The most popular question I hear from clients these days is “Can I retire, and when?” It is the next milestone for one third of our population, as the first of the Baby Boomer Generation applies for Social Security Retirement Benefits this year. It is estimated at 76 million people will enter this phase of their life over the next 20 years and they are expected to transfer $41 to $100 Trillion dollars from their generation to the next. Are you ready?
According to Employee Benefit Research Institute (EBRI), a non-profit organization, dedicated to unbiased research and education to contribute to, encourage and improve the development of reliable employee benefit programs and sensible public policy, many of those individuals are not.
The EBRI reports that a large percentage of American workers recognize the U.S. retirement system is undergoing major changes, but many are not adapting in ways that are likely to leave them well-positioned for a comfortable retirement, according to the 17th annual Retirement Confidence Survey (RCS). The survey, released April 11, 2007, was sponsored by the nonpartisan Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, a survey research firm, and funded by grants from 31 organizations and Charter Partners with the American Savings Education Council (ASEC).
Their conclusion:
· Workers are slow to see or adapt to a changing U.S. retirement system in ways that are likely to secure them a comfortable retirement.
· Half of all workers are less confident about pension benefits and will rely more and more on 401(k) retirement savings plans and other personal savings and investments to fund their retirement security.
· Many workers are counting on benefits that may not be there, such as retiree health insurance through an employer, even though the number of employers offering this benefit to future retirees is declining.
· Many workers are unlikely to heed investment advice even if they get it, although more than half of workers indicate they would be likely to take advantage of professional investment advice offered by companies that manage employer-sponsored retirement plans.
· Americans overestimate long-term care coverage as only 10 percent of Americans age 65 and older are estimated to have had private long-term care insurance in 2002 (separate from health insurance, Medicare, and Medicaid), suggesting that many are counting on coverage they do not actually have.
· Most savings levels are modest with almost half of workers saving for retirement report total savings and investments (not including the value of their primary residence or any defined benefit plans) of less than $25,000.
· Continued ignorance about Social Security coverage, as only a small minority of workers is aware of the age at which they can receive full retirement benefits from Social Security without a reduction for early retirement.
Here are a few tips to help you get ready:
1. Don’t underestimate your longevity: Based on IRS Retirement Tables, today someone born in 2006 has a life expectancy of 82.4 years, that’s about 20 years longer than the average life expectancy in 1935. With improvements in our Medical System, nutritional standards and awareness, 30-year retirement is a real probability. The overall potential rate of return and rate of distribution on your retirement assets will play an important role in whether or not those funds will last.
2. Consider Health issues: Health Insurance coverage is an overwhelming expense, for anyone who is self employed or retired. Although there are certain health plans available that offer some tax relief, for those who can afford it, the cost of insurance is expensive and the possible effects of not being insured could be out right devastating. This includes the cost of medication, health check-ups, and the cost of long term care.
In 1991, studies indicated that 43% of all persons aged 65 and over will enter a nursing home in the future, and 50% would stay an average of two years. In 2004 the average daily cost of a private room in a Nursing Home was $192/day or $70,080 a year, according to MetLife Market Survey of Nursing Home and Home Care Costs. This is a more than $4,000 annual increase over the prior year. The cost of a shared Nursing Home room averaged $169 a day, or $61,685 a year.
Don’t be fooled with the thought that health care expenses will decrease with age; on the contrary, they will most likely increase at a greater rate than inflation.
3. Take advantage of special tax considerations with Net Unrealized Appreciated Assets: An example of such assets would be Employer-Contributed Company Stock held in a qualified plan. Rolling the stock into an IRA at retirement may not be the best decision. An informed Tax Professional and Financial Planner could help you take advantage of best tax plan for your situation.
4. Explore any special withdrawal benefits before you roll your Employer Plan into an IRA if you are under the age of 59 ½: The Employee Retirement Income Security Act of 1974 (ERISA) allows for special considerations for distributions from Employer qualified plan to be exempt from the 10% early withdrawal penalty for qualified participants (separated from service and who are under the age of 59 ½). So, if you think you will need to withdraw funds before you turn age 59 ½, verify with the Plan Administrator what your options are if you were to stay in the plan until your turn that magical age of 59 ½, but keep in mind, the distributions may be subject to tax.
5. Don’t leave funds in your previous Employer Pension Plan without considering other options: There are many benefits to roll your 401(k) or pension plan into an IRA, especially if you are over the age of 59 ½, including more control of your invested assets, greater investment alternatives and more flexibility for your heirs.
6. Don’t forget to take your required minimum IRA distribution (RMD): The penalty for not taking your required withdrawal, for participants over the age of 70 ½, is 50% of what you should have taken and did not. Every year the custodian/administrator of your IRA or Pension Plan reports the year end value of your accounts to the Internal Revenue Service (IRS). As a result, the IRS knows to look for a distribution reported on your tax return, or if none, they will, most likely, notify you of the error.
7. Consider Roth IRAs whenever possible: Major benefits include, tax free distribution, no RMD, tax free transfers to Beneficiaries, and more. As long as the account has been in place for 5 years, and you are over the age of 59 1/2, currently there are income restrictions on contributions to Roth IRAs and conversations of traditional IRA into Roth’s, but in 2010, the rules will change. Conversions from Traditional to Roth IRAs will remain to be a taxable event, but the income restrictions will be lifted, unless Congress changes the laws, of course.
8. Review and update your beneficiary designations: Review your current beneficiary designation of all your accounts, and keep a copy of your designation request for your own records. Some of the most common mistakes include naming your Estate as your Beneficiary, or a minor child, or not considering distribution control. Things change in our lifetimes; reviewing these documents and placing copies in a secure location makes solid Estate Planning sense.
9. Consider your IRA or Qualified Plan when considering charitable bequests: By naming your favorite charity as a beneficiary, or even giving the asset now, thus moving a highly taxable asset from your estate to a non-taxable entity, you have not only left a legacy, but you also saved your heirs from potential Income and Estate Taxes.
10. Consider Term Life Insurance to help enhance your Retirement and Legacy Plan: Term Life Insurance could be an inexpensive way to increase the funds available for your family when you are not there. Often term policies for individuals under the age of 65 could be quite reasonable and are often guaranteed for 20, and sometimes 30, years; guarantees, of course, are based on the claims-paying ability of the issuer.