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We’re going in the wrong direction… February 4, 2015

Posted by forwardfinancialplanning1 in 401k plans, Pensions, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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The Center for American Progress has just released a study that can hardly be deemed as “progress”.

About 31% of Americans have nothing saved for retirement and also lack a defined benefit plan, such as a traditional pension. Among the age group closest to retirement (55-64 year olds), about one fifth (19%) reported no savings at all.

Of the 55-64 year olds who have saved something for retirement, the median retirement account balance was only $14,500. If you strip out the households who have saved nothing, the median retirement account balance of this age group rises only to $104,000.

While $104,000 is not an insignificant sum, it’s not going to support the life style that most of these households expect. Using the withdrawal rule of thumb which allows annual distributions of about 4%, we’re still only projecting about $5,000 per year. And income taxes will eat up a portion of this as well!!

Looks like a lot of people are going to be working well into their 70’s—or depending on the government. Neither of these outcomes look like progress to me.


Yogi was right September 10, 2014

Posted by forwardfinancialplanning1 in 401k plans, Financial Planning, Retirement Savings, Roth IRA, Traditional IRA.
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New York Yankee icon Yogi Berra is as famous for his euphemisms as he is for his stellar performance on the baseball diamond. One of my favorite “Yogi-isms” is the following: “If you don’t know where you’re going, you might wind up somewhere else………..”

Yogi had it pegged as it relates to retirement planning. Far too many people never take the time to estimate (or request assistance in estimating) the amount of money they will need to accumulate to cover the costs of their prospective retirements. A recent study by Security Benefit quantifies this planning shortfall. It found that 66% of Gen X and Gen Y workers (born between 1965 and 1992) have not estimated the amount they’ll need to accumulate for a secure retirement. This situation persists despite the fact that 90% of the respondents said that saving for retirement was an important goal, and 88% said it was important to maintain their desired lifestyles in retirement.

Only 19% work with a financial advisor, so it’s not surprising that they are moving forward without having taken the important first step of asking, “Where am I trying to go?”. However, it was quite surprising that only 12% prefer to save with a company that they found on the internet and just 18% would go on-line for advice on how to save more.

I wonder what Yogi has to say about overcoming inertia???

“You can’t fix stupid….” August 7, 2014

Posted by forwardfinancialplanning1 in 401k plans, Financial Planning, Retirement Savings, Retirement Spending, Roth IRA, Social Security, Traditional IRA.
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I’ve heard people mutter these words many times over the years, but always felt that they were a bit too fatalistic. After all, everyone has the capacity to learn, although the inclination and motivation to do so may be lacking. However, after reviewing a section of the Federal Reserve’s Report on the Economic Well-Being of the U.S., I’m starting to think there’s some truth to such a cynical adage. When asked how they and their spouse will pay for expenses in retirement, an incredible one quarter of all respondents and 14% of those aged 45 and greater chose the answer, “I don’t know.”

I mean, at least they could have said, “winning the lottery……”

Why should your failure to plan create an obligation for me? July 31, 2014

Posted by forwardfinancialplanning1 in 401k plans, Personal Budgets, Retirement Savings, Roth IRA, Traditional IRA.
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Most of us go through life knowing that we should be addressing some particular need, but often failing to act upon this necessity. For instance, I positively know that I need to lose 20 pounds, yet I’m not making the requisite dietary changes. However, I’m living with the consequences of a larger than optimal waistline and I don’t expect others (society as a whole and taxpayers in general) to come to my rescue.

However, I wonder what’s going to happen when a very large swath of American society hits retirement without having properly saved for it. A recent Harris poll confirms the degree of unwillingness to address an obvious need. Among people in the 68+ age group who have not yet retired, 51% say that having enough money to retire is a major concern, yet only 29% of this group is putting aside anything to meet that need. Among Boomers aged 49-67, three quarters are worried, yet only 43% are saving. Gen X’ers (aged 37-48) are more worried at 77%, but are doing only marginally better with a savings participation rate of 48%. Millennials (aged 18-36) are saving at a 46% rate, with 72% of them being concerned enough to describe it as a “worry”.

So when you look across all of these generations, you see that less than half of Americans as a whole are acting on this critical need. What’s going to happen when they are all aged and too feeble to work? The current “progressive/liberal” movement will surely seek to socialize the costs, and with more than 1/2 of the (voting age) population doing nothing to prepare, they may be able to pull it off!!
If anything causes the “American Experience” to collapse from within, this might be it………………

Creditors get a break……… June 13, 2014

Posted by forwardfinancialplanning1 in Retirement Savings, Roth IRA, Traditional IRA.
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The US Supreme Court recently issued a ruling that inherited IRA’s do not enjoy the same level of protection from the claims of creditors in an individual’s bankruptcy. An individual account held in an employer sponsored retirement plan such as a 401k is pretty much out of the reach of the creditors during the settlement of an individual’s bankruptcy and traditional/Roth IRA balances are nearly as sacrosanct (some differences in state bankruptcy laws for IRA’s may intervene). However, this Supreme Court ruling has determined that when the bankrupt individual inherited the IRA, the protective shield is removed.

