Retirement Planning Blog

One of the greatest advantages of 401(k) account is that it allows you to specify how your retirement stash would be invested. And by knowing those, you can use your funds to get optimum results. According to a recent survey by Watson Wyatt, around 69% 401(k) plans offer 10 to 19 investment options, which you can opt for. On the other hand, 11% 401(k) accounts offer 25 or more options. So, before choosing your 401(k) accounts, learn about various investment options that are available with 401(k) accounts and then pick your chosen ones.

So, you might be getting interested to know why the investment options are important for you, isn’t it? To tell you in short, there are plenty of reasons. 401(k) fees may differ at a large extent depending upon the investments chosen. It has been found that the average expense ratio of most of the 401(k) plans lies between 0.5% and 0.84%.  Only 33% of the 401(k) plans have an average expense less than 0.5%. Only 10% plans charge more than 0.85% fees.

Moreover, there are also ‘recordkeeping fees’ that are levied to the retirement savers, which most of them pay by subtracting it from their investment revenue. Some 401(k) accounts are also charged a ‘direct fee’.

It has been observed that most of the employees fail to register to 401(k) of employers and hence miss the opportunity to actively participate in the investment choice process. And this is the reason why many organizations are currently enrolling their employees in retirement accounts automatically, unless they specifically choose to stay away from it.

The most accommodating part of your 401(k) is perhaps the contribution by your employer. However, it has been observed that many organizations have stopped their matching contributions.

Finally, when you reach at the retirement age, you will largely be able to decide how and where to invest. If you know about all the available options in detail, it becomes quite easy to take right decision. Happy investing!

It seems that the good times of the Target date funds are still on. Like its previous quarter, target date funds have again given stellar results in the third quarter. Of the 319 funds, the average target maturity fund gave a return of 14.3 percent during the quarter, comparing to a 15.6 percent growth for S&P Index. Target date funds play a major role in the planned retirement ages of the investors. In the course of time, these funds automatically regulate their mix of stocks, bonds and other holdings and create the risk profile for the investors that suits their changing age. And this is exactly the reason why the target date funds have become hugely popular as default option in the 401(k) plans of a number of employers.

In the second quarter, the target date funds saw a growth of 15.5 percent, comparing to 15.9 percent gain for S&P 500. However, due to an extensive meltdown of equity prices, the funds saw continuous declines in the past six quarters. As these funds have been designed for the retirement accounts, hence a number of critics became vociferous against the funds and opined that the funds should have been more cautiously managed.

The funds have about 12 existing maturity target years, which have been created in five-year increments for the investors turning 65 in a particular target year. The oldest as well as the most conservatively invested is the 2000 group of funds. On the other hand, the 2055 group of funds is for those who are going to start their career. It can be mentioned here that the 2055 group of funds gave a return of 17.5 percent, comparing to 9.8 percent by the 2000 group.

Finally coming to the funds for the younger investor, which invest greatly in stocks and other asset classes that give higher returns. These holdings have a good track record and have consistently outperformed other investments. However, they carry higher risk as well. During the third quarter, the best performer was the real estate holdings of target maturity funds with a return of 33.3 percent, followed by U.S. small-company value stocks with a return of 22.7 percent and emerging market stocks with a return of 21 percent. On the other hand, by contact, the U.S. short-term bonds gave a return of only 1.4 percent. The Treasury Inflation Protected Securities gave a return of 3.1 percent, while the U.S. longer-tern bonds gave a return of 3.7 percent.

The last year has seen the largest increase in Social Security checks in the past 25 years with a rate of 5.8 percent. At the same time, as per the present law, the enrollees are also not going to get any cost-of-living adjustment in the next three years. In fact, the increment in Social Security is linked to the Consumer Price Index for the urban workers. It can be recalled here that the Consumer Price Index has decreased last year due to the plunging prices.

It’s the new retirees born in 1947and signed for the Social Security this year, rather than the current beneficiaries, who are going to get affected by the impact of the lack of Social Security boost. These people didn’t reap any benefit from the increase of Social Security last year. Moreover, there is every possibility that their purchasing power may erode by inflation before the cost-of-living increases once again in 2012. Andrew Biggs, a former deputy commissioner of the Social Security Administration and a resident scholar at the American Enterprise Institute has done an analysis to find out the possible impact of it on the retirees. According to the analysis, the new retirees may face a permanent benefit reduction of about 5 percent, while the benefits of the current retirees will remain the same.

