When you first enter the workforce you have many decisions to make in regards to how you will fund your retirement years. After years of earning an income, soon-to-be retirees also have some major decisions to make regarding how their retirement funds will be distributed once they are no longer in the workforce. For individuals who have a pension plan in place, the decision of how they will take their pension is an important one with significant consequences.

Lately, I have met with several clients who are faced with a very important question, “Should I roll my pension into an IRA or take the lifetime payments?” See, pension plans can be distributed in one of two ways;

1. Through regular installment payments received throughout your retirement years or
2. Through one lump sum payment (which can be rolled into an IRA)

There are benefits and drawbacks to each option, therefore it is important to weigh each option carefully before making your final decision. Here we evaluate the pros and cons whether you should or should not take the lump sum option on your pension.

Control of the Pension Money

One of the potential benefits of opting for the lump sum is the additional control you have over pension funds. This can be beneficial in that most pension plans do not account for inflation when establishing what your monthly annuity payment will be in the years to come. When you choose the lump sum option, you have control over your pension funds and can invest them as you see fit, which can result in additional growth throughout your retirement years.

Control is the largest driving force that have led to most of my clients choosing to roll their pension money over. Most recently, I had a client that said, “I’ve worked for the company 31 years on their terms, now I want to take my money on mine.” Could not have said it better myself.

When you roll it over, you decide when you want your money on your terms. If you want a little extra to spoil your grand-kids on a trip to Disney World, you have the power to do it.

Having control does come with its risks.

You have to be careful to not go on a spending spree and run the risk of spending down your retirement too soon. By choosing the annuity method, you have a guaranteed paycheck for the rest of your life and possibly your spouse if your pension plan allows for it. For some that have a harder time managing money, not being able to have access to the principal may be a good thing.

I have had cases where the client opted to take the lump sum option thinking they could control their spending. Alas, they could not and blew through their entire savings in a short amount of time. Now they have little savings and only Social Security to depend on during retirement.

Security of the Pension

photo credit: Simon Cocks

Choosing to get your pension in one lump sum payment, eliminates the security of receiving a monthly check for the remainder of your life, however you do know exactly how much money you are getting. Consider for example, if the company funding your pension annuity payments finds themselves in financial trouble, this may result in problems with your pension payments. There is a Federal agency; the Pension Benefit Guaranty Corp) that may make up for companies that file for bankruptcy, however there are limits to how much money you will receive.

As of 2009, the PBGC has insured pensions up to $54,000 for those that retire at the age of 65. If you’re pension is for more than that and your company goes bankrupt, you might be regretting that you hadn’t taken the lump sum.

As I mentioned above, security of having all your money up front can be reassuring, but; if you mismanage it, you can go through it quickly leaving you with no security in retirement. It’s important to do a self assessment of yourself and your spending habits to make sure you don’t make this mistake.

Estate planning: Don’t Forget the Kids

Annuity payments will cease once you and your spouse have departed. By choosing to receive your pension in a lump sum payment, you can plan your estate to include beneficiaries of retirement funds that are unused during the lifetime of you or your spouse.

In essence that means that if you unexpectedly passed away and your spouse wasn’t too far behind you, all the money that you had paid into your pension goes back to the company.

Should You Choose the Lump Sum?

The decision as to how you will receive your pension is one that should not be taken lightly. There are several factors to consider and the decision you make today will outline your quality of life for your remaining years. The benefits listed here could also be considered drawbacks if handled incorrectly, therefore be certain you are capable of managing your lump sum payment to ensure you will have financial security in the years to come.

If you feel you cannot properly manage your funds or simply don’t want the hassle of dealing with investments and long term planning, annuity payments might be the better option for you and your family. What is beneficial to one family may not be perceived the same for another, so make sure your decision is based on your unique situation and future needs. If you’re still not sure, be sure to meet with a qualified financial planner to asses your needs and see what direction is best for you.

photo credit: donbuciak

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

Retirement savings must be actively managed to ensure you have enough money to live comfortably for the remainder of your days.  While most people assume once you hit retirement age, that all of your work is behind you, anyone who is embarking on their golden years or who have a few years under there belt will tell you otherwise.  Work in the traditional sense may be a thing of the past, but there is still plenty of work that has to be done when it comes to managing your personal finances and savings.  Here we look at some tips you can use in your savings strategies to help prepare so that you have the money you need, when you need it.

