Tag Archives: 401(k)

The Importance of 401(k)s.

Pensions are fading fast.  If you work for a private company the chances are good that your retirement plan is a 401(k), not a pension plan.   Even if you work for the government, the chances are that the entity you work for will resemble Illinois eventually.

That leaves you with the responsibility for your retirement.  There are two problems with the 401(k).

The first is that too many people do not participate.  Even when employers match their employee’s contribution, not everyone takes advantage of this “free money.”

The second problem is that most people don’t have enough information on the investment choices they are given in their 401(k).    Investing is complicated.  Most plans offer dozens of choices and few people know enough about investing to use them to create an appropriate portfolio.

Employers are not equipped to provide the information.  Most do not want to assume the liability that giving investment advice exposes them to.  An RIA (Registered Investment Advisor) who is also a CFP™ can provide the guidance people need to make sense of the investment option in a 401(k).   Find a CFP™ in your area.

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Fixing the Public Employees’ pension crisis

Public employee pensions are time bombs set to explode.  The State of Illinois finances are in such a state of crisis that its comptroller, Susana Mendoza, has told the legislature that over 90% of its monthly revenue is now being commandeered for court-ordered payments, primarily to pay current pensioners.  If Illinois does not pass a new budget within a few days there will be a financial crisis.

According to Forbes:

Public employee pension plans around the country are facing a shortfall of at least $1 trillion, and some of the largest plans are beginning to radically cut promised benefits because they have not stashed away enough to meet their obligations.

There is only so much money to go around.  Promises that can’t be kept won’t be kept … and that includes pensions.

One sign of things to come is a bill signed by Pennsylvania Governor Tom Wolf.  It reforms the state pension system that makes it more sustainable.

 “Let’s be clear: This plan addresses our liability in the only real and responsible way possible, by changing the structure of pension benefits,” said Mr. Wolf. “The fact is, we cannot accelerate the shrinking of our liability on the backs of our current employees, and this bill recognizes this in a real, concrete way.”

The bill moves new workers not in high-risk jobs such as state police and corrections officers into a hybrid retirement system.   Half of their retirement benefits will come from pensions paid for by the taxpayer and the other half will come from a 401(a) defined contribution plan.  A 401(a) is similar to a 401(k) but for public employees.  There are differences, but both transfer responsibility for retirement income to the employee and away from the employer.

The law is projected to save more than $5 billion and shield taxpayers from $20 billion or more in additional liabilities if state investments fail to meet projections, said a news release issued from the office of Republican Sen. Jake Corman, the bill’s chief sponsor.

We suspect that Pennsylvania is just the first state to adopt a system that transfers the responsibility for public employees’ retirement income away from the taxpayer and toward the employee.  It levels the playing field between public and private employees.

It will also make financial planning increasingly important for everyone.

Click HERE for questions about financial planning.

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What is the difference between a 401(k) and a pension plan?

Both plans are designed to provide income for retirement.  There are some very important differences.

A 401(k) is a type of retirement plan known as a “defined contribution plans.”  That means that you know how much you are saving but not how much it is worth when you are ready to retire.  That depends on your ability to invest your savings wisely.  The benefit is that your savings grow tax deferred.  Many employers match your contribution with a contribution of their own, encouraging you to participate.

A pension plan is known as a “defined benefit plan.”  That means that you are guaranteed a certain amount of income by the plan when you retire.  The responsibility of funding the plan and investing the plan assets are your employer’s.

Because your employer is liable for anything that goes wrong with the pension they have promised their employees, many employers have discontinued pension plans and replace them with 401(k) type plans.  This shift the responsibility for your retirement income from the company to you.

If you have a 401(k) for your retirement and are unsure about the best investment options available to you, get the advice of a financial planner who is experienced in this field.

For more information, contact us.

