Retirement Planning FAQ
Q: How much money do I need to retire?
A: The amount of money needed for retirement will be different for everybody. While some people will want to travel and spoil their grandkids, others will not. The best rule of thumb is to add up expected retirement income – social security, pensions, distributions from individual retirement accounts, investments, etc. – and subtract all expected retirement expenses – housing, utilities, taxes, insurance, food, clothes, etc. – to see how much of this will be needed after retirement. The final answer, of course, will be based on anticipated life expectancy.
Q: When does the average American retire?
A: Most Americans typically retire between the ages of 62 and 68. However, given the recent economic downturn, many retirees have returned to the workforce.
Q: What is the best retirement plan if I'm self-employed?
A: Those who are self-employed can establish a SEP (simplified employee pension plan) IRA. Both unincorporated sole proprietors and incorporated small business owners can establish a SEP IRA. The maximum contribution for 2011 is 25% of compensation up to a maximum of $49,000.
Q: What happens to a retirement fund if I die before withdrawing the money?
A: If you are married, the money in your retirement accounts becomes the property of your spouse unless you've named a non-spousal beneficiary. If you are single and have named a beneficiary, the beneficiary will inherit the accounts. If you are single and have not named a beneficiary, the accounts will become part of your estate.
Q: What if I become disabled before retirement age and have to take disability?
A: If you are younger than age 59 ½ and need to tap into your retirement accounts, you can do so. While the 10% penalty may be waived, you will still have to claim the distribution as income.
Q: What retirement accounts are best for teachers?
A: Teachers and public employees often have access to 403(b) and 457 retirement savings accounts. In addition, teachers can always contribute to their own traditional or Roth IRA accounts provided they meet the income and employer-sponsored retirement plan requirements.
Q: What retirement accounts are best for government workers?
A: Federal government employees have access to FERS (Federal Employees Retirement System). State and local government employees can usually participate in 403(b) and 457 plans.
Q: What retirement accounts are best for those in the military?
A: Military personnel can contribute to a Thrift Savings Plan (TSP) along with either a traditional or Roth IRA.
Q: How will my tax bracket be affected after I retire?
A: Most people assume that they will be in a lower tax bracket after retirement because they will have less income. While it's not usually the case that a person or married couple would be in a higher tax bracket after retirement, it is possible that the tax bracket would be the same as before retirement.
Q: What age is considered early retirement?
A: Retirement before the age of 62 is usually considered early retirement.
Q: Is it possible to start retirement planning too early?
A: No. It is never too early to start planning – and saving – for retirement.
Q: What are the penalties for withdrawing retirement funds early to buy your first home?
A: Provided the borrower meets current qualifications established by the Internal Revenue Service, there is no penalty for taking an early distribution to buy a first home. The distribution will have to claimed as income for the year, but will not be subject to the 10% early withdrawal penalty.
Q: How much should I be saving each month for retirement?
A: If you contribute to an employer-sponsored retirement savings plan such as a 401(k) or 403(b) plan, it's a good idea to contribute at least as much as your employer's matching contribution. After that, you should either contribute to a traditional or Roth IRA to save as much money as possible each month.
Q: What retirement plans can a small business reasonably afford?
A: The low cost of set up, administration, and compliance make SEP and SIMPLE IRA plans ideal for small businesses.
Q: Should I pay off student loans or start a retirement account?
A: Take advantage of an employer-sponsored retirement plan if your employer offers it even if you have student loans. If your employer doesn't offer a plan, it's best to pay down as much debt as possible as quickly as possible. If, however, your student loans are at a very low rate of interest, you should consider contributing to a traditional or Roth IRA while paying off the loans.
Q: What is the best way to invest retirement money?
A: This depends on the age, risk tolerance, and overall asset allocation of the account owner. While specific circumstances may be different, generally, those between 20 and 40 should have up to 90% of their IRA accounts in stocks and 10% in bonds. Between the ages of 40 and 50, the allocation changes to 80% stocks and 20% bonds. Between 50 and 60, 65% should be in stocks and 35% in bonds. Between the ages of 60 and 70, stocks should make up 55% of the account and bonds 45%. After retirement, the account should be comprised of 50% stocks and 50% bonds.
Q: Is a retirement pension taxable?
A: If the pension or annuity was purchased with after-tax dollars, the distributions are only partially taxable.