• Financial advisor-  Hiring a professional is not a necessity, however if you have find it too time consuming or too complicated to manage your finances on your own, you may benefit from a trusted financial advisor or planner.  This person must understand your unique needs as well as your future goals and offer a strategy that will help you reach those goals.  Even with a reliable planner on your side, you should still remain on top of your finances and continue to make the final decisions that are in your best interest.  Editor’s Note: Here are some reasons that would want to fire your financial advisor.
• Asset allocation-  For most of your working life you have probably used a savings strategy the allowed for maximum growth.  These strategies typically involve a bit more risk than you want to assume once you reach retirement.  This does not mean you have to move all of your assets to one safe location, however you should diversify in a way that puts an emphasis on securing the money you already have. Consider putting more of your money in low risk areas such as savings accounts and CD’s which are relatively liquid and offer little risk.  You can view and compare the rates and benefits of many accounts online making it easier to find the savings accounts and other savings tools that will benefit you the most.  Consider high-yield reward checking accounts and high interest savings accounts that will offer some opportunity for growth while keeping your assets close at hand.
• Pay off debt-  If you have carried debt into your retirement years, you want to pay off debt as quickly as possible to eliminate financial obligations which may be eating away at your savings.  This is especially true for high-interest debt such as credit cards.
• Minimize tax consequences-  It is important to understand how retirement savings are taxed and the penalties of not distributing retirement plan savings in a timely manner.  Pay attention to the rules and requirements for qualified distributions of IRA and 401k accounts to ensure you are not handing more money over to Uncle Sam than necessary.

The golden years are supposed to be a time of rest, relaxation and living life to the fullest with those you love.  If you make the right choices in how you manage your savings at this time of your life, you can have a plan for your remaining years.

This is a guest post by Debbie who writes for the site DepositAccounts.com which looks to educate consumers on all things concerning savings accounts.  Debbie is not endorsed or affiliated with LPL Financial.

• Asset Allocation does not ensure a profit or protect against a loss.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform non-diversified portfolio.  Diversification does not ensure against market risk.
• CD’s are FDIC Insured and offer a fixed rate of return if held to maturity.

photo credit: Darrren Hester

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

Early retirement is the dream of many. The idea of paying your dues, saving up, investing smart and retiring at some point before the “traditional” retirement age of 65 has a strong pull. For many, early retirement is something that might even happen in their 40s. If you are considering how you can retire early, here are 3 ideas that can help you reach an early retirement goal:

1. Disciplined Saving and Investing

One way you can build up a sizable nest egg is to practice disciplined investing. Consider how much you will need in your investment portfolio to create an income stream that you can live off of. You will have to consider your age, how long you are likely to live, and the asset allocation you will need to provide reasonable growth, but not leave you over-exposed to the vagaries of the market. A long-term approach can help you. If you are 30, and plan to retire by age 50, you might be able to amass $522,063.08 if you start with $10,000 and invest $1,000 a month for 20 years, assuming a 6.5% return — compounded quarterly — on your portfolio. (Note, though, that returns will vary according to market conditions, and there is always the risk of loss.) You can end up with more than $1 million if you double that to $2,000.

When you start living off your retirement portfolio, though, you will need to make sure you are not withdrawing so much that your nest egg can’t support you. You can maximize your efforts by investing in tax advantaged accounts and making use of your employer’s company match program. But you need a plan, and you need to be disciplined enough to stick with it if you go this route.

2. Cultivate Multiple Income Streams

Another idea for early retirement planning is to begin cultivating multiple income streams, rather than relying solely on your ability to build up a massive nest egg to get you to retirement. Instead, make a plan to pay down your debt (including your mortgage) by your early retirement target date. Try to rid yourself of as many obligations as possible, so that you will have fewer expenses during retirement. Make a plan to pay down this debt while preparing for the future. Figure out how much money you will need each month to support your retirement lifestyle and then begin cultivating different income streams to create that income.

While there are rules that allow you to begin withdrawing from an IRA early, you likely won’t have access to Social Security benefits during an early retirement. You can consider your early withdrawal from an IRA if you must, but consider other sources of revenue. You can establish a web site that helps you earn residual income, write a book that results in royalties, start a business that can provide an income stream, or even engage in income investing. It is, of course, possible to cultivate a number of income streams at once, diversifying your income sources. Start now to develop these streams so that they are established and mostly automatic by the time you are ready for early retirement.

