Saturday, May 14, 2016

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How to Save for Retirement on a Small Salary

 


It's extremely difficult to save for retirement when your paychecks are barely big enough to cover your basic expenses. But there are a variety of strategies you can use to build a nest egg, even on a small income. Here's how to best prepare for retirement with a meager salary:

Find a job with good retirement benefits. When deciding where you would like to work, make sure you consider the retirement plan as part of the compensation package. "If they offer a retirement plan, that's a job that should probably be looked at a little harder than one that does not have a retirement plan," says Sam McPherson, a certified financial planner and CEO of McPherson Financial Advisors in Brooklyn, N.Y. "If you participate and you get a match, you are effectively getting a raise beyond what their quoted salary is." For example, if you are choosing between two positions that each pay $35,000 per year, but one offers a 401(k) match of up to 3 percent a year, you could potentially earn $36,050 at the job with the retirement account if you save enough to get the entire match, $1,050 more than the job without the 401(k) match.

Take advantage of tax breaks. If you save even a small amount in a traditional 401(k) or IRA, you can defer paying income tax on the amount contributed. "You reduce your taxable income by the amount of your contributions to a regular 401(k)," says Scott Winkler, a certified financial planner and founder of Winkler Financial Planning in Norcross, Ga. A worker in the 15 percent tax bracket who saves $1,000 in an IRA or 401(k) will save $150 on their next federal income tax bill. IRA, but not 401(k), contributions can even be made just before you file your tax return in April to capture nearly immediate tax savings.

Get the saver's credit. Low- and moderate-income workers who contribute to a 401(k) or IRA are additionally eligible for a retirement saver's tax credit. Employees who earn less than $29,500 for singles, $44,250 for heads of household and $59,000 for couples in 2013 may be able to claim this tax credit worth up to $1,000 for individuals and $2,000 for couples. "Your credit rate is dependent on how much you contribute and depends on the size of your income," Winkler says. The saver's credit can be claimed on up to $2,000 in retirement account contributions, and the credit ranges from 10 percent to 50 percent of the amount contributed, with the biggest credits going to savers with the lowest incomes. For example, a couple earning $30,000 that contributes $1,000 to a traditional IRA would get a $500 credit.

Consider a Roth IRA. Workers who are in a low tax bracket but expect to be in a higher tax bracket later in their career or in retirement have much to gain by making Roth IRA or Roth 401(k) contributions. Roth accounts allow you to pre-pay income tax based on your current low income. No income tax will be due on withdrawals in retirement, even if you are in a higher tax bracket then. "It's best to use a Roth when you are younger and you have a very long time for growth," Winkler says. Roth accounts also give you the ability to withdraw your contributions, but not the earnings, without having to pay income tax or a penalty if you need the money for an emergency. "The Roth has more flexibility," McPherson says. "With a Roth, you don't get any tax deduction, but if you had to withdraw your contributions, you don't have to pay any tax or any penalty."

Keep costs low. While it's important for all investors to make sure they aren't paying more in fees and investment expenses that they need to, fees can be especially problematic for retirement savers who need to make every dollar count. "It's enormously important to choose low-cost index funds," McPherson says. "The one thing investors can control is how much we pay for our investment management and investment accounts." Actively managed equity funds had an average expense ratio of 0.92 percent in 2012, far higher than the 0.13 percent average annual cost charged by index equity funds, according to Investment Company Institute and Lipper data.
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11 Ways to Avoid the IRA Early Withdrawal Penalty

 



If you withdraw money from your individual retirement account before age 59 1/2, you will generally have to pay a 10 percent early withdrawal penalty in addition to income tax on the amount withdrawn. This means a $5,000 withdrawal taken by a mid-career worker in the 25 percent tax bracket would result in $1,750 in taxes and penalties. But there are a variety of ways to avoid the IRA early withdrawal penalty if you meet specific criteria:

Turn age 59 1/2. Once you turn age 59 1/2, you can withdraw any amount from your IRA without having to pay the 10 percent penalty. But regular income tax will still be due on each withdrawal. IRA distributions are not required until after age 70 1/2.

College costs. You can avoid the early withdrawal penalty if you use the distribution to pay for higher education costs for you, your spouse or the children or grandchildren of you or your spouse. Spending the money on tuition, fees, books and other supplies required for attendance will get you an exemption from the 10 percent penalty.

Room and board also count if the individual attending college is at least a half-time student. Qualifying institutions include colleges, universities and vocational schools eligible to participate in federal student aid programs.

However, IRA distributions are considered taxable income and could impact your child's eligibility for federal financial aid. "Let's say the tuition payment is $25,000. You have just added $25,000 of taxable income," says Jeremy Portnoff, a certified financial planner for Portnoff Financial in Woodbridge, N.J. "It could push you into a higher bracket, you could pay a higher tax rate on that money and it could affect your ability to take deductions."

A first home purchase. You can take a penalty-free IRA distribution of up to $10,000 ($20,000 for couples) to buy, build or rebuild your first home or the first home of you or your spouse's child, grandchild or parent. For the purposes of avoiding the IRA early withdrawal penalty, the IRS considers you to be a first-time homeowner if you or your spouse did not own a home during the two-year period leading up to the home sale. If the purchase or construction of your home is canceled or delayed, put the money back in your IRA within 120 days of the distribution to avoid the penalty.

Medical expenses. You can use IRA distributions to pay for unreimbursed medical expenses that exceed 10 percent of your adjusted gross income without incurring the early withdrawal penalty. "The distribution has to be in the same year as the medical expense," says Kathleen Campbell, a certified financial planner for Campbell Financial Partners in Fort Myers, Fla.

Health insurance. IRA distributions can be taken without penalty to pay for health insurance for you, your spouse and your dependents following a period of unemployment. To qualify, you need to receive unemployment compensation for 12 consecutive weeks due to job loss. The distribution must be taken in the year you received the unemployment compensation or the following year, and no later than 60 days after you have been reemployed.

Disability. If you become disabled to the point that you cannot participate in gainful activity due to your physical or mental condition, you can quality for an exemption to the early withdrawal penalty. But be prepared to prove it. "A physician must determine that your condition can be expected to result in death or to be of long, continued and indefinite duration," according to the IRS.

Leave it to an heir. If you die before age 59 1/2, your traditional IRA can be distributed to a beneficiary or your estate without incurring the 10 percent penalty. However, if a spouse inherits the IRA and elects to treat it as his or her own, it may become subject to the 10 percent penalty. "If the spouse is under age 59 1/2 and they think they will need the money before age 59 1/2, I would leave it as the inherited IRA," Portnoff says. "If that spouse rolls it over to their IRA, they are subject to the 10 percent penalty."

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Saturday, April 23, 2016

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Summer Job? Time to Start a Roth I.R.A.

 


When teenagers earn money for the first time, there are so many things they can do with it.

In some families, teenagers contribute to basic costs like housing. In others, parents expect summer earnings to replace a weekly allowance. Many teenagers save for their first car, and few among the college-bound escape the pressure to put money away for tuition.

Some parents dictate the terms, while in other families, there’s a negotiation over how to divide the money once a summer job has ended. It’s rare, however, that families consider the possibility of giving a child a running start on retirement savings.

It’s a shame, too. That’s because the boost that comes from opening a retirement savings account as a teenager instead of a few years after college can lead to hundreds of thousands of extra dollars after a half-century of growth.

Most of us have seen basic compound interest graphs before, so we know how the math works for grown-ups who start setting money aside from their first full-time paycheck. But beginning even earlier supercharges the savings for families that can afford it — or who reel in grandparents and others willing to match a child’s contributions.

The process starts with a Roth individual retirement account, and it will need to be a custodial account, with an adult co-signing, if the teenager is under 18. The nice thing about Roths is that you generally pay no taxes on the withdrawals. So the money will grow for many decades and then come out tax-free as long as the rules don’t change. While there are no tax deductions for deposits, that doesn’t mean much to teenagers whose income is so low that they may not pay any income taxes at all.

