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Tag: 401(k)

  • Beginning at age 72, you must withdraw money from your retirement accounts

    Beginning at age 72, you must withdraw money from your retirement accounts

    If you have money in an individual retirement account, once you turn 72, the Internal Revenue Service requires that you withdraw money from this account every year, even if you still work. (Note: The Secure Act of 2019 made changes to this rule. “If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first Required Minimum Distribution by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first Required Minimum Distribution by April 1 of the year after you reach 72.”)

    In effect, once you turn 72, the IRS requires you to stop saving all your money in your individual retirement account “IRA” or most other employer-based retirement accounts, such as 401(k), 403(b) and 457(b) plans. You must withdraw it over time. Unfortunately, when you withdraw the money, the government gets to tax it. Remember that any money that you put into these accounts went in tax-free, before taxes. And, any money in an IRA can appreciate without any taxes on the appreciation until you withdraw the money.

    • How much must you withdraw from your retirement account? The amount you are required to withdraw before the end of each year depends upon the amount in your IRA and your life expectancy. It is called the RMD or required minimum distribution. The total distribution can come out of one or more of your IRA accounts, if you have more than one. It does not have to come out of each one of them. But, the 401(k) and 457(b) distributions must come out of those accounts.
    • Can you withdraw more than the required minimum distribution amount? Yes. You will be taxed on whatever amount you withdraw that was deposited pre-tax; it will be counted as part of your taxable income and taxed at your income tax rate. It will not count towards your RMD for the following year.
    • Are there any retirement accounts not subject to the RMD? Any retirement accounts you have with after-tax contributions are not subject to the RMD and you are not required to withdraw money from them. This would include a Roth IRA, unless you inherited it.
    • When must you take your first distribution? You are permitted to take your first distribution in the April of the calendar year following the year you turn 72.  Put differently, you do not need to take a distribution in the calendar year you turn 72. But, you must then take another distribution by the end of that calendar year.
    • What if you forget to take a distribution? If for any reason you forget to take a distribution when you are required to, do so as soon as possible and complete an IRS form explaining why you forgot. Unless the IRS accepts your explanation, you may have to pay a big penalty if you do not take a distribution when you are required to. That penalty can be as much as half of the amount you should have withdrawn.
    • Must you spend the money you withdraw from your retirement account? You are not required to spend the money from your IRA after you withdraw it. You can reinvest it in a different taxable account if you do not need it, but not into a tax-deferred account. And, if you want to give the money in the IRA to a charity, you may distribute up to $100,000 from the IRA to the charity without paying any taxes on it.

    (Note: This article was updated to reflect the new withdrawal age of 72. It used to be 70.5)

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  • Without pensions, more people rely on Social Security

    Without pensions, more people rely on Social Security

    Axios reports that, increasingly, companies are doing away with pensions. As a result, younger adults are unlikely to have pensions, putting their retirement security at risk. Most probably, they will rely heavily on Social Security.

    Millennials and members of Generation Z are at greatest risk of not having adequate retirement savings. Pensions give workers guaranteed income in retirement. But, most companies today do not want to assume the cost of pensions, which provide defined benefits–guaranteed annual income. Pensions put the companies at risk if the stock market drops or retirees live long lives. Instead, companies may offer defined contribution plans, which do not guarantee a fixed amount of income each year.

    To avoid financial risk, companies are selling people’s pensions to insurance companies, putting workers’ savings at risk instead. If the insurance company fails or a person’s benefit was not calculated correctly, the person loses.

    Only 81 of the Fortune 500 companies offered a pension plan in 2017. Twenty years ago, 288 offered a pension plan. And many pension funds today do not have the funding they may need to pay out what they are supposed to pay out.

    Retirement savings accounts, including 401(k) plans come with no guarantees and often with fees. They provide less security than pensions, as they fluctuate with the stock market. If the stock market drops, 401(k) plans are likely not to generate the income expected.

    Some people buy annuities.  But they have costs and risks as well. The most cost-effective way to promote retirement security is by strengthening Social Security.

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  • Don’t count on 401(k) annuity investments for retirement security

    Don’t count on 401(k) annuity investments for retirement security

    Congress appears all too willing to steer more retirement savings to risky Wall Street investments, rather than protecting Americans against predatory actors. The Wall Street Journal reports that a bill just passed in the US House of Representatives would open up 401(k) accounts to more workers and allow them to buy annuities through these accounts. Beware of 401(k) annuity investments, which may come with high costs and no guarantees of additional income in retirement.

    The bill, Setting Every Community Up for Retirement Enhancement, or SECURE, Act, is allegedly designed to help people have more income in retirement. People are living longer and retirement costs are rising, making it more likely for people to end up spending all their assets while they are still living.

