Retirement

Retiring Within the Next 5 Years? Here Are 5 Things You Should Be Focusing On

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Photo by rawpixel.com on Pexels.com

You can prepare for your retirement transition years before it occurs.

In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.

1. How much monthly income will you need?

Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.

2. Should you downsize or relocate?

Moving into a smaller home may reduce your monthly expenses. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so.

3. How should your portfolio be constructed?

In planning for retirement, the top priority is to build investments; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time, risk tolerance, and goals: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.

4. How will you live?

There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.

5. How will you take care of yourself?

What kind of health insurance do you have right now? If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.

Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Extended care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?

Give your retirement strategy a second look as the transition approaches.

Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.

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▲ Income replacement needs vary by household income

Income replacement needs in retirement vary by household income due to different levels of pre-retirement savings and changes in sp¹ending and income taxes. Based on J.P. Morgan research, this chart shows the percentage of pre-retirement income that may be needed to provide a comparable lifestyle through retirement. It also shows what percentage of that total income amount is estimated to come from Social Security to determine what amount will need to be covered by private sources, which include employer-provided retirement plans, IRAs, mutual funds, annuities and other investments.¹

Sources

  1. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. Investments seeking to achieve higher rate of return also involve a higher degree of risk.

What’s the Difference Between an IRA and a 401(k) for Retirement Savings?

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Comparing their features, merits, and demerits.

How do you save for retirement?

Two options probably come to mind right away: the IRA and the 401(k). Both offer you relatively easy ways to build a retirement fund. Here is a look at the features, merits, and demerits of each account, starting with what they have in common.

SIMILARITIES:

1. Taxes are deferred on money held within IRAs and 401(k)s.

That opens the door for tax-free compounding of those invested dollars – a major plus for any retirement saver. (1)

2. IRAs and 401(k)s also offer you another big tax break.

It varies depending on whether the account is traditional or Roth in nature. When you have a traditional IRA or 401(k), your account contributions are tax deductible, but when you eventually withdraw the money for retirement, it will be taxed as regular income. When you have a Roth IRA or 401(k), your account contributions are not tax deductible, but if you follow Internal Revenue Service rules, your withdrawals from the account in retirement are tax free. (1)

3. Generally, the I.R.S. penalizes withdrawals from these accounts before age 59½.

Distributions from traditional IRAs and 401(k)s prior to that age usually trigger a 10% federal tax penalty, on top of income tax on the withdrawn amount. Roth IRAs and Roth 401(k)s allow you to withdraw a sum equivalent to your account contributions at any time without taxes or penalties, but early distributions of the account earnings are taxable and may also be hit with the 10% early withdrawal penalty. (1)

4. You must make annual withdrawals from 401(k)s and traditional IRAs after age 70½.

Annual withdrawals from a Roth IRA are not required during the owner’s lifetime, only after his or her death. Even Roth 401(k)s require annual withdrawals after age 70½. (2)

DIFFERENCES:

1.Annual contribution limits for IRAs and 401(k)s differ greatly.

You may direct up to $18,500 into a 401(k) in 2018; $24,500, if you are 50 or older. In contrast, the maximum 2018 IRA contribution is $5,500; $6,500, if you are 50 or older. (1)

2. Your employer may provide you with matching 401(k) contributions.

This is free money coming your way. The match is usually partial, but certainly nothing to disregard – it might be a portion of the dollars you contribute up to 6% of your annual salary, for example. Do these employer contributions count toward your personal yearly 401(k) contribution limit? No, they do not. Contribute enough to get the match if your company offers you one.1

3. An IRA permits a wide variety of investments, in contrast to a 401(k).

The typical 401(k) offers only about 20 investment options, and you have no control over what investments are chosen. With an IRA, you have a vast range of potential investment choices. (1,3)

4. You can contribute to a 401(k) no matter how much you earn.

Your income may limit your eligibility to contribute to a Roth IRA; at certain income levels, you may be prohibited from contributing the full amount, or any amount. (1)

5. If you leave your job, you cannot take your 401(k) with you.

It stays in the hands of the retirement plan administrator that your employer has selected. The money remains invested, but you may have less control over it than you once did. You do have choices: you can withdraw the money from the old 401(k), which will likely result in a tax penalty; you can leave it where it is; you can possibly transfer it to a 401(k) at your new job; or, you can roll it over into an IRA. (4,5)

6. You cannot control 401(k) fees.

Some 401(k)s have high annual account and administrative fees that effectively eat into their annual investment returns. The plan administrator sets such costs. The annual fees on your IRA may not nearly be so expensive. (1)

All this said, contributing to an IRA or a 401(k) is an excellent idea.

