Money, Health, and Other Things

Educational Blog in the Area of Family and Consumer Sciences for the Middle Peninsula


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[Replay] Planning for Retirement, Part VI

Over the next few weeks, we’ll revisit our series on retirement planning! This week, we’ll return and continue our discussion on estimating how much you need to save for retirement.

Last week we discussed ensuring that your retirement savings are invested in a manner that helps those savings grow, without being too risky for your personal risk tolerance. Once your retirement savings are being put in the appropriate investments, it’s time to look at current and future retirement resources. How much are you saving each year for retirement? How much do you already have saved for retirement? How many more years do you plan to work, or alternatively, when do you plan to retire? When you retire, are you planning to do any part-time work, or “fully” retire?

Once you’ve answered all of these questions, you can estimate how much money you’d have at retirement. But how do you know if that will be enough? To answer that, you need to look at how much pre-retirement income you’ll need at retirement. As mentioned last week, a typically household needs anywhere from 70% to more than 100% of pre-retirement income. How much you’ll need will depend on what type of retirement you anticipate. Do you plan to do a considerable amount of traveling? Are you planning on downsizing your home? While many expenses may decrease at retirement – auto insurance, gas, and other auto expenses, lower utilities and housing costs for a smaller home, and often decreased income taxes – many expenses may increase – higher medical and health expenses, and higher travel and entertainment spending.

Lastly, you need to look at how many years of retirement income you’ll need – which brings up the darker question, how long to you expect to live? According to the CDC, for those who reach the age of 65, the average life expectancy of men is 83, and for women is 86. Think about your current health, and also consider being safe and planning for more retirement years than you estimate.

We’ll return next time to conclude our discussion on estimating how much you need to save for retirement, and discuss strategies to make your retirement money last.


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[Replay] Planning for Retirement, Part V

Over the next few weeks, we’ll revisit our series on retirement planning! This week, we’ll return and discuss estimating how much you need to save for retirement.

While many households need 70% to sometimes more than 100% of pre-retirement income during retirement, social security often only provides 25% to no more than 50% of needed retirement income. This creates the need for the majority of households to save a considerable amount of money for retirement. Which begs the question, “am I saving enough?” To answer that larger question, you need to answer some more specific questions.

First, look at where your current and future retirement savings are being invested. Are they being invested in a manner that helps those savings grow, without being too risky for your personal risk tolerance?

The historical average annual return of a 100% equity/stock investment, with diversified investments similar to the S&P 500, is around 10%. However, that comes with significant variation. Historically that 10% average includes years with more than 50% gains, and some years with more than 40% losses. While we would all appreciate higher growth, many people saving for retirement, especially those only a few years away from retirement, cannot afford a 40% loss in retirement savings. To reduce that risk, you could save money in an investment with more high-quality bonds, and fewer stocks, with the tradeoff being a lower average annual growth. Many investors invest at a high risk when they’re younger, at a time where they can take advantage of higher average growth, with many years to recover from a down market, and invest more conservatively as they age, to avoid significant losses. One common rule of thumb for asset allocation, which is the percentage of investment in stocks/equity vs. bonds and other fixed incomes, involves taking the number 100, subtracting your age, and using that as the target percentage of stocks in your retirement investments. More aggressive investors may use 120 minus age. If you find that your retirement savings are well off your desired asset allocation, you may need to adjust your retirement portfolio. Keep in mind, there may be a cost to adjusting your portfolio if you need to sell and buy new investments. If you take this approach, you may want to make changes primary through adjusting future retirement savings, for instance, focusing on purchasing more bonds or bond funds if your portfolio has too high a percentage of stocks, and/or avoid adjusting your portfolio unless you’re at least 5-10% off of your goal.

We’ll return next time to continue our discussion on estimating how much you need to save for retirement.


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[Replay] Planning for Retirement, Part IV

Over the next few weeks, we’ll revisit our series on retirement planning! This week, we’ll return and discuss the difference between 401(k)s, 403(b)s, 457(b)s and IRA plans.

Your eligibility for any of the three employer-sponsored defined-contribution plans will depend on your employer. 401(k)s are generally for for-profit businesses, while 403(b)s and 457(b)s are generally for non-profits, hospitals, ministries, and government entities. 403(b)s are often used to supplement existing defined benefit or pension plans with your employer.

