Retirement Planning. Jason Ice, CFP Director of Financial Services and Dane A. Wilson Financial Advisor C&P Wealth Management, LLC

Transcription

1 Retirement Planning Jason Ice, CFP Director of Financial Services and Dane A. Wilson Financial Advisor C&P Wealth Management, LLC Jeffrey R. Spencer, CPA, Macc Principal Ciuni & Panichi, Inc.

2 Agenda Why to Save Where to Save Employer provided plans Individual investments Investment Ideas and Concepts Recommendations

3 Who is funding your retirement? WHY TO SAVE

4 Retirement Planning has Changed Average Life Expectancy at Birth Year Men Women Source: NIH, CDC Life Tables,

5 Retirement Planning has Changed Understanding Life Expectancy Probability of living to a specific age or beyond Couple (at least one Age Male Female lives to the age) Age 80 63% 73% 90% Age 90 22% 34% 49% 1 SSA 2014 Life Tables 2 63% of Americans underestimate how much money they ll need in retirement, 2016 TIAA Lifetime Income Survey 2

6 Percentage of Households with a Defined Benefit Plan Source J.P. Morgan Guide to Retirement

7 Put Time on Your Side Sam Sally Age at First Year of Savings Age 24 Age 40 Total Years of Savings Monthly Savings $250 $500 Cumulative Savings $123,000 $150,000 Earnings $408,664 $196,497 Total at Retirement $531,664 $346,497 Projected Income in Retirement $3,095 $2,087 The illustrations above assume a retirement age of 65 and that the individual receives the monthly retirement payment shown until age 90. The amount saved until retirement assumes an annual investment return of 6%. The monthly payment amount in retirement assumes an annual investment return of 5%. The investment performance shown does not represent the return of any particular investment and does not guarantee any future rate of return. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals from a tax-deferred account before age 59½ are subject to a 10% federal penalty tax unless an exception applies. 4

8 Year Retirement Readiness 1 Average Participant Deferral Percentage Average Participant Savings 1 Average Participant Account Balance 1 Median Participant Account Balance (middle value) % $102,682 $29, % $96,288 $26, % $96,495 $24,713 1 How America Saves 2017 Average Balance by Age Age Average Savings Rate Average Median (middle value) <25 3.9% $4,154 $1, % $22,256 $8, % $61,631 $23, % $116,699 $43, % $178,963 $66, % $196,907 $60,724 1 How America Saves 2017

9 Savings Recommendations Overall theme: More is better than less Start early If you haven t started early, start now Get to 15% savings as soon as possible Increase savings by 1% per year 6

10 What options are available to you? WHERE TO SAVE 7

11 Annual Savings Limits (2018) Maximum Annual Limit 401(k) 403(b) Governmental 457(b) Non-Governmental 457(b) $18,500 $18,500 $18,500 $18,500 Limit Coordination Yes Yes No No Catch-Up Contribution (age 50+) Pre-59 ½ Penalty (10%) $6,000 $6,000 Yes, (2) options Yes, potential limitations Yes Yes No No Subject to ADP Test Yes No No No 8

12 Annual Savings Limits (2019) Maximum Annual Limit 401(k) 403(b) Governmental 457(b) Non-Governmental 457(b) $19,000 19,000 $19,000 $19,000 Limit Coordination Yes Yes No No Catch-Up Contribution (age 50+) Pre-59 ½ Penalty (10%) $6,000 $6,000 Yes, (2) options Yes, potential limitations Yes Yes No No Subject to ADP Test Yes No No No 9

13 Non-Profit Employers Typically offer either a 403(b) or 401(k) If you have Highly Compensated Employees (HCE) s and you offer a 401(k) plan Might investigate why a 401(k) v. 403(b)? Reason: No Average Deferral Percentage (ADP) test on 403(b) s topic covered later Some non-profits might have multiple 403(b) vendors With fiduciary rules, might consider consolidating to (1) provider Ease of administration as well 10

14 Non-Profit Solutions Adding a Non-Governmental (NG) 457(b) plan Additional plan for top employees Can discriminate who is offered eligibility Non-Qualified Deferred Compensation plan Savings do not aggregate with 403(b)/401(k) Ideally for executive directors, finance director, other c-level employees Potential recruiting advantage for key employees 11

