Things I Wish I’d Known (and Done) Before I Retired

  

It’s hard to believe that I’ve now been “retired” for three years. That said, there are some things that, in hindsight, I wish I had known and/or acted on sooner. And a couple that I actually did - but might easily have overlooked. 

Here they are:

Do More Roth — Sooner

I’ve long been a huge fan of Roth. It’s not hard to look at the federal government’s finances, the current tax brackets, and figure out that the rates aren’t likely to get any lower in the future.

And yes, for the last decade or so of work, I went all Roth, including catch-ups. In fairness, Roth wasn’t an option for most of my retirement savings career. Even so, in those first years, recordkeepers weren’t really ready — and I, like most of my generation, had by then been so thoroughly coached on the advantages of pre-tax accumulations — well, it was easy to shrug off Roth as one of those things of which only the wealthy could afford to benefit.

But — and particularly as I got closer to retirement — the question has always been, where will your income in retirement line up with those brackets? That said, the closer I got to retirement, the easier it was to make that determination — and even more fully appreciate the benefits of tax diversification, particularly as I look ahead to the implications of required minimum distributions (RMD), when taxes on all those previous years of pre-tax savings come due — with a vengeance.

So, if you haven’t been thinking about Roth — and those new catch-up contribution limits are a good opportunity — do so.

Set Up the Roth IRA Before the Rollover

This one still makes me shake my head.

A few months after retirement, I rolled those balances into an IRA: one for a Roth, another for the pre-tax accounts.

Only to “discover” that the five-year clock on the withdrawal of Roth account earnings without penalty starts with the date of the IRA account opening, NOT the date from my 401(k). This turns out not to be a hidden secret — but I never picked up on it.

Now, as it turns out, I won’t need to pull that money out before the five-year clock resets with the rollover Roth IRA. But I could have spared myself a bit of worry if I had opened that Roth IRA earlier — and THEN rolled over to that account after retirement.

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Lesson learned: Open the account early — even if you don’t think you’ll use it right away.

Future You will thank you.

Know That 1099 Income Is … Messy (and It All Counts)

I assumed income in retirement would be simpler (there’s surely less of it) than working-life income.

That assumption did not survive contact with my new status as a 1099 worker. The good news is that, post-retirement, I’ve had several amazing opportunities not only to continue contributing my writing and expertise, but also get paid for it.

The bad news is, I wasn’t really prepared for the financial challenges of estimated tax payments, and, more critically, the financial toll of self-employment tax, wherein I am — even as a Social Security recipient — expected to pay both the employer and employee portions of FICA withholding. From a practical standpoint, that means that that “extra” income — well, less of it goes into my pocket than one might think.

Without withholding, income timing becomes trickier. Estimated tax payments become real (and, oh so large). Cash flow planning requires more attention. And there’s a persistent, low-grade constant uncertainty about whether I’m underpaying, overpaying, or just guessing until April rolls around. Oh, and the IRS has some pretty specific rules around how much estimated tax is due — and when.

And yes, there are financial penalties for guessing “wrong”.

The More You “Make,” the More They’ll “Take”…in Unexpected Ways

I have previously written about the biggest surprise of my retirement[i] — and I continue to struggle with it.

Like most people (I assume), I never gave much thought to post-retirement healthcare insurance. Oh, I’m aware of the funding issues (it’s actually in a more financially precarious position than Social Security), but as post-retirement healthcare has pretty much evaporated in the private sector, I figured we’d deal with it …when we had to.

Turns out, Medicare health insurance premiums are based on income. And if you’ve filed jointly, BOTH of your premiums are based on your adjusted gross income (AGI). Which means that 1099 income counts, and most particularly those withdrawals of pre-tax savings count. Big time.

Together, they can quietly push you into higher income-related premium tiers for Medicare — increasing Part B and Part D premiums in ways that feel disconnected from the original retirement planning conversation …but absolutely aren’t. That’s where those Roth decisions can really pay off.

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The interaction is subtle, but the dollars aren’t.

File for Medicare Before You Need It

Once you start receiving Social Security benefits, you are automatically enrolled in Medicare Part A. But even if you work past age 65 (as I did) and don’t start taking Social Security (like me), you still have to sign up for Medicare — even if you’re still working, have insurance, and don’t plan to use Medicare (this will, of course, confuse your current health care providers, at least momentarily. Everyone assumes when you turn 65, you’re on Medicare). 

