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A target to aim for: what do I need to save for retirement?

KJ: One of the commercials that Fidelity had running a few years ago had a green arrow with a number above each person. The magic number was the amount of money that person needed to have socked away for retirement. But, how did they calculate how much a person needs for retirement? What factors should you think about as your family plans for your future? Well, there have been numerous research studies over the years about a little thing called the ‘safe withdrawal rate.’ This is the percentage of your savings/investments that you could “reasonably” expect to withdraw over a long period of time while letting your savings continue to grow. I.e., it is the amount of income you and your family could plan to live off of in retirement. And, this is such a little understood concept of personal finance that it’s why people who win the lotto or sports players with HUGE signing contracts end up dead broke after spending all of their money.

And, if you do not have a barometer for what amount you need to save in order to retire, there’s slim chance that you can get there successfully. Do you need to have $500,000, $1,000,000, or $5,000,000+? The answer: it depends.

Success On Dartboard Showing Accomplished Progress

Looking at the math
While it is entirely dependent on your age in retirement, expense levels, and other factors, some suggest the safe withdrawal rate is anywhere between 3.5% and 4.5% of your savings. To illustrate this point, if you and your family had annual living expenses of $50,000 per year, you may need anywhere from $1,100,000 – $1,450,000 ($1,100,000 X 0.045 = $50,000) in savings to be able to maintain the purchasing power of your dollars over time while you took your $50,000 per year out of the account. I.e., in a “normal” year (whatever that is!) you could earn some return on your money, take your money out for your living expenses, yet still end up with the same amount of money as you started the year (accounting for the little thing called inflation, that is).

Fortunately, there are income sources like Social Security that may help reduce the overall amount you need to save, so the true amount you may need to accumulate in your savings could be MUCH lower. So, are you on track? One of our prior posts highlighted the milestones you could aim for based on your salary and age. Check it out here.

Other things to consider as you plan:
What does retirement mean after all? – Is it living on a beach, traveling around to play golf at all of the amazing courses around the world, or spending time at home with your family? Each of these has very different implications for what you would need to save and how your savings may need to keep up with your expenses. Thinking about it before-hand means you won’t be spending your days at home stuck to the computer wondering what you’re supposed to be doing with your time!

Expanding life expectancies
Life expectancies are not decreasing, but in fact have continued to increase significantly over the past century, so planning ahead by thinking about how long your savings could last you for the next 20, 30, or 40 years could be the difference between a well laid plan and a complete flop.

Your comfort levels for investments
Who would have thought this would come into play, but it really is an important one – especially when planning for a VERY long time horizon! If you’re not comfortable taking on a certain level of investment risk, you may have to save up more than your friend by shooting closer to the 3.5% target instead of 4.5%, so you can remain more conservative with your savings. Whatever your preferences, talk to your significant other (and an advisor as well) to get a feel for what you are and are not comfortable with when talking about your savings. If you find the stress of stock markets keep you up at night, then maybe you could be more conservative in your strategy. However, with that approach, you may find yourself needing to set aside more savings each month. It’s a bit of a trade-off, but it’s important to discuss before you find yourself making a reactive decision later!

    How do you calculate what you are aiming for?
    What do you do to determine how much money you need for retirement?
    Tell us your retirement success plans.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net.

A target to aim for: what do I need to save for retirement? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

State of the union: what is MyRA? Success or failure? What we know now.

State of the Union #myRA My Retirement AccountKJ: So without getting into any of the politics from the State of the Union, we wanted to bring a quick summary about what this new myRA account is all about (i.e. with many wondering if myRA is a new account, if it’s like a Traditional IRA, or is myRA more like a Roth IRA?…all things we hope to clarify in this post). While there are a lot of details to be ironed out, the program is designed to be made available in 2015 with some early adopters starting the program in late 2014. There are quite a few good articles out there, but here is the Whitehouse.gov press release with some additional reading. Here is what you should know now:

