As we approach or settle into retirement, financial resilience becomes increasingly important. The ability to withstand economic downturns ensures that we can maintain our quality of life and achieve our retirement goals. This guide offers strategies specifically tailored for those between 55 and 75, helping you navigate economic uncertainties with confidence.

Building an Emergency Fund

A Safety Net for Peace of Mind

Having an emergency fund is crucial, especially in retirement. Here’s how to build and maintain it:

• Assess Your Needs: Aim to save at least six months’ worth of living expenses. This should cover your essential costs, including housing, utilities, groceries, and healthcare. Given that medical expenses can be unpredictable, it’s wise to err on the side of caution and potentially save even more.
• Secure Savings Accounts: Use a high-yield savings account or money market account for your emergency fund. These options provide better interest rates and easy access to your money. Unlike investments in the stock market, these accounts offer stability and immediate liquidity, which is crucial during emergencies.
• Automate Contributions: Even in retirement, automating small monthly transfers from your checking account to your emergency fund can help it grow over time. Consider directing a portion of any supplemental income, such as dividends or part-time work earnings, into this fund.

Diversifying Income Streams

Stability Through Multiple Sources

Relying solely on retirement accounts or Social Security can be risky. Diversify your income to ensure stability:

• Part-Time Work: Consider part-time or consulting work in your field of expertise. This not only provides additional income but also keeps you mentally and socially engaged. Many retirees find part-time work fulfilling and a good way to stay active.
• Rental Income: If you own property, renting it out can be a reliable income source. Consider short-term rentals, such as Airbnb, if you have extra space or a second home. Alternatively, long-term leases can provide steady, predictable income. Ensure you understand the responsibilities and potential risks involved in becoming a landlord.
• Dividend-Paying Investments: Invest in stocks or funds that pay regular dividends. This can provide a steady income stream without depleting your principal investment. Diversified dividend-focused funds can offer stability and reduce the risk of income fluctuation.
• Annuities: Annuities can offer a guaranteed income for life, reducing the risk of outliving your savings. Fixed annuities provide regular payments that can help cover your essential expenses. However, be aware of the fees and terms associated with annuities, and consider consulting a financial advisor to determine if this is a suitable option for you.

Debt Management Strategies

Minimizing Financial Burdens

Reducing debt before and during retirement is essential for financial security:

• Pay Off High-Interest Debt: Prioritize paying off high-interest debts like credit cards. High-interest debt can erode your savings and create financial stress. Consider using a portion of your retirement savings to eliminate these debts if it makes sense for your overall financial plan.
• Consider Downsizing: If you have significant mortgage debt, downsizing to a smaller, more affordable home can lower your housing costs and possibly eliminate your mortgage. This not only reduces your monthly expenses but also frees up equity that can be used to bolster your savings or invest in income-generating assets.
• Refinance Loans: Look into refinancing options for any remaining loans to secure lower interest rates and more manageable payments. This can be particularly beneficial for mortgages and car loans, where even a small reduction in interest rates can lead to significant savings over time.
• Debt Snowball vs. Debt Avalanche: Choose a debt repayment strategy that works for you. The debt snowball method involves paying off the smallest debts first to build momentum, while the debt avalanche method focuses on paying off the highest interest debts first to save money on interest. Both approaches have their benefits, so select the one that best fits your financial situation and psychological preferences.

Investment Diversification

Protecting Your Nest Egg

A diversified investment portfolio is key to weathering economic downturns:

• Balance Risk and Safety: Maintain a mix of stocks, bonds, and other assets. Generally, as you age, you should shift towards more conservative investments to protect your capital. This doesn’t mean completely avoiding stocks but rather balancing them with more stable investments like bonds and fixed-income accounts.
• Regular Portfolio Reviews: Schedule annual reviews of your investment portfolio with a financial advisor. Adjust your asset allocation to match your risk tolerance and retirement goals. Ensure your investments align with your income needs and the current economic outlook.
• Consider Real Estate: Real estate investments can provide diversification and a hedge against inflation. If you’re already a homeowner, additional investments in real estate can further diversify your income sources. Real estate investment trusts (REITs) offer a way to invest in real estate without the hassles of direct property management.
• Stay Informed: Keep up with changes in the financial markets and the broader economy. Understanding the factors that affect your investments can help you make more informed decisions and adjust your strategies as needed.

Expense Management

Living Within Your Means

Keeping your expenses in check is vital for long-term financial health:

• Track Your Spending: Use budgeting tools or apps to monitor your expenses. Identifying areas where you overspend can help you make necessary adjustments. This can include discretionary spending on dining out, entertainment, and travel.
• Reduce Discretionary Spending: Evaluate non-essential expenses, such as dining out or subscription services. Cutting back can significantly improve your financial situation. Look for cost-effective alternatives that still allow you to enjoy life, such as cooking at home or participating in free community activities.
• Create a Realistic Budget: Establish a budget that covers your essential expenses, includes savings for emergencies, and allows for some discretionary spending. Factor in potential changes to your income and expenses over time, such as increased healthcare costs or changes in Social Security benefits.
• Plan for Healthcare Costs: Healthcare can be a significant expense in retirement. Consider long-term care insurance and other healthcare plans to cover potential future needs. Regularly review and update your healthcare coverage to ensure it meets your needs and budget.

Real-Life Examples

Learning from Others

Hearing how others have successfully navigated financial challenges can be inspiring:

• Case Study 1: Linda, a retired teacher, started a tutoring business to supplement her pension. The extra income allowed her to travel and cover unexpected medical expenses. She utilized her existing skills and experience, which made the transition to part-time work seamless and fulfilling.
• Case Study 2: Bob and Mary downsized their home and moved to a lower-cost area. The proceeds from selling their larger home paid off their remaining mortgage and funded their emergency savings. This move significantly reduced their monthly expenses and provided a more manageable lifestyle.
• Case Study 3: John, a retired engineer, invested in annuities. These investments provided a steady income stream that supplemented his Social Security and pension, ensuring he could maintain his standard of living without dipping into his principal savings.

Expert Insights

Advice from the Professionals

Financial experts emphasize the importance of preparation and proactive measures:

• Maintain Liquidity: Ensure you have easy access to a portion of your investments in case of emergencies. Liquid assets, such as cash and short-term bonds, are ideal. This provides a buffer that can help you avoid selling long-term investments at a loss during market downturns.
• Stay Informed: Keep up with economic trends and financial news. This helps you make informed decisions and adjust your strategies as needed. Subscribing to financial newsletters and following reputable financial news sources can keep you updated on relevant developments.
• Seek Professional Help: Regular consultations with a financial advisor can provide personalized advice and help you stay on track with your financial goals. An advisor can help you navigate complex financial decisions, optimize your investment strategy, and ensure that your retirement plan remains robust and adaptable.

Conclusion

Building financial resilience is a continuous process, especially as you approach or enjoy retirement. By establishing an emergency fund, diversifying income streams, managing debt, diversifying investments, and controlling expenses, you can better prepare for economic downturns. The goal is to ensure you not only survive but thrive during financial challenges, securing a stable and fulfilling retirement. Start implementing these strategies today to protect and enhance your financial future. By taking proactive steps, you can enjoy the peace of mind that comes with knowing you are well-prepared for whatever economic uncertainties lie ahead.

Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here

The post Preparing for Economic Downturns in Retirement first appeared on SafeMoney.com.

In an era marked by economic fluctuations and rising living costs, Americans’ visions of a comfortable retirement are reaching new financial heights. Recent data suggests that the average American believes they will need approximately $1.46 million to retire comfortably, a figure that starkly contrasts with the actual savings most currently possess.

The $1.46 Million Benchmark

A 2024 study by Northwestern Mutual highlights a significant increase in the retirement ‘magic number’—the amount individuals believe they need to retire comfortably. This number has jumped to $1.46 million, up 15% from the previous year’s $1.27 million and a substantial 53% from the $951,000 reported in 2020​​. This uptick far outstrips the current inflation rate, suggesting that more than just economic indicators are at play.

Generational Expectations and Realities

The expectation varies notably across different generations. Gen Z and Millennials are setting the bar high, with targets over $1.6 million, driven perhaps by their longer anticipated lifespans and potentially more expensive retirement goals​. In contrast, Gen Xers and Baby Boomers have somewhat lower expectations, though they are not insubstantial. Interestingly, high-net-worth individuals envision needing nearly $4 million, underscoring the varied perceptions of ‘comfortable’ retirement across economic brackets​​.