There’s a seven-month initial enrollment period that begins three months before the month you turn 65 and ends three months after your birthday month. Now, there are some exceptions to that timing, but — the bottom line is, you’ll likely find it to be less complicated to sign up around your 65th birthday, and then you don’t have to worry that you’ll run afoul of deadlines that can cost you a lot later on.

The bottom line here is that your post-retirement spending plans need to include something for health insurance (more precisely, your Social Security benefit will be reduced by that amount). You can find out more at: https://www.medicare.gov/basics/costs/medicare-costs

The Sixth “Lesson”

Let’s face it, even those of us who have spent our lives thinking about retirement don’t get everything right when it comes to our own.

The irony is that I spent years telling others to plan — and I did - at least sporadically. Ultimately, I focused more on the accumulation side of the retirement equation and less on the spending side.  The good news is, even with the “surprises” noted above, the accumulations appear to have provided a pretty good buffer.   

Retirement is good. Really good, in fact. But it’s even better when you make the easy moves before they become harder ones. If you’re still working and thinking, “I’ll handle that later,” take it from someone three years in:

“Later” comes faster than you think.

-          Nevin E. Adams, JD

[i] See The Biggest Surprise About (My) Retirement

5 Reasons Why Your Small Business Should Offer a Retirement Plan

People who don’t have access to a plan at work don’t save for retirement. Here’s why small business owners should care.

About half of private sector workers did not participate in a workplace retirement savings program in 2012, and a recent report by the Government Accountability Office (GAO) found that most workers who did not have coverage lacked access to such programs.

While there are many reasons that might account for those individual decisions, among those not participating, the majority worked for an employer that did not offer a program or they were not eligible for the programs that were offered. In particular, lower income workers and those employed by smaller firms were much less likely to have access to programs, after controlling for other factors. However, the majority of these workers participated when they had workplace access.

Here’s why small businesses should provide that access.

To attract and retain workers.

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. But it’s a bit more complicated than that. The reality is that a larger employer that does not offer a retirement plan benefit sticks out like a sore thumb.

However, among smaller employers, the situation is almost a mirror image. In fact, the GAO reports that only 14% of small employers with fewer than 100 employees sponsor a plan in which workers can save for retirement.

The opportunity for smaller employers then, is to stand out from your competition precisely because you do offer a workplace retirement plan.¹ And to use plan design features such as vesting and an employer match to keep the good workers you’ve attracted, and maintain that competitive edge.

Your workers will use it.

This may seem obvious, but among the more intriguing rationales offered by small businesses for not offering a workplace retirement plan was one put forth in a 2003 Small Employer Retirement Survey by the Employee Benefit Research Institute (EBRI) — that their employees are “not interested” in having a retirement plan. And I have actually had plan sponsors say to me “nobody has ever asked about a 401(k).” Well, I’ll grant you that workers are probably more concerned about their paycheck, and perhaps health care. And they may just be glad to have a paying job, and don’t want to rock the boat by pressing for benefits.

That said, the vast majority of workers who do not participate in a workplace retirement plan – 84% — reported they did not have access to a workplace retirement program. Of two key access factors — the employer must offer a program, and the worker must be eligible to participate — GAO found that the lack of access was primarily due to employers not offering a retirement program (68% reported they worked for an employer that did not offer a program, and another 16% reported they were not eligible for the program their employer offered. Indeed, the GAO report found that workers at the largest firms were only slightly more likely to participate compared to workers at the smallest firms.

Your workers need it.

You may well employ a workforce that has alternative sources of retirement income — a legacy from that rich uncle everyone’s so fond of, or maybe they have a surefire lottery strategy. Or perhaps their pension or savings from a prior employer, combined with Social Security, will be “enough.”

But EBRI’s 2014 Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course — but it’s a big part of it.

You need it (too).

It’s not unusual for a small business owner to invest heavily in the enterprise, including sinking some of their own personal retirement savings into “the business.” Whether you have or not, and no matter how much you are now able to pursue your passion, you’ll want to provide for a retirement at some point that doesn’t necessarily require liquidating your business to fund it. That’s when the benefits that your employees appreciate can pay off for you as well, including:

• The availability of pre-tax contributions that can reduce your current taxable income.
• Deferral of taxes on pre-tax contributions and investment gains until you take a distribution.
• The flexibility of a Roth 401(k) (if offered).
• The “magic” of compounding returns over time.

