Retirement

Working in Retirement: What You Need to Know

 

Working in Retirement: What You Need to KnowPlanning on working during retirement? If so, you’re not alone. Recent studies have consistently shown that a majority of retirees plan to work at least some period of time during their retirement years. Here are some points to consider.

 

Why work during retirement?

 

Obviously, if you work during retirement, you’ll be earning money and relying less on your retirement savings, leaving more to grow for the future. You may also have access to affordable health care, as more and more employers offer this important benefit to part-time employees. But there are also non-economic reasons for working during retirement. Many retirees work for personal fulfillment, to stay mentally and physically active, to enjoy the social benefits of working, and to try their hand at something new.

 

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Pretax, Roth, or After-Tax Contributions: Which Should You Choose?

 
Pretax, Roth, or After-Tax Contributions: Which Should You Choose?If your employer-sponsored retirement savings plan allows pretax, after-tax, and/or Roth contributions, which should you choose?
 

Pretax: Tax benefits now

 
With pretax contributions, the money is deducted from your paycheck before taxes, which helps reduce your taxable income and the amount of taxes you pay now. Consider the following example, which is hypothetical and has been simplified for illustrative purposes.
 

Example(s): Mark earns $2,000 every two weeks before taxes. If he contributes nothing to his retirement plan on a pretax basis, the amount of his pay that will be subject to income taxes would be the full $2,000. If he was in the 25% federal tax bracket, he would pay $500 in federal income taxes, reducing his take-home pay to $1,500. On the other hand, if he contributes 10% of his income to the plan on a pretax basis–or $200–he would reduce the amount of his taxable pay to $1,800. That would reduce the amount of taxes due to $450. After accounting for both federal taxes and his plan contribution, Mark’s take-home pay would be $1,350. The bottom line? Mark would be able to invest $200 toward his future but reduce his take-home pay by just $150. That’s the benefit of pretax contributions.

 
In addition, any earnings made on pretax contributions grow on a tax-deferred basis. That means you don’t have to pay taxes on any gains each year, as you would in a taxable investment account. However, those tax benefits won’t go on forever. Any money withdrawn from a tax-deferred account is subject to ordinary income taxes, and if the withdrawal takes place prior to age 59½ (or in some cases, 55 or 50, depending on your plan’s rules), you may be subject to an additional 10% penalty on the total amount of the distribution.
 
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Are federal employees eligible for phased retirement?

 

Are federal employees eligible for phased retirement?Yes, a phased retirement program is authorized by the Moving Ahead for Progress in the 21st Century Act or MAP-21. In 2014, the United States Office of Personnel Management (OPM) issued final rules relative to the program that provide guidance to agencies and employees about who may elect phased retirement, what benefits are provided, how the retirement pension/annuity is computed during and following phased retirement, and how federal employees may exit the phased retirement program.

Generally, each federal agency has the option of offering a phased retirement program–employees have no right to phased retirement. Otherwise, only employees who have worked full-time for the preceding three years–who meet certain age and years of service combinations for immediate retirement in either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS)–may be eligible. Employees subject to mandatory retirement (law enforcement officers, firefighters, air traffic controllers, etc.) may not participate.

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What is a phased retirement?

 

What is a phased retirement?In its broadest sense, a phased retirement is a gradual change in your work patterns as you head into retirement. Specifically, a phased retirement usually refers to an arrangement that allows employees who have reached retirement age to continue working for the same employer with a reduced work schedule or workload.

A phased retirement has advantages for both employees and employers. Employees benefit from the opportunity to continue active employment at a level that allows greater flexibility and time away from work, smoothing the transition from full-time employment to retirement. And employers benefit by retaining the services of experienced workers.

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Give Your Retirement Plan an Annual Checkup

 

Give Your Retirement Plan an Annual CheckupFinancial professionals typically recommend that you review your employer-sponsored retirement savings plan annually and when major life changes occur. If you haven’t revisited your plan yet in 2015, the end of the year may be an ideal time to do so.

 

Reexamine your risk tolerance

This past year saw moments that would try even the most resilient investor’s resolve. When you hear media reports about stock market volatility, is your immediate reaction to consider selling some of the stock investments in your plan? If that’s the case, you might begin your annual review by reexamining your risk tolerance.

Risk tolerance refers to how well you can ride out fluctuations in the value of your investments while pursuing your long-term goals. An assessment of your risk tolerance considers, among other factors, your investment time horizon, your accumulation goal, and assets you may have outside of your plan account. Your retirement plan’s educational materials likely include tools to help you evaluate your risk tolerance, typically worksheets that ask a series of questions. After answering the questions, you will likely be assigned a risk tolerance ranking from conservative to aggressive. In addition, suggested asset allocations are often provided for consideration.
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