If you’re trying to persuade children or grandchildren to save rather than ordering them to do so, you could start with some simple numbers. If you take $5,000 in savings from a few summer jobs and put it in a Roth at age 19, it will grow to $52,006 by the time you’re 67 if it grows at a 5 percent annual rate. Wait until 25 to start with that same $5,000, however, and the balance at age 67 is just $38,808. You can plug your own numbers and investment return assumptions into the Roth I.R.A. calculator at dinkytownnet.

Things get more interesting, however, if you pledge that once a Roth is open, you’ll spend a few years helping a young adult max out the $5,500 contribution each year as long as that person earns the $5,500 necessary to make a deposit of that size. If that 19-year-old starts with $5,000 and makes the maximum contribution each year until 67, the ending balance is $1,164,985 if it grows at a 5 percent annual clip. That’s over $330,000 more than what someone would end up with if they waited just six years, until age 25, to start the Roth and then saved the same amount.

An increase of about a third of a million dollars ought to be enough to get any teenager’s attention, even if a dollar won’t be worth as much 50 years from now. For grandparents, uncles, aunts and others looking for a way to make a meaningful contribution to a child’s future financial stability, this is a nice way to do it while directly rewarding hard work. You might match some or all of what teenagers make and even open the account with them. It’s also fine for you to give them the matching funds for the Roth, while all of their actual earnings go toward the car, college or allowance replacement.

Some families do seem to be catching on to these possibilities. At Charles Schwab, 87 percent of all custodial accounts are Roths. Vanguard reports that about 2 percent of Roth I.R.A. contributors over the last five years have been people younger than 20. According to Fidelity, the number of Roth I.R.A. accounts there owned by people under 20 increased 22 percent from the second quarter of 2013 to the second quarter of 2014.

To parents who can’t simply write checks for college tuition, another car or an allowance, matching or even saving a teenager’s earnings in a Roth will probably seem highfalutin. If you fear that every dollar a teenager saves will lead to a need to borrow that much more money for college tuition, then it will be tempting to forgo the potential long-term winnings to keep the shorter-term loan balances as low as possible.

Other parents may worry about the financial aid implications, given that colleges generally want families to turn over a large chunk of student assets each year. The good news here is that when you’re filling out the Fafsa form to determine eligibility for various forms of federal financial aid, a student’s Roth or other retirement account is not part of the calculation.

Scores of colleges and universities do require families to fill out an additional form known as the CSS/Financial Aid Profile. On it, student applicants must report a single total for all their retirement balances as of the end of the previous year. In theory, these schools could take this number into account when determining how much of their own grant money to award the applicant.

But for now, few, if any, colleges appear to be penalizing students for owning a Roth. Eileen O’Leary, assistant vice president for student financial assistance at Stonehill College in Easton, Mass., said she had seen a financial aid applicant disclose a retirement account only once. As far as she knows, asking students to pay more based on any such balance is not widespread. It may well be that so far at least, it’s mostly affluent families (who don’t need aid) who help their teenagers open Roths. Still, she suggests asking about a college’s policy if a financial aid applicant has a Roth or is thinking about opening one.

Kal Chany, who advises families through his firm Campus Consultants in New York City, has had only a handful of college applicants as clients who also had retirement accounts. Even though some of them have had balances upward of $10,000, he knows of no adverse impact on financial aid so far. Still, he said he feared that might change if lots of families started putting their children’s earnings in Roths or matched those earnings with their own money.

For now, however, the risk seems reasonably small for families applying for financial aid. The potential gain over many decades for all families is enormous, especially if the supervision turns the young adult into a regular saver who maxes out the contributions early in life and continues to do so.

Paying for college is enormously challenging, but that problem may end up paling in comparison to what will happen when millions of pensionless people who didn’t save enough in their workplace retirement accounts and I.R.A.s start running out of money. The earlier we start helping the youngest among us avoid that fate, the better.

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Nine compelling benefits of a Roth IRA

 


Wondering how a Roth IRA works and what its benefits are? A Roth IRA can help lower your taxes and increase your retirement savings (as long as certain requirement are met.1) But those are just two of the many benefits of a Roth IRA.

"We believe that most people should consider a Roth IRA,” says Ken Hevert, vice president of retirement products at Fidelity. “And that’s either by contributing to one or converting to one. Besides tax-free withdrawals, a Roth IRA also offers flexibility, doesn’t require distributions when you reach a certain age, and can benefit your heirs."

Before we delve into nine key benefits of a Roth IRA, here’s an important note: Not everyone can contribute to a Roth IRA, because of IRS-imposed income limits. But even if your income is over the limits, you still may be able to have one by converting existing money in a traditional IRA or other retirement savings account. (See “If you earn too much to contribute,” at the end of the article.)

1. Money may grow tax free; withdrawals are tax free, too.

You contribute money that has already been taxed (after-tax dollars) to a Roth IRA. There’s no tax deduction on the front end as there can be with a traditional IRA. Any growth or earnings from the investments in the account—and money you take out in retirement—is free from federal taxes (and usually state and local taxes too), with a few conditions. Withdrawals from Roth IRAs are federal income tax free and penalty free if a five-year “aging” period has been met (if a withdrawal is made after a five-year period, beginning with the first taxable year after a contribution to any Roth IRA was made), and the account owner is age 59½ or older, disabled, or deceased. There’s also a $10,000 exception for first-time homebuyers.

2. There are no minimum required distributions.

Roth IRAs do not have minimum required distributions (MRDs), also called required minimum distributions (RMDs), during the lifetime of the original owner. Traditional IRAs and, generally, 401(k), 403(b), and other employer-sponsored retirement savings plans—both Roth and traditional—do. If you don’t need your distributions for essential expenses, MRDs may be a nuisance. They have to be calculated and withdrawn each year, and may result in taxable income. If you miss taking one, there could be a big penalty as well—50% of the MRD not taken. Because a Roth IRA eliminates the need to take MRDs, it may also enable you to pass on more of your retirement savings to your heirs (see below).

3. Leave tax-free money to heirs.

In many cases, a Roth IRA has legacy and estate planning benefits, but you need to consider carefully the pros and cons—which can be subtle and complex. Be sure to consult an attorney or estate planning expert before attempting to use Roth accounts as part of an estate plan.

For instance, if you’re planning to leave your retirement savings to your heirs, consider how doing so may potentially affect their taxes. MRDs from inherited traditional IRAs generate taxable income for heirs, often during their peak earning years, which could unintentionally push them into a higher marginal tax bracket. While MRDs are also required for inherited Roth IRAs, those distributions generally remain tax free.

On the other hand, if your heirs’ combined federal and state income tax rates are expected to be lower than yours, depending on the situation, they may be better off inheriting a traditional IRA rather than a Roth IRA. This may sound counterintuitive, because the heir would not have to pay taxes on distributions from the Roth IRA, but you should consider the total tax cost—including income taxes paid by both parties as well as any applicable estate taxes—not just the income taxes paid by the heir.

Because Roth IRAs don’t require MRDs during your lifetime, these accounts could potentially grow larger over the years for your heirs. And because you pay the income taxes due up front, when you contribute to a Roth, a Roth IRA conversion may also help reduce the size of your taxable estate.

However, be aware that if you’re planning to leave assets to a charity rather than to your heirs, conversion to a Roth IRA has the potential to be disadvantageous. This is because in many cases IRAs can be left to a charity directly, without any tax liability to either the IRA owner or the charity. In such cases, a conversion would incur taxes that could be avoided.