Owing to the inflation hitch in 2008, newly retired couples are going to get a monthly Social Security check of $2,235. According to the calculations of Biggs, they will lose almost $1,340 per year. The calculation also says that, if the couple survives until the age of 83, they would lose around $25,000 in their lifetime.

It is not possible to evade this financial loss by delaying your retirement either, unless the cost-of-living gets adjusted, which is again projected to resume in 2012.

Recently a bill was passed by the house, which would prevent the Medicare Part B premiums to get increased from this year. The legislation with 45 cosponsors passed the bill by a vote of 406 to 18 and provided a much needed relief to the seniors.

Though, there is already a law, which bars the Medicare Part B premium to get increased more than the annual increment in Social Security payment. About 75 percent of the seniors are already reaping the benefits of this and are protected from Medicare Part B premium increment. It can be stated here that the Social Security payments are hiked with the Consumer Price Index, which is not expected to go up in 2010. However, according to the Medicare Trustees, it is quite possible to increase the premiums of Medicare Part B for about 25 percent of the Medicare recipients, without the congressional action, from a monthly $96.40 this year to $104.20 in 2010 and again $120.20 in 2011.

This boost in payments is more than the usual rate, as the costs are dispersed over a small part of the recipients. According to the bill, the new Medicare enrollees as well as those existing high income recipients who have a modified adjusted gross income of over $85,000 ($170,000 for couples), need to pay higher premiums this year. The state and federally funded Medicaid will have to take in the major part of the Part B premiums for the low-income seniors, who are entitled to both the government programs.

The recent analysis report by Kaiser Family Foundation, Georgetown University, and the University of Chicago researchers are to believe, the average monthly premium of Medicare Part D is going to increase by 11 percent for those who are planning to stick to their current plan. Moreover, a number of plans will have deductibles in 2010. So, this is the right time to review your prescription drug plan, compare those with others available and take a decision whether you should stick to your current plan or should change to others.

Medicare’s annual open enrollment period is going to be quite useful for the beneficiaries. It will be a wonderful opportunity to shop around, go through the various prescription drug plans available, compare those and choose the right plan for you. As the features of the plans may change every year so as their premiums, a plan suitable for you last year may not suit that much in this year. So, you have got the opportunity to explore and choosing the plan that would suit you best in this year.

Now the question is, what to consider while choosing the right Medicare Part D prescription drug plan. There could be a lot to consider before you choose one. However, there are a few certain things that play major roles and you need to think upon those.

One of the most important factors that you need to consider is surely the premiums. A good number (about 1.2 millions) of the beneficiaries enrolled in Medicare Part D prescription drug plans will have to pay an increased premium of at least $10 per month unless they opt for a less expensive plan. This will also reduce the monthly Social Security checks for the beneficiaries whose premiums are deducted from their social Security payments, as there is not projected increment of Social Security cost-of-living in 2010.

Another important factor is the deduction. In the coming year, about 61% plans are going to have new deductions. It may happen that though the premiums remain the same, but for the new deductions, the beneficiaries may have to pay more.

And don’t miss to look out for the coverage gaps. These are the doughnut holes in your Medicare Part D plans, where you must pay full amount of your drug costs. Coverage gaps start when beneficiaries incur a total drug spending of $2,830 in 2010. In that case, seniors must have to pay the total amount until the total amount reach $6,440. According to the Kaiser Family Foundation, around 80% of the plans won’t have any coverage gaps.

So, analyze all the available plans and choose the plan that suits you the best. There is a tool provided by the Centers for Medicare and Medicaid Services, which you can use to compare the available plans.

2010 has arrived and you will have higher Medicare Part D deductible and coverage gaps as never before. There are also a few more changes in healthcare that will come into effect from this year. Now once a year, seniors can shop around for new prescription drug coverage. They can move in to a lower cost plan as well. From this  year onwards, each state will have the opportunity to choose from 39 or more prescription drug plans, each having different price tags and coverage options.

