Posts Tagged "IRA"

State Auto-IRAs are Building Momentum

About half of the nation’s private-sector employees do not have a retirement savings plan at work, and that hasn’t changed in at least 40 years.

Some states are trying to fix this coverage gap in the absence of substantial progress by the federal government in solving the problem.  And the state reforms are gaining momentum.

Auto-IRA mapIn the past year alone, Maine, Virginia, and Colorado have passed bills requiring private employers without a retirement plan to automatically enroll their workers in IRAs, with workers allowed to opt out. New York City, which is more populous than most states, approved its program in May. And other states are either starting to implement programs or looking at their options.

Auto-IRAs are already up and running in California, Illinois, and Oregon, where a total of nearly 360,000 workers have saved more than $270 million so far. The programs are run by a private sector administrator and investment manager.

These mandatory programs are the only practical way to close the coverage gap, because voluntary retirement saving initiatives have never done the trick. Numerous voluntary plans created by the federal government – such as the Simplified Employee Pension (SEP) – have failed to measurably increase coverage.

Large corporations usually offer a 401(k) plan and match some of their workers’ savings. But millions of restaurants, shops, and other small businesses either can’t afford to set up their own 401(k)s or don’t see it as a priority. Without additional saving, half of U.S. workers are at risk of a drop in their standard of living when they retire.

State auto-IRA programs eliminate the administrative burden and expense to employers of a private plan and provide an easy way for workers to save. The money is taken out of their paychecks before they can spend it and is deposited in an account that grows over time. The state programs also permit workers  to withdraw their contributions without a tax penalty for emergencies, like a medical problem or broken-down car, if they need the money they’ve saved. …Learn More

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.

Savers credit tableHere’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.

Piggy bankGranted, 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

Printed Social Security statement

Workers Overestimate their Social Security

The U.S. Social Security Administration reported a few years ago that half of retirees get at least half of their income from their monthly checks. For lower-income retirees, the benefits constitute almost all of their income.

Yet Americans have only a vague understanding of how this crucial program works – one of many obstacles on the road to retirement. A new study by the University of Southern California’s Center for Economic and Social Research finds that workers are overly optimistic about their future benefits, which is one reason so many people don’t save enough for retirement.

Workers “would probably have fewer regrets after retirement” if they were better informed, the study concluded. And many retirees in the study have regrets. Roughly half wished they’d done a better job of planning.

The researchers’ focus was on working people ages 30 and over. In a survey, the workers were asked to pick the age they plan to start Social Security and to estimate their future monthly benefits. To get as good a number as possible, they were instructed to predict a range of benefits in today’s dollars and then assign subjective probabilities to the amounts within that range.

Their guesses were compared with more precise estimates, made by the researchers, who predicted each workers’ future earnings paths – based on characteristics like their age, gender, education, and past and current earnings – and put them into Social Security’s formula to calculate the expected benefits.

The subjective estimates made by every group analyzed – men, women, young, old, college degree or not – on average exceeded the researchers’ more accurate estimates, though to different degrees. For example, women were more likely than men to overshoot the reliable estimates. Interestingly, people who said they had “no idea” what their benefits would be came closer to the mark than anyone – having less confidence apparently offset the tendency toward overestimation.

Young adults, who aren’t naturally focused on retirement, overshot their benefits the most. This is not surprising but still unfortunate, because good decisions made early in a career – namely, how much to save in a 401(k) – will greatly improve financial security in retirement.

One explanation for workers’ widespread inaccuracy, the researchers found, is that they aren’t clear on how much their benefit would be reduced if they claim it before reaching Social Security’s full retirement age. …Learn More

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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

The Cares Act

Wisconsin Finds Owners of Lost Pensions

Some people lose old retirement accounts because they forget about them. Others don’t want the hassle required to retrieve small amounts. And workers who change jobs fairly often can leave a lot of small accounts in their wake.

As a result, millions of dollars of retirement wealth – in pensions, 401(k)s, IRAs, profit-sharing plans, and annuities – sit in state repositories of unclaimed property.

So how can workers and retirees be united with their long-lost money?

To answer this question, a new study contrasts what has happened to unclaimed retirement accounts in two states with vastly different approaches to handling them: Wisconsin and Massachusetts.

