Retirement Planning

Sarah Ruef-Lindquist, JD, CTFA

By Sarah Ruef-Lindquist for Pen Bay Pilot

I’ve said it before, and I’ll say it again: The only things that are sure in this life are death and taxes…we need to be mindful of change, at least as it pertains to taxes.

Retirement Savings

A variety of plans can be used to save money on a tax-deferred basis. Those include 401(k)s, IRAs SEP and SIMPLE plans. The great thing about tax deferral is it allows accounts to not pay taxes on their dividends, income and capital gains for years and years, until funds are withdrawn, presumably in retirement. This tax deferral can allow for significantly higher levels of appreciation due to growth in market value without the negative impact of taxes on that growth.

It’s important to maximize saving for retirement and take advantage of the provision of the tax law that allow taxpayers to save funds in tax-deferred accounts…for 2025, the contribution limit for most plans (401(k), 403(b) and 457 plans) increases from $23,000 to $23,500 with another $7,500 for those age 50 – 59 or those older than 63. For those age 60, 61 or 62, the amount is now $11,250.   That means that certain taxpayers can add as much as $34,750 to their plans in 2025, the highest amount ever allowed.

Similarly, in 2025 SIMPLE plans will have new elective deferral limits:  $16,500 up from $16,000 and a catch-up amount of $3,500 for those 50 – 59, and $5,250 if there are 26 or more employees. For those with 25 or fewer employees, the catch-up amount is $3,850 for those age 50-59 or older than 63, and $5,250 for those 60, 61 or 62.

IRAs will continue to have a 2025 contribution limit of $7,000 with an unchanged catch-up amount of $1,000 for those age 50 and older.

There are other changes for SEPs in store for 2025. For those who participate in them, taxpayers should consult their accountants and financial advisors for more details.

Why maximize savings in these types of plans and accounts? Earnings in these plans are tax free until withdrawn, which for many is not required until age 73 or if born in 1960 or later, age 75.

Please remember that financial and tax situations differ widely from person to person, and there is no one-size-fits-all for most of these situations. Consult with your financial and tax advisors for how any of these or other provisions that are changing in 2024 may affect you.

Some people are savers, some are spenders, some live carefully within their means, and some live life to the fullest, even if that results in accumulated debt. You likely won’t remain solidly in one category throughout your life, as circumstances, income, and expenses change. So, even if you saved diligently during your youth, at some point, you may suddenly be faced with a combination of financial obligations that require decisions about what to prioritize. When juggling day-to-day expenses, debt (student, credit card, or other types), saving for retirement, and saving for your child’s college education, where should you focus? Here’s a guide to help you decide the priority order these obligations should take, and why.

Establishing Priorities

1. Emergency fund. Before shifting your focus to long-term savings or debt repayment, your priority should be building an emergency fund to provide a safety net. These funds should be available to cover unexpected financial difficulties like job loss, car or home repairs, or medical emergencies. Do your best to save at least three to six months’ worth of living expenses in an account that you can easily access whenever necessary. Building this buffer before you put money toward other obligations will keep you from deeper debt and additional financial trouble caused by an emergency.

Helpful tip: Set up automated transfers to your emergency savings account, treating it like a monthly bill. This way, the funds will grow consistently, and you’ll be able to build a safety net without constant effort.

2. High-interest debt. Since credit card debt and personal loans often come with high interest rates, paying those off should be your next priority. This will help free up money for other financial goals and eliminate the interest payments that are costing you more money than you actually owe. You can also call credit card companies and ask if they can lower your interest rate. They might not agree, but it’s worth trying.

Helpful tip: Choose a debt repayment strategy that works best for you. Consider the snowball method (paying off debts from smallest to largest) or the avalanche method (paying off debts with the highest interest rates first). Then, stick to the plan until all your high-interest debts are cleared.

3. Retirement savings. Your retirement may seem too far in the future for you to think about now, but this should come next on your list of financial priorities. Why should it come ahead of saving for your child’s college tuition, which is likely to be a huge expense? Because, unlike retirement, there are various options for funding a college education, including scholarships, grants, and student loans. There are far fewer options for funding your living expenses after retirement. Also, since more Americans are living longer, maintaining your standard of living will require more money. You don’t want to outlive your financial resources.

Helpful tip: Take advantage of individual retirement accounts (IRAs) or employer-sponsored retirement plans like 401(k)s. Try to contribute at least enough to receive any company matching contributions because that’s essentially free money for you. Thanks to compound interest, even a small contribution now can result in significant savings as it grows over time.

