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Taking Required Minimum Distribution

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Retirement savings accounts that allow employees to make pretax contributions have a caveat: At some point, taxes must be paid on that earned income. The Internal Revenue Code generally requires that retirement account owners take a certain amount of money out of those accounts each year, starting when they reach age 70 ½. This is what is referred to as “required minimum distributions,” or RMDs.1

The main reason for this requirement is so that the U.S. government can collect taxes on this previously untaxed money. Therefore, the account owners must take the annual distribution whether they need the money for retirement income or not. If retirees are using these accounts for retirement income, there’s a good chance they are already meeting the requirement and don’t need to take out any more.2

Decisions about when and how much to draw down from retirement accounts should all be part of a carefully crafted distribution strategy. RMDs play a big role here, because they are taxed as regular income. If you don’t need the RMD for living expenses, you could consider reinvesting it in tax-efficient financial vehicles.3 If you’d like some help determining whether to use your RMD as income or to reinvest it, please give us a call.

The IRS has specific rules about how to calculate the annual RMD amount and provides tables to help account owners determine the appropriate amount for their situation. In general, you can figure your RMD by dividing the account balance as of Dec. 31 of the preceding year by the applicable distribution period (life expectancy), as specified in the IRS tables.4

Account owners still working after age 70 ½ may qualify for an exception to the RMD age requirement. They may be able to waive the RMD mandate, but only for the plan of their current employer. If they have other tax-deferred company retirement plans or traditional IRAs, they must take RMDs from those.5 Also, if they own 5% or more of the business sponsoring the plan, they must take their first RMD when they reach age 70 ½, whether they are retired or not.6

The penalty for not taking the RMD each year is steep – 50 percent of the amount that should have been withdrawn. For example, if the RMD is $10,000 and the owner withdrew only half that amount, he or she may owe an additional tax penalty of $2,500 on the $5,000 that wasn’t withdrawn – in addition to the taxes on the amount that was withdrawn.7

Remember, RMDs and a comprehensive distribution strategy are key components of retirement income planning. We believe how and where retirees withdraw money is just as important as how and where they invest it to help build their nest egg.

 

Content prepared by Kara Stefan Communications.

1 Michael Kitces. Nerd’s Eye View. Oct. 11, 2017. “Rules for Calculating Required Minimum Distributions (RMDs) During Life.” https://www.kitces.com/blog/required-minimum-distribution-rmd-calculation-tax-rules-ira-401k-403b/. Accessed Nov. 9, 2017.

2 Ibid.

3 Fidelity. July 3, 2017. “Smart strategies for required distributions.” https://www.fidelity.com/viewpoints/retirement/smart-ira-withdrawal-strategies. Accessed Nov. 28, 2017.

4 IRS. Aug. 26, 2017. “Retirement Topics – Required Minimum Distributions (RMDs).” https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds. Accessed Nov. 9, 2017.

5 Liz Weston. Bankrate. March 13, 2015. “Take 401(k) required minimum distributions if working?” http://www.bankrate.com/retirement/401k-required-minimum-distribution-rules/. Accessed Nov. 28, 2017.

6 Marlene Y. Satter. Benefits Pro. April 17, 2017. “10 things to know about RMDs.” http://www.benefitspro.com/2017/04/17/10-things-to-know-about-rmds?ref=hp-news&page_all=1&slreturn=1510256659. Accessed Nov. 9, 2017.

7 Ibid.

The content provided in this blogpost is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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How Much Retirement Income Should Come From Savings?

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According to the Bureau of Economic Analysis, Americans’ personal savings rates are about half of the amount they once were. For the past few years, the personal savings rate has hovered around 5 percent, but that’s still significantly lower than the savings rate from 1950-2000, which averaged 9.8 percent.1

For many retirees, a big concern during retirement is running out of money. So how can you help make your retirement savings last? We help clients create individual financial strategies using insurance and investment products — and the strategy isn’t the same for everyone. For some, it may be maintaining an annual withdrawal rate of between 4 to 5 percent from their investments.2 For others, it might make sense to consider working full-time longer, taking a part-time job during retirement or even repositioning a portion of assets into an annuity that can provide income guaranteed by the issuing insurance company.