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Putting RMDs to Work

When you’re over 70 ½ and have a retirement plan you have to start taking money out of the plan (with rare exceptions).  But even if you remember to take annual RMDs (Required Minimum Distributions) you could use help preparing for and managing the process. This includes reinvesting RMDs you don’t need immediately for living expenses.

It isn’t as simple as “Here’s your RMD, now go take it.”  Baby Boomers often retire with IRA and 401(k) balances instead of the defined benefit plans their predecessors often had.  And the rules are often complicated.  Take the retiree who has an IRA and a 401(k) that he left behind with a previous employer.

Many are surprised to learn that they have to take separate RMDs on their 401(k) and their traditional IRA.  RMDs must be calculated separately and distributed separately from each employer-sponsored account. But RMDs for IRAs can be aggregated, and the total can be withdrawn from one or multiple IRAs.  That’s one of the reasons that advisors suggest rolling your 401(k) into an IRA when leaving an employer for a new job or when retiring.

Steep penalties apply.  The failure to take a required minimum distribution results in a penalty of 50% of the RMD amount.

According to a 2016 study from Vanguard, IRAs subject to RMDs had a median withdrawal rate of 4% and a median spending rate of 1%. For employer plans subject to RMDs, the median withdrawal rate was 4% and the median spending rate was 0%.  A mandatory withdrawal doesn’t mean a mandatory spend.  Most retirees don’t need the income they are required to take from their plans.  As a result the money usually goes right back into an investment account.

If you have an investment account that is designed for your risk tolerance and goals, the money coming out of your retirement account should be invested so as to maintain your balanced portfolio.

For questions on this subject, please contact us.

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The Retirement Dilemma Facing American Workers

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The way Americans fund their retirement has undergone a fundamental transformation in the last 30 years. According to the Bureau of Labor Statistics, the percentage of private-sector employees with a traditional defined benefit pension plan has dropped from about 45% in 1980 to a little over 20% in 2011. A defined benefit pension plan is one that provides the retiree with a guaranteed income for the rest of his or her life.

The guaranteed pension has been replaced by a defined contribution plan. Today, about 50% of the private workforce participates in one of these plans, which include 401(k) plans and 403(b) plans and allow the worker to set money from their paycheck aside to grow tax-deferred until they retire, at which point they can start pulling from it to fund their retirement. However, there is no guarantee that the amount saved will be adequate to meet their income needs once they retire.

Most government workers still have access to traditional defined benefit pension plans. However, most of these plans are severely underfunded and questions are being raised about cities and states being able to pay the benefits that were promised. A recent poll of people 25 years and older concluded that “Americans are united in their anxiety about their economic security in retirement.” Over 75% of those surveyed worry that economic conditions might hurt their chances for a secure retirement. (For related reading from this author, see: How Retirees Should Think About Retirement Income.)

Social Security and Medicare Concerns

The federal government provides a basic level of retirement income via Social Security, and provides a basic level of health insurance via Medicare and Medicaid. However, these programs are on shaky ground according to most actuaries. The Social Security Trust Fund will run out of money around 2034 unless it is reformed. That does not mean that checks will not go out to retirees, but it does mean that the amount going out will decrease.

Medicare is in even worse shape and, with the continued rapid rise in medical costs, may face a crisis even sooner. The costs of health care and increasing life spans are major issues for retirees, which explains the reason that so many Americans think they are facing a retirement crisis in the first place. Given the level of debt at the federal level and the rhetoric of the current administration, we do not see the government jumping in to fund the American worker’s retirement at levels above what it does now.

Even Denmark, an icon of the Welfare State, is proposing tax cuts, reducing welfare benefits and raising the retirement age.

“We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society.”

Funding Your Own Retirement

If the government is not going to come to the rescue, and if corporations are going to continue to unload the financial risks and burdens associated with pension plans, what is the answer? Look to the old saying, “If you want something done, do it yourself.” Going forward, it’s increasingly going to be up to the individual American worker to fund his or her own retirement.