In fact, many pre-retirees contribute to both 401(k)s and IRAs at once. Today, investing in these accounts seems all but necessary to pursue retirement savings and income goals.

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▲The power of tax-deferred compounding

Deferring the tax on investment earnings, such as dividends, interest or capital gains, may help accumulate more after-tax wealth over time than earning the same return in a taxable account. This is known as tax-deferred compounding. This chart shows an initial $100,000 after-tax investment in either a taxable or tax-deferred account that earns a 6% return (assumed to be subject to ordinary income taxes). Assuming an income tax rate of 24%, the value of the tax-deferred account (net of taxes owed) after 30 years accumulates over $79,000 more than if the investment return had been taxed 24% each year. (6)

Sources:

  1. nerdwallet.com/article/ira-vs-401k-retirement-accounts
  2. irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
  3. tinyurl.com/y77cjtfz
  4. finance.zacks.com/tax-penalty-moving-401k-ira-3585.html
  5. cnbc.com/2018/04/26/what-to-do-with-your-401k-when-you-change-jobs.html
  6. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Working Past 65 Can Help Improve a Women’s Retirement Prospects

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Why striving to stay in the workforce a little longer may make financial sense.

The median retirement age for an American woman is 62.

The Federal Reserve says so in its most recent Survey of Household Economics and Decisionmaking (2017). Sixty-two, of course, is the age when seniors first become eligible for Social Security retirement benefits. This factoid seems to convey a message: a fair amount of American women are retiring and claiming Social Security as soon as they can. (1)

What if more women worked into their mid-sixties?

Could that benefit them, financially? While health issues and caregiving demands sometimes force women to retire early, it appears many women are willing to stay on the job longer. Fifty-three percent of the women surveyed in a new Transamerica Center for Retirement Studies poll on retirement said that they planned to work past age 65. (2)

Staying in the workforce longer may improve a woman’s retirement prospects.

If that seems paradoxical, consider the following positives that could result from working past 65:

1. More years at work leaves fewer years of retirement to fund.

Many women are worried about whether they have saved enough for the future. Two or three more years of income from work means two or three years of not having to draw down retirement savings.

2. Retirement accounts have additional time to grow and compound.

Tax-deferred compounding is one of the greatest components of wealth building. The longer a tax-deferred retirement account has existed, the more compounding counts.

Suppose a woman directs $500 a month into such a tax-favored account for decades, with the investments returning 7% a year. For simplicity’s sake, we will say that she starts with an initial contribution of $1,000 at age 25. Thirty-seven years later, she is 62 years old, and that retirement account contains $974,278. (3)

If she lets it grow and compound for just one more year, she is looking at $1,048,445. Two more years? $1,127,837. If she retires at age 65 after 40 years of contributions and compounded annual growth, the account will contain $1,212,785. By waiting just three years longer, she leaves work with a retirement account that is 24.4% larger than it was when she was 62. (3)

A longer career also offers a chance to improve Social Security benefit calculations.

Social Security figures retirement benefits according to a formula. The prime factor in that formula is a worker’s average indexed monthly earnings, or AIME. AIME is calculated based on that worker’s 35 highest-earning years. But what if a woman stays in the workforce for less than 35 years? (4)

Some women interrupt their careers to raise children or care for family members or relatives.

This is certainly work, but it does not factor into the AIME calculation. If a woman’s work record shows fewer than 35 years of taxable income, years without taxable income are counted as zeros. So, if a woman has only earned taxable income in 29 years of her life, six zero-income years are included in the AIME calculation, thereby dragging down the AIME. By staying at the office longer, a woman can replace one or more of those zeros with one or more years of taxable income. (4)

In addition, waiting to claim Social Security benefits after age 62 also results in larger monthly Social Security payments.

A woman’s monthly Social Security benefit will grow by approximately 8% for each year she delays filing for her own retirement benefits. This applies until age 70. (4)

Working longer might help a woman address major retirement concerns.

It is an option worth considering, and its potential financial benefits are worth exploring.

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▲ Older Americans in the workforce

The long-term trend is that more people are working at older ages, as seen in the top chart. Even so, with the large increase in the age 65+ population shown in the grey shading, there will be more people than ever stopping work in the coming years. The bottom chart shows the reasons for working in retirement, or after they typically have retired from their primary career. It indicates that the definition of retirement is changing, as more people are working due to positive reasons such as wanting to stay active and socially engaged more so than for financial reasons.

