Retirement Planning Newsletter Winter 2016 The end of the year is a time to wrap things up literally (as in gifts) and metaphorically. If you re thinking about wrapping up your career and embarking on the next adventure your retirement congratulations! In this issue of Financial Footnotes, we ll cover a few of the important things that you can do now to help you prepare for what s ahead. Catching up with catch-up contributions Do you feel like you re behind in the race to retirement? If so, take heart. As you approach the finish line of your working life, the IRS has created a way for you to save some extra money in your retirement savings plan. If you re nearing retirement, the extra cash can really help you save more. Each year, the IRS sets a maximum contribution amount that applies to just about everyone. For 2015 (and 2016), the maximum allowed is $18,000. However, wisdom isn t the only thing that comes along with age. The Internal Revenue Code offers a special provision that allows you to make catch-up contributions. If you are age 50 or over, you can contribute an additional $6,000 for 2015 and again in 2016. In total, you can set aside $24,000 for those years. 1 Catch-up contributions can make a significant difference in your savings. For instance, let s review Joe s account. Joe, who just turned 50, is contributing the maximum amount of $18,000 to his retirement plan. His account earns a 6% rate of return each year. He decides to contribute the extra $6,000 catch-up contribution each year and does so for each of the 15 years from age 50 to age 65. Joe s catch-up contributions add an extra $144,000 to his retirement coffers. 2 And, of course, that s in addition to Joe s underlying regular contribution of $18,000 each year. Continued 1 The maximum allowable amounts may change each year. 2 Source: http://www.bankrate.com/calculators/retirement/401-k-retirementcalculator.aspx 1 Financial Footnotes Winter 2016
Catching up with catch-up contributions (continued from Page 1) Assuming the same rate of return and no changes in the allowable amounts for the next 15 years, Joe s total contributions plus any investment earnings just from the past 15 years of contributing to the plan could amount to about $576,000. When added to the amount he had saved before he turned 50, his retirement plan balance is significant. * True, it may be difficult to find an extra $500 each month to contribute to the plan. But there may be ways to cut back and changes to make in order to find the money. Remember, making changes now while you re working and have some flexibility can be easier than trying to do so in retirement. Adjustments in today s lifestyle can create a better life for your future. Finding additional savings y Shop the services you use. How do the costs of your dry cleaner, your car insurance and your cellphone plan compare with the costs of other providers? y Switch to lower-interest credit cards. If you transfer a balance from your existing card to one with a lower rate, your required payments may be lower, allowing you to make progress more quickly without increasing your monthly expenses. But the real power is that you may be able to pay off the balance much sooner (especially with a zero-interest card). Watch out, though: Don t carry a balance after the low-interest promotional period ends. After this period, the rate may increase significantly. y Eat at home. Eating out may be convenient, but don t do it out of habit. Make dining out an event and enjoy your at-home meal more by relishing the feeling of saving money. y Don t use medical services without a close examination of where and how. Because medical insurance can be complex, you may not realize that the lab order your doctor gave you is from an out-of-network lab. The extra out-of-pocket costs could run into the hundreds of dollars. Make sure you understand your medical plan and shop for the services you need based on your understanding. y Use your imagination. Undoubtedly, you spend money in other areas of your life without thinking. As you go through your day, make notes about where and when you spend money. Then, at the end of the day, take a close look at your notes. With a little imagination and a lot of motivation, you may uncover more money you can put toward retirement. * Investing involves risk, including possible loss of principal. 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 a 6% 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 Winter 2016
Retirement finances: How much you may need vs. how much you may have For years now, you ve probably read about the importance of figuring out how much money you may need in retirement. If you haven t, don t leave the task on the to-do pile any longer. As you zero in on your last few years on the job, it s important to take the time to compare your future financial needs with your ability to pay for them. After all, many people today can expect to live 25 or more years after they retire. Before you can decide whether you re on track, you need to do some projections of your expected income and expenses. Once each year from now until retirement, list your expected income and expenses in retirement and compare them with your income and expenses from the year before. Your retirement plan s website is a great resource to help you do this. If you see progress from year to year, that s cause for celebration! If not, you still have some time to make adjustments. You may need to scale back your expectations or increase your income. Remember, even if the picture is not quite what you had hoped, this kind of planning exercise can help you avoid nasty surprises at a time when your options are fewer than they are today. It s also a good idea to meet with a financial advisor to review your situation. He or she is in a great position to make suggestions about how to maximize your savings and investments. In the meantime, here are a few things you should know: Social Security estimates If you are eligible to receive Social Security benefits, you can get an estimate of your projected Social Security income online via SSA.gov. Once you create a username and a password and verify your identity, you can view your future benefits. You can also print your statements or request ones in the mail. Retirement calculators According to the Employee Benefit Research Institute, almost half of workers ages 45 and over haven t calculated how much money they ll need to live comfortably in retirement. 3 Log in to your retirement account online to see your projected income in retirement and to make any changes to improve it. Retirement income sources When you think about retirement income, you may think about only a pension. Today, while a lucky few may have a traditional pension every month, many people are counting on a combination of Social Security and a 401(k), 403(b) or 457(b) plan to carry them through retirement. However, you may want to explore the following income sources. yrental property yinheritance ynon-plan investments ysmall business income yhobbies yreverse mortgage Remember, the more thought you put into your retirement income and expenses now, the less you may have to worry about later. There s no time like the present. 3 Source: http://www.ebri.org/pdf/surveys/rcs/2015/rcs15.fs-4.age.pdf 3 Winter 2016