Despite these lofty aspirations, the average American has less than $89,000 saved for retirement, illustrating a daunting gap between dreams and reality​ (Northwestern Mutual)​. This disparity points to a potential crisis as populations age and savings lag behind needs.

The Impact of Inflation and Economic Trends

Inflation, though moderate in terms of annual rates, has a compounded impact over time, particularly on fixed incomes and savings that do not keep pace. The expanding expectation for retirement funds may partly reflect growing awareness of these challenges. Additionally, the shifting economic landscape, including job market volatility and the evolving nature of retirement itself, plays a role. The traditional notion of retirement is being redefined, increasingly seen as a phase of life where active living and high costs continue much as they did during employment.

Strategies for Closing the Gap

To bridge the gap between current savings and retirement goals, financial experts emphasize starting early. The power of compound interest means that savings grow exponentially over time, so the earlier one begins, the better the potential outcome. Moreover, diversifying retirement savings through a mix of traditional 401(k) plans, IRAs, and Roth IRAs can offer tax advantages and income stability in later years​​.

Educational efforts on financial planning are crucial, as understanding the basics of investment, the benefits of early savings, and the impact of taxes can empower individuals to take more effective actions toward securing their retirement. Additionally, considering alternative retirement income sources like annuities and life insurance can provide further buffers against volatility and longevity risk​​.

The Role of Financial Advisors

Given the complexities of modern financial markets and retirement planning, professional advice can be invaluable. Financial advisors can tailor strategies to individual needs, taking into account factors like expected lifespan, health costs, and lifestyle aspirations​. They also play a critical role in educating clients about the realities of retirement costs and how to plan for them effectively.

Looking Forward

As the average retirement savings goal continues to rise, the gap between what Americans have and what they believe they’ll need underscores a vital need for enhanced financial education and planning. The narrative of retirement is changing, and with it, the strategies for achieving a secure and comfortable later life. Addressing this issue will require concerted efforts from individuals, financial advisors, and policymakers alike to ensure that the dreams of retirement do not outpace the means to achieve them.

In sum, while the goal of $1.46 million might seem daunting, it is not unattainable. With strategic planning, early savings, and the right financial advice, Americans can work towards closing the gap between their current savings and their retirement aspirations.

Estimating Annual Income Needs for Retirement

In planning for retirement, a key assumption is the portion of pre-retirement income that should be replaced to maintain a similar lifestyle in retirement. Financial experts generally recommend aiming to replace between 70% to 90% of your annual pre-retirement income through a combination of savings and Social Security​​. This percentage can serve as a useful guideline for estimating the annual income you’ll need once you retire, helping to shape how much you should be saving now.

For example:

If someone earns an average of $63,000 annually before retirement, they should plan to have access to about $44,000 to $57,000 per year in retirement to sustain their standard of living​​. This approach takes into account changes in expenses—like reduced costs from commuting and work attire, against potential increases in healthcare or leisure spending.

Setting these targets can help guide your investment choices and saving strategies, ensuring you are financially prepared for retirement. Remember, the exact percentage can vary based on individual circumstances, including expected retirement lifestyle and other income sources.

Looking for Guidance?

If you’re seeking personalized advice, consider reaching out to a financial professional.. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 of contact us here to schedule an appointment with an independent trusted and licensed financial professional.

Source Disclaimer

Northwestern Mutual’s 2024 study on retirement savings and expectations: Northwestern Mutual
NerdWallet’s guide on retirement planning and income assumptions: NerdWallet

The information provided in this content is based on sources believed to be reliable and accurate at the time of writing. However, the data and statistics mentioned are subject to change and may not reflect the most current developments or research. Readers are advised to consult additional resources and verify the information before making significant financial decisions. This content is intended for informational purposes only and should not be construed as financial advice.

Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here

The post The Rising Cost of Retirement Dreams first appeared on SafeMoney.com.

At the very least, a second opinion can’t hurt. After all, retirement is very different from other stages of life. During their working years, people usually make goals around investing, which focuses on growing assets over time. On the other hand, retirement planning is about making sure those assets will pay a steady income stream throughout their golden years.

Of course, that isn’t the only thing that it’s homed in on. Forward-thinking retirement planning also covers protecting assets from various financial pitfalls that can arise, from chaotic market swings and rising inflation to unexpected medical emergencies and long-term care spending. Those assets need to last as long as you need them to generate retirement income.

If you are thinking about pursuing a second opinion for your financial situation, here are a few things to consider. We will talk about what a second opinion for retirement planning might look like, what to look out for, and some other things to keep in mind.

What Is a Second Opinion for Retirement?

Seeking out a financial second opinion is simply having another financial professional review your current plan. That is all.

Sometimes you ask a second opinion from a doctor after you have received a recommendation for a major surgery. If you run a business, you might get input from an attorney specializing in a certain area of law after you have obtained general counsel. A second opinion on retirement planning is the same concept, except it’s for your retirement finances.

To be clear, a second opinion is just what someone thinks of your existing financial plan. You don’t move forward with their suggestions. You may feel that their advice isn’t right for you. Nor are you under any obligation to have to work with the financial professional who gave you their opinion. The decision of whether to stick with your current financial advisor or work with a new advisor is completely up to you.

The good news is a second opinion can give you feedback on parts of your retirement plan needing changes, draw your attention to areas you didn’t notice before, or equip you with new ideas to enhance your financial future.  It can be a great opportunity to see how on track financially you are (and what you can do better going forward).

How Can an Income Plan Help You?

You might have a retirement investing strategy, but what about a retirement income plan? These things are very distinct from each other. A retirement income plan is a blueprint for ensuring you can maintain a secure lifestyle in retirement. One way to look at it is like having a roadmap for your financial future.

Once you kick off your work boots, the income from your earnings in your career goes away. Where will you come up with the money to pay the bills? An effective plan will lay out where your income will come from, ensuring you have a reliable flow of money to cover your living expenses.

Of course, there is the question of how reliable those income sources are. Can you truly count on those income sources, regardless of what the market does? Are there any financial gaps in your retirement plan that need addressing? How do you protect yourself from many risks that can derail your retirement dreams?

A well-thought-out income plan would distinguish between “permanent” income sources – or that pay predictable, ongoing income – and “maybe” income sources – or that pay income that can go up or down depending on market and interest rate conditions.

Unlike an investing plan, which is largely about accumulation, a retirement income plan is about decumulation, or how you turn your retirement assets and savings into lifelong income. And thanks to advances in healthcare and technology, retirement can last for as long as a few decades, which makes it prudent to plan for 30 years of income or greater.

Why Consider a Second Opinion on Retirement Planning?

Retirement planning has a lot at stake. There are no second chances with some financial decisions, and to name a few:

• Where you roll over your 401(k) balance
• If you have a pension, how and when you receive your benefits
• When you start Social Security retirement benefits (with a few exceptions)
• Whether you opt for long-term care protection before it’s too late

Some of these decisions can add up to tens of thousands, or even hundreds of thousands in savings or benefits. Once you are retired, you are in it for the long haul. Any missteps could have lasting effects.

That is why getting a second opinion on your retirement planning can be invaluable. It’s a chance for you to have a fresh set of eyes look over your strategy and identify any areas for improvement.

If your current plan has any gaps, a second opinion can help you pinpoint those as well. Again, there are no do-overs when it comes to many retirement decisions. Your choices should be made with well-informed confidence and help bring you the most benefit.

What Questions Should You Ask for a Second Opinion?

If you are considering a second opinion for your retirement plan, here are some important questions to explore:

• Do you have a set retirement date in mind?
• Could you potentially retire earlier than expected?
• Are there any financial goals you would like to achieve before retiring?
• Will you have enough money to support your desired lifestyle in retirement?
• How long should you plan for in retirement, considering factors like life expectancy and healthcare costs?
• Does your investment strategy align with your risk tolerance and financial goals?
• What is the optimal order for withdrawing funds from your various retirement accounts?
• How can you prepare for potential long-term care and healthcare expenses?

How Much Does a Second Opinion Cost?

The cost of getting a second opinion on your retirement plan can vary depending on the financial professional whom you choose. Some may charge a fee for their services. Others may offer initial consultations at no cost.

In the case of paid-for opinions, you may receive a full-fledged plan with suggested improvements for your current plan. For example, the financial professional may identify some opportunities for tax savings that you might not be taking advantage of.