Sources

  1. dqydj.com/average-retirement-age-in-the-united-states/
  2. thestreet.com/retirement/18-facts-about-womens-retirement-14558073
  3. investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator
  4. fool.com/retirement/social-securitys-aime-what-is-it.aspx
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

4 Important Questions You’ll Need to Answer Before Claiming Social Security

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Whether you want to leave work at 62, 67, or 70, claiming the retirement benefits you are entitled to by federal law is no casual decision. You will want to consider a few key factors first.

1. How long do you think you will live?

If you have a feeling you will live into your nineties, for example, it may be better to claim later. If you start receiving Social Security benefits at or after Full Retirement Age (which varies from age 66-67 for those born in 1943 or later), your monthly benefit will be larger than if you had claimed at 62. If you file for benefits at FRA or later, chances are you probably a) worked into your mid-sixties, b) are in fairly good health, c) have sizable retirement savings. (1)

If you sense you might not live into your eighties or you really need retirement income, then claiming at or close to 62 might make more sense. If you have an average lifespan, you will, theoretically, receive the average amount of lifetime benefits regardless of when you claim them; the choice comes down to more lifetime payments that are smaller or fewer lifetime payments that are larger. For the record, Social Security’s actuaries project the average 65-year-old man living 84.3 years and the average 65-year-old woman living 86.7 years. (2)

2. Will you keep working?

You might not want to work too much, for earning too much income can result in your Social Security being withheld or taxed.

Prior to Full Retirement Age, your benefits may be lessened if your income tops certain limits. In 2018, if you are 62-65 and receive Social Security, $1 of your benefits will be withheld for every $2 that you earn above $17,040. If you receive Social Security and turn 66 later this year, then $1 of your benefits will be withheld for every $3 that you earn above $45,360. (3)

Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” = adjusted gross income + non-taxable interest + 50% of Social Security benefits.) Single filers who have combined incomes from $25,000-34,000 may have to pay federal income tax on up to 50% of their Social Security benefits, and that also applies to joint filers with combined incomes of $32,000-44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes surpass $44,000 may have to pay federal income tax on up to 85% of their Social Security benefits. (3)

3. When does your spouse want to file?

Timing does matter, especially for two-income couples. If the lower-earning spouse collects Social Security benefits first, and then the higher-earning spouse collects them later, that may result in greater lifetime benefits for the household. (4)

4. How much in benefits might be coming your way?

Visit ssa.gov to find out, and keep in mind that Social Security calculates your monthly benefit using a formula based on your 35 highest-earning years. If you have worked for less than 35 years, Social Security fills in the “blank years” with zeros. If you have, say, just 33 years of work experience, working another couple of years might translate to slightly higher Social Security income. (1)

Your claiming decision may be one of the major financial decisions of your life. Your choices should be evaluated years in advance, with insight from the financial professional who has helped you plan for retirement.

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▲ Maximizing Social Security benefits

The age at which one claims Social Security greatly affects the amount of benefit received. Key claiming ages are 62, full retirement age (FRA is currently 66 and 4 months for today’s 62-year-olds) and 70, as shown in the row of ages in the middle of the slide. The top three graphs show the three most common ages an individual is likely to claim and the monthly benefit he or she would receive at those ages. Claiming at the latest age (70) provides the highest monthly amount but delays receipt of the benefit for 8 years. Claiming at Full Retirement Age, 66 and 4 months, or 62 years old provides lesser amounts at earlier ages. The grey shading between the bar charts represents the ages at which waiting until a later claim age results in greater cumulative benefits than the earlier age. This is called the breakeven age. The breakeven age between taking benefits at age 62 and FRA is age 76 and between FRA and 70 is 80. Not shown is the breakeven between 62 and 70, which is 79 (78 and 6 months). Along the bottom of the page, the percentages show the probability that a man, woman or one member of a married couple currently age 62 will reach the specified ages. Comparing these percentages against the breakeven ages will help a beneficiary make an informed decision about when to claim Social Security if maximizing the cumulative benefit received is a primary goal. Note that while the benefits shown are for a high-income earner who maxes out their Social Security taxes each year (income of $128,700 in 2018), the breakeven ages would hold true for those at other income levels.

Sources

  1. fool.com/investing/2018/07/07/4-frequently-asked-social-security-questions.aspx
  2. ssa.gov/planners/lifeexpectancy.html
  3. blackrock.com/investing/literature/investor-education/social-security-retirement-benefits-quick-reference-one-pager-va-us.pdf
  4. thebalance.com/social-security-for-married-couples-2389042
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

8 Surprising Retirement and Lifestyle Facts for Pre-Retirees

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Photo by Tookapic on Pexels.com

Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you.

