Retirement Plan - Employees

Financial Wellness II

We are excited to continue the seven-part series on financial wellness that covers several financial struggles Americans are facing and ways to overcome them. This is the second half of the series and includes parts 5-7.

Part 5: Retirement 101

All approach retirement, some sooner than others. To enjoy your retirement years and not be a burden on family members, it is essential that you save sufficient assets to carry you through your retirement. No one knows precisely the amount of assets you will need for a comfortable retirement, but the more you save now, the more comfortable you are likely to be at retirement.

Here are the essentials to know about your retirement plan:

What is it? Your employer’s retirement savings plan is a defined contribution plan designed to help you finance your retirement. As a participant in the plan, you own an individual account within the plan that you contribute money to for your retirement.

What are the limits? For the year 2018, you can contribute a total of $18,500 towards your retirement plan. Individuals age 50 and over can contribute an additional $6,000.

Salary deferral advantages. Participating in your company’s retirement savings plan allows you the benefit of saving via payroll deduction on a tax deferred basis. Every dollar you save goes directly into your retirement savings account. Tax deferral on both savings and asset growth via payroll deduction helps you save more money and pay less tax upon distribution at retirement.

Tax deferred growth. Not being taxed on the growth of your assets helps accumulation during your working years. With your qualified retirement savings plan you not only defer taxes on the amount you save, but earnings on your savings is also tax deferred until distribution.

Employer contributions. Employer contributions, if offered, help you accumulate assets for retirement and can add considerably to your retirement account balance. You are also not taxed on your employer’s contributions until distribution. As an example, if your employer contributes 25 percent on your contribution that is the equivalent of earning a 25 percent return on that portion of your contribution, in addition to whatever return your investment generates.

Portability. If you change employers at some point in your career, you typically can keep your assets in the current plan, roll your assets over to your new employer’s plan or roll your assets into an IRA.

Part 6: Your Retirement Date

Retirement can be the most wonderful time of your life, truly the golden years. It is up to you to do what you can to make it so. Enjoying good health in retirement is key to quality of life. The other major determiner of quality of life in retirement is financial security. Below are some important questions that are never too early to consider.

When is your retirement date?  Life expectancy is constantly being extended by medical advances and lifestyle decisions. Working until age 70 is not a farfetched concept. Many people will be quite physically and mentally capable of sustaining some degree of employment through their 80s, whether for financial reasons or simply because they enjoy the engagement.

What will your expenses be?  Expenses are difficult to estimate. Having your own home is very helpful, but trying to predict other expenses is a challenge. The retirement investing industry has relied on the “old saw” that you should plan to replace 75 percent of your pre-retirement income. That may have worked for your parents, but likely not so much for you. If you retire with some degree of financial comfort you will have much time on your hands to indulge in your interests and hobbies. Don’t worry that you might save too much for retirement, because there is no such thing as too much money. There are many worthy causes you can help, if you have excess assets.

What about working longer?  In some ways work is like school or military duty (during peaceful times), you can’t wait until you are done with it, but then in hindsight, you miss aspects of it. This is not to say you should remain working 40 hours a week, but you may consider part-time work in your current field or begin a new career that is of interest to you, perhaps this may be associated with a hobby or sport you enjoy, or some charitable institution you feel strongly about. There really are many options.

What about Social Security?  In spite of all the Social Security kerfuffle about it being bankrupt, it is likely to still be here when you need it. For every year past eligibility you wait to begin benefits, your monthly amount increases by approximately 8 percent. That is not a bad return for a safe investment. You can delay your benefit until it makes sense not to. Also, consider a potential spouse’s benefit as well.

Part 7: How Long will Your Money Last?

The big question when it comes to retirement is, “How much money am I going to need?” With all of the advanced education and strategy tools available, it is still often difficult to understand the difference between what you can save for retirement and what is needed to retire. Sometimes, it is helpful to see what your account can actually provide over the course of your retirement. It can also help you set an achievable goal.

SavingsMonthly income for 10 years1Monthly income for 20 years1Monthly income for lifetime of individual and spouse
$50,000$493$289$174
$100,000$986$578$349
$150,000$1,479$867$523
$200,000$1,972$1,157$698
$250,000$2,465$1,446$872
$500,000$4,930$2,891$1,745
$750,000$7,395$4,337$2,617
The monthly incomes are hypothetical and not intended to project the performance of any specific investment or insurance product.

Monthly income can be greatly influenced by the number of distribution years.  A shorter payout over 10 years will result in the highest monthly distribution amount, but the risk is if you live longer than 10 years in retirement, you may actually run out of money. Perhaps the most important decision is to decide when you actually want the distributions to begin. Deferring the beginning date of distributions from your account a few years can not only reduce the payout timeframe, but could allow an opportunity for additional asset growth depending on investment performance.

For more information on increasing your deferral amount or other retirement planning questions, please contact your retirement plan advisors at Rathbone Warwick Investment Management at [email protected] or 208-297-5445.
¹Payment increases 2% annually to help offset effects of inflation. Illustrative amounts based on 3.5% interest rate. Lifetime payments assume retirement age of 65. Based on 5.5% annual yield compounded monthly. Investment option performance can dramatically affect these numbers. Inflation can also seriously affect the value of the withdrawals. Rate of return is hypothetical and does not represent any specific investment option or imply guaranteed results. Amounts shown do not reflect the impact of taxes on earnings, your actual return will vary depending on your investment option and your tax bracket. ²Lifetime payments assume start at age 65 over two lives, Joint and Survivor at 100% survivor benefit and 3% COLA. Analytics provided by MassMutual.

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