We are now crossing a zone of turbulence. The Captain has turned on the fasten seat belt sign. Please remain seated. Thank you.

Human Investing serves as a fiduciary on a variety of employer-sponsored retirement plans. We get the opportunity to meet with individuals with different vocations, interests, and life goals.  This is because we advise retirement plans ranging across different industries, different ownership structures, and different geographic locations. We have also established on-site client visits at different points in the year.

Over the years, we have provided advice throughout different market highs and lows.

That’s a lot of differences.

Despite these differences, we have a similar conversation with each retirement plan participant. We remind participants that it’s the decades and not the days that are important for building one’s retirement savings. Given the current market volatility, it’s not surprising that we have been receiving more phone calls than usual. And these calls are welcomed! It is our job to ensure that participants feel equipped and empowered to survive this turbulence.

Both financially and emotionally, one of the best ways to thrive in market volatility is to ensure that you have created a sound strategy for your 401k account.

What do we think is a sound strategy?

When we meet with 401k participants, we discuss their expected retirement age and then check these three boxes:

1. Savings Rate

2. Tax Advantages

3. Investment Strategy

Your retirement horizon is a key driver for the synchronization of tax advantages, a contribution amount, and an investment strategy geared for your retirement age. If we have spoken before, then we would have checked these boxes. Note that market volatility in and of itself does not uncheck boxes, but it often prompts us to review our account setup. 

If you are not expecting to access your dollars soon, then my gentle reminder to you is as follows: by doing nothing, you are doing something. If you sustain your contribution rate and remain invested in the stock market, your account will grow over time. To illustrate this concept, see the chart our team created to show the importance of being invested today.

Total values (assuming a 7% annual rate of return and an inflation rate of 3.22%). Actual results will vary.

Lastly, and most importantly, we recognize that today is stressful. We feel it, too. Quite frankly, there is something for everyone to worry about. Please take precautions and be mindful that your mental and physical health is of utmost importance during this time.

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@emilegt

We have all been told to save for retirement.  We need the “Magic Number” before we can retire.  What about having debt during retirement?  Most retirement planning calculators ignore debt and debt payments can limit the amount of future income and can wreak havoc on retirement.  A comprehensive financial plan considers debt in the retirement equation providing a tool and process to fully answer the retirement questions.

Studies Show Debt is Increasing for those Entering Retirement

More of us than ever before have debt going into retirement.  A study by Lusardi, Mitchell and Oggero entitled “Debt Close to Retirement and Its Implications for Retirement Well-being,” quotes numerous findings demonstrating that those nearing retirement have increased borrowing at all economic levels.  Based on a 2015 NFCS survey of persons from age 56 to 61, 37% had mortgages, 11% had home equity loans, 14.6% still had student loan debt, 29.6% carried auto loan debt and, 36.4% had credit card debt with a balance paying interest.  And more concerning, 23% had what they called, “expensive credit card behavior” meaning, “paying the minimum only, paying late or over-the-limit fees, or using credit cards for cash advances.”  

Debt is a Presumption of the Future

When we take out debt, we presume that we will have future income that will both cover living expenses and the additional payments we promise to make.  We effectively reduce our future income.  For the retiree with adequate income and assets, debt might be okay.  The retiree that has cash in an account to purchase a car that takes a no interest loan might come out ahead.  And at any time, they have the power to pay off that debt.  However, often debt is a decision that can cripple future living.

Debt in Retirement Limits Lifestyle

Of course, a debt payment means higher total expenses, but it doesn’t stop there.  Debt usually means more expense due to the added interest.  Additional debt and interest require higher retirement distributions.  Higher distributions from IRA accounts increase taxable income and can increase the likelihood Social Security income will also be taxed.  And for many, the result of the compounding expenses due to debt eventually lead to the need for a cut to lifestyle and live on less. To the 23% with “expensive” debt behavior in the study, even more expenses come due to late payments and higher interest costs which further the cycle of limits on lifestyle.

Financial Planning Answers the Questions

While some debt might be considered “okay”, most we know is not.  How do we know?  The answer comes in a financial plan.  It pulls together all the other pieces of the story and provides a structure to answer the question.  A financial plan provides possible options, strategies and answers.  It is a tool and process that fully answers the retirement equation.  Do I have enough for retirement, including debt?

Want to create your financial plan today?

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Many of the blogs that we post reference strategies on how to save for retirement and how many Americans need to save more than they currently are (or else you might end up like this.)

However, in addition to saving, many of us will be a recipient of a retirement account via a loved one or acquaintance passing away. Will Kellar and I had the idea to consolidate some good resources online and provide a road map for beneficiaries as they look to navigate best practices when they are on the receiving end for one of these accounts. In a season of loss, remember we are here to help navigate this difficult time.

You are listed as a beneficiary, are you the SPOUSE or OTHER?

You are a spouse listed as a beneficiary

 

Traditional, SEP IRA, or SIMPLE IRA

Option 1: Transfer the assets to your own IRA

Benefits

• Dollars can continue to grow tax-deferred.

• Designate your own beneficiaries.

Next steps

• This option is only available if you are the sole beneficiary.

• All that’s needed is to roll the funds into your existing IRA or open a new IRA to roll the funds into.

When is the money available?