15 NG 457 Contributions and Eligibility Funded via employee and/or employer annual salary deferrals Pre-tax only (Roth deferrals not permitted) Typically funded by employee not employer Generally offered to top 10% of employees based on pay Employer can discriminate who is offered eligibility This is different than 401(k) and 403(b) plans Target group: Anyone who is maximizing the 403(b) Special catch-up contributions (next slide) 12

16 Special Catch-Up Contributions Unique to NG 457(b) plans In the three years prior to the year a participant reaches normal retirement age Typically age 62, 63, 64 Eligible participants may contribute the lesser of: Twice the annual salary deferral limit ($18,500) The unused portion of prior years limits (if any) 13

17 NG 457(b) Participant Balances Participant balances are subject to the general creditors of the non-profit Total participant balances are listed as a liability of the company Corresponding asset (mutual fund) is listed as an asset 14

18 Distributions & Rollovers Distributions directly from 457(b) plans are not subject to the 10% premature distribution penalty tax Ideal for participants retiring before age 59 ½ Cannot rollover the 457 account to a non-457 plan or an IRA Plan could have force distributions at retirement/separation i.e., 5 year payout or lump-sum 15

19 Public Service Loan Forgiveness Created through the College Cost Reduction and Access Act of 2007 Created to encourage individuals to enter and continue to work full-time in public service jobs Student debt has surpassed groceries as a primary expense in the average home (source: New York Fed) Borrowers may qualify for forgiveness of the remaining balance of their Direct Loans 16

20 Eligible Public Service Jobs A government organization Federal, state, local, or tribal organization, agency, or entity A public child or family service agency; or a tribal college or university) A not-for-profit, tax-exempt organization Under section 501(c)(3) of the Internal Revenue Code 17

21 Keys to Remember This program could be cancelled at any time Recruiting, retention and retirement strategy Less money towards student loans, more for retirement Parents who work in eligible employers could use this for their child s education i.e., PLUS Loans 18

22 Governmental Governmental 457(b) Plan Most common is Ohio Deferred Compensation 457 plan Most common is Ohio 457(b) Deferred Compensation Similar to a 401(k)/403(b) 19

23 Governmental 457 Plan Voluntary program, no automatic enrollment Employees would have to enroll Can enroll via website Plan can only be funded via payroll deferrals Employees are 100% vested at all times Employee can fund via pre-tax or Roth deferrals Consider Roth option for tax diversification No employer funding/contributions 20

24 Catch-up Contributions Option 1: Age 50+ $6,000 for 2018 Option 2: Normal catch-up allows participants to contribute more in the 3 years prior to normal retirement age You may contribute up to double the normal limit 2018 ($18,500 x 2 = $37,000) This limit is subject to the amounts you were allowed to contribute in previous years, but did not fund the maximum 21

25 457 Benefits: Age 59½ Exclusion Accessing 457 plan assets Must separate from service to access account Unlike 401(k), 403(b) plans and IRAs There is no 10% IRS penalty for withdrawing 457 funds prior to age 59½ Example, retiring before age 59½ Privilege is lost if you roll the 457 assets to an IRA or another non-457 retirement plan 22

26 457 Plan and Pension Offset? Does participation in the 457 Program affect my pension or reduce my OPERS pension/retirement benefits? No This is a supplementary plan which does not replace or reduce your pension retirement benefits No Government Pension Offset (GPO) or Windfall Elimination Provision (WEP) offset Applicable to Social Security only (covered later) 23

27 For-Profit Employers 401(k) Average Deferral Percentage (ADP) test Simple IRA Advanced retirement plans Profit Sharing Contributions Non-Qualified Deferred Compensation (NQDC) Cash Balance Pension Plan 24

28 Average Deferral Percentage Test Applies to 401(k) plans Does not apply to 403(b) plans Does not apply to 457(b) plans Tests Non-Highly Compensated Employees (NHCE) v. Highly Compensated Employees (HCE) HCE = 5% owner or income greater than $120,000 HCE can typically only defer 2% more than the NHCE group 25

29 ADP Example NHCE Average Deferral 3.00% HCE Average Deferral 7.00% Test would allow HCE to defer NHCE (3.00) % = 5.00% HCE would receive corrective distribution the following year (March 15) 26

