Transition From Work Income To Retirement Income

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By SJS Investment Services Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.

Retirement. There is a lot of emotion and change tied up in this single word - beginnings, endings, opportunities, uncertainties, regrets, excitement. In our conversations with clients over the last 25+ years, we have observed that one of the most challenging transition points in life is the move from “work” to “retirement.” In some ways, as much as this change results in a physical shift - no longer going to work - the mental shift from saving to spending sometimes is a bigger adjustment.

We spend a lot of our adult lives developing habits; hopefully, most of them good ones! Author James Clear has written about human behavior and how we form habits. He commented on a study by Phillippa Lally that found that people take somewhere between 18 to 254 days to form a new habit, depending on behavior, the person, and the circumstances.[1] So if we think about developing a retirement mindset as a new habit, transitioning from the idea of saving our nest egg to being comfortable spending it, it might take between two and eight months to gain comfort. Clear’s takeaway is that “understanding this (is a process) from the beginning makes it easier to manage your expectations.” 

So how do we get comfortable with transitioning our nest egg to an income stream? In our working lives, we are used to receiving a regular income stream, whether from a bi-weekly paycheck, paid invoices for consulting income, or payment on completion of a project. So why should it be different in retirement? Receiving a distribution of income on a regular basis - monthly or even twice a month - helps to create that regularity that is comforting. Others may find that a quarterly distribution is adequate for meeting cash flow needs. Consider the frequency that seems most comfortable, and we can work with you to support it!

Second, the need for emergency or “rainy day” funds doesn’t go away. Just because you may now be retired, the twists and turns of life don’t stop. Emergency funds can cover pleasant opportunities like taking an unplanned trip, or it might be available to cover unexpected necessities like an air conditioning unit that suddenly needs replacement or a bill for a dental emergency. We typically recommend setting aside three to six months’ worth of expenses, so when life throws a new opportunity or cost our way, we can feel a little more comfortable knowing there is some financial leeway!

Third, we understand that your “routine” is bound to change. As you have more time to spend time with family, friends, & loved ones, to enjoy new or old hobbies & activities, to travel, or to focus on all those neglected home projects, normal routine is about to be redefined. Take some time to find the rhythm of your new life and endeavors, and we will help guide you along the way.

Finally, we can help you answer the questions of “how much to withdraw” and “from what account do I take it.” We can model how your nest egg can best supplement income from part-time work, pensions, and / or Social Security to meet your lifestyle needs, as well as when you might start those different income streams. In collaboration with your tax professionals, we can help evaluate whether your income should come from after-tax or retirement accounts. Likewise, we can help you determine the stock-to-bond mix that supports the growth you might need, at a risk level you are comfortable with.

When we spend as much as thirty or more years of our life working and saving for retirement, the idea of “undoing” our life’s work might seem a little unsettling. At SJS, we have had the privilege of guiding many of our clients through the preparation and transition to retirement. We are here for you, to lend an ear, to listen, and hopefully to help make the transition a more smooth and enjoyable one!

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Important Disclosure Information & Sources:

[1] “How Long Does it Actually Take to Form a New Habit? (Backed by Science)“. James Clear, jamesclear.com.

There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.

Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.

Statements that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

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What Is The Value Of Your Advisor? - Retirement Plans

By SJS Senior Vice President & Director of Financial Institutions Craig Huntington.

Economic turmoil and seismic shifts in unemployment, consumer income, and savings have led to widespread uncertainty for the household finances of many. In spite of all of the uncertainty, SJS still believes that retirement plans remain a vital tool for American families to take control of their savings for retirement.

What do plan sponsors find important when it comes to structuring and managing retirement plans for their participants? Recently, Fidelity released the results of its 2020 Plan Sponsor Attitude Survey, using information from over 1,500 plan sponsors. SJS would like to highlight a few key takeaways from this survey, and provide details of how we have worked with plan sponsors to address their concerns and accomplish their goals.[1]

 

Why Offer A Retirement Plan?

