9 minute read
Retirement Strategies Pre-Retirees Can Plan Now
Options for clients to consider now in order to make the most of their savings later.
By Mark MacGillivray
A2020 economic study uncovered information that suggests many older workers chose early retirement because of the pandemic. Yet CNBC reported that as of the fourth quarter of 2020, Americans between the ages of 50 and 59 have an average 401(k) balance of only $203,600. However, people in this age bracket should aim to have at least six times their salary saved by that point.
This gap is why many people now need to consider how to stretch their retirement savings. Pre-retirees in particular — those age 50 and older — are likely considering retirement options and strategies that will provide them with the safety and security that currently feels more precarious because of the pandemic.
Pre-retirees should be in retirement planning mode. Although they cannot yet touch their 401(k) without penalty, now is the time to learn about the options that will bolster and protect their savings so that their money will continue to grow in retirement. Essentially, pre-retirees can plan for retirement now in order to make the most of it later.
Turning A 401(k) Into A Payment Stream
Many 401(k) accounts have pre-determined time frames for retirement, where asset allocation gets more conservative the closer one gets to leaving the workforce. That sum of money has been built up over decades, and there are ways to protect it (and grow it) in case of market volatility. Older workers don’t know what to do with their 401(k) beyond letting it sit and build interest, so it’s important to help them understand that there are options for protecting their savings so they can be sure they have it later (or when they need it).
Once someone is of retirement age and separated from the employment where they had their 401(k), they can roll over a portion of their 401(k) into an annuity to accumulate safe interest. Many annuities are actually purchased with pretax funds (also known as qualified funds) such as 401(k)s. For those who don’t have 401(k)s, Roth or traditional individual retirement accounts are also options that can be set up and contributed to by an individual and be used to purchase an annuity.
Even when in retirement, it’s a best practice to protect some of your savings and continue to let it grow. This is why a partial rollover from a 401(k) or other pretax account into a fixed annuity can be a good option. And for those who have potentially saved less, such as the majority of the American population, it’s more important to protect what is there now to help it grow later. (See chart.)
As you can see, the initial deposit of $150,000 grew by $43,000 into more than $193,000 over a 7-year period. Then it was
Here is an example of what that growth can look like:
31% Participation Rate on the S&P 500 Index
$150,000 Deposit, Tax-Free Rollover From 401(k) – Female/Male Age 65
Year S&P 500 Return Annuity Return Annuity Value
2014 11.39% 3.53% $155,295 2015 -0.73% 0.00% $155,295 2016 9.54% 2.96% $159,892 2017 19.42% 6.02% $169,517 2018 -6.24% 0.00% $169,517 2019 28.88% 8.95% $184,689 2020 16.26% 5.04% $193,997
$193,995 tax-free rollover into a single premium immediate annuity Female Age 72
Male Age 72
For example only. Actual payment amounts will vary. Income tax is assessed each year on the total amount paid out.
annuitized into a monthly retirement payment stream of $1,121.13. Whether 401(k) funds are limited or not, putting a portion into a fixed annuity helps stretch those savings and make them last longer for a few reasons. Some annuity interest rates do not fluctuate during their fixed period. As interest is credited, those earnings are locked in; funds will never decrease if the market goes down.
By tying an annuity’s interest crediting to the index, the funds can participate in general market gains. At the same time, they are protected from downturns.
Short-Term Annuities
There are both short-term and long-term annuities to choose from, and for pre-retirees it’s good to consider the benefits associated with each.
Deposited funds in a short-term annuity, such as a fixed or index annuity, are protected and guaranteed, and the holder can choose to receive payments immediately or defer payments until a later date. While the annuity holder can decide when to take payments from the amount that has accumulated, interest continues to grow tax deferred until money is withdrawn.
Short-term fixed annuities can make a great bridge for early retirement, providing income before the client touches their 401(k).
Long-Term Annuities
Long-term annuities, such as a fixed deferred annuity, can act as a future payment stream, similar to a pension. As referenced in the chart, as an annuity’s interest builds, so does its future payout. No matter what happens in the market during the chosen annuity duration, the annuity’s principal is protected, as is the guaranteed minimum interest rate.
