Newsletter July 2015 Behind on Your Retirement Savings? What steps could you take to catch up? If life has not allowed you to build substantial retirement savings, what can you do to improve your retirement prospects? Here are some suggestions. Play catch‐up. If at all possible, take advantage of the catch‐up contributions the IRS allows you to make to IRAs and other retirement accounts starting in the year in which you turn 50. For example, this year a worker age 50 or older can put $24,000 into a 401(k) account compared with $18,000 for someone younger.1 Get the match. If your employer matches your retirement plan contributions to some degree when you contribute to a workplace retirement plan at a certain level, you should make every effort to get the match and take advantage of what amounts to an offer of free money. Work a little longer. More years contributing to retirement accounts means additional inflows into those accounts, and additional growth and compounding for those assets. It means you claim Social Security later, resulting in a larger monthly benefit. It also leaves you with fewer years of retirement that you must fund. Alternately, think about working a little early in retirement. It is true, your Social Security benefits could be docked as a result – but the tradeoff might be worthwhile. If you are a Social Security recipient and younger than full retirement age in 2015, Social Security will withhold $1 in benefits for every $2 you earn over $15,720. This is called the Social Security earnings test. Social Security essentially balances this penalty out, however, by boosting your benefit as you reach full retirement age – and for that matter, you can earn as much as you want at full retirement age or later with no reduction to your benefits.2 If you retire at 62 and make $25,000 a year through a part‐time job you hold during the first five years of your retirement, you are putting a dent in any Social Security income you receive until age 67 – but that $25,000 yearly income can represent $25,000 you do not have to withdraw annually from your retirement savings. You could also invest some of that income, and the annual yield on your investment could exceed annual consumer inflation. Not a bad move in many eyes. Think about long‐run growth investing. One of the biggest risks retirees face is the erosion of purchasing power. Some seniors invest in such a risk‐averse way that they lose ground versus even minor inflation. Keeping a foot (or both feet) in the market may be essential if your retirement nest egg is small – not just because it needs to grow, but because it will need to grow faster than inflation. Whittle down your debt. As Ben Franklin wrote in the 1758 edition of Poor Richard’s Almanac, “A penny saved is a penny got” (he never actually said “a penny saved is a penny earned”). While you may be thinking “mortgage,” reducing your credit card debt can produce the savings you want now. So can eliminating certain household expenses. Speaking of family expenses...3 Tell your adult children that you will not be supporting them. If you desperately need to catch up on your retirement savings effort, the last thing you want to do is provide your kids with a financial lifeline. You have 15 years or less until retirement; they may have 40 or 45. Helping them pay off their college loans may feel like the right thing to do for them, but it is not the right thing to do on behalf of your retirement. Take one crucial step before you pursue any of these options. Turn to a financial professional to see what kind of retirement income you may need to live comfortably. (Any such consultation should include a Social Security analysis.) When you retire, having adequate income becomes just as important as having adequate savings. Taking a Loan from Your Retirement Plan = Bad Idea Why you should refrain from making this move. Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice about that, because these loans are not only risky but injurious to your retirement planning. A loan of this kind damages your retirement savings prospects. A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan. So in borrowing from a 401(k), 403(b), or 457, you siphon down your invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.1 Most plans charge a $75 origination fee for a loan, and of course they charge interest – often around 5%. The interest paid will eventually return to your account, but that interest still represents money that could have remained in the account and remained invested.1 Your contributions to the plan may be halted. Some workplace retirement plans suspend regular employee salary deferrals when a loan is taken. They can resume when you settle the loan.1 Your take‐home pay may be docked. Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored.1 If you leave your job, you will quickly have to pay 100% of your loan back. This applies if you quit; it applies if you are laid off or fired. You will have 30‐60 days (per the terms of the plan) to repay the loan in full, with interest.2 If you are younger than age 59½ and fail to pay the full amount of the loan back, the IRS will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty.1,2 Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1 Would you like to be taxed twice? When you borrow from an employee retirement plan, you invite that prospect. One, you will be repaying your loan with after‐tax dollars. Two, those dollars will be taxed again when you withdraw them for retirement (unless your plan offers you a Roth option).1 Why go into debt to pay off debt? If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks. You should never confuse your retirement plan with a bank account. Some employees seem to do just that – in 2013, Fidelity researched participants in its retirement plans and found that 66% of those who had borrowed from 401(k)s had done so more than once. No doubt they became acquainted with the above dilemmas in the process.1 In a recent TIAA‐CREF survey, 44% of those who had taken loans from their 401(k) plans said they regretted doing so. Why risk joining their ranks? Look elsewhere for money in a crisis, and borrow from your employer‐
sponsored retirement plan only as a last resort.2 Citations Behind on Your Retirement Savings 1 ‐ money.usnews.com/money/retirement/articles/2014/12/01/how‐to‐max‐out‐your‐retirement‐accounts‐in‐2015 [12/1/14] 2 ‐ ssa.gov/retire2/whileworking2.htm [7/2/15] 3 ‐ forbes.com/sites/realspin/2014/08/18/a‐penny‐saved‐was‐never‐a‐penny‐earned/ [8/18/14] Citations Taking a Loan from Your Retirement Plan = Bad Idea 1 ‐ cnbc.com/id/101848407 [9/14/14] 2 ‐ mainstreet.com/article/why‐you‐cant‐borrow‐your‐401k‐and‐only‐way‐you‐should [7/24/14] This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note ‐ investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.