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Strategies for Retirement: Trending Industry Topics to be Aware Of

Cole Hansen, Wealth Management Associate | Carolyn Taylor, Founding Partner, President | September 22, 2016

Strategies for Retirement – What retirement plans and trending industry topics you need to be aware of to achieve your personal retirement goals. An adviser at Weatherly can assist with selecting an optimal retirement plan, providing strategic investment strategies, and addressing retirement concerns or topics.

Defined Benefit to Defined Contribution Plans

Saving for retirement has not always been a cause of anxiety for employees. In the past, individuals would begin working for a company in early adulthood, continue working with that same company for decades, and retire with a sponsored defined benefit (DB) pension plan that provides the employee with sufficient retirement assets through pension payments. The major risk employers face is that the returns generated from investing employer monthly contributions to the general fund will not satisfy the pension premiums owed to retirees in the future due to lower interest rates, uneasy markets, and increase in life expectancy. If returns are not sufficient, the business will have to pay out of pocket to negate the accumulated liabilities. This extra cost has led most employers to switch to offering company sponsored defined contribution (DC) plans, in which the employee is responsible for all payouts during retirement, rather than the employer. This elimination of risk to the employer and freedom of investing for the employee are reasons these plans are popular for both parties, although employees are now on the hook to save for retirement through their own investment strategy and prowess and hope to receive a company match to their contributions.

Choosing the Right Plan – Plan options will depend on compensation:

  • W-2 Employees
    • Company Sponsored Retirement Plan – 401(k), 403(b), Roth 401(k), or Employee Stock Ownership Plan
      • Contribution Limits –Employees can contribute up to $18,000 of deferred income for 2016 and if the employer offers a contribution match, the employer can contribute up to 25 percent of annual compensation. Total contributions between the employee and employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize a catch up provision of $6,000 for a total allowable value of $59,000.
      • Benefits – Deduction on employee tax return and deferred taxes on capital gains, dividends, and interest income.
      • Administration – N/A
      • Action Items – Auto-enroll in company sponsored plans and contribute to at least the employer matching maximum percentage.
  • Self-Employed/Business Consultants
    • Self-Employed 401(k) – available for individuals with no other employees, excluding a spouse
      • Contribution Limits –Total contributions between the employee and employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize a catch up provision of $6,000 for a total allowable value of $59,000.
      • Benefits – Can contribute as both the employee and employer with generous contribution limits without being subject to complex ERISA rules and regulations. Large universe of investment options to choose from such as stocks, bonds, mutual funds, and exchange-traded funds.
      • Administration – Annual Form 5500 filing if assets grow to greater than $250,000.
      • Action Items – Establish plan before calendar year-end for employee deferral and tax filing deadline for employer deferral.
    • Simplified Employee Pension Plan (SEP IRA) – any business can establish this type of plan
      • Contribution Limits – Total contributions by the employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize a catch up provision of $6,000 for a total allowable value of $59,000. The business must contribute the same percentage of income to employee accounts that the business owner contributes to his or her own account.
      • Benefits – Easy to establish and no annual fees. Large universe of investment options to choose from such as stocks, bonds, mutual funds, and exchange-traded funds.
      • Administration – No required annual Form 5500 filing and must establish SEP IRA for every employee.
      • Action Items – Must establish and fund by business tax filing deadline.
  • Small Business Owners
    • Saving Incentive Match Plan for Employees (SIMPLE IRA) – available for companies with less than 100 employees
      • Contribution Limits – Employees may contribute 100% of income up to $12,500. If the individual is at least 50 years old, the employee may utilize a catch up provision of $3,000 for a total allowable value of $15,500. The employer is required to match up to 3% of employee contributions.
      • Benefits – Easy maintenance and no required identical percentage match to employees. Large universe of investment options to choose from such as stocks, bonds, mutual funds, and exchange-traded funds.
      • Administration – No required annual Form 5500 filing. If the employer is not matching 3% of contributions, then the employee must be notified before the 60 day election period for the calendar year.
      • Action Items – The plan must be established between January 1st and October 1st.
    • Safe-Harbor 401(k)
      • Contribution Limits – Employers can contribute up to 25 percent of annual compensation and employees can contribute up to $18,000 of deferred income. Total contributions between the employee and employer may not exceed $53,000. If the individual is at least 50 years old, the employee may utilize the catch up provision of $6,000 for a total allowable value of $59,000.
      • Benefits – High-earning employees can maximize contributions to retirement plans without the complex Internal Revenue Service non-discrimination test.
      • Administration – Employers are required to give employees annual notice of rights and obligations regarding the plan.
      • Action Items – Establish the plan with a third party administrator and financial advisor. The plan must be established within 3 months of the end of the plan year.