• You can access funds at any time, but a penalty will apply to distributions made before 59 ½.

• After 70 ½ your account will be subject to normal required minimum distributions.

This might make sense when

• If you are over age 59 ½ this option often can make sense because it provides flexibility on beneficiaries you can designate, you have the full ability to access funds. Additionally, if you are between 59 ½ and 70 ½ you might be taking yourself out of a Required Minimum Distribution (RMD) scenario.

Option 2: Transfer the assets to an Inherited IRA

Benefits

• Dollars can continue to grow tax-deferred.

• You will not have to pay a 10% early withdrawal penalty.

• You can designate your own beneficiaries.

Next steps

• You can transfer assets into Inherited IRA in your name.

• If there are multiple beneficiaries you must establish a separate account by December 31st following the year of death in order to use your own life expectancy. If you miss this deadline RMD’s will based off of oldest beneficiary.

When is the money available?

• You can access funds at any time.

• Your life expectancy may be used to calculate RMD’s.

If the original account holder was under 70

• RMD must begin by the later of:

  • December 31 following the year of the original account.

  • December 31 of the year in which the original account holder would have reached 70 ½.

• If the original account holder was 70 ½ or older:

  • RMD’s must start by December 31st of the year after death.

  • If the original account holder did not take RMD for the year in which he or she died, you must take at least that amount as a distribution by the end of the current year.

This might make sense when

• If you are under 59 ½. By transferring to an Inherited IRA you provide yourself flexibility in three ways:

1. You have the option to withdrawal funds penalty free based on your life expectancy. So if you would like the money over time this is a great choice.

2. You also have the choice to start RMD’s based on when your deceased spouse would have turned 70 ½.

3. If you are hoping to use all of the funds in the next 5 years there is a provision called the “5-year method” that allows for distribution of all funds without paying penalties over the first 5 years of the account being open.

Option 3: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty (think of this as following the 5-year rule).

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• All at once.

• Taxable portion of the distribution will be considered taxable income.

This might make sense when

• You have an immediate need for the funds.

Qualified Retirement Plan (401(k), 403(b), etc.)

Option 1: Leave it in Plan (this is dependent upon plan rules)

Benefits

• Dollars can continue to grow tax-deferred.

• You will not have to pay a 10% early withdrawal penalty.

• You can designate your own beneficiaries.

Next steps

• You can transfer assets into Inherited IRA in your name.

• If there are multiple beneficiaries you must establish a separate account by December 31st following the year of death in order to use your own life expectancy. If you miss this deadline RMD’s will based off of oldest beneficiary.

When is the money available?

• You can access funds at any time.

• Your life expectancy may be used to calculate RMD’s.

If the original account holder was under 70

• RMD must begin by the later of:

  • December 31 following the year of the original account.

  • December 31 of the year in which the original account holder would have reached 70 ½.

• If the original account holder was 70 ½ or older:

  • RMD’s must start by December 31st of the year after death.

  • If the original account holder did not take RMD for the year in which he or she died, you must take at least that amount as a distribution by the end of the current year..

This might make sense when

• You are needing to by some time and do not have trusted place to open an IRA this is a great option. Ultimately, in our opinion having these dollars end up either in an IRA in your name or an inherited IRA often providing additional flexibility.

Option 2: Transfer the assets to your own IRA

Benefits

• Dollars can continue to grow tax-deferred.

• Designate your own beneficiaries.

Next steps

• This option is only available if you are the sole beneficiary.

• All that’s needed is to roll the funds into your existing IRA or open a new IRA to roll the funds into.

When is the money available?

• You can access funds at any time, but a penalty will apply to distributions made before 59 ½.

• After 70 ½ your account will be subject to normal required minimum distributions.

This might make sense when

• If you are over age 59 ½ this option often can make sense because it provides flexibility on beneficiaries you can designate, you have the full ability to access funds. Additionally, if you are between 59 ½ and 70 ½ you might be taking yourself out of a Required Minimum Distribution (RMD) scenario.

Option 3: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty (think of this as following the 5-year rule).

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• All at once.

• Taxable portion of the distribution will be considered taxable income.

This might make sense when

• You have an immediate need for the funds.

ROTH IRA

Option 1: Transfer the assets to your own IRA

Benefits

• Dollars can continue to grow tax-deferred.

Next steps

• If you are the sole beneficiary you can transfer funds into your existing or new ROTH IRA.

• If you are one of multiple beneficiaries, you must take your share as a distribution and roll into a ROTH IRA within 60 days.

When is the money available?

• You can access funds at any time.

• Distributions are generally tax and penalty free if you are over 59 ½ or qualify for a penalty free exception and have met the five-year holding period. Schwab provides guidance if you are looking for what rules apply to you if you are looking to distribute funds.

This might make sense when

• You plan to take distributions based on when you turn 59 ½ not the beneficiary.

Option 2: Transfer the assets to an Inherited ROTH IRA

Benefits

• You bypass the 10% early withdrawal penalty.

Next steps

• Transfer assets into Inherited ROTH IRA held in your name.

• If there are multiple beneficiaries, separate accounts must be established by December 31st following the year of death in order to use your own life expectancy; otherwise RMDs will be based on the life expectancy of the oldest beneficiary.

When is the money available?

