#retirementplanning

How Are Workers Preparing for Retirement?

By:  Tina Schackman, CFA®, Senior Retirement Plan Consultant

According to a 2021 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), U.S. workers preparing for retirement vary by age but there are signs that savings habits are starting to take place earlier than previously reported. In fact, 48% of respondents between the ages of 25 and 34 reported having savings of $100,000 or more.

Starting to save early is one of the easiest ways to accumulate savings for retirement.

Of the 31% of respondents that stated they made changes to their retirement plan since January 1, 2020, more than half increased the amount they contribute.  A workplace retirement plan, such as a 401(k) or 403(b) plan, can help build retirement savings through tax-deferred savings and the potential for your company to match your contributions to the plan.  Check out our recent Summer Webinar Series “Retirement Accounts: Traditional vs. Roth” for typical ways to save for retirement.

What’s getting in the way of reaching savings goals?  Debt is the #1 reason, and it weighs heavier on workers who experienced loss of income or a job.  In fact, 70% feel debt is negatively impacting their ability to save for emergencies. Establishing and sticking to a budget can be a great way to get your finances under control and find more ways to save.  We recommend you watch the replay of “Connecting the Dots to Your Financial Future (Part 1)” to learn some budgeting tips and debt payment strategies.

Confidence is key! The majority of U.S. workers remain confident in their ability to live comfortably in retirement. 

Source: EBRI 2021 Retirement Confidence Survey (*1993 first year asked)

We wanted to provide a few tips to start creating healthy savings habits:

  1. Pay yourself first and start early.
  2. Don’t take on more debt than you can afford.
  3. Pay down credit cards as soon as you can.
  4. Understand your employer’s retirement plan.
  5. Create a budget and track expenses.
  6. Set financial goals and have a plan (start with a small goal that can be easily attained)

Contact BFSG if you’d like to learn more about developing your personal financial plan at financialplanning@bfsg.com.

Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

A Beginner’s Guide to Deferred Compensation

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner | Wealth Manager

Understanding the Basics

A Non-Qualified Deferred Compensation (NQDC) plan allows individuals to defer a portion of their income now and then withdrawal the money typically in retirement when their income is lower. Most of the time the amount of money deferred can be invested in stocks or bonds so the money can grow over time.

Deferred Compensation plans are called non-qualified because they do not have to comply with Employee Retirement Income Security Act (ERISA) like a 401(k) or 403(b) and can be offered to a certain group of employees like executives. These plans will have a written agreement between the employer and employee that outlines all the rules like how much can be deferred when the payout can occur and what investment options are available.

You will make annual elections on how much income you would like to defer and when you would like to receive that money back in the future. Most commonly you can choose a lump sum option or receive payments over a set amount of time like five or ten years. For example, if you defer $50,000 in 2021 you could choose to receive that $50,000 at retirement or as a $10,000 a year payment over five years.

Rules You Need To Know

Deferred Compensation plans do not follow ERISA guidelines, so it is very important to fully understand the rules for your plan.  For example, some plans will have many investment and distribution options while others may only offer limited (or no investment) options.

The deferred compensation stays on the company’s financial statements, so it is not fully protected if the company has financial issues down the road like filing for bankruptcy. When choosing to use a deferred compensation plan it is important to have strong faith in the company’s long-term viability.

Choose Your Distribution Option Wisely

Once your distribution elections are made it can be difficult to make changes. Most plans limit the number of changes you can make and require you to work at least another 12 months before you retire. Another common rule is that any changes made will delay the distribution by five years. For example, an individual that is 59 and plans to retire at age 60 makes some changes to her elections for the distribution. As a result, the new changes typically will be paid out at age 65 at the earliest based on the five-year rule.

Let’s take a look at an example and why you typically want to spread the payments out over time. An individual retires in 2022 with deferred compensation of $600,000 and chooses to receive everything as a lump sum. Assuming no other income sources the $600,000 would be taxed at a Federal income tax rate of 35% for a couple filing jointly (based on current Federal income tax rates and not factoring in deductions). However, if they choose to spread the payments over five years, they would receive $120,000 per year for five years. Assuming no other income sources they would be taxed at a Federal income tax rate of 22% each of those five years. By delaying the payments, the individual greatly reduces the tax burden and creates an income stream for the first five years of retirement. 

How We Can Help

We can look at your plan documents and provide guidance on how much you should save each year and provide recommendations on the best distribution options. If you have a plan in place already, we are happy to review it and see if any changes should be made to how you will receive distributions from the plan. These decisions vary for each individual based on their income needs and tax situation.

