THE SMART WAY TO REVIEW – AND IMPROVE – YOUR RETIREMENT HOLDINGS
A May report by human resources consultant Hewitt Associates showed that the average U.S. employee will need more than 15 times their final pay in retirement resources (including personal retirement savings, employer-based retirement savings and Social Security) to maintain their current standard of living during retirement. Unfortunately, Hewitt found that four out of five workers are still expected to fall short of meeting all their financial needs in retirement unless they take immediate action to improve their savings habits or retire at a later age.
Everyone should set a quarterly review of their holdings in 401(k) plans and other resources because that’s typically when statements come out. But knowing their performance information isn’t enough.
Most people don’t take a comprehensive view of their retirement picture – they might check their individual IRA statements and check on how their employer-based pension accounts are doing, but to make sure their retirement engine is really chugging along, good advice is key.
That’s why it might be wise for investors to get a fresh start with retirement advice this fall. It doesn’t matter if you believe your investments are falling behind or if you’ve never started – make time to consult with financial planning professionals to make sure your personal and work-related retirement savings complement each other.
Things you should do:
Check your allocations first: While you don’t want to make severe moves (many people are tempted to do so after a major market downturn and most end up missing the benefits of a recovery), you want to know whether your asset allocation fits your age and retirement goals. Also, if a major life event occurs – divorce or widowhood, starting a family – that’s another important reason to re-evaluate your retirement numbers. As we age, we generally need to put less money in volatile investments like stocks and more in conservative investments with guaranteed returns like Treasuries, bonds or CDs. If you’re behind on your retirement goals, you will probably have to take on a bit more risk, but it’s best to do so with proper supervision. After all, no one wants to be left out of a market upswing when they have catching-up to do. But they certainly don’t want to be overexposed in volatile investments when the market heads down – that’s the lesson most people learned in 2008.
Save even if your company has cut or discontinued matching: Matching is one of the greatest things about working for an employer. Unfortunately, many employers retracted the benefit during the recession. Even if your company doesn’t bring back matching, you’ve got to try and pick up the slack. You will still realize the benefit of pre-tax contributions made to your traditional 401(k). And, when you have money automatically taken from your paycheck you are “dollar cost averaging”. That means the fixed dollar amount that comes from your paycheck buys more shares when prices are low, and fewer when prices are high. Thus, your average cost per share is lower than the average price per share.
If your employer doesn’t enroll you, make sure you do it: According to the Profit Sharing/401(k) Council of America’s 2009 statistics, nearly 40 percent of U.S. employers automatically enroll workers in their 401(k) plans. Nearly 83 percent of U.S. employees have some money in those plans. If you’re not in either camp, you need to join, even if your company doesn’t match – the tax advantages are too attractive.
Continue to save while you wait to join a plan: A significant number of companies don’t let you join the 401(k) until you’ve been working there a year. If that’s the case, get in the habit of putting money away for retirement anyway. Start an individual IRA with the funds you would put in the company plan, or set aside money in a savings account so you can supplement your cash flow and put the maximum amount into your 401(k) once you’re allowed to join.
Contribute the maximum: Not every employee can afford to contribute the maximum allowed by the plan, but try. In 2010, the maximum 401(k) contribution will be $16,500, and those 50 and older can make an additional catch-up contribution of $5,500.
Don’t rely on the 401(k) alone: Particularly if matching lags for a while, 401(k) plans can’t be relied upon as a single source of retirement dollars. You must invest outside your company plans.
Don’t over-invest in company stock: Most financial planners advise that you put no more than 15 to 20 percent of your whole 401(k) portfolio in company stock.
Don’t borrow from the 401(k): A 401(k) shouldn’t be a house fund or a source of emergency cash. You’re taking money out of the account that otherwise would grow tax-deferred, and if you fail to pay back the money, you could face income taxes and penalties. Instead, build an outside emergency fund of three to six months of living expenses you can draw from.
Don’t cash out: Some workers think it’s a great idea to treat a 401(k) as a windfall for when they quit a job. Don’t do it. You’ll pay huge penalties and lose your retirement savings momentum.
Keep track of 401(k) accounts left behind at former employers: Maybe you’ve changed jobs several times and never got around to moving older, smaller 401(k) accounts from past employers to current ones or into a self-directed retirement account. Always get advice about 401(k) funds when you leave an employer.
Always re-evaluate if the company radically changes your retirement offerings: Big changes in funds and options require scrutiny. And with recent regulatory changes, governing fees and other once invisible charges that ended up coming out of investors’ pockets, it’s worth having a talk with your financial planner and maybe your HR department.