• You can access funds at any time.

• Any earnings are generally tax free if the five-year holding period has been met.

• Your life expectancy may be used to calculate RMDs.

Annual distribution (RMDs) must begin by the later of:

• December 31 following the year the original account owner died or

• December 31 of the year when the original account holder would have reached 70 ½

You may also follow the five-year rule under which the account must be fully distributed by December 31 of the fifth year following the year of death.

Option 3: Take a lump sum distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• All at once.

• Distributions are generally tax and penalty free if you are over 59 ½ or qualify for a penalty free exception and have met the five-year holding period.

This might make sense when

• You have an immediate need for the funds.

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You are listed as a beneficiary, not a spouse

 

Traditional, SEP IRA, or SIMPLE IRA

Cannot roll over to your own IRA

Option 1: Transfer assets to an Inherited IRA

Benefits

• Dollars can continue to grow tax-deferred.

• No 10% early withdrawal penalty for distributions.

• Designate your own beneficiaries.

Next steps

• Transfer dollars to Inherited IRA, under your name.

• If there are multiple beneficiaries you must establish a separate account by 12/31 to use your own life expectancy for Required Minimum Distributions (RMDs). Otherwise RMDs will be based off the life expectancy of the oldest beneficiary.

When is the money available?

• Able to access dollars at any point. Dollars withdrawn will be considered taxable income. Here are some distribution options:

  • Cash out the IRA in 5 years, by Dec 31st of the fifth year since the retirement account owner’s death.

  • Take distributions over your life expectancy.

  • Take distributions over life expectancy of original owner.

  • Take Out Required Minimum Distributions Over the Oldest Beneficiary's Life Expectancy.

• RMDs must start by 12/31 of the year after death.

• If account holder was younger than 70 ½ and original account owner did not take an RMD for year of death, you must take this RMD amount for current year.

• Notably, the requirement for a non-spouse beneficiary to take out a minimum distribution is only a minimum requirement the beneficiary may take out more, anytime he wishes.

This might make sense when

• The non-spouse beneficiary would like to stretch inherited dollars, taking distributions over their life expectancy while allowing dollars to continue to grow tax deferred.

• The non-spouse beneficiary is older than the original owner (who was not 70 ½ at death), it’s more appealing to use the decedent’s longer life expectancy.

Option 2: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• Dollars available at once.

• Taxable portion of the distribution will be considered taxable income.

This might make sense when

• You have an immediate need for the funds. Note that by taking funds out all at once there is the potential to move into a higher tax bracket.

ROTH IRA

Cannot roll over to your own IRA

Option 1: Transfer assets to an Inherited Roth IRA

Benefits

• Dollars can continue to grow tax free.

• No 10% early withdrawal penalty for distributions.

• Designate your own beneficiaries.

Next steps

• Transfer dollars to Inherited Roth IRA, under your name.

• If there are multiple beneficiaries you must establish a separate account by 12/31 in order to use your own life expectancy for Required Minimum Distributions (RMDs). Otherwise RMDs will be based off the life expectancy of the oldest beneficiary.

When is the money available?

• Able to access dollars at any point, any earnings are generally tax-free if the five-year holding period has been met. Here are some distribution options:

  • Distribute the Roth IRA in 5 years, by Dec 31st of the fifth year since the retirement account owner’s death.

  • Take distributions over your life expectancy.

  • Take distributions over life expectancy of original owner.

  • Take Out Required Minimum Distributions Over the Oldest Beneficiary's Life Expectancy.

• RMDs must start by 12/31 of the year after death.

• Notably, the requirement for a non-spouse beneficiary to take out a minimum distribution is only a minimum requirement the beneficiary may take out more, anytime he wishes.

This might make sense when

• The non-spouse beneficiary would like to stretch inherited dollars, taking distributions over their life expectancy allowing for dollars to continue to grow tax deferred.

• The non-spouse beneficiary is older than the original owner (who was not 70 ½ at death), it’s more appealing to use the decedent’s longer life expectancy.

Option 2: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• Dollars available at once.

• Any earnings are generally tax-free if the five-year holding period has been met.

This might make sense when

• You have an immediate need for the funds.

Qualified Retirement Plan (401(k), 403(b), etc.)

Option 1: Transfer assets to an Inherited IRA

Benefits

• Dollars can continue to grow tax-deferred.

• No 10% early withdrawal penalty for distributions.

• Designate your own beneficiaries.

Next steps

• Transfer dollars to Inherited IRA, under your name. This must be done so as trustee-to-trustee transfer, where the distribution check is made payable directly to the new inherited IRA account; if the beneficiary takes possession of money, it is permanently and irrevocably distributed and ineligible for rollover.

• If there are multiple beneficiaries you must establish a separate account by 12/31 in order to use your own life expectancy for Required Minimum Distributions (RMDs). Otherwise RMDs will be based off the life expectancy of the oldest beneficiary.

When is the money available?

• Able to access dollars at any point dollars withdrawn will be considered taxable income. Here are some distribution options:

  • Distribute the Roth IRA in 5 years, by Dec 31st of the fifth year since the retirement account owner’s death.

  • Take distributions over your life expectancy.

  • Take distributions over life expectancy of original owner.