Q: What happens to my retirement account or pension if my employer goes out of business?
A: The federal government protects the assets of employer-sponsored retirement plans. The Employee Retirement Security Act (ERISA) requires that plan assets be held in a trust account that is separate and apart from the employer's other accounts.
Q: Is it smart to borrow against my retirement account to buy a first home?
A: While each borrower's situation will be unique, some may find that the only reasonably low-cost loan available to them is a loan against a retirement account. Keep in mind that the money must be paid back according schedule or penalties will be incurred. Further, if the home should go into foreclosure, the borrower will have lost all of the money used to buy the house.
Q: Is it smart to borrow against my retirement account to start a business?
A: No. It is not a good idea to borrow against a retirement account to start a business. Programs such as the Small Business Association are available to guarantee loans in order to help entrepreneurs secure financing.
Q: Is a spouse automatically the beneficiary of a retirement account owned by the other spouse?
A: Federal law has established that a spouse must specifically give up the right to inherit the retirement accounts of the other spouse.
Q: What is the average cost of health insurance for a retiree?
A: Retirees under the age of 65 who are not yet eligible for Medicare could pay as much as $6,000 to $7,000 per year for health insurance. The amount will vary based on a number of factors, such as the state the retiree lives in, whether or not there are any pre-existing conditions, and if an employer-based health plan is covering any of the cost. Medicare is available after age 65, but many retirees will elect to purchase Medigap policies in order to obtain more complete coverage.
Q: What good is retirement planning in a bad economy?
A: Retirement planning in a bad economy is especially important. For example, the Federal Reserve often lowers interest rates in a bad economy to spur investment. But lower interest rates on savings accounts, money market accounts, and certificates of deposit mean retirees will have less income interest paid on their savings. Lower interest rates often lead to inflation, which then erodes the purchasing power of savings. A successful retirement plan can offset the effects of a bad economy. A bad economy is also the best time to buy up undervalued equities. Investment rule #1: buy low, sell high.
Q: What agencies regulate/insure retirement accounts?
A: The Federal Insurance Deposit Corporation (FDIC) insures IRA accounts that are held in banks. The Federal Savings and Loan Insurance Corporation (FSLIC) insures IRA accounts at savings and loans. The National Credit Union Administration (NCUA) insures IRA accounts at credit unions, and the Securities Investor Protection Corporation (SIPC) insures brokerage and mutual fund accounts.
Q: At what age can I claim social security benefits?
A: Provided you have enough credits to claim benefits, the earliest you can begin receiving social security payments is age 62. If you were born in 1937 or before, you are eligible for full benefits at age 65. If you were born in 1960 or later, you are eligible for full benefits at age 67.
Q: Can I claim social security benefits early?
A: Generally, no, but you can claim social security disability benefits if you are permanently disabled before age 62.
Q: What percentage of my retirement living expenses will social security cover?
A: The amount of your social security payment will depend on the age at which you retire, how many credits you have accumulated, and your cost of living. Because these factors vary greatly, calculations must be made relative to each individual. It's safe to assume that Social Security won't cover more than 25% of an "average" cost of living.
Q: Will social security still be around when I retire?
A: Based on 2011 estimates, the social security trust fund could be depleted by 2037.
Q: How are social security benefits calculated?
A: The Social Security Administration (SSA) calculates payments based on the average indexed monthly earnings that summarizes up to 35 years of earnings. A formula is applied to the average to determine the amount of the monthly payment.
Q: How does a retirement account work?
A: Employer-sponsored plans and traditional IRAs are funded with pre-tax dollars. Roth IRAs are funded with after-tax dollars. The earnings on all retirement accounts grow tax-free. After distributions begin, taxes are paid on accounts that were funded with pre-tax dollars but not on accounts that were funded with after-tax dollars.
Q: I'm a stay at home mom. What kind of retirement account can I open for myself if I don't work?
A: You must have earned income to open a retirement account for yourself. If your husband has earned income, he can contribute to a spousal IRA that is established in your name.
Q: What is the best retirement account or best way to save for retirement?
A: Setting goals and taking steps to meet them is the best way to save for retirement. First, establish realistic income and expense projections. Then calculate the amount of money that needs to be saved and the return that needs to be earned in order to meet those projections. Knowing this will help determine your investment strategies.