Fixed annuities can act as a long-term savings plan that provides future income to supplement retirement income. Longerterm annuities typically earn a higher rate because those funds are used to make longer-term investments (which generally pay higher returns). They are a long-term income replacement plan across a fixed amount of time to reduce the odds that someone will run out of money in retirement.
Making A Plan
Those who are approaching retirement age have much to consider, and it’s best to figure out a plan beforehand. Fortunately, it’s never too early to do so. Whether a client is forced to unexpectedly retire early or late, making their funds last is their fundamental goal.
Pre-retirees can educate themselves now so that by the time they retire they can do so with more confidence. After all, the closer one gets to retirement, the better it is to understand which options, such as annuities, help to make the most of it.
Mark MacGillivray is director of financial institutions for annuities at The Standard. He may be contacted at mark. macgillivray@innfeedback.com.
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Health Care: America’s Largest Source Of Debt
» Average medical debt in lowest-income ZIP code — $677 » Average medical debt in highest-income ZIP code — $126
Source: Harvard Business School
Forget credit cards or student loans. Health care is America’s largest source of debt that is in collections, according to new research from Harvard Business School, Stanford University, the National Bureau of Economic Research and the University of California at Los Angeles. The researchers found collection agencies held $140 billion in unpaid medical bills in 2020, up from $81 billion in 2016.
About 18% of Americans hold medical debt that is in collections, researchers said, making unpaid medical bills the largest source of debt that Americans owed collections agencies between 2009 and 2020.
Medical debt is different from other forms of debt, the researchers said, because those who owe that debt often didn’t have a choice in racking up those bills. Debt also appears to be more concentrated in ZIP codes that correlate to lower incomes, the researchers found.
Another way medical debts are different? They are much less likely to be repaid, researchers said.
model regulation was set by the National Association of Insurance Commissioners and adopted by most states.
GIG WORKERS PAYING MUCH LESS FOR HEALTH INSURANCE
Gig workers have traditionally lacked access to affordable, quality health insurance. But that appears to have changed, according to Stride, a benefits platform for independent workers.
The American Rescue Plan enabled more gig workers to enroll in coverage through Healthcare.gov, and those workers are paying less for health insurance. Stride’s data showed gig worker enrollment in health insurance increased sixfold in April 2021 compared with the same time last year.
AN END TO THE BIRTHDAY RULE?
New parents frequently find themselves snagged by something called the “birthday rule” — an obscure health insurance policy rule that often ends up costing them thousands of dollars soon after welcoming a baby into the world.
The birthday rule dictates how insurance companies pick the primary insurer for a child when both parents have coverage: The parent whose birthday comes first in the calendar year covers the new baby with their plan first. But the rule can strangle new parents with medical expenses if the parent whose birthday comes second in the calendar year has a policy with more generous benefits.
U.S. Rep. Sharice Davids, D-Kan., introduced the Empowering Parents’ Healthcare Choices Act, a bill that would do away with the birthday rule and a “coordination of benefits policy” that trips up first-time parents when it’s time to sign up a new baby for insurance. This
QUOTABLE
Clearly, there’s strong demand for quality, affordable health insurance among gig economy workers.
— Noah Lang, co-founder and CEO of Stride
More than one-third (37%) of independent workers are paying less than $1 per month for coverage. The vast majority (93%) of gig workers received subsidies to help them afford health insurance.
DOLLAR GENERAL MAKES PUSH INTO HEALTH CARE
Dollar General is the latest retailer seeking to become a health care destination. The company hired a chief medical officer as it plans to make a push into health care. In
addition, the store’s customers will see more health products — such as cold medications and dental care items — on the shelves.
CEO Todd Vasos said Dollar General’s new push is inspired by customers who said they want more convenient and affordable health care products and services.
The discount retailer has more than 17,400 stores throughout the country, most of them
in rural areas that don’t have many pharmacies nearby.
DID YOU KNOW ?