It will be for the first time since the launch of the benefit that most of the stand alone drug plans are going to have deductibles. People do focus mostly on the premiums, and the other factors sometimes go unnoticed or attract very little attention. But the current changes in Medicare Part D plans will certainly have effect on the yearly spending for the seniors on prescriptions. According to the results of the research at the Kaiser Family Foundation, Georgetown University and the University of Chicago, from 2010, nearly 61% of the drug plans are going to charge a deductible, comparing to 45% this year (2009). There will also have a coverage gap in almost 80% of the Part D plans, comparing to 75% this year.

So, as a number of changes are coming into effect this year, it is the high time you scrutinize your plan and if needed you may also shift to another. There are some tools available like Centers for Medicare and Medicaid Services tool, which will help you to compare estimated out-of-pocket costs under various Part D plans. So, go through the plans, scrutinize those and choose the right plan that suits you the best. If needed, don’t hesitate to switch over to another plan.

Savings is what we all wish to make in order to build a better future. And when we think about savings, we need to work on our investment plans. Proper investment is what that can give us better returns, this in turn, can make our future better. As per the standard financial-planning advice, people should reserve their three to six months of spending needs in liquid assets, so that they can use those in case of any emergency. Otherwise, they may have to sell their investments at an inconvenient time, which may lead them to incur big financial loss.

It has been found that, most of the people don’t have extra money to pay out when an emergency arises. Leave aside the emergency, even in normal times, it also becomes very tough to fund the spending of next three to six months. It is extremely important to set aside some funds for the future days; it will lead to a happy retirement. The fund will also be able to fulfill your old-age health needs. Let’s explore the paths that make that will lead to better retirement.

Every successful effort starts with better planning. If you want to make your retirement better, you need to start with proper planning. Analyze your earnings, savings and the investment options that you have. According to that, you should set aside some money and invest those in proper places. Your lifestyle should also justify your earnings. It has been seen in many times that people often spend more that what they earn. They often use credit cards or borrow money against the rising equity to make up the extra amount, which lead to lower savings. So, planning is important, but more important is executing the plans.

So, how can you save some money? The good way to do it is by making a household budget. Though a tough job to do, making household budget and executing that successfully can result in good amount of savings. Always try to keep a tab on your spending. If you are a tech-savvy, you can use various spreadsheet programs or other available software to develop a spending profile.

Once you come to know about your spending habit, you can chalk out a plan and find out the possible areas where you can cut down your expenses. These areas may vary in each month. It can be groceries in one month, whereas in the next month, it can be utilities or your car expenses etc.

Loosing your mortgage will surely make you financially more stable. It becomes quite hard to build a successful retirement if we are to make continuous payments for mortgage. If you have any home mortgage, you should try to accelerate the payments and get rid of it.

Finally, it can easily be said that, one can lead a good life only if he/she is healthy. Believe it or not, diet and exercise are wonderful investments for a better retirement. There is no substitute of better health in life. For retirees, health care expenses are one of the biggest unidentified expenses that may come as a big blow in your retirement days. With ever-growing health care cost, it becomes the cheapest way to save those expenses if you take care of your body. Eat healthy, live healthy.

As a medical beneficiary, you may not love to hear the term ‘higher Medicare premium’. For some relief, most of you won’t have to pay higher premiums for Medicare Part B next year, but there are certainly a few ‘not-so-lucky’ groups who may have to face higher Medicare premiums in the coming days. As per the present law, premiums of Part B can’t go up faster than the rate of increment of Social Security annual cost-of-living. And according to the predictions of the Congressional Budget Office, the cost-of-living for Social Security recipients is most unlikely to go up in 2010 and 2011. But it doesn’t ensure rise in health insurance costs for all the Medicare recipients. According to a latest report, about 75% of the Medicare recipients won’t get affected by the premium increase, but the rest 25% will have to pay higher premiums.

Medicaid recipients are those who may have to pay higher premiums in the coming days. The states and the federal government funded Medicaid pays Medicare Part B premiums for those low-income groups who qualify for both the government programs. It will soak up the larger premiums for the 17% of Medicare beneficiaries qualified for Medicaid. It is the state, not the individual that pays the higher cost of Part B premium.