When will you retire? If you ve spent the last decade dreaming about the day you turn 55 (or 62, or 65) and close the door on your career, you may want to take a moment to think things over. There are a lot of things to take into consideration. And while ASAP might seem like the right time, you might want to take a harder look. Consider the following common myths and realities about retirement. Myth No. 1: I m going to relax on a hammock all day with a cold drink in my hand and that s all I need. Reality: For most people, satisfaction with that kind of life will last a couple of weeks at best. In order to remain emotionally and physically healthy, you need a certain level of activity and productivity. If you are determined to retire as soon as you can, make sure to plan activities, schedule visits with family and friends, find new hobbies, take classes, and pursue other interests to keep your mind sharp and your body active. Myth No. 2: The workplace doesn t have room for those of us who are older anyway. Might as well retire. Reality: Millennials are entering the workforce just as baby boomers are leaving it. The truth is that each group has a lot to offer each other. As a member of an older generation, you likely have deep knowledge and expertise that your 4 Source: https://www.socialsecurity.gov/oact/quickcalc/early_late.html#late, October 2015 young colleagues lack. At work, why not propose a mentorship program in which you and each of your baby-boomer peers take a millennial counterpart under wing? You can impart a career s worth of knowledge and you may benefit from a millennial s unique viewpoints, not to mention his or her technological abilities. Through this kind of relationship with your younger colleagues, your employer and your mentee may benefit from a steady transfer of knowledge. For you, the benefits are great, too. Not only will you have the opportunity to sock more money away in the company retirement plan, but you may also be able to work out a semi-retirement, thereby keeping yourself active and engaged in a meaningful way. Myth No. 3: I d better start my Social Security benefits as early as I can; otherwise, I won t get them at all. Reality: You may believe the Social Security system is not as well-funded as it should be; with so many baby boomers retiring each day, and fewer workers in the subsequent generations, you ve probably read about the system s imminent collapse. Many experts predict changes to the system (yes, probably cuts) but not a complete collapse. And even when those changes come, predictions usually involve people who will retire decades from now, rather than those who are set to retire in the next few years. It s up to you to decide what you believe about your future Social Security benefits. However, you should keep in mind that for every year you put off receiving your Social Security payments, you would receive about 8% more in your lifetime payments 4 based on the current system. For example, if your full retirement benefit at age 66 is $1,000 and you decide to start payments at age 62, your monthly benefit would be $750. On the other hand, if you delay the start of your Social Security benefits until you reach age 70, you would receive about $1,320 per month for the rest of your life. 4 Winter 2016
Retirement in motion Tips and resources that everyone can use Q&A Did you convert an IRA to a Roth IRA in 2010 or earlier? You may be able to take a tax-free withdrawal If you converted to a Roth in 2010 or earlier, you ve reached the end of the five-year waiting period and can tap your Roth without penalty or taxes. But you still need to follow two key IRS rules. First, withdrawals can be tax-free if you have reached age 59½ or have kept funds intact in the Roth for five years. Second, if you are under age 59½, in order for the distribution to qualify as taxfree, the distribution must be for a first-time home purchase or the result of death or disability. Tax laws are complex and subject to change, so you should consult with a tax advisor before you take any distribution from a qualified retirement account. Quarterly reminder Take steps to prepare for year-end that will reduce taxes You can reduce your tax bill in April by maximizing your contributions to your qualified plan, or possibly contributing to a traditional IRA if you qualify for deductions. Also, making an extra mortgage payment in December can increase your mortgage interest deduction. And, finally, if your employer offers a health savings account, sign up. It s like a savings account that you can use for medical expenses. Contributions typically are deducted from your paycheck before taxes, and you can use the proceeds to pay for the portion of your healthcare costs that insurance does not cover. Tools and techniques: Resources to help guide your retirement plan Planning for a boomerang kid According to the Pew Research Center, 36% of all 18- to 31-year-olds lived at home in 2012. 5 If you have a grown-up child returning to the roost, it will help a great deal to set expectations about how he or she contributes to the household. Rent, utilities, food, cellphone service and chores are all topics that should be on the table as well as how long the arrangement will last. In the meantime, if you are a recent empty nester and want to downsize, you may want to think carefully ahead at least plan for a guest suite with a sleeper sofa. 5 Source: Richard Fry, A Rising Share of Young Adults Live in Their Parents Home, Pew Research Center, August 1, 2013; http://www.pewsocialtrends.org/2013/08/01/ a-rising-share-of-young-adults-live-in-their-parents-home/ 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. cannot offer investment, fiduciary, 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? Log in to your account and click on Go Paperless under the My Profile icon. G3784FF_Winter2016 (01/01/2016) PT248561 5 Winter 2016