  • Take Out Required Minimum Distributions Over the Oldest Beneficiary's Life Expectancy.

  • RMDs must start by 12/31 of the year after death.

  • Notably, the requirement for a non-spouse beneficiary to take out a minimum distribution is only a minimum requirement the beneficiary may take out more, anytime he wishes.

This might make sense when

• The non-spouse beneficiary wants more flexible distribution options than in the Qualified Retirement account.

• The non-spouse beneficiary would like to stretch inherited dollars, taking distributions over their life expectancy allowing for dollars to continue to grow tax deferred.

• The non-spouse beneficiary is older than the original owner (who was not 70 ½ at death), it’s more appealing to use the decedent’s longer life expectancy.

Option 2: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• Dollars available at once.

• Taxable portion of the distribution will be considered taxable income.

• The distribution will be subject to a mandatory 20% Federal Tax withholding (possible additional state tax will be withheld).

This might make sense when

• You have an immediate need for the funds.

 

In a season of loss, remember Human Investing is here to help navigate this difficult time.

Sources: www.irs.gov www.schwab.com

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This article was originally published on Forbes.

Shutterstock

The Employee Retirement Income Security Act (ERISA) was established in 1974 to give employees retirement income security. Why, then, after 40-plus years, are Americans so underprepared for retirement?

According to a 2015 study from the Government Accountability Office, "About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA)." Even those who have saved have saved poorly. Among those households of residents ages 55 to 64 with some retirement savings, the median amount saved is $104,000. For those 65 to 74, the amount is roughly $148,000 per household. And, with 70% of the civilian population having access to a retirement plan and 91% access for government employees, it’s a wonder there is such a lack of retirement readiness.

There is no shortage of financial and intellectual capital being spent on a solution for retirement readiness. But most solutions have fallen short of narrowing the gap between the retirement haves and have-nots. So, what is the solution? My thoughts follow:

Government Plus Employer Plus Employee

First, the government is already involved in the regulation of retirement plans, as well as allowing for employers to deduct the expenses of having a plan, so why not go all in? Why not tell employers, “If you are going to get the deduction, you need to meet certain requirements that are great for employees, great for your business and great for our country”?

Those requirements could include auto-enrollment (as this has been a home-run for participation), auto-increase (as individuals get raises, they add a little more to their retirement) and an eligible age-based default option (eligibility for a great default option would be low-cost and diversified as you get from the likes of popular mutual fund providers with their index retirement glide path funds).

In order to qualify for a business deduction or incentive from the government, an employer would be required to match a certain amount. I’d propose 5%, with the employee required to commit 5% to get that amount. Why these amounts? Because if someone has a job for 40 years and invests in a basket of mutual funds growing at or around 8%, with both the employee and employer contributing at 5% each, they end up a millionaire (assuming a $36,000 annual salary, or $300 per month contributions, compounded monthly for 40 years.)

The Industry

In a recent Society for Human Resource Management (SHRM) study, more than 70% of HR professionals surveyed emphasized the importance a retirement savings plan. So, at a minimum, employees are aware of the need to save and desire to do so. While there is definitely a need amongst employees to save for retirement, there are several barriers that impact participants interest and willingness to save. First, trust among advisors is low. Second, many plans have a dizzying array of options, which negatively impacts deferral rates. Finally, not all employers offer to match contributions, which minimizes the incentive for employees to contribute to the 401(k) versus less automated choices, like an IRA.

So, what can the industry do to partner with employers and their workforce? There are two things in my view:

1. Understand the heart of ERISA. Advisors and their firms are to put the interests of the employee and their income security at the center of everything they are doing. If, somehow, the advice we are giving in any way conflicts with the employee and their security, then we should reassess what we are doing and meet the stated purpose of ERISA -- it doesn’t need to be any more complex.

2. In order to minimize the potential for anything but the fiduciary standard, any firm operating in the retirement space should be required to be a fiduciary and have no ability to be dually registered or receive commissions, kickbacks, trips or any other super-secret benefit.

Join the small percentage of firms that are truly fee-only and have no way of receiving any form of compensation other than from the client. Disclosing away conflicts is not the answer for the clients, as few read the disclosures they are provided. If we are going to serve clients well, eliminating the ability for the conflict to exist is the only reasonable route to go.

In conclusion, the government is already involved in both rule-making and incentives for companies and their employees to offer and invest in retirement plans. A model for offering a retirement plan that meets certain criteria in order to fully receive the incentive should be outlined and adhered to by companies and their employees. In partnership with the government, employers and employees, the financial services community should be held to a higher standard to eliminate the conflicts that keep retirement plans for becoming all they could be, which is for employee retirement income security.

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Are you a sole proprietor or business owner running a closely held family business? Maybe you have a side consulting gig while working for a Fortune 500 company? Maybe you are already participating in your primary employer’s plan? If so, that’s great! But, are you aware that as a self-employed business owner there are additional plans you can implement to help put even more money away for retirement and reduce your income tax liability? For many, a retirement plan is synonymous with a corporate 401(k) plan. Often the perception is that only large employers have access and resources to implement these tax deferral and savings benefits and that your only other option for putting money away is to contribute to Individual Retirement Accounts (IRAs). Nevertheless, as a self-employed business owner there are several other inexpensive plan options that can be as effective and efficient in putting away additional dollars for your retirement.