From the survey, we learn that employers offer retirement plans for four primary reasons:

1. Ensure participants save throughout their working years (45% of plan sponsors agreed)

2. Provide adequate retirement savings to successfully replace participants’ income in retirement (20%)

3. Retain and recruit top employees (18%)

4. Remain Competitive in marketplace (17%)

Retirement Plan Concerns

Additionally from the survey, we learn that plan sponsors are particularly concerned about the following when designing and implementing a retirement plan:

1. Whether or not the plan is effectively preparing employees financially for retirement (27% of plan sponsors agreed)

2. Fiduciary responsibilities (18%)

3. Reducing business costs related to the plan (17%)

4. Whether or not the plan is helping to attract top talent (13%)

5. Whether or not the plan is helping to retain top employees (13%)

Increasing Participant Savings - Retirement Plan Features

Over SJS' 20+ years working with retirement plans and plan sponsors, we have learned that various plan features can significantly increase participant savings, including:

1. Setting up auto-enrollment when an employee is eligible to participate in your retirement plan

2. Increasing the default savings rate for your participants

3. Choosing investment options with lower expense ratios and more diversification

4. Improving your plan’s default investment choice (using low-cost well-diversified target-date funds)

5. Improving your employer matching formula to encourage more employee saving

6. Adding auto-increase / auto-escalation savings program, so your employees agree ahead of time to save an increasing percentage as their compensation increases

7. Providing a Roth savings option

8. Allowing your employees to contribute 100% of compensation up to legal limits

9. Improving your plan’s vesting rules

10. Scheduling the plan’s investment advisor to meet with your plan participants annually to educate them and answer questions

11. Sending emails to remind your participants of their current contribution levels, and demonstrate the potentially positive impacts of higher contributions

12. Introducing you to and collaborating with reliable, experienced, low-cost recordkeeping and administrator firms

Value Of An Advisor

As a plan sponsor, you may work with an investment advisor to aid in determining that your retirement plan investments are appropriate for your employees and to help you stay current with managing plan investments. Large and small employers want to better understand how their retirement plans are working for employees and how they can improve their plans as their business grow and change. As an investment advisor, SJS can work with you as you shoulder these responsibilities and you look to limit your liability and manage your risks.

Working with an investment advisor that is experienced in retirement plans can really help you as a plan sponsor to deliver a positive experience for your participants.

If you would like help in reviewing your retirement plan, please feel free to reach out to us. We are always here to listen and assist.

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Craig Huntington has worked in the financial services industry for more than 20 years and oversees the financial institution channel at SJS. Craig is based in Naples, Florida. To contact Craig, you can email him at chuntington@sjsinvest.com or call him at +1-239-404-1925.

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Important Disclosure Information and Sources:

[1] “2020 Plan Sponsor Attitudes Survey.“ Fidelity Investments & Harris Insights and Analytics, 2020, institutional.fidelity.com.

Advisory services are provided by SJS Investment Services, Inc.., a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only.

There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

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Mid-Year Updates: IRA And PPP Rules

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By SJS Managing Director Jennifer Smiljanich.

In the current economic environment, the federal government has stepped in with the CARES Act legislation and other stimulus to help provide greater financial flexibility for Americans.  In the last few weeks, there have been two additional rulings that intend to offer help to those needing relief.  Below, we offer a summary of how those rulings may affect you. As always, please be sure to check in with your tax professional for guidance.

IRA Distribution Relief, Part 2

Earlier this year, the CARES Act allowed individuals who would be required to take a distribution from an IRA or defined contribution retirement plan in 2020, to avoid taking any withdrawals.  In Notice 2020-51 issued on June 23rd, the IRS offered further relief regarding Required Minimum Distributions (RMDs).

First, the 60-day rollover period for any RMDs already taken this year has been extended to August 31.  This extension will allow more taxpayers to take advantage of this relief. Second, Notice 2020-51 directs that any IRA owner or beneficiary who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by August 31.[1]  

For those individuals who took IRA distributions early in the year or who took distributions as beneficiaries of inherited IRAs, this guidance offers the option to return all or part of those distributions by August 31.  More flexibility is certainly good news and offers a “fair and favorable outcome” to those who took distributions in compliance with the rules early in the year.[2]

Paycheck Protection Program Flexibility Act of 2020

On June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law, amending the CARES Act.  Among its provisions, the PPPFA offers greater latitude to the millions of businesses that applied for Paycheck Protection Program (PPP) loans, as follows:[3]

• Extended covered period for PPP loan forgiveness from 8 weeks to the earlier of 24 weeks or December 31, 2020.  Borrowers who received loans before June 5 may extend or keep the original 8-week period.

• Reduced the requirement that payroll costs make up 75% of covered loan amount to 60% in order to receive loan forgiveness.

• Increased PPP loan maturity from a minimum of 2 years to 5 years for loans originating after June 5, 2020.   

• Extended safe harbor deadlines from June 30 to December 31 to restore any reductions in salaries or hourly wages, or full-time equivalency levels.