3. Take Mini-Retirements

Tim Ferriss, author of The 4-Hour Workweek, made the idea of a mini-retirement somewhat popular. If you want to enjoy life now, and aren’t concerned about having a huge chunk of time to try and kill when you are older, you can plan to take mini-retirements, living in a different place for one to six months. You do have to be willing to quit a job — and try to find a new one — in some cases.

An alternative that appeals to me is having a job you can do from anywhere. I work from home as a freelance writer and I could actually whittle my workload down to a couple hours a day for a few months, and take my job on the road. I’d be living in a state of almost retirement, and it would work as long as I had access to the Internet. Consultants and other freelancers, as well as online entrepreneurs, could make this work. After all, if you can manage to work on reduced hours, and have time to do what you want, you won’t need the same size of large nest egg.

Bottom line: There are even more paths to early retirement, and it might be that you combine different efforts to come up with a method that works well for you. The important thing is to decide what you want to do, and then make a realistic plan to accomplish it.

This is a guest post Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.

photo credit: Pug50

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

When it comes to retirement planning, the term “pension” is becoming almost archaic.  According to the Office of National Statistics (ONS) only 35% of workers in the private sector paid into a company pension fund last year.  Most employers have adopted 401k plans and put the responsibility on the employee’s shoulders to take care of funding their own retirement.  While having control can be a blessing, it can also be a double-edged sword.  Especially, for those that don’t take the time to fully understand all of their investment options.  For those people, there just might be a solution.  It’s called the DB(k) pension plan and here are the rules on how it works.

photo credit: patrick h. lauke

401(k) Match + Pension Plan = DB(k)

What exactly is a DB(k) pension plan?   Essentially, it combines the benefits of an income stream of a pension with the matching of a 401(k) plan. Many boomers that still have pensions, love them because they know they have an income stream that they can depend on.  The DB(k) offers the luxury of that stable income with a matching contribution to boot.  Might be the closest example of having your cake and eating it too when it comes to retirement planning.

DB(k)s  Could Be Popular to Employees

Many small businesses will bypass a Simple IRA or a SEP IRA and go straight to the 401(k) plan purely because of name recognition.  Employees like perks and a potential employer with a 401(k) plan with a match sounds much more attractive that a SEP IRA.  The DB(k) has the potential to be the next household name of retirement plans.  Most workers that I come across that have 401(k)’s don’t really understand them.   Having a  pension-style income like the one Mom and Dad had, may be a safer and less complicated solution.

Are DB(k) Plans Expensive for Employers?

It’s tough to say.  With the recent adoption of these plans, it doesn’t seem that employers are rushing off to get these started.   I’m sure the slumping economy is the largest barrier.  For those companies that do start these, they most likely have a very good cash reserve.  However, it isn’t as if a business is funding two retirement plans at once. In fact, any businesses that offer both defined benefit plans and 401(k) plans may unite them in this new option.

Less Paperwork Makes Everybody a Happy Camper

Companies with 2-500 employees are eligible to have DB(k)s pension plans.  Where 401(k) plans must meet certain “testing requirements” for top-heavy rules, the DB(k) is exempt and with a plan document and one simple form 5500, your business is ready to rock and roll DB(k) style.

These plans are exempt from “top-heavy” rules, and a company can put one in place with just one Form 5500 and one plan document.  The cost of the overall plan is the question.  Being new plans, it’s hard to say, but based on most reports I’ve read the cost should be cheaper compared to having both a 401(k) and a pension plan.

Employee Benefits from DB(k) Plans

An income stream, an employer match and a really neat tool to save for retirement. In brief, the DB(k) has four compelling attributes:

• Monthly Paycheck for Life. The income stream won’t replace an employee’s end salary, but it certainly will help. Employees that have worked for the company for a longer period of time are rewarded: the pension income equals either

a) 1% of final average pay times the number of years of service, or

b) 20% of that worker’s average salary during his or her five consecutive highest-earning years.

• Automatic Enrollment for 401k. That employees save for the future by default. (They can choose to opt out.)
• The company automatically directs 4% of a worker’s salary into his or her 401(k) account. The company also has to match 50% of that amount, which is vested upon the match. (Employees do have the choice to alter the contribution level up or down from 4%.)
• It only takes three years for an employee to become fully vested in a DB(k) pension plan. So even if they leave the company, the money is theirs.

