The Value of Time
When recent retirees are asked whether they would have done anything differently about their retirement planning process, many say they wish they’d started sooner. The mistake that people at all income levels make with retirement accounts is not starting at a younger age.
Time is an important ally when saving and investing, because it allows you to recover from periodic bouts of market volatility. It took five and half years after the vertigo-inducing drop that deleted $11 trillion from stock portfolios for the Dow Jones Industrial Average to regain all of its losses and reach a new high. Those who did not panic and sell their stock investments in 2008-2009 have fully recovered.
Having time on your side makes it easier to accumulate money for retirement, because those who start early don’t have to set aside as much every month. Each decade you delay starting to save means you’ll have to approximately double your savings rate to meet your goal. For example, if socking away 5% per year starting in your early 20 will get you to your goal, waiting until your 30s may mean having to save 10%, and so on.
Time gives you the luxury to be able to develop a plan, and to adjust your savings strategy as you move through your first job, while building your career and preparing for the transition to retirement.
While you’re young, it’s fun to spend money and live in the moment. But, if this describes your philosophy of money, you should motivate yourself to start saving sooner. The longer you wait to save, the more you ultimately will need to save. By making small adjustments in your savings rate now, the easier it will be for you in the long run.
(c) 2013 Kmotion, Inc.*
*Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com
This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.
Plan Sponsors Ask…
Q: Women are better retirement savers but still lag behind men in outcomes. What gives?
A: Indeed, there is a noteworthy imbalance in retirement wealth accumulation among men and women. Men consistently come out ahead, despite women’s superior savings behaviors.
Women are more likely to save, but men have higher account balances, according to a Vanguard white paper. Its data shows that women are 14% more likely than men to participate in their employer-sponsored retirement plan. Further, once enrolled, women save at higher rates—typically 7%-16% higher than men. Don’t “autopilot” provisions like auto-enrollment equalize things? On the participation front, yes; for savings, no. Among auto-enroll plan participants, men and women participate at similar rates, but men defer at 5% higher rates. Moreover, women are conscientious savers, and auto-enrollment provides them an advantage. Sixty percent fall into lower wage brackets than men, but lower-income individuals experience more positive impacts on savings due to auto-enrollment. What’s more, higher incomes cancel out default features. Among male Vanguard participants, average wages were 25% higher, accounting for higher contribution rates by men in auto-enroll plans. In voluntary-enroll plans, women save at 6% higher rates. Vanguard’s paper highlights a lingering income disparity between men and women and shows that American employers have more work to do to close the gender gap in retirement outcomes.
Read more at http://tinyurl.com/WomenAreBetterSavers.
Q: Many younger participants are simultaneously saving for retirement and paying off student loans. How do we help them successfully accomplish both?
A: Putting off retirement savings to pay down student loans is among the biggest financial mistakes younger workers can make.
In fact, LIMRA found that a 22-yearold with $30,000 in student loan debt could have $325,000 less in savings at retirement than his or her debt-free counterpart. So what’s a plan sponsor to do? Emphasize holistic financial well-being by:
• Encouraging DC plan participants to make the minimum monthly payments on their student loans, and also reminding them to save enough in their retirement plan to get matching contributions. According to Financial Engines, 1 in 4 employees don’t take advantage of the match, meaning they’re leaving up to $43,000 on the table over 20 years.
• Emphasizing creating an emergency fund for unforeseen expenses so they won’t be tempted to borrow from their retirement account or use credit cards.
• Advising them to direct any remaining funds strategically, either by paying down high interest student loans or investing more into their retirement portfolios and putting the money to work through compounding.
• Encouraging participants to stash that extra cash in their retirement accounts once their debt is paid off. Many experts say workers should be saving 15% of their income by age 25 to ensure a comfortable retirement.
Visit http://tinyurl.com/LIMRAStudentLoanResearch and
http://tinyurl.com/StudentDebtVsRetirement to find out more about helping workers save for retirement while paying off student loans.
For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.
Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com © 2016 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.
How people get as much as 88% more from Social Security!
Many people may be unaware of the impact various decisions can have on their ultimate social security benefit amount. Timing of election, work income, taxes, spousal benefits, etc., must all be considered in effective social security benefit planning.
