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.”
Friday, December 20, 2013
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