Is The 4% Rule Of Retirement Still Good Advice?

By , Contributor

Making sure the income you will count on from your retirement savings is sustainable is one of the most important steps people should take. And one common method that people have used for the past 25 years or so is the “4% rule.” However, some question whether the 4% rule is still useful.

We reached out to three of our experts on retirement planning and asked for their latest thoughts on the 4% rule and whether it’s still worthy advice. Here’s what they had to say.

Reasons it might (or might not) work for you

Jason Hall: The basic premise of the 4% rule is thus: In your first year of retirement, withdraw 4% of your retirement savings, and then increase that dollar amount each year thereafter based on inflation. There are two potential reasons \the 4% rule may be unworkable for you:

  • Median retirement savings balances are very low.
  • Low interest rates could mean that a 4% withdrawal rate would deplete retirement savings too quickly.

According to recent data, the average 65- to 74-year-old has only about $140,000 saved for retirement. At the 4% rule, that’s only $5,600 per year, potentially far less income than many retirees will depend on to supplement Social Security or pensions.

Which brings us to the second point. In retirement, a substantial portion of retirement savings should be in less volatile fixed-income investments, such as government or high-quality corporate bonds. And in the current interest-rate environment, these kinds of bonds often yield less than 3%, meaning that your distributions each year could deplete your retirement savings at too high a rate to make it last the remainder of your life.

But if you’ve saved up far more than the median retiree, or if you’re still years from retirement and making sure you’ve saved enough, then the 4% rule could certainly work for you. As my colleague Brian discusses in a moment, it can at least help you figure out how much you need to have saved for retirement if you’re expecting to use the 4% rule.

It gives a ballpark figure, and that’s important

Brian Stoffe: I’ll be the first to admit that the 4% rule isn’t perfect. There are scenarios where following it strictly could get you in trouble, and those shouldn’t be swept under the rug.

However, when we zoom out and look at the much larger picture of how prepared we are for retirement, the size of our nest eggs is the primary area of concern. Younger workers might be shocked to find out that $100,000 will safely provide only $4,000 of income in retirement. That kind of wake-up call is what motivates us to start saving and investing more.

The 4% rule puts the magnitude of retirement savings into perspective.

Using the 4% rule to ballpark how much you’ll need to save when you’re young could keep you from having to work when you’re ready to retire. Image source: Getty Images.

At the same time, its important to show how a simple strategy of automatic saving and investing can make accumulating a large nest egg very doable. For instance, if you want to have $30,000 of non-Social Security income in retirement, you’ll need a $750,000 nest egg. That sounds like a lot — it may even cause you to despair.

But if you’re 30 years old and earn the inflation-adjusted average of 6.8% per year, it’s not so bad. Put away $75 per week, and by the time you are 70, you’ll have the equivalent of $750,000 in today’s dollars.

You can do better than the 4% rule

Dan Caplinger: Simple rules of thumb often have problems that make them less than perfect solutions to key issues. The 4% rule does a good job of protecting retirees from a worst-case scenario, but one of its major failings is that it can be far more conservative than necessary in many situations and therefore provides retirees with less income than they could realistically take.

Even one of the pioneers behind the rule admitted in subsequent studies that some minor refinements to his models could support withdrawal rates that are closer to 4.5% to 5%. That might not seem like much, but if you want to spend $50,000 per year in retirement, being able to withdraw 5% rather than 4% means only having to save $1 million rather than $1.25 million.

One particular way in which the 4% rule is rigid is in its complete insulation from market performance. The biggest danger to your savings is a bear market early in your retirement years, and the 4% rate is designed to handle particularly unlucky circumstances.

However, if you can be flexible with your withdrawals — taking less money when the markets perform badly — then it can make your savings last a lot longer. The 4% rule isn’t a bad starting point, but it is a bad stopping point if you don’t dig any further into what you need to retire comfortably.

Source: Fox Business


5 Reasons a Roth IRA Should Be Part of Your Retirement Plan

If you’ve been considering a Roth IRA as part of your retirement investment portfolio, now’s the time to start one.

With tax-free growth and tax-free withdrawal opportunities, Roth IRAs provide the investment flexibility to help you achieve both retirement goals and other financial goals.

