Retirement Planning Newsletter Fall 2015 This issue of Financial Footnotes brings you information to help you meet the challenges of midcareer. Of course, some of the ideas here can also apply if you re just starting out in your career or wrapping up your working life. Read on for tips you can use today and going forward. Reaching the milestones of midcareer (and midlife) Life s responsibilities increase in your 30s and 40s. Maybe you re becoming more established in your career path or thinking about marriage and raising a family. Whatever your goals, it s important to build a financial infrastructure to support them. Here are five elements of a plan: 1. Pay down school loans. Americans are awash in $1 trillion in education debt, and the average student loan debt in 2012 was $27,253. 1 The problem is that outstanding loan balances may cause you to delay other life decisions, such as buying a home or starting a business. There s a straightforward approach to retiring school debt. Look at all forms of outstanding debt (student loans and credit card debt) and assess whether you re on track to pay off your debt in a desired time frame. You might consider consolidating your debt or refinancing if it reduces the interest rate you pay each month or accelerates your repayment schedule. 2. Protect your loved ones. Even when you re in the prime of your life, misfortune may strike. If you are married, you may want to set up a living will and/or a revocable life insurance trust. A living will specifies what actions should be taken for your health if you are no longer capable of making decisions for yourself because of illness or incapacity. A revocable life insurance trust allows you to specify that life insurance benefits be paid into a trust for the benefit of your loved ones. This is often recommended for younger families with relatively modest assets but substantial insurance policies to pay down debts, fund educations or accumulate wealth. Continued 1 Source: $1 Trillion Student Loan Problem Keeps Getting Worse, Forbes.com, February 21, 2014, http://www.forbes.com/sites/halahtouryalai/2014/02/21/ 1-trillion-student-loan-problem-keeps-getting-worse/ 1 Financial Footnotes Fall 2015
Reaching the milestones of midcareer (and midlife) (continued from Page 1) 3. If you have dependents, consider buying term insurance. Term life insurance pays a fixed amount of benefit for a certain period of time (the relevant term). Parents with dependent children often purchase term life insurance policies as the least expensive way to provide for their children s livelihoods in the event of their death. 4. Save for a down payment on a house. Start saving for a down payment on a house if you have no credit card debt and you ve set up a six- to eight-month emergency fund. The emergency fund needs to be an account that you can access relatively quickly, without penalty, such as a bank savings account or money market fund. Many financial advisors do not recommend purchasing a home with less than a 20% down payment. 5. Keep saving. A rule of thumb is to save 10% or more of your salary for retirement, including individual IRAs, employersponsored plans and any employer-matching contributions. Don t be discouraged if you re not saving that much right now. Take small steps and increase your savings rate over time until you ve reached your goal. While taking charge of your finances is not especially difficult, it does take time and attention. Consider working with a financial advisor to create a plan that takes into account your specific circumstances and goals. Midlife, big changes: Kids college and a new job You ve made it through your early career period and have established yourself as an adult. The middle phase of life and a career is often a time of change big change. If you have children, you re probably thinking about how to pay for their college. And perhaps you are tempted to see what s on the other side of the fence, professionally speaking. What are some things to consider when you re dealing with these changes? Paying for college Paying for college can seem like buying a new car every year, but the sticker shock can be lessened if you plan ahead. Here are seven tips to help get you started: 1. Get your retirement in order first. Your kids will have access to more sources of college money than you will once you stop working, so make sure you re on the right path to retirement before you set aside money for college. 2. Start early. Even small contributions can add up if you give them time to grow. Investing just $100 a month for 18 years can yield $48,000, assuming an 8% average annual return. 2 Continued 2 FOR ILLUSTRATIVE PURPOSES ONLY. This hypothetical illustration is not intended as a projection or prediction of future investment results, nor is it intended as financial planning or investment advice. It assumes an 8% annual rate of return and reinvestment of earnings with no withdrawals. Rates of return may vary. The illustration does not reflect any associated charges, expenses or fees. The taxdeferred accumulation shown would be reduced if these fees had been deducted. 2 Fall 2015
