NAPA Net » ‘Out’ Takes

NAPA Net » ‘Out’ Takes:Nevin Adams •7/8/14 •
My first car wasn’t anything special, other than it was my first car. It was an older model Ford, ran reasonably well, with one small problem — it went through oil almost as quickly as it did gasoline. At first I attributed that to being a function of the car’s age, but as the leakage grew, I eventually dealt with it by keeping a couple of quarts of oil in the trunk “just in case.” Eventually, I took the car to a dealership — but by the time they finished estimating the cost of a head gasket repair, let’s just say that, even on my limited budget, I could buy a lot of oil by the quart, over a long period of time, and still be ahead financially.

“Leakage” — the withdrawal of retirement savings via loan or distribution prior to retirement — is a matter of ongoing discussion among employers, retirement plan advisors, regulators and policy makers alike. In fact, EBRI Research Director Jack VanDerhei was recently asked to present findings on “The Impact of Leakages on 401(k) Accumulations at Retirement Age” to the ERISA Advisory Council in Washington.

Ida May Fuller, the first recipient (Photo credit: Wikipedia)

EBRI’s analysis considered the impact on young employees with more than 30 years of 401(k) eligibility by age 65 if cashouts at job turnover, hardship withdrawals (and the accompanying six-month suspension of contributions) and plan loan defaults were substantially reduced or eliminated. The analysis assumed automatic enrollment and (as explicitly noted) no behavioral response on the part of participants or plan sponsors if that access to plan balances was eliminated.

Looked at together, EBRI found that there was a decrease in the probability of reaching an 80% real income replacement rate (combining 401(k) accumulations and Social Security benefits) of 8.8 percentage points for the lowest-income quartile and 7.0 percentage points for those in the highest-income quartile. Put another way, 27.3% of those in the lowest-income quartile (and 15.2% of those in the highest-income quartile) who would have come up short of an 80% real replacement rate under current assumptions would reach that level if no leakages are assumed.

The EBRI analysis also looked at the impact of the various types of “leakage” individually. Of loan defaults, hardships and cashouts at job change, cashouts at job change were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). The leakages from cashouts resulted in a decrease in the probability of reaching an 80% real replacement rate of 5.9 percentage points for the lowest-income quartile and 4.5 percentage points for those in the highest-income quartile.

Advisors take note: that effect from cashouts — not loans or hardship withdrawals — turns out to be approximately two-thirds of the leakage impact.

However, and as the testimony makes clear, it’s one thing to quantify the impact of not allowing early access to these funds — and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes, perhaps by reducing contributions,¹ potentially offsetting some or all of the prospective gains from restricting access to those funds.

Because ultimately, whether you’re dealing with an old car or your retirement savings account, what matters isn’t how much “leaks” out — it’s how much you put in, and how much you have to “run” on.

Footnote

1. An EBRI/ICI analysis published in the October 2001 EBRI Issue Brief found that, “on average, a participant in a plan offering loans appeared to contribute 0.6 percentage point more of his or her salary to the plan than a participant in a plan with no loan provision.” Testimony provided to the ERISA Advisory Council testimony notes that it’s likely that a similar relationship exists with respect to the availability of hardship withdrawals. See “Contribution Behavior of 401(k) Plan Participants,” online here. ↩

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Study shows how to fix big flaw with 401(k) plans

retirement (Photo credit: 401(K) 2013)

CBS News:
By 

STEVE VERNON / 

MONEYWATCH/ October 1, 2013, 7:39 AM

(MoneyWatch) Most 401(k) participants plans are on their own when it comes to deciding how to turn their retirement savings into reliable, lifetime income. ... Most employers pay retiring employees a lump sum from the 401(k) plan and don't provide any help with the critical task of generating retirement income from that savings. 

... To set the stage for future changes, a new study from the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA) shows employers how they can help their older workers plan for a secure retirement. (Disclosure: I was the primary author of this report).

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What are the challenges?

The long-term shift from traditional pensions to defined contribution and hybrid defined benefit plans places significant responsibility on retirees to generate lifetime retirement income. For example:

• Given people's longer life expectancy these days, the money set aside for retirement may need to last a long time -- potentially 20 to 30 years or more.
• Market volatility complicates the challenge of managing savings in retirement. Since 1987, there have been four major market meltdowns. Retirees can expect -- and should plan for -- more meltdowns.