What it is:
(1) Another confusing acronym that sounds eerily similar when pronounced to the already existing IRA. Wait, are you saying myRA, my IRA, or just IRA? Are you saying Myra (as in the person – a mistake a number of people have made on Twitter putting @myra instead of #myRA – oops!) or my RA (as in rheumatoid arthritis or residential adviser – college dorm term). All-in-all, just a bad name choice in my opinion.
(2) A Roth IRA equivalent – The participant does not get any tax advantages today for contributing to the account today (it is “after-tax” money meaning you don’t take any current year tax deductions for what you put into the account), but it grows tax-exempt, just like a Roth IRA. Plus, an account owner can roll the funds over to a Roth IRA at a financial institution (and will be required to do so after they have accumulated $15,000 or have been invested for 30 years) at any time.
(3) Your own savings. It’s not a plan or account that the employer controls or has any say in. Really, their only involvement is to process payroll deductions and then send the funds to the Treasury for deposit into your myRA. Plus, if you leave your employer, the account is yours to take with and do what you want – and fund it again with your new employer. Thus, it has a lot of the portability benefits that a Traditional IRA or Roth IRA has.
(4) Your myRA contributions are protected from investment loss. Guaranteed by the Treasury, and the same “G” – government securities – investment option in the Thrift Savings Plan (TSP) for government employees in their workplace retirement programs, it will not lose principal. Check out the TSP website on historical performance for more on this fund.
(5) A way to help those save for retirement who don’t have a workplace retirement option available. However, just because you don’t have a workplace 401(k), does’t mean you have NO options on saving for retirement. See our post on how to save for retirement if you don’t have a 401(k) for some further reading.
(6) There are no tax penalties for taking a withdrawal. Much like a Roth IRA, for money you put into the account, you don’t have a penalty or taxes owed on money distributed. However, there are likely to be restrictions (much like a Roth IRA) for earnings in the account if withdrawn before a certain age and an exception doesn’t apply (read, taxes and penalties could apply to the earnings).

Who it is for:
(1) It’s touted to be for anyone who doesn’t have a workplace retirement account they can save for. Well, not EVERYONE would be eligible. It is designed to be a retirement plan that you can contribute to at work through payroll deductions, but the employer has to actually offer it as an option when processing payroll. At the current time, it sounds like it could be in addition to a 401(k), instead of a 401(k), or instead of another workplace retirement account. So, while it could be available for all, there currently isn’t a mandate that employers actually offer it as an option.
(2) Couples making less than $191,000 per year (and a lower threshold for single tax filers at $129,000 per year). It doesn’t quite say that this is when the phase-out begins (or ends) for being able to make contributions, but it sounds quite similar to the maximum income to be able to contribute to a Roth IRA for married couples.
(3) Those looking to start saving for retirement with very little money each paycheck. With contributions as low as $5 per paycheck, and minimum investments of $25, it is arguably both approachable and affordable for all families.

What are my thoughts?
(1) While a guarantee against loss of principal sounds (in theory) like a good option compared to the volatility you see in a private investment strategy (think bonds, stocks, etc.), at what long-term savings cost is this guarantee? Even just earning an extra 0.5% or 1% on your money over the long-term (though subject to periodic market swings) would equal THOUSANDS of dollars of extra retirement money. The key is holding your ground and staying invested and not panicking at the bottom of the markets. Markets fluctuate quite regularly (anyone look at their statements from January?), so learning this early in your investing career can equip you to focus long-term (i.e. 5, 10, 15, 20 years).
(2) Depending on someone’s income, it could be an interesting opportunity to get some additional funds into the myRA, then roll over to a Roth IRA, so you can ultimately get more funds in the great account that is a Roth IRA. Note that this could be severely limited pending further discussions on whether contributions to the myRA are the same limits subject to Traditional and Roth IRAs, so those maximizing their existing Roth IRAs may not be able to contribute anything to the new myRA.
(3) How can a maximum account value of $15,000 with the new myRA be enough to help America’s retirement problem? Assuming you spent the money in one year (not to mention trying to LIVE off of the account on an ongoing basis), that’s barely enough funds to provide for one year of income at the Federal poverty level, yet it’s the maximum you can save in the account? Sure you can roll the funds over to a Roth IRA above this threshold (then the sky is the limit on your account value), but what kind of cap is $15,000?
(4) It can be a good way to get people to START to think about saving for retirement and saving for their future at even a low threshold.
(5) Why do we need another account? Can’t there be solutions to enhance existing options? Is it me, or are there just too many account types out there: Traditional IRA (wait, is a portion deductible or non-deductible?), Roth IRA, SEP IRA, SARSEP IRA, SIMPLE IRA, HSA, MSA, FSA, 401(k), 403(b), TSP, TRS, 457, PSP, checking account, savings account, trusts, credit cards…anything I’m missing?

