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When Not To Save For Retirement

When Not To Save For Retirement

By Mark Miller

CHICAGO (Reuters) – Everyone should save for retirement – that is a mantra we have all heard endlessly.

But for many people, saving for retirement actually should be fairly low on the financial priority list – well behind the more immediate goals of building a rainy day fund and reducing their consumer debt.

That is evident in new research by the Pew Charitable Trust examining causes and impacts of financial shocks that hit Americans. A Pew survey of more than 7,800 households found that most households have failed to build enough liquid savings outside retirement accounts to respond to emergency needs.

Sixty percent of households experienced a financial shock in the past 12 months – typically lost income due to unemployment, illness, injury, death or a major home or vehicle repair. The financial setbacks affect people of all ages and racial groups, although shocks disproportionately affect younger and minority households.

However, even higher-income workers grapple with the problem. Thirty-five percent households earning more than $85,000 reported a financial shock in the past year.

When income shocks come along, lower-income households – those with income below $25,000 – have enough savings to replace only six days of household income, Pew found. Households with more than $85,000 can replace just 40 days of income from savings.

SEEKING BALANCE

“We don’t talk enough about the balance people need to strike for themselves between consumption, preparing for the short-term and preparing for the long term. All three are important,” said Clinton Key, research officer with Pew’s financial security and mobility project.

Another sign of imbalance: a sizable share of financially stressed households also are saving for retirement, according to Pew. Thirty-five percent of households with no liquid saving said that they do own a retirement account.

These accounts often are used as emergency funds – 23 percent of workers have taken a loan or early withdrawal from their retirement savings, according to a 2015 survey by the Transamerica Center for Retirement Studies. But withdrawals from IRAs and 401(k)s by investors younger than 59-1/2 are subject to a 10 percent withdrawal penalty in most cases, plus any income tax that is due.

In addition, the paperwork necessary for getting your money out of a retirement account easily can take a couple of weeks. That is too long to meet some emergency needs.

DIGGING OUT OF DEBT

Eliminating high-interest consumer debt is another priority that generally should come ahead of retirement saving. The percentage of older households carrying debt is troubling: in 2014, some 47 percent of baby boomers still carried mortgage debt (median balance: $90,000), according to the Pew study. Forty-one percent carried credit card debt and 35 percent had an auto loan.

“Getting rid of consumer debt by the time you retire is huge,” said Dirk Cotton, a financial planner and retirement researcher who blogs at the Retirement Cafe (http://bit.ly/1nlxKYe). “I have three kids in their twenties, and they’re constantly reading that they need to be saving for retirement. But I tell them there are more important things. One of them is, don’t run up a huge amount of consumer debt.”

Retirement researchers often focus on the risk of outliving retirement savings, but Cotton thinks debt – and the absence of liquid saving – poses a bigger risk when financial shocks occur. His research shows that debt leaves households vulnerable to multiple financial shocks. During the Great Recession of 2009, households over age 65 accounted for 8.3 percent of all bankruptcy filings, up from 7.8 percent in 2006, according to the Institute for Financial Literacy.

“It can start with a job loss that forces you to borrow on the credit card to meet living expenses,” Cotton said. “But as the balance grows, the interest rate gets higher and higher, and the credit ultimately is cut off. Now you have a financially devastating problem that is really difficult to escape.”

A better approach, he argues, is to focus on debt reduction and aim to maximize retirement income through delayed filing for Social Security benefits.

The prioritization questions are striking, considering that policymakers are pushing for new ways to get us to save more for retirement.

California and Illinois are among the states creating plans that would require employers to cover nearly all workers. Just this week, the Obama administration rolled out a proposal to make it easier for small businesses to band together to form 401(k) plans. ().

Those are admirable initiatives – but they need to be coupled with sound advice about where the first available dollar should go.

“You can easily get the impression that the biggest retirement planning problem is how much of your portfolio can you spend every year and not go broke,” Cotton said. “But most people don’t have a big portfolio, and we don’t hear nearly enough about this huge group of other risks people face.”

(The writer is a Reuters columnist. The opinions expressed are his own)

(Editing by Matthew Lewis)

Photo: Debt doesn’t melt like snow, unfortunately. 

Getting Started: Are You Saving Enough For Retirement?

Getting Started: Are You Saving Enough For Retirement?

By Carolyn Bigda, Chicago Tribune (TNS)

Saving for retirement is no easy task, but a new study says you don’t need to be a Powerball winner to put away enough cash for old age.

According to the study by Fidelity Investments, 45 percent of those surveyed in 2015 were on track to cover essential expenses during their retirement, up from 38 percent in 2013.

Although that’s still less than half the population, the percentage is heading in the right direction. One reason: People are saving more.

From 2013 to 2015, the median savings rate among survey participants jumped from 7.3 percent to 8.5 percent.