• 

  English: Proportion of pay to save. (Photo credit: Wikipedia)

  Many employees don't know how to calculate the amount of savings they need to generate adequate income during their retirement. They often guess at this amount, and they usually guess too low. 



English: Retirement savings for various periods with squirrel and nut analogy (Photo credit: Wikipedia)

• There's also evidence that retirees are doing a poor job of managing retirement risks; many lack a formal plan to generate retirement income from their savings, and as a result, they're planning to spend down assets at an unsustainable rate. Others are under-spending in retirement for fear of running out of money, leaving them with less money for necessary expenses.

These challenges could all be addressed if 401(k) plan sponsors provided retirement income programs within their 401(k) plans instead of just pre-retirement investment vehicles. So why aren't more employers offering such programs? The primary reason seems to be how plan sponsors view their defined contribution plans. According to one study, 91 percent of plan sponsors view them as savings plans, while only 9 percent view them as vehicles for providing retirement income.

A cultural shift is needed: Employers and plan sponsors need to commit to operating their 401(k) plans not just as a way to save for retirement but as plans that help employees before and during their retirement.

Help is on the way

Several reputable financial institutions offer an array of retirement income products, including AllianceBernstein, Fidelity Investments, Financial Engines, Great-West Insurance, Guided Choice, Income Solutions, Prudential, Schwab, Transamerica, UBS and Vanguard. Many of these products and services are available on the platforms of 401(k) plan administrators, such as AonHewitt, Fidelity Investments, J.P. Morgan, Mercer, T. Rowe Price, Vanguard, Wells Fargo and Xerox/Buck. The bottom line is that plan sponsors now have realistic retirement income products they can offer in their 401(k) plans.

The SCL/SOA study provides employers with guidelines for selecting the products and services that employers can offer in their 401(k) plans and implementing a successful program of retirement income. The report describes common retirement income generators (RIG), such as annuities and systematic withdrawals, and provides projections of the amounts of retirement income that each RIG might generate. These projections show that a retiree's choice of a RIG can have a significant impact on the amount of income they'll receive, when they initially retire and throughout their retirement.

One important conclusion from the SCL/SOA study is that plan sponsors can significantly increase the amount of retirement income employees might receive by offering retirement income products that come with institutional pricing instead of the standard retail pricing individuals have to pay for such plans. Institutionally priced products have the potential to increase retirement incomes by five to 20 percent.

Plan sponsors and employers are uniquely positioned to help their employees convert their retirement savings into income without any economic incentive that might bias individuals' decision-making. This objectivity will help older workers retire with confidence and security.

If this scenario sounds promising to you, show this blog post to your employer and diplomatically ask them to consider implementing a program of retirement income in your 401(k) plan. Employers often respond to employee requests, and if enough of your coworkers make the same request, you can make it happen.

© 2013 CBS Interactive Inc.. All Rights Reserved.

• Steve VernonON TWITTER »
  

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  For more than 35 years, consulting actuary Steve Vernon helped large employers design and manage their retirement programs. Now he's a Research Scholar for the Stanford Center on Longevity, where he helps collect, direct, and disseminate research that will improve the financial security of seniors. He also delivers retirement planning workshops and has authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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Five 401(k) mistakes to avoid

401k, retire, retirement, retiring, 401(k) plan, money, investment, investing / ISTOCKPHOTO
CBS News:
By 

RAY MARTIN / 

MONEYWATCH/ September 20, 2013, 7:00 AM

(MoneyWatch) Workers in 401(k) plans are required to make important decisions that can have a significant impact on their ultimate retirement savings. Folks relying on their 401(k) as their primary retirement nest egg need to make the right decisions on when to enroll in the plan, how much to contribute, how to invest contributions and how to manage the account.

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Most people have the best of intentions when they contribute to their 401(k), but merely being a good saver isn't enough. Here are some of the common mistakes savers should avoid in order to keep their savings growing in their employer's plan.

1) Not enrolling at the earliest opportunity

The problem is that a lot of workers don't take the steps to sign up and join their employer's 401(k) plan at the earliest opportunity. ... The problem is they've lost out on matching contributions (assuming their employer matches) and on the tax-deferred gains on funds they could have saved and invested. Changing jobs five to seven times over a working career (which is typical) only compounds this mistake.