However, each of these strategies comes with advantages and drawbacks that could affect long-term financial goals. That’s why we work closely with each client to customize a retirement income strategy based on their specific financial situation.

Fewer retirees have a pension plan to help fund their retirement, which can mean personal savings — ranging from an investment portfolio to IRAs to company 401(k) plans — may now be a primary source for retirement income.

Social Security provides 34 to 40 percent of retirement income for the average retiree,3 and that share is higher for elderly unmarried women; nearly half of this demographic relies on Social Security benefits to provide 90 percent or more of their income.4

The Center for Retirement Research at Boston College recently conducted a study to find out just how much Americans may need to rely on 401(k) plans for retirement income. Here are the results:5

  • Low-income households: 25%
  • Middle-income households: 32%
  • High-income homes: 47%

While those are general numbers, it’s important to point out that, overall, women are 80 percent more likely to live in poverty during retirement than men. There’s a big combination of factors that cause this, including lower pay, time out of the workforce for caregiving and the fact that women tend to live longer. Other ancillary variables can make the situation worse, such as divorce, loss of spouse and being forced to retire due to poor health.6

One way individuals are shoring up their savings is by working longer. If you plan to continue working full-time or part-time in retirement, you won’t be alone. As of May 2016, there are approximately 9 million U.S. employees who are 65 and older.7

 

Content prepared by Kara Stefan Communications

 

1 NerdWallet. Aug. 16, 2017. “Average American Saves Less Than 5%; See How You Stack Up.” https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/. Accessed Aug. 21, 2017.

2 Fidelity. June 5, 2017. “How can I make my savings last?” https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last. Accessed July 13, 2017.

3 American College of Financial Services. Dec. 28, 2016. “How much of your client’s retirement income should come from a 401(k)?” http://knowledge.theamericancollege.edu/blog/how-much-of-your-clients-retirement-income-should-be-from-a-401k. Accessed July 13, 2017.

4 Anna-Louise Jackson. NerdWallet. March 31, 2017. “3 Ways Women Can Bridge the Retirement Gap.” https://www.nerdwallet.com/blog/investing/3-ways-women-can-bridge-the-retirement-gap/?trk=nw-wire_305_375718_26766. Accessed July 13, 2017.

5 American College of Financial Services. Dec. 28, 2016. “How much of your client’s retirement income should come from a 401(k)?” http://knowledge.theamericancollege.edu/blog/how-much-of-your-clients-retirement-income-should-be-from-a-401k. Accessed July 13, 2017.

6 PBS Newshour. July 10, 2016. “Women more likely than men to face poverty during retirement”. http://www.pbs.org/newshour/rundown/women-more-likely-than-men-to-face-poverty-during-retirement/. Accessed August 21, 2017.

7 NerdWallet. Aug. 16, 2017. “Average American Saves Less Than 5%; See How You Stack Up.” https://www.nerdwallet.com/blog/banking/american-personal-saving-rate/. Accessed Aug. 21, 2017.

Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs.

This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

 

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Potential Reasons to Put the Retirement Countdown on Hold

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Retirement is still something most people look forward to, but over the years, some of the reasons for anticipation have dwindled. During the industrial age, more people worked jobs requiring manual labor that were hard on the body.

By mid-century, many rank-and-file workers could look forward to a pension waiting for them upon retirement. Workers simply had to accumulate enough credits to retire knowing that a pension would provide income for the rest of their lives.

Now, physically demanding jobs are more of a rarity for pre-retirees, and modern-day ergonomic training is available to help ease the aches and pains of the daily grind. Pensions are also more uncommon, giving way to employee-contribution retirement vehicles like 401(k)s. Instead of looking forward to retiring, working longer can enable employees to save and invest longer.1

Workers today understand they may have to provide for a substantially greater share of their retirement income thanks to longer average lifespans. There’s also the possibility retirement could last multiple decades, and some retirees might miss the daily intellectual and social engagement a job provides.

This makes retirement income planning different than, say, college planning. When saving for a child’s education, parents have the advantage of knowing when the student will go to college and generally how many years he or she will be there. The “when” and “how long” are unknown factors when it comes to retirement.

