an individual policy sold by a participating commercial company. (Deadlines apply to both types of conversions.) However, you should carefully evaluate your options to determine whether VGLI will meet your life insurance needs. Points to consider include premium costs, plan features, and whether term insurance is your best option.
For more information about these and other life insurance programs for servicemembers, visit insurance.va.gov.
Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Pay Down Debt or Save for Retirement?- by John Jastremski
You can use a variety of strategies to pay off debt, many of which can cut not only the amount of time it will take to pay off the debt but also the total interest paid. But like many people, you may be torn between paying off debt and the need to save for retirement. Both are important; both can help give you a more secure future. If you’re not sure you can afford to tackle both at the same time, which should you choose?
There’s no one answer that’s right for everyone, but here are some of the factors you should consider when making your decision.
Rate of investment return versus interest rate on debt
Probably the most common way to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return by investing than the after-tax interest rate you pay on the debt. For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. By getting rid of those interest payments, you’re effectively getting an 18% return on your money. That means your money would generally need to earn an after-tax return greater than 18% to make investing a smarter choice than paying off debt. That’s a pretty tough challenge even for professional investors.
And bear in mind that investment returns are anything but guaranteed. In general, the higher the rate of return, the greater the risk. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but you won’t have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest-rate debt is a sure thing.
An employer’s match may change the equation
If your employer matches a portion of your workplace retirement account contributions, that can make the debt versus savings decision more difficult. Let’s say your company matches 50% of your contributions up to 6% of your salary. That means that you’re earning a 50% return on that portion of your retirement account contributions.
If surpassing an 18% return from paying off debt is a challenge, getting a 50% return on your money simply through investing is even tougher. The old saying about a bird in the hand being worth two in the bush applies here. Assuming you conform to your plan’s requirements and your company meets its plan obligations, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty. That’s why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than focusing on debt.
And don’t forget the tax benefits of contributions to a workplace savings plan. By contributing pretax dollars to your plan account, you’re deferring anywhere from 10% to 39.6% in taxes, depending on your federal tax rate. You’re able to put money that would ordinarily go toward taxes to work immediately.
Your choice doesn’t have to be all or nothing
The decision about whether to save for retirement or pay off debt can sometimes be affected by the type of debt you have. For example, if you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let’s say you’re paying 6% on your mortgage and 18% on your credit card debt, and your employer matches 50% of your retirement account contributions. You might consider directing some of your available resources to paying off the credit card debt and some toward your retirement account in order to get the full company match, and continuing to pay the tax-deductible mortgage interest.
There’s another good reason to explore ways to address both goals. Time is your best ally when saving for retirement. If you say to yourself, “I’ll wait to start saving until my debts are completely paid off,” you run the risk that you’ll never get to that point, because your good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have left to save for retirement.
It might also be easier to address both goals if you can cut your interest payments by refinancing that debt. For example, you might be able to consolidate multiple credit card payments by rolling them over to a new credit card or a debt consolidation loan that has a lower interest rate.
Bear in mind that even if you decide to focus on retirement savings, you should make sure that you’re able to make at least the monthly minimum payments owed on your debt. Failure to make those minimum payments can result in penalties and increased interest rates; those will only make your debt situation worse.
Other considerations
When deciding whether to pay down debt or to save for retirement, make sure you take into account the following factors:
- Having retirement plan contributions automatically deducted from your paycheck eliminates the temptation to spend that money on things that might make your debt dilemma even worse. If you decide to prioritize paying down debt, make sure you put in place a mechanism that automatically directs money toward the debt–for example, having money deducted automatically from your checking account–so you won’t be tempted to skip or reduce payments.
- Do you have an emergency fund or other resources that you can tap in case you lose your job or have a medical emergency? Remember that if your workplace savings plan allows loans, contributing to the plan not only means you’re helping to provide for a more secure retirement but also building savings that could potentially be used as a last resort in an emergency. Some employer-sponsored retirement plans also allow hardship withdrawals in certain situations–for example, payments necessary to prevent an eviction from or foreclosure of your principal residence–if you have no other resources to tap. (However, remember that the amount of any hardship withdrawal becomes taxable income, and if you aren’t at least age 59½, you also may owe a 10% premature distribution tax on that money.)
- If you do need to borrow from your plan, make sure you compare the cost of using that money with other financing options, such as loans from banks, credit unions, friends, or family. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.