Is the DB(k) the Retirement Savior?

For now, it’s too tough to say.  The strongest benefits I see is the ability to offer more to your key employees.  If you’re able to offer a sweet retirement package, it may help retain and gather more productive and easier to manage staff.

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

Small business owners have many options when it comes to setting up a retirement plan for their business and employees.  Previously, I had mentioned the SEP IRA as one of the more common choices.  Another option is the the SIMPLE IRA.   But don’t let the name fool you.   When it comes to the rules of the SIMPLE IRA, I actually think it’s one of the most confusing when compared to the rest of the retirement plan options.

photo credit: Jimee, Jackie, Tom & Asha

SIMPLE IRA stands for Savings Investment Match Plan for Employees.  Often times I’ll refer to it as the “mini-401k” as it’s traditional used for employers with less than a 100 employees.  In addition to that, the administrative cost of a SIMPLE IRA for your employer is considerably much less than what a 401(k) would be.

If you are a business owner, here are some consideration if your interested in opening a Simple IRA for you and your employees.

What You Give to Your Employees is Theirs-Immediately

In 401k plans, you are allowed to put a vesting schedule that requires the employee to work there for a certain number of years before they can take the money if they quit or get fired.   This is not the case with the Simple IRA.  The day that you make a contribution to your employee’s account, the money is immediately theirs.  If they want to cash it out, then they can; although they have to pay a pretty stiff penalty.

Employers Have To Match in a SIMPLE IRA

Each year, the you are required to  make a contribution to your SIMPLE IRA account whether it be in the form of a match or what’s called a non-elected contribution.  Matching contribution states that the employer has to match at least what you match.  So, if you’re matching 3%, the employer has to match 3% as well.  Note that 3% is the most that the employer has to match, which could be considerably different than compared to a 401(k) or SEP IRA.

You do have the option to reduce the matching amount to 1% for two of a five year period.  That means if you do decide to do this,  that you have to match the full 3% for the remaining three of those five years. This aspect makes the Simple IRA a little tricky and not quite that “simple”.

If you don’t want to worry about the match, then you can elect to do a non-elective contribution.  This means that you will have to contribute 2% of your employee’s salary no matter what.

Remember, what you match is based on the employee’s salary, not yours or the businesses.   Business owners often times get this confused.

The Employees Control the Investments

With most 401(k)s, you are limited to the investment options of the 401k provider.  This is considerably different when compared to the SIMPLE IRA.  Being a self employed retirement plan, the SIMPLE IRA gives you the discretion of what exactly you want your money  invested into.  If you want to buy 100 shares of XYZ stock, then you have the capability and freedom to do so.  (Note: you are allowed to do this in a SEP IRA, too)

Employees Can Defer, Too.

Employees, if they choose, can defer up to $11,500 per year into the Simple IRA.  You are currently allowed to contribute up to $11,500 per year in a SIMPLE IRA.  If  they are over the age of 50, then they are allowed a catch-up contribution, which is $2,500.  These are the same contribution limits as the business owner, as well.  Please note that the $11,500 is far less than the $16,500 that you are eligible to contribute to a 401k.

No Borrowing Allowed

Simple IRA’s do not allow you to borrow as a 401k plan may.  If they have to get money, they’ll have to pay tax and penalty, which is higher than most plans-see below.

The SIMPLE IRA Two-year Rule.

This is something that should be definitely noted within the SIMPLE IRA.  Most retirement plans — 401(k)s, regular IRAs, or Roth IRAs, etc. — have the 10% early withdrawal penalty if under the age of 59.5.  But with the SIMPLE IRA, it takes it one step further.  If the SIMPLE IRA that you’ve started is less than two years and you cash that out, instead of the normal 10% penalty, you will be subject to a 25% penalty in addition to ordinary income tax.  That is a huge item to not be overlooked.  Keeping in mind as well too that doesn’t apply to just cashing it out.  If you were attempting to roll over your SIMPLE IRA into a rollover IRA, the 25% penalty would apply as well.  The key point is just to wait the two years before converting into either a regular IRA or cashing it out.

Jeff Rose is a registered representative with and Securities offered through LPL Financial, Member FINRA/SIPC.