    For sure, we all need to save as much as possible, and it’s good for there to be incentives to do so. But, unlike Social Security, 401(k) plans often have high transaction costs. And, 401(k) investments tend to rise and fall with the market, potentially leaving people with little in retirement savings when they most need it. Giving people another costly and risky 401(k) option is of little if any help.

    The House bill is not about making it easier for people to save money or protecting their retirement investments. According to Amy Hubble, an adviser at Radix Financial LLC in Oklahoma City, the legislation is “an excuse to allow insurers better access to the $5 trillion U.S. 401(k) plan market.”

    The House bill is designed to promote 401(k) plan annuities–guaranteed monthly income in retirement. It allows people to invest their 401(k) money with insurers offering annuities. At the same time, the House bill protects employers responsible for choosing these annuity investment options even if the insurers are poorly rated by credit rating agencies, financially unstable, offer a low-value product or go out of business and don’t pay the annuity claims. It does not appear to protect consumers against these risks.

    Jeff Hauser of the Revolving Door Project at the Center for Economic and Policy Research told The Intercept that “This bill is an open invitation to prey upon people who are exceedingly likely to lack meaningful access to a lawyer.”  The bill allows insurers to charge high fees for their annuity products and to offer variable-income or indexed annuities that can end up delivering little if any income in retirement, as well as fixed income annuities.

    Rather than promote these risky annuities, why won’t Congress let people invest more money in Social Security for a guaranteed cost-effective annuity or better still, lift the cap on Social Security contributions?

    There are a few helpful provisions in the SECURE Act. Among other things, it would allow people to continue investing in IRAs past the age of 70.5. And, it would delay the time people must withdraw money from their retirement accounts until 72 from 70.5.

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  • Health care costs in retirement average $140,000

    Health care costs in retirement average $140,000

    Arielle O’Shea reports in Forbes that a couple who retires this year should expect to spend $280,000 on health care costs over the rest of their lifetime. Put differently, individual out-of-pocket health care costs in retirement now average $140,000. Not only is the amount extraordinary, but people’s 401(k) savings typically will not even cover their full health care costs.

    A person’s average 401(k) savings is $102,900, not even three-quarters (73.5 percent) of the estimated amount they will need to pay for health care in retirement. To help with retirement expenses, some people are pushing back their retirement date. The Employee Benefits Research Institute says that nearly one in four Americans are now saying they will not retire until age 70. A later retirement means lower health care expenses, more earned income and, usually, more earnings on your savings.

    That said, more than half of people surveyed by Fidelity Investments (56 percent) said that they had retired earlier than expected. If you retire before 65, you will likely have higher health care costs.

    Forbes advises that it is never too soon to plan ahead for health care costs and find ways to lower them. You should question your doctors’ orders and ensure you are not getting costly tests you do not need. Doctors are known to overprescribe tests and medicines. Always make sure you need the services and prescription drugs your doctor is recommending. You should find out whether you can change your diet and behavior to avoid taking prescription drugs.

    Also make sure that the doctors you see are in your health plan’s network.  If you are enrolled in traditional Medicare, you should not have to worry. Almost all doctors take Medicare. But, to keep costs down, you should make sure your doctors take assignment–that means that they accept Medicare’s approved rate as payment in full. If you are enrolled in a Medicare Advantage plan, you need to confirm you are seeing network doctors, especially if you are hospitalized. Many doctors in in-network hospitals who treat you may be out of network. And, make sure that any tests are sent to an in-network lab.

    Find out which preventive care services Medicare covers and talk to your doctor about whether you need them. Check out what the US Preventive Services Task Force has to say about them as well. Some tests may not be recommended. Keep in mind that your doctor may not know about Medicare-covered preventive services.

    If you have questions, Medicare offers free state health insurance assistance programs or SHIPs in every state. The SHIPs can guide you to free local resources and help you navigate Medicare.

    You might also want to have a written financial plan so you are best able to budget for your needs.
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  • Rescuing retirement with Social Security plus

    Rescuing retirement with Social Security plus

    In an article for Politico, Jacob Hacker lays out his vision for rescuing retirement–universal private retirement savings that become a defined benefit upon retirement, an annuity paid by Social Security –“Social Security Plus”–on top of Social Security benefits.  How much would this help working people in retirement?

    Hacker explains that as a result of flawed social policies over the last 25 years, government and businesses have laid tremendous economic risk onto working people and their families. Among other things, unions have lost their influence, companies have been less caring of their workers. As a result, people are at risk in their jobs, their health, their education and their shelter.

    Hacker describes this change as the Great Risk Shift. And, he says retirees have been hit particularly hard. No longer do most retirees have a defined pension. At best, if they are lucky, they might have a defined pot of money that can get wiped out by a market crash, which does not guarantee them set benefits. On top of that Social Security benefits have shrunk as a percent of retiree income from 50 percent at the end of the 20th century to 40 percent in the next several years.

