Each year we celebrate our nation’s independence and honor the work and sacrifice of those early Americans who made it possible.
Independence (or Freedom, or Liberty – pick the word you like best) isn’t something that just happens. It takes work, and, yes, sacrifice. Are you working (and even sacrificing) to achieve your own financial independence?
Personally, I am planning that the day I fully retire will be my “independence day” – the beginning of the time when I have the freedom to spend my time as I wish, without worrying about living up to the expectations of my employer. I will have the liberty to spend (or not spend) as I see fit, writing my own paycheck as I see fit. I haven’t set the date yet – it’s 5-10 years away – but I believe that the work I’m doing now and the sacrifices I’m making now will pay off with a new level of liberty, which I will enjoy!
Of course, I will not have unlimited freedom. I will still need to live within the laws of the land and pay my electric bill if I want to keep the lights on. But I expect to have considerable freedom to travel and enjoy some leisure activities that are meaningful to me.
What are you willing to sacrifice to ensure you have the freedom you want when you retire? Check out Retirement Secure Your Future and the Ballpark Estimate of Retirement Savings Needs to move forward toward your independence day!
If I retire today, I have access to accumulated funds in an employer managed retirement fund. I can transfer the money to a private IRA and put it under the management of a financial advisor I select. I could also purchase an annuity; a contract that is offered by an insurance company that operates similar to a pension and would pay me regular monthly income.
I won’t be given a detailed sheet explaining the commissions or fees collected as a result of my choices. I’ll have to trust the guidance provided by the financial advisors I consult and accept that there will be fair compensation for their knowledge and work completed on my behalf.
Today, financial advisors who sell “retirement” classified products must follow the “suitability” standard. They can recommend financial products they reasonably believe are appropriate based on the client’s financial needs, objectives and unique circumstances. A key distinction in terms of loyalty is also important, they can place the interests of their employer and themselves first, not necessarily the client served. It can result in recommendations for products that have higher commissions and fees.
In June, these same financial advisors will be placed under a stricter “fiduciary” standard. The Department of Labor’s definition of a fiduciary demands that advisors act in the best interests of their clients, and to put their clients’ interests above their own. It states that all fees and commissions must be clearly disclosed in dollar form to clients. The advisors are bound legally and ethically to the standard.
The rule change has faced several challenges, but the June 9, 2017 implementation has been announced with a transition period that ends on January 1, 2018. Consumers should see improved disclosure and will have greater control over the fees they pay for retirement-focused financial products.
To learn more visit: http://www.investopedia.com/updates/dol-fiduciary-rule/
Everyone is subject to tax laws, so we all have a reason to pay attention to proposals that are being discussed in Washington DC. When changes are introduced, it’s human nature for proponents to emphasize the positive and omit details that might disappoint. As citizens and consumers, it is wise for us to look beyond the “selling points” and examine the details.
One proposal is to raise the standard deduction and eliminate personal exemptions. Analysis of the proposal by a respected non-partisan organization points out that the move would benefit single individuals and couples, but not large families. It remains to be seen if changes in child care credits will equalize the loss of additional personal exemptions.
Changes in tax rates also have hidden impacts. Analysis once again raises the question of where the income breaks will occur. Using the current tax table, adjusted gross income between $15,000 and $19,625 is taxed at 10%; under the proposed changes, that group would see an increase to 12%.
When deciding on a traditional versus Roth retirement account, one factor individuals consider is whether they expect their taxes to be higher or lower during retirement. If you currently pay taxes in the highest tax brackets, there is a good chance you will see a reduction in tax rate after you retire. Analysis indicates that under the proposed changes, a similar reduction may not be experienced by individuals in the middle or lower income brackets.
We will need more details before we can determine how proposed tax law changes may impact us; in the meantime you can learn what experts in the field predict at the Tax Policy Center.
Graduation from high school and college is a milestone event for many families in May. Parents might feel that their role as a financial provider is nearing it’s end, but recent data indicates that youth are living at home longer.
Reasons for this trend extend beyond financial reasons. The Boston Federal Reserve report includes a willingness on the part of parents to be more supportive and a trend toward larger homes as additional factors.
Being supportive can extend beyond putting a roof over a young person’s head and food in the refrigerator. It can include teaching the value of setting aside funds earned today for the future.
