T H E
Financial
Standard
SUMMER 2015
Crunching the Numbers:
A Retirement Income Planner
Carolie W. Johnson CLU, ChFC , CFP
Registered Principal
Carlton W. Johnson
Financial Consultant
Wildrick & Johnson Financial
10 Fairmount Ave.
Chatham, NJ 07928-2343
Tel:(973) 635-6272
Fax:(973) 635-6551
[email protected]
[email protected]
www.wildrickjohnson.com
The numbers don’t lie. With more of the population moving toward retirement and living
longer in retirement (see article on page 3) income generation and cash flow strategies
have risen to the top of the retirement planning priority list.
Today individuals from all demographic
groups—from young workers to retirees,
from the ultra-high-net-worth to those of
relatively modest means—may be concerned
about market volatility, the future of Social
Security and health care costs. As a result,
many investors have assumed a conservative
stance, and are more interested in increasing
their savings and holding on to what they
have accumulated than they are in taking
their chances in the often fickle stock market.
And when it comes time to roll up their
sleeves and get serious about planning for
retirement, cash-flow projections—or the
process of determining how much will be
needed to meet retirement income targets
and managing assets to ensure an adequate
income stream throughout retirement—are
of primary importance.
Creating “What-If” Scenarios
Enlisting the assistance of a financial advisor,
individuals will want to consider all potential
sources of income, all anticipated expenses,
and then assemble various hypothetical asset
allocations to determine the best scenario for
their unique situation.1 When conducting
this exercise it is prudent to maintain
conservative assumptions with regard to
investment returns and to factor in the
effects of inflation on regular household
expenses as well as bigger-ticket items, such
as health care premiums.
Once this initial analysis has been done, an
advisor can assist you in constructing
“what-if ” scenarios that present best and
worst case outcomes. For instance, if you are
particularly concerned about Social Security,
you may want to review your estimated
benefit statement, available on the Social
Security Administration’s website, and then
reduce that amount by 25% to 50% to give
you a ballpark figure to plan around. This
approach may take some of the anxiety out
of one of the big “unknowns” in the planning
process and help you to prepare accordingly.
From Planning to Implementation
Once you are armed with some planning
foresight, you can begin to take steps to
address gaps in your retirement income
strategy. For instance, you may resolve to
save more. Or you may determine that
retiring a few years later than originally
planned will help to extend savings and
1
Asset allocation does not assure a profit or protect
against a loss.
(Continued on back)
Securities Offered Through LPL Financial, Member FINRA/SIPC
After-Tax 401(k) Contributions:
More Attractive
Than Ever
If you are a high-earning individual who is not taking
advantage of after-tax contributions to your employersponsored retirement plan, now may be the time to
do so. Recent guidance from the Internal Revenue
Service has made after-tax 401(k) contributions more
attractive than ever.
A Simplified Process
Now the IRS has authorized individuals holding both pretax
and after-tax amounts in a 401(k) or similar qualified retirement
plan to transfer—through direct, trustee-to-trustee rollovers—
the pretax portion of a distribution to a traditional IRA and the
after-tax portion of a distribution to a Roth IRA.1 Prior to the
new ruling, plan participants could only accomplish this end
result through more complicated, indirect 60-day rollovers, not
through simplified direct rollovers.2
It should be noted that while the new rule can be used when
distributing money from either a regular 401(k) or a Roth-style
401(k), the real benefit comes when the after-tax contributions
reside in a regular 401(k). In this case, the plan participant can
move after-tax dollars from a tax-deferred account to a tax-free
account with no upfront costs, in what essentially amounts to a
tax-free conversion.1
Importantly, the IRS has stated that all disbursements—both
pretax and after-tax—from a retirement plan made at the same
time will be treated as a single distribution even if they are sent
to multiple new accounts. Prior to the ruling, the IRS treated
distributions from a retirement plan that were rolled over to
multiple new accounts as separate distributions, each requiring
that a proportional share of pretax and after-tax monies be
disbursed.3 While the new rule does not change the IRS’s
determination of what portion of a distribution comes from pretax
money or after-tax money, it does simplify the process by treating
all disbursements made at the same time as a single distribution.
How It Works
If you are left wondering how the “proportional share” rule
works under the new IRS guidance, consider this example.