Here’s more on why a Roth should be part of your retirement investment mix:

1. You get tax-free growth and withdrawal

Unlike a traditional IRA, contributions to a Roth are made using money that’s already been taxed. While there’s no tax benefit up front, your earnings within the account grow tax-free, and withdrawals made during retirement are also tax-free.

There are two rules you must follow to ensure that all the money you withdraw comes out tax-free. For starters, you must be at least age 59½ when you make your withdrawal. Also, the first withdrawal cannot occur until five years after you have made your initial Roth IRA contributions.

2. You can withdraw contributions at any time

The waiting period we describe in point No. 1 applies to your Roth IRA earnings — that is, the investment gains on your contributions. However, the money you contribute to a Roth IRA can be removed at any time for any reason without paying a penalty.

Although it’s not a great long-term investment strategy, you always can access the money you’ve contributed. Because of this fact, some investors use a Roth IRA as an emergency savings fund, knowing that as long as their contributions are invested in a money market or cash-equivalent account, the funds are easily accessible and available penalty-free.

But to state it again, the earnings within your Roth are another story: The five-year aging rule and minimum retirement age rules apply to withdrawals that include earnings.

3. You can contribute as long as you’re working, regardless of age

You can keep adding to your Roth IRA well into retirement. No matter your age, if you earn a paycheck or receive 1099 wages for contract work, you can still contribute to your Roth. By contrast, with a traditional IRA, contributions must stop when an earner reaches age 70½.

4. You can avoid required minimum distributions

Unlike a 401(k), 403(b) or traditional IRA, Roth IRAs don’t mandate minimum distributions during the lifetime of the original owner. That can be a big relief for those who don’t need additional income in retirement or for those who’d rather have a Roth to bequeath as part of their estate.

Minimum distributions do apply to heirs who are not spouses. If you’re considering making your Roth IRA a significant part of your estate, consult an attorney or investment adviser for details on how a Roth inheritance might affect your survivors’ taxes.

Watch the video of ‘5 Reasons a Roth IRA Should Be Part of Your Retirement Plan’ on

5. You get added tax flexibility

The biggest and best benefit of a Roth IRA is hidden in plain sight — namely, the ability to choose whether you take your income in retirement tax-free or taxed.

Shifting political realities have some wondering if their tax rates are likely to be higher in retirement. Many folks are betting that it’s smarter to pay the taxes now instead of kicking the can down the road and risking higher rates later.

Regardless, having at least a portion of your retirement in a Roth IRA offers the option of managing your tax liability by diversifying your sources of income.

Who qualifies?

It’s important to note that not everyone qualifies to invest in a Roth IRA, and for those who do, there are annual contribution limits. For 2016, the upper income limit for single filers to make a full contribution is $117,000. As income increases, the amount that can be contributed diminishes and goes to zero at an income of $132,000. For couples who file jointly, the income limit is $184,000 for a full contribution, with an upper limit of $194,000 for a partial one.

If you exceed those income limits, you can’t contribute new money to a Roth IRA, but you are allowed to convert money from an existing traditional IRA or other qualified plan to a Roth.

For those who can contribute the maximum to a Roth, that amount is $5,500 ($6,500 if you’re age 50 or older).

To learn more about Roth IRAs, check out the IRS’s complete guide here. And remember, the sooner you make a Roth part of your retirement planning, the longer that tax-free balance can grow. Get started today!


IRS Grants Sweeping Relief To Retirement Savers Who Miss Rollover Deadline

By , Contributor

In a surprise move, the Internal Revenue Service today made it dramatically easier and cheaper for taxpayers who miss the 60 day deadline for rolling over retirement account money to fix their errors. “It’s a great move by IRS. It’s a taxpayer friendly move,” exalted  IRA expert Ed Slott, after learning of the change from Forbes. “There will be people, that this ruling today, will save their retirement savings.’’

By law, money received by a taxpayer from an IRA, 401(k), or other workplace retirement plan, must be contributed (i.e. rolled over) to another retirement account within 60 days to escape immediate taxation. Otherwise, it is considered a distribution subject to regular taxes and (if you’re under 59 ½), apossible 10% early withdrawal penalty. That 60 day rule tripped up so many taxpayers, that in 2001 Congress gave the IRS the ability to waive it, if the delay wasn’t a taxpayer’s fault —for example,  his house was destroyed, or a financial advisor gave him bum advice about the time he had to do the rollover.