In the situation where a financial second opinion is complimentary, the goal is to show some of the value that you would receive from working with that financial professional. Their review may have high-level ideas or concepts for you to consider. By choosing to work with them, you would then get access to more fleshed-out recommendations that enhance your situation.

Either way, the investment of time – and possibly money – is a small price to pay for the peace of mind knowing your retirement plan is on solid ground. The paid-for advice may be the route you choose if you are looking for guidance to work off. If you want help in enhancing your current plan, you may opt to work with that financial professional and commit to certain financial products or strategies that they suggest to you. For example, they may recommend that you include an annuity as part of your retirement income plan so that you have ongoing income for as long as you may live.

Remember, you aren’t under obligation to act on the second opinion, either – there is nothing wrong with sticking with what you have, although that advisor did give the opinion they did for a reason.

Finding the Right Financial Professional

When seeking a second opinion on your retirement plan, it’s crucial to find the right financial professional for the job. Start by asking for recommendations from trusted sources, such as friends, family, colleagues, or other professionals like your tax advisor or attorney.

Look for advisors who specialize in retirement income planning. One thing to confirm is whether they have relevant professional credentials, such as the RICP®, CRPC®, or CFP® designation. On top of that, you can look at other factors like their track record, published articles, or contributions to the field. Membership in professional organizations like the Financial Planning Association (FPA) or National Association of Insurance and Financial Advisors (NAIFA) can show their commitment to continuing education and professionalism.

You might schedule appointments with three financial professionals and see what each of them brings to the table before moving forward with someone. That can give you more details and confidence in what you need and who would be best to guide you.

The Bottom Line on a Second Opinion for Retirement Planning

Retirement planning can be daunting. But it’s an important part of your financial puzzle, and it’s crucial to get it right. Getting a financial second opinion can bring you clarity, better direction, and peace of mind as you prepare for a secure lifestyle in retirement.

With the right guidance and support, you can feel confident that your retirement plan is well-crafted to support you in your golden years. Don’t be afraid to ask questions and clarify when there is something you don’t understand. Your financial security and your life savings are at stake. But with a well-thought-out second opinion, you can have even more confidence that you are on the right path for lasting financial wellness.

Are you looking for someone to give you a second opinion of your retirement planning? Or maybe you have a plan, but not quite yet built for retirement. For your convenience, many independent and experienced financial professionals are available here at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly. Should you want a personal referral, please call us at 877.476.9723.

The post Could You Benefit from a Second Opinion for Retirement Planning? first appeared on SafeMoney.com.

On the other hand, it’s also a hard goal to achieve. One major moving target in retirement is how our health needs evolve as we age. These changes can be especially impactful if we move into health situations requiring assisted living or other long-term care support.

According to a U.S. News & World Report survey, 9 in 10 adults aged 55 and up said it’s an important goal for them to be able to receive this care in their own homes, where they are comfortable and familiar, if at all possible. In this article, we will discuss aging in place and some other things to keep in mind, including:

• What you should know about it,
• Ways to create a sustainable plan that can make it possible, and
• Potential pitfalls for planning for aging in place.

What Does Aging in Place Really Mean?

Aging in place means different things to different people. Still, basically it refers to growing old in your home and community rather than downsizing or moving into some form of assisted or institutional living.

The Centers for Disease Control and Prevention defines it as “the ability to live in one’s own home and community safely, independently, and comfortably, regardless of age, income, or ability level.” Those who do age in place have better self-esteem, life satisfaction, and a more positive quality of life, according to research by AARP.

Being able to age in place is good for everyone. The retiree enjoys the health and wellness benefits of living in the comfortable and familiar settings of their home, while the surrounding community benefits from retaining its older members. Young people can enjoy contact with older adults, and those adults can volunteer, as they do, more than any other age group.

Is Aging in Place Really Possible for Many Retirees?

The obvious question is, of course, is aging in place financially and physically possible for most retirees? Let’s look at some of these issues and ways to respond to them.

Affordability

Often, there are financial questions facing a retiree seeking to age in place. Mortgages, HOA fees, utility bills, and paying for services one can no longer easily do (ex: lawncare), all factor into what may be affordable for someone.

If you aren’t sure about what spending you can afford, your financial professional can help you understand what is available and how you can begin to arrange your finances now to deal with the issues then.

Structure Changes

Consider whether you have a deep bathtub or a walk-in shower. Are there lots of stairs? Can you negotiate the house in a wheelchair?

What other changes may be needed to cover any future mobility issues? Any of these may be a problem in years ahead and require more structural modifications than you can afford or want to live through.

Health Issues

Consider where your health is now and where it will be. If you are already suffering from a chronic and life-threatening condition, assisted living might be the better option for you. If you are relatively healthy and expect to continue to be, aging in place may work for you.

Just be aware that your needs will change over the years, and it’s good to anticipate any responses to those changes.

Getting Around

Can you still drive? Is public transportation convenient and safe near your home? Will you need share-a-ride services, and are they cheap and easy in your area? You will lose your ability to drive at some point and want to ensure you can still get around as you need to.

How Do You Plan for Aging in Place?

Planning for aging in place can be challenging because of many unpredictable variables.

Health changes can be slow, or they can occur in a single event in a way that makes a huge difference in someone’s ability to live independently. But there are some things that everyone can anticipate and plan for, of which we cover a few in this article.

Healthcare Needs

Healthcare considerations for aging in place start with where you are right now. Are there chronic illnesses like diabetes or COPD that you have to plan around? Can you remember to take your prescribed medications at the right time and in the right amount? Do you need any special care?

There are ways to deal with all of these issues. You can use weekly pill holders and keep Post-It notes or an online calendar to remember appointments.

If you are just out of the hospital, your discharge team can help you make any necessary arrangements for special care and help you find out if Medicare will cover a home health aide. If you have memory issues with doctor instructions, either get them in writing or take a trusted person along with you on doctor visits. Ask this person to write down everything the doctor wants you to do.

Available Support

Do you need help with planning for aging in planning and other important “what-ifs” of retirement? Talk to your financial professional at SafeMoney.com or elsewhere for guidance on starting points for your retirement planning.

Insofar as aging in place planning, AARP and your local Area Agency on Aging can help you find resources. Speak to them as you plan and ask for help from friends and family who may already be aging in place.

Your financial professionals can be valuable guides in choosing financial options. Their input can assist you in matters such as how to integrate your Social Security benefits with your other retirement assets and disbursements to maximize what you get.

Food Issues

Grocery shopping can be handled by delivery or, if you are still driving, by picking up an online order. Cooking is more challenging. It may require you to work with neighbors and friends to ensure everyone gets plenty of fresh, healthy food. Potlucks, progressive dinners, and cooperative cooking can all help to achieve this goal.

Meal delivery services can bring hot meals to you a few days a week, often free or at a low cost. Perhaps you have a friend or relative who can bring you a healthy meal a few times a week.

Financial Matters

Elder financial abuse comes up a fair bit in the United States. It’s good to plan against that occurring to you. Even if you don’t have to worry about abuse, memory issues later on may affect the timely paying of bills.

Trusted relatives can help, as can volunteers, financial advisors, trust officers, and even senior care specialists. Keeping your bills paid and your finances protected are key elements to aging in place successfully. Your local Area Agency on Aging can help you find the right resources.

You also need to protect yourself from fraud. Seniors are among the most frequent victims of financial scams. Be defensive – don’t give anyone your Social Security Number, bank or credit card numbers, or any other private financial information. The IRS won’t call you and ask for information like this, and your bank and brokerage firm won’t either. If you get a call like that, hang up, call the number you usually call, and ask if they are trying to reach you.

 Also, never, ever allow anyone to take control of your computer if you use one. Unless you have called a repair service and know they are to be trusted, no one should control your computer but you. Your “nephew” will just have to wait for bail money.

Also, plan for how you will hold and spend your retirement dollars. Don’t put all your eggs in one basket but consider retirement accounts, mutual funds, annuities, long-term care riders and policies, and other financial holdings.

Each of these financial instruments brings different aspects to your financial planning. They can be counter-cyclical, protecting you by having one go up when another goes down. Using a financial professional can help you set up the best plan for you.

Personal Care

For some retirees, keeping up with personal care can be difficult. Whether it’s washing your hair, standing in a shower, or just getting dressed, all of these get harder as we get older and can decline seriously from certain conditions.