• Amended reduction in loan forgiveness associated with staff levels.  The PPPFA added flexibility if Borrowers could document an inability to re-hire or hire qualified employees; or could document an inability to return to similar business operations as of February 15, 2020 due to compliance with COVID-19 restrictions.

• Allowed borrowers receiving loan forgiveness to also defer payroll tax payment per CARES Act provisions. 

Please know that your SJS team is here to help guide you through these ever-changing and difficult times. Please feel free to reach out to us with any questions.

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Important Disclosure Information and Sources:

[1] “IRS Extends RMD Rollover Relief Under CARES Act.” Melanie Waddell, 23-Jun-2020, thinkadvisor.com. 

[2] “New Rollover Rules For Unwanted 2020 RMDs Under IRS Notice 2020-51… Welcome Relief And A Troubling Precedent.” Jeffrey Levine, 25-Jun-2020, www.kitces.com.

[3] “Paycheck Protection Program – Where are we Now?  An Up-to-Date Guide to the Paycheck Protection Program.”  Proskauer, 24-Jun-2020, proskauer.com.

SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professional for specific advice. This material has been prepared for informational purposes only.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

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The SECURE Act Shifts The Rules Of Retirement

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By SJS Managing Director Jennifer Smiljanich

It seems like the only constant in life is change.

Last December, President Trump signed The SECURE Act as part of the year-end 2019 spending legislation.[1]

The SECURE Act – “Setting Every Community Up for Retirement Enhancement” – shifts the existing rules on retirement saving and distributions, for both account owners and their beneficiaries.

As happens often with tax legislation, there are some people who may benefit from the changes and others who may view the changes as detrimental. We’ve highlighted some of the more significant modifications within the Act that affect your retirement planning:

The SECURE Act extends the current required minimum distribution age from 70½ to 72

If you turned 70½ in 2019, you must begin taking a minimum distribution from your IRAs and other retirement accounts no later than April 1, 2020. In a nutshell, if you reached age 70½ in 2019 or before, you must continue taking at least minimum distributions from IRAs or retirement accounts. For this group of retirees, there are no changes to the distribution rule.

The change comes into effect if you will turn 70½ in 2020 or later. If you are in this age group, you can wait until age 72 to begin taking distributions from your IRAs or other retirement accounts.

The SECURE Act allows individuals who don’t want or need the income from their retirement accounts to delay taking these distributions, and delay paying taxes to Uncle Sam. Statistically, this provision may help the 20% of retirees who take only the minimum amount required. The remaining 80% of retirees take out more than the IRS-required minimum.[2]

Interestingly, the SECURE Act still allows anyone who is 70½ to make Qualified Charitable Distributions from IRAs and avoid having the distribution count as taxable income.

The SECURE Act allows IRA contributions after age 70 if still employed

Many Americans are delaying retirement longer than ever. As of February 2019, the Census Bureau reported that about 20% of Americans over age 65 – more than 10 million people – were either working or looking for work, representing a 57-year high.[3]

The SECURE Act allows anyone who still earns income from employment, or is married to a spouse earning income, to contribute to an IRA after age 70½. Traditional IRAs had been the only retirement account that did not allow contributions to be made after age 70½.[2]

The SECURE Act eliminates “Stretch IRA” benefits for some beneficiaries

Until now, when IRA owners passed away, their beneficiaries could take distributions from those IRAs over their lifetimes. By doing so, they could allow the IRA funds to grow tax-deferred and potentially stretch out the tax liability over their lives.

Under the new legislation, when IRA owners die (any time in or after 2020), most non-spouse beneficiaries must fully distribute the IRA balance within 10 years following the year of inheritance. (The prior IRA distribution rules remain unchanged for any beneficiaries of IRAs whose original owner died prior to January 1, 2020.)

There is some flexibility, in that IRA beneficiaries who inherit this year and going forward could choose to distribute at any time during their 10-year window. Exceptions also may exist for spouses, minor children, or those with special needs or chronic illnesses.

As always, we at SJS stand ready to listen and work with you and your other professional advisors to guide you in understanding how these changes may affect your plans for the future. Please give us a call – we’re here for you, and happy to help!

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Sources:

[1] “The SECURE Act.” Chairman Richard E. Neal, House Committee on Ways & Means.

[2] “SECURE Act and Tax Extenders Creates Retirement Planning Opportunities and Challenges.” Michael Kitces, www.kitces.com. December 23, 2019.

[3] “Millions of Americans are Working Past 65, and It’s Not Because They Can’t Afford to Retire.” Tanza Loudenback, Business Insider. April 29, 2019.

Important Disclosure Information:

SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only.