High-income retirees are another group that may face higher premiums in future. Seniors who have a modified adjusted gross income of $85,000 or above (for individuals) and $170,000 (for couples) in the year 2009, are already paying higher premiums.

New enrollees could be the other group which will face higher premiums soon. Those retirees, who are going to sign up for Social Security or Medicare Part B, will have to pay higher premiums in the near future. According to the Medicare Trustees, though the recipients of Medicare Part B are currently paying $96.40 per month, and are expected to pay the same amount next year as well, but the amount will increase to $104.20 per month for a quarter of retirees in 2010. In 2011, the cost would be $120.20 per month.

There are plenty of options available for the beneficiaries to choose the right Medicare Part D prescription drug plan for them. Most of the U.S. states offer its enrollees to choose from more than 40 Medicare Part D prescription drug plans. In some counties, the number may reach up to 70. Seniors have the option and the opportunity to go through all the available plans, analyze those and choose the ones that suit them the best. But according to a new study, it has been found that most Medicare Part D beneficiaries don’t choose the lowest cost drug plan.

According to a research by the Kaiser Family Foundation and the Massachusetts Institute of Technology economist, Jonathan Gruber, only 6% of the seniors opted for the best priced option in the year 2006. By not choosing the lowest cost plan, the beneficiaries had to lose on an average of $520 on their monthly premiums and out-of-pocket expenses if there were any. The report also says that only 10% of them chose one of the 5% of the best priced plans. It could have also saved $400 per month for the beneficiaries. Around 53% of the enrollees chose one of the 25% of plans with the lowest costs.

So, the question arises, why seniors do not often go for the lowest cost plan? According to Gruber, there are several factors that play a major role in influencing the decisions of the seniors to enroll in higher priced plans. Good reputation, strong brand name, recommendations, fewer utilization restrictions and convenient in-network pharmacy etc. may lead them to go for the higher priced plans.

So, next time when you go to choose your Medicare Part D plan, you can analyze and compare various plans available. There is a tool offered by the Centers for Medicare and Medicaid Services, which you can use to compare various plans. You need to enter the drugs that you may require to take in the coming year and the tool would compare the estimated out-of-pocket costs under different plans. And if you find any different plan that would suit you better than your current plan, you can surely shift to that one. For this, you need to attend annual open enrollment period of Medicare which is scheduled to be held between November 15 and December 31.

Though many Americans can be found withdrawing their 401(k) prematurely while still working, it is too dangerous a practice to follow. In fact, it can have terrible effect on retirements. The fees and penalties that you need to pay for early distributions will cut into your retirement account balance. There are several ways your money can leak out of your 401(k). So, learn it well and save your money.

One of the greatest threats of leaking out of cash from your 401(k) is the ‘Cashouts’. Employees are given an option to cash out their 401(k). It was observed that, while changing their jobs, American employees drew almost $74 billion from their retirement accounts. But the danger lies in the fact that, employers hold back 20% of the account balance while paying the amount to the employees in order to pay for federal and state income taxes. Employers also have to pay an early withdrawal penalty of 10%. Moreover, who opt for cashing out entire amount of the account balance, have to experience more damage. It calls for larger reduction.

Emergency or sudden withdrawal is another way your money can leak out of 401(k). In some 401(k) plans, employees can withdraw a part of their retirement stash if they need to pay any emergency bill like health care, educational expenses, purchase and repair of residence etc. The limit of the withdrawal amount depends on the contributions of the employee to the retirement account, excluding the income earned on the savings. This sudden withdrawal will have significant impact on the savings at retirement. According to GAO, young and low-income retirement savers are the most affected by this.

Finally loans are what that may cost you a lot. Employees can take a loan up to 50% of the 401(k) account balance or $50,000, whichever is less, which they have to pay back with interest. If you can’t repay the loan amount, the outstanding balance will be treated as a taxable distribution of income. Moreover, if you are under 59½ years of age, you may need to pay an early withdrawal penalty of 10% of the loan balance.