Up to 85% of a retiree’s Social Security income can be taxed.

Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (It is worth mentioning that the I.R.S. offers free tax advice to people 60 and older through its Tax Counseling for the Elderly program.) (1)

Retirees get a slightly larger standard deduction on their federal taxes.

Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for an individual taxpayer in this age bracket is $13,600, compared to $12,000 for those 64 or younger. (2)

Retirees can still use IRAs to save for retirement.

There is no age limit for contributing to a Roth IRA, just an inflation-adjusted income limit. So, a retiree can keep directing money into a Roth IRA for life, provided they are not earning too much. In fact, a senior can potentially contribute to a traditional IRA until the year they turn 70½. (1)

A significant percentage of retirees are carrying education and mortgage debt.

The Consumer Finance Protection Bureau says that throughout the U.S., the population of borrowers aged 60 and older who have outstanding student loans grew by at least 20% in every state between 2012 and 2017. In more than half of the 50 states, the increase was 45% or greater. Generations ago, seniors who lived in a home often owned it, free and clear; in this decade, that has not always been so. The Federal Reserve’s recent Survey of Consumer Finance found that more than a third of those aged 65-74 have outstanding home loans; nearly a quarter of Americans who are 75 and older are in the same situation. (1)

As retirement continues, seniors become less credit dependent.

GoBankingRates says that only slightly more than a quarter of Americans over age 75 have any credit card debt, compared to 42% of those aged 65-74. (1)

About one in three seniors who live independently also live alone.

In fact, the Institute on Aging notes that nearly half of women older than age 75 are on their own. Compared to male seniors, female seniors are nearly twice as likely to live without a spouse, partner, family member, or roommate. (1)

Around 64% of women say that they have no “Plan B” if forced to retire early.

That is, they would have to completely readjust and reassess their vision of retirement, and redetermine their sources of retirement income. The Transamerica Center for Retirement Studies learned this from its latest survey of more than 6,300 U.S. workers. (3)

Few older Americans budget for travel expenses.

While retirees certainly love to travel, Merril Lynch found that roughly two-thirds of people aged 50 and older admitted that they had never earmarked funds for their trips, and only 10% said they had planned their vacations extensively. (1)

What financial facts should you consider as you retire?

What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. When it comes to retirement, the more information you have, the better.

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▲ Changes in lifestyle

As households transition into retirement, time that had been spent working now is available for other pursuits. Individuals often enter retirement having spent too little time determining how they plan to spend this time – and run the risk of spending time and money pursuing activities that may not prove to be as fulfilling as they had anticipated. “Practicing retirement” can be a good way for individuals to try out interests in advance so that they are more likely to use their time and resources wisely. Older individuals tend to spend more time caring for other adults in their household, volunteering and focusing on their finances.

Sources

  1. gobankingrates.com/retirement/planning/weird-things-about-retiring/
  2. fool.com/taxes/2018/04/15/2018-standard-deduction-how-much-it-is-and-why-you.aspx
  3. thestreet.com/retirement/18-facts-about-womens-retirement-14558073
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How Annuities Can Help Provide a Retirement Income Floor

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Here’s why many people choose annuities for for retirement income, and what prospective annuity holders should consider.

Imagine an income stream you cannot outlive.

That sums up the appeal of an annuity. If you are interested in steady retirement income (and the potential to defer taxes), you might want to look at the potential offered by annuities. Before making the leap, however, you must understand how they work.

Just what is an annuity?

It is an income contract you arrange with an insurance company. You provide a lump sum or continuing contributions to fund the contract; in return, the insurer agrees to pay you a specific amount of money in the future, usually per month. If you are skittish about stocks and searching for a low-risk alternative, annuities may appear very attractive. While there are different kinds of annuities available with myriad riders and options that can be attached, the basic annuity choices are easily explained. (2)

Annuities can be either immediate or deferred.

With an immediate annuity, payments to you begin shortly after the inception of the income contract. With a deferred annuity, you make regular contributions to the annuity, which accumulate on a tax-deferred basis for a set number of years (called the accumulation phase) before the payments to you begin. (1,2)

Annuities can be fixed or variable.

Fixed annuities pay out a fixed amount on a recurring basis. With variable annuities, the payment can vary: these investments do essentially have a toe in the stock market. The insurer places some of the money that you direct into the annuity into Wall Street investments, attempting to capture some of the upside of the market, while promising to preserve your capital. Some variable annuities come with a guaranteed income benefit option: a pledge from the insurer to provide at least a certain level of income to you. (1,3)

In addition, some annuities are indexed.

