To Roth or Not to Roth?

Posted On August 29, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

The question of “Roth or Traditional” has become even more complicated today with the advent of the Roth 401(k). Which should you choose for your 401(k)? Like many financial questions, the answer is “it depends”.

In asking the same question for an IRA, investors often look at their eligibility for the Roth versus their ability to deduct the Traditional IRA contribution. For the 401(k), that’s not an issue – there are no income restrictions or eligibility rules for a Traditional 401(k) or a Roth 401(k). You should also know that while you may choose Roth or Traditional contributions, any company match will always go in the Traditional bucket.

How to choose, then? Here are five considerations to making the decision:

1) If you are going to be in a lower tax bracket in retirement, it’s preferable to defer taxes today and pay taxes later. If this describes your situation, then you are likely better off in the Traditional 401(k). A majority of people should have an expectation of lower taxes in retirement.

2) The problem is that we don’t know what future tax rates will be. We do know that we are running massive budget deficits and that the accumulated national debt is a growing problem. While every politician wants to promise lower taxes to get votes, that seems unrealistic as a long-term solution to our budget issues. Retirees are often surprised that their taxes do not in fact vanish in retirement. Pension, Social Security, RMDs, etc. are all taxable income.

Link: Taxes and Retirement

If you believe you will be in the same or higher tax bracket in Retirement, then the advantage goes to the Roth. While you will not realize a tax benefit today from a Roth contribution, your money will grow tax-free. If you are going to pay the same tax rates in the future as today, you would be indifferent, in theory. Except that…

3) When you reach retirement, a $1 million Roth gives you $1 million to spend, whereas $1 million in a Traditional IRA or 401(k) may be worth only $750,000, $600,000, or less after you take out Federal and State income taxes. This means saving $18,000 in a Roth 401(k) is worth more than the same $18,000 in a Traditional 401(k), because the Roth money will be available tax-free.

If you are in a lower tax bracket or can comfortably pay the taxes, then the Roth may be preferable. In retirement, if you have both Roth and Traditional accounts, you can choose where to take withdrawals to best manage your taxes. (We call this tax diversification.)

4) The only caveat to the Roth contribution is that contributing to a Traditional 401(k) can lower your Adjusted Gross Income (AGI). If having a lower AGI would make you eligible for a tax credit, or eligible for an IRA contribution, then it may be beneficial to choose the deductible contribution.

For example: The Saver’s Tax Credit

5) There are no Required Minimum Distributions from a Roth account. If you are in the fortunate position to have plenty of retirement assets, making Roth contributions will add to tax-free assets, rather than creating an RMD liability for when you turn 70 1/2.

Last thought: for the past two decades, I have met people who don’t want to invest in a Roth because they think the government will take away the tax-free benefit in the future. I don’t see this happening. The government actually prefers Roths because it increases current tax revenue rather than the Traditional, which decreases current taxes. And I don’t see Roth accounts being used or abused by Billionaires or corporations – the amounts are so small and used mainly by working families.

How America Saves

Posted On July 4, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Defined Contribution (DC) Plans are the backbone of retirement planning in America. Vanguard manages DC plans for 4 million Americans, with over $800 Billion in assets. So, I am always interested to read their annual report, How America Saves, which offers a window into the state of retirement preparation in America.

Link: How America Saves, 2016 Report

Looking through this year’s report, I see both reasons for optimism as well as concern. On the positive side, 78% of eligible employees participated in their company plan. And the average account balance was $96,288. It’s great that a majority of employees are participating.

However, it is surprising to discover the difference between the average and the median. (As a quick refresher, the median is the data point that is exactly in the middle – with half being higher and half being lower than this point.) The difference between the average and the median scores in Vanguard’s report belies a growing chasm between participants who save the minimum and those who save as much as they can.

While the “average” account balance was $96,288 in Vanguard Retirement Plans, the median participant had only $26,405. That means that half of all accounts have under $26,405, and that the average is skewed higher by very large accounts of $300,000, $400,000 and more.