Q: Do some states tax retirement accounts more than others?
A: Yes, some states do not have a state income tax at all.
Q: My retirement account is losing money. What can I do to turn it around?
A: If your account is losing money because the overall markets are down, you might want to try to ride it out. By continuing to contribute on a regular basis, you'll be buying while prices are low, which is known as "dollar cost averaging". If you're losing money because of bad investments, then you need to reconsider your approach to picking equities and investments. Make sure your portfolio is diversified and consists of mostly best-of-breed stocks. Limit your exposure to foreign markets. Be disciplined enough to invest with a 2-5 year time horizon, and keep up with market news.
Q: How much of my retirement account should be liquid cash?
A: You never want to be fully-vested in equities or long-term bonds. It's a good idea to have free cash in your IRA or 401k to take advantage of market downturns. Smart investors commonly have 25% or more of their portfolio in cash. Many retirement accounts offer money market funds that can hold this cash temporarily and earn enough interest to offset inflation.
Q: Can I buy gold inside a retirement account?
A: Yes. You can own actual gold in a retirement account. You can also buy mutual funds and exchange-traded funds (ETFs) that hold gold and companies that deal with gold, such as mining companies.
Q: Can a collection agency garnish my retirement account?
A: Unfortunately, yes. Depending on the state you live in, your retirement accounts may not be protected from creditors.
Q: Should I keep annuities inside a retirement account?
A: Earnings on an annuity grow tax-deferred regardless of whether it is part of a retirement account. So in most cases, no, it doesn't make sense to keep an annuity in a retirement account.
Q: Can I use a retirement account to finance real estate?
A: You can borrow from a retirement account or take an early distribution to buy, build, or rebuild a first home, but this doesn't apply to commercial real estate.
Q: What interest rate can I expect in my retirement account?
A: It depends on the types of investments you have. Historically, bonds yield 4-6% while equities yield 8-12%.
Q: Will I pay capital gains tax in a retirement account if I sell stock?
A: If the stock is sold within a tax-qualified account you will not pay capital gains when you sell it. This is one of the greatest benefits of 401(k)s and IRAs.
Q: How good is a 403(b) retirement plan compared to the others?
A: A 403(b) plan is actually a great retirement savings plans. For 2011, contributions can be as high as 100% of compensation (up to a total of $49,000) plus the "catch-up" contribution that can be made by made by workers age 50 and over.
Q: I have a government 457 retirement account, do I need another account, like a Roth IRA?
A: You can contribute up to $16,500 ($22,000 if you're age 50 or over) to your 457 account in 2011. If your modified adjusted gross income is more than $120,000 in 2011, you cannot contribute to a Roth IRA. You can contribute to a traditional IRA, however, the amount that is deductible will depend on how much you earn and contribute to your 457 plan.
Q: How do I transfer money from one retirement account to another?
A: Transferring money from one tax-qualified account to another is called a rollover. You can transfer money via a direct rollover, in which the money is transferred directly from one custodian to another. Or, you can transfer the money via an indirect rollover in which you receive the distribution and establish the new account yourself.
Q: What are the penalties for tapping into my retirement accounts for a rainy day?
A: If you take a distribution from a tax-qualified account prior to age 59 ½, you will pay a 10% penalty on the distribution. You will also have to claim the distribution as income for the year.
Q: Will putting money into a retirement account lower my adjusted gross income?
A: Contributing to a pre-tax employer-sponsored account or a traditional IRA will reduce your adjusted gross income.
Q: Can my spouse and I both contribute to the same retirement account?
A: No. You must each establish a separate account.
While we've covered the basics of retirement planning here, there is much more to securing a great retirement. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.
More Retirement Planning Guidance
- Retirement Planning Guide — The complete guide to retirement planning.
- Retirement Income Options — Explore your retirement income investing options.
- Retirement Savings Tips — Tips for how to saving for retirement.
- Building a Solid Retirement — A practial guide to implementing your retirement plan.
- Early Retirement — What it takes to plan an early retirement.
- Inflation — Understanding how inflation affects retirement planning.
- Assest Allocation & Diversification — Learn how to manage investment risk.
- Retirement Pitfalls — Common retirement planning mistakes you'll want to avoid.
- Tax Considerations — How to minimize tax burden while saving for retirement.
- Retirement Planning FAQ — Frequently asked questions about retirement planning.