This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Dev Goswami, CFP®, a member of FPA in Jacksonville, who offers securities through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way, Cincinnati, OH-4524, and Investment Advisory Services through O.N. Investment Management Company. He can be reached at (904)565-2969, email at [email protected], or www.DevGoswami.com.
Accounting
Consider these strategies for your ira
Do you own an IRA that has declined in value this past year? At least you may be able to take advantage of certain tax-saving opportunities for IRA owners. For instance, you might convert a regular IRA to a Roth IRA when the account balance is at a low level. Alternatively, if you previously converted to a Roth, you can undo the conversion.
Unlike a regular IRA where contributions may be wholly or partially tax-deductible, contributions to a Roth IRA are never deductible. But qualified distributions from a Roth that has been in existence at least five years are entirely tax-free. In contrast, distributions from regular IRAs are taxed at ordinary income rates.
When you convert a regular IRA to a Roth, you’re taxed on the amount transferred. Currently, even if your income exceeds $100,000 annually, you can do a Roth conversion. The tax liability is determined on the date of the conversion. Therefore, if your account balance has dropped recently due to stock market conditions, you can benefit from a lower tax on a conversion.
Conversely, if you converted last year and the value of your IRA was higher, it’s not too late to “recharacterize” your Roth IRA as a regular IRA. This completely eliminates the tax bill. You have until Oct. 15, 2010, to undo a 2009 conversion. Subsequently, you can convert back, but no sooner than next year.
Note that there’s an added benefit for Roth conversions in 2010. The resulting tax liability may be spread over the following two years — 2011 and 2012.
Don't ignore the time value of money.
The “time value of money” is a critical concept in handling personal finances. The same basic premise should be applied in making decisions for your business.
Here's how it works: Typically, the money you currently have in your hands is worth more than it would be years from now. That's because you're able to spend or invest the funds now instead of waiting to receive them. In other words, there's an “opportunity cost” attached to any delay.
For example, let's say that you're entitled to a $100 payment. If you receive the $100 now and you're able to invest it at a 5 percent annual interest rate, you'll have $105 after one year. Assuming you don't need the money for expenses, it will be worth $110.25 after two years, and so on. This amount is known as the “future value” of the money.
Similarly, you can compute the “present value” of money. Suppose you won't receive the $100 payment until one year from now. The value of the money must be discounted due to the opportunity cost. Using the same 5 percent interest rate, the present value of the $100 you’ll receive a year from now is $95.24 ($100 value divided by 1.05).
The future value of money may also be increased by inflation and decreased by deflation. The opposite is true for the present value.
It's easy to see how this concept can affect your business. Accelerating payments from customers will enable you to better meet your current obligations and provide reserves for investment. On the other hand, delays hamper cash flow, and reduce the opportunity for investment. Computing the time value of money may also encourage your business to lease, rather than buy, assets.
Check the status of your savings bonds.
There’s a good chance you have some U.S. savings bonds stashed away in a safe deposit box or a drawer somewhere. Perhaps, you received them as a graduation gift or purchased them through a company savings plan. Do you know whether they’re still earning interest? It might be worth checking.
Track important dates. There are two dates you need to know. Savings bonds accrue interest and increase in value until “original maturity.” That’s when the value of the bond reaches face value. But that doesn’t mean it stops earning interest. It keeps earning through one or more extension periods until “final maturity.” After that date, it earns no more interest. For many bonds, final maturity is 30 to 40 years after the issue date.
Evaluate extension period interest. During the extension periods, bonds generally earn interest at market rates, sometimes with a guaranteed minimum rate. Depending on current market rates, those guaranteed minimum rates might be attractive. You may want to leave your bond earning interest until it reaches its final maturity.
Be aware of tax consequences. When your bond reaches final maturity, tax on the interest earned is due whether you cash the bond in or continue to hold it (unless you elected to pay tax on the accrued interest on an annual basis). You need to be aware of approaching final maturity dates on any bonds you own and do some planning to minimize the tax consequences. For example, it might make sense to cash bonds in over a number of years prior to final maturity in order to spread out taxes owed.
Check your bond’s status. It’s easy to check on your bond’s maturity dates or to discover the interest rate you’re earning. Just go to the savings bond Web site at www.publicdebt.treas.gov where there’s even a calculator to let you find your bond’s current value.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail [email protected] or [email protected].