Below are three retirement savings plans that work well for many business owners; from the lone self-employed contractor to a multi-shareholder corporation with up to 100 employees:

SEP (Simplified Employee Pension) IRA is a plan that allows an employer to make contributions to IRAs established by or on behalf of each qualifying employee.

• Annual SEP IRA contribution limit of 25% of annual compensation/business net income (54k contribution limit for 2017).

• Annual contributions are not required. You can elect year to year whether contributions are to be made.

• Qualifying employees must be 21 years of age, have performed services for the employer during 3 of last 5 years and received at least $600 of compensation.

• SEP IRAs must be setup and funded by the tax filing deadline, including extensions, for the tax year the plan is to be in effect (i.e. October 15, 2018, for a 2017 Form 1040).

• SEP IRAs can be setup in addition to participation in another company’s qualified retirement plan (i.e. 401(k) plan).

SIMPLE (Savings Incentive Match Plan for Employees) IRA is a salary reduction plan which eligible employees defer a portion of their salary with the employer contributing a portion as well.

• Employee deferral up to $12,500 (+3k catch up for >50years old) with an employer 3% match or 2% non-elective contribution.

• Eligible employees have earned at least 5k any two prior years and expect to earn 5k in current year.

• SIMPLE IRAs may be setup and effective between January 1 and October 1 of the tax year for a new plan, after October 1 if the business came into existence after October 1 to start that year, or effective January 1 if the company has previously established a SIMPLE IRA.

• These work well when a business has net income of less than 50k, as the employee deferral portion is a set max (i.e $12,500) not a percentage based on business net income.

Solo 401(k) is a profit sharing plan for self-employed individuals who are both the employee and employer.

• 401(k)s have salary deferral limits of 18k/year (+6k catch up for >50years old).

• You can add a ROTH feature vs. pre-tax contributions (i.e. up to 18k year into a ROTH 401(k) vs. $5,500 into a ROTH IRA).

• Allows for plan loans from your account balance; starting at 10k, up to the lesser of 50% of your account balance or 50k.

• Much of the complexity of a 401(k) plan are in relation to the non-discrimination testing, which is not applicable to solo 401(k)s.

• Spouses and/or children of the self-employed business owner can participate in a solo 401(k).

Internal Revenue Code 415 provides the rules surrounding contribution limitations for these plans. The 54k total contribution limitation is a “per plan” limitation, while the employee contribution limitation (i.e $12,500 and $18,000 deferrals) is a “per participant” limitation. Say, for example you were to participate in two separate company retirement plans, such as a 401(k) and SIMPLE IRA; as the employee participant in both, you are only allowed to defer 18k in total between the two plans, but are allowed up to 54k in total contributions each in (54k in combined employee and employer contributions). Accordingly, had those plans been a 401(k) and a SEP IRA (which is an employer contribution plan only), you could max out the 18k deferral in the 401(k) in addition to the employer contribution. This allows for up to 54k in total contributions plus the ability to make a full 54k in annual contribution in the SEP IRA.

Also note that the IRS views all “commonly controlled” companies as one entity for retirement plan purposes. Therefore, if a self-employed business owner owns more than 50% in multiple business entities, all businesses would be aggregated for retirement plan participation and Section 415 limitation (i.e. contribution limitations) purposes.

If you are self-employed and have questions about how your business can benefit from one of these retirement savings plans please reach out. Your entity structure, employee base, net income and timeline will point to what plan might be the best fit. Let us help you implement the right plan, save on taxes and save more for your future retirement!

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  Over 50% of us take Social Security before “Full Retirement Age”… and over 90% take Social Security by “Full Retirement Age”.

What age are we taking Social Security?

Munnell, A and Chen, A, “Trends in Social Security Claiming”, May 2015, Center for Retirement Research at Boston College, from http://crr.bc.edu/briefs/trends-in-social-security-claiming/

What is “Full Retirement Age” and are 90% of people right?

Full Retirement Age or FRA is the age an individual can take their full Social Security retirement benefit without a deduction.  Depending on your age this is between 65 and 67.

While the FRA to take Social Security is between 65 and 67, we can take Social Security as early as 62 with a reduction in benefits.  48% of women and 42% of men take their benefit at age 62.  Is this a good idea?  If your FRA is 67, by taking your benefit at 62 there is about a 30% reduction in your benefit for your lifetime.  If you were normally to receive $2,000 a month, by taking it at 62 you would receive about $1,400 a month for life not including cost of living increases.  Over time, this is significant.

Consider these 4 reasons for delaying Social Security:

Higher Income

If you wait until 70, your monthly benefit is significantly higher. If your FRA benefit at 66 is $2,000, then waiting until 70 will provide a benefit of $2,640.  You will receive an additional $640 each month for the rest of your life plus the cost of living increases.  If the $2,000 covers basic expenses, the additional $640 per month of discretionary income can be significant to an enjoyable retirement.

Survivor Benefit

If you are married, this applies to you.  When one spouse passes away the survivor gets the higher of the two benefits and loses the lower benefit. Having the spouse with the highest Social Security benefit wait until 70 can drastically improve the life of the surviving partner.  If you both take Social Security at FRA with one at $2,000 and the other at $1,200, when one passes the remaining spouse will lose $1,200 a month and be left with only the $2,000 benefit.  Waiting until 70 for the spouse with the higher benefit of $2,640 may significantly improve the life of the remaining spouse.

