Month: November 2019

Retirement Roundup: What one financial planner learned while planning his own retirement

Posted on by planeteria

A digest of news from publications around the nation about finance, investing, and retirement

This man spent decades teaching retirement planning. Here’s what he learned from planning his own. | Money

Like many on the cusp of retirement, David Littell felt excited and little nervous. But the 65-year-old differed from his peers in one key way: He spent the bulk of his career teaching retirement planning to financial advisors. He’s a pro at turning a lump sum of savings into a reliable income stream that will last for life. And as he approached retirement himself, Littell discovered some key differences between what the textbooks say and the way things play out in real life.

457(b) vs. 401(k) plans: What’s the difference? | SmartAsset

When saving for retirement, your employer may offer a tax-advantaged savings plan, such as a 401(k) plan or a 457(b) plan. Both allow you to contribute money toward retirement on a tax-deferred basis. And while there are similarities between plan types, there are also key differences to keep in mind that can affect how a plan will work for you and your retirement.

Saved Enough for Retirement? Well, That Depends | Kiplinger

People frequently ask how much money they’ll need to retire, as if there’s a one-size-fits-all dollar amount. But they’re asking the wrong question. Instead of starting with how much should be saved for retirement, start with how much you expect to spend.

What Retirement? People Over 65 Are Launching Encore Careers and Finding Fulfillment Like Never Before | Money

A growing number of older Americans are challenging the idea of traditional retirement, as more retirees decide they want to keep working or pursue passions after leaving the rat race behind. The number of Americans age 65 and over who continue to work has doubled since 1985, according to a study by United Income.

More Americans are leaving their money in 401(k) plans after retirement. Should you? | MarketWatch

Millions of workers contribute to a 401(k) plan so they can have more money when they retire. But some don’t touch those accounts for the first years of retirement. More than half of workers choose to leave their assets in their former employer’s 401(k) plan for a year into retirement, compared to 45 percent four years ago, according to Fidelity data on its workplace retirement accounts.

IRS Announces Changes for 2020

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Employees will be able to contribute up to $19,500 in pre-tax wages to their 401(k) plans next year thanks to an increase in the IRS limits that also covers 403(b) plans, most 457 plans, and other tax-advantaged savings vehicles. Each year, the Secretary of the Treasury is required to adjust limits based on cost-of-living changes.

Many financial experts suggest building up multiple sources of income during your working years, even if you are in a pension plan. While pensions provide steady, reliable income, it can help to have access to a 401(k) for additional monthly spending needs as well as a source of cash for larger one-time expenses, such as an unexpected health care bill or purchasing a home.

In addition to the higher contribution limit, the IRS announced the following changes:

  • The IRS allows people over 50 to contribute an additional amount to a 401(k) or 457, a rule known as the “catch-up contribution.” In 2020, that limit increases to $6,500 from $6,000.
  • Eligible low- and middle-income taxpayers who make contributions to accounts such as an IRA or 401(k) can file for a nonrefundable tax credit worth up to $2,000 ($4,000 for joint filers). The income limit for this Saver’s Credit increased to $65,000 for joint filers, $48,750 for heads of households, and $32,500 for singles.
  • Health Savings Account (HSA) contribution limits will go up for calendar year 2020. Anyone with a high deductible health plan (HDHP) can open a HSA and save money for health expenses in the future. These accounts have the ultimate tax advantage: As long as money is withdrawn for qualified medical expenses, these dollars are never taxed. Contributions are pre-tax, investment gains or interest are tax-free, and withdrawals aren’t taxed. The contribution limit for an individual is $3,550 for 2020, and, if a family is on an HDHP, their total contribution limit is $7,100. PERA retirees enrolled in Kaiser Permanente’s HDHP plan can enroll in an HSA with their preferred financial institution to take advantage of these savings (PERA does not offer HSA accounts).

Options available to PERA members

Any active PERA member (currently working for a PERA employer) can enroll in a 401(k) through PERA. Some members can also enroll in a 457 if their employer has chosen to offer one. Those who have access to both types of accounts don’t need to choose between the two—a person may contribute to both at the same time. All PERAPlus accounts offer the same low-cost investment options.