4. Children’s college education. The reason this financial obligation falls last on the list of priorities is certainly not because it’s less important. College costs are high, and it makes sense to start saving early. But, if you must sacrifice this goal to focus on others, you can fund your child’s education in other ways. Scholarships, grants, and part-time student employment opportunities may be available for supplementing education expenses if you haven’t saved enough to cover costs.

Helpful tip: Explore the option of a 529 savings plan or education savings account (ESA). These accounts offer tax benefits and can help you save money to use specifically toward educational expenses. If you can manage to automate contributions, you’ll maintain consistency and enable your fund to build steadily over time.

This priority order can serve as a good guide, but changing financial goals, income, or other circumstances might cause you to reassess and refocus from time to time. The key is to find a balance between the financial obligations you have now and making sure your financial future is secure, too. As always, your financial advisor can help you determine the best strategy to maintain stability, maximize your benefits, and minimize your costs and penalties based on your individual situation and goals.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.

© 2024 Commonwealth Financial Network^®

Sarah Ruef-Lindquist, JD, CTFA

By Sarah Ruef-Lindquist for Pen Bay Pilot
A recent program presented by The Hartford entitled Helping Clients through 8,000 days of Retirement suggested an interesting approach to thinking about one’s retirement years, and the careful planning for it that should take place.  For many, the primary preoccupation is whether they will have enough financial resources; every day I hear people express the concern that they not “outlive their money”,  an understandable concern.

The presentation was based on work done at the MIT Age Lab, which works with financial services companies to help inform the work of retirement planning, in addition researching and finding ways to address other areas related to the physical, mental and emotional aspects of aging.

The presentation included a review of the first 8,000 days of one’s life, focused on education; the second 8,000 days focused on growing as a person; the third 8,000 days focused on maturing and the final 8,000 days focused on exploring, which coincides with what for many as retirement years. 8,000 days is about 22 years, so retirement comes in this model around age 66.

Initial retirement years tend to be dominated by several factors that change over time; relatively good health and increased unscheduled time.

Often there are psychological issues that come from having more free time, so thinking ahead about how one plans to spend time is important; for many, travel and spending more time with family and on hobbies is part of the plan. For some, this involves moving to another part of the country to be closer to the ocean, or the mountains, or to children or grandchildren. These choices involve financial considerations as well, of course, but also can lead to a different lifestyle than the one to which one may have been accustomed before retirement and therefore require adjustment.

Health issues play a role more and more as the years progress, so thinking about how one will adapt to these changes and possible challenges is appropriate, too.

The recent pandemic taught us that social isolation can be detrimental to one’s health. Planning for maintaining a healthy or even robust social life is important.

For the presentation, planning for later years of retirement, these issues boiled down to three questions:  How will you change a light bulb? How will you get an ice cream cone? With whom will you have lunch?

Each one is remarkably insightful. Maintaining a household is more than just being able to afford it the way you live in it now. When you can’t get on a ladder to change a lightbulb or clear a gutter, do you have access to (and perhaps can pay for) someone else to do it? This kind of question can lead to decisions about downsizing or moving to places where that kind of maintenance is provided.

The question about ice cream cones related to mobility; when you are not able to drive, how will you get an ice cream cone? If you remain ambulatory, how far would it be to walk? Driving ability plays a very large role in many retiree’s quality of life and choices.

Lastly, with whom will you have lunch? This points to the issue of social connections.  For many, initial retirement means having lunch with a spouse or life partner instead of having lunch with coworkers, clients or at one’s desk. People can also have a social network through work that they lose touch with in retirement. This may suggest to us that we need to build a new social network, or work on another one we already have to help us maintain social connections. However, given the longevity difference between men and women, there are many women who outlive male spouses or partners and have to learn to build a social network that they might not have had while their spouse or partner was still living. Of course, the same can be true for men. Building and constantly nurturing a social network can help to provide the kind of social connections that are beneficial to us as we age no matter what gender.

So yes, not outliving your financial resources is very important, but so are other aspects of our lives in retirement that require thoughtful, careful and intentional planning. A conversation with your financial advisor could be helpful to access some of the resources in your community to help you plan what could be the best 8,000 days of your life.

As you advance in your career and hold jobs at various companies, you may discover at some point that you’ve left behind valuable cookie crumbs: a trail of employer-sponsored retirement accounts. Leaving previous plans with former employers saves you from having to take any action, and you still have the ability to roll them over later. If you prefer the investment choices with your old plan or that plan has lower fees than a new 401(k) or IRA, you might want this option. Also consider that you won’t pay a tax penalty for taking a distribution from your employer’s 401(k) after you turn 55, which you would pay on an early withdrawal from an IRA.