2) Not increasing contributions

According to industry data, the average contribution percentage for workers saving in a 401(k) is around 6 percent. Most studies that take a measure of what folks need to save over their working lifetimes indicate that workers without a pension will need to save and invest 10 percent or more every year into a 401(k) type retirement plan. These assets combined with Social Security income should be sufficient for retirement. If you enrolled into your 401(k) with a six percent contribution percentage, increase this to at least 10 percent as soon as possible and work towards increasing it from there over time.

3) Not making catch-up contributions

... In 2013 workers can contribute up to $17,500 annually into their employer sponsored 401(k) type retirement plans. But if you're over 50 at any time in 2013 (even if you turn 50 on December 31st 2013), you can contribute an additional $5,500 (which remains unchanged from 2012 limits) for a total contribution of $23,000.

4) Taking a 401(k) loan

Most retirement plan experts agree you should never take money from your 401(k) plan because you are taking money away from what you will need for a financially secure retirement. The biggest risk of borrowing from your 401(k) is that most plan rules require repayment within 30 to 90 days of leaving your employer. That's a disaster for someone who suddenly loses their job. If you don't have the money to pay off the loan it will be included in income as a taxable distribution. If you are under the age of 59 1/2 you'll owe a 10% penalty tax on top of applicable federal and state income taxes. If you don't have the money to pay the tax, the IRS can collect what you owe by deducting it from your remaining balance, virtually wiping out your retirement savings in the plan. Whether or not it's a good idea to take a withdrawal from your 401(k) account ultimately depends on what you are doing with the money, but for the reasons explained here, it's wise to avoid this move, as it can backfire.

5) Not running your retirement numbers

The time to find out you have not saved enough is not after you retire. Now is the time to do some serious number crunching. Calculating how much income your current retirement account and annual savings will generate at retirement is a critical step to ensuring you are on track to achieving your retirement income goals. If your retirement plan offers access to online tools to do this, use them.

© 2013 CBS Interactive Inc.. All Rights Reserved.

• Ray Martin
  

  View all articles by Ray Martin on CBS MoneyWatch »
  Since 1986, Ray Martin has been a practicing financial counselor, providing valuable and practical financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch, and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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A Rich Retirement: How to get the biggest Social Security check

CBS News:
By 

MELLODY HOBSON / 

MONEYWATCH/ September 18, 2013, 5:27 AM

(MoneyWatch) According to the Employee Benefit Research Institute, only two-thirds of Americans have saved for retirement and most have saved less than $25,000. The average retiree depends on Social Security for 70 percent of his or her income....

Ida May Fuller, the first recipient (Photo credit: Wikipedia)

You can start collecting Social Security anytime from age 62 to 70, but the later you start, the bigger your benefit. Just how much bigger depends on when you were born. People born from 1943 to 1954 have a "normal" or "full" retirement age of 66. They get 25 percent less than their normal benefit if they cash in at 62 and 32 percent more than their normal benefit if they wait until 70. (People born later have a slightly higher "normal" retirement age and take a somewhat bigger hit for claiming their benefits early and a somewhat smaller bonus for waiting until 70.)

Roosevelt Signs The : President Roosevelt signs Social Security Act, at approximately 3:30 pm EST on 14 August 1935. Standing with Roosevelt are Rep. (D-NC); unknown person in shadow; Sen. Robert Wagner (D-NY); Rep. John Dingell (D-MI); unknown man in bowtie; the Secretary of Labor, ; Sen. (D-MS); and Rep. David Lewis (D-MD). (Photo credit: Wikipedia)

Say you turned 62 in June 2013 and earned $50,000 a year. You could collect about $1,011 a month as a single if you retire at 62, or $1,420 a month (in today's dollars) at your full retirement age of 66 in 2015, or $1,972 a month (again in today dollars) starting in 70 in 2019. If you're earning $150,000, the comparable monthly amounts would be $1,840 at 62, $2,501 at 66, and $3,370 at 70.

While those benefit amounts sound dramatically different, in theory the system is neutral -- meaning if you live to an average age, you'll end up with roughly the same total benefit no matter when you claim. ...

