Don't let worst-case scenarios dictate investment strategy
Our daily roundup of retirement news your clients may be thinking about.
Don’t let worst-case thinking ruin your 401(k) tax savings
Retirement savers should not allow worst-case scenarios of the future deter them from contributing to their employer-sponsored 401(k) plans, according to this article on MarketWatch. For instance, instead of assuming sky-high interest rates in the future, which could dampen interest in a 401(k) plan, clients should bear in mind that by making contributions today, they reduce taxable income, defer tax liability on the funds until withdrawal and allow the money to grow tax-free. Those who opt to forgo 401(k) contributions for fear of higher tax rates in the future should realize that the tax brackets are indexed to inflation, and they miss out on the benefits of tax deferral. To be sure, the future is uncertain, the writer says, but a worst-case scenario is unlikely to materialize. Instead, prudent financial planning focuses on things as they are today, and the most likely scenario for tomorrow while remaining flexible enough to accommodate changing circumstances. (As a hypothetical example, the writer notes that an airline pilot who acted upon the worst-case scenario for today's flight, rather than the most-probable scenario, would never leave home.)
When filing for Social Security at 62 can be a good move
Filing for Social Security retirement benefits at age 62 can be a smart move in some cases, according to this article on personal finance website Motley Fool. For one, the conventional wisdom that says to wait until age 70 only pays off once someone reaches their eighties. So if there are health issues, or someone is not willing to take the risk, it can makes sense to file earlier. Also, applying for Social Security early will also allow couples to file for spousal benefits and boost their household income. Finally, if a retiree has enough money to fill their basic needs, filing for benefits at age 62 can enable them to enjoy their free time with hobbies while they are still physically able to do them.
Dreaded WEP strikes again for Social Security beneficiary
A public school teacher who has earned 40 Social Security credits is entitled to retirement benefit, but the benefit is reduced because of the program's Windfall Elimination Provision, according to this Q&A article on USA Today. For example, a saver can expect his monthly benefit to decrease by as much as $428 if he incurs 20 years or less of "substantial earning years," says a certified financial planner. “The reduction [shrinks] for each year of substantial earnings you have over 20," the planner says. "Once you reach 30 years of substantial earnings, you get to keep all of your Social Security.”
We have a retirement savings problem. Politicians can help
More states are creating retirement programs for workers who have no access to workplace retirement plans after federal legislation calling for a similar program failed to get approval from Congress, according to this article on The New York Times. However, legislators in other states are reluctant to pass new mandates after the Affordable Care Act, with the underfunding woes of state pensions and leadership problems in state governments making the passage of a law more difficult. This is lamentable, the writer says, as state legislators can push small employers to help more workers save for their golden years and reduce the costs of retirement investing.