Getting financially organized before retirement can be a daunting task. There are many unknowns and it can be hard to know where to begin. For that same reason people often wait too long to address retirement needs and, unfortunately, don’t achieve the financial freedom for which they long. When people get serious about retirement, many start by analyzing their investment account(s) (or lack, thereof). Ideally, they’ll meet with a CERTIFIED FINANCIAL PLANNER™ professional to get them on track. In this article, I’ll share with you five steps you should take to get financially organized before retirement. Spoiler alert: None of the five steps outlined involve contributing to a retirement account! Let me explain:
The first steps to getting financially organized do not involve dollars and cents.
Financial organization starts by identifying and prioritizing what is most important to you. This is a foundational financial planning concept you need to adopt in order...
Here is something we hear on occasion at CameronDowning: “I’m not sure an IRA is for me. I hear it may be too risky.” The problem with this statement is that an IRA, or Individual Retirement Account, is not an investment. So what is an IRA?
An IRA is technically a registration
It holds investments, but is not an investment itself. You can put all kinds of investments within an IRA. Consequently, stocks, bonds, mutual funds, CDs, and even gold bullion are investment options within an IRA. You can be 100% in cash in an IRA, which by definition has no risk. We’ve also commonly seen annuities put in IRAs which is typically not a good idea, and I discuss why elsewhere.
So what is an IRA?
Getting the terminology right is important. Picture a candy wrapper holding chocolate inside. An IRA is like the candy wrapper. Likewise, there are different kinds of candy wrappers just like there are various kinds of IRA registrations. Traditional, Roth, SEP, SIMPLE are the most...
An annuity in an IRA is typically a dead giveaway that a client worked with a salesperson, not a financial planner. Annuities, like any other tool, are not inherently bad. They work best when they do the job they were designed to do – and that job is income distribution. Annuities can be a useful accumulation vehicle for those with a more conservative investing outlook. They make sense for asset protection. An annuity is also a safe way to create a perpetual stream of income without market risk. Also, the use of a single premium immediate annuity, or SPIA, has particular application in estate planning. But an annuity in an IRA? Why???
Annuity salesmen & first responders
While annuities are appropriate in certain circumstances, most clients do not have the special planning needs that make an annuity in their best interests. Law enforcement, firefighters, and other first responders, are marketed heavily by annuity salesmen. Why? The often have DROP payments. Annuities pay a...
A retirement plan sponsored by a non-profit
Most people are familiar with the 401k, but what’s a 403b? Basically a 403b is a retirement plan that is sponsored by a 501c3 organization, meaning a not-for-profit employer. A local school board or hospital are good examples. The employee invests in mutual funds or annuity contracts – the only choices available. If annuity contracts are the only investment choice, the plan is likely administered by an insurance company, and can also be known as a TSA, or tax-sheltered annuity.
Money can go into your account from two sources: deferrals from your paycheck (money that you could have taken in cash) and your employer can also make contributions. The employer’s contributions can be discretionary or according to a match formula. Say the employer will offer you 50 cents on the dollar of whatever you contribute, up to 6% of your earnings. That’s a fairly typical formula. We’ve seen some out there more generous, and...
Picture the scene: My wife has a group of friends visiting. I come home from work, greet everyone, and have a glass of wine to be sociable. At some point I announce that I’ll retire to my study for the evening. What does that verb mean – to retire? It means to go away or apart; to withdraw; to be in a place of privacy or shelter. It can also simply mean that I’m going to bed for the night. It isn’t until about three generations ago that the definition expanded to mean cessation of paying work. Before that, for all of human history, people simply worked until they could no longer. Retirement, as we currently think of it, is a relatively new concept. When extended families lived together on the farm, everyone worked and contributed in some way. When the same families moved to the cities at the beginning of the last century, it was the same way. So how did our current concept develop?
You mean I’m not working but you’ll still pay me?
During WWII, the...
FRS participants have a choice among two retirement plan options:
The investment option, which is a defined contribution plan (DC)
The pension option, which is a defined benefit plan (DB)
In previous posts, I covered both the FRS Pension Option and the DROP (Deferred Retirement Option Program). In this post, I’m presenting the FRS Investment Option.
The salient feature of any DC plan is the number of contributions that can go into an individual’s account. On the other hand, with a defined benefit plan (also known as a pension plan) there is a pension formula. The inputs are usually based on years of service and average or final compensation. The formula calculates a pension amount that is guaranteed over the pensioner’s lifetime or lifetimes of the pensioner plus spouse. Here, though, I’m focusing in on the FRS investment option, which is the FRS defined contribution plan.
How much money goes in?
ERISA statues define limits to contributions. ERISA is the...
The Deferred Retirement Option Program (DROP) is available to Florida Retirement System (FRS) pension plan participants. As a DROP participant, you earn your salary while your monthly pension is paid into the FRS Trust Fund. You earn interest at the rate of 1.3% on those DROP funds. This money adds up quickly. If your pension payment is $5000/month, your ultimate DROP payment will approximate $310,000!
This is a rich retirement – there’s nothing remotely like it that we’ve see in private industry.
Before you participate in DROP, you earn one month of retirement service credit for each month you work. When you enter DROP, you are considered to be retired and your pension is frozen at that level. You will still benefit from the cost of living increases, however.
Who is eligible to join DROP?
To participate in DROP, you must be vested and eligible for normal retirement (based on your years of service or age). You must be an active member of the FRS Pension Plan, TRS,...
It used to be the case that you went to work for one employer and remained with that employer for the entirety of your working life. You received a pension from that employer when you retired – in other words, you continued to get paid a lesser amount even though you’d stopped working. This arrangement is no longer the norm – people expect to change jobs several times during their working lives. A 401K retirement plan suits this kind of work environment. When you leave one employer, you can move your 401K funds into the 401K of your new employer, or over to an IRA. In any event, the responsibility for providing a retirement income lies firmly with the worker!
Contributions are limited by IRS regulation. The maximum deferral that a plan participant can make in 2017 is 100% of salary up to $18,000. If you are age 50 or older, you may be able to make an additional $6,000 “catch-up”...