Until today, however, to get 60 day relief, you had to apply to the IRS for what’s known as a private letter ruling. That meant paying the IRS a stiff fee (which rose on January 1, 2016 to a stunning $10,000), plus shelling out another $5,000 to $10,000 for a tax pro to prepare the private letter ruling request. The ruling took six to nine months, and you couldn’t roll the money into a new account until the IRS  gave the green light. Even worse, Slott says, a lot of people didn’t even know the letter ruling was an option, and ended up paying a whopping tax bill on their retirement savings and losing potentially decades of tax deferral, because of an innocent mistake.

But in Revenue Procedure 2016-47, both  issued and effective today, the IRS has created a new “self-certification” procedure that allows someone who misses the 60 day deadline to avoid the expense and delay of obtaining a private letter ruling. Instead, a taxpayer submits a model IRS letter to the  new retirement account custodian, checking in that letter one of 11 acceptable excuses for missing the deadline. This isn’t an unconditional pass—the IRA custodian will report the letter to the IRS and should the taxpayer be audited, the IRS can still determine he didn’t quality for 60 day relief.

But the 11 excuses are pretty inclusive and cover most of the reasons that the IRS has granted private letter relief for in the past.   They include an error by a financial institution; a taxpayer misplacing (and never cashing) the retirement account distribution check; and a taxpayer mistakenly putting the check in a taxable account he thought was an eligible retirement account.  There’s also lots of dispensation for personal problems, including a death or serious illness in the family;  a home being severely damaged; and even a taxpayer being unable to  complete the rollover because he was incarcerated.

One catch is that the taxpayer must usually complete the late rollover within 30 days after the circumstance which kept him from making a more timely rollover is discovered or ends. “One of these reasons is because a family member dies. Who’s to say when the 30 days starts? When do you finish grieving?’’ Slott asked. “It’s a little ambiguous. I would get it done as soon as possible,” he added.

While the reasons are broad, they only apply if you were eligible to do a 60 day rollover to begin with.  That’s a crucial point, because, as a result of a 2014 U.S. Tax Court decision,  taxpayers may only do one 60 day IRA rollover every 12 months, no matter how many IRAs they have.  (Before that, you could do one rollover a year for each IRA.)

The safest way to move money from one retirement account to another is to have one trustee (that would be the bank, broker, mutual fund or other financial firm that holds your account)  transfer it directly to another trustee.  You can do that as many times a year as you want and run no risk of missing the 60 day deadline. In announcing the new self-certification procedure, the IRS urged taxpayers to consider such direct trustee-to-trustee transfers.

Note that IRAs inherited from anyone other than a spouse never qualify for 60 day rollovers; they can be moved only from trustee to trustee and must be carefully retitled as an “inherited IRA” —e.g.  “John X. Smith II,  deceased, inherited IRA for the benefit of John X Smith III.”

In addition, 401(k) money is almost always best transferred directly from custodian to custodian. That’s because if you take a distribution from your 401(k), your employer must withhold 20% for taxes, meaning you won’t have the full amount to put into the new account unless you can come up with it from your other savings.

Warning: one excuse the IRS won’t allow is that you were using your retirement money as a short term loan for some non-retirement purpose—say, a down payment on a house—and missed the 60 day deadline because of a snag. In its private letter rulings, the IRS has shown little mercy to taxpayers in such situations.

Source: Forbes


Tax-Smart Ways to Save When You’re Too Old for a Traditional IRA

Some workers may be too old to contribute to a traditional IRA.

By Kimberly Lankford, August 19, 2016

I’m 72 years old and earn some money as a self-employed consultant. Can I contribute to an IRA and, if so, how much?

You can’t contribute to a traditional IRA starting in the year you turn 70½. But you can contribute to a Roth IRA at any age, and the money can grow tax-free in the account indefinitely (you don’t have to take required minimum distributions). To qualify for a Roth, your income in 2016 must be less than $132,000 if you’re single or $194,000 if you’re married and file taxes jointly.