- If you focus on retirement savings rather than paying down debt, make sure you’re invested so that your return has a chance of exceeding the interest you owe on that debt. While your investments should be appropriate for your risk tolerance, if you invest too conservatively, the rate of return may not be high enough to offset the interest rate you’ll continue to pay.
Regardless of your choice, perhaps the most important decision you can make is to take action and get started now. The sooner you decide on a plan for both your debt and your need for retirement savings, the sooner you’ll start to make progress toward achieving both goals.
Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.Securities offered through FSC Securities Corporation, member FINRA / SIPC .
Deciding when to retire may not be one decision but a series of decisions and calculations. For example, you’ll need to estimate not only your anticipated expenses, but also what sources of retirement income you’ll have and how long you’ll need your retirement savings to last. You’ll need to take into account your life expectancy and health as well as when you want to start receiving Social Security or pension benefits, and when you’ll start to tap your retirement savings. Each of these factors may affect the others as part of an overall retirement income plan.
Thinking about early retirement?
Retiring early means fewer earning years and less accumulated savings. Also, the earlier you retire, the more years you’ll need your retirement savings to produce income. And your retirement could last quite a while. According to a National Vital Statistics Report, people today can expect to live more than 30 years longer than they did a century ago.
Not only will you need your retirement savings to last longer, but inflation will have more time to eat away at your purchasing power. If inflation is 3% a year–its historical average since 1914–it will cut the purchasing power of a fixed annual income in half in roughly 23 years. Factoring inflation into the retirement equation, you’ll probably need your retirement income to increase each year just to cover the same expenses. Be sure to take this into account when considering how long you expect (or can afford) to be in retirement.
| Men | Women | |
|---|---|---|
| At birth | 76.3 | 81.2 |
| At age 65 | 83.0 | 85.6 |
Source: NCHS Data Brief, Number 267, December 2016
There are other considerations as well. For example, if you expect to receive pension payments, early retirement may adversely affect them. Why? Because the greatest accrual of benefits generally occurs during your final years of employment, when your earning power is presumably highest. Early retirement could reduce your monthly benefits. It will affect your Social Security benefits too.
Also, don’t forget that if you hope to retire before you turn 59½ and plan to start using your 401(k) or IRA savings right away, you’ll generally pay a 10% early withdrawal penalty plus any regular income tax due (with some exceptions, including disability payments and distributions from employer plans such as 401(k)s after you reach age 55 and terminate employment).
Finally, you’re not eligible for Medicare until you turn 65. Unless you’ll be eligible for retiree health benefits through your employer or take a job that offers health insurance, you’ll need to calculate the cost of paying for insurance or health care out-of-pocket, at least until you can receive Medicare coverage.
Delaying retirement
Postponing retirement lets you continue to add to your retirement savings. That’s especially advantageous if you’re saving in tax-deferred accounts, and if you’re receiving employer contributions. For example, if you retire at age 65 instead of age 55, and manage to save an additional $20,000 per year at an 8% rate of return during that time, you can add an extra $312,909 to your retirement fund. (This is a hypothetical example and is not intended to reflect the actual performance of any specific investment.)
Even if you’re no longer adding to your retirement savings, delaying retirement postpones the date that you’ll need to start withdrawing from them. That could enhance your nest egg’s ability to last throughout your lifetime.
Postponing full retirement also gives you more transition time. If you hope to trade a full-time job for running your own small business or launching a new career after you “retire,” you might be able to lay the groundwork for a new life by taking classes at night or trying out your new role part-time. Testing your plans while you’re still employed can help you anticipate the challenges of your post-retirement role. Doing a reality check before relying on a new endeavor for retirement income can help you see how much income you can realistically expect from it. Also, you’ll learn whether it’s something you really want to do before you spend what might be a significant portion of your retirement savings on it.
Phased retirement: the best of both worlds
Some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age, while you continue to work part-time for the same employer.
Phased retirement programs are getting more attention as the baby boomer generation ages. In the past, pension law for private sector employers encouraged workers to retire early. Traditional pension plans generally weren’t allowed to pay benefits until an employee either stopped working completely or reached the plan’s normal retirement age (typically age 65). This frequently encouraged employees who wanted a reduced workload but hadn’t yet reached normal retirement age to take early retirement and go to work elsewhere (often for a competitor), allowing them to collect both a pension from the prior employer and a salary from the new employer.