These annuities can be either fixed or variable; they track the performance of a stock index (often, the S&P 500), and receive a credit linked to its performance. For example, if the linked index gains 8% in a year, the indexed annuity may return 4%. Why is the return less than the actual index return? It is because the insurer usually makes you a trade-off: it promises contractually that you will get at least a minimum guaranteed return during the early years of the annuity contract. (3)

Annuities require a long-term commitment.

Insurance companies expect annuity contracts to last for decades; they have built their business models with this presumption in mind. So, if you change your mind and decide to cancel an annuity contract a few years after it begins, you may have to pay a surrender charge – in effect, a penalty. (Most insurance companies will let you withdraw 10-15% of the money in your annuity without penalty in an emergency.) Federal tax law also discourages you from withdrawing money from an annuity – if the withdrawal happens before you are 59½, you are looking at a 10% early withdrawal penalty just like the ones for traditional IRAs and workplace retirement accounts. (1,3)

Annuities can have all kinds of “bells and whistles.”

Some offer options to help you pay for long-term care. Some set the length of the annuity contract, with a provision that if you die before the contract ends, the balance remaining in your annuity will go to your estate. In fact, some annuities work like joint-and-survivor pensions: when an annuity owner dies, payments continue to his or her spouse. (Generally, the more guarantees, riders, and options you attach to an annuity, the lower your income payments may be.) (1)

Deferred annuities offer you the potential for great tax savings.

The younger you are when you arrange a deferred annuity contract, the greater the possible tax savings. A deferred annuity has the quality of a tax shelter: its earnings grow without being taxed, they are only taxable once you draw an income stream from the annuity. If you start directing money into a deferred annuity when you are relatively young, that money can potentially enjoy many years of tax-free compounding. Also, your contributions to an annuity may lower your taxable income for the year(s) in which you make them. While annuity income is regular taxable income, you may find yourself in a lower tax bracket in retirement than when you worked. (1)

Please note that annuities come with minimums and fees.

The fee to create an annuity contract is often high when compared to the fees for establishing investment accounts – sometimes as high as 5-6%. Annuities typically call for a minimum investment of at least $5,000; realistically, an immediate annuity demands a five- or six-figure initial investment. (3)

No investment is risk free, but an annuity does offer an intriguing investment choice for the risk averse. If you are seeking an income-producing investment that attempts to either limit or minimize risk, annuities may be worth considering.

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▲Understanding annuities: Which annuity may be right for you?

Annuities come in all shapes and sizes, which can often confuse investors. This chart helps to identify the type of annuity that aligns to specific income needs and tolerance for investment risk, and provides information about how the annuity growth and payout amounts are determined, as well as other key characteristics to know.

Sources

  1. investopedia.com/articles/retirement/05/063005.asp
  2. forbes.com/sites/forbesfinancecouncil/2018/01/04/annuities-explained-in-plain-english/#626afc215bd6
  3. apps.suzeorman.com/igsbase/igstemplate.cfm?SRC=MD012&SRCN=aoedetails&GnavID=20&SnavID=29&TnavID&AreasofExpertiseID=107
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Which Retirement Savings Vehicle Should You Use: Traditional IRA or Roth IRA?

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Perhaps both traditional and Roth IRAs can play a part in your retirement plans.

IRAs can be an important tool in your retirement savings belt, and whichever you choose to open could have a significant impact on how those accounts might grow.

IRAs, or Individual Retirement Accounts, are investment vehicles used to help save money for retirement. There are two different types of IRAs: traditional and Roth. Traditional IRAs, created in 1974, are owned by roughly 35.1 million U.S. households. And Roth IRAs, created as part of the Taxpayer Relief Act in 1997, are owned by nearly 24.9 million households. (1)

Both kinds of IRAs share many similarities, and yet, each is quite different. Let’s take a closer look.

