YOUR RETIREMENT PLANNING GUIDE
We all have an ideal age to retire, but without an appropriate plan, this notion becomes more of a distant reality. We need to consider how to fund our retirement so that we may live contentedly with sufficient income in our later years. So, how much money do you really need so that you may retire comfortably? It should be no surprise that there is no specific retirement plan that trumps all, nor is there a magic number that will be enough. Your approach to retirement should be based on our life goals and future plans as well as our affordability, but starting earlier in life is always recommended.
Other than deciding on how to fund our retirement, we need to consider several factors. We need to determine how taxation will affect us and what social security benefits are we entitled to. The two determinants will also have their own factors that will contribute to our final decision. For instance, you will have to consider how much reduction you may have in benefits if you choose to retire before your full retirement age? Consider how you could develop a tax-advantaged retirement plan that will supplement your benefits. You should also determine how to manage your risk, protect your family and legacy adopting proven strategies that can provide an income for life. Due to unfair societal influences like gender wage gaps, women should consider ramping up their contributions.
When seeking advisement about your social security benefits make sure you speak with a licensed professional or Registered Social Security Analyst who is equipped to address the 4 main types of Social Security benefits including retirement, disability, dependents, and survivor. AARP.org explains that "Social Security benefit is not meant to be a retiree's sole source of income," but plays a big factor in decision making for most of us.
DIFFERENT WAYS TO SAVE FOR YOUR RETIREMENT.
There are a number of plans to choose from when considering what is right for you. Whether it consists of tax-deferred or tax-advantaged strategies your goal is to have enough to sustain your lifestyle and protect your family as well as your legacy. Since your family, future plans, and livelihood are at stake you should consider which plan would be the most advantageous route. You will need to study how certain factors like taxation and contribution limits will affect your overall financial plan. Because of these determinants, the continuous rise of inflation and taxation laws you must be well versed. To help you understand, I will discuss and provide some insight into the most common savings vehicles used for retirement and demystify some misconceptions about the traditional methods listed below. I will also share proven strategies currently used that will you improve your financial plan to better accomplish your goals and enhance your future financial health. Make sure you read until the end of this article to see if these conceptualized strategies are appropriate for you and your family.
THE MOST COMMON METHODS USED TODAY TO SAVE FOR RETIREMENT:
Pension Plans
401(k) and 403(b)
Traditional IRA
Roth IRA
Annuities
PENSION PLAN
A pension plan or a defined-benefit plan is a type of retirement plan that guarantees an employee a benefit when he or she retires. The benefit is determined using a formula calculating the amount of service credit multiplying it by a specified multiplier and again multiplied by the average of a set period of earnings. These types of retirement plans are becoming a rarity in today's business world. More companies today are electing to use other means, such as defined-contribution plans to help individuals plan for retirement. Unless you are working for federal, state, or local government agencies most companies are using defined-contribution plans such as 401k or 403b plans because it is much less expensive than traditional defined-benefit plans.
Members of NYC transit, DOE, employees of Health & Hospital Corporation along with local city agencies like NYPD and FDNY are some of the few organizations that utilize a pension fund to provide these members of service a retirement funding option. Members of such organizations should be aware that different classifications and tiers are entitled to different benefits and should consider different ways to pad their retirement to ensure their future and keep up with the hefty cost of living and inflation.
Consider a member of service who has amounted 20 years of credits making an average of $80,000 with a 1.6% multiplier would roughly take home $26,000 per year, this amount is roughly half of his or her earned wages per year, dependent on his income from other sources like social security he or she may need to undergo drastic changes in lifestyle to keep up with their cost of living in the future especially in retirement.
www.NewYorkRetirementNews.com is a resource that can provide insight and FAQs for members of service living in NYC. According to NYSLRS the average ERS benefits for retirees and beneficiaries is $24,345 per year, while the PFRS is an average of $52,804 annually. Every person's necessitated requirements vary, the estimated values presented may be sufficient for some, but it will leave most people with a huge shortfall. When considering your options you should always consult with a professional to help evaluate your situation and life planning needs.
DEFINED-CONTRIBUTION PLAN: 401(k) and 403(b)
Defined-contribution plans have become a popular alternative to defined-benefit plans The most common are 401(k) and 403(b). These plans are funded by the participants or employees and contributions are usually "matched" by the employer which is one of the main reasons why it is an attractive option for most.
100% employer match or contribution is traditionally 6% of the employee's annual salary, which is based on the employee's contribution. Depending on the benefits package your employer may offer a 100% match, a 50% match or even less of your annual contribution. For example, if your salary is $100k and you contribute 6% of your salary to a plan and your employers offers a 100% match, you will have a total of $12k in your annual plan, If they offer a 50% match (or 3%) you will have $9k in your plan. For the year 2020, the IRS has declared contribution limits of $19,500 for individuals under 50 years of age. Anyone above this age group may elect to add $6,500 in "catch-up contributions." Your employer match or contributions are not included to either contribution thresholds hence it may be in your best interest to maximize your plan up to these limits depending on your financial plan and goals.
A few things to consider when choosing a defined-contribution plan as your retirement plan option. First are the risk factors and risk tolerance as well as the ability to grow your funds, with that said you should place heavy consideration on asset allocation. Because of the uncertainty and volatility of the market as well as the complexities, low return rates on bonds and mutual funds you should speak with a knowledgeable professional before making any decisions. Aside from potential market risks associated with this type of plan another factor that you must consider is how taxation would affect your overall approach. There are advantages to tax deferral strategies that can lower your tax liability over the years which can be a good thing, but what is that worth to you in the future? We can assume that as you get older you will earn and generate a higher income which means you will be in a higher tax bracket. When you defer your taxes you must pay them back. In most situations, you will be paying them back at a higher tax bracket which could be a hefty fee.