The problem is that many participants are simply not contributing enough. The average deferral rate is 6.8%, but the median again is lower: 5.9%. Disappointingly, the average deferral rate is down from 7.3% in 2007, which means that most people are saving even less than they were 10 years ago.

People really do need to save 10% or more for their retirement. Instead, many invest only 3% or whatever is the default minimum. That’s because many participants only contribute up to the company match. In fact, when I ran a plan for a small company with a dozen employees, all but two only contributed up to the match. When you contribute the minimum over the course of a career, you are not thinking in term of the outcome. Will I have saved enough to fund a comfortable retirement? Am I on the path to financial independence?

However, there are good savers out there. 20% of the participants in a Vanguard plan are saving more than 10% of their salary into their retirement plan. These are the accounts which are bringing up the median of $26,405 to the average of $96,288. And this is what you want to do -you want to be a savings overachiever!

Over time, compounding makes a huge gap between people who contribute the minimum versus those who save more. To examine this, let’s consider two employees: Minimum Mike and Saver Sally. They both have the same salary of $45,000 and earn 3% raises over the next 35 years. Mike contributes 3% to his 401(k) and gets the company match of 3%. Sally contributes 10% and also receives the 3% match. Both earn a return of 7% compounded annually.

Here are their account balances after 35 years:
Minimum Mike: $567,615
Saver Sally: $1,230,417

Saving 10% really does make a big difference over the length of a career. Although the news media would like for you to believe that your financial future hangs by a thread on the outcome of the Brexit, or the Presidential Election, or whatever new crisis is on that day, the reality is that the biggest determinant of your long-term wealth is likely to be the percentage you contribute.

Being average is still a lot better than being median. If you want to be above average, start by increasing your deferral rate.

There is still time to increase your 401(k) or 403(b) contribution for 2016. The maximum contribution is $18,000 for 2016, with an additional catch-up of $6,000 if you are over age 50.

Can You Retire In Your Fifties?

Posted On June 27, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

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I recently wrote that most people should plan to work to age 70 before retiring. As a society, embracing 70 as the new full retirement age, would greatly alleviate the forthcoming retirement crisis and reduce the level of poverty in senior citizens. While there are many advantages to waiting until 70, I also see how attractive it would be to retire in your fifties while you are young and healthy.

With enough planning, saving, and advanced preparation you can retire in your fifties. But, retiring at 55 is not the same as retiring at 65. Social Security won’t kick in until 62, and if you read my previous article, you know I suggest waiting until 70. You won’t have Medicare until age 65, so you will need to have your own health insurance coverage, a significant expense which keeps many would-be retirees in the workforce until 65.

I’m going to go through the math of how you might be able to retire in your fifties, and then I’m going to tell you how most fifty-year old retirees actually did it. (Which may disappoint you…)

The “4% rule” suggests that the safe withdrawal rate from a 60/40 portfolio is to start at 4% and subsequently increase your withdrawals for inflation to maintain your standard of living. This research, assumes a 30 year retirement period, such as 65 to 95. If you retire at 50 or 55, it is likely that you or your spouse could live for another 40 or 50 years, especially with continued advances in medical care.

Unfortunately, the 4% rule has a higher failure rate when applied to periods longer than 30 years. That’s because market volatility, especially in the early years of a plan, increases the possibility that an account will be depleted. So, if someone wants to retire in their fifties today, they may need to use an even more conservative withdrawal rate, such as 3%. That way their account will still grow, net of withdrawals, to cope with the inflation that will occur over the next 40 plus years.

Currently, we have record low yields in the bond market, and relatively high valuations (Price/Earnings or P/E ratio) in the stock market. Looking forward, our expected returns should be lower than historical returns. This is another reason why a 4% withdrawal strategy may be too aggressive today for someone who wants to retire in their fifties.

Link: BlackRock CEO says retirement savers should expect returns of as little as 4%.

