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Why Smart People Have Retirement Accounts

Why Smart People Have Retirement Accounts

You could stick your money in a savings account, a traditional brokerage account, or a dedicated retirement account, like an IRA or 401(k). Retirement accounts come with tax benefits, either up front or in the future When you stick money into a regular savings or brokerage account, you don't get any sort of tax break on that cash. On the other hand, if you contribute to a traditional IRA or 401(k), you get an immediate tax break on the money you put in. Roth IRAs and 401(k)s work differently in that they don't offer an initial tax break for contributions. So if, for example, you invest in a traditional brokerage account this year and realize a $2,000 gain, you'll be required to report and pay taxes on that $2,000 when you file your 2017 return. With a traditional IRA or 401(k), your money gets to grow tax-deferred, so you won't pay taxes on your gains until you actually start withdrawing from your account in retirement. Some retirement accounts give you free money Though you may not get any help funding your IRA, if your company offers a 401(k) and you choose to participate in its plan, you might snag some free retirement cash in the form of an employer match. Imagine your company is willing to match up to 3% of your $50,000 salary each year. If you contribute $1,500 of your own money and get an additional $1,500 each year from your employer for 20 years, you won't just be $30,000 richer come retirement. Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.
12 Ways You Can Get More Money In Retirement

12 Ways You Can Get More Money in Retirement

Here's the bad news: The average monthly Social Security retirement benefit was recently $1,365 per month, or about $16,000 per year, with the maximum benefit for those retiring at their full retirement age recently at $2,687 per month -- or about $32,000 annually. That's more than $160,000 extra just for delaying retiring for a few years. If you're willing and able to work a little in your first few years of retirement, you can generate some helpful income. You might even just work part-time for your current employer. Enjoy dividend income You can generate income in retirement by selling off shares of stock from your stock portfolio over time -- but with dividend-paying stocks, you can collect income without having to sell any shares! Here are a few well-regarded stocks with significant dividend yields: Stock Recent Dividend Yield Ford Motor Company 5.4% Verizon Communications 5% Chevron 4.1% Pfizer 3.8% Cisco Systems 3.6% A dividend-focused exchange-traded fund (ETF) can be a fine option, too, offering instant diversification. For example, you could spend less by quitting cable TV and just streaming your video entertainment -- that might save $50 you per month or $600 per year. Believe it or not, you might save hundreds of dollars just by spending an hour on the phone calling insurance companies to get the best current deal on your home insurance and car insurance. You can increase or decrease your benefits by starting to collect Social Security earlier or later than your "full" retirement age, which is 66 or 67 for most of us, and you can make some smart moves by coordinating with your spouse when you each start collecting. Clearly, there are lots of ways that you might increase your income in retirement.
Making This One Move Now Can Boost Your Retirement By Thousands A Year

Making This One Move Now Can Boost Your Retirement by Thousands a Year

With traditional 401(k)s, by contrast, account holders get to deduct their contributions from their income, but taxes are due when those funds are withdrawn, usually during retirement and at a lower tax rate because the saver is no longer working. Beshears: What we found is that people didn’t save any differently, in the sense that they still had the same total contribution rate. But it makes a big difference if you’re doing it in the traditional 401(k) or the Roth. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. Beshears: Indeed, it’s just a difference of whether you’re paying your taxes now or later. With the Roth 401(k), you’re paying the taxes now. WSJ: Do you recommend the Roth 401(k) over the traditional pretax option? If people have a rule of thumb for the number of dollars they put into these savings vehicles, the exact same implications follow. Traditional 401(k): Study Finds a Clear Winner” first appeared in The Wall Street Journal.
Here’s Why 43% Of Baby Boomers Could Wind Up Cash-Strapped In Retirement

Here’s Why 43% of Baby Boomers Could Wind Up Cash-Strapped in Retirement

Social Security is only designed to replace roughly 40% of the average worker's pre-retirement income. We're not saving enough The Economic Policy Institute reports that an estimated 41% of baby boomers have no money saved for retirement at all. The median savings amount among workers aged 56 to 61 is a measly $17,000, which is a drop in the bucket. That may sound impressive, but it won't get a typical senior very far. Let's also assume you and your spouse are each eligible to receive $1,360 a month in Social Security benefits, which is what the average beneficiary gets today. Add in $2,720 from Social Security benefits ($1,360 x 2), and you have $3,401 per month to spend, or $40,812 per year. If you're aged 50 or older, you can put up to $6,500 a year into the former and $24,000 a year into the latter. If you have a 401(k) and you manage to max it out for the next 10 years, you'll have another $302,000 in retirement savings to work with, assuming your investments generate a moderately conservative 5% average annual return during that time. If you can't max out your retirement plan contributions, save whatever you can, even if it's only a few thousand dollars a year. That's why the expert financial planners and portfolio managers from Motley Fool Wealth Management have put together an exclusive video seminar on addressing our clients' biggest questions… Like what (and when) to sell in a bull market… to why all dividends aren't created equal… to the three critical questions you should be asking your financial advisor… This free video has you covered so you can weather the market in stride.
What To Do When You Haven’t Saved Enough For Retirement

What To Do When You Haven’t Saved Enough For Retirement

What To Do When You Haven't Saved Enough For Retirement. How much is in your savings accounts? A simplified equation for determining how much you will be able to spend during your first year in retirement is Social Security benefit(s) + pension benefit(s) + 4% of retirement savings. Retirement savings in a Roth IRA or Roth 401(k) account will generally not be taxed if withdrawn past the age of 59½.) Still, you can start by estimating your fixed expenses and likely discretionary expenses to get an idea of what you will need. Every year no money is withdrawn from retirement savings is an extra year those savings can benefit from compounded returns. For a person who has not saved enough, the potential tax savings must be weighed against the ability to save more for retirement. Though Roth IRA withdrawals are not taxed, a person’s or couple’s tax rate may be lower in retirement. Allocate money needed in three to seven years to a bucket with high-quality bonds and high-quality dividend-paying stocks. A smaller withdrawal rate is used during years with bad investment returns and a larger withdrawal rate is used during years with good investment returns.
We All Know To Put Money Into Retirement Accounts — What’s The Best Strategy For Taking It Out?