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

Are you a self-employed business owner that is looking for a cost effective to lower your taxes and help you save for retirement?  If that fits your profile then opening a SEP (Simplified Employee Pension) IRA might be a good retirement account to start for your business.

photo credit: khowaga1

When I was researching what would be the best retirement plan to set up for myself when I first became self-employed, I narrowed it down between the SEP IRA and the Solo 401k.  Both allowed very favorable contribution limits, but the administrative costs and ease of setting up made the SEP IRA the easy answer.  If you are considering opening a SEP IRA for your business, here’s what you need to know about the SEP IRA rules and contribution limits and how easy it is to open one.

SEP IRA’s Have Tax Deferred Compounding

Just as a traditional IRA or 401k, your contributions are pre-tax and can significantly lower your taxable income.

You contribute pre-tax dollars to a SEP IRA, and that has the effect of lowering your tax bill. The money in the IRA grows tax-deferred, and your business doesn’t pay any taxes on the IRA earnings. The assets can be invested in many ways.

The traditional IRA rules apply. When you take the money out of a SEP IRA for retirement, you pay ordinary income taxes on it. (Should you withdraw SEP IRA assets before age 59½, you’ll likely be assessed a penalty, with some exceptions.)

SEP IRA Contributions are Discretionary.

One huge bonus for business owners is that you are not required to contribute to a SEP IRA each year.  In addition, there is not a set amount that you have to put in.  This flexibility is priceless for a business owner that has fluctuating net income year after year.

Also, you are not subject to the typical IRA deadline to contribute: April 15th.  If you file a tax extension, you can wait until then to make the contribution.

How Much Can you Contribute to a SEP IRA?

In 2009 and 2010, you can contribute up to 25% of an eligible employee’s compensation, up to a limit of $49,000. No catch-up contributions are permitted for older employees.  Based on the 25% rule the income threshold is $196,000.  Over an above that you will not be able to contribute any more.  That’s when you might want to consider some other business retirement plans.

What Makes Employees Eligible for a SEP IRA?

If you have employees, then provided they pass a series of test, you will have to contribute the same percentage to them- just based on their salary- not yours. Generally, employees of a small business are eligible for a SEP IRA if they

1. are older than 21,
2. have worked for the business in at least three of the five years preceding the year in which the IRA contribution is made,
3. have received $550 or more in compensation from the business in 2009 (this can rise with COLA adjustments in future years). However, the IRS states that an employer “may use less restrictive requirements to determine an eligible employee.”

If you have employees that have ties to a union contract, they may be excluded from having to make contributions.

Opening a SEP IRA is Easy Breezey.

photo credit: another.point.in.time

Opening a SEP IRA is just as easy opening a regular investment account. You can open up one of these plans with the help of almost any financial advisor or financial institution.

In fact, you can even have other retirement plans at your business in addition to SEP IRAs, and you can set up a SEP IRA for your small business even if you are already participate in another retirement plan at another company.

So if you have a small business or work on your own and you want a retirement plan that works for your future without a lot of hassles, talk to a financial professional to see if a SEP IRA is right retirement account  for you to open today.

Securities offered by LPL Financial, Member FINRA/SIPC.

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

Working past normal retirement age is not unusual. According to the Social Security Administration, 28% of individuals between the ages of 70 and 74 reported income from earnings in 2006, the latest year data are available. Among a younger age group, those between 65 and 69, approximately 46% had income from a job.

photo credit: edward_marshall

Some remain employed for personal reasons, such as a desire for stimulation and social contact; others still want a regular paycheck. Whatever the reason, the decision to continue working into your senior years could potentially have a positive impact on your financial future.

Working later in life may permit you to continue adding to your retirement savings and delay making withdrawals. For example, if you earn enough to forgo Social Security benefits until after your full retirement age, your eventual benefit will increase by between 5.5% and 8% per year for each year that you wait, depending on the year of your birth. You can determine your full retirement age at the Social Security Web site or by calling the Social Security Administration at 1-800-772-1213.

Adding to Your Nest Egg

Depending on the circumstances of your career, working could also enable you to continue adding to your retirement nest egg. If you have access to an employer-sponsored retirement plan, you may be able to make contributions and continue building retirement assets. If not, consider whether you can fund an IRA. Just remember that after age 70 1/2, you will be required to make withdrawals, known as required minimum distributions (RMDs), from traditional 401(k)s and traditional IRAs.

