Mar 3, 2014

It’s time again for the regular check-up on the state of retirement accounts in the US. Fidelity recently updated numbers for 2013, and while accounts have increased, the bottom-line still remains that the overwhelming majority of employees are still well underfunded for retirement.

The average 401(k) balance hit $89,300 at the end of the year, up 15.5% from $77,300 in 2012, according to an annual tally by Fidelity Investments. Most of the boost came from stock market gains as all three major stock indexes ended the year more than 20% higher.

People on the verge of retirement, ages 55 to 64 years old, saw their nest eggs grow to an average balance of $165,200 from $143,300 in 2012, Fidelity said. Savers with both a 401(k) plan and Individual Retirement Account managed by Fidelity had larger nest eggs, with an average balance of $261,400, up from $225,600 in 2012.

Even a balance of $261,000 is hardly enough for a comfortable retirement. And many Americans are much more woefully unprepared for retirement. A 2013 study by the Employee Benefit Research Institute found that nearly half of workers had less than $10,000 saved.

Here’s something I found interesting: part of the problem is that many workers are putting their retirement savings at risk when switching or leaving jobs by not rolling over the accounts to 401(k)s or IRAs. Of the roughly 800,000 workers with Fidelity accounts who left a job in the first nine months of 2013, 35% cashed out their 401(k) balances, as opposed to leaving the money in their former employer's plan or rolling it into a new 401(k) or IRA. While Fidelity said the statistic was "concerning," it was not a significant increase from previous years.

These cash-out balances averaged $15,500, and were especially common among young and low-income workers. More than 40% of participants between the ages of 20 and 39 and 50% of workers earning between $20,000 and $30,000 had opted for the cash. Unless workers use the funds to open an IRA account within 60 days, they get hit with significant taxes and a 10% penalty.

Ultimately this makes it harder for their savings to grow. For example, a 30-year-old who cashes out $16,000 could lose nearly $500 in monthly retirement income, assuming she retires at 67 and lives to the age of 93, Fidelity said. Plus, the 30-year-old would be hit with $3,200 in taxes and another $1,600 in penalties at the time she cashes out.

Such an impact is why it never hurts to reiterate that, especially for young savers with years of potential investment gains ahead, it is important to save, and save often. Though personal financial situations will be different for everyone, one literally can’t afford not to sock away for retirement.

Source: http://money.cnn.com/2014/02/13/retirement/401k-balances/index.html?hpt=hp_t2

Feb. 3, 2014

President Barack Obama used his State of the Union speech to roll out a plan to coax low- and middle-income Americans into saving more for retirement. New retirement accounts being set up by the Treasury Department would target workers whose employers don't offer retirement benefits or who haven't started saving yet for old age. The new "starter" savings program is called "myRA" — for "my IRA." Treasury expects to have a pilot program working by the end of the year. The White House does not need congressional approval to start the program.

The plan is a response to a looming retirement crisis. Companies have largely abandoned traditional pensions, which provided workers with guaranteed incomes in old age. Social Security is under strain as Baby Boomers retire. Many Americans lost their jobs or saw their wages stagnate in recent years, leaving them less able to save for retirement.

How would myRA work?

The plan is voluntary. The accounts — which are intended for people who do not now have employer-sponsored savings plans — will operate much like Roth IRA’s, according to Treasury officials. Married couples with modified adjusted gross incomes up to $191,000 and individuals earning up to $129,000 will be able to save up to $15,000 total in after-tax dollars for a maximum of 30 years. The accounts are governed by Roth IRA rules that limit annual contributions to $5,500 — $6,500 for those 50 and older. When the balance reaches $15,000, the savings would be transferred to a private sector Roth IRA.

Savers could have money deducted from their paychecks and put into a retirement fund that pays the same variable interest rate as a retirement fund available to federal workers. They would contribute after-tax dollars into the accounts, starting with as little as $25, or could opt for contributions as low as $5 a paycheck.

Savers can withdraw what they've contributed tax-free at any time. Although the money would be deducted from workers' paychecks, employers won't have to administer the program or contribute to it. Savers could take the accounts with them when they change jobs and could roll the savings over into another private-sector retirement account at any time.

Is this a safe investment?

There will be only one investment option: The Treasury will create a security fund modeled after the federal employees’ Thrift Savings Plan Government Securities Investment Fund, which pays a variable rate.

For the year that ended in December 2012, it had an average annual return of 1.74 percent. It posted an average annual return of 2.69 percent for the five years that ended in December 2012. There are no fees, the Treasury said.

The accounts would be backed by the U.S. government; the principal would be protected from loss. Still, unlike in 401(k) plans, workers also will not have the benefit of potentially higher returns when investing in a diversified portfolio of stocks and bond funds.