  1. Up to certain limits, traditional IRAs allow individuals to make tax-deductible contributions into the retirement account. Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. For individuals covered by a retirement plan at work, the deduction for a traditional IRA in 2019 has been phased out for incomes between $103,000 and $123,000 for married couples filing jointly and between $64,000 and $74,000 for single filers. (2,3)
  2. Also, within certain limits, individuals can make contributions to a Roth IRA with after-tax dollars. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2019, contributions to a Roth IRA are phased out between $193,000 and $203,000 for married couples filing jointly and between $122,000 and $137,000 for single filers. (2,3)
  3. In addition to contribution and distribution rules, there are limits on how much can be contributed to either IRA. In fact, these limits apply to any combination of IRAs; that is, workers cannot put more than $6,000 per year into their Roth and traditional IRAs combined. So, if a worker contributed $3,500 in a given year into a traditional IRA, contributions to a Roth IRA would be limited to $2,500 in that same year. (4)
  4. Individuals who reach age 50 or older by the end of the tax year can qualify for annual “catch-up” contributions of up to $1,000. So, for these IRA owners, the 2019 IRA contribution limit is $7,000. (4)

If you meet the income requirements, both traditional and Roth IRAs can play a part in your retirement plans. And once you’ve figured out which will work better for you, only one task remains: opening an account.

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▲  Evaluate a Roth at different life stages

The decision to make a pre-tax/deductible contribution to a Traditional 401(k) or IRA or an after-tax contribution to a Roth 401(k) or Roth IRA is based on the income tax rate of the individual at the time of making the contribution, and his/her anticipated tax rate in the future. The difference in tax rates can be caused by an investor’s personal situation and/or tax policy over time. This chart shows a typical wage curve and the general “rule of thumb” about what type of contribution may be most appropriate based on current income and the bracket in retirement. An additional consideration is to maintain a healthy mix of taxable, tax-free (Roth) and tax-deferred accounts so that you can have greater flexibility to manage your income taxes. The numbers on the chart specify situations in which contributing to a Roth option should be carefully considered. (5)

Sources

  1. https://www.ici.org/pdf/per23-10.pdf
  2. https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14
  3. https://money.usnews.com/money/retirement/articles/new-401-k-and-ira-limits
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Searching for Health Coverage in the Years Before Medicare

doctor pointing at tablet laptop

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What are your options for insuring yourself prior to age 65?

If you retire before age 65, you must be prepared to address two insurance issues.

One, finding health coverage in the period before you can sign up for Medicare. Two, finding a way to pay for that coverage.

You know it will probably be expensive, but do you realize just how expensive?

A single retiree may pay as much as $500-1,000 per month for private health insurance. For a couple, the monthly premiums can surpass $2,000. These are ballpark figures; fortunately, seniors without pre-existing health conditions can locate some less expensive plans offering short-term coverage, albeit with high deductibles. (1,2)

If you find yourself in this situation, what are your options?

It is time to examine a few.

You could retire gradually or take a part-time job with access to a group health plan.

Ask your employer if a phased retirement is possible, so you can maintain the coverage you have a bit longer. Securing part-time work with health benefits elsewhere could be a tall order, as it may be much tougher to find a job in your early sixties; not all employers value experience as much as they should.

You could turn to the health insurance exchanges.

Purchasing your own coverage could be a first for you, and you may not be optimistic about your prospects at the Health Insurance Marketplace (healthcare.gov) or a state exchange. Your prospects could be better than you assume. As a Miami Herald article points out, a married couple younger than 65 earning around $65,000 could likely get a bronze plan for free through the Marketplace, thanks to federal government subsidies. A couple would be eligible for such aid with projected 2019 earnings in the range of $16,460-$65,840. For the record, the open enrollment period for buying 2019 coverage ends December 15. (2)

You could arrange COBRA coverage.

If you voluntarily or involuntarily retire from a company or organization that has 20 or more employees and a group health plan, that employer must give you the option of extending the health insurance you had while working for up to 18 months (or in some instances, up to 36 months). This is federal law, part of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. (There is a notable exception to this: an employer can legally choose not to offer you COBRA benefits if you were fired due to “gross misconduct,” though the law defines that term hazily.) COBRA coverage is expensive: you effectively pay your employer’s monthly premium as well as your own, plus a 2% administrative fee. If you miss a premium payment by more than 30 days, your COBRA benefits may be canceled. (3,4)

You might be lucky enough to secure retiree health insurance.

Some employers do offer this to retiring workers; if yours does not, your spouse’s employer might. It is not cheap by any means, but it may be worthwhile. (1)

As a last option, you could move to another country (or state).

You could relocate to a nation that has either a universal health care system or much cheaper health care costs than ours does, either temporarily or permanently. If you decide to stay in that nation for the long term, you will really need to think about whether or not you want to sign up for Medicare at 65. Alternately, another state may present you with a cheaper health care picture than your current state does; a little research may reveal some potential savings. (1)

Review these options before you retire.

See how the costs fit into your budget. Have a conversation about this topic with an insurance or financial professional, because you may end up leaving work years prior to age 65.