These accounts allow members to contribute pre-tax dollars from their paychecks. When a person begins taking withdrawals in retirement, the amount withdrawn is taxed. Some people would prefer to make contributions to these accounts after they’ve already paid taxes, which would allow for tax-free withdrawals in the future. This arrangement is called a Roth contribution. Some employers allow employees to make Roth contributions to their 401(k) or 457 accounts directly from their paychecks. People whose employers don’t allow them to make Roth contributions directly from their paychecks can still take advantage of the Roth rules by doing an in-plan Roth conversion.

Find more information about these two types of retirement accounts here.

PERA’s Investment Objective: Ensuring Retirement Security

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Investing requires an objective, just like charting a course on a map requires having a destination. A trip to Peru is not a successful trip if the objective had been Norway. Both destinations are viable options when you’re planning a trip, but they can’t both be the objective when you leave home: You can’t travel north and south at the same time. Investment objectives are no different.

In January 2019, Colorado PERA’s Board of Trustees stated that “PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants.” That objective not only includes ensuring a secure retirement for the 82-year-old retired teacher who relies on PERA today, but also for the 25-year-old CDOT employee who doesn’t plan to retire until 2059.

To reach that overall objective, the Board stated that “PERA seeks to maximize long-term risk-adjusted investment returns while incorporating the fund’s liability characteristics.” In other words, PERA must make investments that, altogether, are most likely to provide security for more than 600,000 members.

The Board’s statement continued, “A central component in managing investment risk is diversification”. This allows an investor, like PERA, to spread out risk (as in “don’t put all your eggs in one basket”) by looking into the widest number of possible investment opportunities.

The Divestment Dilemma

In recent years, outside organizations have suggested that institutional investors like PERA adopt a new objective: Use pension fund dollars to make political or social statements. Over time, these divestment requests have included industries such as mining, fossil fuels, meat, tobacco, guns, and more.

Each divestment proponent seeks to do good as they define the term. And, in September, PERA staff met with one such group to hear their concerns. But making divestment an objective is problematic. Issues PERA’s Board has raised include:

  • Limiting the investment opportunities available to PERA could lead to a less diversified portfolio. By accepting potentially more risk or smaller returns, this objective could conflict with PERA’s primary objective to provide retirement security to its members.
  • Calls for divestment span many issues. Over time, proponents have identified various industries as candidates for divestment. Deciding which of these to act on would be extremely problematic given PERA’s investment objectives. PERA invests in companies, not causes. Becoming an arbiter on issues like meat consumption or guns is not within PERA’s purview.
  • Divesting PERA’s existing holdings within an industry could lead to unintended outcomes. For example, PERA invests for the long term. Some investments might not be profitable today, but are expected to be in months or years down the line. Abruptly selling shares of a company, perhaps at a loss, would be in direct conflict with PERA’s main objective.

An Alternate Reality

Calls for divestment are gaining momentum. Proponents suggest that divesting from certain industries or companies will better enable PERA to achieve its long-term investment objective.

To demonstrate this, some organizations have proposed the following thought experiment: What if PERA had divested from a certain industry in the past and reinvested those dollars elsewhere? These thought experiments suggest PERA could have made millions or billions of dollars by investing differently in the past.

This type of thought experiment implies PERA could have made investment decisions years ago based on information only available today. That model does not reflect reality. While it’s always possible to find one company or industry that did better than another in hindsight, that isn’t a helpful guide when investing in the real world, where the future is unknown.

Investing for the Future

Finally, PERA does take into account that environmental, social, and governance factors can indeed affect a company’s long-term profitability. The ability to adapt to a changing world, do business in a sustainable way, and use resources in a way that ensures long-term success can be indicative of a quality company worth investing in.

Factors like these are part of a mosaic of factors PERA’s investment team considers when making any investment decision. Making investing decisions based on multiple pertinent data points instead of singling out one factor and ignoring the rest is the most responsible way forward for PERA and its members.