Oh, and there are tax advantages. 

Despite all the compelling reasons outlined above, for some it still (rightly) comes down to the bottom line. And, in addition to the benefits of offering a plan, there are some tax advantages designed to encourage you to do so.

Any employer matching contributions will be tax-deductible, as will any costs incurred by the employer in connection with offering the plan. Better yet, you may be able to claim a tax credit for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan.
But don’t take my word for it — here’s what the IRS has to say.

Let’s face it, there are any number of reasons to put offering a workplace retirement plan — not enough time, worries about the expense, a sense that this is something better put off to a future time.

Then again, aren’t those the same reasons often put forth to justify not saving for retirement?

Nevin E. Adams, JD

1. A growing awareness of the coverage “gap” among smaller employers has led a number of states to consider a variety of initiatives that, generally speaking, include a requirement that employers above a certain size/business longevity threshold offer a payroll deduction IRA option to their employees. The Obama administration is lending its support to these efforts, with some additional regulatory clarity anticipated before the end of the year.

Above “Average”

Every so often an industry survey will come out with an “average” 401(k) balance(1). The specific numbers vary, but they are consistently less than even the most optimistic would see as sufficient to provide a financially viable retirement.

Now, in fairness, the validity of an “average,” while mathematically simple, depends heavily on its components. Most are no more than the total of all the balances of those in the 401(k), from those just entering the workforce (and thus, by definition, with negligible balances) – and with decades to go to retirement – to those who are perhaps just days away from that point. Looking at no more than the “average,” you can’t tell how many are in which category. So, while the average can, over time, provide a sense of the direction in which things are moving, it tells you very little about the adequacy of that savings to fund an individual retirement.

One way to help provide a more meaningful measure is to segment those balances by specific age demographics. In fact, EBRI has long provided not only an average 401(k) balance, but also totals for different groups. To give you a sense of the difference that can make, at year-end 2010, while the average 401(k) balance was $60,329, the average 401(k) balance for those in their 60s – at least for those with 20 years of tenure – was $159,654.

In fairness, $159,654 may not look like very much to have saved by someone in their 60s. But even then, there are many things we don’t know about that person’s individual circumstances. We don’t know if they have a defined benefit pension, for one thing, nor do we know if they have savings outside their workplace. Perhaps just as significantly, we don’t know if that average takes into account their accumulated savings in all defined contribution plans, including those savings that might have been rolled into individual retirement accounts (IRAs) along the way.

In testimony before the Senate Finance Committee last fall(2), EBRI Director of Research Jack VanDerhei noted that “[p]articipation in a retirement plan through current employment at a specific moment in time does not tell the full story of a worker’s preparedness for retirement or the availability of some form of retirement income from an employment-based retirement plan.” He went on to caution, “Unfortunately, the ‘success’ of these plans are sometimes measured by metrics that are not at all relevant to the potential for defined contribution plans to provide a significant portion of a worker’s pre‐retirement income. For example, some analysts will merely report the average balance in defined contribution plans (most commonly the 401(k) subset of this universe) and attempt to assess the value of these plans by determining the amount of annual income that this lump sum amount could be converted to at retirement age. Of course, this concept does not adjust for the fact that the vast majority of 401(k) participants are years, if not decades, away from retirement age. Moreover, even if one does look at the average balances for workers near retirement age, it is obviously not correct to look only at the 401(k) balance with the employee’s current employer. For example, an employee age 60 may have very recently changed jobs and rolled over a substantial account balance from his previous employer to an IRA.”

Sure enough, as I sit here today, I have three separate 401(k) accounts at three separate employers, a rollover IRA, and a SEP.

Anyone trying to glean a sense of my retirement prospects while looking only at my current 401(k) balance surely wouldn’t feel very optimistic.

But then, they’d only be looking at part of the picture.

- Nevin E. Adams, JD

(1) Including EBRI – see “401(k) Plan Asset Allocation, Account Balances, and Loan Activity In 2010”

(2) A copy of the testimony is available here. See also “Tax Reform Options: Promoting Retirement Security”