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▲ Rising annual health care costs in retirement

This chart illustrates the current range of total out-of-pocket health care costs experienced by today’s 65-year-old, and how those costs may increase over time. These costs include traditional Medicare with a supplemental policy. Supplemental policies, called Medigap, fill in gaps in Medicare coverage such as co-pays and deductibles. Part D for prescription drugs and out-of-pocket expenses are also included. Median costs are about $5,210 per person. Median costs are projected to more than triple over 20 years for three reasons: 1) higher than average inflation for health care expenses; 2) increased use of health care at older ages; and 3) Medigap premiums that increase not only with inflation but also due to increased age. It is important to note that these costs do not include most long-term care expenses. (4)

Sources

  1. forbes.com/sites/nextavenue/2018/08/07/shopping-for-health-insurance-before-medicare-kicks-in
  2. tinyurl.com/yccclxmc
  3. bizfilings.com/toolkit/research-topics/office-hr/what-is-cobra-what-employers-need-to-know forbes.com/sites/heatherlocus/2018/10/21/what-you-need-to-know-about-3-key-options-for-health-insurance-after-divorce/
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What Comprehensive Financial Planning Is and How It Can Help You

flat lay photography of macbook pro beside paper

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Your approach to building wealth should be built around your goals & values.

Just what is comprehensive financial planning?

As you invest and save for retirement, you may hear or read about it – but what does that phrase really mean? Just what does comprehensive financial planning entail, and why do knowledgeable investors request this kind of approach?

While the phrase may seem ambiguous to some, it can be simply defined.

Comprehensive financial planning is about building wealth through a process, not a product.

Financial products are everywhere, and simply putting money into an investment is not a gateway to getting rich, nor a solution to your financial issues.

Comprehensive financial planning is holistic.

It is about more than “money.” A comprehensive financial plan is not only built around your goals, but also around your core values. What matters most to you in life? How does your wealth relate to that? What should your wealth help you accomplish? What could it accomplish for others?

Comprehensive financial planning considers the entirety of your financial life.

Your assets, your liabilities, your taxes, your income, your business – these aspects of your financial life are never isolated from each other. Occasionally or frequently, they interrelate. Comprehensive financial planning recognizes this interrelation and takes a systematic, integrated approach toward improving your financial situation.

Comprehensive financial planning is long range.

It presents a strategy for the accumulation, maintenance, and eventual distribution of your wealth, in a written plan to be implemented and fine-tuned over time.

What makes this kind of planning so necessary?

If you aim to build and preserve wealth, you must play “defense” as well as “offense.” Too many people see building wealth only in terms of investing – you invest, you “make money,” and that is how you become rich.

That is only a small part of the story. The rich carefully plan to minimize their taxes and debts as well as adjust their wealth accumulation and wealth preservation tactics in accordance with their personal risk tolerance and changing market climates.

Basing decisions on a plan prevents destructive behaviors when markets turn unstable.

Quick decision-making may lead investors to buy high and sell low – and overall, investors lose ground by buying and selling too actively. Openfolio, a website which lets tens of thousands of investors compare the performance of their portfolios against portfolios of other investors, found that its average investor earned 5% in 2016. In contrast, the total return of the S&P 500 was nearly 12%. Why the difference? As CNBC noted, most of it could be chalked up to poor market timing and faulty stock picking. A comprehensive financial plan – and its long-range vision – helps to discourage this sort of behavior. At the same time, the plan – and the financial professional(s) who helped create it – can encourage the investor to stay the course. (1)

A comprehensive financial plan is a collaboration & results in an ongoing relationship.

Since the plan is goal-based and values-rooted, both the investor and the financial professional involved have spent considerable time on its articulation. There are shared responsibilities between them. Trust strengthens as they live up to and follow through on those responsibilities. That continuing engagement promotes commitment and a view of success.

Think of a comprehensive financial plan as your compass.

Accordingly, the financial professional who works with you to craft and refine the plan can serve as your navigator on the journey toward your goals.

The plan provides not only direction, but also an integrated strategy to try and better your overall financial life over time. As the years go by, this approach may do more than “make money” for you – it may help you to build and retain lifelong wealth.

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▲ Comprehensive Planning

Planning for retirement can be overwhelming as individuals navigate various retirement factors over which we have varying levels of control. There are challenges in retirement planning over which we have no control, like the future of tax policy and market returns, and factors over which we have limited control, like longevity and how long we plan to work. The best way to achieve a secure retirement is to develop a comprehensive retirement plan and to focus on the factors we can control: maximize savings, understand and manage spending and adhere to a disciplined approach to investing.