As financial professionals, these are the types of variables we help address when advising clients. It is important to have the experience of helping clients make financial decisions and contingency plans throughout their retirement — experience we can use to guide the financial strategies we help our clients create every day.

Here are some other reasons today’s workers may be inclined to keep working past the traditional retirement age:

Increase Savings

According to a recent survey, the most common financial reasons older employees work in retirement are to:2

  • Give their nest egg more time to grow (19%)
  • Earn “fun money” for discretionary purposes (31%)
  • Leave a better legacy to heirs or charities (6%)

Increase Social Security Benefit

Sometimes it’s necessary for retirees to start taking Social Security benefits early, but that doesn’t mean they can’t continue or go back to work; nor does it mean they necessarily lock into a lower benefit for life. If you earn more than $16,920 in 2017 while receiving benefits prior to full retirement age, Social Security will deduct one dollar in benefits for every two dollars in earnings above $16,920.3 However, once you reach full retirement age, your benefit will be increased to account for benefits withheld due to earlier earnings and working once you reach full retirement age doesn’t affect your benefits. The agency will also recalculate your benefit based on your “new” highest 35 years of annual earnings, which could increase your overall benefit.4

Company Benefits

Some seniors continue to work because their employer’s health insurance is better and less expensive than Medicare.5 Please note that even if you have coverage through a current or former employer, you may still need to make some important Medicare enrollment decisions.

Switch Jobs, Work Longer

Some people retire because they dislike their job. However, a new study revealed that when workers take the initiative to switch to a more enjoyable position say, in their 50s, they tend to work longer — increasing both their income potential and job satisfaction. That’s no small improvement on both fronts.6

Feel Valued

Retirees have been known to go back to their old jobs because they get bored. At least one retiree observed that returning to work in a part-time capacity not only led him to enjoy the job more, but he felt better valued by his employer.7 We all know that sometimes we don’t appreciate what we have until it’s gone, and that can certainly apply to employers.

 

 

 

 

Content prepared by Kara Stefan Communications

 

1 Kim Blanton. Center for Retirement Research at Boston College. May 25, 2017. “Fewer Older Americans Work Part-time.” http://squaredawayblog.bc.edu/squared-away/fewer-older-americans-work-part-time/. Accessed July 10, 2017.

2 Emily Brandon. U.S. News & World Report. Feb. 17, 2017. “8 Reasons to Work in Retirement.”

https://money.usnews.com/money/blogs/planning-to-retire/articles/2017-02-17/8-reasons-to-work-in-retirement. Accessed July 10, 2017.

3 Social Security Administration. 2017. “Fact Sheet: 2017 Social Security Changes.” https://www.ssa.gov/news/press/factsheets/colafacts2017.pdf. Accessed Aug. 7, 2017.

4 ElderLawAnswers.com. April 1, 2016. “Incentives to Keep Working While You Collect Social Security.” https://www.elderlawanswers.com/incentives-to-keep-working-while-you-collect-social-security-15312. Accessed July 10, 2017.

5 Jean Chatsky. CNBC. Jan. 20, 2017. “Retirement doesn’t have to be the end: How working longer benefits you.” http://www.cnbc.com/2017/01/20/retirement-doesnt-have-to-be-the-end-how-working-longer-benefits-you.html. Accessed July 10, 2017.

6 Kim Blanton. Center for Retirement Research at Boston College. March 23, 2017. “The Benefits of Late-career Job Changes.” http://squaredawayblog.bc.edu/squared-away/the-benefits-of-late-career-job-changes/. Accessed July 10, 2017.

7 Kim Blanton. Center for Retirement Research at Boston College. April 20, 2017. “A Californian’s ‘Retirement’ is Part-Time.” http://squaredawayblog.bc.edu/squared-away/a-californians-retirement-is-part-time/. Accessed July 10, 2017.

 

We are able to provide you with information but not guidance or advice related to Social Security and Medicare benefits. Our firm is not affiliated with the U.S. government or any governmental agency.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

 

 

 

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Happy Thanksgiving!

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Heise Advisory Group will be closed for the Thanksgiving Holiday on Thursday, November 24th and Friday, November 25th.
Normal office hours will resume on Monday, November 28th.  Happy Thanksgiving! Have a safe and wonderful weekend!

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