4. Tax flexibility in retirement.

You've already paid the taxes on the money in a Roth IRA, so as long as you follow the rules, you get to take out your money tax free. Mixing how you take withdrawals between your traditional IRAs and 401(k)s, or other qualified accounts, and Roth IRAs may enable you to better manage your overall income tax liability in retirement. You could, for example, take withdrawals from a traditional IRA up to the top of a tax bracket, and then take any money you need above that bracket from a Roth IRA. “The opportunity for tax diversification is one reason we believe most investors should at least consider having a Roth IRA as part of their overall retirement plan,” says Hevert.

5. Help reduce or even avoid the Medicare surtax.

A Roth IRA may potentially help limit your exposure to the Medicare surtax on net investment income. This is because qualified withdrawals from a Roth IRA don’t count toward the modified adjusted gross income (MAGI) threshold that determines the surtax. MRDs from traditional (i.e., pretax) accounts such as a workplace retirement plan—like a traditional 401(k)—or a traditional IRA, are included in MAGI and do count toward the MAGI threshold for the surtax. Depending on your income in retirement, MRDs could expose you to the Medicare surtax.

6. Hedge against future tax hikes.

Federal tax rates rose in 2013. Will they rise further in the future? There’s no way to know for certain, but the top tax rate remains far below its historical highs, and if you think it might go up again, a Roth IRA may make sense.

7. Use your contributions at any time.

A Roth IRA enables you to take out 100% of what you have contributed at any time and for any reason, with no taxes or penalties. Only earnings in the Roth IRA are subject to restrictions on withdrawals. Generally, withdrawals are considered to come from contributions first. Distributions from earnings—which can be taxable if the conditions are not met—begin only when all contributions have been withdrawn.

8. If you’re older, you can continue to contribute as long as you work.

As long as you have earned compensation, whether it is a regular paycheck or 1099 income for contract work, you can contribute to a Roth IRA—no matter how old you are. There is no age requirement for contributions, as there is for a traditional IRA, where you cannot contribute if you are older than age 70½—even if you have earned income.

9. If you're young, your income is likely to rise.

The younger you are, the more chance there is that your income will be higher when you retire. For instance, if you’re under age 30, it’s likely that your income and spending during retirement will be significantly higher than it is now, at the beginning of your career. And the greater the difference between your income now and your income in retirement, the more advantageous a Roth account can be.

If you earn too much to contribute

In order to contribute to a Roth IRA, you must have employment compensation, and then there are income limitsOpens in a new window.. If your income is over the IRS limits, the only way you can take advantage of a Roth IRA’s tax-free withdrawals is by converting money from an existing retirement account, such as a traditional IRA.2 A caveat: Although you may be tempted to pay for the costs of a Roth IRA conversion by using proceeds from the qualified account you’re converting, doing so can reduce the potential benefits of conversion. This is doubly true if you’re not yet age 59½, because you may have to pay a 10% withdrawal penalty in addition to regular income taxes.

In conclusion

No matter what your age, because a Roth IRA may improve your tax picture, it makes sense to take the time to learn how a Roth works and see whether you would benefit from one, notes Hevert. The key is to discuss your situation with a tax or financial adviser to help you fully assess your situation.
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Tuesday, April 12, 2016

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How to create a secure retirement plan

 

When I retire, I want to create my own pension, but I have reservations about annuities. So I'm thinking of investing some of my savings in a bond fund, leaving the principal untouched and just living off the income. I'll keep the rest of my nest egg in mutual funds and dip into it as needed. Do you think this is a good plan? --Mike A., New York


I totally understand why you're wary of annuities. Many of them are expensive and mind-numbingly complex. So I get your reluctance to include an annuity in your retirement income plan.

But while the strategy you suggest -- putting a portion of your savings into a bond fund and living off the income and other distributions -- might work, it also has some drawbacks. And, perhaps more importantly in your case, it doesn't come close to replicating a pension, at least in the way most people think of one.

Why? Well, the main reason is that is that a pension typically gives you a fixed monthly payment (although in some cases it may rise with inflation) that you can depend on the rest of your life regardless of how the financial markets are performing. Research shows that such reliable income can make for a happier retirement.

With your plan, however, your income can fluctuate, depending on what interest rates do. The value of your investment in the bond fund can also go up or down, rising if interest rates fall and dropping if interest rates rise.

You say you won't sell any shares in the fund, so theoretically at least that shouldn't affect you. I say theoretically because if you decide to abandon your hands-off policy at some point and sell shares because you need extra money, then the current market value of your fund may become an issue, especially if it has declined.

You should also know that you'll likely have to settle for a pretty low level of income from the assets you invest in the bond fund. With investment-grade bond funds currently yielding in the neighborhood of 2% to 4% depending on their maturity, an investment of, say, $150,000 might generate income of roughly $250 to $500 a month these days, although the exact amount will fluctuate (and might include other distributions, such as realized capital gains if interest rates fall and the fund sells bonds at a profit). You can always generate more income from the bond fund by increasing the amount you invest in it, but that would mean diverting money from the rest of your nest egg.

You can call this arrangement whatever you like, but referring to it as a pension is a stretch. That said, if you're okay with the fact that your "pension" income isn't stable and that you'll have to devote considerable assets to a bond fund to generate decent income, then you may want to proceed with your plan.

But if you really want to turn a portion of your nest egg into something that approximates a pension -- a specific amount of money you can count on month in and month out for the rest of your life -- then I suggest you suspend your wariness about annuities long enough to at least consider a type of annuity that's easier to understand, less prone to the abuses that are too often associated with annuities and is very efficient at turning savings into assured lifetime income -- namely, an immediate annuity.

The premise behind an immediate annuity is relatively simple. You turn over a lump sum of cash to an insurer (although you may actually buy the annuity through an adviser or an investment firm rather than directly from the insurer) and in return you get a monthly payment that's guaranteed for life. The size of the payment you get depends, for the most part, on your age, gender, the level of interest rates and the amount of money you invest. (This annuity calculator can give you an estimate of how much you might receive for a given amount invested in an immediate annuity today.)

The way that an immediate annuity might work in your situation is also pretty straightforward. You devote a portion of your nest egg to an immediate annuity and invest the rest in a diversified mix of stock and bond mutual fund that jibes with your tolerance for risk. The annuity generates steady income much like a pension. The stock and bond funds can provide long-term growth to help maintain your purchasing power over the course of a long retirement and also act as a source of liquidity for any additional spending money you need. (As a practical matter, you'll also want to have a cash reserve for emergencies and such.) This column goes into more detail about how this annuity-plus-traditional portfolio approach works.

Annuity payments: Income for life

One significant drawback to relying on an immediate annuity for retirement income is that you can no longer get to your money once you've invested in the immediate annuity. So you can't tap it for emergencies or leave it to your heirs. And if you die shortly after buying the annuity, you'll have shelled out a lot of dough for a small number of payments. Generally, an annuity makes the most sense if you (or your spouse, if you're married) expect to live to life expectancy or beyond.

But there are advantages too. You can count on the annuity payment to be stable whether interest rates are rising or falling. An annuity also generates higher monthly payments than you can get from a bond fund (largely because, unlike with a bond fund, you give up access to your original investment in the annuity). Today, for example, a 65-year-old man who invests $150,000 in an immediate annuity might collect about $820 a month for life.

Or, since the annuity provides higher payments, you could choose to invest less money in the annuity than in the bond fund and receive the same size monthly payments. This would allow you to keep more of your nest egg in a mix of stocks and bonds that can grow over time.

Before you embark on either strategy, I suggest you do a retirement budget to get a better handle on just how much retirement income you may need. If it turns out that Social Security (which is also effectively a pension) will provide enough income to cover all or most of your essential living expenses, then you may not need more pension-like income from an annuity. In which case you can rely on your portfolio of stock and bond funds for any income needs beyond what Social Security provides.

In fact, even if Social Security doesn't cover your essential expenses, you may not need an annuity if your nest egg is so large relative to whatever expenses it must cover that your chances of running through your savings in your lifetime are minuscule. (To see whether that's the case, you can go to this retirement income calculator.)

