Posts Tagged "403(b)"
July 13, 2021
Think of Saver’s Tax Credit as Free Money
Life’s unpleasant surprises – a new set of tires or a big vet bill – can get in the way of saving money for retirement. This is especially true for low-income workers.
But if they are able to save a little here and there, the federal government provides a very big assist through its Saver’s Credit. Unfortunately, low-income workers are also the least likely to be aware the tax credit exists.
Here’s how the Saver’s Credit works. The IRS returns half of the amount saved over the year – up to certain limits – by a head of household earning less than $29,626 or a couple earning less than $39,501.
So, the head of household with earnings under the income limit who saves $2,000 in a tax-exempt retirement plan like an IRA or an employer 401(k) would get back the IRS’ maximum credit of $1,000. And the couple that saves $4,000 would get back the $2,000 maximum.
Granted, these are very large sums for low-income workers. But if they can manage to save a little bit every week, the Saver’s Credit is effectively free money from the federal government.
Smaller tax credits are available to people with slightly higher incomes. Individuals and couples do not qualify if they earn more than $49,500 and $66,000, respectively.
Unfortunately, only about a third of households earning under $50,000 are aware of the credit, according to a Transamerica Institute survey.
Now that you know, start saving. You’ll get a big chunk of it back. …Learn More
April 1, 2021
What the Research Can Tell us about Retiring
It’s difficult to envision what life will look like on the other side of the consequential decision to retire.
But research can help demystify what lies ahead – about the decision itself, the financial challenges, and even the taxes. Readers understand this, as evidenced by the most popular blog posts in the first three months of the year.
Here are the highlights:
The retirement decision. The article, “Retirement Ages Geared to Life Expectancy,” attracted the most reader traffic. Myriad considerations go into a decision to retire. But a sense of whether one might live a long time – because of good health or simply seeing that parents or neighbors are living unusually long – is a compelling reason to postpone retirement either to remain active or to build up one’s finances to fund a longer retirement.
A recent study found that as men’s life spans have increased, they have responded by remaining in the labor force longer, especially in areas of the country with strong job markets and more opportunity. This is also true, though to a lesser extent, for working women.
The planning. The second most popular blog was, “Big Picture Helps with Retirement Finances.” It described the success researchers have had with an online tool they designed, which shows older workers the impact on their retirement income of various decisions. When participants in the experiment selected when to start Social Security or how to withdraw 401(k) funds, the tool estimated their total retirement income. If they changed their minds, the income estimate would change.
The tool isn’t sold commercially. But it’s encouraging that researchers are looking for real-world solutions to the financial planning problem, since the insights from experiments like these often make their way into the online tools that are available to everyone.
The taxes. It’s common for a worker’s income to drop after retiring. So the good news shouldn’t be surprising in a study highlighted in a recent blog, “How Much Will Your Retirement Taxes Be?” Four out of five retired households pay little or no federal and state income taxes, the researchers found. But taxes are an important consideration for retirees who have saved substantial sums. …Learn More
February 18, 2021
Big Picture Helps with Retirement Finances
The prospect of retiring opens a Pandora’s box of questions. But one big question dominates all the others: How will I manage my finances when I retire?
This is a vexing problem, and baby boomers could use some help thinking it through. To ease the process, a team at UCLA and Cornell University led by David Zimmerman, a UCLA doctoral student, created an online decision tool. In an experiment, they found that the tool might help future retirees understand how to smooth out their income over many years and make their savings last.
The results are preliminary, and the researchers are refining their analysis. But for the initial experiment, they recruited 400 people, ages 40 through 63. The participants were instructed to use the tool to make three big retirement decisions: starting Social Security, choosing a 401(k)-withdrawal strategy, and deciding whether to purchase an annuity. Their decisions would be on behalf of a 60-year-old who is single and plans to retire in two years. He earns $55,000 and has $250,000 in savings to work with.
The participants were split into two comparison groups. One group received immediate feedback on the impact of each separate decision. For example, when the participants picked a Social Security starting age for the hypothetical person, a chart showed a horizontal line tracking the fixed annual benefit locked in by that decision.
When they moved on to another page and selected a plan for 401(k) withdrawals, a chart showed the age when the savings would probably run out. The final decision was whether to buy a deferred annuity with some portion, or all, of the 401(k) assets. The chart on this page displayed the fixed income the annuity would generate every year for as long as the person lives.
The participants were encouraged to change their decisions as much as they liked to see how a change affected that particular source of income. But the researchers suspected that seeing each decision in isolation doesn’t help to clarify how various decisions work together to determine total retirement income over time.
So, the second group got to see the big picture. The chart in this case displayed the impact of any single decision on the annual income from all sources. …Learn More
January 28, 2021
Smaller Pensions Don’t Spur More Saving
Most state and local governments provide their employees with traditional pensions, which are nice to have. But not all pensions are equally generous.
The monthly benefits vary from one place to the next, and some governments have cut costs by reducing pensions for their newest hires. Further, one in four public-sector workers aren’t currently covered by Social Security, because their employers never joined the system.
A logical back-up plan for these workers would be to contribute money to the supplemental savings plans that most public-sector employers provide. When the workers retire, they can add the money saved in their accounts – a 401(k), 401(a), 457 or 403(b) – to their pension benefits.
But researchers at the Center for Retirement Research (CRR) find that workers are only slightly more likely to participate in a savings plan if they work for government employers with less generous pensions – a criterion based on how much of the worker’s current income will be replaced by the pension after they retire.
This lackluster response may not be surprising. Workers can see what’s deducted from their paychecks every week but don’t necessarily understand how these deductions – combined with their employer’s contributions – will translate to a pension.
Public-sector workers are probably more aware of whether their employers are part of the Social Security system. But apparently workers don’t consider that either. …Learn More