Your Money Matters More

Retirement is Personal

Retirement is personal:  it can be an elusive goal or it can be a well -planned gift to yourself after a long career.  There are key milestones in this process. To avoid tax penalty waiting until you reach the age of fifty-nine and a half to take distributions from your qualified plan maximize your benefit. Contribute the maximum matched dollar value—the more the better—and keep it invested.  When you do reach fifty-nine and a half you have more options. Remember though, fifty-mine and a half is a number; retirement is a goal.

 

To avoid any penalty from a qualified plan your birthdays count. Once you are fifty-nine and a half, there is no longer a penalty to remove your money, but your money can still work for you if you leave it.  The penalty is considerable: it not only becomes taxable income, but there is an additional ten percent tax on the amount of the withdrawal. Conversely, if your money is not in a qualified plan these restrictions do not apply…you will have already paid tax each year as it accrued but you will have less to invest and you will have less accumulating tax defered. As always, talk to a Certified Financial Planner (CFP) before making any move.

Putting away the maximum dollar amount matched by your employer makes you less dependent on the rate of return as your investment accumulates funds. If you can add other moneys to this amount they too can grow tax deferred. The tax deferral allows you to accumulate money faster. For example if your 401(k) is being invested at the rate of $3,000 a year, you are not only saving the whole $3,000, but you are also compounding interest on that investment tax defered. If you are able to leave it until you are fifty-nine and a half, you will not pay tax until it is distributed.

Waiting until you are at the optimal age, you can take the entire amount or you can take any amount you need to live on and let the balance ride.  Determine with your CFP what supports your lifestyle. You can control your taxable income by controlling your distributions. The ability to combine your defined contribution plans gives you better economy of scale when it comes to selecting your investments, also.  

Although fifth-nine and a half is the point where penalties no longer occur, retiring later can have even greater benefit.  Your CFP can walk you through these options based on your personal financial standing. Begin planning as soon as possible to allow for the optimal benefit when using a defined contribution plan.  When the time is right—enjoy! 

Financial Rules of Thumb

I have relied on general rules of thumb for the financial well being of clients.

Financial security results by adhering to basic principles:

Controlling Debt
    o Not exceeding 20% of your net worth (excluding the mortgage and net equity in the home)

Housing Costs
    o should not exceed 28% of your net income
    o includes all the expenses related to your house

Emergency Fund
    o Represents three to six months living expenses
    o Should be liquid and not volatile
This would include your money markets, short-term bond funds, and other cash equivalents.

Retirement Funding
    o Contribute 6% on a pretax basis to an IRA or a 401(k)
    o Or 8% funded on an after tax basis

Following these four steps should result in the accumulation of enough wealth to retire comfortably

If you would like more ideas contact.:

Charles T Shearman, CFP

Prospero Financial Planning
23 S 8th Street, Suite 3400
Noblesville, IN 46060
Work (317) 774-5136

www.prosperofp.com

 

Simple IRA

Overview

If you need to have a basic retirement plan, one with limited paperwork maybe a simple IRA is for you. With a simple IRA you have the increased contribution levels with much additional paperwork. With contributions up to $12,000 with a catch-up provision of an additional $2500 for those over 50, these are fairly attractive plans without much in the way of paperwork. Overall they provide for low-cost  operation with increased contribution limits.

Prosess

1. Fill out an IRA application
2. Adopt a prototype
3. Fill out an Employer Agreement
4. Contribute

 

Not Ready To Retire Yet?

 I was looking around my networking group and it seemed to be made up of a large group of people on their second or third careers due to company downsizing. They probably had a retirement plan, 403(b) for not-for-profit entities or 401(k) for any other entities, after leaving a previous employer.  They may be spending this to maintain their lifestyle and that's probably alright as long as that doesn't go on for very long. It is better to reduce your lifestyle then drain your retirement plans.  You not only don’t have the money for the retirement years you also don’t get the growth on that money that you withdraw from these accounts.   

Not only do you pay tax on the withdrawls but this can be doubly bad if you're paying tax penalties on an IRA or 401(k).  The IRS may charge a 10% premium to withdraw funds.  This is if you haven't reached the age of 59½.  There are several exceptions to the age 59½ rule. Even if individuals receive a distribution before they are age 59½, they may not have to pay the 10% additional tax if they receive a distribution from a retirement plan (other than an IRA) after leaving a job and are age 55 (age 50 for qualified public safety employees).  Or they are receiving a series of distributions in equal payments based on your life expectancy.  These are not the only exceptions but those most likely to apply.    

Another way to avoid the 10% penalty is to prove hardship. A retirement plan may (but is not required to) allow participants to receive hardship distributions. A distribution from a participant’s elective deferral account can only be made if the distribution is because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need.  

You should consult your tax Advisor before you undertake this.

Not to Late For an IRA!

If you have not made your individual retirement account (IRA) contributions it's not too late unless you have already filed your tax return. The deadline is the earlier of which you file your tax return or April 15. 

Contribution Limits

The contribution limits for IRAs for tax year 2012 are $5000 plus an extra $1000 for a total of $6000 if you were over age 50.  If you're doing a Roth IRA not concern yourself with the deductibility since the contributions are not deductible anyway.  However if you are doing a traditional IRA the deductions are phased out between $92,000 and $112,000 of  AGI if you are married and either you or your spouse have a reirement plan at work.  Beyond $112,000 you can't deduct it anyway and you probably should do Roth IRA.  If you and your spouse are not covered by a retirement plan you can take a full deduction up to the contribution limits. 

For tax year 2013 the contributions are increased to $5,500 or $6,500 if you're over 50. This is per individual So it can make for an Inexpensive retirement plan.  A Roth IRA is still worth doing because your growth is not taxable and when you take it out it is not taxable.

This provides some food for thought.  You should probably go on the IRS website to get the full details.

Rising Costs of Employee Health Care

According to a recent Wall Street Journal interview with Mike Thompson of PriceWaterhousecoopers, employers face a 9% increase in the coming year in health insurance.  This in turn could result in double-digit increases in health insurance cost for the employee.  So at this rate those who still have health insurance may be faced with no choice but to go without it.  Further due to the recession, employees are not getting wage increases to meet the increased cost.  This is occurring just as many people are losing their jobs because of downsizing.  Thus, there is a large concern for both employer and employee.  Since the number of uninsured will rise, the costs will be passed on to the employers’ health insurance costs.  And so it goes, like a domino-effect, with no relief in the near future.

 I Think It's Time for Health Reform

These circumstances, I believe, set the stage for some badly-needed health reform in the form of cost containment or government subsidy.   However, these reforms will not happen overnight.  In fact, we may not see the fruits of the health care changes until 2012 or later.  And retirees may see cutbacks in some of their current benefits.  If health care reform was ever needed, it is certainly now.  We need to encourage our lawmakers to push to get these changes enacted before more and more people fall through the cracks by having to drop their health insurance.

These are the current problems as I see them:

• We are the richest nation in the world.  Yet we can’t afford the basic necessities of life for our workers and retirees.

• Lack of health care coverage could cost us more in the long run because of loss of productivity by workers.

• It cuts to the core of our standard of living to not have basic health care.

• Many Americans are resistant to universal health care.  Therefore, we need a middle-of-the-road solution between that and what exists now.