Tag: retirement savings

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Missing Retirement Funds? 

Photo: Andres Siimon | Unsplash

Losing track of retirement funds is a common and concerning trend that has worsened in recent years. As of May 2023, there were approximately 29.2 million forgotten 401(k) accounts in the United States that held approximately $1.65 trillion in assets. And, due to recent increases in job switching, the number of forgotten 401(k)s has grown by more than 20 percent since May 2021. 

Missing out on these retirement funds can put your retirement at risk, as you may end up losing significant assets. Fortunately, there are ways to locate and reclaim lost retirement accounts. The following tips can help. 

1. Check with past employers. 

If you’ve changed jobs throughout your career, it’s important to follow up with past employers to make sure you didn’t leave any money behind. Retirement plan administrators have several options for how to handle abandoned funds in an employer-sponsored account, based on the amount left in it. 

• $1,000 or less — The employer can issue a check and mail it to your last known address. If you’ve moved since leaving a job, you may need to request a new check.

• Between $1,000 and $5,000 — Employers can move funds to an IRA without your consent. You’ll need to ask your past employer how to access the account. 

• More than $5,000 — There’s a good chance your funds are still in the employer’s plan. It may be wise to roll over the account balance to an IRA that you control. 

2. Search unclaimed property databases. 

Sometimes people lose track of their retirement savings when they move and forget to notify past employers of their new address. When an employer or financial institution is unable to reach an account-holder, it may turn over the account to the state’s unclaimed property office. 

Fortunately, you can search for your name on the National Association of Unclaimed Property Administrators (NAUPA) website or your state-specific unclaimed property office to find any unclaimed retirement funds that may be waiting for you. 

2. Check the Department of Labor (DOL) abandoned plan database.

If your past employer’s plan was terminated, the DOL’s Employee Benefits Security Administration consolidates information about unclaimed retirement benefits and makes it easy to track down missing funds. 

3. Contact the Pension Benefit Guaranty Corporation (PBGC).

The PBGC can be a great resource if you lost track of a defined benefit pension plan at a previous employer. This organization is a government agency that insures the value of pension benefits and helps individuals locate lost pension plans. Visit pbgc.gov for more information. 

4. Track down forgotten IRAs. 

If you think you may have abandoned an IRA along the way, take inventory of past bank and investment account statements for any evidence of the account. You can also reach out directly to any financial institutions you’ve worked with in the past to inquire about any inactive or dormant IRAs associated with your name. 

If you think you left behind retirement assets at some point, it may be worth the effort of tracking them down. Even if you haven’t contributed to the accounts in many years, the power of compounding has the potential to significantly grow your retirement assets over time. 

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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Five Habits of Successful Retirement Savers

Be a successful saver. (Photo: Annie Spratt | Unsplash)

A recent report indicated that a mere 46 percent of American households have savings in a retirement account. Of those who have saved, 6 percent reported having more than $100,000 in retirement savings, and only 9 percent have more than $500,000, indicating a significant retirement savings gap between the amount they say they need for retirement and the actual amount saved for many Americans. 

The good news is that successful retirement savers can teach us a lot about how to set aside money for the future. The following habits of successful savers can help you bridge the retirement savings gap.

1. They start saving early in life.

Successful retirement savers understand the importance of saving early and consistently throughout life. This practice allows them to maximize the benefits of compound interest over time because as investment gains accumulate, they increase an account’s balance and begin earning their own interest. Over the years, this cycle can lead to significant earnings. 

2. They gradually increase the amount they save. 

Successful retirement savers understand that gradually increasing the amount they save over time can have a significant impact on their assets, with a minimal impact on their current lifestyle. These savers often make an effort to increase the amount they contribute to their retirement accounts by 1 percent to 2 percent each year. Over time, small, regular increases such as these can have a big impact on your retirement savings, and you’re unlikely to even notice the difference in your net income. 

3. They prioritize saving for the future. 

Saving for the future requires focus and dedication. Successful savers often prioritize saving over paying for nonessential expenses. A great way to prioritize saving is by incorporating it as a line item on your budget. Just as you need to pay the electric bill each month, so should you save for the future.

4. They remain focused on the long term. 

Successful retirement savers understand the importance of taking a long-term approach, both with their investment allocation and their savings behavior. For example, they tend to establish a long-term investment allocation and stick with it rather than trying to time the market. 

In addition, successful savers typically avoid behaviors that could derail their savings goals, such as taking 401(k) loans or withdrawals before retirement. 

5. They save in multiple accounts. 

Successful savers often save in multiple accounts. For example, you may wish to start by saving enough in an emergency fund to cover three to six months of unexpected expenses. At the same time, be sure to contribute to your workplace retirement account. If you have additional funds available, make regular contributions to an IRA and a health savings account (HSA). Regularly contributing to multiple accounts can help maximize your savings over time. 