For 2009 only, Congress had suspended the RMD requirement. RMDs will have resumed in 2010 according to current rules. Keep in mind: RMDs are not required from Roth IRAs and Roth 401(k)s.

Even if you do not have access to a retirement account, continuing to earn income may help you to delay tapping your personal assets for living expenses, which could help your portfolio last longer in the years to come. Whatever your decision, be sure to apply for Medicare at age 65. In certain circumstances, medical insurance might cost more if you delay your application.

Work doesn’t have to be a chore. You may find opportunities to work part time, on a seasonal basis, or capitalize on a personal interest that you didn’t have time to pursue earlier in life.

Securities offered through LPL Financial, Member FINRA/SIPC

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

On December 23, 2008 the President signed H.R. 7327 into law, the “Worker, Retiree, and Employee Recovery Act of 2008,” which suspended Required Minimum Distributions (RMDs) for 2009. This meant that if you were 70 ½ or older in 2009 you did not need to take an RMD in 2009. The law change was applicable for the 2009 tax year only, so as of January 1, 2010 Required Minimum Distributions are required for tax year 2010 and beyond.

photo credit: GilbertoFilho .

For IRA client’s over 70 1/2, LPL Financial will be mailing the annual RMD notice by the end of January as required under IRS rules reminding participants of the requirement to take a distribution for 2010.

Required Minimum Distributions Revisited

The beauty of investing in retirement plans is the tax deferred growth. All these years you’ve seen your account grow but never had a 1099 you had to report any of those gains on. You planned well enough were you have prolonged withdrawing even longer now, but you can only hold out for so long. The IRS is chomping at the bit waiting to get some of that tax money back. They do so with RMD’s by making you take out a portion of your retirement account each year and pay the respective tax on it. If you don’t take it out, you get taxed 50% of the amount that you should have taken. That’s a pretty stiff penalty that you want to avoid.

When do RMD’s  have to start?

The IRS says you must start by April 1 following the year that you turn 70 and a half, and you must do it each year ongoing. Some retirement plans will allow you to postpone withdrawing so long as you are still employed by that company. Keep in mind that April 1 is for the first year and the first year only. After the first year, it falls back to a calendar year schedule and must be withdrawn by December 31.

Required Minimum Distribution Example

Somebody born on July 1, 1939 would not turn 70.5 until January 1, 2010. That means that they would not have to take their first RMD until April 1, 2011 (which would satisfy 2010 RMD requirement). They would, however, be required to take another distribution that year by December 31, 2011 to satisfy for that year. Each year following would follow the December 31^st deadline.

How much do you have to take?

The amount will also be based on the previous year’s balance in your retirement plan. For example, to figure your RMD for 2010 you would take the value of your plan as of December 31, 2009.

The amounts to be withdrawn are based of life expectancy tables issued by the IRS which factor in your age, your beneficiary’s age, and your relationship with your beneficiary. Based on the 2008 Uniform Life Expectancy Table, you can expect to be required to withdraw 3.65% of your retirement plan when you turn 70.5. It then increases to 3.77% the next year and increases each year ongoing. The IRS tables are named:

• Single Life Expectancy
• Joint Life and Last Survivor Expectancy
• Uniform Lifetime

The tables are helpful, but nowadays calculators are used to compute the amount with ease. Please seek guidance from a financial professional to ensure that you are taking your RMD’s correctly.

Securities offered through LPL Financial, Member FINRA/SIPC.

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

When I worked for my old brokerage firm, I was a W-2 employee and the retirement plan options were simple.  I had the 401k and could also do a Traditional or Roth IRA outside of it.  Things changed a bit when I started my own company.  I officially became a small business owner and had man more choices on retirement plans. What options do hands-on owner-operators have and which one is the best for you? If you have a small company and want a retirement program, you want to consider these plan choices.

photo credit: eflon

The SIMPLE IRA.

These plans are very easy to create, and they have very low administrative costs and no annual IRS reporting requirements. You set up traditional IRAs for each eligible employee; they can contribute to the IRA on a tax-deferred basis (via payroll deductions, and you can either match the contributions of plan participants or contribute a fixed percentage of all eligible employees’ pay. The employees own the money in their IRAs.