If you live with someone, they can help. If not, you can get home care for the short time it takes to do these things every day.

What Are the Pros and Cons of Aging in Place?

Aging in place has good things and bad things. In other words, there are pros and cons, and you can explore your options and determine which outweighs the other for you.

Pros of Aging in Place

Familiarity – You have lived in your home and your community for a long time. You know how to get around your home and its potential hazards.

Consistency – You don’t have to make major changes in your lifestyle. You are still your own boss in your own home.

Ease – Downsizing and moving is a major undertaking, physically, mentally, and emotionally. Aging in place keeps you from having to do that, letting you remain comfortable with the things you love in the place you love.

Cons of Aging in Place

Maintenance & Upkeep – All that work around the house still has to be done, and you are less able to do it. You can get most anything done for you, from cleaning to repairs to shopping, but the costs may be prohibitive.

Isolation – Many people experience loneliness while living in place. Your home used to have your spouse and children in it, but now you may be on your own or with just a pet. Assisted living can give those feeling isolated access to interpersonal contact daily.

Safety – When you are alone, you can fall, and no one will know. Or you can become ill or be injured without anyone knowing you need help. There are alert services to deal with these issues, but they do have charges, and then it’s a matter of being able to pay for them.

What Are Some Common Pitfalls for Aging in Place?

Some of the most important pitfalls are transportation, access to care, maintaining relationships, keeping your home safe, and figuring out who you can trust.

How Should You Pay for Home Healthcare and Long-Term Care?

Like with all things retirement, aging in place has costs. Medical care is a huge percentage of your potential costs. Paying for things you used to do for yourself, like shopping and home repairs, can also add up.

You will have Social Security, possibly a pension, and the retirement assets you have built up. These may include annuities that give you a stream of income in addition to Social Security, investment accounts that you can withdraw from, IRAs, and 401k plans that also allow or require withdrawals. And you can use riders on your annuities to make paying for certain types of medical expenses more easily.

However, weaving all these things together in the way that will gain you the most dollars and cost you the least taxes is a complex and mysterious task. Consider obtaining – especially if you are in your mid-career stages and retirement is approaching year by year – a trusted financial professional who can assist you in making plans for the very best retirement you can have.

The Bottom Line on Aging in Place

Ultimately, aging in place is a decision you will make many times during your retirement. Balance all of these pros and cons, be honest with yourself about your assets – financial and physical – and decide what works best for you.

If you aren’t yet speaking with a financial professional, perhaps consider connecting with someone and asking for their guidance in exploring your options as well as the pros and cons. You may want to look into a financial professional who is independent, meaning they aren’t beholden to one parent financial company or have a limited shelf of financial solutions they can draw on for you.

If that and experience are important to you, many retirement-knowledgeable financial professionals are available here at SafeMoney.com. Get started by visiting our “Find a Financial Professional” section to connect with someone directly, where you can talk about your goals, concerns, and overall situation. Should you need a personal referral, please call us at 877.476.9723.

The post Aging in Place: a Guide to Living Well in Retirement first appeared on SafeMoney.com.

This calculation is by no means universal. That being said, it’s probably among the most common formulas you will find in the pension arena today. In this article, we will go over the Rule of 85, how it works, what its limits are, and how you can use it in your retirement planning for income and other financial goals.

How Does the Rule of 85 Work?

The Rule of 85 is a basic calculation that you can use to see whether you can retire early. The full retirement age for most pension plans is 65 years of age. Therefore, if you want to retire before you reach full retirement age, generally you will have to meet the Rule of 85 instead.

Both private-sector and public employers offer pension plans, so the Rule of 85 can apply to pensions in which private-industry employees and government employees participate. You can check with your employer for more details.

How Do You Calculate the Rule of 85?

As mentioned previously, the Rule of 85 is a very simple formula. Just add up your age and your years of service to your employer, and if the total is at least 85, then you can retire early with full benefits.

If you are 55 years old and have put in 30 years of service to your employer, then you can sail off into the sunset without forfeiting any of your pension benefits. Of course, this assumes that your employer follows the Rule of 85 in its pension plan and its provisions.

Do All Employers Follow the Rule of 85 with Their Pension Plans?

Some companies’ pension plans adhere to this rule while others don’t. The pension plans that do allow employees to easily discover whether they can retire early with full benefits or must continue to work for a few more years to reach this goal.

Other companies may use other guidelines, such as the Rule of 82 or 88 as their cutoff ages, for this formula. For example, under the rule of 82, you could be 62 years old with 20 years of service and would then qualify to retire early with full benefits.

What Are the Limits of the Rule of 85?

In many cases, applying the Rule of 85 isn’t as simple as merely adding your age plus your years of service. You may have to reach an absolute minimum age before you can apply this formula.

For example, you may need to be at least 60 or 62 years of age to be eligible for this formula. Say that your plan requires you to be 60 before you can retire early. In that case, you can’t retire at age 55, even if you have 30 years of service under your belt.

Other plans may require that you have at least a minimum number of years of service, such as 25 years before you can use this rule. Some plans stipulate that only certain classes of employees are eligible to use this rule, while others can’t.

Covering Income Gaps, Even with Full Pension Benefits

If your employer uses the Rule of 85 and you can retire, you may still have a gap between your retirement income and your expenses tied to your retirement lifestyle. This is where personal savings come into play.

Your employer may have offered a defined-contribution retirement plan during your working years. If your employer is in the private sector, that workplace plan may have been a 401(k) plan. And if you are a federal employee, you had access to the Thrift Savings Plan or if you were a public employee, such as someone working in a public school district, you might have had a 403(b) retirement plan.

If you built up retirement money in your plan, then you can use it to create an income stream that fills those financial gaps. In many cases, pensions and Social Security benefits alone won’t be enough to cover all of your living expenses. For example, educators and other public employees may retire only at a percentage of their salary, from what their pension will pay them. This is one reason why financial professionals recommend also saving for retirement using defined-contribution plans at work or personal IRAs.

Seeking Help for the Rule of 85 and Other Retirement Planning

To see if you have any income gaps and you can do anything else to reach your goals, consider working with a financial professional whether or not you qualify for the Rule of 85. They can help you map out your expenses in retirement and then see if your income will be enough to maintain your lifestyle.

If you are looking for ways to close the gap and have more peace of mind, an annuity can provide you a guaranteed income stream as part of an overall strategy. This is income that you will be able to count on for the rest of your life, regardless of what happens.

Of course, the rest of your money would be well-positioned in a personalized financial plan that keeps up with inflation, grows your money, and provides you with liquid funds. But for covering your living expenses in retirement, only annuities can provide guaranteed lifetime income.

How to Find Out if Your Pension Plan Follows the Rule of 85

The easiest way to find out whether your pension plan adheres to the Rule of 85 is, of course, simply to ask your pension administrator. They should be able to provide you with a direct answer, along with any other information that is pertinent to retiring early.

You will need to know whether there is a required minimum age or minimum number of years of service. Your plan administrator can also clarify whether employees in your class or level are eligible for this rule.

Final Thoughts on the Rule of 85

Although this rule may tell you whether you can retire early, it’s not wise to bank on it being able to give you a secure retirement all by itself. You may still have a sizeable gap between your income and your spending in retirement. So, you can supplement your pension with a defined-contribution savings plan such as a 401(k), 403(b), or 457 plan, or a traditional or Roth IRA.

A financial advisor can help you to create an overall plan of action to help you reach your savings goals. In some cases, this may mean that you will work for a few more years even if you satisfy the Rule of 85 so that you can sock away some more money in your retirement accounts. If you participate in Social Security, delaying your benefits gives them more time to accrue, thus boosting your retirement income.

The Bottom Line

Consult your financial advisor today for more information on retirement planning, especially if you plan on retiring early and satisfy the Rule of 85. They can help you work through your pension options and what important “what-ifs” relating to your financial future. You may also wish to look into working with someone that is independent, meaning they can offer products and strategies from multiple financial services companies, not just one parent company.

If turning to an independent, experienced financial professional sounds right for your needs, many are available at SafeMoney.com to assist you. Get started by using our “Find a Financial Professional” section to connect with someone directly, where you can discuss your goals, concerns, and personal situation. Should you need a personal referral, please call us at 877.476.9723.

The post Exploring the Rule of 85: It’s Role & Impact first appeared on SafeMoney.com.

The good news is, yes, most of your retirement assets are protected in one way or another. The bad news is that the protection is mostly a matter of state law. As a result, the details depend on where you live.