But if there is a gap between the income you'll receive from Social Security and your basic living expenses and you would like to cover all or most of that gap with income that's assured, then you may want to do so with an investment that can actually provide pension-like income -- i.e., an annuity.

One final note: There's no need to rush this decision. Indeed, spending a couple of years in retirement can give you a better sense of how much income you'll require and how much, if any, pension-type income you need beyond what you get from Social Security. And if you eventually decide an annuity is a good choice, you'll also want to set aside plenty of time to get answers to these key questions before you buy, so that you end up with an annuity that's right for you.
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Retirement planning: How much to save

 


To live well in retirement, you no longer can rely solely on a company pension plan or Social Security. Instead, you will have to depend on how skillfully you plan and invest, and whether you make good use of tax-advantaged savings plans such as 401(k)s and IRAs.

Step 1: First, estimate how much you will need. One rule of thumb is that you'll need 70% of your annual pre-retirement income to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you retire.

But if you plan to build your dream house, travel or get that Ph.D. you've always wanted, you may need 100% of your income or more.

Remember, too, that your health care expenses are likely to go up in retirement, especially if you retired prior to being eligible for Medicare and must purchase insurance on your own.

Step 2: Second, figure out how you'll meet those expenses. There are three main sources of retirement income: Social Security, pensions and annuities, and your savings. Start by determining your estimated Social Security benefits. (If you haven't already received a statement in the mail, you can order one online or use an online calculator to make estimates based on expected earnings.)

Step 3: Next, add in any annual payouts you expect from an annuity or company pension.

If it's not enough, it's time to think about where the extra money will come from. Count on needing at least $15 to $20 in investment savings to cover each dollar of that shortfall. If your projected retirement expenses exceed Social Security and pensions by, say, $20,000 a year, that means you'll need a nest egg of $300,000 to $400,000 to bridge the gap.
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Monday, April 11, 2016

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The Best Places to Retire on $75 a Day

 


You don't need a huge nest egg to retire well, especially if you're willing to move to a place with a low cost of living. Relocating to one of these places could help you to get by on a combination of Social Security and a small amount of savings, or allow you to retire younger or maintain a better lifestyle than you could in a more expensive city.

To find places where retirees can live well on less than $75 per day, U.S. News analyzed recently released 2012 Census Bureau data. We looked for places where people age 60 and older spend the least on housing, including rent, mortgage payments and other housing costs, and places where retirees spends less than a third of their income on housing. Among the most affordable cities, we selected places with amenities retirees will need, such as medical facilities, services for seniors and recreation options.

Here are 10 places where it's possible to live well in retirement on less than $75 a day:

Akron, Ohio

Once known for its rubber production, Akron is now home to the world's largest concentration of polymer research and development, thanks to The University of Akron's College of Polymer Science and Polymer Engineering. Seniors can get discounts to the Akron Art Museum and Akron Symphony Orchestra, or enjoy the 6,600 acres of metropolitan parks for free. The Akron General Medical Center and Summa Akron City and St. Thomas Hospitals are ranked as high-performing medical centers in a variety of specialties including geriatrics. These amenities are coupled with low housing costs. People age 60 and older pay a median of $1,087 per month with a mortgage, $646 in monthly rent or $420 per month if they own their homes debt free.

Augusta, Ga.

The best golfers in the world come to Augusta each spring for the Masters Tournament. The low home prices will tempt you to stay. The median monthly housing cost for people age 60 and older is $1,057 among homeowners with a mortgage, just $329 for those who have paid it off and $616 monthly for renters. Located along the Savannah River, this college town is the home of Georgia Regents University, which includes the Medical College of Georgia. Seniors can get discounted admission to the Augusta Museum of History, the Boyhood Home of President Woodrow Wilson and on boat tours of the Augusta Canal.

Chattanooga, Tenn.

Chattanooga is nearly surrounded by mountains, and the Tennessee River flows right through it, offering ample opportunities for outdoor activities. Retirees can take in these views for a median of just $644 in rent, $1,023 in mortgage payments or $353 monthly without a mortgage. The city operates a fleet of zero-emission electric buses that seniors age 65 and older can ride for just 75 cents each way.

Des Moines, Iowa

Burl Pierce, 74, a retiree in Des Moines, has season tickets to University of Iowa football games and volunteers three days per week at the Greater Des Moines Botanical Garden. "This is my means of helping to expand my knowledge of horticulture, but it's also become rather personal in that you enjoy the camaraderie of the volunteers that you are with," he says. It costs retirees a median of $1,134 in monthly mortgage payments to live in Iowa's state capital. Renters who have paid off their mortgages pay $456 in other monthly housing costs and renters are charged $678. If you're so inclined, you can meet the U.S. presidential candidates when they descend on the state for the Iowa caucus.

Greenville, S.C.

There's no shortage of free things to do in Greenville. You could take a stroll over the Liberty Bridge that curves over and around Reedy River Falls, ride on the Downtown Trolley or visit the Greenville County Museum of Art, all with no admission fee. Housing for people age 60 and older costs a median of $1,027 with a mortgage, $673 in rent and just $290 monthly for older homeowners without mortgages. "Part of the reason we were able to retire as young as we did is because the general cost of living is so much less in South Carolina than it was in California," says Linda Barnett, 57, a retired financial analyst from California who moved to Greenville in 2012. "The townhouse we have here would have cost three to four times that much in California." Barnett now spends her time volunteering for Meals on Wheels and hiking at nearby Jones Gap State Park.
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10 Best Places to Reinvent Your Life in Retirement

 


Members of the massive baby boom generation have reinvented each stage of life as they passed through it. Their retirement years will be no different. Like previous generations, boomer retirees are going to take up new hobbies and volunteer. But those who didn't save enough or choose to continue working will also start businesses and begin second careers. As life spans continue to increase, retirees are likely to embrace a mix of work and leisure activities.

Take Marie Hornback, 66, who runs two businesses in Fort Collins, Colo., and has no plans to retire. Hornback, a British-born American citizen and director of H.M.S. Protocol & Etiquette Training, opened a stationery store, Sign With Prestige, in May 2008. "I think if I didn't have these businesses, I would not sit at home crocheting every day, even though I do crochet and embroider," Hornbacks says. "I don't tire easily and I like the excitement and the rewards of accomplishing goals, doing something that has value, and making an impact on other people." Although business is sometimes slow, Hornback says it's a challenge she enjoys. "I've only sold $27 worth of products today," she says. "But it's exciting to see a day when you get a rush of [consumers] and think, 'Alright, now I can pay the rent.'"

To help retirees find a place to launch this new phase of life, U.S. News revved up our Best Places to Retire online search tool, powered Onboard Informatics, which provides the underlying data. We searched for places that provide plenty of recreational and cultural activities, including museums, concerts, and outdoor spaces, and that also offer affordable housing and a reasonable cost of living. We also screened the data for locales with employers or industries that are generally open to hiring older workers, and especially sought places that offer jobs in the relatively recession-resistant education, health care, and government sectors. Each place also has a nearby college or university, hospital, and in-home and residential long-term care facilities.

College towns such as Madison, Wis., and Tallahassee, Fla., offer an ideal mix of amenities and affordability. Schools give you a chance to stay intellectually active, host world class speakers, entertainers, and sports, and often provide great health care and cutting edge medical research. Many colleges allow retirees to take courses for free or a nominal cost. The University of Southern Maine in Portland, for example, waives tuition for Maine residents age 65 and older. In May, George Bilodeau, 76, received a bachelor's degree in industrial technology from USM without having to pay tuition—his only expenses were books and fees. "I sat in a classroom with teenagers and people in their early 20s," says Bilodeau. "They accepted me as one of their own and I enjoyed it."