You can contribute up to the amount you earned for the year (your net income from self-employment), with a maximum of $6,500 ($5,500 plus $1,000 for people age 50 and older). If your earnings are well over the $6,500 max, you can simply contribute that amount, but if they are close to or under the maximum, you’ll need to know what is considered compensation and how to calculate your allowed contribution. For that information, see IRS Publication 590, Individual Retirement Arrangements.

Or, because you are self-employed, you can contribute to a solo 401(k), says Rande Spiegelman, vice president of financial planning with the Schwab Center for Financial Research. You can deduct your contribution now and defer taxes on the money until it’s withdrawn. But because you’re over age 70½, you must take required minimum distributions from the solo 401(k). Employees usually don’t have to take RMDs from their current employer’s 401(k) if they’re still working at age 70½, but that rule doesn’t apply if you own 5% or more of the company. Because you’re self-employed and own the whole company, you’re stuck taking the RMDs.



The Keys To A Successful Transition To Retirement

By Lacey Kessler, Contributor

As workers get older and closer to retirement, they often focus solely on the “vacation” aspects of retirement. They can’t wait to forget about the daily work grind and start traveling and pursuing their hobbies and interests. But that would be a mistake with possible serious long-term consequences.

Instead, you should think about life not just immediately after you exit from employment, but further down the road as well. You can find some helpful insights in this regard in a recent study titled “Leisure in Retirement: Beyond the Bucket List,” a collaboration between Merrill Lynch and Age Wave, a research firm that focuses on age-related issues.

The report suggests that you focus on four stages of retirement leisure as you transition from being “time constrained” to “time affluent.”

Stage 1: Winding down and gearing up

In the five years prior to retirement, many workers look forward to having more time for personal interests. Almost three-quarters (74 percent) say work is a barrier to pursuing their life goals, and many feel stressed because they’re so busy.

During this period, it’s a great idea to assess your retirement resources to estimate how much income you may have. This can help you decide how much income you really need for the rest of your life. While many people are willing to accept lower income as part of the deal to gain their retirement freedom, you still need to make sure you have enough to cover your basic needs.

In this assessment, you’ll want to plan for your financial, health and social needs throughout all of your retirement.

Stage 2: Liberation and self-discovery

Recent retirees (less than two years) typically enjoy their newly found freedom, but they may be challenged by the realities of adjusting from an identity centered on work to one now defined by a range of interests, including leisure. Most retirees (78 percent) experience an enormous sense of relief at finally having enough time, and many want to try new leisure activities (72 percent).

On the other hand, almost half of all retirees in this stage (47 percent) still feel guilty about not using their leisure time productively. Almost one-quarter (24 percent) continue to work, and an almost equal number (22 percent) regularly volunteer.

During this phase, it’s helpful to be aware of the emotions you’re experiencing and to be forgiving to yourself (and your spouse, if applicable) if you think you’re lost or flailing around with no real road map. As you read about the next stage, you’ll see that this period of uncertainty won’t last forever.

A mistake that many people make is focusing exclusively on this phase of their retirement as they’re dreaming and planning — and not laying the groundwork for the next two key stages.

Stage 3: Greater freedom and new choices

In the three to 15 years following retirement, most retirees’ enjoyment of their leisure activities continues to improve and deepen. Retirees embrace their new identities, and feelings of happiness, contentment and confidence are high. As they further separate from full-time work, “being” increasingly replaces “doing,” and fewer people express guilt at not using leisure time productively.

Retirees at this stage are more likely to take pleasure in day-to-day activities such as exercise, shopping, volunteering, reading, taking classes and socializing with friends. Travel may be longer and more immersive. A small percentage (9 percent) still work, often in different and more enjoyable ways than their core career.

Stage 4: Contentment and accommodation

More than 15 years into retirement, the focus often shifts to maintaining health and independence. Much of leisure time is spent relaxing or connecting with friends and family. Compared to prior stages, retirees are likely to prioritize simplifying their lives.

At this stage, almost three-quarters (72 percent) of retirees report that health conditions are pervasive and that they limit leisure activities. Doctor visits, medical care and care-giving responsibilities limit leisure activities for almost two-thirds (61 percent) of retirees.