In this article, we will talk about the various creditor protections that you may have in retirement. Keep in mind that this is general information and isn’t intended to be legal advice. If you have any questions about your personal situation, talk to your financial professional and to an experienced attorney.

Retirement Assets in General

Most accounts set up under the Employee Retirement Income Security Act of  1974 (ERISA) are protected from seizure by creditors. This ERISA protection extends to employer-sponsored plans, such as 401(k) plans, pensions plans, and even some 403(b) plans. However, in that case, the 403(b) plan must fall under ERISA, and many 403(b) plans don’t. You can check with your plan administrator to see if it’s an “ERISA governed” plan.

Now, back to our discussion of protection. Even if you have large debts or have declared bankruptcy but also have considerable sums in these kinds of accounts, your creditors generally can’t access these funds.

IRAs, whether in traditional or Roth flavors, aren’t protected by ERISA. However, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) protects your IRAs for up to $1,512,350 per person (for all plans combined).

If you are rolling money from a 401(k) to an IRA, it’s unclear whether this limit would apply since ERISA rules might still cover those funds. Outside of bankruptcy, the protection relies on state laws.

Bankruptcy Exemptions

One thing to remember at the outset of bankruptcy is that you will be required to use the state’s exemption list in most states. However, some states allow you to choose between state or federal exemptions.

Nonetheless, you must choose. You aren’t allowed to pick and choose between the two. If you use the state exemptions, you should look at the chance to use the federal nonbankruptcy exemptions.

Federal Nonbankruptcy Exemptions

These federal nonbankruptcy exemptions can be quite powerful. For example, your retirement benefits are fully exempt if you are a:

• Civil, foreign, or military service employee.
• Railroad worker.
• CIA employee.
• Veteran.
• Military Medal of Honor Roll.
• Social Security benefit recipient.

That last category brings in most of us, especially in retirement. Generally, you are eligible to use these exemptions if you are using your state’s exemptions.

State Bankruptcy Exemptions

Each state provides exemptions for certain kinds of property in a bankruptcy proceeding. Generally, for example, the state will permit someone to retain a certain amount of equity in their home and in their car.

These exemptions vary widely from state to state. For example, Indiana only exempts $19,300 of equity in real estate or tangible property. In contrast, New York, which sets its homestead exemption by county, ranges from $179,950 to $89,975 in equity.

Remember, though, that equity isn’t the value of your home. It’s the amount you own of it. If you own a $200,000 house but have a $185,000 mortgage, your equity is only $15,000.

Annuity Protections in Bankruptcy

Some people who own an annuity for retirement won’t have placed it in an IRA. What’s more, until very recently most 401(k) plans didn’t offer annuity choices.

So, your annuities will be protected, if at all, by state bankruptcy exemptions. A 50-state chart is attached with this material, and that chart was current at its creation then in 2017, but some highlights follow.

Qualified Annuity

You are home free if your annuity meets the Internal Revenue Service Code qualified retirement account rules. Your annuity will be exempt from creditors.

A similar federal exemption exists for an annuity funded from an IRA or specific other non-qualified retirement plans. However, your exemption is capped at $1,513,350 for all plans combined. Even capped, that is a significant sum, and it resets every three years.

If you are considering filing for bankruptcy and have significant annuity and retirement assets, remember this. It’s prudent to consult with a professional familiar with the impact of bankruptcy on your retirement annuities before making your initial filing.

Other Federal Annuity Exemptions

Even if you are using the state exemptions, the bankruptcy code itself includes an exemption for an annuity that will pay when you are ill, disabled, die, reach a certain age, or service sufficient time.

If your annuity is from a structured settlement for a bodily injury, wrongful death, or lost future earnings, it will also be exempt under federal annuity exemptions (and most states).

State Exemptions

State exemptions for annuities are all over the place. Some states, like Kansas and Missouri, only exempt retirement annuities. Other states base their exemptions either on the monthly income stream from your annuity (e.g., Montana up to $350 per month) or by assets (e.g., Nebraska up to $100,000 accrued proceeds, cash values, or benefits).

In either case, you may find more help with the federal nonbankruptcy exemptions here.

Timing

Finally, some states will only protect an annuity over six months old. Even if you don’t live in a state with that requirement, bankruptcy trustees tend to be suspicious of major purchases close to a bankruptcy filing. Keep this in mind if you are thinking of purchasing an annuity and then declaring.

Some Final Thoughts

Protection of your money from creditors is important, but it’s just one part of your retirement financial picture. Other crucial retirement issues are having enough lifelong income for your lifestyle, making sure your money keeps up with inflation, being well-prepared for healthcare and long-term care expenses, and more.

If you are looking for a financial professional to help you with these “what-ifs,” it may be helpful to work with someone who is independent and not captive. In other words, since they are independent, the financial advisor or agent is free to shop around for products from multiple companies and not just one parent company. That can give you more options for your financial goals and situation.

If the thought of working with someone independent appeals to you, many independent and experienced financial professionals are available here at SafeMoney.com. You can get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly and request a first appointment to discuss your situation. Should you want a personal referral, please call us at 877.476.9723.

The post Creditor Protection in Retirement: What to Know first appeared on SafeMoney.com.

If you are within ten years of retirement (either before or after), then you are in what many financial professionals consider to be the “retirement red zone.” Famously coined by Prudential, the retirement red zone is a crucial stage for your long-term lifestyle.

Why? Because how your retirement portfolio behaves during this period can substantially affect your standard of living during your golden years.

Just as it’s critical that a football team can come away with points from the red zone, it’s also imperative that you manage your assets well during this critical period.

Red Zone Risks

There are a few risks that are common to red zone investors that trip many people up. The first is sequence of returns risk.

And what is sequence risk? The probability that a substantial drop in the value of your portfolio early on, or just prior to retirement, can adversely affect the overall growth you get from your investments.

It can be difficult to make up for major losses that are sustained during this period. After all, you generally don’t have as much time left to let your portfolio recover.

Many workers who planned to retire in 2008 ended up having to work for another five to ten years. A large part of that was due to the losses that they sustained during the Subprime Mortgage Meltdown and subsequent market crash.

Behavior, Another Retirement Red Zone Risk

Behavioral risk is another common malady that can adversely affect your retirement plan.

It may be tempting to get out of assets that are declining in value at the moment. But this is seldom a good idea. You might end up buying high and selling low — just the opposite of what you want to do.

Don’t let your emotions control your thinking here. This is definitely a time and place for hard logic, historical analysis, and level-headed thinking.

Of course, you may also face an unexpected large expense during retirement, such as for a major illness or other medical condition. Or you might have to care for an aged parent.

It’s wise to anticipate as many of these possibilities as possible when you do your retirement planning. That way you aren’t caught completely by surprise if something does occur.

The Longevity Factor

Longevity risk is another risk that is becoming increasingly common. As people live longer, they have to provide for themselves during retirement for a much longer period of time in many cases. This can stretch your retirement dollars thin.

You may need to consider working until age 70, when you can get the maximum Social Security payout. Or if longevity runs in your family history, working until age 75 may also be a point to think through.

Another possible solution is to purchase an annuity. Opting for either a single-life or joint-life payout will pay you an income stream for as long as you live. You can’t outlive this form of income, even if you completely exhaust all of the money in the annuity contract.

You can also add a period certain onto your payout. That guarantees that the insurance company will have to make a minimum number of payments either to you or your beneficiary if something happens to you.

The Indexed Annuity Solution

Fortunately, there is a financial vehicle that can help you manage your downside risk while offering growth potential while you are in the red zone (and afterwards as well).

A fixed index annuity can guarantee your principal while letting you earn interest based on an underlying financial benchmark. For many fixed index annuity contracts, the underlying index is the Standard & Poor’s 500 price index.

Your money in the contract will earn interest when the benchmark rises in value. But your money’s value will remain the same when the benchmark declines.

This protection in down periods is called an index annuity floor. In exchange for the protection, the interest credited to your annuity is based on a portion of the index’s increasing values during up periods.

Protect Your Retirement Money and Enjoy Some Growth Potential

Fixed index annuities and their indexing choices can have monthly, quarterly, annual, or biannual crediting periods. One of the chief advantages is that the annuity resets when the end of the crediting period is reached.

Say the underlying benchmark drops in value during a given crediting period and then the annuity resets.