MyRA might be a place to start. If a student is employed part-time or in a temporary summer job, they can save in this Roth account which is low risk and pays a higher return than a pass book savings account. Because it is a retirement account, it isn’t a factor in determination of student financial aid and the rules make it less likely to be raided for spur of the moment expenses. You are expected to leave the money in the account for five years before making a withdrawal of contributions, a time frame that might work well for a high school graduate who intends to earn a college degree and might need a cash reserve when they reach the next milestone. Introduction to retirement savings also makes sense for a generation that is less likely to see benefits from pensions and social security. Learn more at MyRa.gov
April is National Social Security Month. It’s really fitting that they chose April, because April is also Financial Literacy Month. And understanding your Social Security situation is an important part of Financial Literacy.
If you’re under 40, you may be surprised to consider that you need to pay attention to Social Security. (Even some people under 60 may be surprised at that idea!). Now I’m not suggesting you need to fully understand Social Security – that’s a tall order. But you do need to be aware of your own social security record and what it means.
The key your record is found at my Social Security. Here you can activate your own on-line account so that you can log in any time; this lets you verify the accuracy of your earnings record, learn what you can expect in retirement or disability benefits, order a replacement social security card, and more.
Why it matters. On average, Social Security replaces approximately 40 percent of pre-retirement earnings. To enjoy a comfortable retirement, most people will also need income from other sources — like pensions, savings, and investments. Understanding your social security projections can help you make informed plans for your own retirement.
Throughout the month of April, the Social Security Administration will boost its outreach through traditional media and social media, including a Facebook Live Chat:
Social Security will participate in a Facebook Live Chat, hosted by USA.gov, on April 20, 2017, at 7:00 p.m. ET. The public may ask questions via livestream about the “5 Steps Toward Financial Security.”
To participate, follow USA.gov and Social Security on Facebook.
NOTE: some young adults may be skeptical, questioning whether Social Security will still be around by the time they retire. While Social Security will likely change over the next 2-4 decades, you will not find any experts who believe it will disappear. Understanding your situation under current law will help you understand policy changes as they are proposed and enacted. No matter your age, it’s smart to activate your Social Security account and see what it tells you.
You might wonder “What is that?” America Saves Week is coordinated by America Saves and the American Savings Education Council. Started in 2007, the week is an annual opportunity for organizations to promote good savings behavior and a chance for individuals to assess their own saving status. Typically, thousands of organizations participate in the week, reaching millions of people.
The 2016 annual America Saves Week survey assessing national household savings revealed:
- Just two out of every five U.S. households report good or excellent progress in meeting their savings needs.
- Fifty-two% are saving enough for a retirement with a desirable standard of living.
- Only 43 percent have automatic savings outside of work.
- More men (74 %) report saving progress than woman (67 %).
- Those with a savings plan with specific goals (55 %) are making much more savings progress than those without a plan (23 %). Try saving at work: it is one of the most effective ways for people to save automatically. There are at least three ways you can promote automatic savings.
So, what can you do to start saving?
- Try saving a portion of your pay automatically into a separate savings account through direct deposit.
- Open or add to work-sponsored retirement accounts.
- If your employer doesn’t offer a retirement plan, consider opening a myRA account.
myRA (my Retirement Account) is a new retirement savings program that helps you take control over your future. It is simple, safe and affordable retirement account created by the United States Department of the Treasury for the millions of Americans who face barriers to saving for retirement. https://myra.gov/how-it-works/
If your employer matches your contributions to a retirement plan, then it is smart to contribute at least that much. For example, if your employer matches your contributions up to 3%, then it’s smart to contribute at least 3% of your income. If you don’t, you’re turning down part of your paycheck.
Does that mean that if you’re maximizing your employer match, you’re saving enough for retirement? Not necessarily.
Your employer’s decision about how much they’ll match is not based on how much investment is needed to keep you secure. That decision is up to you.
Only you can decide how much to save toward your future. Only you can decide to give up certain spending now, in order to have a more secure lifestyle in the future. Our earlier post describes tools for assessing your progress toward a secure retirement.
Employers who offer a match typically match employee contributions up to 3-5% of income. If it is a dollar-for-dollar match, then making full use of a 3% match means a total of 6% of your income is being put toward retirement (3% from you plus 3% from your employer).
Based on typical life expectancy and investment returns, experts now estimate that lifelong savings of approximately 15% of income is needed in order to provide retirement income equivalent to pre-retirement income. Of course, workers who will have other sources of retirement income (such as rental income or a traditional pension like IPERS) can achieve full income replacement with lower savings rates. On the flip side, some workers may decide they don’t need full income replacement, and will be satisfied with a lower retirement income; a lower savings rate may work for those workers as well.