For this stage, you’ll want to consider living where it’s easy to connect with friends and family, and where you can arrange for transportation when you’re less able to drive where you need to go. If this requires changing your residence, you’ll want to make this move before you’re less energetic, physically limited or worn out, as reported by many people in this stage.

What’s next?

A more colorful expression of these retirement phases is to plan for your remaining life in three periods: the go-go years, the slow-go years and the no-go years. Each phase has implications for where you’ll live, the friends and family who are close by and how much money you need.

Whatever you call these life phases, you’ll want to ask yourself five very important questions: the who-what-when-where-why that apply to the rest of your life, not just the next five to 10 years. This will help you address the sixth important question: How? As in, how will you support yourself financially for a retirement that could last 30 years or more?

You’ll feel happier and more secure if you take the necessary time now to plan for all the phases of your retirement and become conscious of the issues and emotions that are only natural to experience as you navigate the significant transition away from a life of work.

Source: cbs


How to Super-Fund a Roth IRA

By Lisa Brown, CFP® from Brightworth
You can use after-tax 401(k) contributions to save significantly more for your retirement and reap the tax advantages of a Roth.There is good news for people who work and contribute to a 401(k) retirement plan. Because of a recent Internal Revenue Service ruling, anyone making after-tax contributions to these plans can often turn this money into tens, and possibly hundreds, of thousands of income tax-free dollars when they quit their job or retire.

Most workers are familiar with 401(k) retirement plans. As of 2016, people can contribute up to $18,000 annually to these plans—or $24,000 annually for those over age 50—to defer taxes until this money is withdrawn in retirement.

But some companies also allow workers to make after-tax contributions to their 401(k) retirement plans in what is called an “after-tax account.” For the senior-level manager or executive looking to retire in a few years, or leave for another job, the money in these after-tax accounts can generate a significant amount of tax-free income for them in retirement. That’s because the IRS ruled in late 2014 that a person’s after-tax contributions can now be rolled directly into a Roth IRA and avoid tricky tax issues. In other words, you can effectively “super-fund” a Roth IRA once you leave your employer.

Here’s an example of how this strategy can work. Let’s assume you make the following contributions:

  • Annual Pre-Tax contribution to 401(k): $18,000
  • Annual Pre-Tax “catch up” contribution (50 and older): $6,000
  • Employer Match (varies by employer): $9,000
  • Annual After-tax employee contribution $26,000

Once you leave your employer, your $26,000 in after-tax contributions can be rolled into a tax-free Roth IRA. By taking this step, you have effectively quadrupled the amount of money in future tax-free Roth retirement assets compared with the standard method of funding a Roth IRA. In 2016, annual contributions to Roth IRAs are limited to $5,500 for anyone under age 50 and $6,500 for those 50 and older.

Of course, the benefits really add up the longer a person contributes to their after-tax account in their 401(k) plan. For example, a person putting aside $26,000 in after-tax contributions annually for five years will have saved $130,000—not counting any appreciation. If the same person (who is over the age of 50) made maximum annual contributions directly to a Roth IRA, they would only have $32,500. That’s a difference of nearly $100,000.

The after-tax contribution strategy also has other significant advantages. First, there are no earned income limitations on contributions to an after-tax 401(k) account; anybody, even those earning $1 million or more annually, is eligible. On the other hand, to contribute the maximum to a Roth IRA, you must earn less than $117,000 annually, if single, and $184,000 if married filing jointly. (Certain phase-out limits apply for incomes above these levels). This after-tax 401(k) strategy presents an opportunity for high-income individuals to significantly build income-tax free assets in a Roth IRA.

Next, a person contributing to an after-tax 401(k) account can still make the maximum contribution to their company’s pre-tax 401(k) account, enabling those 50 and older to defer up to $24,000 annually, while still making after-tax contributions to their plan. There is a limit, of course, on how much money can be poured into these two accounts each year: $53,000 for people under age 50 and $59,000 for those age 50 and older. These totals include money contributed by the employee and the company.

Finally, even if your company has discontinued its after-tax contribution provision in recent years, those who have funded after-tax dollars in previous years can take advantage of the Roth IRA strategy once they leave their employer.