As mentioned in the previous segment, one of the big benefits for 457(b)s is that they do not have penalties for early withdrawals. Additionally, 457(b)s have separate contribution limits than 401(k)s and 403(b)s. This means if you’re able to contribute to both a 457(b) and 403(b) plan, for instance, you can max out both at the $19,500 or $26,000 contribution limit *($20,500/$27,000 for 2022, and expected to be $22,500/$30,000 for 2023)*. This is not the case if you contribute to a 401(k) and a 403(b), as they share the combined $19,500/$26,000 contribution limit. *($20,500/$27,000 for 2022, and expected to be $22,500/$30,000 for 2023)*

IRAs are a bit different than the three aforementioned plans since they are not employer-sponsored plans, instead being individual retirement accounts with just your own contributions. The ability to make tax-advantaged contributions or to be eligible to participate at all depends on your income and whether or not you have access to an employer-sponsored plan at your work. For 2021 for traditional IRAs, if a single taxpayer, with access to a workplace retirement plan, makes more than $66,000 in a year *($68,000 in 2022)*, their tax deduction on contributions begins to phase out and they are ineligible for tax-free contributions altogether at $76,000 *($78,000 in 2022)*. For married couples filing jointly, phase out starts at $105,000 until $125,000 *($109,000/$129,000 in 2022)*, and for those without access to a workplace retirement plan, but their spouse does, their phase out is from $198,000 to $208,000 *($204,000/$214,000 in 2022)*. With that said, if you do not have access to a workplace retirement plan, and you are either unmarried or your spouse also does not have access to a workplace retirement plan, no income phase out applies to you. For Roth IRAs for 2021, you are ineligible to contribute at all if you are single and make more than $140,000 *($144,000 in 2022)*, with a phase out on how much you can contribute starting at $125,000 *($129,000 in 2022)*, and for those married but filing jointly, the income limit is $208,000 with the phase out beginning at $198,000 *($204,000/$214,000 in 2022)*.

We’ll return next week to discuss estimating how much you need to save for retirement.


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[Replay] Planning for Retirement, Part III

Over the next few weeks, we’ll revisit our series on retirement planning! This week, we’ll return and discuss 401(k)s, 403(b)s, 457(b)s and IRA plans.

First, let’s start with the similarities.

All four plans are based on tax-advantaged money you invested. This is different from defined benefit or pension plans, which pay out a guaranteed amount based on a formula that often includes factors like years of service and highest earning salaries.

All four plans generally have traditional and Roth options – traditional allowing for tax-free contributions and Roth allowing for tax-exempt withdrawals. All four plans have contribution limits. For 2021, the three employer-sponsored defined-contribution plans – 401(k)s, 403(b)s, and 457(b)s – have maximum contribution limits of $19,500 for those under 50 and $26,000 for those 50 and older *($20,500/$27,000 for 2022, and expected to be $22,500/$30,000 for 2023)*. For IRAs, the 2021 contribution limit is $6,000 for those under 50, and $7,000 for those 50 and older *($6,000/$7,000 for 2022, and expected to be $6,500/$7,500 for 2023)*.

All four plans generally have required minimum withdrawals starting at age 72, with the exception of Roth IRAs, and all except 457(b)s have a 10% penalty plus taxes for withdrawing before 59.5, with a handful of exceptions, such as having high unreimbursed medical expenses, being a qualified first-time homebuyer for IRA owners, or the disability or death of the plan owner. More exception can be found at the IRS website.

All three employer-sponsored defined contribution plans have the possibility of an employer match, however, for 457(b)s, that match goes towards your personal maximum contribution limit, which is not the case for 401(k)s and 403(b)s. Instead, for 2021, there is a combined maximum contribution for both employees and employers of 401(k)s and 403(b)s of $58,000 for those under 50 and $64,500 for those 50 and older *($61,000/$67,500 for 2022, and expected to be $66,000/$73,500 for 2023)*; however, your personal contribution limit of $19,500/$26,000 still applies! Those matches are typically vested in one of three ways, either they are immediately vested, with the employee having immediate ownership to the match, graded vested, where you gradually get ownership of matching funds, or cliff vested, which gives you 100% ownership after a certain number of years, often three.

All three defined contribution plans may also have options to borrow money from the plan.

Lastly, all three defined contribution plans are typically portable, allowing them to be rolled into a new employer’s plan or into an IRA.

Next week, we’ll return and discuss the difference between these four plans.