If people begin saving early, a large part of the retirement problem will be solved. The most valuable asset that people have when they are young is time. If workers begin putting money aside at an early age, it will grow and compound for 40 to 50 years until retirement, solving a large part of the problem. The compounding of returns is what makes so much of the difference.

Here is a little math exercise: assume you begin by saving $25 per month—much less than the cost of having one decent dinner at a restaurant—and invest it conservatively so that it grows at 5% per year. At the end of 45 years you will have $50,000. Now assume that you increase your savings by 10% each year—so that in year two you save $27.50 per month (still far less than the cost of just one dinner out)—at the end of 45 years you have $400,000 to use in retirement. These examples go to show that saving a modest sum for retirement does not require much cost or effort, just discipline, time and patience.

Financial Education is Key

The greatest asset that young workers have is time. Unfortunately, people rarely enter the workforce knowing much about saving or investing. That is one reason so many people live paycheck to paycheck. The solution to the retirement crisis is achievable by educating young people and raising awareness. Until schools and colleges begin having mandatory courses for our young people about managing money, parents should be doing this. If they are unsure, they can put their children in touch with a financial planner who will spend time to provide the education. Many financial planners are beginning to offer hourly rates to help people learn to plan and budget.

For most people, the retirement problem is the result of a lack of information. The solution is right in front of us, if we realize that times have changed and people must change with it.

(For more from this author, see: Are You Ready for the Retirement Challenge?)

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The Public Pension Crisis

Government workers at all levels are likely to have pension plans but there is a big question about the plans’ ability to pay.

According to the Bureau of Labor Statistics (BLS), 92% percent of full-time government employees like teachers and police officers are eligible for pensions, known as “defined benefit plans.”

According to the BLS about 22% of workers in the private sector have pensions, down from 42% in 1990.  In the private sector, retirement plans are much more likely to be 401(k) plans, known as “defined contribution plans.”  Part of the reason for this is that some large companies, like General Motors, accrued huge pension liabilities over the years that they were unable to pay.

Since the Federal Government can print money, federal employees are not worried.  However, states and municipalities depend on their tax base and can’t print money.  That’s where the problem comes in.  Some estimates claim the unfunded liability of public pension plans exceeded $3 trillion dollars.

According to Governing, the city of Chicago’s has an unfunded pension liability of almost $20,000 per capita.  Other cities are somewhat better off, but no big city has a fully funded pension account.  Dallas and Denver, for example are on the hook for between $8,000 and $9,000 per resident.  It’s difficult to even measure the amount of indebtedness because political leaders really don’t want to discuss it.

The problem has been exacerbated by rate-of-return assumptions that are unrealistic.  Most pension funds assume that their assets will grow at rates of seven to eight percent per year indefinitely, a virtual impossibility in this age of low interest rates and sluggish growth.

What does that mean for public employees?   They may want to cast a wary eye on Puerto Rico and some cities in California who have gone into default.  As a wise man once said, “something that can’t go on forever, won’t.”  A little planning ahead won’t hurt.

Whether you are a public employee or work in the private sector we welcome your inquiries.

 

 

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Do you have questions about retirement? You’re not alone.

Charles Schwab recently conducted a survey of people saving for retirement and found that saving enough for retirement was the single most force of financial stress in their lives; … greater than job security, credit card debt or meeting monthly expenses.

A new survey from Schwab Retirement Plan Services, Inc. finds that saving enough money for a comfortable retirement is the most common financial stress inducer for people of all ages. The survey also reveals that most people view the 401(k) as a “must-have” workplace benefit and believe they would benefit from professional saving, investment and financial guidance.

Most people who come to see us have concluded that they need professional help.  They have some basic questions and want answers without a sales pitch.

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They know that they need to save for retirement but don’t know exactly how.

  • The want to know how much they need to save.
  • They want to know how they should be investing their 401(k) plans.
  • They wonder if they should put money into a Regular IRA or a Roth IRA.
  • They know they need to invest in the market but are concerned about making mistakes.