30 ADP Test Solutions Adopt auto-enrollment (slow fix) New employees (and/or employees not currently contributing) are automatically enrolled at a certain percentage (typically 3%) Would recommend 5-6% due to statistics Employees can opt out (~70% do not) Auto escalation (slow fix) Each year employees automatically have their deferrals increased 1.00% per year up to a designated ceiling (recommend 10%) 27

31 ADP Test Solutions Stretching the employer match (quicker fix) Most employees will contribute up to the match Current match: 50% match up to 4% Recommendation: 25% match up to 8% Adopt safe-harbor provisions (quickest fix) ADP/ACP/Top Heavy tests are waived Requires mandatory employer match 2 year or immediate vesting Generally only done 30 days before year-end 28

32 SIMPLE IRA Savings Incentive Match Plan for Employees Mini-401k/403b Designed for smaller employers or employers who cannot afford retirement plan administration ~$3,000/year A SIMPLE IRA can be the only plan offered by an employer in a calendar year No ADP, ACP, Top Heavy compliance test 29

33 SIMPLE IRA Contributions 100% immediate vesting Employer and employee contributions Employee Up to $12,500 per year (indexed) $3,000 catch-up contribution (indexed) Employer, choice of either Matching contributions: 100% to first 3% Non-elective contributions: 100% of first 2% 30

34 Advanced Plan Options Profit Sharing Contributions Non-Qualified Deferred Compensation (NQDC) Can discriminate who is offered eligibility Cash Balance Pension Plan Options if owners/key executives are looking for additional ways to save 31

35 Individual Planning Individual Retirement Accounts (IRAs) Social Security Health Savings Account (HSA) 529 College Savings Plans 32

36 IRA Limits Year Limit Catch-Up (age 50 or older) Funding Deadline 2018 $5,500 $1,000 4/15/ $6,000 $1,000 4/15/

37 Types of IRAs Traditional IRA Roth IRA Deductible Non-Deductible 34

38 Comparing IRAs Deductible Traditional IRA Roth IRA Non-Deductible IRA Contributions Tax Deduction No Tax Deduction No Tax Deduction Growth Tax Deferred Growth Tax Deferred Growth Tax Deferred Growth Distributions 100% Taxable at Ordinary Income *100% Tax Free Earnings Taxable at Ordinary Income Required Minimum Distributions (RMD) Yes, Age 70 ½ No Yes, Age 70 ½ *Assuming appropriate requirements are met 35

39 IRA Eligibility What type of IRA can I fund? Factors: Age, Adjusted Gross Income (AGI), tax filing status, access to retirement plan If funding Non-Deductible IRA Convert to Roth IRA Maintain as Traditional IRA, ensure filing of IRS Form 8606 to track basis 36

40 Social Security Full Retirement Age (FRA) Birth Year Earliest Eligibility Age Full Retirement Age 1937 and prior and 2 months and 4 months and 6 months and 8 months and 10 months and 2 months and 4 months and 6 months and 8 months and 10 months 1960 and later

41 Early and Delayed SSA Impact 140% 120% 100% 80% 75% 80% Full Retirement Age of % 108% 100% 93% 86% 124% 132% 60% 40% 20% 0%

42 Monthly Payments by Claiming Ages High Wage Earner $4, % $3,000 $2,000 $1,875 $2,000 75% 80% $2,168 87% $2,333 93% $2, % $2,700 $2, % 116% $3, % $3, % 120% 80% $1,000 40% $ % 39

43 Achieving Age Life Expectancy at Retirement 65 year old male 65 year old female 65 year old couple, at least (1) spouse 75 78% 85% 97% 85 54% 41% 73% 90 33% 21% 47% 95 13% 7% 19% 100 3% 1% 4% Source: Social Security Administration 40

44 Health Savings Accounts (HSAs) Must be enrolled into a High Deductible Health Plan (HDHP) Best investment ever Pre-tax payroll deduction Tax free distribution for qualified health care costs Can roll unused funds indefinitely No use it or lose it Individually owned account 41

45 HSA Funding Limits (2018) Single Family (including spouse and/or (1) child) Maximum Contribution (Employer + Employee) $3,450 (2018) $6,900(2018) Additional $1,000 catch-up if age 55 or older $4,450 (2018) $7,900 (2018) Contribution to your HSA is limited by the level of your insurance coverage (Single v. Family). Proceeds can be used for any family member. 42

