Adirondack Trust Co
BY SUSAN E. CAMPBELL
A retirement plan is one of the few tax advantaged
savings options available to just
about anybody. Still, too few take advantage
of a plan’s unique benefits, say retirement
planning professionals.
“The population as a whole has not saved
enough at this point,” said Glen Larkin, an
investment officer and financial planner for
Adirondack Trust Co.’s Trust Department.
Even for those fortunate enough to have
company retirement plan distributions and
personal savings and investments, in addition
to social security payouts when they retire,
Larkin said the impact of taxes and inflation
must be taken into account when determining
whether the projected income will cover expenses
during what could be a 25- to 30-year
retirement, or longer.
But don’t retirees usually need less money
in their retired years than they did in their
working years?
That is the conventional wisdom, which
may not be holding true anymore. Unpredictable
things come up in life, Larkin said. The
culprit is rising medical costs, not only in the
premiums paid for coverage, he said, but also
in the bottom-line price of treatments.
“The biggest unknown and fear today for
those planning for retirement is health care
spending,” said Ryan S. Bouchey, vice president
of Bouchey Financial Group.
“Many components of monthly spending
can be controlled but no one can predict
where health care expenses will go, ” Bouchey
said. “That is because they are inflating at a
much greater rate than the consumer price
index.”
As even the most generous companies
come under pressure to trim health coverage,
the threat of higher future medical spending
overshadows retirees as well as current
employees.
Trends like this demonstrate why retirement
planning is such an important and
integral part of financial planning, and why
successful retirees involve a professional to
determine future goals and objectives while
designing a plan to help meet their needs,
say the experts.
“Planning for retirement takes time and
understanding the needs and income sources
of the individual,” said
Jim Campone, senior
vice president of the
Wealth and Financial
Group of NBT Bank.
“Many people put more
effort into planning
their vacation than
their retirement.”
“Retirement planning
is not a one-size-fits-all proposition,” Larkin
said. “Planners deal with many scenarios.”
“A planner gives you clarity on the things
that are relevant to your whole financial picture
in retirement,” Campone said.
The first recommendation a retirement
planner may make is which type among the
expanding realm of tax-qualified plans to
establish.
“Congress has been quiet this year,” said
Bouchey. Yet it was not that long ago that
Simple IRA and Roth IRA plans, followed by
Roth 401(k) and the Solo 401(k) plans, came
onto the legislative scene.
The variety of tax-qualified plans is designed
to provide something for everybody
at different stages of a career or during the
evolution of a company, said Richard Fuller
of Richard W. Fuller, CPA.
Keeping on top of reporting requirements
and other areas of legal compliance
is the key challenge
of administrators.
For example, there
are deductible and
non-deductible types
of individual retirement
accounts and
“each has a different
tax outcome and
guidelines for participant
contributions and reporting,” said
Fuller.
“If new in business and the owner has a
few thousand dollars to put aside, contribute
fully to a Traditional IRA,” said Fuller. “Double
that, from $10,000 to $25,000 available for
contribution, and the options include a SEP
(Simplified Employee Pension) IRA or Simple
IRA, both of which avoid the complexities of
a pension or profit sharing plan.”
“A sole proprietor or partner can also begin
a 401(k) plan for the company, but costs go
up with the complexity of a plan,” he said.
“However, to contribute more than $25,000
a year the individual would have to set up
a form of pension or profit sharing plan, or
a combination of those plans, or consider
a Solo 401(k) with reduced reporting and
administration than the traditional 401(k).”
As a company grows, the business owner
may find switching to a different type of qualified
plan more beneficial for accumulating assets
for retirement. There is another decision
to make when adding employees, as different
plans require employees to be covered and
vested as part of non-discrimination regulations
and other ERISA rules.
“ERISA is the governing body for retirement
plans,” said Campone. “Their focus in
the industry has been on disclosing the fees
associated with a plan and making sure plan
providers are providing accurate information
that the client company and participants can
easily compare to other plans.”
Group of NBT Bank
Therefore cost is another variable to consider.
Campone said there are custodial fees,
administrative fees, investment management
fees and fees built into the underlying pools
of investments themselves.
“Transparency is the buzzword today,” said
Campone. “Consumers
have rights and
plan sponsors are
obliged to maintain
certain records and
disclose them, not
hide behind the
numbers.”
Larkin believes
the media has done
a fine job educating
consumers of the benefits of retirement planning.
Thereafter it is up to the professionals
to “know the customers, understand their
needs and objectives, and help them work
toward realistic goals,” he said.
On the other hand, some believe the media
has not properly educated consumers about
the pitfalls of withdrawing money from a retirement
plan before age 59 1/2, when penalties
kick in on top of ordinary income taxes.
“We tell our clients regularly that if they are
considering any financial change, they should
call us first to investigate how their decision
might impact income taxes,” said Thomas J.
Kubiak, EA, tax advisor and owner of Accutax
Income Tax Services.
Even though younger workers “are not
thinking about retirement,” Fuller said “the
earlier they start, the better the result”.
“Younger workers are scared of the stock
market because of the turmoil of 2000 and
2008,” said Bouchey.
“You only have one chance to retire the
way you want to, so focus on that,” he said.
“Having a discipline to savings, especially
during prime earning years, and keeping at
it makes all the difference.”
Retirement plans do not have to be invested
in risky options. In fact, it is better to
choose an ultra-conservative option than to
hold off contributing altogether, the professionals
say.
Consider what happens when a 20-year-old
puts aside $100 a month in an account with
zero interest and no capital growth. At age 65
the account would be valued at $54,000. The
plan participant would have had a $1,200-ayear
tax deduction and an extra $54,000 to
spend during retirement.
Compound the account at only two percent
and it will have grown to $87,466 in 45 years,
according to Kubiak. The planholder had the
same $54,000 deduction from current taxes
and earned $33,000 tax-deferred until the
money is withdrawn during retirement.
While a low-earnings investment is better
than none, it is difficult to “avoid the stock
market if seeking to get growth out of a portfolio,”
Larkin said.
Two-percent has historically not been
difficult to obtain in the U.S. stock market,
although past performance does not guarantee
future results. The average annual rate
of return of the benchmark S&P 500 Stock
Index was 9.19 percent for the past 10 years,
11.15 percent for the past 20 years, and 18.47
percent for the past five years as of December
31, 2013, according to www.yahoofinance.com.
“Plan conservatively, but do plan,” said
Bouchey, who works with many on the verge
of retirement. “A planner will help you keep
on track.”
“It is not the easiest conversation to tell
someone they have to reel in spending during
retirement,” he said.
Retirement services companies use investment
models that guide participants to the
best option or options for funding their plans.
“The core strategy at NBT Bank is to utilize
research and asset allocation models that
provide the appropriate choice that matches
the participant’s goals and objectives, from
conservative to aggressive,” said Campone.
Fuller said, “We help people navigate that
matrix of choices to their best interest this
year while recognizing that things may change
next year, or the next.”
Start it and stick to it is the mantra of retirement
planning professions. And contribute
as much as you can.
“Most companies will match at least a portion
of employee contributions, but employees
have to participate first,” Campone said.
“It always makes sense to maximize
retirement contributions before making investments
or adding to savings that are not
tax-deductible or tax-deferred,” he said.
“Get past the first step and make a commitment,”
said Fuller. “Contribute on time to get the
tax advantages, as deadlines for setting up and
funding the account vary among plans.”