However, pension plans now are allowed to pay benefits when an employee reaches age 62, even if the employee is still working and hasn’t yet reached the plan’s normal retirement age. Phased retirement can benefit both prospective retirees, who can enjoy a more flexible work schedule and a smoother transition into full retirement; and employers, who are able to retain an experienced worker. Employers aren’t required to offer a phased retirement program, but if yours does, it’s worth at least a review to see how it might affect your plans.
| Age | Don’t forget … | |
|---|---|---|
| Eligible to tap tax-deferred savings without penalty for early withdrawal | 59 ½* | Federal income taxes will be due on pretax contributions and earnings |
| Eligible for early Social Security benefits | 62 | Taking benefits before full retirement age reduces each monthly payment |
| Eligible for Medicare | 65 | Contact Medicare 3 months before your 65th birthday |
| Full retirement age for Social Security | 66 to 67, depending on when you were born | After full retirement age, earned income no longer affects Social Security benefits |
*Age 55 for distributions from employer plans upon termination of employment
Check your assumptions
The sooner you start to plan the timing of your retirement, the more time you’ll have to make adjustments that can help ensure those years are everything you hope for. If you’ve already made some tentative assumptions or choices, you may need to revisit them, especially if you’re considering taking retirement in stages. And as you move into retirement, you’ll want to monitor your retirement income plan to ensure that your initial assumptions are still valid, that new laws and regulations haven’t affected your situation, and that your savings and investments are performing as you need them to.
The information in these materials may change at any time and without notice. Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.
Working During Retirement
Planning on working during retirement? If so, you’re not alone. An increasing number of employees nearing retirement plan to work at least some period of time during their retirement years.
Why work during retirement?
Obviously, if you work during retirement, you’ll be earning money and relying less on your retirement savings–leaving more to potentially grow for the future and making your savings last longer, as shown in the example below:
Assumptions:
- Retirement savings $1,000,000
- Earnings rate 6%
- Preretirement income $150,000
- Social Security $2,000/month
- Desired income replacement 80% ($120,000/year, $10,000/month)
| Without working, you’ll need to use $8,000 ($10,000 desired income minus $2,000 Social Security) of retirement savings per month, and your savings will last 16 years. | |||
|---|---|---|---|
| But if you earn this amount monthly: | for 3 years, your savings will last: | for 5 years, your savings will last: | for 10 years, your savings will last: |
| $1,000 | 17 years | 18 years | 19 years |
| $2,000 | 18 years | 19 years | 22 years |
| $3,000 | 19 years | 21 years | 26 years |
| $4,000 | 20 years | 23 years | 32 years |
| $5,000 | 22 years | 26 years | 39 years |
| This is a hypothetical example and is not intended to reflect the actual performance of any specific investment, and does not take into account the effect of taxes and inflation. | |||
If you continue to work, you may also have access to affordable health care, as more and more employers are offering this important benefit to part-time employees.
But there are also non-economic reasons for working during retirement. Many retirees work for personal fulfillment–to stay mentally and physically active, to enjoy the social benefits of working, and to try their hand at something new–the reasons are as varied as the number of retirees.
How working affects Social Security
If you work after you start receiving Social Security retirement benefits, your earnings may affect the amount of your benefit check. Your monthly benefit is based on your lifetime earnings. When you become entitled to retirement benefits at age 62, the Social Security Administration calculates your primary insurance amount (PIA), upon which your retirement benefit will be based. Your PIA is recalculated annually if you have any new earnings that might increase your benefit. So if you continue to work after you start receiving retirement benefits, these earnings may increase your PIA and thus your future Social Security retirement benefit.
But working may also cause a reduction in your current benefit. If you’ve reached full retirement age (65 to 67, depending on when you were born), you don’t need to worry about this– you can earn as much as you want without affecting your Social Security retirement benefit.
If you haven’t yet reached full retirement age, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit ($14,640 in 2012). A special rule applies in your first year of Social Security retirement–you’ll get your full benefit for any month you earn less than one-twelfth of the annual earnings limit, regardless of how much you earn during the entire year. A higher earnings limit applies in the year you reach full retirement age. If you earn more than this higher limit ($38,880 in 2012), $1 in benefits will be withheld for every $3 you earn over that amount, until the month you reach full retirement age–then you’ll get your full benefit no matter how much you earn. (If your current benefit is reduced because of excess earnings, you may be entitled to an upward adjustment in your benefit once you reach full retirement age.)