I had considered going with the Simple IRA initially, but the one item I didn’t like is that it has a 25% early withdraw penalty for the first two years.  This is well over the standard 10% all other plans have.  In the event I did get into a bind, I didn’t like the idea of having to pay the extra to get it out.

The SEP IRA.

A Simplified Employee Pension plan lets you make contributions toward your retirement and your employees’ retirements. (You can even have a SEP and another kind of retirement plan at your business simultaneously.) A SEP allows business owners annual tax-deductible contributions equal to 25% of your compensation (if you have a corporation) or 20% of self-employment income (for a sole proprietor).

This is currently what I have and should satisfy me for a few more years.   Pretty soon I hope to graduate to the next level….

The Solo 401(k).

photo credit: adamhgs

Are you ready to fly solo?  As in a “Solo” 401(k). Yes, you can have a 401(k) when you are self-employed. A business owner may establish one and include their spouse in the plan, provided the spouse is an employee of the business. A solo 401(k) throws in a profit-sharing twist on the standard 401(k). Solo 401ks may be funded by the employee (deferred compensation) and the business (a percentage of profit). As an employee of your business, you can contribute an amount up to the standard yearly 401(k) contribution limit (catch-up contributions permissible if you are 50 or older). Additionally, solo 401(k) plans allow you to make tax-deductible profit-sharing contributions equal to 25% of your compensation (corporate entity) or 20% of self-employment income (sole proprietor). It is even possible to have a solo Roth 401(k). These plans do require a TPA (third-party administrator).

Ultimately, the Solo 401(k) will allow me to contribute the most pre-tax, but my income has to get me there first

Profit-sharing plans.

Here’s one way to compete with larger companies for prime employees. Contributions are usually deductible at both the federal and state level, with contribution limits equivalent to a SEP. Contributions aren’t mandatory. If your business has a bad year, you don’t have to make them. The assets placed within the plan grow tax-deferred. Again, annual tax-deductible contributions may be made according to the 25%/20% rule depending on your business entity.

New comparability plans.

Basically, this is a form of profit-sharing plan that rewards senior or key employees more than others. The classic situation for this plan is when you have a small business whose multiple owners take home similar earnings, but are of different ages. The plan must be tested to meet Internal Revenue Code nondiscrimination requirements, of course. It allows different levels of compensation to different groups within a small business.

What plan is best for your business?

If you are reading this, you are probably thinking about putting a plan into place or switching to a retirement program more easily administered than the one you have now? But which one should you choose – and what is the next step? Take a big step today and take advantage of all that is available in the marketplace – consult an independent financial professional and  a CPA to review your options and find the program that fits your needs.

This article in part was prepared by Peter Montoya Inc. Securities offered through LPL Financial, Member FINRA/SIPC.

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

How much do you need to retire?

How much do you need to retire? The usual suggestion provided by financial planners and retirement calculators is 75% to 85% (roughly 80%) of your pre-retirement income. But is that really enough money to retire with security? Does the 80% rule-of-thumb work under all circumstances, or is it merely a rough approximation to simplify the retirement planning process? Let’s examine these issues more closely…

Is 80% Of Pre-Retirement Spending A Realistic Budget?

The basis for the 80% spending rule is that your living expenses are expected to decline once you retire thus your spending should decrease without forcing you to lower your lifestyle. For example, you’ll no longer need to purchase expensive professional clothing and your transportation costs will drop without a daily commute to work. Additionally, your children will probably be grown and out of the house, and you will no longer have to fund your retirement savings. You may even have your home paid in full thus eliminating your mortgage payment and you may be in a lower tax bracket. All these factors indicate your spending should drop during retirement.

Unfortunately, the issue is not as clear as it might appear on the surface. The analysis above assumes certain types of spending will decrease while all other spending remains the same. That is not realistic. For example, many new retirees like to hit the open road and see the world thus increasing their travel budgets. Similarly, it is the rare retiree who does not face rising health care costs.

In short, the 80% rule of thumb is a generalization designed to simplify the retirement planning process at the expense of accuracy. It makes many assumptions about your future that may not be true for you. It is no substitute for making a real budget based on your actual plans for retirement, and it could actually jeopardize your financial security. To make this point clear we will examine five reasons why your expenses may actually increase during retirement instead of decrease…

Longer And More Active Retirements

People are living longer and more active retirement lifestyles than ever before. Increasing longevity has made 60 the new 40. If you plan an early retirement so you can sail around the world or take frequent wine-tasting trips to France and Italy, the cost of those leisure activities and travel can easily offset any decrease in work-related expenses. Alternatively, if you are planning an early retirement it will mean you need more money to support a longer life of leisure. A longer retirement means you can’t spend as much investment principal each month, and a more active retirement means you need more savings and income to support a more expensive lifestyle.