An alternative to the 4% Rule is the Actuarial Method, which is what the IRS uses for Required Minimum Distributions: you take your current life expectancy and use that as a divisor to determine your withdrawal rate. If you think your life expectancy is 33 years, use 1/33 or approximately 3%.

Then to retire in your 50’s here’s the rule of thumb: at a 3% withdrawal rate, you need your investment assets to equal 33 times your annual withdrawal. For example, if you plan to spend $100,000, you should have at least $3.3 million in your investment portfolio.

This is a pretty high hurdle for most investors. Few people in their 50’s will have accomplished this level of assets, especially if they are still paying mortgages or for their children’s college educations.

The majority of people I know who have actually retired in their fifties have something I have not mentioned: an employer pension. They may have worked for the military, a municipality, school district, or increasingly rarely, a large corporation, and stayed for 25 or 30 years, starting in their twenties. Now in their mid fifties, if they are debt free, it may be possible for them to retire with a pension that pays maybe to 50 to 80 percent of their previous salary. Their taxes will be much lower, so they will actually keep a higher percentage of their pension and there will not be any OASDI or Medicare taxes withheld.

If their pension covers their basic necessities, they can avoid dipping into their portfolio, which can be used for discretionary spending. When the market is up for several years, they can spend a little more on trips or buy a new car. If their portfolio is down, they can hold off on purchases until the market rebounds. And while they may be scrimping by for now, they may get a raise later when they or their spouse become eligible for Social Security. But the key ingredient remains the guaranteed monthly income from their pension.

Most of us will not have a pension, in which case, we will need to be very aggressive savers if we are to end up with a portfolio 33 times the size of our annual withdrawal requirements. If you want to retire in your fifties, I can help you do it. It will take years of planning, so the best time to get started is right away.

Is This Amazing Technology A Danger To Your Career?

Posted On June 6, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

Last October, electric car maker Tesla introduced self-driving features into its cars overnight, with a software update installed via wifi. In January, General Motors invested $500 million into car-service Lyft with plans to begin testing driver-less car services for actual customers in one year. Google, Apple, Ford, Toyota and others are racing to produce self-driving cars and we are very, very close to seeing this incredible technology become a reality. Could your next car be an Apple iCar?

Technological change is nothing new, but we may be on the verge of seeing the rate of change increase dramatically, with significant implications for individuals and the economy as a whole. Some of these changes are fairly easy to predict, but there will be secondary and tertiary impacts which will be much more difficult to imagine. And while the changes will be net positive for society, cost savings often come about when jobs which are no long necessary become eliminated.

Self-driving cars will be much safer, virtually eliminating accidents from distracted driving, driver error, fatigue, or drunk driving. Driver-less trucks and taxis will gradually replace drivers, reducing transportation costs. Families will no longer need two, three, or four cars, and many will forgo car ownership altogether, being able to summon a vehicle for the relatively few minutes a day they require transportation. Your newborn child or grandchild may never even have a driver’s license!

Speeding tickets and traffic infractions will decline, creating budget gaps for cities who previously enjoyed significant revenue. Warren Buffett called self-driving cars a “real threat to insurers” like GEICO, which derive substantial revenue from car insurance. As insurance premiums fall for safer driver-less cars, you can expect that premiums for the remaining human drivers will skyrocket as they will quickly become the high risk vehicles on the road.

There are so many positives about driver-less cars that will make our lives better. However, if you are a truck driver, own an auto body shop, work for an insurance company or emergency room, you should expect less demand for your services, reduced revenue, and loss of jobs across your industry. For those individuals, the driver-less car will have the same effect as Henry Ford’s Model T had on carriage makers and buggy whip manufacturers a hundred years ago.

Innovation is great for society and the economy, but can come at a high cost for those individuals who get left behind. Last month, I wrote about the benefits of working until age 70. The greatest challenge for many people will not be their ability or willingness to work until 70, but just keeping their job for that long.

