Friday, December 20, 2013

Frozen 401(k) contributions might have silver lining

Dan Berman for BenefitsPro writes: Maximum 401(k) contributions for next year were frozen at 2013 levels by the IRS, but advisors say that might not be such bad news for those saving for retirement.  “By building so much 401(k) money you are making a deal with the devil,” said Jim Heafner, president of Heafner Financial Solutions in Charlotte, N.C.

Heafner explained that, with many expecting tax rates to rise over the next several years, using Roth IRAs, brokerage accounts and other post-tax vehicles for a portion of retirement savings is a good strategy.

Kile Lewis, co-CEO and founder of oXYGen Financial in Atlanta, puts the matter succinctly.
“Just because you can’t contribute to a 401(k) doesn’t mean you can’t save,” he said.
The limits on 401(k) contributions for 2014 announced by the IRS kept them at $17,500 for those in 401(k), 403(b) and 457 plans. Those over age 50 are still allowed an additional $5,500 in catch-up contributions. The limit for IRA contributions was kept at $5,500. The self-employed will be allowed to contribute $52,000 to SEP-IRA and Solo 401(k)s next year, a $1,000 bump from this year.

The methods advisors use to keep their clients on track with their retirement savings and other financial needs vary from the technological to the old fashioned, but they all promote discipline and awareness of needs.

“I use purpose-based asset allocation,” said David Edwards, president of Heron Financial Group in New York City. “I divide clients’ money into separate accounts for retirement, college. Each has its own investment strategy.”

That leaves some clients with seven or more accounts that can offer a snapshot of exactly where they stand in relation to the goal they have set in each area.  Lewis prefers a modern version of the multiple accounts strategy by using software to analyze the assets of clients. Either way, the effect is the same.

“I still believe in planning,” he said. “It’s hard to save if you don’t know why you are saving. Our clients have 10,000 choices. Our job is to show them the 10 that matter and help them choose the best three.”

Exactly which options work for a client and how much can be saved depends on every day needs for things like housing and college, and, of course, how much a client earns.

Heafner’s advice is simple for everyone: “The more they can save the better.”
One trend he has seen among younger workers is a move to purchase annuities, which traditionally have been marketed to those at or near retirement age. While they guarantee an income for life once retirement begins, no money is recouped for heirs if the purchaser dies at a younger age.

“Younger people have been driven by stock market crashes to seek something stable,” Heafner said, adding that the sale of annuities is more “consumer driven than sales driven.”
Adding to the allure of annuities are those that are indexed to inflation, thereby adding more income protection to those that purchase them.  “I think if you look ahead,” Heafner said, “inflation is going to be a big thing [in retirement planning].”

That “deal with the devil” Heafner mentioned is a key element that all three advisors mentioned when plotting strategy for retirement savings.
“I think the tax environment is going to get tougher,” Lewis said. “If everything is in nontaxable [accounts], you can get bitten down the road.”

He advocated making sure that all breaks and exemptions are used to reduce income tax bills. In that way, more money will be available to save for retirement and use for other needs.
For instance, he noted a Georgia law that allows citizens to purchase tax credits from movie companies that can’t use them. Other states have their own quirky tax laws that can lower the amount owed to the government.

In the end, whether because of pressure to buy the latest smartphone or TV or lack of income and other factors, retirement savings fall short for many U.S. workers.  “I think what we don’t do a good job of in this country is save monthly,” Lewis said, adding that for “many it’s a cash flow issue.”

Recent surveys bear that out. A Towers Watson study, for instance found that less than half have saved money outside of their employer’s retirement plans. And a J.P. Morgan poll found that most workers underestimated how much money they would need to save to replace their income.

Helping clients sort through the choices they need to prepare for retirement gets complicated. Add in the stress of working and family needs and it can be tough to figure out the right path.
“If you don’t get it right, the results can be disastrous.”


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