We all know to put money into retirement accounts — what’s the best strategy for taking it out?

Should you use, if you have such options, the in-plan decumulation/retirement-income products or should you use out-of-plan products? But let’s say your plan does offer in-plan decumulation/retirement income products? “Or the decumulation products offered within the 401(k) might not generate enough income given the 401(k) account balance, so the employee must use outside products anyway,” she said. For employees it may be easier to meet their decumulation needs using investment products outside the plan. “The cautionary note is that because of the somewhat looser environment outside alternatives may present more alternatives – but with lots of important details,” Park said. “That said, advisers connected to the plan many times constrain solutions to those associated with the company they work for, limiting alternatives,” he said. He noted, for instance, three popular strategies used by retirees and their advisers to better manage sequence of returns risk: The bucket strategy in which bucket one is supposed to provide income for one to five years; bucket two is for assets that will fund retirement in the next five to 10 years; and bucket three is for assets that will be needed in 10-plus years. “I would suggest they consider engaging a fiduciary, fee adviser — by the hour cost — as an initial sounding board,” said Park. Acknowledging the conflict, Park said working with a certified financial planner would be best. “Insist on paying them by the hour, so as to eliminate conflicts,” he said.
3 Reasons Why This Couple Is Ignoring Their 401(k) Accounts In Early Retirement

3 reasons why this couple is ignoring their 401(k) accounts in early retirement

One of the things we consistently get questions about is why we’re taking the two-phase approach, especially with well-funded retirement accounts already in place, instead of starting to tap those funds now, and already being able to retire. We don’t think it’s a good idea to see taxable and tax-advantaged funds as one big pool of money. And we definitely don’t think it makes sense to apply the 4% rule to your total balance to figure out what you can spend in your early retirement years, before you can access your tax-advantaged funds without penalty. (We don’t think you should be using the 4% rule at all, actually, but that’s another post.) Or even that it’s a fine idea to plan on level spending over your lifetime. Tax rules can and do change, which could spoil your early withdrawal plans. The problem is that relying too heavily on your tax-advantaged funds for early retirement makes it easy to accidentally spend some of the money older you needs later. And by the time you realize that you should have saved that money for later instead of converting it or withdrawing it early, you’ll have a much harder time earning more income than you would have in your 30s/40s/50s. But as for SEPPs and the Roth conversion plan, we see a few other important downsides worth noting, in addition to all that stuff above about selling out future you: Forced to sell when you’d rather not: With a SEPP, you must withdraw equal amounts each year, even if your investments are tanking and you’d rather not sell shares. If you’re reliant on a Roth conversion for your cash flow, you might be forced into the same situation, even though there are no tax rules forcing you to sell shares in a down year.
Opinion: Here’s A Way To Get Retirees To Spend Their Savings Responsibly

Opinion: Here’s a way to get retirees to spend their savings responsibly

Opinion: Here’s a way to get retirees to spend their savings responsibly. Getty Images Employers, academics, and policymakers all recognize that drawdown is the major challenge facing the 401(k) system. First, people form an unnatural attachment to their pile of assets, which they have spent a lifetime accumulating. Second, people are fearful of end-of-life health and long-term care expenses. Third, many people want to leave a bequest to ensure their immortality. Under this arrangement, a fund will allow participants, say, age 50 or older to invest a portion of their assets in deferred annuity accounts. When the fund reaches its target date, it will dissolve, participants will receive an annuity certificate providing for immediate or deferred annuity payments, and the remaining portion of the participant’s investment would need to be reinvested, either by the participant or a plan fiduciary, in other alternatives. Specifically, it stated that, if certain criteria were met, a series of target date funds that include deferred annuities among their assets would be treated as a single benefit and therefore should not raise plan qualification concerns. In addition to how a TDF series may satisfy Internal Revenue Code nondiscrimination requirements, Treasury asked for DOL views on these TDF/deferred annuity structures. •The DOL said that the annuity selection safe harbor (2008 Safe Harbor) applicable to defined contribution plans establishes a means for plan fiduciaries to satisfy responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA) regarding annuity selection.
How To Get All Americans To Save For Retirement

How to get all Americans to save for retirement

How to get all Americans to save for retirement. In fact, the worldwide retirement savings gap in 2015 is estimated to be $70 trillion, with the largest shortfall being in the U.S., according to the report. And having one — an employer-sponsored retirement plan such as a 401(k) plan — is key to saving for retirement. So, given the absence of and the need for such plans, the Department of Labor issued guidelines in 2016 that paved the way for states to set up retirement plans for workers without running afoul of federal pension laws. But what if the Trump administration is successful in putting the kibosh on plans by states to help their workers achieve retirement security and the country avoid a retirement crisis? Given that, Rappaport said improving Social Security benefits, particularly at the lower income levels is job one. And lastly, the coverage problem can be solved by improving low-paying jobs and employment opportunity, she said. MEPs or not To be fair, some experts have suggested that multiple employer plans (MEPs) can solve the coverage issue. “In the state context, states would create a MEP for its small businesses,” the report noted. However, Rappaport wasn’t so certain MEPS would increase coverage in the absence of mandate.