Would you rather pay taxes on your money today or at a later time knowing that taxes will continually rise? How do you think this method of saving would affect you? Is there a better alternative?
Another limitation that you should consider would be the ability to access your money as well as the fees and penalties you would be subjected to. It's a given that you should try to avoid touching your nest egg, but life is full of challenges and there may be instances when you would need to gain access to your money. Most retirement plan strategies are subjected to a 10% early withdrawal fees in addition to taxes on the income distribution if you access your funds before 59.5 and require you to take RMD at 72 under the SECURE Act passed in late 2019 or face certain tax implications. This can be very costly, but there are a few instances where these fees would not apply. Be sure you check your disclosure statements before accessing your retirement funds prior to this specified age or delaying taking your minimum required distribution.
Are there retirement strategies that will provide you a tax-advantaged retirement income in the future while providing you a solution for your current necessitated requirements and wants?
TRADITIONAL IRA and ROTH IRA
A Traditional IRA and a defined-contribution plan have many similarities including certain limitations. When considering a traditional IRA as a retirement you should take the same consideration as mentioned above. Unlike a pension plan and a defined-contribution plan a Traditional IRA and Roth IRA are set-up by any individual, not by their employer. These retirement vehicles have different contribution limits that are much less than the other retirement plans mentioned above.
The biggest and major differences between a Traditional IRA and Roth IRA are when and how your money is taxed. A traditional IRA just like the defined-contribution plans above lower your taxable income in the year contributions are made, while Roth IRA allows the individuals to make qualified tax-free withdrawals in retirement. Individuals can not make contributions to a traditional IRA the same year he or she reaches 70.5 or older. However, you can continue to contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.
The IRS offers additional information on less common types of retirement plans as well as specified rules & regulations regarding governmental plans.
ANNUITIES
Annuities are contractual agreements between you and an insurance company that will allow you to receive payments immediately or in the future, during your retirement. You can either fund it with a single immediate payment (by rolling over a current investment) or make a series of deposits. With time, your deposited funds will earn interest (variable or fixed during the accumulation phase), which can either be withdrawn or annuitized during the annuitization phase for a "certain period" of time or you can receive payments for the remainder of your lifetime. If you are "transferring your money from one to another annuity" for either poor performance or other reasons you may have still have to pay a surrender charge, but you will avoid any tax or penalty fees, so make sure you are aware of the specific limitations of your contractual agreement. Additionally, annuities can also provide benefits for a surviving spouse and heirs when the annuitant prematurely passes away.
Just like other financial products annuities come in different forms. It can either be fixed, variable or indexed and just like other investments they all carry a level of risk. Because of the similar properties that annuities have to pension plans, they are a great alternative to other investment vehicles or an excellent way to pad your pension and retirement, but beyond that annuities held outside a retirement account has no (RMD) required minimum distributions giving certain individuals more control and access to their money with the obvious limitations set within your contract. As mentioned, there are specific risks with all investments so you must be fully aware of your contractual agreement, the financial strength of the provider, as well as the penalties and fees associated with your contract.
FOR YOUR CONSIDERATION
Who is in control of your retirement fund?
Consider the "Time Value of Money."
Consider Taxation and Inflation.
Consider Management and Administrative Fees.
MItigate Market Risk.
What product or strategy yields higher returns?
Deferred Tax vs Tax-Advantaged Approach.
Wealth Management, Legacy Planning and Wealth Transfer
How to maximize social security benefits?
Do I need life insurance after retirement?
Consider your tax bracket, liabilities, as well as healthcare needs.
In addition to these retirement plan options mentioned above, there are other conceptualized strategies that will lead to financial wellness, a prosperous retirement and help develop generational wealth for your heirs.
THE BIG REVEAL...
Fixed-Indexed Annuities allows you to take advantage of market growth (with a ceiling cap) based on a specific index such as the S&P 500 and protection from a down market. A Fixed-Indexed Annuity does not actually invest in a specific index, the performance is based on the growth and loss of a chosen index. This allows for principal protection that will not decrease resulting in a loss when the performance of the index is poor and allow you, the investor the growth potential when the index is low. Using certain properties of the contract you, the investor can elect to annuitize your policy for a lifetime income or a certain period.
Another approach would be the use of the Infinite Banking Concept to grow a retirement fund that you can conceptually use as a financing solution for your current needs. This strategy uses a savings property (cash value) within a permanent life insurance policy to continually grow your funds. You can collateralize your contract and take policy loans to provide for your current needs and/or future needs in retirement. Since these loans are not borrowed directly from your policy (instead it is collateralized against the policy) so it does not, and will not disrupt the earning potential within the insurance contract.
A synonymous melody spoken throughout this article and many others advises everyone to seek advisement from a professional before taking action and make sure that you are well aware of the provisions stated within your contact and disclosure statements. Enable to successfully overcome specific financial hurdles and life challenges as well as acquire a clear healthy financial future contact a Unifirst Financial Advisor. Allow us to help you to make informed decisions that will improve your financial health, enhance your banking solutions for your current needs and major expenses, develop a retirement plan ensuring your future and your family's generational wealth.
References
NYSLR(2019). Pension System. Retrieved Jan 2020 from: https://www.nyretirementnews.com/category/pension-sysytem/
IRS(2019). 401(k) contribution limit increases to $19,500 for 2020; catch-up limit rises to $6,500. Retrieved Jan 2020. from https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500
IRS. Types of REtirement Plans. Retrieved Jan 2020. from: https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans
