Column, Money Matters

Money Matters: Retirement plans

Not everyone is financially prepared for retirement. Earlier this year, the Employee Benefit Research Institute estimated almost 41% of American households will run short of money in retirement. Believe it or not, that’s an improvement over 2014 when almost 43% of 35- to 64-year-olds were unprepared.

Here is some good news: Many Americans are doing better financially in retirement than they expected.

Each year, T. Rowe Price conducts a survey of Americans who participate in or are eligible to participate in employer-sponsored 401(k) plans. The results have consistently confirmed retirees’ experience exceeds workers’ expectations.

For instance, people who have been retired for 10 or more years were asked, “Given your savings, income, and expenditures, which of the following statements are true of your retirement?” The answers may be surprising to some:

81% Have enough money to pay for health care

72% Live as well as or better than when they were working

66% Will be able to leave money to family members or charity

28% Will be able to help out younger family members with tuition/housing

11% Will work at least part-time in retirement

10% Will run out of money

While retirement has a different story for everyone, the survey found satisfied retirees tended to have more income than unsatisfied retirees. Even when you have set aside significant savings and investments, transforming accumulated wealth into a steady stream of income that will support you throughout retirement can be challenging. Many strategies for generating retirement income include one or more of the following resources:

Social Security: 9 out of 10 Americans receive Social Security benefits in retirement. It’s a steady source of income that is periodically adjusted for inflation. The average monthly benefit in June 2019 was $1,471.

Retirement plan savings: A fair number of American workers have set aside savings in defined contribution plans, like 401(k), 403(b), or 457 plans. When it’s time to retire, talk with an investment professional before taking any action. Taking the right steps can ensure you don’t lose tax advantages or pay too much in taxes when you take plan distributions.

Pensions: Just 17 percent of Americans working in the private sector have pension plans that will provide steady income after retirement. If you have a pension, the amount of income will be determined by your tenure, earnings, and retirement age. If you’re not sure whether your employer offers a pension, talk with the Human Resources department.

Other retirement accounts: Many people own Traditional IRAs, Roth IRAs, and other types of retirement accounts that can provide income during retirement. Distributions from traditional IRAs are usually taxed as ordinary income, while distributions from Roth IRAs are tax-free, as long as certain conditions are met.

Stocks and bonds: Many people have savings invested in stocks and bonds. Some stocks pay dividends and some bonds pay interest. Both can be sources of retirement income.

Health Savings Accounts (HSAs): If you have high-deductible health insurance, then you may qualify for an HSA. It provides an opportunity to save pre-tax money in an account that can be used to pay qualified medical expenses today or in retirement. You can invest the savings in your HSA, too.

Inheritance: Receiving an inheritance from parents or loved ones is less common than many people think. The most recent research from the Bureau of Labor Statistics found from 1989 to 2007, just 21% of American households received an inheritance.

If you’re one of the lucky few, the assets you receive can be used to generate income in retirement or leave a legacy for your heirs.

“Guaranteed” income sources: Having a stable and predictable income is a high priority for many retirees. The 2019 Retirement Confidence Survey reported income stability is a higher financial priority than conserving wealth for two out of three retirees. There are a variety of products in the market that offer “guaranteed” income. Be very careful of these brokered products as they tend to be complicated, expensive and often should be avoided.

Home equity: Your home might be one of your most valuable assets. Your equity – the difference between the value of your home and what you owe on your home – could be a source of retirement income. Home equity loans can help you access home equity without selling your home.

The first step in building a retirement income strategy is deciding what you want life in retirement to be like. Once you know, you can estimate costs and develop a plan. Typically, a sound retirement income strategy will have flexibility and growth potential.

Kevin Theissen is the owner of HWC Financial in  Ludlow.

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