46 529 College Savings Plans Tax law, now able to use 529 for private tuition for elementary, middle and high school Cap of $10,000 per year per beneficiary Tax free distribution for qualified educational expenses No cap for college Potential state income tax deduction on contributions 43

47 Savings Recommendations Understand the employer provided plans that are available to you Review your Summary Plan Description Where else can you save? IRAs, Health Savings Accounts, 529 Plans Understand your Social Security benefits When should you and/or spouse file? 44

48 How to invest your savings? INVESTMENT IDEAS AND CONCEPTS 45

49 Tax Control Triangle Bucket 3 Bucket 1 Bucket 2 46

50 Tax Diversification Diversify the taxation of your investments Bucket 1: Pre-Tax 401(k), 403b, 457, Pension, Social Security, Traditional IRAs Bucket 2: Post-Tax Checking, Savings, Non-IRA Bucket 3: Tax Free Roth IRA, Roth 401k, 529 plans 47

51 Is the Market Really Like a Casino? Game Odds of Winning Baccarat 48.8% Craps 48.6% Blackjack 48.0% Poker 46.6% Let it Ride 46.5% Roulette 44.7% Slots 40.0% Keno 23.0% 48

52 Time horizon Median return Volatility Happens Standard deviation of returns Positive return probability One day 0.06% 1.10% 54% One week 0.35% 2.27% 58% One month 1.29% 4.19% 64% One year 13.69% 16.50% 83% Ten years % % 91% S&P Returns: 1/4/1988 2/16/2018 Sources: Vanguard calculations, using data from Bloomberg. Dates: January 4, 1988 February 16,

53 Percentage of Years U.S Stocks Posted Positive Returns over Rolling Periods: % Rolling Monthly Returns 100.0% 80.0% 75.0% 83.0% 87.0% 94.0% 99.7% 60.0% 40.0% 20.0% 0.0% 1-Year 3-Year 5-Year 10-Year 15-Year Source: Morningstar Direct 4/

54 20 Year Annualized Returns ( ) 12.00% 10.00% 9.70% 8.00% 6.00% 7.70% 6.90% 6.50% 5.80% 5.30% 4.60% 4.00% 3.70% 3.40% 2.00% 2.10% 2.30% 0.00% REITs S&P /40 Allocation 40/60 Allocation Gold Bonds EAFE Oil Homes Inflation *Average Investor Source: Dalbar Inc. 9/30/

55 Everybody has a plan until they get punched in the face. - Mike Tyson Volatility Does Not Equal Loss Unless You Sell Year S&P 500 Calendar Year Return Largest Intra-Year Price Decline (Worst day of the year) Difference % -47% 9% % -26% 49% % -16% 29% % -19% 19% % -10% 23% % -6% 9% % -7% 18% % -12% 11% % -11% 21% Source: FactSet, Standard & Poor s, J.P. Morgan Asset Management 4Q

56 S&P Index Performance (12/31/01 12/31/2016) Investment Period Rate of $10,000 Investment Return Fully Invested 7.28% $28,698 Missed the top 10 days 2.60% $14,697 Missed the top 20 days -0.25% $9,630 Missed the top 30 days -2.58% $6,756 Missed the top 40 days -4.63% $4,908 Source: Ned Davis Research Group, Inc.. 53

57

58 The Real Cost of Volatility Loss and subsequent gain necessary for full recovery of value Loss Required Gain -10% 11% -20% 25% -30% 43% -40% 67% -50% 100% -60% 150% -70% 233% Source: 2 JP Morgan Asset Management, Guide to the Markets, 4Q

59 Recommendations Volatility happens Studies have confirmed, and confirmed: Investors inevitable buy high and sell low See market drops as a Black Friday Tax diversification matters 55

60 C&P Wealth Management Services Investment planning Tax planning Income protection and asset preservation Retirement savings Retirement transition and income planning Business planning Estate planning Education planning Special situations Debt management 56

61 Workshops C&P Wealth Management team is able to provide turnkey workshops at your business/firm Can tailor presentation to audience No fee for presentation(s) Attendees can set up personal meetings afterwards if desired 57

62 Questions? Jason Ice, CFP Dane A. Wilson C&P Wealth Management, LLC Jeffrey R. Spencer, CPA, Macc Ciuni & Panichi, Inc