Summary

Deferred compensation plans offer a wonderful way for people to delay income which can potentially be taxed at a lower tax bracket in retirement and create a cash flow stream for a part of retirement. When these plans are structured effectively, they can allow you to retire early and have a stream of income in your early and middle years of retirement.

The challenge though lies in the options people choose for when to receive the money in the future. It is very important to work with your BFSG adviser so we can help you navigate how to receive the money in retirement. These plans can be complex, and it is important to understand how to most effectively use this great employer benefit!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

BFSG’s Retirement Planning Summer Webinar Series

Back by popular demand….BFSG’s Summer Webinar Series! BFSG is bringing together our CERTIFIED FINANCIAL PLANNERS™ and other subject matter experts in a series of thought-provoking retirement webinars to give you the tools to help you boost your financial literacy and help you make smarter financial decisions. Register today and feel free to share this unique opportunity with friends and family.

July 8, 2021: Retirement Q&A – Ask the Experts

July 15, 2021: Retirement Accounts – Traditional vs. Roth

July 22, 2021: Healthcare in Retirement

July 29, 2021: The Future of Retirement in America

Longevity is a Blessing and a Curse

It is amazing how long people are living and the wonderful quality of life they live. We had a client that was 93 and was a fantasy football fanatic. Another client was 94 and still playing tennis and golf. We have a client over 100 and she is still sharp as a tack. We are blessed to be able to live long and fulfilling lives these days. Longevity is a real blessing but does not come without some challenges. The longer you live the larger the nest egg you will need and additional planning around things like long-term care is important as well. For tips on how to increase longevity or to review and make sure you will have enough income in retirement do not hesitate to contact us at financialplanning@bfsg.com

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Save for Retirement or Pay Off Debt

First Things First: Build an Emergency Fund

Experts agree you should have three to six months of living expenses set aside in a safe, interest-bearing account. What you earn on that money is irrelevant. The main goal or objective of this investment is liquidity. Not having an emergency fund can prove to be a very costly mistake. For example, if you need to replace the brakes in your car, if your rent increases, or if you even lose your job. None of this is predictable. Without an emergency fund most people reach for the high-interest rate credit cards to pay their expenses. This strategy is in conflict with your long-term goal of saving for retirement.

One consideration: A Roth IRA. The Roth is unique, in that any contributions you make to a Roth can be withdrawn without penalty or taxes. The caveat is that any earnings in the account need to remain for five years and you must be 59.5 years old or older (unless an exception applies) for it to be considered a qualified distribution to avoid taxes and a 10% penalty. In turn, you are technically saving for retirement and building a nest egg for any short-term unexpected expenses (i.e., emergency fund). Check out our Roth in Retirement Plans webinar to learn more.

Next: Prioritize Your Debt Load

Maybe you have a car payment, student loans and miscellaneous credit cards. Put together a budget that reflects balances, monthly payments, as well as the interest rate attached to each of the debts. Once you have a clear understanding of your debt load you can then develop a plan to paydown the debts. There are a couple different schools of thought on this. You can either begin by making a “monster” payment on the credit card with the highest interest rate after the minimum payments are made on other debts with lower interest rates. This is referred to as the “avalanche” method and ultimately saves you the most in interest payments.

Secondly, there is the “snowball” method. Here you make the “monster” payment on the account with the lowest account balance. How do you eat an elephant? One bite at a time. The same is true for your debt – break down the debt into bite-sized pieces to make it more attainable and less scary.

There is no right or wrong method because everyone has a unique approach to managing their finances. If you are someone who can sleep better knowing you have completely paid off a debt and no longer owe money to a given creditor then the “snowball” method probably makes sense. Whereas, if you are a numbers-driven person and feel saving more money on interest charges over the long-term makes more sense the “avalanche” method might be for you.

Watch our “Connecting the Dots to Your Financial Future (Part 1)” webinar for learning more about these strategies to pay off your debt.

Wait: My Company Matches My Retirement Plan Contributions

If you are fortunate to work for an employer who matches your retirement plan contributions, then that is free money you should grab. For example, if your company will put in 50 cents for every $1 you contribute that is a 50% return in your account immediately! This strategy should be prioritized over paying down anything above and beyond the minimum payments owed on any debts described above.

The Bottom Line

It really comes down to personal preference. The math would suggest that you should maximize retirement savings while taking advantage of the current low-interest rate environment and potentially refinance debt if possible. However, if you’re someone who sleeps better knowing you don’t owe money to others that works just as well.

A Certified Financial Planner™ at BFSG can work with you to develop a plan designed to help you save for retirement and pay-off debt to achieve your financial goals.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.