Millennials, those age 25 to 34, made the biggest leap of any group, with a median savings rate of 7.5 percent in 2015, up from 5.8 percent two years before. (The study was based on responses from 4,650 people age 25 to 75 who earn at least $20,000 annually.)

For young investors, a higher savings rate is especially beneficial.

“They have time on their side and a long work history ahead of them,” said John Sweeney, executive vice president of retirement and investing strategies at Fidelity. “So the biggest thing that they can do is to increase their savings rate.”

Although millennials are socking away more, they still fall short of the 15 percent savings rate that many financial advisers, along with Fidelity, recommend for retirement.

“If millennials doubled their savings rate, it would have a very significant improvement on their retirement preparedness,” Sweeney said.

You can see the impact for yourself by using Fidelity’s Retirement Score calculator. The calculator will ask your age, annual salary, how much you’ve saved for retirement so far and a few other financial details. It also makes assumptions about the future, like market returns and Social Security benefits.

In the end, you get a score, which is then ranked on a scale of colors ranging from red (the worst) to dark green (the best).

If your score puts you in dark green, you should be able to cover all of your essential costs in retirement, plus fun stuff like travel. Land in the red, and you’re at risk of not being able to cover even your basic needs.

The 15 percent recommended savings rate includes any employer match you might get in your 401(k) or other company-sponsored retirement plan. The closer you can get to — or even exceed — that goal, the better off you’ll be.

Take a 27-year-old today with $10,000 in retirement savings and an annual salary of $50,000. His score lands in the red if he saves $300 per month and retires at age 67, when he is eligible for full Social Security benefits.

But if he saves twice as much per month, his score changes to light green. (Light green means you can cover your essential expenses in retirement but not all of your discretionary ones.)

If you can’t save more for retirement, changing your portfolio’s asset allocation can also brighten your financial future.

“It’s not as impactful as other steps,” Sweeney said, “but it does make a difference.”

In the example above, the 27-year-old had an allocation of 70 percent stocks and 30 percent bonds and cash. But if the portfolio mix was too conservative — say, with only 20 percent in stocks and the rest in bonds and cash — his score fell. Likewise, the score took a hit if he invested 100 percent in stocks.

For a young investor, Fidelity recommends putting 90 percent in stocks and the remaining 10 percent in bonds.

ABOUT THE WRITER

Carolyn Bigda writes Getting Started for the Chicago Tribune. yourmoney@tribune.com.

©2016 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Photo: Retirement Plan. American Advisors Group via Flickr

 

The Journey: Declining Market Is No Time To Pull More Cash From Your Retirement Account

The Journey: Declining Market Is No Time To Pull More Cash From Your Retirement Account

By Janet Kidd Stewart, Chicago Tribune (TNS)

Financial markets’ rocky start this month hasn’t seemed to slow down some retirees’ spending train, but it should, experts say.

Just when the holiday bills are looming like a bad hangover, portfolio values are retreating, which should be a wake-up call to trim withdrawals, but that isn’t happening, said Mari Adam, a financial planner in Boca Raton, Fla.

“Last year, returns were flat, and I’m starting to see some familiar patterns” to how some clients responded to the 2008 financial crisis, she said. “That was a horrible year, but the people who went into it with good financial habits came through it and are better than ever. Others got destroyed and never bounced back.”

In this year’s first week, she said, she sifted through a mountain of big-ticket portfolio withdrawal requests, while stocks were posting triple-digit losses and fixed-income experts were bracing for lower bond yields as interest rates begin rising.

“I have a desk covered (with requests from clients) who need extra money for things, and it worries me,” she said. “Some already ate into principal last year because it was a flat market, and we’re starting to see some people get into credit card debt again.”

Just what is overspending? There are myriad theories about safe withdrawal rates from retirement portfolios. Many start with a percentage of total assets in the first year of retirement, say 4 percent, and then adjust that figure for inflation thereafter, regardless of what happens in the market. Others, including financial planner and author Jonathan Guyton, take a more dynamic approach that allows for slightly higher withdrawals early on, but with the caveat that retirees may need to pull back if markets underperform.

Adam generally advises clients to withdraw 4 percent of last year’s ending portfolio balance but adjusts that as needed depending on circumstances and investment performance. For elderly clients in their 80s, for example, she typically recommends simply taking the required minimum distribution amount (which kicks in after age 70 1/2) from retirement accounts.

She doesn’t quibble with younger retirees who are spending slightly more than 4 percent in any given year. It’s the ones spending well above the guidelines that have her worried, she says.

“A lot of people are really ignoring reality and overspending,” she said. What to do? Take advantage of year-end spending reports from your credit card company and any budgeting software you use and identify the problem areas, Adam said.