If you need or want to work in retirement, it's a good idea to find a place with a strong and diverse economy, such as Nashua, N.H., or Overland Park, Kan. In 2007, Shawn Slome, 57, got out of the outlet clothing business and opened an eco-friendly products store, Twig, in Chapel Hill, N.C. The year before, he designed and built a solar home. "It feels like my business has more purpose than money alone or profit," Slome says about his 1,800 square-foot store that's located in a shopping center with Whole Foods. "My staff really enjoys their work and feels like they are making a contribution, and I am enjoying my work because my staff is so upbeat about working—it has really improved my day."

You can also stretch your nest egg by moving to a place with a lower cost of living than where you live now. If the city has convenient public transportation, you can save even more by going car-less. Annette Mills and David Eckert sold their car two weeks after they moved from Falls Church, Va., to Corvallis, Ore., when they retired in 2006. The couple now gets around using a combination of bikes, public transportation, and walking. "Every time I get on my bike, I feel like I am eight years old again," says Mills, 61, who carries groceries home from the farmers' market and local food co-op in her bike baskets. Biking allows the couple to incorporate exercise into their routine as well as save money. "It is phenomenal all the bills that we don't have anymore," says Eckert, 62, a retired documentary filmmaker. "It's like a huge burden has lifted."

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10 Banking Trends for 2016

 


The ball has dropped in Times Square, and 2015 is officially in the books. Now it’s time to look forward and consider what the future might hold.

U.S. News spoke to four financial and banking experts to find out what’s on the horizon for the banking sector in 2016. Here are 10 trends they told us to watch.

1. Fewer people will head to branches.
Mark Hamrick, senior economic analyst for Bankrate.com, says the number of Americans foregoing branch visits is on the rise.

“Four in 10 Americans haven’t visited a branch in the last six months,” he says, citing Bankrate’s Financial Security Index survey last month. “That number’s risen from 18 months earlier.” If the trend holds true, even more people will be doing their banking online, on their phone or at ATMs in 2016.

2. The digital and branch experience will merge.
As mobile services expand, banks will be looking for more ways to integrate banking on a phone with banking in a branch, says Byron Vielehr, president of the Depository Institution Services group for Fiserv, which provides technology solutions for banks and financial institutions.

“Banks will be looking to connect the digital experience to the branch experience,” Vielehr says. “For example, you may start an application online, realize you need help and then finish it the branch.”

3. Branches will start to go digital.
Mobile banking won’t only be something for consumers in 2016. The banks themselves may start to use mobile technology in their branches. Vielehr says some branches are “unshackling” tellers from the counter and giving them tablets so they can meet with customers more informally and comfortably either in the lobby or private offices.

Other branches are adding technology by installing self-service kiosks or video ATMs that provide the opportunity to chat with a remote teller. Vielehr even tells of one bank in Switzerland that has installed an automated safety deposit system that allows customers to check their deposit boxes without ever talking to a live person.

4. Investment options at the bank aren’t likely to expand.
One area not likely to change this year concerns bank participation in investment options such as health savings accounts and IRAs. Kevin Boyles, vice president of retirement planning provider Ascensus, says institutions could be missing a golden business opportunity, particularly when it comes to HSAs.

“The trend we’re seeing is that HSAs are growing rapidly, and that’s not going to abate anytime soon,” Boyles says. He estimates that only 2,300 of the nation’s 12,000 banks and credit unions offer HSA options, and that number isn’t likely go up, meaning many banks are foregoing their share of a growing market. “[Financial institutions] will keep living with the status quo.”

5. Savings account interest rates should go up, but you won’t get rich.
The recent Federal Reserve decision to raise interest rates may mean bank accounts get a boost, but savers shouldn’t get too excited yet, says WalletHub.com analyst Jill Gonzalez.

“Unfortunately, savings accounts are not tied one-to-one to the prime rate [set by the Federal Reserve],” she says, “but it’s probable banks will increase saving account rates.”

The Bankrate CD forecast for 2016 projects a modest increase in CD rates to 1.02 percent for one-year CDs and 2.21 percent for five-year CDs.

6. Banks could start charging for convenience.
Banks are under pressure from regulators and the public to keep fees down, but that doesn’t mean they won’t find ways to tack on new charges in 2016. Fees for convenience services, such as remote check deposits and expedited payments, top the list of new charges consumers could see in the coming year, according to Vielehr.

“Our mantra at Bankrate is it pays to shop around,” Hamrick says. “You can still find accounts that have little or no fees.”

7. Online banking will remain popular but won’t replace branches.
In the face of fees, Gonzalez says some consumers may be tempted to do just that – shop around. “We have seen that online-only banks have less fees,” she says. “We might actually see an increase in the popularity of online banks.”

However, brick-and-mortar bank branches shouldn’t worry about mobile or online banking replacing them completely. A Federal Deposit Insurance Corp. report last year found that visiting a teller remains the most common way for people to access their account.

8. Mobile payments will continue to make in-roads.
Despite the onslaught of ads touting the benefits of services like Apple Pay or Android Pay, only 22 percent of mobile phone users made a mobile payment with their device in 2014, according to a Federal Reserve mobile financial services report last year. That could be changing in 2016.

“Retailers have been a little slow to sign on,” Gonzalez says. “They have been waiting for the big-box retailers to [pilot the technology].” Now that big merchants are successfully accepting money via smartphones, smaller companies may be ready to jump aboard the mobile payment bandwagon.

9. Regional banks will get in on mobile deposits.
“Before a few years ago, people thought they’d always have to go to branches to deal with checks,” Vielehr says. Now, people can simply snap a photo of their check to have it instantly deposited, a service over half of mobile banking customers used in 2014, according to the Federal Reserve.

The ability to make remote deposits has been limited mainly to large, national banks, but look for the services to expand in the coming year. Gonzalez estimates regional banks and large credit unions should be ready to roll out the technology in the next 12 months.

10. Chip cards may finally see some action.
Another technology that may finally be ready for prime-time is chip cards. While there was much ado about banks switching over to chip cards last year, you probably haven’t noticed anything different in the checkout, even if you have a new card.

That’s because some merchants may not have the right chip software for payment terminals, Hamrick says. Once merchants begin updating their systems, you can expect to start inserting your card into the terminal rather than swiping it.

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Saturday, April 9, 2016

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A New Retirement Haven For Golfers: Panama

 


Panama doesn't have a long history with the game of golf, but interest in the sport is increasing. Several courses have opened near Panama City in the past few years, and many offer discounts to retirees via the country's Pensionado program. The following six courses offer great golf at affordable prices and welcome newcomers.

1. The Summit Golf Club. This is a convenient 18-hole course near Panama City that's ideal for golfers looking for a physical challenge. This unique jungle course is about 25 minutes outside the capital and surrounded by thick trees and foliage. Leave your expensive balls at home, as you are almost certain to lose more than a handful here.

There is a new Radisson hotel on the property that sometimes offers golf and hotel packages if you'd like to make a weekend of it. Because of Panama's heat and humidity, it could be a good idea to stay at the hotel and get an early start on the fairway.

Summit was built in 1999 and is a 6,880-yard, par-72 course designed by American Jeffrey Myers. It's set on rolling hills overlooking the famous Gaillard Cut of the Panama Canal and the Camino de Cruces National Park. A number of holes have good vertical drops and unique challenges.

The fairways are pristine, but the greens are always rough and slow, which probably has more to do with the weather conditions than the efforts of the club. White-uniformed groundskeepers are on the course every day working to keep the ever-advancing jungle at bay.

Green fees: weekdays, $74.90; weekends, $90.95 (plus 7 percent tax). Pensionado retirees get a 20 percent discount on weekdays.

2. Mantaraya Golf Club. This 18-hole course near Playa Blanca on Panama's Pacific coast is part of the Royal DeCameron resort and was designed by architect Randall Thompson. The front nine holes on this par-72 course are said to be largely for beginners and not terribly challenging, but the back nine can be more interesting with a lot of risk-and-reward shots. The facility has hosted the U.S. Senior Amateur Golf Championship and features a pro shop, a driving range and a clubhouse.