Only 43 percent know how much money they may need for a comfortable retirement, which is significantly lower than awareness of other important targets in their lives, including ideal credit score (91%), weight (90%) or blood pressure (77%).

“With so many competing obligations and priorities, it’s natural for people to worry about whether they’re saving enough for retirement;” said Steve Anderson, president, Schwab Retirement Plan Services, Inc. “Roughly nine out of ten respondents told us they are relying mostly on themselves to finance retirement. It’s encouraging to see people of all ages taking responsibility for their own future and making this a top priority.”

But you don’t have to go it alone.  At Korving & Company we are investment experts.  And we’re fiduciaries which mean that we put your interests ahead of our own.

Contact us for an appointment.

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How much annual retirement income will you have?

Most people believe that their home is their most expensive thing they’ll ever pay for.  They’re wrong.  The most expensive thing people ever pay for is retirement. And they’ll pay for it after they quit working.

That’s why it’s important to have a clear idea of what you’re getting into before you decide to tell your employer that you’re leaving.

The typical retiree’s sources of income include Social Security.  They may have a pension, although fewer companies are offering them.  If there is a gap between those sources of income and their spending plans, the difference is made up by using their retirement savings.

Running out of money is the single biggest concern of retirees.  The big question is how long we will live and the amount we can draw from our savings before they are depleted.

For simplicity, let’s assume: You’re ready to retire today and plan to have your retirement savings last 25 years. You’ve moved your savings into investments that you believe are appropriate for your retirement portfolio. The investments will provide a constant 6% annual return. You’ll withdraw the same amount at the end of each year.

If you saved this amount Here’s how much you could withdraw annually for 25 years
$100,000  $7,823
$200,000 $14,645
$300,000 $23,468
$400,000 $31,291
$500,000 $39,113
$600,000 $46,936
$700,000 $54,759
$800,000 $62,581
$900,000 $70,404
$1,000,000 $78,227

Keep in mind that these examples don’t include factors such as inflation and volatility that can have a big impact on your purchasing power and account value.

For example, if inflation were 4% a year, a withdrawal of $31,291 25 years from now would only be worth $11,738 in today’s dollars.

Investment losses would decrease your account’s growth potential in subsequent years. To account for these factors, you might need to save even more.

Many experts estimate that you’ll need 80% or more of your final annual salary each year in retirement. Social Security may only provide around 40% of what you need. And don’t forget that retirees typically have different types of expenses compared to people still in the workforce, such as increased health care and travel costs.

This is why planning is so important.  A financial plan will provide you with answers to many of these questions.  Retirees also need to reduce the chances that their portfolio will experience major losses due to market volatility or taking too much risk.  This is where a Registered Investment Advisor who is also a Certified Financial Planner (CFP®) can help.  At Korving & Company we prepare retirement plans and, once you approve of your plan, we will manage your retirement assets to give you peace of mind.

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What happens if you are 70 ½ and you have an IRA and a 403(b)?

RMDs, or Required Minimum Distributions have to be taken after you become 70 ½ if you have a retirement account such as an IRA or 401(k).   To determine the amount you are required to take, the value of all of your retirement accounts have to be added together.  If you have multiple retirement accounts you can take the RMD from only one account and leave the others alone … unless you have a 403(b) plan.

403(b) plan accounts must be added to the total of the retirement accounts to determine the RMD.  But  you can’t use distributions from IRAs to satisfy the RMDs from 403(b)s, nor can you use 403(b) distributions to satisfy IRA RMDs.

However, if you have several different 403(b) accounts, you can take the RMD from just one of the accounts, as long as it’s at least as much as the RMD based on the sum of all of the 403(b) accounts.

If you are retired, you may be able to simplify your life by rolling all of your retirement accounts into an IRA.  That way you can eliminate a lot of confusion, and the potential penalties that go along with making a mistake.

If you have questions about retirement accounts, call us.

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