I’ve advised several of my clients to take advantage of this super-funded Roth strategy. Here’s a good example: One of my clients recently retired at age 65 and had accumulated more than $350,000 in lifetime after-tax contributions. We took all of this money and rolled it into a new Roth IRA. It would have taken him more than 50 years—longer than his entire working career—to deposit that much in a Roth IRA at today’s limits.

If your company offers this benefit, high-income taxpayers should make it a point to start funding, or keep funding, after-tax contributions into their 401(k) plan. It will enable you to accumulate more assets in a tax-efficient manner for retirement.

Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta wealth management firm. She specializes in investment management, executive compensation, retirement transition and estate planning.


Alternative Investments Aren’t Just For The Rich

By , Contributor

We’ve heard the saying that “the rich get richer,” and we all know that it takes money to make money. If it seems like wealthy people have special tools we don’t know about that help them grow their wealth more successfully, alternative investments could be the key.

Alternative investments — like private equity, direct real estate and reinsurance — have been staples in the high-net-worth portfolios of individuals and institutions for decades. For those new to the concept, alternatives are investments that tend to move independently from the stock market, unlike traditional asset classes such as stocks and bonds.

Average retail investors generally have been relegated to those traditional asset classes, and alternatives have been virtually unavailable to them — until recently.

Continue Reading →


Longer Life Expectancy: A Challenge for Retirement Advice

BankInvestmentConsultant article by Charles Paikert

Increasing life expectancies and better health among seniors will change how retirement planners advice older clients, BankInvestmentConsultant writes.

Living Longer and Betterretirement planning

People are living longer: the oldest person is 116 years old, and the U.S. now has 70,000 people over 100 — twice as many as 20 years ago, according to U.S. Census Bureau data cited by the publication. By 2050, the number of Americans over 65 is projected to reach 84 million, almost double what it was in 2012, according to census data cited by BankInvestmentConsultant.

What’s more, advances in medical technology such as organ replacement and prosthetics are changing not only how long people live, but what they do in their old age, BankInvestmentConsultant writes.

Considering the Costs

All these factors will make it more difficult for financial planners to properly advise their clients, according to the publication.

For some, such as Steven Podnos, principal of Wealth Care in Cocoa Beach, Fla., the answer to increasing longevity is to tell clients to keep working longer, BankInvestmentConsultant writes. Others encourage clients to wait until turning 70 to claim Social Security benefits, according to the publication.

Work past retirement age doesn’t have to be full-time, but there’s “no reason they can’t work until their 70s,” Podnos tells the publication. Many are doing just that: 225 of the American workforce is over 55, according to Bureau of Labor Statistics data cited by BankInvestmentConsultant.

Employers are also realizing that older workers can be a boon rather than a liability, according to the publication.

Virtual reality can make employment for people over 50 even easier: physical constraints will no longer play as big a role when someone can work remotely, Jeremy Bailenson, founding director of Stanford University’s Virtual Human Interaction Lab, tells BankInvestmentConsultant.

Not Just About the Money

Ellen Siegel, an advisor based in Miami, says where and how her clients live is key to ensure a comfortable retirement, particularly for those considering continuing-care communities, the publication writes. Geographical location is often another issue, she tells BankInvestmentConsultant.

To cope with expenses, some advisors recommend that client take out reverse mortgages, according to the publication. Annuities and long-term care insurance, while controversial, should also be considered, advisors tell BankInvestmentConsultant. Long-term care insurance should also not be overlooked, they say. What’s more, new products, such as hybrid insurance and annuity products, are constantly coming to the market and advisors should keep abreast of them, BankInvestmentConsultant writes.

Many advisors also focus on areas of senior living outside of work and home, such as staying active through volunteering, BankInvestmentConsultant writes. Siegel advises older clients to retain a life coach to help steer them, according to the publication.

Source: BankInvestmentConsultant


How to Pay Less Taxes on Retirement Account Withdrawals

US News

You don’t get to use all the money in your traditional 401(k) and IRA for retirement because you still have to pay taxes on it. However, there are several ways to minimize taxes as you pull money out of your retirement accounts. Consider these strategies to decrease the tax bill for your retirement account withdrawals. Continue Reading →

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