So, while there can be benefits and it may feel easier to leave them as they are, managing and keeping track of those cookie crumbs could become burdensome. Consolidating or rolling them over into one account is one way to alleviate that burden. Here is helpful information to help you decide whether a rollover is the best choice for you.

Benefits of a Rollover

Simplicity and streamlining. One major benefit of consolidating your retirement accounts into one account is that there’s less information to track. You’ll receive one statement, have only one retirement account to manage (with one password and one account number), and be able to see your overall financial picture more clearly by reducing multiple savings sources to one.

Avoiding overlap and easier rebalancing. When you have multiple retirement savings accounts, you might assume your investments are sufficiently diversified, but this may not be true. Over time, as portfolios shift due to market movement, rolling all of your accounts into one allows you to properly analyze asset allocation in one place instead of many.

Keeping track of RMDs. Starting at age 73, you must withdraw minimum amounts, called required minimum distributions (RMDs), from your retirement accounts each year. With multiple retirement accounts, it’s more difficult to calculate accurate RMD amounts and there are steep tax penalties for underestimating RMDs and missing the deadline. Combining accounts can help reduce these risks.

Potentially fewer fees. 401(k) plans incur various fees, including administrative, management, investment, and service charges. By combining accounts, you may pay fewer fees. In addition, you may be able to avoid certain fees altogether if fee reductions are dependent on the total account balance.

Estate-planning convenience. Thinking about your death isn’t pleasant, but it’s important to consider the responsibilities your loved ones and beneficiaries will have when you’re gone. With all of your retirement funds in one place, there will be less work for your family to do when tracking down your assets.

Your Rollover Options

Roll into your new employer’s 401(k) plan. If you have a new job and establish a retirement plan with your new employer, one option is to roll your previous account balance into your new plan. Requesting a direct rollover of funds from previous employer to new employer is a nontaxable transaction that retains creditor protection.

Roll into an IRA. Whether you’re switching jobs or retiring, rolling your retirement savings into an IRA might give you more flexibility in how you manage the money you’ve saved. IRAs often have a wider range of investment options that might not be offered by an employer’s 401(k) plan. In this type of account, your investments continue to grow tax deferred, meaning you’ll pay taxes upon withdrawal. Please note: You can’t borrow from an IRA as you can with a 401(k), and RMDs are still required at age 73.

Roth IRA. Withdrawing traditional, pretax assets from a 401(k) into a Roth IRA is known as a Roth conversion. By doing so, you will owe income taxes on the amount converted in the year of the transaction. One benefit of this strategy is that any additional earnings in the Roth IRA can grow and be withdrawn at retirement age tax free (as long as the withdrawal occurs at least five years after the Roth account was created).

Take a cash distribution. Although this option might seem appealing if you have debts or major expenses, there are many reasons not to withdraw your funds. One major drawback is potentially not having enough money to retire or maintain your lifestyle in retirement. In addition, you could pay significant penalties and taxes for early withdrawal.

Rollover Tips to Keep in Mind

Whether you roll over to a 401(k) or an IRA, these are trustee-to-trustee transfers where the money moves directly from one provider to the next. If you receive a check in your name, you may have inadvertently requested a withdrawal, which would result in owing income tax on the amount and additional penalties if you have not yet reached retirement age. If this occurs, contact the recordkeeper immediately to discuss a correction.

When considering a Roth, note that your 401(k) could have Roth or after-tax dollars already within it, and these assets will transfer to a Roth IRA without additional taxes. Contact the recordkeeper to determine if the dollars in your 401(k) are on a pretax or post-tax basis—or a mix of both.

If you are considering rolling over money from an employer-sponsored plan, you often have the following options: leave the money in the current employer-sponsored plan, move it into a new employer-sponsored plan, rollover to an IRA or cash out the account value. Leaving money in plan may provide special benefits including access to lower-cost investment options; educational services; potential for penalty-free withdrawals; protection from creditors and legal judgments; and the ability to postpone required minimum distributions. If your plan account holds appreciated employer stock, there may be negative tax implications of transferring the stock to an IRA. Whether to rollover your plan account should be discussed with your financial advisor and your tax professional.

© 2023 Commonwealth Financial Network®

You’ve planned, saved, and waited for retirement for years. When the time to stop working finally arrives, what will you do? You may be surprised to learn that many people go back to work.

People make this choice for a few different reasons. Some need the money, others crave social interaction, and some miss working for a goal or cause about which they’re passionate. Whether your motivation falls into one of these categories or a different one, following are questions to ask yourself before deciding to start working again after you retire.