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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How to Cover Retirement Living Expenses

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Congratulations! After years of planning and saving, you’re finally nearing retirement! This stage in life comes with a mix of emotions, but with planning, you can turn your savings into a source of income to cover your living expenses. Here are four tips to help you plan for income in retirement.

1. Make a plan.

The first step is to have a comprehensive financial plan. A custom financial plan serves as a blueprint to inform your financial decision-making and ensure all aspects of your financial life are working together to achieve your goals.

A solid plan puts you in control of your financial future and provides you with the confidence of knowing you have a plan to generate retirement income.

2. Properly structure your portfolio.

One of the best ways to generate income in retirement is by striking a balance between short- and long-term investments.

We typically recommend maintaining three to five years of living expenses in a short-term, semi-liquid investment account. A mix of bond funds typically works well, as it provides capital for opportunistic rebalancing as well as a monthly income. Having a short-term allocation to bonds can prevent you from being forced to sell out to equities at a loss when markets are low.

It’s also important to continue growing your assets throughout retirement in order to help offset inflation and ensure you have enough income to last. We often recommend investing any assets not necessary to fund short-term needs in a diversified portfolio that focuses on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it can be invested in riskier assets than your short-term account. Throughout retirement, you can identify opportune times to transfer assets from your long-term savings to your short-term savings in a tax-efficient manner.

3. Implement a tax-efficient withdrawal strategy.

Ideally, you’ve been saving in multiple accounts with different tax treatments, such as traditional IRAs, Roth IRAs, 401ks, and taxable accounts. If so, you may have an opportunity to maximize your retirement income by strategically withdrawing from different accounts in different circumstances. We call this tax diversification.

• Taxable (non-retirement) accounts: These accounts offer the benefits of tax-loss harvesting and have fewer restrictions on contribution amounts as well as fewer distribution penalties.

• Tax-deferred retirement accounts, such as pre-tax IRAs and 401ks: Withdrawals from these accounts trigger ordinary income taxes, as they’ve enjoyed tax-deferred growth.

• Tax-exempt accounts, such as Roth IRAs: These accounts allow tax-exempt investments to grow for as long as possible, and qualified withdrawals are tax-free.

There are two main withdrawal strategies to consider based on your specific goals, tax situation, and income needs.

• Traditional approach: You would withdraw from one account at a time. Typically, the order of withdrawals is from taxable accounts first, followed by tax-deferred accounts, and, finally, tax-exempt accounts. This allows the tax-advantaged accounts to continue growing tax-deferred and tax-free for a longer time. However, it may result in uneven taxable income.

• Proportional approach: This strategy establishes a target percentage that will be withdrawn from each account each year. The amount is typically based on the proportion of retirement savings in each account type. This can help ensure a more stable tax bill and can also help you save on taxes over the course.

The benefit of following a disciplined approach is that you won’t be tempted to spend more than you can afford. This can help you maintain adequate assets to last a lifetime, regardless of market volatility. An advisor can assist you with creating a distribution strategy aligned with your financial needs and tax bracket, whether through a traditional or proportional approach or some combination of the two.

4. Regularly revisit and readjust.

Given the potential longevity of retirement, periodic reviews of your financial plan and income strategy are essential. You don’t have to do it alone — a qualified wealth manager can help you understand how regulatory and market changes may impact you, and adapt your plan as needed to align with your evolving goals.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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Facts and Feelings: Roth vs. Traditional IRAs

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The choice between a Roth and a traditional retirement account is one of the most common dilemmas in financial planning. As you probably know, both types of accounts grow tax-deferred. The difference is that contributions to traditional IRAs or 401(k)s may reduce your income tax due today. For Roth accounts there’s no upfront tax benefit, but then withdrawals in retirement are generally tax-exempt.

The typical “correct” answer is that the decision between a traditional and a Roth IRA comes down to the relationship between your tax rate now and your tax rate in retirement. This seems counterintuitive, as it feels like paying taxes on the large eventual balance you’ll have in your retirement account would be much worse than paying a little bit of tax now on today’s smaller contributions. The math does work, however, because the assumption is that you’ll have less to invest in your Roth because you have to pay taxes before you can invest.

Here’s a hypothetical example: Imagine a world where everyone pays a flat 20 percent income tax rate, now and forever, and your investments today will exactly double between now and retirement.

If you have $5,000 of income today that you want to invest in a traditional IRA, you’ll invest all $5,000 today, and it will double. If you pull that money out at retirement, you’ll start with $10,000, but after 20 percent in taxes you’ll end up with a net of $8,000 available to you.

If you have $5,000 of income today that you want to invest in a Roth account, you’ll get no tax benefit today. That means you only have $4,000 to start with after paying the 20 percent tax this year. If you withdraw these funds upon retirement, your money will have doubled and you’ll have $8,000 tax-exempt, which is exactly the same outcome as the traditional IRA example above.

You can see that if you think your tax bracket will end up higher in retirement, you’d lean toward a Roth. If you’re expecting a lower tax rate in retirement, you’d likely prefer a traditional contribution.