Last year, I met an individual who lost his job of 30 years at age 57 when his employer closed. He wanted to keep working and was not prepared, financially or emotionally, for retirement. However, his skill set was decades out of date. He wanted to hold out for his old salary and was unwilling to relocate or consider jobs that were not near. He looked for a job for three years before officially declaring himself retired at age 60. Now, he has no choice but to start Social Security at age 62 and lock-in a greatly reduced benefit. His retirement will be quite tight, which wouldn’t have been the case had he been able to work and save for another 8-10 years as he had originally planned.

To work to age 70, most folks will have several different careers and will need to continually educate themselves and possibly even retrain entirely if their profession is going to be impacted by innovations such as the driver-less car. Education will become life-long, instead of something which is completed and left behind in your early twenties. There is no doubt that it is a challenge to be a job seeker in your 50’s or 60’s, which is why the best thing for those at risk of job loss is to keep your skills and certifications fresh and to change jobs before you find yourself unemployed.

The two most valuable companies in the world today are Apple and Google, each with a valuation of roughly $500 Billion. That shows the remarkable economic opportunity behind innovation. And Google created that value in less than 18 years! As investors, it’s easy to recognize the growth achieved from new technology. For the sake of your individual financial plan, however, you first need to make sure that you will have an income to save and invest! Consider what are the risks to your career before those risks become a reality.

The Saver’s Tax Credit

Posted On May 30, 2016 By Admin In Retirement Planning, Uncategorized / 1 Comment

Since most employers today no longer provide defined benefit pension plans for their employees, the burden of retirement saving has shifted to the employee. Not surprisingly, saving for retirement is a pretty low priority for the many Americans who are focused on how they are going to pay this month’s bills.

Funding Your Retirement With Dividends

Posted On May 2, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning /

Much has been studied, analyzed, and written about the “safe withdrawal rate” from a retirement portfolio, but unfortunately, there is no withdrawal rate that is guaranteed to work in all circumstances. The interest rates on bonds remains so low today that a portfolio of 60% equities and 40% bonds is almost certainly going to lag its historical return over the next decade. That’s a real danger to anyone who is basing their retirement withdrawals on past performance.

Self Employed? Discover the SEP-IRA.

Posted On April 11, 2016 By Admin In Retirement Planning /

The SEP-IRA is a terrific accumulation tool for workers who are self-employed, have a family business, or who have earnings as a 1099 Independent Contractor. SEP stands for Simplified Employee Pension, but the account functions similar to a Traditional IRA. Money is contributed on a pre-tax basis, and then withdrawals in retirement are taxable. Distributions taken before age 59 1/2 may be subject to a 10% penalty.

Social Security: It Pays to Wait (Updated for 2026)

Posted On April 4, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

Delaying Social Security retirement benefits can significantly increase your monthly checks — sometimes by 24% or more — and provide more lifetime income for retirees. This article explains the 2026 rules for claiming, the benefits of waiting, and how this decision fits into a retirement income plan. We work with retirees and pre-retirees with $500,000–$5 million in assets.

How Social Security Benefits Are Adjusted in 2026

In 2026, Social Security retirement benefits receive a cost-of-living adjustment (COLA) of 2.8%, increasing average monthly payments for retirees. The average benefit will be about $2,071 per month in 2026, up from around $2,015 in 2025, and the maximum benefit for someone who delays until age 70 can exceed $5,200 per month.

A 2.8% COLA helps protect retirees against inflation, but most retirees still find it difficult to keep pace with rising costs, especially for healthcare and housing.

At What Age Can You Claim Social Security?

Age 62: Earliest eligibility — benefits are permanently reduced compared to later claiming.
Full Retirement Age (FRA): 67 for anyone born in 1960 or later; benefits at this age are unreduced.
Age 70: Maximum benefit age — delayed retirement credits stop after age 70.

Because FRA has fully risen to age 67 for newer retirees and stays there under current law, most people born in 1960 or later should plan around age 67 as the baseline for full benefits.