Do You Need the Money?
Many Americans lack the necessary savings to maintain the same lifestyle in retirement that they had when employed. Others underestimate how long they’ll live after retirement and don’t have enough saved to last the rest of their lives. One obvious benefit of going back to work is earned income.

Given the current inflation rate and rising interest rates, it makes sense that many retirees return to work because they need money. But adding income doesn’t just affect your bank account and spending capacity. It also has ramifications on your social security payments, health benefits, and pension.

Social security. If you’ve reached full retirement age (66 or 67, depending on when you were born), additional income from a job won’t reduce your social security benefits. If you’ve opted to start collecting social security before your full retirement age, however, there is a limit on how much you can earn without having your benefits reduced. The limit in 2023 is $21,240. If you earn more than that at your job, you will have $1 withheld from benefits for every $2 over the limit. Thankfully, once you reach full retirement age, that money will come back to you in the form of a higher check each month.

Health benefits. Once you turn 65, you qualify for Medicare. But earning additional income could push you to a higher tax bracket and, therefore, increase your Medicare premiums. If you’re able to get medical coverage through your job, that might provide a more affordable option. You can then reenroll in Medicare later, though that comes with rules and deadlines you’ll need to be aware of. The bottom line: Do your research on how working after retirement will affect your health benefits. Speak to a Medicare representative and/or benefits advisor at your company.

Pension. If you work for someone other than your original employer, your pension benefit won’t be affected—you can work, receive a salary from your new employer, and also receive your pension benefit from your original employer. If, however, you continue to work past your retirement date for the same employer or you retire and then return to work for that employer, your pension may be affected in various ways.

Different plans have different stipulations regarding working and receiving your pension, so it’s best to ask your company’s plan administrator what your plan says. It’s possible you can still receive your pension even if you continue to work. Other plans might suspend your pension while you work but will increase your payment when benefits resume to make up for the suspension. There are some plans in which you’d forfeit the pension benefits during the time you’re working. Find out what the rules are for your company’s plan so you don’t unexpectedly lose benefits.

Do You Miss Your Coworkers?
Even if you don’t need the extra income, you might miss the social interactions that come with a job. Or you might crave the mental stimulation from solving problems and working toward set goals. If your career was a passion, you might have a strong desire to continue working in that field after retirement. In these cases, you should still consider the financial effects of returning to work, but there are also nonmonetary factors to think about.

Work-life balance. If money isn’t an issue, consider a part-time or flexible-schedule job. Freelancing or consulting will give you control over your time and allow you to maintain a healthy work-life balance. Tap into a hobby or passion to find a job you will enjoy. These types of roles can provide a purpose, activity, and goals—and likely won’t feel as demanding as full-time work.

Health and well-being. The mental and physical toll of working is worth considering, too. If you’ve taken a break from your career due to retirement and you miss it, you might be forgetting stress or physical demands that came with the job. Be sure to assess the psychological and physical impacts of returning to work to ensure that your overall well-being isn’t compromised.

Deciding to work after retirement is a personal choice that should be based on individual circumstances and preferences. It offers the opportunity for financial security, mental stimulation, and passion pursuit; however, it also carries the risks of reduced leisure time, potential health challenges, and impacts on retirement benefits. It’s important to carefully weigh the pros and cons to make an informed decision that aligns with the retirement lifestyle you seek.As always, we’re available to advise you on retirement planning and the best course of action based on your personal goals and financial situation. Feel free to reach out to our office to discuss the option of working after retirement.

© 2023 Commonwealth Financial Network®

By Sarah Ruef-Lindquist
For Pen Bay Pilot Wave 

Sarah Ruef-Lindquist, JD, CTFA

Many of us spend between 35 and 45 years working, earning and saving for retirement. People retire and shift into a spending mode but they often want to be sure they will have what they need, and won’t outlive their money. Every day people thinking about their retirement ask me “How much do I need to have set aside to retire?”

Well, that depends. As financial advisors, we look at known data and estimate some other amounts as best we can.

First, we look at the sources of projected “guaranteed” income like pensions or social security, and consider especially the timing of beginning one’s draw on social security. Beyond your Full Retirement Age (“FRA” which depends upon the year you were born) you can add 8% to the value of your benefit by waiting a year, up until age 70, which is the current mandatory age to begin withdrawing from social security.

Once we have a good estimate of “guaranteed” sources of income, we look at savings: We look at “qualified” accounts, like 401(k)’s, 403(b)’s and IRA’s.  We look at ROTH accounts, that can be withdrawn tax-free. We look at non-qualified savings and investment accounts. We can use a ball park figure of 4% or maybe 5% (depending on how much someone wants to leave in their legacy at death) and calculate that percentage of both qualified and non-qualified savings that one could spend in a given year, and add that to the “guaranteed” amount we already estimated.