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Increased 401(k), 403(b) Contribution Limits In Effect For 2020

By SJS Senior Advisor Andrew Schaetzke, CFP®

As we settle in to the new year, the IRS has announced the new retirement account contribution guidelines for 2020. As always, contributing more to your retirement accounts now can lead to a lower tax bill – not to mention more invested income in retirement.

Those who contribute to many common types of retirement plans, including 401(k) and 403(b) plans, will be able to increase their annual contribution by $500, to $19,500.

The IRA and Roth IRA annual contribution limits remain unchanged for 2020 – at $6,000. Catch-up contributions for workers ages 50 and older also remain the same, at $1,000.

The income ranges that determine eligibility for deductible contributions to traditional IRAs, Roth IRAs, and to claim the saver’s tax credit also have been increased for 2020. The IRS highlights these changes at IRS.gov, but please talk with your tax professional for specific advice.

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Is It Time to Throw Out the ‘Three-Legged Stool’?

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By SJS Managing Director Jennifer Smiljanich

As a college student, I remember learning about the “three legged stool” as a metaphor for retirement security.  Each leg of the stool represented a different financial resource, and all three were needed to provide a solid foundation for retirement.  So what were these legs?

1. Social Security

2. Private Pensions

3. Personal Savings and Investments

In surveying the stool today, it seems as though the legs are in need of some shoring up – or maybe even replacement. For those of us born in the mid-1960s and later, there may be uncertainty about what Social Security could look like when we finally reach full retirement age. Likewise, the idea of working for a company or a public entity for 30 years and collecting a guaranteed pension is almost unheard of.  Which leaves us to rely on personal savings and investments. The statistics here are somewhat grim – the personal savings rate has been on the decline for the past 30 years, according to statistics from the Bureau of Economic Analysis. Americans are currently saving a little more than five percent of their disposable income, which is only about half of what they were saving in the 1970s and 1980s.[1]

So maybe it’s time to throw out the three-legged stool analogy and start over.  Recognizing that Social Security and private pensions are less secure or common than in the past, it’s up to us to do more individually to save for retirement. What tools do we have to use?

Company Retirement Plans

If you are fortunate to be one of the millions of Americans with access to a company retirement plan, consider it to be a gift.  Many companies offer employer matching – your company will contribute money to your account as long as you contribute an equal amount, up to a set percentage. Who says there’s nothing free anymore? You may contribute as much as $18,000 per year to a 401(k) plan – or up to $24,000 per year if you are turning age 50 or older in 2017.  Other retirement plan types may have different limits, but still allow you to contribute thousands of dollars per year.

Individual Retirement Accounts (IRAs)

If you do not have access to a retirement plan, that doesn’t mean you can’t save for retirement. You may save up to $5,500 a year in an IRA, or up to $6,500 if you are turning age 50 or older in 2017.

After-Tax Savings

If you maximize contributions to company retirement plans and IRAs, you still may be able to save money in after-tax investment accounts.

So how much is enough?  The right amount will depend on how much you earn and what type of lifestyle you want to lead during your retirement.

Research by Wade Pfau, Professor of Retirement Income at The American College, suggests that a “safe” savings rate might be as high as 20 percent, depending on the amount of time before retirement and the length of time in retirement.[2] A 2015 study by Aon Hewitt suggests that saving about 11 times your final salary level may be a good target for retirement at age 65.[3]

We may be more likely to spend money if it just sits in a checking account – after all, it can make us feel wealthier. If instead we save or invest our money before it ends up in a checking account, perhaps we won’t be as inclined to spend it. Think about it – could you save up to 10 percent of your income without significantly affecting your lifestyle?

Saving as early as you can, and as much as you can, gives you the most options and flexibility when you reach your retirement years. And who doesn’t love options?  You might be able to leave a full-time job to start a second career, to spend more time enjoying your favorite hobby, to make memories with children and grandchildren near or far, or to volunteer for the cause you feel passionately about.  If you have questions, please talk to us. With MarketPlus Investing®, we can project how your savings may grow and design a portfolio to help you achieve your specific financial goals.

Be mindful of your future self – 10, 20 or even 30 years from now.  It’s time to reimagine what your retirement security looks like, one dollar at a time.

Sources:
[1]: “United States Personal Savings Rate.” www.tradingeconomics.com, March 2017.

[2]: “Safe Savings Rates: A New Approach to Retirement Planning Over the Life Cycle.” Journal of Financial Planning, May 2011.

[3]: “The Real Deal: 2015 Retirement Income Adequacy at Large Companies.” Aon Hewitt, 2015.

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