What is still to be determined:
(1) What are the exact income limitations, and is there a phase-out?
(2) How much can you actually contribute each year?
(3) How does the contribution impact your total contributions to Traditional IRAs/Roth IRAs (up to $5,500 per person for 2013 and 2014) and other retirement accounts? Will it be a new type and completely separate contribution limits or will it combine with your existing IRA limits?
(3) What is the process for when you have had the account for 30 years or when the balance reaches $15,000 and must be rolled over to a private retirement account (i.e. Roth IRA)?
(4) Will this become a requirement for employers to offer at some point?

    What have you read about the new myRA?
    Will you be keeping up with this new account type?
    What would motivate you to contribute to this new account?

State of the union speech: what is MyRA? Success or failure? What we know now. is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

How to save for retirement if you don’t have a 401(k)

It should be called retIRAment (IRA and retirement)KJ: How DO you plan for retirement and save when there aren’t any options with your employer? What happens if the 401(k) (or 403(b) for those public workers) everyone pines for isn’t even an option for you? Surely there have to be ways around this, so you too can save for and enjoy a comfortable retirement, right? Well, the good news is that there still are tax-advantaged ways of saving for retirement despite not having an employer retirement plan at work. Check out our post on IRAs for some additional reading.

I think the key thing to recognize about whether you do or do not have a tax-efficient way of saving for retirement is that you are saving for retirement, period. It may be a long ways off, but with the compounding effect of interest, you’re a sucker to not let time be on your side and invest early. Start early…like REALLY early!

SEP IRA
If you are a contract worker, there is something called a SEP IRA (Simplified Employee Pension). You can take your happy little 1099 earnings for the year and contribute (typically) up to 25% (nice little caveat there since it is slightly less for those who are self-employed) of your income up to a maximum savings of $51,000 for 2013 (or $52,000 for 2014)…and that’s a LOT of retirement contributions. Do your best to contribute the full 25%, and work with your accountant to make sure you’re maximizing this as an option.

As an aside, you have until your tax filing deadline (including extensions – i.e. up until October of the following year) to make a contribution for the prior tax year.

Traditional IRA
For 2013 and 2014, you can contribute up to $5,500 per person into a Traditional IRA. However, depending on your income (or family’s income), you may not be able to deduct all of your contribution from your tax-return. Just because you can’t deduct it from your taxes, doesn’t mean you shouldn’t contribute! However, if you can’t deduct it, but you can participate in a Roth IRA, then a Roth IRA would likely be a better fit for you.

Roth IRA
Again, you can contribute up to $5,500 per person into a Roth IRA for 2013 and $5,500 per person for 2014. Do note that this limit of $5,500 applies to the TOTAL of your contributions between Traditional IRAs and Roth IRAs, and it’s not for EACH account, so you can split up the contributions however your heart desires (or you know, what the tax man says you can).

Good old savings account
Like I said earlier, just because you don’t have a tax-advantaged way of saving for retirement (or are no longer eligible due to income limits), doesn’t mean you should stop or not contribute. In fact, quite the opposite. Without a tax-advantaged way of saving for retirement, you should be saving more to account for the fact that you can’t benefit from those advantages. Yeah, more savings! :)

Your savings account dedicated for retirement should likely not just be sitting in a little old bank account, so you should look for options to invest the money and get some more long-term growth. Your comfort, experience, and tolerance for investing will help guide the ship for where to go and what to do (find an advisor, manage yourself, stocks, bonds, fluffy bunnies – wait, what?).

Another important feature about a good old savings (or investment) account is that what it lacks in tax advantages, it gains in flexibility for you to use the funds for other goals, retirement, education, new pool, and more!

Now it’s your turn! Join in the discussion and let us know if you have a retirement plan at work (and whether it’s the greatest thing since sliced bread – or not, ya know) or if you have had to explore other options. We’d love to hear what your experiences are!

How to save for retirement if you don't have a 401(k) is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

What does it mean to “roll over” your 401(k)?

401(k) Roll over

 

KJ: Have you ever had a job that you left forgetting you had a retirement plan that you had at the prior company? Chances are this may have happened to you at some point in your career. When you leave your employer (whether voluntarily or involuntarily), there are so many things going through your mind that it’s easy to forget your retirement account you had been saving to especially since saving to your 401(k) (or 403(b)) is such an automatic process coming out of each paycheck that it’s usually out of sight, out of mind.