Less Taxes

Social Security is not subject to tax the same way as your earned income. How much tax is paid on Social Security dollars depends on total combined income and differs from an individual to a married couple filing jointly. Whichever your situation may be, Social Security benefits are taxed either up to 50% or up to 85%. In any case, it is never taxed at 100% of the benefit. And waiting to receive your benefits until 70 may benefit the overall tax you pay. Always check with a CPA to confirm your specific numbers.

More Money

Most people will receive more Social Security dollars by waiting until 70 (If they live beyond 83.) Or if married and one of you live beyond 83, you will likely have more total dollars by waiting until 70. Additionally, if you live a long life, you will receive significantly more total dollars in retirement. This is due to the significantly higher Social Security benefit amount received by waiting, coupled with potentially lower income taxes.

Personally-saved retirement income is the base for many people’s retirement budget.  If portfolio assets run out or are greatly reduced, a higher Social Security benefit can drastically impact later years of retirement to fill the gap.

Higher income, survivor benefit, lower taxes, and more money… 4 good reasons to consider waiting past full retirement age to take your Social Security benefit.

Each person, each couple is unique

There is no one size fits all in retirement planning and the ramifications of the decisions made here are significant.  The questions you ask as you invest and then begin to plan towards retirement may be some of the most important, such as: what are you investing in and what are you taking your Social Security for? It's worth your time and finding trusted partners to help you navigate. At Human Investing these are the very questions we help people work through everyday for their "today's" and their "tomorrow's."

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The more I work through financial planning scenarios with individuals and families the more I realize how important it is to have a clear understanding of your social security benefit. A study in 2014 showed that 55% of retirees defined social security as their main source of retirement income and 88% responded saying that social security would need to be a steady source of income in order to meet retirement goals. These numbers make perfect sense due to longer lifespans, increased healthcare costs, and corporations using 401k accounts rather than pension plans. Now more than ever, it is becoming necessary to have a steady stream of income that has the ability to last the rest of your life.

The goal of this post is simple; equip you with tools on how to best take advantage of your Social Security benefit. See below for three things to consider when looking to get the most out of a program you’ve been paying into your entire working career:

1. The Waiting Game

Generally speaking, you’re eligible to receive 100% of your Social Security benefit at your full retirement age (FRA) which is currently between the ages of 66 and 67. If you decide to claim before your FRA, the benefit amount will be reduced. For each month you delay claiming Social Security your benefit increases until you reach age 70. If you were born between 1943 and 1954 here’s an illustration that provides some context to your benefit percentage:

Notice that between your FRA and age 70 your benefit increases at a rate of 8% per year. This is risk free rate of return that you receive just for delaying your benefit. Note that investors in the stock market who have the potential to lose 10% of their money in a given week are very pleased with an 8% rate of return in a given year!

2. Finding Break Even Points

Once you have an understanding of why it might make sense to wait to take your benefit, combine that with a knowledge of your personal health and family history, and you're ready to make an educated guess regarding when to take your benefit. Below are a couple key numbers to keep in mind.

Between 77 and 78

Is the age where an individual who files at FRA today catches up and exceeds the age 62 filer in total money collected. Also remember that the FRA filer has higher monthly payments going forward so the gap is only going to increase.

Between 80 and 81

Is the age where an individual who files at age 70 catches up with and exceeds the age 62 filer in total money collected.

Between 82 and 83:

Is the age when the age 70 filer catches up with and exceeds the FRA filer in total money collected. Many variables can factor into these equations such as; taxes, employment status, and other financial considerations. While I encourage you to dig into these calculations on your own, make sure to consult a financial professional (like Human Investing) when making these decisions.

3. Additional Income and Social Security

While there are many things to consider when filing for Social Security don’t forget how other income affects your benefit. Many people that I've spoken with about this issue commonly confuse "keeping" your benefit at FRA vs. "being taxed on" your benefit at FRA. The short of it is once you reach FRA you can keep all of your benefits, but you can also be taxed on those benefits contrary to what some people think. See below for a summary on the differences between keeping your benefit and being taxed on your benefit when accounting for additional income:

• If you work, and are full retirement age or older, you may keep all of your benefit, no matter how much you earn. If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. If you’re younger than full retirement age during all of 2015, the government must deduct $1 from your benefits for each $2 you earn above $15,720. If you reach full retirement age during 2015, the government must deduct $1 from your benefits for each $3 you earn above $41,880 until the month you reach full retirement age. This brochure provides some additional commentary on how working income factors into your benefit.

• Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits. This link provides some more details on the taxes you pay on your social security when factoring in other income. Lastly, this web page gives the best example I've seen when factoring in taxes and Social Security.

By looking at the advantages of waiting to take your benefit, some break-even points, and tax strategies for social security hopefully you see that it takes time and effort to make the most of your benefit. It’s possible to literally leave tens of thousands, if not hundreds of thousands of dollars on the government's table if you’re not thoughtful in how you receive this benefit.