Wisconsin in 2015 began to use Social Security numbers to automatically match up and return misplaced retirement accounts to their owners. As long as the account has a Social Security number attached to it, the state can find a resident’s current contact information in Wisconsin’s taxpayer records.

Under this system, two-thirds of the accounts were returned in 2016 and 2017, the researchers found.

Over the same two years in Massachusetts, only 3.4 percent of unclaimed retirement accounts were returned to their owners. Massachusetts takes the same passive approach used in most states: individuals must initiate the process by locating an account in the state’s unclaimed property database and then retrieve it themselves.

The University of Wisconsin study also uncovered an explanation for why some people are motivated to track down accounts on their own. …Learn More

Tax Form 1040

How Much Will Your Retirement Taxes Be?

Four out of five retired households will pay little or no income taxes. But the tax rates at the highest income levels are meaningful, averaging 11 percent of household income and as much as 23 percent at the very top.

These estimates come from a new analysis by the Center for Retirement Research that sheds light on a potentially important consideration that is often overlooked by people approaching retirement age.

The highest tax rates are paid by the highest-income households because they often withdraw money from 401(k)s and IRAs to supplement their Social Security benefits. They must also pay capital gains taxes when they sell stocks and bonds for a profit from their regular financial accounts.

Retirement Taxes ChartHouseholds with income in the top 20 percent have nearly $770,000, on average, in retirement savings and other financial assets – their taxes equal 11 percent of their total retirement income. However, limiting the households to the top 5 percent of the income distribution, the tax rate increases to 16 percent – and the top 1 percent pays 23 percent.

These estimates assume retirees start pulling money out of their taxable 401(k) and IRA accounts when the IRS’ required minimum distributions (RMDs) kick in at age 70 1/2 – this age will increase to 72 next year. The tax rates were very similar under alternate scenarios that assume retirees either start withdrawing savings prior to the RMD or buy an immediate annuity with a survivor’s benefit.

The tax estimates are based on data for older U.S. households with at least one recent retiree. The researchers first calculated their expected future lifetime income from Social Security, 401(k)s and other sources in each year. The future yearly tax payments were then estimated using a program that applies IRS rules and each state’s tax rules to the various types of retirement income.

The tax rates are their total tax bills as a percentage of their total income. …Learn More

High Fees Tied to Mutual Fund Complexity

When David Marotta is investing his clients’ money in mutual funds, he scrutinizes the fees.

SP500 Index FundsTo demonstrate why fees are so important, Marotta charted the fees and 10-year returns for dozens of index funds in the Standard & Poor’s 500 family. Since these funds all track the same index and their performance is roughly the same, the fees will largely determine how much of the return the investor keeps and how much goes to the mutual fund company.

“The larger the fee the less that it performs. It’s kind of a straight line,said the Charlottesville, Virginia investment manager. “Anytime we’re picking a fund” for a client, “we’re trying to find the lowest-cost fund that we can find in that sector.”

The fees for the S&P 500 index funds he analyzed using Morningstar data ranged from one-tenth of a percent to 2.5 percent of the invested assets.

The issue of fees versus performance is more complicated for actively managed investments, which sometimes have strong returns that justify paying a higher fee. But in any investment, the true measure of how it’s doing is the after-fee return.

However, deciphering mutual fund fee disclosures can be extremely difficult for do-it-yourself 401(k) and IRA investors – and that is by design.

An analysis of S&P 500 index funds identified numerous narrative techniques in mutual fund documents that confuse investors. The researchers – from the University of Washington, MIT, and The Wharton School – evaluated each fund’s disclosures and showed that funds with more complex explanations of their investment holdings and fees also have higher fees. The researchers call this “strategic obfuscation.”

The study, which covered the period from 1994 through 2017, illustrated this complexity with two firms’ descriptions of their S&P 500 index funds. Schwab’s one-sentence summary gets right to the point: “The fund’s goal is to track the total return of the S&P 500 index.” This fund’s annual fee is 0.02 percent of the assets.

Deutsche Bank’s disclosure is more complicated for a few different reasons. First, the summary is three paragraphs and starts this way: “The fund seeks to provide investment results that, before expenses, correspond to the total return of common stocks…” …Learn More