Decumulation: There Is No Rule of Thumb

By Rich Rausser, CPC, QPA, QKA,   Senior Vice President, Pentegra Retirement Services

In most pursuits, people usually look for a “rule of thumb” when it comes to sound strategies or best practices. However, when it comes to developing a retirement plan strategy the rule of thumb is that there is no rule of thumb.

The reason for this may be obvious. As individuals, we all have our own needs, wants and concerns; many of us may be the same age, live in the same geographical area, and even make the same exact salary. Even if two people were hired on the same day by the same firm at the same salary, and made equal contributions to their 401(k) plans throughout their careers, there are still a number of variables to prevent them from taking a “one size fits all” approach to decumulation.

Are both persons married? Are their spouses/partners both working and, if so, what are their salaries and retirement savings? Do they have any children? Where are they in terms of college expenses and healthcare needs?

Unrealistic Rules

I note this because there has been some discussion of late over an industry-wide “rule of thumb” that suggests retirees should try to replace 80 percent of their income during the first year of retirement. While that may be an admirable goal, it may not be realistic for many retirees for the reasons listed above as well as others.

Another specious rule of thumb is that retirees will simply take their 401(k) savings as a lump sum distribution when they retire. While lump sum distributions are certainly a viable option, many plan participants may not even be aware that other options exist and may benefit from further education about alternative distribution options.

Alternative Distribution Options

Many 401(k) plans have numerous distribution options, thus offering a tremendous amount of flexibility in how retirees can take their money. These can include what we call an “ad hoc distribution” – whereby the retiree takes out some money whenever he or she wants; a regular, periodic distribution — $2,000 per month, for instance, or $6,000 per quarter; or structuring payouts over the retiree’s life expectancy.

There is another option that I have mentioned before: supplementing one’s retirement income by purchasing an out-of-plan annuity that can provide a guaranteed level of income to retirees for as long as they live. If a retiree puts 20 to 25 percent of their retirement savings into an annuity, with Social Security providing supplemental income and the rest of the retiree’s account balance consisting of various other pieces, the retiree is in effect “pensionizing” part of their retirement savings.

The annuity option should be available to every 401(k) plan participant, regardless of individual circumstances; it should be viewed as another tool in their retirement savings tool box.

Retirement plans should be constructed in a way that provides the best possible solutions to its plan participants in a cost-effective manner.

For additional information, watch the recent webinar, “Keys to Building Successful Retirement Outcomes.”  Or, download The Pentegra Distribution Path™  for an overview of all the options available to employees and essential tips for creating a decumulation strategy to build a lifetime income stream.

Pentegra_LogoPentegra is the NAFCU Services Preferred partner for Qualified Retirement Plans for Credit Union Employees. More educational resources and contact information are available at www.nafcu.org/pentegra

10 Steps to Better Retirement Planning for the New Year

RICHARD W. RAUSSER, CPC
SENIOR VICE PRESIDENT, CLIENT SERVICES

Rich RRich Rausserausser is a Certified Pension Consultant (CPC), a Qualified Pension Administrator (QPA), a Qualified 401(k) Administrator (QKA), and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College. 

Pentegra Retirement Services is the NAFCU Services Preferred Partner for Qualified Retirement Plans for Credit Union Employees. http://www.nafcu.org/pentegra/

The start of every New Year brings the promise of new beginnings; a time to think about setting goals and resolving to do new things, particularly when it comes to finances.

It is important to take a few minutes this month to think about the state of your retirement portfolio and to commit to an annual self-assessment.  This should be more than ‘I will spend less’ in 2015. One of your resolutions should be to find better ways to manage your finances and invest your money.

I encourage everyone to jump-start their efforts with this checklist:

1. Increase Plan Contributions:  Are you contributing as much as you can afford to your retirement plan? The more money you put into your plan now, the bigger your potential retirement nest egg. Adding as little as five or ten extra dollars per paycheck could make a big difference over the long term.

2. Make Catch-up Contributions: Your plan may allow you to make “catch-up” contributions over and above the regular contribution limit if you are age 50 or older. If possible, take advantage of the opportunity to give your retirement savings a boost.

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Retirement Savings Incentives Listed Among Possible Tax Reform Options

Originally posted on CUInsight.com.

Guest post written by Dennis Zuehlke, Compliance Manager, Ascensus.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and Consulting.

The Senate Finance Committee has released its Economic Security tax reform option paper  containing a laundry list of retirement savings incentives among the possible tax reform options. The non-exhaustive list is just the latest indication that retirement savings incentives will be scrutinized as part of efforts to reform the tax code, in part because their cost to the Treasury is second only to the cost of the exclusion of employer contributions for healthcare.

Earlier this year, Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orin Hatch (R-UT) laid out a series of discussion topics to set the stage for comprehensive tax reform. Over the past several months, the Finance Committee has been meeting weekly to discuss the tax reform option papers drafted by the majority and minority committee staffs to determine which options they may want to consider as part of comprehensive tax reform.

The option papers have covered a wide array of issues from across the tax code, including simplifying the tax system for families and businesses; business investment and innovation; infrastructure, energy, and natural resources; international competitiveness; and economic and community development. The Economic Security paper is the seventh in a series of papers and focuses on health, retirement, life insurance, fringe benefits, and executive compensation.

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IRA Withholding Notice and Election Requirements

Originally published in The Federal Credit Union Magazine.

Guest blog post by Jennifer Basset, writer/editor at Ascensus.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and Consulting.

With many of your members getting ready to take out their 2013 required minimum distributions (RMDs), now is the perfect time to brush up on the Individual Retirement Account (IRA) withholding notice and election requirements for credit unions.

Withholding is an important compliance issue for IRAs. Like withholding from a paycheck, IRA distribution withholding prepays income taxes. Taxes withheld from IRA distributions are credited against an individual’s total tax liability for the year. So not only is withholding required by law, it’s a valuable customer service that you provide your members.

Notice Requirement

For annual IRA distributions of $200 or more, your credit union must provide a withholding notice. This notice allows the member (i.e., the IRA owner or beneficiary) to choose exactly how much or what percentage they want withheld— including not having any withholding at all. Even if members choose not to withhold taxes from their distributions, they are still responsible for paying taxes on the distribution. The notice also lets them know they have the right to change their mind about how much they want withheld. If your credit union fails to give members a withholding notice, the IRS could assess a $10 penalty for each failure.

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Obama Budget Proposes Cap on Retirement Plan Balances

Originally posted on CUInsight.com.

Guest post written by Dennis Zuehlke, Compliance Manager, Ascensus.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and Consulting.

The Obama Administration has proposed a cap of $3 million on IRAs and retirement savings plans in order to raise $9 billion of additional revenue over the next 10 years. This is the first time that the Obama Administration has proposed a cap on the total amount of assets that can be accumulated in IRAs and retirement savings plans held by individuals. It comes on the heels of the Administration’s proposals in last year’s budget to reduce the tax incentives for making retirement plan and IRA contributions.

The Administration released details of the proposal in the Fiscal Year 2014 Revenue Proposals. Under this new proposal, contributions to tax-advantaged retirement savings plans (such as IRAs, 401(a) plans, 403(b) plans, and funded section 457(b) governmental plans) would be prohibited for individuals who have accumulated assets past a certain threshold. That threshold is the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan (currently $205,000), which, for an individual age 62 in 2013, would be approximately $3.4 million.

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