In case you missed it, the contribution limits to your 401(k) plan, IRA and Roth IRA—set by the government each year based on the inflation rate—will not go up in 2017. Just like this year, you will be able to defer up to $18,000 of your paycheck to your 401(k), and individuals over age 50 will still be able to make a “catch-up” contribution of an additional $6,000. (The same limits apply to 403(b) plans and the federal government’s new Thrift Savings Plan.) Your IRA and Roth IRA contributions will continue to max out at $5,500, plus a $1,000 “catch-up” contribution for persons 50 or older.
There’s finally an answer to an age-old question: How can you live a longer, more satisfying life?
The answer: work past the traditional retirement age of 65.
There have been studies showing that financial issues are one of the primary reasons why married couples fall apart. A recent article in Market Watch suggests that the biggest reason for these significant disagreements is a failure to create a unified view of the financial future that both parties have agreed to. In many cases, one dominant spouse will make decisions on behalf of the couple, which can lead to disagreements (and potential divorce) down the road, as one spouse feels left out of the picture.
Suppose somebody offered you a choice between two cars. The first car was identical to the second car, with one exception: it would only travel at a constant speed of 30 miles an hour. In the other car, you could could choose to travel at any legal speed, and quite a number of illegal ones. Meanwhile you can only buy the one-speed car if you make less than a certain threshold income, and eventually, if you drive enough miles in the one-speed car, you’d have to buy the car that can travel at any reasonable speed anyway.
Which car would you choose?
That’s the interesting choice posed by a new retirement account that was launched on Wednesday. In his 2014 State of the Union address, President Obama announced that he was directing the U.S. Treasury Department to create a new retirement savings initiative: the myRA, officially named My Retirement Account. This week, the first retirement savers will put the first dollars into the program.
The myRA is basically a government-sponsored Roth IRA with the same contribution limits ($5,500 a year, or $6,500 for those 50-and-older). Like the Roth IRA, all myRA contributions will be made after-tax (in other words, no deductions for the contributions), but the money will come out tax-free when the taxpayer reaches age 59 1/2. However, unlike the Roth, where the money can be invested in zillions of possible combinations of thousands of mutual funds, ETFs and individual stocks, the myRA participant has exactly one investment option: the government’s Securities Fund for federal employers, which earned 2.31% last year.
Moreover, there are limitations on who can participate in the myRA. Only people with no 401(k) or 403(b) retirement plans at work can make myRA contributions, and even then, only those with an adjusted gross income less than $131,000 a year ($193,000 for couples). Also: once you’ve accumulated the maximum myRA balance of $15,000, you have to move the money over to a private-sector Roth IRA. The only benefit: the myRA doesn’t come with any custodial or account fees, but those are typically nominal when you open a private sector Roth IRA.
So why would people contribute to a retirement option that is identical to a Roth IRA, but with roughly a zillion fewer investment options? It’s possible that unsophisticated investors will appreciate the simplicity of the myRA solution, where, instead of having to decide where to invest, they simply lend their money to the federal government and collect the (modest) interest. The fact that the myRA account has no minimums could be attractive. Most private sector Roths require at least $1,000 to be invested, but theoretically you could start your myRA with a penny.
It’s also possible that the U.S. Treasury Department is about to discover that there’s less demand for an inferior retirement plan than government economists had projected.
For beginning savers, a MyRA is a safe way to get started.
MyRA, the Obama administration’s free, guaranteed-return starter retirement account, launched nationwide on Wednesday. The government-backed plan is an option for the tens of millions of U.S. workers whose employers don’t offer a retirement savings plan. MyRA accounts are open to anyone earning an annual salary of less than $131,000, or $193,000 if they are married and file taxes jointly.
The Treasury Department officially rolled out its new myRA retirement plan on Wednesday, deeming it a free, no-risk savings plan. The truth is that the newly launched retirement account will do very little to help the working poor and will quickly become another bloated bureaucratic system that wastes billions of taxpayer dollars.
The NerdWallet organization recently issued a report which found a few differences between today’s college graduates and those of 20 to 40 years ago. For one thing, they carry a lot more student loan debt: $35,051 on average. That means, again on average, that the new graduates will be paying $4,239 a year for ten years before they can properly start saving. NerdWallet estimates that these higher loan payments could potentially reduce future retirement savings by 32%—an average of $700,000.
In addition, today’s younger generation faces higher rental payments—up 11% since 2012—and having to delay home ownership to a median age 33. This, too, reduces their ability to squirrel away money for the future.
Finally, millennial investors have apparently been powerfully impacted, psychologically, by the Great Recession. NerdWallet found studies showing that younger savers keep an average of 40% of their saved money in checking and savings accounts or CDs. This means they’re missing out on investment returns, which would cost them more than $300,000 in future retirement funds, on average.
Add it all up, and the NerdWallet researchers estimate that today’s college graduate won’t be able to retire at the traditional age 65. On average, they’ll have to wait until age 75 before work (and an income) is optional. The site notes that the graduate would have to save 15% of his/her income a year starting at age 23 to bring retirement back down to age 65—which may not be possible due to higher student loan debt and rent, and won’t be anywhere close to possible with a 40% allocation to cash.
On the surface, it seems too good to be true. You have a married couple, where (let’s say) the husband has earned higher yearly income than his wife. That means he has contributed more to Social Security over his working life. The husband files for Social Security benefits at full retirement age (currently age 66) and then immediately files to suspend those benefits.
As a result of this simple maneuver, the wife is now entitled to immediately receive Social Security spousal benefits equal to half of the husband’s full retirement benefits that were just suspended. She would do this if 50% of the husband’s benefit is higher than she would have received if she had simply claimed her own Social Security payments.
Because he suspended his benefits, the husband can continue working, and wait until age 70 to start receiving Social Security checks in his own name. Why would he do that? Because each year of deferral allows him to accumulate more credits—effectively raising his monthly benefits 8% a year, which is considerably higher than the inflation rate. At that time, the wife would stop claiming the husband’s benefits and start receiving her own Social Security checks. If she was working at the time, she might have raised the amount she could claim under her own name. Or she might have been able to wait to claim her own account until she’s 70, raising the amount she collects just as her husband did.
Presto! More money now, more money later.
This popular Social Security claiming strategy is called “file and suspend,” and by this time next May, it may no longer be an option for retirees. The Bipartisan Budget Act of 2015 that recently was recently signed into law will close what lawmakers are calling the “file and suspend” loophole six in the future. You can expect that eligible seniors will be knocking on the doors of their Social Security offices before that deadline. Meanwhile, those who have already filed and suspended will be allowed to continue as before.
The original rationale behind the file and suspend strategy was to encourage more seniors to continue working. The rationale behind ending it is that it was becoming a drain on the Social Security system. Moreover, Congress was looking for money to offset a huge increase in Medicare Part B premiums for individuals not yet receiving Social Security payments. The provision is likely to pass the Senate, and could be the opening gambit of a broader discussion about how to “fix” Social Security’s messy finances.
When it comes to Social Security, most of us hope to get the most we possibly can from our benefits. Methods for making that happen, however, are a source of heated controversy. “File and suspend” is one advanced claiming strategy that can help retirement savers at all income levels, especially women, maximize their benefits.
A popular Social Security planning strategy used by Americans mostly in their 60s to expand their benefits, known as File and Suspend will be coming to an end in six months as a result of last week’s Congressional budget deal. Closely related and also receiving the ax under the Bipartisan Budget Act of 2015 is another rule permitting Restricted Application.