However, options abound when you leave your employer on what you can do with that “old” 401(k). Here are four things that can be done:

Roll it over to an IRA
The nice thing about a 401(k) is that your contributions are YOURS, so you’re able to take the funds and roll them over to another retirement account called an IRA (Individual Retirement Account). The tax nature of your contributions (i.e. if you made “pre-tax” contributions or “post-tax” contributions) will dictate what type of IRA you are able to roll your accounts to. If you have pre-tax 401(k) contributions, then you can roll those funds over to a Traditional IRA. On the other hand, if you have a portion of your account that is Roth contributions, then you can roll it into a Roth IRA.

For employer contributions, the answer isn’t quite so easy. Some types of employer contributions to your 401(k) can be rolled over, but some contributions may be forefeited (unfortunately!). For most of us who receive a regular employer match each paycheck, those funds are considered “portable” (i.e. you can take it with you) and can be rolled over with the rest of your account. However, if there is what is called a “profit sharing” component of the employer’s contribution or any kind of discretionary contribution, then the funds the employer has put into your account are likely subject to something called “vesting.” What this means is there is typically a schedule the employer has on when you “vest” (i.e. when the contributions become YOURS), and it typically takes anywhere from 1-7 years of working at an employer to receive all of the employer contributions in your account. For our household, Angela has regular matching contributions from her employer (i.e. the first 5% of her salary, her employer automatically contributes 4%) whereas contributions made to my 401(k) at work fall into the “profit sharing” bucket and thus employer contributions are subject to a schedule of vesting. If you have any uncertainty about your 401(k) and what is “yours,” then check your most recent statement (and don’t forget to ask your HR department if you have any questions!). You should be getting statements quarterly, and the portion that is “vested” should be clearly identified as well as whatever contributions you and/or the employer are making regularly to the account.

Roll it over to your new 401(k)
Just like rolling it over to an IRA, you can typically roll it over to your 401(k) with your new employer. Again, same types of rules apply as outlined above. This can sometimes be preferred if you have small accounts and don’t want both an IRA and 401(k) to keep up with or if you don’t know what to do about managing an IRA (i.e. if you aren’t willing to manage it yourself or aren’t currently working with an advisor to help you with this process).

Keep it as-is
Many companies let you keep your 401(k) with the former employer. However, some require that you withdraw the funds (noting you should really ONLY consider options of transferring to an IRA or another 401(k) as mentioned above) within the year. Each 401(k) is setup differently, so it’s important to work with your former HR department to understand your options as well as the timing of when it needs to happen.

Cash it out
NOT RECOMMENDED! While this is an option that is technically available to you, I struggle to even list this as an option. Cashing out your 401(k) involves paying taxes (Federal and/or State), significant IRS penalties if you are under the age of 59 1/2, as well as losing future retirement deferrals by not letting it grow for its intended purpose – retirement!

So, how do you work through which solution is best for you?
The answer to this question could probably warrant an ENTIRE post, but we’ll focus on just six key aspects to think through in the process:

1) Are you able to begin accessing the 401(k) with your new employer right away to roll funds into? Some companies require you wait a year before becoming eligible for a 401(k). For others, you actually have to elect NOT to participate in a 401(k) and are automatically enrolled.
2) Are you willing/able to manage your investments yourself? If so, an IRA can give you some extra flexibility.
3) Do you have an advisor that would help you manage the retirement account? Most advisors can’t work directly with a 401(k), but they can manage an IRA.
4) What are the fees associated with the 401(k) options? Look at outlining what the existing fees are with your current 401(k) (now clearly outlined on your quarterly statements thanks to a new law that went into effect in the last couple years) as well as what the fees may be with the new 401(k). Some costs are covered entirely by the employer, some may be fixed expenses, and others may be based on a percentage of your account value. Only one way to find out: run the numbers! There may be a clear winner, and it can also help you tell if an IRA may be a better target to send the funds to since most custodians allow you to open an IRA with very little money and with no annual/monthly fees.
5) Are you looking for simplicity of options? 401(k) plans usually have 5-20 options of funds to invest in whereas an IRA typically has thousands and thousands of options – a bit “the world is your oyster” so to speak. Maybe the options paralyze you or maybe they inspire you since you’re not tied down to the options offered by the 401(k) plan(s). Potato/potato.
6) How old are you, and when do you plan to stop working? If you are at or near retirement, sometimes rolling your funds into a 401(k) can be attractive. Given that if the funds are in an IRA you MUST begin taking withdrawals at age 70 1/2, the 401(k) can keep letting your funds defer past this age provided you’re still employed.