What problem is myRA designed to solve?

Americans aren't saving enough for retirement. Boston College's Center for Retirement Research estimates that 53 percent of Americans won't have enough money to maintain their lifestyle in retirement. The National Institute on Retirement Security puts the retirement savings shortfall at a staggering $6.8 trillion — or higher. More than half of workers do not have retirement plans at work, the White House says. Obama's plan is designed to get workers into the habit of saving for retirement by giving them an easy-to-use option that protects their principal.

How much will myRA help Americans prepare themselves for retirement?

It's just a start. It is by no means a solution on its own. The program is voluntary for employers too. And the Obama administration acknowledges that it doesn't yet have a commitment from any employers to offer the program.

Another problem: Most workers won't save adequately for retirement unless they are automatically enrolled in savings programs and forced to opt out if they don't want to save. MyRa is completely voluntary. Moreover, the plan allows participants to withdraw contributions without penalty; the possibility that savers will deplete the accounts before retirement makes MyRa still seem an underwhelming response to the retirement crisis.

Nov. 25, 2013

Relocating in retirement is brought up often when we’re working with retirees, especially here in California, where the cost of living is much higher than the country average. The article below does a great job of breaking down things to consider from a taxation standpoint. Beyond your federal tax burden (which usually stays the same no matter where you live if you use the standard deduction) there are state, local, sales, property and inheritance tax variables also to wade through. So if you’re thinking about relocating in retirement -- in hopes of enjoying milder weather and lower expenses -- before you make a move, it pays to assess the overall tax burden of your future home. ---------------------------

No matter where you live, your federal taxes will be about the same if you take the standard deduction. But you'd be amazed at how much your state and local tax burden may vary from one location to another.

People planning to retire often use the presence or absence of a state income tax as a litmus test for a retirement destination. That's indeed one factor for retirees to consider. But higher sales and property taxes can more than offset the lack of a state income tax.

Seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- have no state income tax. Two states -- New Hampshire and Tennessee -- tax only dividend and interest income that exceeds certain limits. But many of the remaining 41 states (and the District of Columbia) that impose an income tax offer generous incentives for retirees. If you qualify for the breaks, moving to one of these retiree-friendly areas could be cheaper – tax-wise -- than relocating to a state with no income tax.

Here are five other key tax factors to consider when comparing states as possible retirement destinations:

Taxes on retirement-plan distributions

Although most states that impose an income tax exempt at least a portion of pension income from taxation, they often treat public and private pensions differently. For instance, some states exclude all federal, military and in-state government pensions from taxation. Other states go even further, exempting all retirement income -- including distributions from IRAs and 401(k) plans.

Some states that tax pension income offer special breaks based on age or income. At the other end of the spectrum, several states are particularly tough on retirees, fully taxing most pensions and other retirement income.

Taxes on Social Security benefits

Depending on your income, you may be required to include up to 85% of your Social Security benefits in your taxable income when filing your federal return. But in recent years, many states have been moving away from taxing Social Security benefits. Fourteen states now tax Social Security benefits to some extent.

Sales taxes

Don't forget to include state and local sales taxes in your personal budget analysis. Some states exempt food and medicine; other states famously have no sales tax at all, while some will tax every dime you spend.

And keep in mind that the sales-tax pain doesn't always stop at the state level. Most states allow cities and counties to assess their own sales taxes.

Property taxes

Property taxes are a major cost factor, particularly for retirees living on a fixed income. The median property tax paid in the U.S. on the median U.S. home value of $185,200 is $1,917, according to the Tax Foundation.

Tax rates vary significantly from state to state and among cities in the same state. But many local jurisdictions offer property tax breaks to full-time residents, some based on age alone and others linked to income.

Check to see how the local jurisdiction generates property-tax bills. There are two key numbers to evaluate: the percentage of a home's assessed value that is subject to tax and the property tax rate. Note that, depending on the tax rate, a home taxed at 100% of its assessed value could have a lower tax bill than a property that is taxed at only 50% of its assessed value. For example, on a $100,000 property taxed at 100% of its assessed value with a 2% tax rate, the property-tax bill would be $2,000. If instead the property is taxed at 50% of its assessed value with a 5% tax rate, the tax bill would be $2,500.

Estate and inheritance taxes

In addition to the federal estate tax (only relevant to estates valued at $5.25 million or more in 2013), some states levy their own estate tax. Many of these taxes kick in at levels lower than the federal threshold. Wealthy retirees need to make sure their estate plans take into account both federal and state estate taxes, which can eat into the amount passed on to heirs.

In a handful of states, heirs have to pony up. States that levy an inheritance tax require heirs to pay taxes on inherited assets.