The math above is accurate, but for most people that’s not how it works. Very few people think in terms of allocating a certain amount of income to investment and netting out the taxes as necessary (as shown above). A more common plan would be to simply pick a dollar amount, then choose between a traditional IRA or a Roth. All else equal, putting $5,000 (or any fixed amount) in a Roth is likely going to result in more money for you in retirement than putting the same amount into a traditional IRA. That’s because these two hypothetical accounts funded identically will end up with the exact same balance at retirement, but tax would be due on the traditional IRA (while the Roth money would be available to you tax-exempt).

If you made a traditional contribution with the $5,000, you wouldn’t be thinking that you should invest the extra tax savings from funding your traditional IRA — you’d probably splurge on something with your slightly larger tax return next year. If you funded the Roth with $5,000, you’d likely eat out a little less over the year (or otherwise tighten your belt) to make up the difference (probably without noticing), functionally giving up a little consumption today to avoid taxes in the future.

Ultimately, the decision to fund a Roth is a little bit like a choice to prepay taxes. A Roth might be the “wrong” choice if you end up with very low taxable income in retirement, but on the other hand, I don’t know anyone who has ever had big tax problems in retirement from overfunding their Roth! A Roth might not be the optimal financial choice, but, depending on your situation, there can be intangibles (such as peace of mind) that can eclipse the hard numbers on paper.

You and your advisor are fortunate to have taxable, traditional and Roth options available. Together you can combine the facts with your personality to make the decision that allows you to feel confident — and stay invested — on the path toward a secure financial future.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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Five Financial Tips for Young Adults

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It can be difficult to know how to start building a solid financial future. With all the responsibilities of early adulthood you may be tempted to put financial planning on the back burner. However, the sooner you start planning, the better off you’ll be in the long run. The following tips can help you get started.

1. Create a budget.

Identify how much money you spend each month and compare that to your monthly income, considering two types of expenses: fixed and discretionary.

Fixed expenses are those you pay each month, including rent/mortgage, minimum credit card payments, car payments, insurance, utility bills, and cell phone.

Discretionary expenses are costs you choose to take on that may not be essential, including eating out, movie and concert tickets, streaming TV subscriptions, gifts, and vacations.

Once you’ve added up your fixed and discretionary expenses, compare the total to the income you bring in. If you’re spending less than you earn, congratulations! You’re one step closer to a stronger financial foundation. If you find you’re spending more than you’re earning, you may need to trim some discretionary expenses to bring you back to level footing.

Look at the discretionary expenses. Where can you lower your spending? Maybe you can cut back from eating out four times per week to one or two times per week. Perhaps you don’t need all your streaming services. Or maybe you choose to take your next vacation closer to home rather than paying for a plane ticket.

The key is to establish a budget that allows you to pay your fixed expenses and discretionary expenses while living within your means and taking care of obligations.

2. Pay off debt.

Regardless of the type of debt (student loan, credit card, auto loan, etc.), the sooner you pay it off, the sooner you’ll achieve financial security. While there are times when it’s necessary to take on debt, there are other times where outstanding debts can spiral out of control. Two effective strategies for paying off debt include:

• The snowball method — This involves paying off your smallest debt balance as quickly as possible, then moving on to the next-smallest debt. This approach can help you gain a sense of accomplishment as you knock out one loan after another.

• The avalanche method — You begin paying on the loan with the highest interest rate first. Once that is paid off, you move to the loan with the next-highest interest rate. This allows you to pick up speed because each payment saves you more money than the one before.

3. Build an emergency fund.

An emergency savings account can enable you to keep up on your necessary expenses, pay down debt, and continue your lifestyle for a period of time. A rule of thumb is to have three to six months’ worth of living expenses saved. An emergency fund can protect you from taking on additional debts to meet your needs

4. Save for retirement.

The sooner you start saving, the better your chances of achieving or maintaining the lifestyle you want. The easiest way to start is by contributing to your employer-sponsored retirement plan at a rate that maximizes your employer matching contributions while still being sustainable.

Don’t have access to an employer-sponsored plan? Consider an individual retirement account (IRA). There are two main types of IRAs: traditional and Roth.

• Traditional IRA — Contributions are made on a pre-tax basis, which reduces your taxable income in the year you contribute. Money invested in a traditional IRA is free to grow tax-deferred until retirement. Distributions are taxed as ordinary income and may be subject to a 10 percent early withdrawal penalty if taken before reaching age 59½.

• Roth IRA — Contributions are made with after-tax funds, providing no tax benefits during the year in which you contribute. Contributions can be withdrawn after five years with no taxes or penalties (earnings are subject to tax and a potential 10 percent penalty if withdrawn before you reach age 59½).

5. Avoid lifestyle inflation.

As your income increases over time, it may be tempting to increase your spending. This tendency is sometimes referred to as “lifestyle creep,” and if not managed, it can get in the way of your financial goals. When your income increases, consider increasing your savings first.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.