Not all income reduces your Social Security benefit. In general, Social Security only takes into account wages you’ve earned as an employee, net earnings from self-employment and other types of work-related income, such as bonuses, commissions, and fees. Pensions, annuities, IRA distributions, and investment income won’t reduce your benefit.
Also, keep in mind that working may enable you to put off receiving your Social Security benefit until a later date. In general, the later you begin receiving benefit payments, the greater your benefit will be. Whether delaying the start of Social Security benefits is the right decision for you, however, depends on your personal circumstances.
One last important point to consider: in general, your Social Security benefit won’t be subject to federal income tax if that’s the only income you receive during the year. But if you work during retirement (or receive any other taxable income or tax-exempt interest), a portion of your benefit may become taxable. IRS Publication 915 has a worksheet that can help you determine whether any part of your Social Security benefit is subject to federal income tax.
How working affects your pension
If you work for someone other than your original employer, your pension benefit won’t be impacted at all–you can work, receive a salary from your new employer, and also receive your pension benefit from your original employer. But if you continue to work past your normal retirement date for the same employer, or if you retire and then return to work for that employer, you need to understand how your pension will be impacted.
Some plans will allow you to start receiving your pension benefit once you reach the plan’s normal retirement age, even if you continue to work. Other plans will suspend your pension benefit if you work beyond your normal retirement date, but will actuarially increase your payment when benefits resume to account for the period of time benefits were suspended. Still other plans will suspend your benefit for any month you work more than 40 hours, and will not provide any actuarial increase–in effect, you’ll forfeit your benefit for any month you work more than 40 hours.
Some plans provide yet another option–“phased retirement.” These programs allow you to continue to work on a part-time basis while accessing all or part of your pension benefit. Federal law encourages these phased retirement programs by allowing pension plans to start paying benefits once you reach age 62, even if you’re still working and haven’t yet reached the plan’s normal retirement age.
If your pension plan calculates benefits using final average pay, be sure to discuss with your plan administrator how your particular benefit might be affected by the decision to work part-time. In some cases, reducing your hours at the end of your career could reduce your final average pay, resulting in a smaller benefit than you might otherwise have received.
How working affects health benefits
Many individuals work during retirement to keep their medical coverage. If working during retirement for you means moving from full-time to part-time, it’s important that you fully understand how that decision will impact your medical benefits.
Some employers, especially those with phased retirement programs, offer medical coverage to part-time employees. But other employers don’t, or require that you work a minimum number of hours to be benefits eligible. If your employer doesn’t offer medical benefits to part-time employees, you’ll need to look for coverage elsewhere. If you’re married, the obvious option is coverage under your spouse’s health plan, if your spouse works and has coverage available. If not, you may be eligible for COBRA.
COBRA is a federal law that allows you to continue receiving medical benefits under your employer’s plan for some period of time, usually for 18 months, after a qualifying event (including loss of coverage due to a reduction in hours). But it’s expensive–you typically have to pay the full premium yourself, plus a 2% administrative fee. (COBRA doesn’t apply to employers who have fewer than 20 employees.) Another option is private health insurance, but that will also be very expensive.
Of course, once you turn 65, you’ll be eligible for Medicare. You’ll want to contact the Social Security Administration approximately three months before your 65th birthday to discuss your options.
The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
The Retirement Group is a Representative with FSC Securities and may be reached at www.theretirementgroup.com
Planning your retirement income is like putting together a puzzle with many different pieces. One of the first steps in the process is to identify all potential income sources and estimate how much you can expect each one to provide.
Social Security
According to the Social Security Administration (SSA), nearly 9 of 10 people aged 65 or older receive Social Security benefits. However, most retirees also rely on other sources of income.
For a rough estimate of the annual benefit to which you would be entitled at various retirement ages, you can use the calculator on the Social Security website, www.ssa.gov. Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. How much you receive ultimately depends on a number of factors, including when you start taking benefits. You can begin doing so as early as age 62. However, your benefit may be approximately 25% to 30% less than if you waited until full retirement age (66 to 67, depending on the year you were born). Benefits increase each year that you delay taking benefits until you reach age 70.
As you’re planning, remember that the question of how Social Security will meet its long-term obligations to both baby boomers and later generations has become a hot topic of discussion. Concerns about the system’s solvency indicate that there’s likely to be a change in how those benefits are funded, administered, and/or taxed over the next 20 or 30 years. That may introduce additional uncertainty about Social Security’s role as part of your overall long-term retirement income picture, and put additional emphasis on other potential income sources.