    Have you rolled funds over from a prior employer?
    Do you have a transition you are going through now?
    Tell us what you chose (and why).

What does it mean to "roll over" your 401(k)? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Defining differences in IRAs: choosing what is right for you

KJ: An IRA stands for “Individual Retirement Arrangement” (you thought I was going to say account, didn’t you?). It’s a way to help you save for your retirement in a tax-advantaged way. Sounds simple, right? While you could walk into a bank or brokerage/investment company to open an IRA in a matter of minutes, it’s best to know the different types and uses of each kind. So, we’ll break it down for the IRA basics on what you need to know. A professional financial advisor or CPA can help you navigate which may be best for your situation.

With the compounding effect of your money over time, you’re just throwing money away each year if you don’t take advantage of these accounts as a twentysomething (or thiry- or forty-something)! We were fortunate enough (my background and studies) that we opened our first IRAs in our teens. It now doesn’t seem like a whole lot, but at the time, it was a lot of money! And, it was less about the actual contribution itself than it was about the act of saving and thinking about future savings that has helped us today to create, set, and accomplish our goals.

There are all kinds of IRAs (Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs to name a few), and understanding the differences is important, so we prepared a handy-dandy chart for you to reference. Enjoy!


Traditional IRA Roth IRA SEP-IRA (Simplified Employee Pension) SIMPLE IRA
Current Taxation Deduct current year contributions on your tax return (as able) No tax deduction Deduct current year contributions on your tax return Deduct current year contributions on your tax return
Ongoing Taxation Interest and gains are tax-deferred Interest and gains are tax-deferred Interest and gains are tax-deferred Interest and gains are tax-deferred
Future Taxation Distributions are taxable as ordinary income Distributions are NOT taxable Distributions are taxable as ordinary income Distributions are taxable as ordinary income
Contribution Limits for 2013 $5,500 $5,500 The smaller of 25% of income (20% for self-employed) or $51,000. Employee contributions cannot exceed $12,000.
Contribution Limits for 2014 $5,500 $5,500 The smaller of 25% of income (20% for self-employed) or $52,000 Employee contributions cannot exceed $12,000
Catch-Up Contributions for Over Age 50 $1,000 $1,000 N/A $2,500 (as allowed by the plan)
Contribution Deadline April tax filing deadline of each year April tax filing deadline of each year Personal return tax filing due date of each year (including extensions) Business return tax filing due date of each year (including extensions)
Required Minimum Distributions (RMD) at Age 70 ½ Yes No Yes Yes
Phase-Out for Contributions Varies depending on whether you are covered by an employer’s retirement plan. See IRS website for more details.(1) $178,000 – $188,000 for Married Filing Jointly for 2013 N/A N/A
Withdrawals Before age 59 1/2 Earnings and deductible contributions subject to income taxes AND a 10% penalty. Withdrawals are proportional to all lifetime deductible/non-deductible contributions. Earnings are subject to income tax and a 10% penalty. Generally, withdrawals are treated as your contributions being withdrawn first (which are not subject to tax or the 10% penalty). Subject to income taxes AND a 10% penalty. Subject to income taxes AND a 10% penalty.
Notes: Great if you think you will be in a lower tax bracket in retirement. Great if you think you will be in a higher tax bracket in retirement. Also, these assets are good for “generational” monies to pass to heirs/children. Cheaper, easier alternative to a 401(k) or other expensive employer retirement plan. Cheaper, easier alternative to a 401(k) or other expensive employer retirement plan.

Note that with a traditional IRA, you could have deductible and/or non-deductible contributions to the account. However, with a Roth IRA, once your income gets above the phase-out, you are no longer able to contribute to the account. See also the IRS website on IRAs for more information.

(1) Read more: IRA deduction limits.
Since Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) aren’t common, see also the IRS website for more information: SEP IRAs and SIMPLE IRA. Note that if you participate in an employer plan (401(k), 403(b), etc.), your SIMPLE contributions apply to the $17,500 annual contribution limit for 2013 and 2014.

    Tell us about your retirement plans.
    Do you have an IRA?
    What types of IRAs do you use?
    What is preventing you from using an IRA?

Defining differences in IRAs: choosing what is right for you is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

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