But don’t stop there or you won’t set the tone for spending in the coming year, said Liz Davidson, founder of Financial Finesse, an online financial guidance service used mostly by employers that links retirement plan participants with advisers. Davidson’s book, “What Your Financial Advisor Isn’t Telling You,” was released this month.

Pre-retirees can make a huge impact on their savings rates by automating retirement plan and taxable savings account contributions, but adopting a mindful approach to spending helps both savers and retirees, Davidson said.

People have identities with their food choices that help them set boundaries and ward off temptation, she notes. Vegans, for example, learn to not even be tempted by a restaurant hamburger because they have taken that choice off the table ahead of time, she said.

“We tend not to have (comparable) financial identities, but if you think about it you might fall naturally into one. You might consider yourself an investment-oriented person so you don’t want to spend much on things that depreciate and you’ll put more into real estate that increases in value. Or you’re a bargain hunter, so you just rarely pay retail. Or a minimalist who wants to keep things simple. Or someone who enjoys particular activities and prioritizes those.”

Commit to conscious decisions about spending, she says, and a more appropriate withdrawal rate will follow.

ABOUT THE WRITER

Janet Kidd Stewart writes The Journey for the Chicago Tribune. Share your journey to or through retirement or pose a question at journey@janetkiddstewart.com.

©2016 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Photo: Pictures of Money via Flickr

 

Retirement Moves To Make This Year

Retirement Moves To Make This Year

By Janet Kidd Stewart, Chicago Tribune (TNS)

Face it: You probably could have done more in 2015 to help your retirement picture, and you weren’t alone. A Capital One Bank survey released in December found that only a third of respondents accomplished their financial goals last year.

But whether you’re retired or just starting to save, there’s always this year. In 2016, you can double down on IRA contributions, lock in a tax-free charitable donation and make some big dents in your spending, among other moves.

“Making IRA contributions is one of the few provisions left in the tax code that you can do early in the new year to affect last year’s taxes,” said Ed Slott, an accountant who produces IRA training workshops for financial advisers and consumers.

While you’re at it, he said, consider tossing a contribution for 2016 into a traditional or Roth IRA, whichever makes the most sense given your age and tax situation.

“If you can go one step further, do a contribution for 2016 early in the year. You can wait until April of 2017, but then you’re back in the same rut,” he said. “If you can double up in one year, then you’re always ahead and that tax-deferred money builds up over the years.”

If you’re past age 70 this year, taking your required traditional IRA or 401(k) distribution early could also make sense, he said. It means you’ll avoid the year-end rush some financial institutions experience as people scramble to take their distributions, which can lead to administrative errors, he said.

And if you donate to charitable organizations, Congress has made permanent the ability to give to charities through your IRA, have it count toward your required distribution, and not have it affect your adjusted gross income. Now you can make a gift early in the year and bank the tax advantage, Slott said. Previously, when the provision was extended very late in the year, IRA holders typically had already taken their distributions, so for many the provision didn’t do much good, he said.

Another bit of permitted retirement-account hindsight involves undoing conversions of traditional IRA money to Roth IRAs. If you converted some funds in 2015, but the market goes south and you’d rather not pay income taxes on the original value, you have until October to recharacterize the conversion, Slott said.

“It’s one of the great second chances in the tax code,” he said. “It’s like being able to bet on a horse after the race is over.”

Another tax move for 2016 is to plan on delaying taking Social Security benefits until age 70, Slott said, particularly now that the ability to suspend one benefit while collecting the associated spousal benefit and the ability to choose between spousal and worker benefits at full retirement age is being phased out. The tax bonus, he said, comes because as you withdraw more retirement savings in your 60s while waiting to start benefits, you are spending down your retirement savings, which could mean lower taxable distributions in the future, he said.

If you took benefits early, consider suspending them at full retirement age, said Jane Bryant Quinn, author of “How to Make Your Money Last: The Indispensable Retirement Guide.” You earn delayed retirement credits through age 70.

Knocking out some major expenses, like a too-large home, is a much better move for retirement than nickel-and-diming yourself, she said. “The big things are where the money is. Once you’ve right-sized the big expenses, you won’t need to worry about drinking cheaper coffee,” she said.

Quinn also advocates a combination of immediate, fixed annuities within a fixed income strategy and a rising amount of stock index funds as retirees age (up to a ceiling that suits your risk tolerance), reflecting some new research showing that increasing the amount of equities helps retirees stay ahead of inflation.

“I’m getting more aggressive myself, increasing my exposure to equities over the past few years, and I haven’t regretted it, even though of course the market at some point will go down,” Quinn said.

ABOUT THE WRITER
Janet Kidd Stewart writes The Journey for the Chicago Tribune. Share your journey to or through retirement or pose a question at journey@janetkiddstewart.com.

(c)2016 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Earl Gilbert, 97, plays chess at Royal Oaks retirement community in Sun City, Arizona, January 8, 2013. REUTERS/Lucy Nicholson