Navigating the retirement maze to financial security
DuPont’s recent layoffs hit home in our family, as one of our sons lost his research position. He is young and educated so we are hopeful that, while DuPont’s door closed, another will soon open. Other DuPont alumni closer to retirement age will face a number of options and considerations.
Retirement Savings Plan
“¢ If you have sufficient savings outside of retirement accounts, consider maximizing contributions to the RSP, a 401(k) type plan, from your remaining regular pay. Severance pay is not eligible for RSP contributions. The maximum deferral for participants ages 50 and older is $24,000.
“¢ Consider contributing some after-tax dollars to the plan in addition to, or in combination with, the pre-tax dollars subject to the $24,000 limit.
“¢ Once final employee and employer contributions have been made to the plan, you will have the option of keeping your funds in the plan, taking taxable distributions, or transferring them to an IRA. Moving assets out of an employer-sponsored plan creates opportunities and some risks.
“¢ Net Unrealized Appreciation (NUA) tax rules cover distributions of employer stock held in the plan. The cost of the stock when purchased by the plan is taxed at ordinary rates, but any growth would be subject to lower long-term capital gain rates.
“¢ Making a direct rollover of the remaining plan assets to an IRA is an attractive option for a couple of reasons. First, you may have funds within the plan that are eligible to be rolled into a Roth IRA, one of the most tax-favored investment accounts, and secondly more investment options are available in the IRA space than an employer-sponsored savings plan. Caution is urged. The financial service industry aggressively targets the retirement plan rollover market. All too often their representatives are compensated by selling products that may be suitable, but not necessarily in your best interest.
Pensions and Social Security
When to begin pension and Social Security requires careful planning. The extent of other financial resources, cash flow needs, taxation, the needs of dependents, and health status are just some of the considerations.
Pensions and Social Security provide sources of cash flow that are not dependent on financial markets. While it is true that the ability of private pensions is impacted by investment results, the employer’s promise to pay is backed by the Pension Guarantee Benefit Corp. There are limits to this guarantee and they vary by age. For example, the maximum pension guarantee for a 65-year-old electing joint and 50 percent survivor benefits is about $4,500 a month.
These promises of benefits for life provide a form of longevity insurance. Unless there is a realistic assumption that one’s life expectancy will be less than average, a plan to defer and receive higher benefits can make sense. Recent legislation also impacted certain Social Security benefit claiming strategies, with a deadline of April 29, 2016, for those still eligible.
The concept of gradually reducing a portfolio’s exposure to riskier assets, like stocks, during retirement is a common strategy and makes intuitive sense. However, the combination of starting retirement with a heavy allocation to equities, the need to take cash withdrawals, and negative initial investment returns can severely impact financial security. The sequence of market returns is more important than your average return over time. Significant negative returns in the early retirement years can’t be offset with higher returns in the later stages of retirement.
Vincent Schiavi is a certified financial planner, certified public accountant and personal financial specialist. Worth Magazine selected Vincent several times as one of the top financial advisors in the country.