The next crediting period will start based on where the benchmark is now. You don’t have to wait for the benchmark to come all the way back up to where it was before in order to earn any more interest.

This arrangement effectively protects you from index losses. When the index drops, you are protected from loss. When it goes up, you will receive interest based on a portion of the index growth.

Index annuities can be an ideal vehicle if you are in the retirement red zone because you have protection for your money.

If the market drops by 40%, then you will stay high and dry in a fixed index annuity. Then, when the underlying index starts to rise again, you can capitalize almost immediately on the subsequent rebound.

Crossing the Income Bridge

Do you plan to retire before you start receiving Social Security? Then you will need to find a way to bridge the income gap that you will have during the waiting period.

Here’s an example. If you want to retire at age 65 but delay your Social Security payments until age 70, then a period-certain annuity might be just what you need.

You will pay the insurance carrier a sum of money upfront. Then it will pay out over the next 5 years until the proceeds in the contract are exhausted.

Create the Right Pass Play for Your Retirement Security

Navigating the retirement red zone may seem difficult at times, but annuities can go a long way towards helping you fill in the gaps.

Index annuities can protect your savings from adverse market conditions while still paying a competitive interest rate. It can give you more than bonds or CDs can in most cases.

Consult with a financial professional for more information about fixed index annuities and how they can help you navigate your retirement red zone. If you need help finding a financial professional, assistance is just a click away at SafeMoney.com.

Use our “Find a Financial Professional” section to connect with someone directly for an initial appointment. Should you need a personal referral, don’t hesitate to call us at 877.476.9723.

The post Beware the Retirement Red Zone in Your Retirement Planning first appeared on SafeMoney.com.

On top of RMD changes, SECURE Act 2.0 also contains a great many changes to Roth savings accounts and how they can be used. The Roth rules have been expanded in an effort to increase current tax revenue, as Roth accounts are always funded with after-tax contributions.

Here, we will examine the key provisions of SECURE Act 2.0 and how they might affect retirement for you as well as your loved ones.

RMD Changes

Starting in 2023, the age at which required minimum distributions must be taken has been raised from 72 to 73 years old. This allows retirees who aren’t currently subject to RMDs to wait for another year to begin taking distributions. Anyone now subject to RMDs under the old age 70.5 or age 72 rules must continue to follow the RMD schedule that applies to their respective situation.

While those who aren’t subject to RMDs now can wait longer, the distributions that they take a year later will most likely be slightly larger because of the extra year of growth in their portfolios. Of course, this assumes that the portfolios will have grown over that time.

The bill also pushes the RMD age back to 75 starting in 2033. Time will tell whether this provision is still in force by then.

Annuity Payouts

Another key change revolves around annuity payments taken from a qualified retirement savings plan. Until now, many annuity payouts from defined-contribution plans, such as a 401(k) plan, weren’t enough to satisfy the RMD rules.

Under SECURE Act 2.0, however, annuity payouts can now be used as long as they increase on an annual basis by a constant percentage each year. In past years, an annuity payout that increased by one or two percent per year may have run aground of the RMD rules. But now, as long as the annuity payment is increasing by the same percentage each year (up to 5%, but no higher), the annuity payout will be allowed.

This provision can make the use of annuities inside qualified defined-contribution plans more attractive due to the growing number of investment products used in these plans that aren’t RMD-friendly.

RMDs Removed from Roth Plans

Another major provision contained in SECURE Act 2.0 now removes RMDs from Roth defined-contribution plans.

Until this point, Roth 401(k), 403(b), and 457(b) plans came with RMDs. Only Roth IRAs were exempt from this requirement.

But RMDs are no longer required from these plans starting in 2024. It can make things easier for retirees who are currently forced to take withdrawals from their Roth workplace retirement plans, whether they want to or not.

This provision can also help those who haven’t reached age 73 yet. They now have the option to leave their money in their Roth plan without having to worry about future RMDs. The new rule may ultimately help employers retain more assets inside their plans.

Up until now, anyone who wanted to avoid taking RMDs had to move their money from their Roth workplace plan over into a Roth IRA. But this will no longer be necessary.

Smaller RMDs for Partial Annuitization

If you have some money inside your workplace qualified plan in an annuity, then you will no longer have to take RMDs from both your annuity and your remaining plan balance. This would effectively result in a larger RMD in most cases.

The new provision has eliminated this combination of RMDs. Now, you can take just one RMD based on both account values.

Reduced RMD Penalty

Congress has also drastically reduced the penalties that used to apply when retirees didn’t take their RMDs in a given year. Under the old rule, RMDs that weren’t taken on time would result in a whopping 50% penalty on the undistributed amount from the account or plan.

This penalty has been reduced to 25%. It’s further reduced to 10% for those who take corrective distributions in a timely manner.

More Early Distribution Exceptions

The new bill introduced several more ways that IRA and qualified plan holders can withdraw money without having to pay the 10% early withdrawal penalty. The new exceptions include:

• Terminal illness – Effective in 2023
• Federally-declared disaster losses – Up to $22,000 and effective going back to 1/26/2021
• Pension-linked emergency savings accounts – Up to $2,500 starting in 2024
• Domestic abuse – Up to $10,000 starting in 2024
• Financial emergencies – Up to $1,000 starting in 2024
• Long-term care – Up to $2,500 starting three years from the date the bill is signed

Roth Matching Contributions

The new bill passed by Congress finally allows employers to start making matching contributions in Roth form. This allows employees to accumulate more tax-free money than ever before.

Before this bill was passed, all matching contributions into Roth qualified plans had to be made with traditional contributions. As a result, people were left with plan balances that were partly tax-free and partly tax-deferred. Now, employees can accumulate tax-free money on their entire plan balances and not just their own elective deferrals.

An example of how this new bill works is with the Thrift Savings Plan, the defined-contribution plan for employees of the federal government. The TSP matches the first five percent of employee contributions into the plan, regardless of whether the contributions were made in the traditional or Roth accounts.

So, a TSP participant making $100,000 who contributes 10% of their pay into the Roth plan would get an additional matching contribution of 5% of traditional TSP money. This means that about a third of the employee’s plan balance would be taxable upon withdrawal with the rest being tax-free. Employees will be able to take after-tax matching contributions once the TSP adopts the new plan rules (which will, of course, take some time).

It should also be noted that SEP and SIMPLE plans can now be funded with Roth contributions. This applies to both employee and employer deferrals (contributions).

Catch-Up Contributions Increased

The SECURE Act 2.0 has raised the level of “catch-up” contributions in IRAs and qualified plans starting in 2025.

Those who are ages 60-63 and participate in qualified plans will be able to contribute an additional $10,000 each year into their plans starting in 2025. That amount will be indexed for inflation in subsequent years.

Furthermore, the annual catch-up contribution of $1,000 per year for IRAs will be indexed for inflation starting in 2025. 

Qualified Charitable Distributions (QCDs)

Starting in 2023, retirees who must take RMDs will be allowed a single distribution of up to $50,000 to be used to fund a charitable remainder unitrust, annuity trust, or gift annuity.

This provision amounts to a material expansion of the types of organizations that donors can gift to. This provision also counts toward RMDs. Donors can still take another $50,000 distribution and send it directly to the charity of their choice for a maximum QCD of $100,000.

Saving for Emergencies

Starting in 2024, employees will be allowed to make additional contributions to their Roth savings plans that can be accessed at any time (up to four times a year) without tax or penalty. The limit on this type of contribution is $2,500 (or less if the employer specifies).

There could also be discretionary matching contributions by the employer, which may encourage employees to save more money for emergencies.

Student Loan Debt

This provision affects all employees who are still making student loan payments. Under this provision, employers could start making matching contributions to a retirement plan or account based on the employee’s student loan payments.

For example, if an employee is paying $500 per month to student loans, their employer would deposit that same amount into a qualified plan or IRA. This plan can greatly reduce the dilemma of middle-aged employees who are trying to save for retirement but are still paying off school loans.

529 Plan Rollovers

If a student or former student has had a 529 plan open for at least 15 years, then they can roll the remaining plan balance into a Roth IRA within the annual contribution limits. For example, a 30-year-old who has finished school but still has money left in their 529 plan could roll over $6,500 of it to a Roth IRA in 2023.

The student can’t roll over more than an aggregate of $35,000. But this provision can benefit those with balances left in their 529 plans that they can’t transfer elsewhere.

