Broader diversification is possible for retirees

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Our daily roundup of retirement news your clients may be thinking about.

Pinching pennies on Social Security? Maybe not
A study by the Investment Company Institute and the IRS shows that retirees saw about 3% increase in after-tax expendable income after they started collecting Social Security benefits, according to this article from USA Today. Expendable income for those in the lowest income groups increased 29% on average, the study found. An expert says that retirees could even have more, as not all their earnings were reported. "By looking at what tax filers, employers and financial institutions actually report to the IRS, we are able to paint a more accurate picture."

State IRA plans are deeply flawed
Several states have passed laws to offer state-run retirement programs for workers with no access to a workplace retirement plan, according to this article on Morningstar. However, State IRAs have lower contribution limits, offer no employer match, and give no tax deduction on the contribution, making them inferior to 401(k) plans. "Employers will face a confusing patchwork of rules, and many small businesses may forego offering retirement plans altogether. Congress must act to protect workers and small businesses from these misguided regulations," says Rep. Francis Rooney, R-Fla.

Smartest, dumbest things people do with 401(k) funds
Paying credit card debt using 401(k) money can be a smart move, as the credit card company charges higher interest rate that what the plan offers, according to this article on CNBC. "The one catch that I tell clients is that when you take a loan from your 401(k), you cannot miss a payment," says an expert. "If you do, the [Internal Revenue Service] will count the entire loan amount as a distribution that year and you will be taxed on it."

Broader diversification is possible for retirees
A study shows that retiree investors can use safe withdrawal rates and maintain a diversified portfolio with more asset classes, writes Wade Pfau, professor at The American College. The research offered a general framework for safe withdrawal rates with a structure that puts together user-specified capital market and retirement assumption, writes the expert, adding recommended withdrawal rate and asset allocation for clients' specification. The study also shows "that a wide range of asset allocations support withdrawal rates nearly as high as the optimal asset allocation."

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Social Security Income taxes 401(k)