You have an account balance of $250,000 that consists of
$200,000 in pretax money and $50,000 in after-tax money—
held in a regular, not Roth, 401(k). You separate from service
and request a distribution of $100,000. The pretax amount of
your distribution would consist of $80,000 and the after-tax
amount would be $20,000. Under the new rules, you would be
permitted to roll over the entire $80,000 of pretax money to a
traditional IRA and the entire $20,000 of after-tax money to
a Roth IRA.3 (Note: Be sure to communicate to your plan
administrator in advance which dollars—after-tax or pretax—
are to be transferred to which IRA.)
A New Opportunity
The new IRS guidelines present a powerful opportunity for
those whose employer accommodates after-tax contributions
to truly maximize their retirement savings. With the current
annual pretax contribution limit of $18,000—or $24,000 for
individuals age 50 or older—high-earning employees who are
not making after-tax contributions are missing out on the
chance to save significantly more (the total cap on additions to
defined contribution plans is $53,000 in 2015, or $59,000 for
those age 50 and up), while also reaping the full benefits of
both traditional and Roth IRAs when the time comes to
distribute plan assets.
1
Fairmark.com, Tax Guide for Investors, “Isolating Basis for a Roth
Conversion,” September 23, 2014.
2
The Internal Revenue Service, Notice 2014-54, “Guidance on Allocation of
After-Tax Amounts to Rollovers,” September 18, 2014.
3
The Internal Revenue Service, Employee Plans News, December 23, 2014.
The Roth IRA offers tax deferral on any earnings in the account.
Withdrawals from the account may be tax free, as long as they are
considered qualified. Limitations and restrictions may apply. Withdrawals
prior to age 59 may result in a 10% IRS penalty tax. Future tax laws can
change at any time and may impact the benefits of Roth IRAs. Their tax
treatment may change.
Life Expectancy and
Your Financial Future
New research indicates that Americans are living longer than previously
estimated. How might a longer lifespan impact your financial future—
and what steps can you take to help ensure your money lasts as long as
you will need it to?
What the Data Said
In the nearly 15 years since the Society of
Actuaries (SOA)—the largest professional
association for actuaries in the United
States—published its last major findings
on longevity, the life expectancy of men
age 65 has risen two years, from age 84.6
in 2000 to age 86.6 in 2014. Similarly,
among 65-year-old women, longevity
rose 2.4 years, from age 86.4 in 2000 to
age 88.8 in 2014.1
While the new data is aimed primarily
at helping retirement plan sponsors and
public policy makers in assessing the
financial implications of longer lives,
it can also be a useful tool in helping
individuals—particularly retirees or
those nearing retirement—to reassess
their own financial plans.
Two More Years
How might those additional two years of
life impact your retirement outlook? In
general, it could mean that the average
person might experience a retirement that
lasts approximately 10% longer than
originally expected. That added time may
require individuals to rethink their
retirement accumulation and/or distribution
plans and make adjustments as needed.
For instance, workers still accumulating
retirement assets who had an estimated
savings goal of $1 million might now
need to increase that amount to $1.1
million to finance those two added years.
Similarly, current retirees might need to
scale back on their annual withdrawal
in order to create reserves for the added
time spent in retirement.
Increased longevity could also translate
into reduced Social Security benefits—
both for recipients who choose to retire
before their normal age as well as for those
who choose to delay receiving benefits.
Given these potential outcomes, there are
some important but manageable steps
that retirees or those near retirement can
take now to help ensure their money lasts
throughout their lifetime.
Proactive Planning Helps
Perhaps the most important way to help
safeguard retirement income is to keep a
close eye on cash flow. For retirees, that
means keeping a detailed budget with an
itemized accounting of income and
expenses on a monthly, quarterly and/or
annual basis. For those not yet retired,
developing some general budget projections
may help you anticipate and plan ahead
for future income and expenses.
Yet even the best laid plans may veer off
track due to circumstances and events
that are impossible to predict. As you
monitor your finances, keep the following
factors in mind.
n
Inflation and health care costs
n
Interest rate trends and market moves,
which could result in an increase or
decrease in income from your savings
and investments
n
Changes in federal, state and local tax
rates and regulations
n
Changes in Social Security or Medicare
benefits or eligibility, as well as new
rules affecting employer-sponsored
retirement benefits and private
insurance coverage
n
Life events that could affect your
cash flow, such as marriage, the death
of a spouse or the addition or loss of
a dependent
By working together with your
accountant or other financial professional
you can make a plan that takes into
account not only the predictable financial
hurdles you will face in retirement, but
also the many contingencies over which
you have little or no control.