This writer holds the opinion that this seems to be fair to creditors. The bankruptcy laws have been written to give people a fighting chance to recover from financial missteps, but the regulations should not be totally one-sided. The institutions who loan money to individuals do deserve a fair shake as well!!. We’ve seen debtors receive enormous assistance from the current regime in Washington, particularly when it comes to repudiating mortgage debt. In my opinion, we don’t need any more rewards going to people who may have been “financially wreck-less” regarding the assumption of debt.

This ruling also will lead to numerous promotions by the legal community that call for the establishment of trusts as IRA beneficiaries as opposed to individuals. The thinking here is that if your beneficiary is a trust, it will not be affected by this ruling which applies specifically to a beneficiary who is an individual. Our suggestion here would be to be very careful when considering this move due to the possibly severe tax consequences of improperly designed trusts. In particular, the ability to “stretch” an IRA distribution over time in order to reduce income taxes may be lost because a trust does not have a “life expectancy” like an individual. See the writings of Ed Slott a national expert on IRA’s with regard to the possible dangers of naming a trust as an IRA beneficiary.

Do we really need this? April 1, 2014

Posted by forwardfinancialplanning1 in Investing-General, Retirement Savings, Roth IRA, Traditional IRA.
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Public policy experts have been expressing concern for years regarding Americans’ abysmal state of retirement preparedness. Two recently published reports shed some important insights on this situation.

The 2014 Retirement Confidence Survey published by the Employee Benefit Research Institute showed that about 2/3 of workers are “very confident” or “somewhat confident” about their financial preparations for later life, i.e., retirement. This was a substantial increase in confidence over 2013’s findings which is attributed to last year’s strong stock market returns.
Additional data in the study suggests that this confidence is unfounded as only 23% of respondents aged 55 and older report retirement accumulations exceeding $250,000. While $250,000 is not an insignificant sum of money, long-standing financial planning tenets suggest that it will only generate about $10,000 of retirement income annually. And, as the EBRI survey reports, the majority of 55+ savers have accumulated far less.

Now, one of the keys to success in any endeavor is to take advantage of all of the “tools” at your disposal. The IRA is a retirement savings tool that is available to most every worker as “earned income” is one of the few requirements for IRA eligibility. Another study by TIAA-CREF reveals how underutilized IRA’s really are.

Just 17% of workers contributed or were contributing to IRA’s in 2014. This IRA participation rate was down from 19% last year and 22% in 2012. And for the Gen Y worker (aged 18-34), who has the most time to allow the power of compounding work in their favor, the participation rate is only 11%!!

The Obama administration has been crowing about its recently introduced MyRA initiative which was developed to promote retirement savings for people who do not have an employer sponsored retirement plan. Traditional IRA’s have been around since the early 1980’s and Roth IRA’s since 1998. Obviously, they are underutilized. So, once again, we have government trying to solve the wrong problem. Rather than creating a another new “tool” with all of its attendant red tape and regulation, it should be promoting the use of the tools that we’ve had all along.

At least some of us are getting it right…………… January 11, 2014

Posted by forwardfinancialplanning1 in 401k plans, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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The financial press publishes article after article bemoaning the lack of retirement preparedness in the US. And, this blog has opined on this very topic on numerous occasions. Some commentators cite these statistics as proof that our general population is incapable of saving/managing within the defined contribution (e.g. 401k’s, 403b’s etc) retirement system that has largely replaced defined benefit retirement plans over the past 25 years. Well, a recent study by the Vanguard Center for Retirement Research suggests that at least some defined contribution plan participants are actually “getting it right.”

In a very thorough analysis of plan participant distribution behavior, Jean Young of Vanguard reported that most retiring participants are rolling dc plan balances into IRA’s and leaving the balances untouched until Required Minimum Distribution rules kick in at age 70 1/2. Young noted that 7 in 10 retirement age participants (defined as those 60 and older terminating from a dc plan) have preserved their savings in a tax-deferred account after five calendar years. The study determined that nine out of ten retirement dollars still remained within an IRA or the original employer retirement plan.

It’s even more noteworthy that the study period included the years 2008-09 when the financial crisis placed abnormal stresses on household finances. All told, analysts examined the behavior of 266,900 employer plan participants aged 60 or older who terminated employment in calendar years 2004 through 2011.

So, it’s not all gloom and doom as some would like us to believe.