Topics for Retirement Investing

  1. Investment Strategies – Most retirement plans will feature mutual funds or exchange-traded funds available for investors to select for investment in retirement portfolios. The availability of these of these funds can be a blessing or a curse as they provide novice investors with greater diversification and professional, active management, but can also charge high fees without guaranteed returns. Selecting a fund with a low expense ratio, a target date close to projected retirement date, or an investment style appropriate for risk tolerance are imperative for successful retirement planning and peace of mind. In order to maintain the appropriate amount of risk to generate ample returns, investors should seek their retirement plan’s investment adviser or personal wealth manager for advice.
  2. Robo Advisers –Although robo-advisers are relatively new to the investing landscape, they are taking the industry by storm, and some retirement plans will opt to use a robo-adviser rather than a human adviser. These computer programs offer investors professional advice and management, at a discounted rate. The online platforms utilize a complex algorithm to recommend asset allocation and securities for investors based on a variety of factors, including client information and current market trends. The recent Department of Labor final ruling, which requires all financial agents advising retirement plans to follow the fiduciary standard, rather than the suitability standard, may have an effect on the legality of robo-advisers advising for retirement plans, although executives in the industry believe these platforms will be unaffected by ruling. Regardless, robo-advisers offering advice to IRA’s and ERISA plans discussed previously in this post will be under the same scrutiny that human financial advisors currently are and may potentially need to alter the programs algorithm or charge higher fees.

How to Utilize an Advisor

A financial advisor that maintains a fiduciary responsibility at your disposal is crucial for retirement planning and execution. The many retirement plans and topics discussed in this article should be common knowledge for advisors, as they collaborate with clients to maximize client tax efficiency and achieve client goals. Individuals, regardless of employment backgrounds, will rely on a financial advisor to provide education on ever-changing plan rules and contribution limits, update financial evaluations to reflect growing retirement savings, and pinpoint optimal times to begin withdrawals from retirement accounts or access social security benefits. Some advisors, such as Weatherly, will offer their services as financial advisors for company sponsored 401(k) plans to assist in meeting strict ERISA compliance rules and answering participant investment related inquires.

Other Considerations in Retirement

  1. Minimum Required Distributions – Minimum required distributions (MRD’s) are IRS imposed withdrawals from a tax-deferred account after the participant turns 70 ½ years old. Investors that efficiently save for retirement may encounter a minimum required distribution that bumps income up so high in retirement years, that his or her tax bill may be higher in retirement than the bill was in income earning years. Well-informed investors will strategically contribute to and draw strategically from a multitude of accounts with different registrations, including Roth IRA, Trust accounts, or Individual Accounts to help balance tax implications.
  2. Medicare Premiums – Higher income earning beneficiaries of Medicare will face higher premiums for Medicare Part B and prescription drug coverage. Married couples with a modified adjusted gross income (MAGI) of greater than $170,000 and single individuals with a MAGI of greater than $85,000 will be subject to the higher premiums. Retirees that draw income from a pension, self-directed retirement plan, or an advisor-managed retirement plan will need to keep track of tax-deferred withdrawals to ensure that MAGI is kept below the threshold for higher premium payments for cost savings.
  3. Social Security Benefits – Many Americans are familiar with Social Security, the monthly deduction from paychecks, but how to utilize Social Security benefits strategically is not as straightforward. A recent study by the Government Accountability Office detailed that delaying claims could possibly allow for tens of thousands of dollars more in benefits to retirees, depending on how long the individual and spouse live. Individuals taking Social Security benefits should also note that up to 85 percent of these benefits are taxable, depending on the individuals overall earned income level. For more information on the taxation of Social Security benefits, please utilize this article from the Congressional Budget Office.

Please contact Weatherly to discuss your retirement options and how to best maximize savings, income, and tax-deferrals.

More resources:

http://www.ivdgl.org/social-security/self-employed.htm

www.ssa.gov/pubs/EN-05-10536.pdf

https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview

https://www.fidelity.com/viewpoints/retirement-plan-small-business

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.