1
Society of Actuaries, press release, “Society of
Actuaries Releases New Mortality Tables and an
Updated Mortality Improvement Scale to Improve
Accuracy of Private Pension Plan Estimates,”
October 27, 2014. The calculations presented
are based on public mortality tables, which were
developed with certain populations in mind,
and reflect probabilities based on averages in
large populations.
A Retirement Income Planner
(Continued from page 1)
Understanding TaxableEquivalent Yields
enhance Social Security benefits. Another
resolution may be to spend less by paring back
on luxuries and relying less on credit cards.
Municipal bonds have historically been a haven for high-net-worth
investors because their income returns are generally free from federal
income taxes and, in some cases, state and local income taxes.
Due to their favorable tax status, municipal bonds can provide yields
equivalent to those of taxable bonds with higher pretax yields. Hence the
term, “taxable-equivalent yield” to describe the comparison.
To illustrate the concept, the table below shows the yield an investor would
need to earn on a taxable investment to achieve the same result as on a tax-free
investment. For example, an investor in the 35% tax bracket would have to
earn a yield of 6.15% on a taxable investment to achieve the same after-tax
result as an investor earning a yield of 4% on a tax-free investment.
Municipal Bond Taxable-Equivalent Yields at a Glance
Tax-Free Equivalent
Tax Rate
2%
3%
4%
5%
6%
7%
8%
9%
10%
2.22%
3.33%
4.44%
5.56%
6.67%
7.78%
8.89% 10.00%
15%
2.35%
3.53%
4.71%
5.88%
7.06%
8.24%
9.41% 10.59%
25%
2.67%
4.00%
5.33%
6.67%
8.00%
9.33% 10.67% 12.00%
28%
2.78%
4.17%
5.56%
6.94%
8.33%
9.72% 11.11% 12.50%
33%
2.99%
4.48%
5.97%
7.46%
8.96% 10.45% 11.94% 13.43%
35%
3.08%
4.62%
6.15%
7.69%
9.23% 10.77% 12.31% 13.85%
39.6%
3.31%
4.97%
6.62%
8.28%
9.93% 11.59% 13.25% 14.90%
Source: ChartSource®, Wealth Management Systems Inc. Does not consider the
effects of the 3.8% surtax on investment income for high-income taxpayers, nor
does it consider state taxes. Municipal bond interest may be subject to the alternative
minimum tax. It is not possible to invest directly in an index. Past performance is not
a guarantee of future results. (CS000008)
© 2015 Wealth Management Systems Inc. All rights reserved. Not responsible for any
errors or omissions.
Rethink Your Investment Strategy
In terms of investments, another strategy may be
to opt to pursue higher returns. History shows
that stocks have proven to be the one asset class
that has the best chance of outpacing inflation
over time—a key necessity for retirement
portfolios.2 On that score, high-quality dividendpaying stocks may be a prudent way to maintain
some exposure to stocks while also creating a
source of income.3
Other income-oriented investments to consider
holding in a retirement portfolio include:
Municipal bonds. Within the universe of fixed
income, municipal bonds may be one of the
better choices for individuals in or approaching
retirement, especially for those in higher income
tax brackets or who live in states with high
income taxes. Interest earned on municipal bonds
is typically exempt from federal income taxes and
may be exempt from state and local income taxes
as well (see sidebar to left).4
Guaranteed income instruments. You may
want to consider including a source of guaranteed
income in your retirement arsenal, particularly if
you are concerned about outliving your assets.
One such vehicle is a fixed annuity. Fixed annuities
earn a guaranteed rate of interest for a specific
period of time—a feature that can be helpful when
forecasting your regular cash flow in retirement.5
Keep in mind, however, that one annuity can be
very different from another, and the rules are
complex. Be sure to consult with your financial
advisor before investing.
2
Past performance does not guarantee future results. Investing
in stocks involves risk, including loss of principal.
3
Companies that offer dividend-paying stocks cannot
guarantee that they will always be able to pay or increase their
dividend payments.
4
Any capital gains are taxable for federal and, in most cases,
state purposes. In addition, some municipal bonds may be
subject to the federal alternative minimum tax. Municipal
bonds are subject to availability and change in price. They
are subject to market and interest rate risk if sold prior to
maturity. Bond values will decline as interest rates rise.
Interest income may be subject to the alternative minimum tax.
5
Guarantee is provided by the issuing insurance company.
The opinions voiced in this newsletter are for general information only and are not intended to provide specific advice or recommendations for any individual.
To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.
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