Sources

  1. cnbc.com/2017/01/04/most-investors-didnt-come-close-to-beating-the-sp-500.html
  2. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Is Generation X Preparing Adequately for Retirement?

man and woman sitting on hay

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Future financial needs may be underestimated.

If you were born during 1965-80, you belong to “Generation X.”

Ten or twenty years ago, you may have thought of retirement as an event in the lives of your parents or grandparents; within the next 10-15 years, you will probably be thinking about how your own retirement will unfold. (1)

According to the most recent annual retirement survey from the Transamerica Center for Retirement Studies, the average Gen Xer has saved only about $72,000 for retirement. Hypothetically, how much would that $72,000 grow in a tax-deferred account returning 6% over 15 years, assuming ongoing monthly contributions of $500? According to the compound interest calculator at Investor.gov, the answer is $312,208. Across 20 years, the projection is $451,627. (2,3)

Should any Gen Xer retire with less than $500,000?

Today, people are urged to save $1 million (or more) for retirement; $1 million is being widely promoted as the new benchmark, especially for those retiring in an area with high costs of living. While a saver aged 38-53 may or may not be able to reach that goal by age 65, striving for it has definite merit. (4)

Many Gen Xers are staring at two retirement planning shortfalls.

Our hypothetical Gen Xer directs $500 a month into a retirement account. This might be optimistic: Gen Xers contribute an average of 8% of their pay to retirement plans. For someone earning $60,000, that means just $400 a month. A typical Gen X worker would do well to either put 10% or 15% of his or her salary toward retirement savings or simply contribute the maximum to retirement accounts, if income or good fortune allows. (2)

How many Gen Xers have Health Savings Accounts (HSAs)?

These accounts set aside a distinct pool of money for medical needs. Unlike Flexible Spending Accounts (FSAs), HSAs do not have to be drawn down each year. Assets in an HSA grow with taxes deferred, and if a distribution from the HSA is used to pay qualified health care expenses, that money comes out of the account, tax free. HSAs go hand-in-hand with high-deductible health plans (HDHPs), which have lower premiums than typical health plans. A taxpayer with a family can contribute up to $7,000 to an HSA in 2019. (The limit is $8,000 if that taxpayer will be 55 or older at any time next year.) HSA contributions also reduce taxable income. (2,5)

Fidelity Investments projects that the average couple will pay $280,000 in health care expenses after age 65. A particular retiree household may pay more or less, but no one can deny that the costs of health care late in life can be significant. An HSA provides a dedicated, tax-advantaged way to address those expenses early. (6)

Retirement is less than 25 years away for most of the members of Generation X.

For some, it is less than a decade away. Is this generation prepared for the financial realities of life after work? Traditional pensions are largely gone, and Social Security could change in the decades to come. At midlife, Gen Xers must dedicate themselves to sufficiently funding their retirements and squarely facing the financial challenges ahead.

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▲Retirement savings checkpoints

Achieving a financially successful retirement requires consistent savings, disciplined investing and a plan, yet too few Americans have calculated what it will take to be able to retire at their current lifestyle. This chart helps investors to quickly gauge whether they are “on track” to afford their current lifestyle for 30 years in retirement based on their current age and annual household income. This analysis uses an appropriate income replacement rate, an estimate of how much Social Security is likely to cover and the rate of return and inflation rate assumptions detailed on the right to determine the amount of investable wealth needed today, assuming a 10% gross annual savings rate until retirement. It is important to note that this analysis assumes a household with the primary earner who plans to retire at age 65 when the spouse is assumed to be 62. If an investor’s current retirement savings falls short of the amount for their age and income, developing a written retirement plan tailored to their unique situation with the help of an experienced financial advisor is a recommended next step. (6)

Sources:

  1. businessinsider.com/generation-you-are-in-by-birth-year-millennial-gen-x-baby-boomer-2018-3
  2. forbes.com/sites/megangorman/2018/05/27/generation-x-our-top-2-retirement-planning-priorities/
  3. investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator
  4. washingtonpost.com/news/get-there/wp/2018/04/26/is-1-million-enough-to-retire-why-this-benchmark-is-both-real-and-unrealistic
  5. kiplinger.com/article/insurance/T027-C001-S003-health-savings-account-limits-for-2019.html
  6. fool.com/retirement/2018/11/05/3-reasons-its-not-always-a-good-idea-to-retire-ear.aspx
  7. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.