Revised QLAC Limits

Qualified longevity annuity contracts got a boost under the new legislation as their contribution limits were raised substantially. Before 2023, retirees could only move up to $125,000 or 25% of their total IRA balances (whichever was less) into one of these vehicles.

The new law raises the limit to $200,000 and does away with the 25% limitation. This effectively allows IRA owners to take smaller RMDs for several years and fund more guaranteed income in their retirement savings accounts.

Many QLACs don’t start paying until age 80 or even 85 in some cases. Retirees can take smaller RMDs because these contracts don’t count as money in an IRA or qualified plan until they start paying out.

Automatic Enrollment and Portable Plans

Starting in 2025, employers who offer new 401(k) or 403(b) plans must automatically enroll new employees and then allow them to take the plans with them easily and quickly when they leave. This move is designed to help certain employees to accumulate some retirement savings while they are still working.

Need Help with Your Retirement Planning?

The SECURE Act 2.0 brings many changes to retirement in the United States. Your plans for retirement saving, withdrawals, taxes, and more can be affected, not to mention other areas of retirement planning. Even you are already in retirement, you might be looking at some changes to your overall financial picture.

Need help with making pivots in your retirement planning, or want a second opinion of your existing plan? An experienced and independent financial professional from SafeMoney.com can help guide you.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and financial situation. Should you want a personal referral, please call us at 877.476.9723.

The post SECURE Act 2.0 – Key Provisions and How They Affect Retirement first appeared on SafeMoney.com.

Pensions are becoming increasingly rare in corporate America today. Many private-sector employers have replaced pension plans with 401(k) or other profit-sharing plans to cut costs.

But if you are lucky enough to be privy to a pension plan, it’s important for you to know how it works, what you will get from it, and effective pension alternatives. And if you won’t be getting a pension, going over your alternative options can help you make well-informed decisions about retirement.

Let’s get into a deeper dive on pension plans, alternatives that are available and will pay you guaranteed income for life, and how these options look in the full spectrum of retirement planning.

What is a Pension Plan?

In a nutshell, a pension plan is a guaranteed stream of income that you will receive when you retire. It’s funded by your previous employer and paid out to you in periodic installments after you retire.

The income from a pension plan typically lasts until the death of the retiree. Pension plans are advantageous for employees because they don’t bear the investment risk, and they can’t outlive the income that they receive.

What Are Your Pension Options When You Retire?

Many pension plan recipients have more than one option to choose from when they retire. They may elect to receive a straight life payout, which will end upon their death. Or they may choose a joint life payout, where the pension will last as long as either the retiree or their spouse lives.

They may also be accorded a period certain option, where they are guaranteed to receive an income stream for a certain period, regardless of how short they might live. But the more guarantees the retiree chooses, the lower the pension payments will be.

What Happens to Your Pension When You Die?

If you go with the straight life payout, then your pension will stop upon your death. This can be a problem for married couples because the surviving spouse will receive no further income after the retiree passes away.

Therefore, many retirees opt to choose the joint life payout option. If you elected to receive a minimum guaranteed amount of money after you retire, then the remaining amount of this sum that hasn’t been paid to you will go to your beneficiary after your death.

But if you opt for a straight life payout and then die unexpectedly after just a few payments, then no more money will be paid out to anyone else.

What Are Alternatives to a Pension Plan?

Defined-contribution plans have replaced pension plans in much of corporate America. These plans allow employees to save money on either a pre- or post-tax basis (either traditional or Roth) and draw the money out at retirement.

But this type of retirement plan carries more risk for employees because they are usually risking their money in the markets.

Alternatives to Pensions for Workers

So, what are some pension alternatives that can provide dependable cash-flow in retirement? Employees who want a guaranteed stream of income that they can’t outlive in retirement can put some retirement savings in an annuity.

Annuities are designed to pay them income for life. Some types of annuity payouts are irrevocable, while others can be started and stopped depending on the needs of the retiree.

Annuities can essentially provide a form of private pension because they are designed for individuals, not as an overarching corporate savings plan. They are also customizable to someone’s personal situation with their many versatile product designs, features, and benefits.

Pension Alternatives for High Income Earners

Corporate executives, and other high income earners, who are already contributing the maximum-allowable amount to their defined-contribution plans can sock extra money away in an annuity to boost their retirement savings over time.

Annuities have the unique advantage of growing tax-deferred, regardless of how much money is placed in them. Someone could put $100,000 upfront into an annuity and have it all grown tax-deferred until they draw it out in retirement.

Many annuities will also the contract owner to put more money into the contract on a periodic basis. There is no IRS limit on the amount of money that can be put into an annuity each year.

However, those contributions aren’t deductible unless they are purchased with qualified money in a retirement plan or IRA.

Pension Alternatives if You Are Self-Employed

Self-employed persons have the same options available to them as high-income corporate executives when it comes to saving for retirement. Self-employed taxpayers have much higher contribution limits for their retirement plans, and they may also put this money into an annuity, if they so choose.

The current savings limit for most self-employed workers is around $60,000 per year, about twice the amount that an employee can put into an employer-sponsored retirement plan.

If you can contribute the maximum-possible amount to your retirement plan each year, you will amass a sizeable amount of money by the time you retire.

Pension Alternatives Pros and Cons

If you have participated in a 401(k), 403(b), or 457 plan during your working years, then you may have invested some money in various types of mutual funds. You may have also put some of your money into an annuity or shares of your company’s stock.

Are you still interested in pension alternatives that can pay you a guaranteed lifetime income stream? You can put some of that money over into an annuity after you retire, and then you can get a guaranteed stream of income for life.

Many annuities now offer guaranteed income riders that can be turned on and off as your needs change. So, if you put some funds into an annuity that has one of these riders, then you could just turn off the income stream and withdraw however much money you want from the contract and then turn the rider back on.

You will still get a guaranteed stream of lifetime income, albeit with a lower payment because of the reduced amount of principal that the payments are based upon.

With other annuities, you can also turn your money into a guaranteed income stream by “annuitizing” the contract. But the vast majority of annuity owners don’t do this, as they lose access to their money with annuitization. Many use income riders for the flexibility instead.

The Bottom Line on Pensions and Alternative Options for Income

If you want a guaranteed stream of lifetime income when you retire and won’t have any type of corporate pension, then an annuity can provide you with the guaranteed income that you are looking for.

On the other hand, should you be looking for pension alternatives that can supplement your income, annuities can be a great solution along with other fixed-interest assets. Consult your financial advisor for more information about annuities, their pension-like income, and how they work.

If you are looking for a financial professional to walk through these important questions, no sweat. Many independent and experienced financial professionals are available at SafeMoney.com to assist you. Get started by visiting our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation. Should you need a personal referral, please call us at 877.476.9723.

The post Pension Alternatives – What Are Your Options for a Secure Retirement? first appeared on SafeMoney.com.

Once you have a better understanding of how your pension works, you will be in a better position to make well-informed choices about your overall retirement. That can include whether other sources of retirement income will help you reach your goals. Read on for a deeper dive into the basics of a pension plan and how it works.

What Is a Pension Plan?

A pension plan is a retirement plan that is generally provided by an employer. The pension plan makes monthly payments to retirees over time. Those payments are usually based on someone’s salary and how many years they worked at that employer.

Classic pension plans, rapidly disappearing over the last few decades, offer a monthly payment to retired employees. The vast majority of the lucky few who still have a plan are federal employees and other public employees. Some corporations still offer pensions to new hires, although that number is shrinking, according to research by Towers Watson.

What Are the Different Types of Pension Plans?

There are two primary types of pension plans: defined benefit plans and defined contribution plans. Most of what we think of as traditional pensions are defined benefit plans. A 401(k), on the other hand, is a defined contribution plan.

Most of the risk is on the employer in the defined benefit plan. On the other hand, the employee shoulders most of the investment risk in a defined contribution plan.

A Brief Side Trip to ERISA

In 1974, after some irregularities arose with the Teamsters Union Pension Fund, Congress passed the Employee Retirement Income Security Act (ERISA) to protect employee retirement assets.

The law puts strict standards on employee pensions, making those who run them fiduciaries by law. ERISA also requires that employees receive certain information periodically about their plans. It also generally prohibits loans for building hotels in Las Vegas.

In sum, ERISA is the most critical factor in the structure of modern pension and employee benefit plans of all types.

How Does a Pension Pay You and Others in Retirement?

There are stages in how a pension plan works. These stages affect what and how someone will get paid.