There is no pat answer to decide when to start collecting Social Security benefits, but there are a few guiding rules. First, if you're still working, don't claim benefits before your full retirement age. This is the rule thumb that nearly every expert can agree on. You shouldn't claim early while you're still employed unless you truly need the money to survive, because it comes with hefty penalties. Until you reach the full retirement age, for each $2 you earn in 2013 above $15,120, you lose $1 of your annual Social Security benefits. By contrast, after 66, benefits don't get cut no matter how much you earn. If you're working, try to wait. Also, don't take the money early thinking you'll make more by investing it: If you invested the money, you would need to earn more than 7 percent annually to equal what you'd make by delaying benefits until full retirement age.

Medicare & Social Security Deficits Chart (Photo credit: Wikipedia)

A common concern is whether Social Security will even exist by the time someone is eligible to receive it, and it's a valid one: The trustees who oversee Social Security say the program's trust funds will run dry in 2033, leaving the program with only enough revenue to pay about 75 percent of benefits. Already, the program is paying out more in benefits than it collects in payroll taxes.

And people frequently aren't confident that they've saved enough on their own to retire comfortably. It's no wonder that a recent survey of Baby Boomers found that 61 percent of respondents fear outliving their retirement more than death. Think about that for just a second. People would sooner die than outlive their retirement. This uncertainty is coloring a lot of people's decision to cash in on Social Security while they know they still can. A recent survey by BMO Retirement Institute found 83 percent of retirees were influenced to start their benefits because they were concerned about the viability of the program.

My next guiding rule: Don't take Social Security until you're sure you want it. Up until December 2011, the Social Security Administration had a "do-over" strategy that had allowed seniors to file for benefits and then later repay them, without interest, to get a bigger check. ... But since December 2011, you have only 12 months to change your mind after initially filing for benefits.

Finally, part of being a smart financial planner is answering tough questions like "How

English: This is a chart illustrating the future payouts of Social Security Benefits in the US from 2009-2083. The source of the information is the Social Security Administration's website. (Photo credit: Wikipedia)

long do you expect to live?" A calculator on the Social Security website will give you your average life expectancy. It predicts a woman turning 62 this coming year will live to an average of 85.5 and a man of the same age to 83.4. But what about your health and your genes? There are a bunch of websites that calculate your life expectancy while taking into account your health, family history, exercise, eating, drinking and driving habits and even social relationships. If you're not in great health and you want to get some of your tax dollars back, it can make sense to start claiming Social Security as early as possible.

Deciding when to collect get a little more complicated if you're married. When a married person claims benefits, they're eligible for what they've earned or up to half of their living spouse's full retirement benefit, whichever is higher. A low earning spouse who is relying on spousal benefits takes an even bigger early claiming hit than a primary wage earner -- if he or she claims benefits at 62, they get just 35 percent of the primary earner's full retirement age check, instead of 50 percent. On the other hand, there are no extra benefits for waiting past full retirement age to claim that spousal check. That means this is the one case where no matter how you slice it, waiting past the "full retirement age" of 66 doesn't net you an extra dime.

Social Security - Ratio of workers to beneficiaries (Photo credit: Wikipedia)

The catch is that a spouse can't claim benefits until the earner makes a claim. So let's say a high-earning husband and non-working wife both turn 66 this year. The best financial plan is for the husband to begin claiming his benefits so his wife can collect. But not so fast! We already covered that he'll receive a bigger benefit if he waits until he's 70. He can still wait and cash in on that delayed payday by requesting that his claim and his benefits be immediately suspended. That way, he then can continue to wait for a bigger benefit, while his wife is now eligible to claim her spousal benefits.

It's tricky, but if you familiarize yourself with the basic rules, you'll be okay. Another thing to remember for married people: If one partner dies, the survivor can claim the deceased spouse's check instead of his or her own, assuming the deceased spouse's check is bigger. The general rule of thumb for married couples is that at least one partner (usually the higher earning one) should delay benefits well past 66. This is "longevity insurance" for you both.

One final thing to remember: Regardless of when you take Social Security and when you stop working, you need to enroll in Medicare when you first become eligible at 65, or you could face financial penalties in the form of higher premiums.

© 2013 CBS Interactive Inc.. All Rights Reserved.

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