Will it be as bad as they say….? December 19, 2013

Posted by forwardfinancialplanning1 in 401k plans, Retirement Savings, Retirement Spending, Roth IRA, Traditional IRA.
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Read two articles today that when combined, suggest a very bleak future as our country ages. The first research paper attempted to quantify the differences in retirement readiness among various races in the US. The first paper is entitled “Race and Retirement Insecurity in the United States” by Nari Rhee. Rhee finds that while the typical white household has clearly undersaved, the shortfall is even worse for black and Latino households. The report notes that the typical white household nearing retirement has about $30,000 saved in retirement accounts while the typical black or Latino household has virtually nothing in dedicated retirement accounts. Looking at the problem via average accumulation amounts, white households fared best with $112,000 saved on average versus $20,000 for blacks and $18,000 for Latinos. When one applies the oft-cited 4% annual sustainable withdrawal rule to these account balances, it’s very obvious that they won’t last very long after the regular paychecks stop.

The prognosis becomes even more disconcerting when the data for the second article is superimposed. According to research by Ron Gebhardtsbauer, associate professor of actuarial science at Penn State University, a 65 year old man has a life expectancy of 82 and a 30% chance of living to 90. A 65 year old woman has a life expectancy of 85 and a 40% chance of living to be 90. A 2011 report by the Census Bureau concluded that a 90 year old in the US has a further life expectancy of nearly five years.

So, the good news is that we are living much longer, but the bad news is that we’ve not saved enough money to support our golden years. I’ve read numerous other studies with somewhat different accumulated amounts, but in every case, the dollars saved are always far too low to fund a 20-25 year retirement. During my lifetime, it’s always seemed that the American spirit finds a way to collectively pull us through. Will that be the case this time?

Stick with the basics in your IRA’s September 30, 2011

Posted by forwardfinancialplanning1 in Retirement Savings, Roth IRA, Traditional IRA.
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Occasionally we are approached by people who express an interest deploying the funds in their IRA’s in more “exotic” investments.  We’ve heard stories of individuals who desired to invest monies held in IRA’s in rental real estate—-and we’ve seen some severe compliance problems created by the scheme.  IRA’s have numerous limitations,  rules and regulations that cause them to be problematic accounts in which to hold real estate.  Nonetheless, promoters of these ideas are sometimes successful in convincing people to go overboard on the “self-directed” element of IRA’s.

Now, from the SEC’s Office of Investor Education and Advocacy and the North American Securities AdministratorsAssociation (NASAA) comes still another warning about self-directed IRA’s:  Fraud

Besides real estate, the investor alert includes promissory notes, tax lien certificates, and private placement securites.  NASAA notes an increase in reports and complaints of fraudulent investing schemes using the self-directed feature of IRA’s.  Our advice would be to heed these warnings.  Stay with the traditonal mutual funds, ETF’s and registered stocks and bonds offered by the traditional IRA custodians such as Vanguard, Fidelity, T Rowe Price, major broker dealers and commercial banks (Disclosure:  This is not intended to be an all-inclusive list).   You can definitely accomplish your investing goals with these traditional financial instruments and avoid the headaches and problems that may come with the non-traditional investment vehicles.


Roth IRA’s and 2011 January 2, 2011

Posted by forwardfinancialplanning1 in Retirement Savings, Roth IRA, Traditional IRA.
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The year of 2010 has come and gone, as has the opportunity to spread the income tax liabilities generated by a 2010 Roth conversion over the 2011 and 2012 tax years.   The loss of this special tax treatment will probably result in less media discussion of Roth IRA conversions in 2011 and subsequent years.  However. the legislation that permitted this special 2010 Roth conversion tax treatment also removed  income limits as an eligibility requirement to execute a Roth conversion. This has created some new retirement planning opportunities that should not go unnoticed.

Higher income taxpayers have been restricted from making Roth IRA contributions by statutory income limitations since the Roth IRA was introduced in 1998.   While these income limitations are increased annually to allow for inflation, they still preclude many individuals from making Roth IRA contributions.  Those limitations are still in place but there now exists a method to circumvent them.

Any taxpayer with sufficient earned income can contribute to a traditional IRA (as can the taxpayer’s spouse).  And, since Roth conversion eligibility is no longer limited by income, any taxpayer can also execute a conversion of a traditional IRA to a Roth IRA.  So, previously ineligible higher income taxpayers can now contribute to a traditional IRA and subsequently convert that account to a Roth IRA.  If this conversion is done shortly after the contribution to the traditional IRA, there will be very little taxable income within the tradional IRA.  This two step process,  in essence, becomes the equivalent of a direct Roth IRA contribution.

Keep in mind, however, that this “two-step” strategy works only if the taxpayer does not have an existing traditional IRA.  If that is the case, the “new”  traditional IRA contribution is co-mingled with the previous IRA funds and the conversion proceeds (as well as any tax liability) are treated as if they came out of the co-mingled pool of funds.