Pension Plans and Vesting

Vesting is essentially the process by which an employee eventually “owns” some share of the pension funds and will be paid on those shares.

First, in any plan in which the employee makes contributions (defined-contribution plan), those contributions vest immediately and totally. Should the employee leave, they can take 100 percent of those funds with them.

Employer contributions vest differently. This happens usually in a schedule outlined in the pension plan’s documents. These contributions may vest immediately, though this is rare, or over a schedule of up to seven years. Employees who leave before all assets are entirely vested will leave some portion of the employer contribution behind if they leave before retirement.

When and How Can You Receive Pension Payments?

Once an employee reaches a combination of years and age that is necessary to retire under a given plan, they may choose to do so.

At their retirement, they can take the stream of income established by the pension plan (usually monthly payments). Alternatively, they can take a lump sum withdrawal, which is often rolled over into another tax-qualified retirement account such as an IRA.

Pensions and Taxes

There are several tax issues relating to pension plan income. For example, money put into a defined-benefit or defined-contribution plan is usually made up of pre-tax dollars.

When that is the case, then the federal government will apply taxes to your income from the pension over the years. Funds in a plan are generally tax-deferred, not tax-free.

Some states also tax pension income. Fourteen states don’t tax pension income at all. Of the remaining states, 27 tax only a portion of your pension income. Current law makes all retirement income exempt from state income taxes beginning in 2023.

Pension Payment Structures

When you do start to receive payments, or when you set up what your future payments will be, it’s not simply a matter of saying, “start payments at 65.”

First, you can get annuity-type periodic payments or a lump sum. If you choose the first option, there are different options available. Let’s go over how these periodic payment options from a pension work below.

Single-Life Plan

This structure will make the highest payments but pays nothing after the employee dies. There are no benefits for the surviving spouse. 

Single-Life with Certain Term

This plan makes payments for a specified number of years, so long as the employee is alive. The beneficiaries will receive the remaining payments if the employee dies before the term ends.

Joint-and-Survivor Plan – 50 Percent

This plan provides payments of a given amount so long as someone lives. The surviving spouse receives 50 percent of the original payment amount when the employee dies. It’s a lower payment, but it does continue for the survivor.

Joint-and-Survivor – 100 Percent

Under this variation, the payments that continue after the employee’s death are the same amount as when they were alive. This is the excellent security available for the surviving spouse.

What Type of Pension Plan is Right for You?

Your pension plan choices will generally depend on your employer. Some state public employers have options for a defined benefit or defined contribution plan, such as the State of Florida.

At other employers, you might not have an option on what type of pension plan to use. In that case, your employer will offer a plan, and you can choose to participate in it or not.

The worker is usually better served by the increasingly rare defined benefit plan, while the employer will prefer the defined contribution plan.

Should you want a guaranteed income stream in retirement, a defined benefit pension plan may be a better fit for you. If you are okay with more investment risk in exchange for your money to have growth potential, then a defined contribution plan may be the ticket.

When Can You Access Your Pension Money?

In most cases, your pension plan will set when and how you may retire and receive payments. However, the Internal Revenue Service and ERISA also impact your payments.

Most pensions allow you to retire somewhere around 60 or 65, with some as early as 55. In many cases, you will find that pension plans will let workers start receiving payments at age 62. Tax qualified plans, however, generally penalize withdrawals or distributions, except for defined emergencies, before age 59.5.

How Are Pensions Taxed?

In most cases, you will owe federal income tax on your pension payments. Those payments are generally taxed at your federal marginal rate.

If you take a lump sum, you must pay taxes for the total amount. That is, unless you have rolled it into another tax-qualified retirement account.

Social Security benefits aren’t taxed unless you have other income beyond specified limits. In that case, as much as 85 percent of your benefits are taxable. Also, approximately $6,000 per person of private pension income is exempt from income tax.

What Happens to Your Pension When You Die?

The fate of your pension at your death depends primarily on the payment structure you set up. If you didn’t arrange for payments after your death, your pension plan simply ends without payment to any beneficiaries.

Can You Lose Your Pension?

Unfortunately, yes, there are circumstances under which you can lose your pension.

The first and most common problem is an underfunded pension plan. Essentially, it’s easy for today’s employers to make pension promises for the future but not pay for them today.

The Department of Labor tracks underfunded plans (less than 65 percent of the assets needed to make committed payments). The Pension Benefit Guarantee Corporation (PBGC) assists plans in danger of insolvency.

If your employer enters bankruptcy, its pension obligations may be discharged. In most cases, the PBGC will step in to cover some portion of the retirement assets.

Finally, church pension plans don’t have to pay into the PBGC fund. Therefore, these plans generally can’t rely on PBGC coverage if the employer fails. This leaves these employees at high risk.

Can You Cash Out Your Pension?

Yes, but generally this is a bad idea. Many pension plans allow for a lump sum retirement distribution or a lump sum distribution when you change employers.

In either case, if you don’t roll the assets into a tax-advantaged retirement account within 60 days of the withdrawal, you will owe taxes at your marginal rate on the entire amount.

Most commonly, those who take a lump sum cash-out will roll the assets into an IRA, or other tax-qualified vehicle like an annuity, to keep from paying taxes on the entire lump sum.

What Are the Differences Between a Pension and an Annuity?

A pension is a retirement plan created and run by an employer for employees. An annuity is an insurance contract that pays a guaranteed lifetime income stream to someone. The contractual stream of income can be used by somebody for himself or herself, or for another designated person.

It’s possible to take your lump sum retirement distribution and purchase a tax-qualified annuity with those funds. Because of the wide variety of features, benefits, and add-ons available in annuities today, starting an annuity may well allow you to tailor a retirement income plan more closely to your needs.

How Safe Is Your Pension?

As noted above, some pension plans seem to be at risk. Even government pensions can be seriously underfunded, making future payments risky.

If you think your plan is in danger, make sure to stay in contact and keep all your records so that you have them in the event you have to claim benefits in the future.

You can get help from private organizations, the Pension Rights Center, and the federal Employee Benefits Security Administration (EBSA). The latter even permits you to file a complaint about your pension.

Can You Take Your Pension If You Leave Your Job?

As a general rule, defined contribution plans can go with you. On the other hand, defined benefit plans will stay at your old employer and be there (with luck) for payment when you retire.

If your traditional pension is a cash-balance plan, you can move the money into another tax-qualified vehicle when you leave.

Do You Need Retirement Income From Other Sources Than a Pension?

Yes, you shouldn’t rely on any one source of retirement income for your retirement security. Social Security will, of course, factor into your retirement planning. But its future ability to pay full benefit payouts to all beneficiaries is unclear due to political pressures as well as partisan gridlock.

Pension plans, of whatever type, are also an open question. The defined benefit plan is disappearing and, where it does exist, is often at risk of failing. As we have seen recently, defined contribution plans are susceptible to market fluctuations and can suffer catastrophic losses.

IRAs, whether traditional or Roth, can add another leg to the traditional retirement stool. By starting to save early and taking advantage of compounding, these can end up representing significant assets.

Finally, there is the annuity. Annuities allow you to purchase a stream of income that can be finely tailored to your precise needs. They can, for example, be used to cover the gap between early retirement and Social Security. Or they can cover a spouse after your death. They can even be designed to cover long-term medical care or catastrophic illness.

An annuity is yours. So long as you have done your due diligence in purchasing an annuity, you should have a secure place to hold those assets and pay into your retirement income in precisely the fashion you need and want.

An annuity should definitely be part of your retirement income considerations.

Some Parting Thoughts on Pensions and Retirement

How, then, does a pension work? Quite simply, it’s a retirement savings plan that will pay you regular payments for life in retirement. A pension is one of the few things that can pay you truly guaranteed income, apart from Security and annuities.

However, a pension and its ability to make good on promised payments depends on the employer standing behind it. If the employer goes belly-up or wishes to unload some of its financial obligations, a pension plan is often on the chopping block.

The good news is that there are pension-like alternatives with annuities, and what’s more, annuities are customizable to your unique financial picture as well as income needs. Ask your financial professional for more information on pensions, how they work, and how other income sources such as annuities can help you in retirement.

What if you are looking for a financial professional to help you through these what-ifs? Many independent and experienced financial professionals are available at SafeMoney.com to assist you.

Get started by using our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and explore a potential working relationship. Should you need a personal referral, call us at 877.476.9723.

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