Midlife, big changes: Kids college and a new job (continued from Page 2) 3. Consider a 529 savings plan for big tax advantages. Qualified withdrawals are free of federal taxes (and some state tax benefits, too), and the amounts you can put in are substantial (more than $300,000 per beneficiary in many plans). Plus, you can open a 529 plan no matter how much you make or the age of the beneficiary which makes it a particularly attractive vehicle for grandparents who want to lower the value of their taxable estate. 4. Custodial accounts give your child more control over money. Gifting assets through a Uniform Gifts to Minors Act (UGMA) account or transferring assets through a Uniform Transfers to Minors Act (UTMA) account can be a practical way to expand the universe of available investment options, but they come with a caveat. UGMA and UTMA accounts weigh more heavily on financial aid decisions because they are considered assets of the child, not the parent. Plus, their tax benefits are limited when compared with a 529 plan. The biggest consideration, however, is that the money saved becomes the child s at a certain age (18 or 21, depending on the state) regardless of whether he or she goes to college. 5. Set up a Coverdell Education Savings Account for simpler needs. A Coverdell Education Savings Account offers tax advantages that are similar to those of a 529 plan, but it limits contributions to $2,000 per year. If you re contributing less than $2,000 a year, it can be simple to set up and manage. Plus, you can select from a broad range of investment options, including mutual funds. 6. Take advantage of federal tax breaks. Depending on your modified adjusted gross income, you may be able to take the American Opportunity Tax Credit and Lifetime Learning Credit in the years you pay tuition. 7. Look for flexible repayment plans. There are still ways to cut costs after your child graduates and begins repaying student loans. For instance, there is often a onequarter percentage-point interest rate decrease if you set up automatic debit, which automatically takes monthly payments from your account. Federal student loan programs generally have more lenient provisions than private education loans. Need more information on college affordability? Visit www.advocacy.collegeboard.org/collegeaffordability-financial-aid. 3 3 Empower Retirement is not responsible for, nor does it endorse the content contained in the additional third-party material provided. 3 Fall 2015
Changing jobs but not your retirement plans You re no longer the junior member of the team. In fact, you ve increased your knowledge and skills to the point that others outside your company have noticed. Maybe you ve decided to move along to another job. What should you do with your retirement money? You essentially have three options 4 : 1. You can leave the money in the plan of the company you re leaving, assuming this is allowed. 2. You can move the money into your next employer s plan or an IRA. 5 3. You can take the money out in a cash distribution and take a really nice vacation. 6 There are two very important factors you may want to consider before deciding which way to go. First: While it may be tempting to cash out your savings, the money you have contributed to the plan is probably tax-deferred. In fact, any investment earnings on your contributions, and most likely any money your employer has contributed for you, are probably also taxdeferred. That s important because taxes will need to be paid sometime and that time is when you receive it. If you take your tax-deferred money in cash, it will be taxed as ordinary income. Your plan will withhold 20% of the amount you requested and send it to Uncle Sam to cover the income tax you owe when you file your Form 1040 for the year. However, if 20% isn t enough, you will need to write a check for the difference at tax time. And don t forget, you might also owe your state or local taxing authority. If you are under age 59½ when you take a distribution, the federal government expects more from you. When you file your income taxes, there is a 10% penalty for a premature distribution. 6 All in all, the taxes could amount to 40% or more of your distribution, substantially reducing the amount you receive and likely the amount of fun you ll have on that vacation. Second: Another important consideration when deciding what to do with your balance in your prior employer s plan is the lost potential of the money that s no longer in the plan. Remember, the more time your money has to grow, the more it could become thanks to compounding. The dollars you invest when you are 25 could grow for 40 years. If you take your money out and spend it, it is no longer in a position to benefit from any potential investment earnings. This makes early contributions more valuable than late contributions. 4 Neither Empower Retirement nor its subsidiaries or affiliates provide tax, legal, accounting and/or investment advice. Please consult your tax advisor or attorney for such guidance. 5 You are encouraged to discuss rolling money from one account to another with your financial advisor/planner, considering any potential fees and/or limitation of investment options. 6 Withdrawals may be subject to ordinary income tax. Withdrawals made prior to age 59½ may incur a 10% early withdrawal penalty. The 10% early withdrawal penalty does not apply to 457 plan withdrawals. 4 Fall 2015
An up-close look at long-term investing Time may indeed be on your side if you re still in midcareer. But there s an interesting phenomenon that comes with investing: The more money you build up in your retirement account, the more nervous you may be every time you hear the words stock market and Dow Jones Industrial Average. You work hard to save for your future, and you don t want to lose your nest egg. You also don t want to lose your mind worrying about it. How can you strike a balance between investing for growth and sleeping at night? The key is remembering what you re investing for. Then pick a strategy and stick to it. It seems easy, but it can be difficult to do when you are not confident in your strategy or you ve chosen a path that is overly risky. Here are a few ideas to help you ride out the bumps in the road when you re investing for retirement or other long-term goals: 1. Set your strategy. You may need some guidance to do this well and that s OK. Seek out a financial advisor who can help you choose the right investments for your longterm goals. Or, find out if your retirement plan offers an investment designed to do it for you. It might be a fund that considers the age at which you want to retire or a portfolio that includes a balanced mix of investments in the three principle categories of stocks, bonds and cash alternatives. 