Pensions
If you are entitled to receive a traditional pension, you’re lucky; fewer Americans are covered by them every year. Be aware that even if you expect pension payments, many companies are changing their plan provisions. Ask your employer if your pension will increase with inflation, and if so, how that increase is calculated.
Your pension will most likely be offered as either a single or a joint and survivor annuity. A single annuity provides benefits until the worker’s death; a joint and survivor annuity provides reduced benefits that last until the survivor’s death. The law requires married couples to take a joint and survivor annuity unless the spouse signs away those rights. Consider rejecting it only if the surviving spouse will have income that equals at least 75% of the current joint income. Be sure to fully plan your retirement budget before you make this decision.
Major Sources of Retirement Income
Fast Facts and Figures About Social Security, 2016, Social Security Administration
Work or other income-producing activities
Many retirees plan to work for at least a while in their retirement years at part-time work, a fulfilling second career, or consulting or freelance assignments. Obviously, while you’re continuing to earn, you’ll rely less on your savings, leaving more to accumulate for the future. Work also may provide access to affordable health care.
Be aware that if you’re receiving Social Security benefits before you reach your full retirement age, earned income may affect the amount of your benefit payments until you do reach full retirement age.
If you’re covered by a pension plan, you may be able to retire, then seek work elsewhere. This way, you might be able to receive both your new salary and your pension benefit from your previous employer at the same time. Also, some employers have begun to offer phased retirement programs, which allow you to receive all or part of your pension benefit once you’ve reached retirement age, while you continue to work part-time for the same employer.
Other possible resources include rental property income and royalties from existing assets, such as intellectual property.
Retirement savings/investments
Until now, you may have been saving through retirement accounts such as IRAs, 401(k)s, or other tax-advantaged plans, as well as in taxable accounts. Your challenge now is to convert your savings into ongoing income. There are many ways to do that, including periodic withdrawals, choosing an annuity if available, increasing your allocation to income-generating investments, or using some combination. Make sure you understand the tax consequences before you act.
Some of the factors you’ll need to consider when planning how to tap your retirement savings include:
- How much you can afford to withdraw each year without exhausting your nest egg. You’ll need to take into account not only your projected expenses and other income sources, but also your asset allocation, your life expectancy, and whether you expect to use both principal and income, or income alone.
- The order in which you will tap various accounts. Tax considerations can affect which account you should use first, and which you should defer using.
- How you’ll deal with required minimum distributions (RMDs) from certain tax-advantaged accounts. After age 70½, if you withdraw less than your RMD, you’ll pay a penalty tax equal to 50% of the amount you failed to withdraw.
Some investments, such as certain types of annuities, are designed to provide a guaranteed monthly income (subject to the claims-paying ability of the issuer). Others may pay an amount that varies periodically, depending on how your investments perform. You also can choose to balance your investment choices to provide some of both types of income.
Inheritance
An inheritance, whether anticipated or in hand, brings special challenges. If a potential inheritance has an impact on your anticipated retirement income, you might be able to help your parents investigate estate planning tools that can minimize the impact of taxes on their estate. Your retirement income also may be affected by whether you hope to leave an inheritance for your loved ones. If you do, you may benefit from specialized financial planning advice that can integrate your income needs with a future bequest.
Equity in your home or business
If you have built up substantial home equity, you may be able to tap it as a source of retirement income. Selling your home, then downsizing or buying in a lower-cost region, and investing that freed-up cash to produce income or to be used as needed is one possibility. Another is a reverse mortgage, which allows you to continue to live in your home while borrowing against its value. That loan and any accumulated interest is eventually repaid by the last surviving borrower when he or she eventually sells the home, permanently vacates the property, or dies. (However, you need to carefully consider the risks and costs before borrowing. A useful publication titled “Reverse Mortgages: Avoiding a Reversal of Fortune” is available online from the Financial Industry Regulatory Authority.)
If you’re hoping to convert an existing business into retirement income, you may benefit from careful financial planning to minimize the tax impact of a sale. Also, if you have partners, you’ll likely need to make sure you have a buy-sell agreement that specifies what will happen to the business when you retire and how you’ll be compensated for your interest.
With an expert to help you identify and analyze all your potential sources of retirement income, you may discover you have more options than you realize.
The information in these materials may change at any time and without notice.Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Securities provided by FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.