Then we look at expenses: usually the big unknown is health care. We examine lifestyle, whether there will be lower expenses upon leaving the workforce, or downsizing a home or moving, and what the resulting cost of living will be. Also, any plans to remain even part-time in the workforce. And we estimate whether there is excess income, or a gap to cover planned costs of living. This can help us determine if our current savings plan is “on track” or perhaps needs to be increased. Inflation is also a factor to be considered, now more than it has in recent years.

It makes sense to begin this kind of planning 10 years and certainly at least 5 years before any planned retirement date.  It also makes sense before making any significant elections, like social security withdrawals, that may be permanent. Get in touch with your Financial Advisor, and begin this very important conversation if you are planning your retirement.

Sarah Ruef-Lindquist, JD, CTFA

By Sarah Ruef-Lindquist
For Pen Bay Pilot 

There are not two, but three certain things in life: Death, taxes and change. This third element was brought home to us recently in the legislation that yet again would change the landscape for retirement planning, saving and spending in potentially radical ways.

A few years ago, the SECURE act increased the age at which one was required to draw out tax-deferred retirement savings from age 70 ½ to 72, causing a great deal of confusion initially, but simplifying the matter overall, since people have a hard time with half-year calculations. This allowed folks to wait a little longer before drawing out a required minimum distribution (RMD) and perhaps more significantly, paying income taxes on the withdrawal. It also allowed a bit more time for funds to grow tax free.

The IRS penalty for failure to make such withdrawal has been 50% of the RMD amount not withdrawn, a big incentive for making full timely withdrawals.

Now we are faced with the RMD age increasing again in 2023 to 73 (known as the RBD, or Required Beginning Date), and yet again in 2033 to age 75. Here’s how this would work for 2023: If you were born after December 31, 1950 (in other words, not yet 72 by 12/31/2022) then your RMD age is 73. So if you turn 72 in 2023, your RMD does not start until 2024.

Here’s an example of that. John’s birthdate is January 5, 1951. Under the “old” provision, he would have to begin his RMD in 2023, because he turns 72 on January 5, 2023. However, under SECURE 2.0 having not reached the age of 72 by 12/31/22, his RMD age would be 73. Technically, he does not have to take a distribution in 2024 when he turns 73 but could delay until April 1, 2025. However, since he would have another RMD amount in 2025, taking the 2024 amount in the same year as 2025 could result in higher tax rates applying, so he might be smart to go ahead and start in 2024 with his first minimum distribution.

So RMD age is now 73, and your first distribution is not due until April 1 of the year following your 73^rd birthday, but it’s often better to take it in the calendar year of your RBD so you don’t have to take multiple distributions in the same tax year.

Also under SECURE 2.0 when we get to 2032, less than 10 years from now, RMD age will increase to 75 if you haven’t turned 74 by the end of 2032. So, in 2033, the age for RMD’s is 75.

Delaying the Required Beginning Date (RBD) for RMD’s – increasing the age to 73, and then 75 – offers retirement savers the opportunity to continue to allow their tax-deferred savings to grow free of tax until RMD’s begin and income taxes are paid on those withdrawals.

The original SECURE Act also eliminated the age limitation on making contributions to IRA’s in recognition of people working later and later in life, just as the increase in the RMD age recognizes a tendency for people to continue to earn income beyond more a traditional retirement age of 65 and have less reliance on retirement income until much later in life.

So we could say we are starting 2023 with positive news on the retirement savings and planning front. There’s much more to the legislation knowns as SECURE 2.0 but we’ll save that for another time.

By Sarah Ruef-Lindquist
For Pen Bay Pilot 

In late October, the IRS announced new limits increasing the amount that taxpayers may contribute to their retirement plans each year beginning in 2023: the amount individuals will be able to contribute to their 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan in 2023 increased to $22,500, up from $20,500 for 2022.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,500, up from $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,000, starting in 2023.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500 from $14,000. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans is increased to $3,500, up from $3,000. This translates into a contribution limit for those aged 50 and older of $19,000.

Similarly, the $6,000 contribution limit for IRAs is increasing to $6,500. The catch-up amount remains the same at $1,000.

These increased amounts expand the ability of workers to put into their tax-deferred qualified plans and IRAs amounts that are able to grow and earn income tax-free, until withdrawn, when income tax is usually due, unless the account is a ROTH, in which case it is not taxed upon withdrawal.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), Roth IRAs, and to claim the Saver’s Credit all increased for 2023. FMI, visit https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500 and consult with your financial and tax advisors to the impact of all of these provisions and changes on your unique financial plans.