Health Care In Retirement

Health Care in Retirement

Health care costs have risen steadily and there is every reason to believe that trend will continue. Additionally, your chances of serious illness or need for expensive medications increases with age. A single medical event can be devastating to your retirement savings if you are not prepared, and if you don’t have long term care insurance then assisted living or nursing home expenses can deplete your retirement savings.

Other Ways Expenses Could Rise

Maybe you haven’t paid off your house, or possibly you took out a home equity loan to remodel. The 80% rule-of-thumb assumes you no longer support dependents, but you may still be paying a child’s college expenses. Alternatively, you might be caring for an aging parent who is living in your home. These expenses certainly won’t go away just because you retire.

Lower Taxes May Be Wrong

The assumption that your taxes will drop during retirement could be totally incorrect. After all, if your retirement income level is similar to pre-retirement income then where will the tax relief come from? In addition, growing budget deficits at all levels of government combined with entitlement program problems indicates a greater likelihood of rising tax rates rather than falling tax rates. In short, the idea that your tax rate will decrease during retirement may turn out to be just the opposite.

Spending Statistics Misrepresent Real Spending

Many research studies have been conducted on the spending patterns of the elderly. One of the more famous studies comes from Ty Bernicke in the Journal of Financial Planning where he cites numbers from the U.S. Department of Labor’s Consumer Expenditure Survey indicating that retirees spend less as they age. A typical 75-year-old spends about half as much as the average 45-to-54-year-old. Overall, spending declines about 25% each decade from age 55 to 75.

This appears to be conclusive evidence that spending does in fact decline with age during retirement; however, there are a couple of major flaws in the research. The first problem results from these figures failing to include long term care costs. You can solve that problem with insurance but there is no solution to the next problem…

Bernicke’s analysis was based on a snapshot in time thus it only compares nominal dollar spending and does not adjust for inflation. In other words, it compares the spending habits of a 75 year old today to the spending habits of a 45 year old on the same day. It does not track a 45 year old over a period of 30 years to determine if their spending decreases with time as the study would imply. Instead, it compares the two different groups at a single point in time.

The problem with this approach is it fails to adjust spending for inflation. A mere 3% inflation will double spending in just 25 years which will more than offset the expected reduction claimed by Bernicke’s research. In fact, it could potentially cause an increase in spending – contrary to what his research would imply.

A More Accurate Approach For Determining How Much Money You Need To Retire

In summary, you would be wise to forget the oversimplified rules of thumb when trying to figure out how much money to retire. Your financial security is at stake and you deserve better. Instead, it is far more prudent to develop a realistic budget for your retirement spending based on your actual retirement plans. You don’t have to make it perfect because nobody can predict the future, but you do want to make it as accurate as you can.

Personal Budget for Retirement is a Must

A personal budget for retirement is necessary because your life situation is unique. Only you know the financial situation facing your maturing children and aging parents that might affect your budget. Only you know about your globetrotting plans to travel the world for a decade or two before slowing down. That means you will need to add that expense into your budget for a decade or two before removing it. If you have long term care insurance then add the premiums as an expense into your budget, and if you don’t then build a cushion into your savings for self-insurance. In short, develop a plan for retirement and then develop a budget to reflect your plan.

When you complete the budgeting process you may be happily surprised to learn you only need 60% of pre-retirement income making you better off than expected – or your dreams could require 140% of pre-retirement income causing a challenge. This is key to your financial security because the difference between these two numbers can either break the back of your retirement savings or make a meager nest egg look plentiful. Because the range of outcomes is so wide and the stakes are so high, the only realistic solution is to replace the rule of thumb with a carefully developed retirement budget based on your unique needs.

It is the only prudent thing to do.

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About The Author =

Todd R. Tresidder is a financial coach who blogs about retirement planning, wealth building and investment strategy. He wrote the book How Much Money Do I Need To Retire teaching you how to overcome the hidden problems behind retirement calculators that threaten your financial security.

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.