Green fees: weekdays, $63 for 18 holes and $53 for nine; weekends, $89 for 18 holes and $66 for nine (plus 7 percent tax). Hotel guests get a $5 discount, and Pensionado retirees get 25 percent off.

3. Tucan Country Club and Resort. This 18-hole course just west of Panama City near the Panama Pacifico development is a favorite among Panama's in-the-know golfers for the novelty of its wildlife. It's not uncommon to see sloths and monkeys hanging around in the trees alongside the fairways.

The course is kept in great shape and features a number of subtle challenges and rolling greens. The staff is well trained, and service is a strong suit. Because of the afternoon heat and humidity, morning tee times are recommended here.

Green fees: weekdays, $48 in the morning and $37 in the afternoon; Fridays, $53 in the morning and $43 in the afternoon; weekends and holidays, $70 in the morning and $59 in the afternoon. Non-Panama residents pay slightly higher rates, and there are no discounts for Pensionado retirees.

4. Coronado Golf and Beach Resort. This stunning 18-hole course in Panama's City Beaches area is in the town of Coronado and popular among foreign retirees. The course was designed by George and Tom Fazio and is a par-72 at 7,092 yards.

Green fees: $95 on weekdays; $115 on weekends. Hotels guests pay $65 on weekdays and $75 on weekends. No discounts for Pensionado retirees.

5. VistaMar Golf and Beach Resort. This 18-hole course is smack dab on the Pacific shoreline and has a flat, open and easy layout. It's a resort-style course that opened the back nine in late 2012. It has great views of the mountains and the Pacific Ocean and claims to be the only course in the world with ocean views from every hole. At just over 7,200 yards from the back tees and a manageable 5,400 yards from the forward tees, Vista Mar is challenging on distance and forgiving for those who haven't seen a straight tee shot in years.

Green fees: Regular rates are $110 during the week and $120 on the weekends, plus tax. Tuesday to Thursday, you can take advantage of special twilight rates of $50 from 1 p.m. onward and $40 from 2 p.m. onward. No discounts for Pensionado retirees.

6. Buenaventura Golf Club. This world-class 18-hole course, designed by Jack Nicklaus and managed by Troon, measures 7,324 yards from the back tees at par 72. A unique aspect of this golf course is the choice of paspalum platinum grass, a warm season turf-grass known for salt and shade tolerance, quick recovery and a brilliant dark green color. This alone makes Buenaventura superior to many other courses in Panama because of the sometimes harsh weather and poor course conditions found elsewhere.

The Buenaventura golf course and resort development and the associated hotel, a JW Marriott, are top of the line, and the prices reflect this. However, you often can find discounted golf packages offered on the JW Marriot site. Because of its steep rates (for the hotel and the course), it is rare to find the Buenaventura course crowded, and morning tee times are usually available.

Green fees: Hotel guests pay $115 during the week (Monday to Thursday) and $135 on weekends (Friday to Sunday); non-guests pay $200 during the week and $250 on weekends. No Pensionado discounts.
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7 Places to Open Your First IRA

 


An individual retirement account can be an excellent way to boost your retirement savings, especially if you don't have a workplace retirement account or have already maxed out your employer-sponsored 401(k) plan. But there are so many options available that deciding where to open your first IRA can be overwhelming. You need to decide how you want to invest the money as well as where to open the IRA. Here's a guide to setting up your first IRA.

How to invest your IRA funds. Your first decision isn't where to invest, but how. There are many options available, depending on how safe or risky you want your investments to be and how involved you want to be in managing the account. Here are the main options for IRA investments, and the pros and cons of each:

  • Stocks. Stocks are often what first comes to mind when people think of investing. These are an ownership stake in companies. Stocks are typically considered a high risk but high reward investment, and they're likely to be a large part of your investment plan until you near retirement and need more stability.

  • Mutual funds. Mutual funds are basically "buckets" of stocks, bonds and other investments. Diversification can help protect you from investment losses, and when you invest in a mutual fund, you get built-in variety. Some mutual funds hold a single type of asset, such as a specific type of stocks, while others are a blend of various types of investments including many different industries.

  • Exchange-traded funds. An ETF is sort of like a mutual fund, but instead of being a "basket" of various investments, it's an investment that tracks certain bonds, a commodity or an index.

  • Certificates of deposit. If your main goal is to save and not lose money, a certificate of deposit may be your best bet. CDs are from banks, and they have a set interest rate for a certain amount of time (usually months or years). CDs are a very low risk investment, but also earn a very low interest rate.

  • Bonds. When you buy a bond, you're basically making a loan to a government or corporation. Bonds can be high risk and high reward or relatively low risk and lower reward, and are rated according to the borrower's credit rating. Bonds from higher rated companies and governments typically have a lower interest rate but are less risky.

A diversified retirement plan could include a variety of these types of investments. Typically, you'll want to invest in more high risk and high reward investments, such as stocks, in your early investing days, and then you may want to shift into lower risk investments as you near retirement age.

What to look for in an IRA. Once you determine what type of investing you would like to do, then you can decide where to open an IRA. Not all investment firms are created equal. You should investigate several IRA options to determine which will work best for you.

The main things to consider when looking into IRAs are costs and investment options. Some IRAs are surprisingly costly, and high fees will steadily erode your savings and investment returns over the years. Paying high fees can put your retirement plans in jeopardy, because you miss out on the compounding interest that would otherwise work its magic on your retirement savings. So be sure that you understand all the fees associated with a potential IRA investment, and compare fees between companies before you decide.

Another important point to consider is the type of investments that will be available to you. Generally, brokers make it easy to invest in stocks and ETFs, while automated investing services will do most of the work of picking stocks and bonds for you. Other options include banks, where you will be able to invest in CDs, and mutual fund companies, which obviously specialize in mutual funds and, increasingly, ETFs. Here are seven options for your first IRA:

E*Trade. E*Trade is a brokerage service you can use to invest in stocks, bonds and mutual funds. Since it has no account minimum, you don't have to have a lot of cash on hand to open an account. E*Trade can be a good option if you want to invest on your own and have ultimate control over where your money is invested. However, E*Trade discourages short-term trading, and you could incur a $49.99 early redemption fee on funds held less than 90 days. This type of account may work best for long-term stock and mutual fund investors.

TD Ameritrade. This is an online broker with no account minimum, which you can use to access over a hundred commission-free ETFs. However, there are trading fees, so this account might be a good fit for low-frequency traders and long-term mutual fund investors.

Betterment. This is an online automated investment service with no minimum deposit. When you start an account with Betterment, you'll go through their quiz to determine your current risk tolerance. Betterment will automatically build a portfolio made up of ETFs. You can make your own choices, or rely on its software to balance your portfolio for you. They also offer lots of tools to track your investments.

Ally. This bank operates exclusively online, and is thus able to offer low fees and competitive interest rates. Ally's high-yield CD currently offers a 1.2 annual percentage yield on an 18-month investment of less than $5,000. And if you have $25,000 or more to invest, you can boost your interest rate to 1.3 percent. That's still not a huge return on your investment, but it's not bad for an 18-month certificate of deposit at the moment.

Wealthfront. This automated investing service determines your risk tolerance and then creates a balanced portfolio for you. It offers options in real estate investment trusts, ETFs and commodities. Wealthfront has a $500 minimum deposit requirement, so you will need some money saved up to use this option.

Vanguard. Vanguard is a huge mutual fund company, so it can offer low fees and easy investing options such as target-date funds, which automatically adjust your risk as you near retirement. For example, if you have at least $1,000 on hand to start with, you can invest in the STAR Fund, which has a relatively low expense ratio of 0.34 percent. The STAR Fund is invested in about 60 percent stocks, which can make it a good long-term, high-yield investment if the stocks do well.