So, if you have questions on your Social Security benefit and how it affects your retirement timeline, feel free to email or call Human Investing at any point. We’d love to partner with you in making the most of this benefit.

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A transplant to the Northwest, I recently developed a penchant for hiking. It’s necessary to point out the fact that I’m not a native of the Pacific Northwest, if only to highlight the amount of wonder that I experience every time I venture beyond the city limits. For me, every step reveals something new and exciting that I never encountered in the Midwest. Hiking in Ohio is quite literally a walk in the park compared to the trails out here, and I’ve learned the importance of being organized and prepared. Not long ago, I was packing for a trip to Mount St. Helens, going through my checklist, and my thoughts turned to retirement planning. In part because I knew that I had this blog to write once I returned, but also because I’m actually passionate about the subject. Much like hiking, planning for retirement requires some forethought and strategy. With that in mind, here are my top three hiking/retirement planning tips!

Don’t lose sight of the trail while hunting for Sasquatch...

We’re often asked, “what is the best investment?” This is a simple question that warrants a complicated answer because factors like age, risk tolerance, and estimated retirement date can all influence an individual’s investment strategy.

The Putnam Institute completed a study in 2012 that showed the impact of selecting the top performing investments quarter over quarter (labeled the “crystal ball strategy”) vs. increasing your savings rate. The study revealed that while the crystal ball strategy yielded a higher account balance than the base case, a 1% increase in savings rate “had a wealth accumulation impact 30% larger than the crystal ball fund selection strategy”. In other words, we can’t always control selecting the “best” fund, but we can control how much we save.

I’m not saying that we should stop trying to invest well, (or that we should stop hunting for Sasquatch for that matter). I am suggesting that focusing too much on finding the best investments, can distract from other facets of retirement planning that are just as important.

Quality gear is worth the extra expense...

The retirement planning side of this tip is that saving more now, will greatly impact your savings in the long run. This is something that we all know, but it can be difficult to commit to increasing your savings rate until you see the actual numbers. For example, saving in your 20’s and 30’s has a greater impact on your lifetime savings than saving later in life. Due to, compounding returns, someone who saves $4,000 a year from age 30 to age 40 will end up with a greater balance at 65 than someone saving $4,000 a year from 40- 65, assuming a 7% rate of return. I know that statistic seems hard to believe, but check it out, it’s true!

There’s always another mountain...

It’s important to remember that the day you retire isn’t the end of your journey. A 2012 CDC study reported that life expectancy is 78.8 years, which is up from 70.8 in 1970. The point being, often times when transitioning into retirement, retirees feel the need to preserve their “nest egg”. When in reality taxes, inflation, and health care expenses are eating away at their savings. By recognizing the dual purpose of retirement accounts; providing cash flow and growing for the future, you can climb the mountain right in front of you while also planing for the ones on the horizon.

Have questions about the transition from retirement savings to retirement income? We can help with that!

As far as the hiking goes, it’s going to take a long time for me to see all there is to see around the Pacific Northwest. Personally, Dog Mountain (seen on the right) is one of my favorites.

You should also note that if you’re hiking in the rain, “windbreaker” does not equal “rain jacket.” I may or may not have made that mistake.

Call or email us at 503-905-3100 or 401k@humaninvesting.com

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In Human Terms: What exactly is a 401k?

Don’t you hate it when you’re hanging out with your friends or family and they use a word in the flow of conversation and you have no idea what it means? Well, after meeting with thousands of 401k participants over the years we realize that often times speaking about retirement accounts can turn into one of “those” conversations. That’s why we wanted to start a series of blogs titled In Human Terms. The goal of these posts are simple, to break down financial lingo to its simplest form allowing you to build on your financial vocabulary and create your own glossary.

With that being said, we thought there was no better place to start than asking the question, what exactly is a 401k? Many of us have one today or have utilized a 401k in the past, but there are few who know how it started, what it is, and some simple do’s and don’ts when participating in one.

How it Started

The section of the IRS code that made 401k plans possible was enacted in 1978 and was intended to provide workers with a tax break on their retirement savings. In 1980, the real birth of 401k plans occurred when a benefits consultant took the IRS code and created a simple, tax-advantaged way for employees to save for retirement. From there, different amendments have been made, but 401k plans have turned into the primary tool for Americans to save for retirement.

What it is

Unlike a Defined Benefit plan where the employer promises to pay a defined benefit to retirees who meet certain criteria, 401k plans are a type of Defined Contribution plan, where employees make automatic contributions that are deducted from their paycheck. This money, that is sometimes matched by the employer, is invested at the employees discretion into one or more funds provided within the plan. At a minimum, employees will have the ability to invest in stock, bond, and money market funds. If investments grow over time in employees accounts, the gains are left untaxed on a year-by-year basis until taken out in retirement.

Do’s and Don’ts

Do’s If your employer provides a match, take advantage of it. If you do not know what your match is, or if your company offers one, feel free to call us (503.905.3100) right now! Put together an investment strategy that makes sense for your time frame and check in about every 6 months. If the words "investment strategy" don't mean anything to you, we can help you make sense of your 401k and creating a strategy. We've found that the most successful strategies come from participants who take time to set up a good plan and stick to it. Understand the specifics of your plan. Having a greater understanding of things like vesting schedules, loan provisions, and contribution types, can affect how successfully you invest in your plan and can save you money over time.