Bottom line? Planning for a secure retirement is up to you. Don’t rely on your employer’s match to determine how much you will save!
If stepping up your retirement planning is part of your new year’s resolution, one key is to understand the pros and cons of traditional tax-deferred accounts in comparison with Roth accounts. Individual Retirement Accounts (IRAs) come in both “flavors,” and many employer accounts have both options as well.
The differences between Traditional and Roth affect your retirement in two main ways:
- How much money you’ll be able to spend in retirement after taxes; and
- Flexibility of withdrawals in retirement (this is affected in a couple of different ways).
Whether you are saving for retirement or are already retired and need to decide when to withdraw from which account, understanding the differences matters. To better understand how those differences play out and how you might put them to work for you, ISU Extension and Outreach has a new on-line mini-lesson (20 min). It’s part of our collection of retirement resources, which includes mini-lessons on five other topics and sixteen printable publications.
In the last ten days I have received year-end statements from all three of my retirement accounts. The arrival of these financial statements presents great reminder to do a retirement check-up. Now is the time to do a calculation to see whether your retirement investments are on track to give you a comfortable retirement.
There are many retirement calculators on-line; most investment firms have them. They’re not all the same; different calculators present information in different ways, using different assumptions and perhaps emphasizing different aspects of the situation.
Calculators often have built-in assumptions about things like inflation, life expectancy, or investment return. With that in mind:
- Try to identify the key assumptions built into each calculator.
- Use a variety of on-line calculators, rather than sticking with just one. Looking at the different responses you are given by different tools will make you familiar with a wider range of possibilities.
Most on-line calculators are commercial; they are posted by companies that have products or services to sell. Keep that sales motive in mind as you review the information you receive. Occasionally, a tool will subtly steer consumers toward a particular type of product. By being aware, you can avoid making decisions based on biased information.
Fortunately, there are free non-commercial retirement calculators available on-line as well. Here are two provided by non-commercial organizations:
- Ballpark E$timate – This tool is, as its name suggests, a ballpark estimate. It doesn’t go into great detail. It is especially appropriate for people who are a long way from retirement, don’t have detailed retirement goals, but just want to be sure they’re on track.
- Department of Labor Retirement Calculator – This tool provides detailed on-line worksheets for examining retirement expenses as well as your income. It is particularly useful for those who are fairly close to retirement and ready for more detailed planning.
If you work with a financial adviser, he or she plays a key role in your retirement planning; even then, however, it is wise to take an active role in the planning. Your adviser will be the first one to tell you that you must be the one to make the final decisions.
I was visiting with a young family member and they shared their employer’s expectations for employee’s to donate generously to the corporate identified charities. The employer has set up an option through payroll to make those contributions and track involvement.
For families who are not in the stage of paying down debt or establishing a solid emergency fund, workplace giving through a payroll contribution has some advantages. For tax purposes, this method eliminates the need to get documentation about a donation directly from the organization, unless the contribution is more than $250 per month. In some cases, employers provide a matching gift, so an initial donation could amount to even more giving. Additionally, a donation goes further because a payroll contribution reduces administrative costs by being funneled directly to the organization.
While working on changes to some retirement education programs, there were several articles extolling the positive impact when employers institute “automatic enrollment,” which means they withhold a certain percentage of their employees’ pay, put it into the 401(k) with identified investments, and then give the employees the opportunity to opt-out of the plan. The Bureau of Labor reports, of employees covered by a retirement plan at work, 30% fail to participate and estimates are the figure would drop to 15% if automatic enrollment was standard practice.
On both counts I see the value in the steps taken, but when you look more closely you discover some flaws. Financial planning emphasizes customizing steps to the specific risk factors of clients. A young family might be in a position where applying income earned to debt reduction makes more financial sense. A smart alternative for them would be to donate time and energy to local charities. Smaller amounts, lower than what an employer withholds from income that doesn’t compete with immediate needs, placed in wisely selected investments could also generate a realistic retirement nest egg. In the long run, if debt is reduced and emergency funds are built, an employee might be less likely to borrow from the retirement account or liquidate it early. As always, standard financial recommendations and actions might solve an identified lack of action, giving back to the community and contributions to retirement savings, but can create unintended results. It’s okay to exercise your options and personalize how your paycheck is distributed.