Regarding the timing of elections, for example, according to a recent study covered by CNBC, someone who retires and begins claiming Social Security at age 70 would receive a benefit that’s 76 percent higher than the one he or she would receive at age 62. The CNBC piece points out that if you factor in late-career earnings replacing a zero-income year, the increase can become as much as 88 percent for women and 82 percent for men.
At Frye Retirement we are familiar with the complicated algorithms, and can crunch the numbers and guide you with any of your social security planning questions. For the full CNBC piece click here: how to get 88% more from social security.
There’s still time for 2016 tax savings…but it is running out!!
With proper 401(k) retirement plan design techniques, clients can reduce taxes, improve owner benefits, and lower employee costs:
$53,000 individual deduction limits for 401(k)/profit sharing plans. If 50 or older, up to $59,000 can be funded into 401(k).
Contributions of up to $300,000 for small business owners in Defined Benefit plans (depends on age and service).
IRS tax credit of $500 per year for the first 3 years of the plan for installation and administrative costs if your client has employees.
Uni-K plan to maximize deductions for self-employed, owner-only or owner-spouse business owners with low W-2 wages (i.e. deduct $28,000 with only $40,000 in wages; if 50 or older, deduction increases to $34,000.
DON’T DELAY: Plans must be adopted by December 31, 2016 (but plans don’t have to be funded until 2017).
Rx: Seven Steps to Financial Wellness
The goal of good health should be at the core of decisions you make about money.
As any wise person will tell you—and many have, from the Roman poet Virgil to Gandhi—health is wealth.
The irony is that the converse is also true—a growing body of research suggests that financial problems actually can lead to health problems. Financial stress has been shown to cause anxiety, migraines, sleep disorders and other physical ailments, including high blood pressure and heart disease.1 And it’s not a rare occurrence. A 2015 survey by the American Psychological Association (APA) showed that 72% of Americans reported feeling stressed about money at least some of the time during the past month.2 Stress levels are particularly high among parents, younger generations and those living in lower-income households. Over the past decade, psychologists coined the term Money Anxiety Disorder (MAD) to describe a condition of constant worry and unease about money. The emotions that arise from worrying about money can lead to health issues that affect job performance, relationships, and feelings about work-life security.
What triggers financial stress?
Not all people react the same to financial roadblocks, but there are several major causes of money-related stress:
• Fearing the possible loss of a job
• Comparing financial situation to others’ — being anxious of “having enough”
• The effects of piling debts
How to face health-related money anxiety
Many Americans resort to eating unhealthy foods, or eating and drinking to excess, as coping mechanisms for financial stress. Health experts warn this can lead to long-term health issues, and instead they recommend deep breathing exercises, which have a proven calming effect on the central nervous system. Regular exercise and sticking to a healthy diet can also be very helpful.
De-stressing about money
Financial experts often suggest taking a direct approach to analyzing your relationship with money so that you can manage financial stress. Some recommend taking one or more of the following steps that can help lead to financial wellness.
1. Understand the role of good health in your life – Money is never a substitute.
2. Prioritize your savings and control your spending – Warren Buffett said it best: “Do not save what is left after spending, but spend what is left after saving.”
3. Budget – You cannot manage your finances without a plan.
4. Plan for life events – Experts suggest setting aside specific “buckets” for nearterm emergencies, education and long-term retirement.
5. Locate a trusted source for advice – This could be a colleague at work, an investment professional or a close relative who is sensible about money.
6. Participate – Get the most out of the benefit programs you’re offered at work.
7. Choose carefully – Select “sleep well” investments that don’t cause anxiety.
By following these guidelines, you’ll be able to put financial wellness in the right perspective. Ultimately, the goal should be to know how to deal honestly with your feelings about money in ways that don’t compromise your health.
Good News on Tax Saver’s Credits
Laws that were enacted as part of the Bipartisan Budget Act of 2015 include new rules that could mean larger tax credits for some workers.
Bigger Retirement Savings Contributions Credit
The Saver’s Credit is an important tax credit that many American workers who save for retirement may be missing out on. Low and moderate-income savers who meet IRS requirements may be able to take a bigger tax credit (“Saver’s Credit”) of up to $2,000/$4,000 (singles/couples) for making eligible contributions to an employer sponsored retirement plan or IRA. To see if you qualify, visit www.irs.gov and enter “Do I qualify for the Retirement Savings Contributions Credit?” in the search box.