    Today, it is projected that the majority of young workers will not be able to continue to live as they have while working when they retire. For that they need about 70 percent of pre-retirement income. In 1983, less than a third of them were at risk of not maintaining their standard of living in retirement.

    Inadequate retirement savings hurts retirees as well as the US economy. And, according to Hacker, the solution needs to be a resetting of the risk, not an admonition to people to save more. People need to be in a situation where they can save more automatically. They also need government protection of these savings, just as the government does with Social Security.

    Hacker has a plan, which includes these two smart solutions. Instead of the government subsidizing the retirement savings for the wealthy to the tune of some $200 billion a year through tax-deferred accounts such as 401(k) plans, the government should take that money to encourage retiree savings for people with lower incomes. He further suggests that Congress should expand Social Security by raising or removing the cap on payroll contributions and requiring contributions on investment income.

    Hacker also argues that Social Security benefits should be higher for vulnerable populations. And, rather than raising the retirement age, which hurts low-wage workers in particular, we should allow people to retire early but offer greater benefits if they can delay retirement.

    Hacker then makes the case that 401(k) savings plans should be universal. All workers should be able to take advantage of them. Today many are not. Hacker wants to require everyone to contribute to 401(k) plans to help ensure people save enough, with some opt out rights. But, his plan as described in Politico does not take into account that many, if not most, working people do not have any disposable income to spare.

    Hacker recommends that the $200 billion that subsidizes retiree savings of wealthy people today to go to match savings of lower-wage individuals. But, if these individuals cannot afford to save, his plan is of no help to them. Moreover, to the extent workers are able to save, 401(k) fees can eat into retiree savings significantly.

    To protect worker savings as much as possible, Hacker argues that 401(k) and IRA investments should be in low-cost index funds. On top of that, Hacker proposes turning these retiree savings into a defined benefit plan upon retirement, with guaranteed monthly income for life–essentially an annuity paid by Social Security–“Social Security Plus.” Hacker says that “We should make [Social Security Plus] the model for a transformed private system that actually provides retirement security.

    The unanswered question is how will this plan help the millions of workers who cannot afford to put money into a 401(k) plan? Removing the cap on Social Security contributions and allowing people to invest more money in Social Security in order to enhance their Social Security benefits seem like simpler and more compelling solutions for improving retirement security.

  • How to maximize Social Security benefits

    How to maximize Social Security benefits

    The Pew Charitable Trust released a report explaining how to maximize Social Security benefits. The report focuses on auto-IRAs, but the strategy applies to retirement savings more generally. If possible, it advises spending retirement savings to cover your needs after you retire, as a way to postpone claiming Social Security benefits.

    If you can delay claiming Social Security benefits from age 62 to age 70, you can increase your monthly benefits significantly. But even if you cannot hold off eight years, delaying four years to a full retirement age of 66, means about a 25 percent larger monthly Social Security check. And, even delaying one year can gain you between seven percent and eight percent more in Social Security benefits, depending upon your age.

    Today, most employer retiree plans are defined contribution plans, meaning that a particular amount of money is set aside for your retirement. Unlike defined benefit plans, which guarantee you a particular retiree income each year, defined contribution plans can go up or down with the stock and bond markets and offer no guarantees. So, the question becomes how to use your retiree funds wisely.

    If your employer does not offer you a retiree savings plan, many states are setting up auto-IRAs or “Secure Choice” programs. These programs automatically enroll you in a retiree savings plan that puts a percentage of your salary or wages into your retiree savings plan each month. You can opt out or change the percentage if you like. California, Connecticut, Illinois, Maryland and Oregon are in the midst of putting these auto-IRAs into place. In Oregon, employees automatically put 5% of their gross pay into their auto-IRAs in year one and 1% more each new year, with a 10% auto-contribution cap.

    The auto-IRAs, much like 401(k) plans and other employer retiree plans, would permit you to use the money in those accounts to postpone signing up for Social Security.  You could withdraw the amount you otherwise would have received from Social Security had you enrolled.

    By using auto-IRA or employer retiree plan funds to pay for expenses post-retirement, instead of enrolling in Social Security, you can increase your total retirement benefits. Married couples can benefit even more because when one of them dies, the surviving spouse will receive the higher of the couple’s individual benefits.

    Of course, not everyone will be able to make use of this strategy or benefit from it. For example, people in poor health or people with shorter life expectancies may want or need to claim Social Security benefits sooner. Moreover, if they delay claiming benefits and live a shorter than average life, their total lifetime benefits may be less than they would have received had they enrolled earlier.

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