Don’ts

• Cash out when you change jobs. Ideally you do not have to cash out a 401k, especially if you are under 59 1/2. The consequences are large. For example imagine you have a $50,000 401k account and you are 40 years old. By cashing out, it’s possible that between the 10% penalty and paying federal and state taxes, your $50,000 becomes $30,000.

• Think of your 401k as a bank. 401k loans can be costly, especially if you leave your company. Before using your 401k for a down payment on a home or to take a trip, give us a call and make sure that there isn't another option.

• Put all of your money in the safest investment option. While not always the case, often times using a money market limits your long-term earning power and puts you in a position where your account is actually losing purchasing power when inflation is included.

Like most things, 401k’s are not perfect. However, if you are looking for an efficient and effective way to save for retirement, they are one of the best tools out there. We look forward to hearing from you soon, if not be on the lookout for the next In Human Terms blog!

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You may have more options within your 401k plan than you realize. A large number of retirement plans are adding a Roth 401k feature, allowing for additional flexibility with how participants save for their future.

Similar to Roth IRAs, Roth 401k’s are funded with after-tax dollars and offer tax-free growth and withdrawals in retirement. You may have access to this benefit through your current retirement plan and not even know it. In fact, a study published by the Harvard Business School noted that, in plans offering the Roth 401k, less than 9% of total dollars in the plan were saved using the Roth feature*. Truly, this can be an excellent way for retirement plan participants to save. Check out the comparison below...

All in all, it’s important to know whether or not the Roth 401k option is available in your retirement plan. And if it is, should you use it? Should you save into both the Roth and the Traditional 401k? We understand that these questions (like many investment-related questions) aren't always simple. That’s why we’re here to help you understand your options. Questions? Worries? Doubts? Let’s talk about it.

Reach us at 503.905.3100 or 401k@humaninvesting.com

*Sources

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The diversity in the people we work with is one of the main reasons we enjoy going on site and meeting with participants or talking with them on the phone. For the purpose of this post, we want to focus on those of you asking about retirement and more specifically how to turn your retirement savings into retirement income. We often hear questions like: should I leave my 401(k) with my company? When should I start taking withdrawals? Or, now that I won’t have an income, how much should I live on?

“Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?”

Recently we had a conversation with a woman who asked us, “Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?” What a great question! This inspired us to assemble a list of steps that addresses her question and other common retirement transition inquiries. So without further ado, here are 5 steps for turning your retirement savings into retirement income!

Step 1: Consolidate your retirement savings into one location

Whether you’re part of a dual income family or have had multiple jobs with multiple 401(k)’s, chances are you have various retirement accounts at numerous investment companies. The truth is, from a planning perspective and from an investment diversification standpoint, having your assets at a single place can provide simplicity and create the foundation to build a financial plan. Often times, this looks like rolling multiple 401(k)’s into an IRA.

Step 2: Identify sources of income

Once your accounts are consolidated, plotting out your different amounts and sources of income is a key next step. Typically, this looks like aggregating social security income, pension income (if applicable), income from retirement accounts, and other income (a part time job, income from a rental property, etc.). Having this information can provide a good baseline of what you are able to live on per year.

Step 3: Identify lifestyle need (how much are you hoping to live on per year?)

Sometimes people have trouble when the word “budgeting” is introduced to the planning process. So rather than creating a budget, create a spending plan (that sounds much more fun right?). By creating a spending plan, this allows you to look at the money you have coming in vs. expenses going out. By finishing this step, you get to see if your inflows are at a surplus or shortage compared to your expenses.

Step 4: Develop appropriate asset allocation and investment strategy

Okay so you’re here. You’ve done the legwork and now it’s time to invest your retirement accounts in a way that can enhance your retirement lifestyle and help you achieve your goals. A few things to consider when developing your allocation:

• Account for market risk by having an appropriate dollar amount in short term investments (money market/CD’s). This will allow you the flexibility of being able to get through the inevitable down market cycles without having to realize losses of long-term investments.

• Account for inflationary risk by having an appropriate dollar amount of your portfolio in long-term growth oriented investments such as US and international stocks. This creates the ability for your accounts to grow above inflation and fund your retirement for the long haul.

• Address dividend and income strategies that can enhance cash flow. By looking at investing in dividend paying stocks, individual bonds, and other cash flow generating investments, you may reduce the burden that your account has to grow each year to meet your spending needs. Having a combination of dividends, interest, and capital appreciation may be an optimal way to generate return over time.

Step 5: Repeat steps 2-4

Has there ever been a 5 step process that doesn’t include the word “repeat”? By continuing to monitor your income and expenses and making sure your asset allocation lines up with your goals, you are ready to start utilizing your portfolio as an income tool.

These steps are a great start when looking at turning your retirement savings into a plan that can generate retirement income. However, there are many other variables when considering using your retirement savings as income (taxes, how it effects social security, required minimum withdrawals, etc.). Remember that we are here to help and support you through this process. If you have any questions or would simply like to have a conversation about retirement please feel free to email or call anytime.

Helpful Links

• Taxes on Social Security Income

• College Savings Options

Have Questions?

Call Us: 503-905-3100 Email Us: 401k@humaninvesting.com

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