TradeKing. If you're looking to do some high-frequency trading, check out an account with TradeKing. It has relatively low stock and options trading fees, making it an affordable option for those who want to trade on a regular basis without triggering high costs. TradeKing doesn't provide a lot of support, so plan to do research on your own. You can access their trader network to see what decisions others are making with their money, which may help guide your thinking. However, investing exclusively in a high-frequency trading option is risky, and there's a significant possibility that you will lose money, especially if you are not very experienced. But you could put some of your money into this type of account just to give it a try.

The first step in deciding between these options and others that you research online is to inform yourself about the types of investments that are available to you. Then, choose a place to open your first IRA and get started.
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The New Retirement Account Fiduciary Standard

 


The Department of Labor issued new rules that will require financial advisers handling 401(k)s and individual retirement accounts to act in the best interest of their clients. Previously brokers were only required to recommend suitable investments, and some firms steered clients into investment products with unnecessarily high costs. The White House estimates that these conflicts of interest cost retirement savers $17 billion a year. Here's how the new retirement account rules will affect your investments.

Advice in your best interest. An advisor who makes investment recommendations to 401(k) plan participants, 401(k) plan sponsors or IRA owners in exchange for compensation will now be considered a fiduciary. Fiduciaries are legally required to recommend investments that are in the client's best interest, not their own. An advisor who manages tax-preferred retirement accounts must now select investments that are best for the participant's situation, not the funds that make the biggest profit for the advisor.

New IRA customers will be required to sign an enforceable contract beginning in January 2018 in which the financial firm commits to acting as a fiduciary, providing advice in the consumer's best interest, charging a reasonable compensation and promising not to make misleading statements about conflicts of interest. Existing IRA owners might receive a notice outlining the new practices, but will not need to take action. Workers participating in employer-sponsored 401(k) plans will receive the same protections and disclosures, but will not need to sign a contract.

The rules apply only to retirement accounts. The new fiduciary standard only applies to tax-advantaged retirement accounts such as 401(k)s and IRAs. Financial advisers who manage other types of investments may not be held to the same standard. For your taxable investment accounts, you will still need to ask potential investment advisors if they are willing to act as a fiduciary and make sure that you are not receiving biased investment advice.

Reasonable compensation. There are several exemptions to the fiduciary standard. Commissions, revenue sharing arrangements and 12b-1 fees will still be allowed if the firm and advisor commit to charging reasonable compensation, providing advice in the client's best interest and disclose conflicts of interest. The law prohibits financial firms from giving financial incentives to advisors who recommend inappropriate investments to clients in order to help that company's bottom line. Financial firms must also direct customers to a website that explains how they make money. Clients can request more detailed disclosures about the costs and fees charged.

Existing investments grandfathered. Previously acquired assets will continue to be subject to the old rules, and advisers will be allowed to recommend that clients continue to hold those investments or follow previously set up purchase agreements. However, any new advice will be required to be in the best interest of the client and only charge a reasonable amount of compensation.
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How to Claim the Retirement Saver’s Tax Credit

 


Low- and moderate-income workers who save for retirement in 401(k)s and IRAs are eligible to claim the saver’s credit, a tax credit worth up to $1,000 for individuals and $2,000 for married couples. Workers can claim this credit in addition to the tax deduction they also get for their retirement account contributions.

The saver’s credit can be claimed by individuals age 18 and older earning up to $28,750, heads of household earning $43,125 or less, and couples with incomes of up to $57,500 in 2012. In 2013, the income limits will increase to $29,500 for singles, $44,250 for heads of household, and $59,000 for couples. The income limits for the credit are adjusted annually to keep pace with inflation. The credit cannot be claimed by full-time students or people claimed as dependents on someone else’s tax return.

The saver’s credit is calculated based on the contributions you make up to $2,000 per person and your credit rate. The credit rate, which ranges between 10 percent and 50 percent of the amount contributed, is highest for retirement savers with the lowest incomes. For example, a married couple that earned $30,000 in 2012 and contributed $1,000 to a traditional IRA would get a $500 credit. Rollovers into retirement accounts don’t count toward the credit, and eligibility may be reduced if you recently took a distribution from a retirement account.

Saver’s credits worth just over $1 billion were claimed on more than 6.1 million income tax returns in 2010, but most people received small benefits. Although the saver’s credit can be worth up to $2,000 for couples, very few taxpayers get that much. “It is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers,” according to a statement from the IRS. Saver’s credits averaged $204 for couples, $165 for heads of household, and $122 for individuals in 2010. The saver’s credit can increase your refund or reduce the tax owed.

The saver’s credit began as a temporary provision in 2002 that was made permanent in 2006. But only a quarter of workers have heard of the saver’s credit, ranging from 35 percent of people in their 30s to just 17 percent of those in their 40s, according to a 2012 Harris Interactive online survey of 3,609 full-time and part-time workers commissioned by the Transamerica Center for Retirement Studies. However, awareness of the credit among people earning less than $50,000 per year is up from 21 percent in 2011 and just 12 percent in 2010. In contrast, the majority (53 percent) of workers are aware that people age 50 and older are allowed to make catch-up contributions to their retirement accounts, including over 65 percent of those in their 50s and 60s.

There’s still time to claim the saver’s credit on your 2012 tax return. To qualify for the 2012 tax credit, 401(k), 403(b), 457, and Thrift Savings Plan contributions must be made by December 31. However, workers have until April 15, 2013, to add money to an IRA or Roth IRA that will qualify them for the credit in tax year 2012.
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Friday, April 8, 2016

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10 Strategies to Maximize Your 401(k) Balance

 


At a time when most people don't have a traditional pension, growing and then protecting your 401(k) balance is essential to a secure retirement. Pay close attention to 401(k) rules to make sure fees, taxes, and other mistakes don't unnecessarily reduce your 401(k) balance. Here are 10 ways to make the most of your 401(k) plan:

Don't accept the default savings rate. New employees are increasingly likely to be automatically signed up for a retirement account at work, most often by having 3 percent of their pay deposited in their company's 401(k) plan. But saving 3 percent of your salary, while certainly better than no savings, may not be adequate to maintain your current lifestyle in retirement. "For a lot of people, that is not going to be enough," says Michele Clark, a certified financial planner for Clark Hourly Financial Planning in Chesterfield, Mo. "When you get a raise, save 1 percent more every year until you can get up to hopefully 20 percent of your pay."

Get a match. The most common 401(k) match is 50 cents for each dollar saved up to 6 percent of pay. If your employer offers a 401(k) match, make sure you save enough to take advantage of it. Capturing a 401(k) match is one of the fastest and most painless ways to boost your 401(k) balance.

Stay until you are vested. You won't get to keep the 401(k) match from your employer until you are fully vested in the 401(k) plan, which can sometimes take as long as five or six years of service at the company. Some employers allow people who leave before they are fully vested to keep a portion of the match based on their years of service, while other companies require workers to forfeit the entire match. It can sometimes be worth thousands of dollars to continue to work for a company until you are fully vested in the 401(k) plan. "If you are in a miserable employment situation or have a life-changing opportunity to go somewhere else, maybe you have to sacrifice the unvested portion," says Joel Kelley, a certified financial planner for Woodstone Financial in Asheville, N.C. "If you are considering a lateral move career-wise, you should definitely take that into account."

Maximize your tax break. Traditional 401(k) plans allow you to defer paying income tax on the money you save for retirement. Investors can contribute up to $17,000 to a 401(k) plan in 2012, up $500 from 2011. And after age 50, the limit jumps to $22,500. Low-income workers who earn less than $28,750 for singles, $43,125 for heads of households, and $57,500 for couples in 2012 and save in a 401(k) plan can additionally claim the saver's tax credit, which is worth up to $1,000 for individuals and $2,000 for couples. Contribution limits for 401(k)s and the saver's credit income threshold are generally adjusted each year to reflect inflation.