2. Rebalance as needed. 7 If you ve chosen your own investments, you may need to adjust them as time goes by to keep them in line with your strategy. For example, if you ve decided to keep 60% in stocks, 30% in bonds and 10% in cash alternatives, you may find that over the years that balance has changed. 8 You may also find that your tolerance for risk changes as you approach retirement and that you d like to reduce your exposure to stocks. Take a look at your investments every year or two to make sure you re where you want to be. 3. Don t focus on day-to-day news. Once you have chosen your strategy, don t watch the financial news every day. It won t improve your chances of enjoying market gains, but it will keep you awake at night. 4. Take the emotion out of your investing. This is hard to do because money is emotional for people. Although past performance is not a guarantee of future results, it may help to remember that when the financial markets suffered during the recent Great Recession, those who didn t panic but stayed invested may have reaped substantial gains since then. On the other hand, people who pulled their money out of their investments at the time lost out on any market recovery. If you re in the middle stretch of your career and life, there is still a long way to go before retirement. Take advantage of the time by saving diligently and investing intelligently. You ll be glad you did. 7 Rebalancing does not ensure a profit and does not protect against loss in declining markets. 8 FOR ILLUSTRATIVE PURPOSES ONLY. Intended to illustrate possible investment portfolio allocations that represent an investment strategy based on risk and return. This is not intended as financial planning or investment advice. 5 Fall 2015
Retirement in motion Tips and resources that everyone can use Retiree Corner: Issues affecting participants as they approach retirement Social Security and married couples When to claim Social Security benefits is more complicated than you may realize. There are a variety of strategies to consider in order to beef up your income and to take full advantage of the benefit to which you ve contributed for so long. Because of the complexities involved, consider enlisting the help of a professional advisor who understands the details. Paying a reasonable fee now could keep you from making a lifetime mistake. Here are few ways couples can take their Social Security benefits: y Each spouse claims his or her own benefit early, at full retirement age or at a delayed retirement. y The higher-earning spouse claims his or her benefit, and the other spouse claims a spousal benefit. y File and suspend, in which one spouse files for benefits and then immediately suspends them, allowing the spouse to claim a spousal benefit early while the suspended spouse continues earning benefits. y Apply a mixture of these strategies. To learn more, take a look at AARP s Social Security for Married Couples. 9,10 Q&A How much does Medicare cover? Established in 1965, Medicare is the federal healthcare insurance program for the elderly and disabled. It is designed to only cover partial healthcare expenses for beneficiaries age 65 and older. According to new analysis by the nonpartisan Employee Benefit Research Institute, Medicare covered 62% of healthcare services for beneficiaries in 2010, while outof-pocket spending comprised 12% and private insurance covered 13%. 11 Quarterly Reminder Align your portfolio with your age If you haven t adjusted your retirement portfolio in five years or more and you are in your 50s or 60s, you may need to make an adjustment to your asset allocation. 12 The closer you are to retirement, the less time you ll have to make up any ground you may lose in a market downturn. As you age, you may want to consider shifting a greater portion of your money to more conservative investments that won t put at risk the savings you ve spent a lifetime accumulating. 9 Source: http://www.aarp.org/content/dam/aarp/money/investing/2014-04/social-security-for-married-couples-aarp.pdf 10 Empower Retirement is not responsible for, nor does it endorse the content contained in the additional third party material provided. 11 Source: EBRI, Fast Facts No. 251, October 17, 2013 12 Asset allocation does not ensure a profit and does not protect against loss in declining markets. Please note: This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice. Representatives of GWFS Equities, Inc. are not registered investment advisors and cannot offer financial, legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor as needed. Core securities, when offered, are offered through GWFS Equities, Inc. and/or other broker dealers. GWFS Equities, Inc., Member FINRA/SIPC, is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company. Empower Retirement refers to the products and services offered in the retirement markets by Great-West Life & Annuity Insurance Company (GWL&A), Corporate Headquarters: Greenwood Village, CO; Great-West Life & Annuity Insurance Company of New York, Home Office: White Plains, NY; and their subsidiaries and affiliates. The trademarks, logos, service marks, and design elements used are owned by their respective owners and are used by permission. 2015 Great-West Life & Annuity Insurance Company. All rights reserved. Want to receive your account statements electronically too? Log in to your account and click on Go Paperless under the My Profile icon. G3784FF_Fall2015 (10/01/2015) PT237823 6 Fall 2015