The times… they are a changin…. again….
The times they keep on changing… Are you ready for today’s retirement reality?
And changing is what we are doing. In fact, 16% of workers say the age at which they expect to retire has changed in the past year, according to the 25th annual Retirement Confidence Survey, conducted by the Employee Benefit Research Institute (EBRI) and Greenwald & Associates. Of those, the large majority (81%) report that their expected retirement age has increased.
A red flag boomers may have overlooked as a result of the recession is mounting debt, says certified financial planner (CFP®) John R. (Dick) Power, principal at Power Plans in Walpole, Mass.
“Work it off while you are working and life will be so much easier financially,” Power says. “It is better to have the mortgage paid, and credit card debt can be a major hurdle when living on a reduced or fixed income.”
For those seeking to maximize their revenue streams in retirement — whether delaying retirement is an option or not — Jeff Bucher, president of retirement planning firm Citizen Advisory Group, recommends clients ask themselves these four questions.
1. Do you have a real and realistic plan for your retirement?
Study after study shows that less than half of retirement age people have an actual retirement plan — a road map for paying for life after you stop working.
Working with a financial advisor can help you figure this out. A good retirement calculator can also help you document and visualize your plan. The NewRetirement Retirement Calculator makes retirement planning easy to do without sacrificing the tremendous amount of detail necessary for a realistic plan.
2. Are there still hidden fees in your employer-sponsored 401(k)?
Since the economic collapse of 2008, a new Department of Labor rule required all hidden fees attached to retirement plans and mutual funds be disclosed to employers and employees, Bucher explains.
“By some estimates, up to 90% of fees attached to retirement plans are hidden. Get an accounting of all fees and if you can’t decipher the information, attend a financial workshop or talk to a financial advisor,” he says in written commentary. “It may be time to roll some your money into a less expensive plan. According to an AARP survey, 71% of those with a 401(k) had no idea they were paying fees for their retirement accounts.”
But are hidden 401(k) fees always important? It depends on the plan, says Craig Cowles, CFP® and founding partner at Cardinal Wealth Advisers, based in Dallas, Texas.
“If [the plan] is transparent, the portfolio is in line with industry standards, and the fees are reasonable, then don’t concern yourself,” Cowles advises. “Fees are inevitable and a part of business. But here is a good litmus test: ask if they have audited their plan in the last two years. Has the Department of Labor been in to audit the plan? What were the results?”
3. Do you want to take a chance on the stock market?
One of the effects of the recession is that retirees and pre-retirees realized the vulnerability of Wall Street.
“Even if the stock market can make you plenty of money, it’s not necessarily going to maintain your wealth,” Bucher says, noting the benefits of annuities.
An annuity, or insurance product that pays out income, allows you to make an investment in the annuity and then makes payments to you — giving you a dependable income stream during retirement.
There are many different types of annuities. Three main types of annuities are fixed, indexed and variable. These annuities differ in the way they generate earnings, and in the amount of risk involved.
“If one wants to keep pace with inflation then stock market exposure must be part of the game,” Power says. “What retirees should do is have an assured income stream they can live on. Some need annuities, some don’t. But, if they have any hope of living a decent life in retirement they will need stock market exposure. Balanced portfolios and conservative allocation strategies make sense.”
4. If you’ve left your job, have you rolled your employer-sponsored 401(k) into an IRA?
“While 401(k)s are a great tool for saving, particularly if your employer is providing matching funds, if you were to die, the taxes your survivors would pay on your 401(k) would be much higher than on an IRA,” Bucher says. “That’s because they would have to inherit the money in a lump sum – that could easily take 35% right off the top. The lump-sum rule does not apply to IRAs. While your spouse would have the option to inherit your 401(k) as an IRA, your children would not. So, take advantage of your employer-sponsored 401(k), but if you leave the company, convert to an IRA or ROTH IRA. You can also begin transferring your 401(k) funds to an IRA at age 59½.”
A 401(k) plan is is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan.
“The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan,” explains the IRS. “In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have mandatory employer contributions.”
An IRA, or individual retirement arrangement, and offers two different types of contributions. A traditional IRA offers before-tax contributions if you qualify, and a Roth IRA offers after-tax contributions.
“Both are vehicles to help provide for your long-term financial security,” says Prudential Retirement, a Prudential Financial business. “And each type of IRA is a personal retirement savings plan that offers certain tax advantages to those who qualify.”
5. Verify You Are On The Right Track
How can you tell if you’re on the right track? It’s easy, says Power.
“If one has a plan there should be a forecast of where you might ideally be at any given time,” Power says, noting that working with a financial advisor is key to meeting your financial goals in retirement. “An annual review will show you how it is progressing.”
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