Diversify with a Roth. A growing proportion of employers now offer a Roth 401(k) option in which workers can save after-tax dollars, and distributions are tax-free in retirement. A Roth 401(k) generally offers the biggest benefits to young and low-income workers who expect to be in a higher tax bracket later on in their career, but can also add tax diversification and flexibility to the portfolios of people closer to retirement.

Don't cash out. Most workers switch jobs several times over the course of their career, which means they need to decide what to do with the 401(k) balance at their former employer. It can be tempting to withdraw the cash, but workers who withdraw money from their 401(k) account before age 59½ face a 10 percent early withdrawal penalty and income tax on the amount withdrawn. Early withdrawals also cause you to miss out on valuable compound interest that is essential for building a large nest egg. "This money needs to be put away for retirement, and that's all it needs to be used for," says Carolyn McClanahan, a certified financial planner for Life Planning Partners in Jacksonville, Fla.
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An Innovative Way to Face Retirement

 


Bank of America wants to put a new face on your retirement—literally. The company's Merrill Edge unit recently released a new app that shows users how they will look decades in the future. The tool digitally ages a picture of the user and shows them a series of renderings of their future self at various ages, concluding with a photo of how they might look after age 100. To reinforce the message that the user will get old one day, the app then flickers back and forth between the current photo and the aged photo. Next to the aged photos are messages about how much the cost of living will increase by the time you reach a given age, and the expected prices for milk, bread, gas, utilities, and other consumer items you are likely to need. In the bottom right-hand corner, Bank of America makes its pitch about saving in its Merrill Edge IRA for retirement. But you aren't required to hand over any personal information or even your email address to use the tool. "Our goal is to engage those 18 to 34 who have not yet started thinking about retirement and get them engaged as soon as possible," says Alok Prasad, head of Merrill Edge. "We tried to use this aging tool to kind of bring a little bit of humor and fun into a tough topic and get individuals thinking about their future selves."

Merrill Edge says more than 250,000 people used the face retirement app to create aged photos of themselves in the month after it launched. And about 10 percent of those users shared their aged photo on Facebook with their friends.

When April Kessler, 42, a business librarian in Austin, first tried the face retirement tool she invited her colleagues into her office to look at it. "We all joked it was going to make us save for plastic surgery," she says. "I decided I need a little more sleep and possibly I need to start moisturizing more." But she also went back to look at the aged photo again later. "It's a gimmick for sure, but it does make you think about it," she says. "It is a reminder that you are going to get older and you do have to plan for the future."

Some experts say the tool is not likely to have an immediate impact on retirement savings, but the experience of seeing your future self could be recalled later when you make 401(k) or IRA decisions. "It's not like somebody goes on there and then happens to read one of their statistics about what you will need and calls their bank the same day," says Kit Yarrow, a consumer-research psychologist at Golden Gate University and coauthor of Gen BuY: How Tweens, Teens, and Twenty-Somethings Are Revolutionizing Retail, who is not affiliated with the tool. "It may not inspire someone to pick up the phone right away, but I think it builds a relationship." And if you begin to think of yourself as someone who will grow old one day, it could change your behavior at a key moment. "It's hard to image that you are ever going to get there when you are 18," says Yarrow. "Getting someone to visualize and imagine themselves in that position is a major benefit of this campaign."

The face retirement tool is based on a series of experiments conducted at Stanford University and published in the Journal of Marketing Research in 2011, which found that people who view age-progressed photos of themselves often consider allocating more money to retirement accounts. For example, in one of the studies, 50 people were shown an aged or current picture of themselves and then asked to allocate a hypothetical $1,000 among four choices: a checking account, a fun and extravagant occasion, a retirement fund, or buying something nice for someone special. Participants who viewed the aged photo said they would put significantly more in the retirement account ($172) then those who viewed a current photo ($80).

How effective the tool is at getting you to increase your retirement contributions may depend on your attitude when you use it. "If they see it via Facebook, I'm not sure someone is going to change their 401(k) contributions," says Hal Hershfield, an assistant professor in the marketing department at New York University's Stern School of Business, and coauthor of the original marketing research. "If, on the other hand, they are actually in the mindset of trying to get more information about retirement, I think this could have a measurable impact on the types of decisions that they make."
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Why You Should Open a Roth IRA

 


Traditional 401(k)s and IRAs give you a tax break while you're saving for retirement, but income tax is due on each withdrawal from the account. With a Roth IRA, you contribute after-tax dollars, but withdrawals from these accounts, including the earnings, are often tax-free. To decide which type of retirement account is best for you, you need to compare your current tax rate to what you think your tax rate will be in retirement. "If you will be in the same or a higher tax bracket in retirement, the Roth IRA is the better choice," says William Keffer, a certified financial planner for Keffer Financial Planning in Wheaton, Ill. "If you will be in a lower bracket in retirement, then the benefit is much less if existent at all." Here are some reasons to do at least some of your retirement saving in a Roth IRA:

Retirement flexibility. Retirees are required to take distributions from their traditional 401(k)s and IRAs each year after age 70½, and income tax is due on each withdrawal. The penalty for failing to take required minimum distributions is a 50 percent excise tax on the amount that should have been withdrawn in addition to the regular income tax due on the withdrawal. But retirees are not required to take annual distributions from Roth accounts, which gives them more flexibility to withdraw the money only when they need it.

Tax diversification. Having some of your retirement money in pre-tax accounts and some in after-tax accounts adds tax diversification to your portfolio. "If you can do both, do both. You're diversifying the tax characteristics of your retirement money," says Neal Van Zutphen, a certified financial planner and president of Intrinsic Wealth Counsel in Mesa, Ariz. "When I'm in retirement, I may be able to manage my taxable income and still meet my retirement needs by only taking so much out of my traditional IRA and taking the rest out of my Roth IRA to keep me in the lowest tax bracket." Whether or not your Social Security benefits will be taxable is dependent on your adjusted gross income and traditional IRA withdrawals—but not Roth IRA distributions—count as income.

Easier to access money before retirement. If you withdraw money from a traditional IRA account before age 59½, a 10 percent early withdrawal penalty will be applied to the distribution in addition to regular income tax. But for early Roth IRA distributions, you will need to pay income tax and the early withdrawal penalty only on the portion of the withdrawal that comes from earnings, assuming the account is at least five years old. "Some younger investors may want to start saving for a house and a Roth is a great place to do it," says Bruce Stoltenberg, a certified financial planner and chairman of SoundView Advisors in Olympia, Wash. "They can access that principal without taxes or even owing a penalty." Additionally, the IRA exceptions to the early withdrawal penalty, including a first home purchase, higher education expenses, and unreimbursed medical costs, also apply to Roth IRA withdrawals.

Leave money to heirs. You are required to take traditional IRA withdrawals throughout the later part of your retirement, and your heirs will need to pay taxes on any money left to them as they withdraw it. But you can leave money in a Roth IRA as long as you live, and your children and grandchildren may be able to receive tax-free distributions. "A Roth is an ideal estate-planning tool," says Stoltenberg. "If you suspect that you have a portion of your estate that you are never going to use yourself, a Roth is a wonderful place to have it."

Convert your existing savings to a Roth. High-income workers are restricted from saving in Roth IRAs, but people at any income level can convert all or part of their traditional IRA balance to a Roth IRA. Income tax will be due on the amount converted, which can result in an unusually hefty income-tax bill if you convert a large amount. Large rollovers can also impact your tax bracket, Medicare premiums, and your child's eligibility for federal financial aid for college. Many financial advisers recommend spacing out your conversions over several years, or trying to do a conversion in a year when you have an unusually low income. "You don't have to do it all in one year for the entire account. You could nibble away every other year," says Van Zutphen. "In one particular year, if you had a lot of tax losses, you could do it in a year when you fall into a lower tax bracket."
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