How Waiting Increases Your Benefit

Delayed Retirement Credits (DRCs) boost your monthly benefit by about 8% for each year you delay past FRA up to age 70. This means:

If your FRA benefit is $2,000 per month, waiting to age 70 could increase it to about $2,480 monthly — roughly a 24% increase.
These increases last for life and are adjusted annually with COLA.

The idea is simple: claiming later means a smaller number of larger checks, versus a larger number of smaller checks if you claim early.

What Happens if You Claim Early

Claiming at age 62:

Can result in up to a 30% permanent reduction in monthly benefits compared with claiming at your FRA. You can receive income sooner, but the benefit is smaller for life.

Many people claim early because they need the income, but that choice often costs tens of thousands of dollars over a lifetime compared with waiting if they have the savings cushion to delay. Social Security decisions should not be made in isolation, but coordinated with investments, taxes, and withdrawal strategy as part of an overall retirement income planning approach.

How Earnings and Work Affect Benefits

If you claim before FRA and continue working:

The earnings test may temporarily withhold some benefits if your income exceeds the 2026 limits.
- For those under FRA: about $24,480
- In the year you reach FRA: about $65,160
  Any withheld benefits are credited back when you reach FRA so they are not permanently lost.

Should You Always Wait Until Age 70?

Not always — but for many pre-retirees and retirees with healthy life expectancies and sufficient savings, delaying benefits until age 70 can offer the strongest long-term financial outcome. Here’s why:

Guaranteed higher lifetime income: Waiting adds DRCs up to age 70.
Protection from longevity risk: Larger lifetime checks help cover decades of retirement. If you are worried that you will live to be 95 or 100 and run out of money, delaying benefits can actually help.
Coordination with other income: Larger Social Security benefits can reduce the need to draw down other retirement savings in your seventies.
Survivor Benefit: If you are married and the higher earning spouse, there will be a Survivor’s Benefit if your spouse outlives you. In effect, whichever spouse has the higher benefit, that amount will apply to both lifetimes. So, even if you have poor health, there could be a benefit to delaying to age 70.

However, waiting makes sense only if you:

Have enough cash flow or savings to bridge the gap
Are in reasonably good health
Have not already locked into significant medical or living expenses early in retirement

How to Fit This Into a Retirement Income Plan

Choosing when to claim Social Security is not just a number-crunching exercise — it’s a major retirement decision that interacts with:

Your overall retirement income strategy
Roth conversion timing
Required Minimum Distribution (RMD) planning
Medicare premiums and cost projections
Sequence of returns risk

An effective claiming strategy considers all of these rather than isolating Social Security alone. For example, coordinating your Social Security timing with a Roth conversion can reduce your taxes and spread taxable income over years — a key component of a comprehensive retirement plan. You might find our Questions to Ask a Financial Advisor and Who We Help pages helpful when evaluating professional guidance. Read about hiring an advisor vs DIY.

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Examples of Claiming Outcomes

Scenario 1 — Claim at Age 62:

Immediate income, but about 30% lower monthly benefits than claiming later.
Suitable for retirees needing earlier cash flow and limited savings.

Scenario 2 — Claim at FRA (67):

Full benefits with no reduction.
Balances early retirement income with higher long-term benefit.
If you will be receiving spousal benefits, there are no deferred retirement credits past full retirement age. Claim now! The spousal benefit is equal to one-half of your spouse’s PIA. If this exceeds your own benefit (based on your earnings), then you will receive the spousal benefit.

Scenario 3 — Claim at 70:

Maximum benefit with roughly 24% more than FRA benefits due to DRCs.
Often best for healthy retirees with adequate savings to wait.

Frequently Asked Questions

What is full retirement age in 2026?
Your full retirement age (FRA) is age 67 for those born in 1960 or later,

How much can Social Security benefits increase by waiting?
If you delay benefits from 67 to age 70, your monthly benefit may increase by up to about 24% from delayed retirement credits. If you delay from 62 to 70, your monthly benefit will be 77% higher.

Can I work and claim Social Security in 2026?
Yes — but if you claim before FRA and earn above the earnings limits, some benefits may be withheld temporarily before FRA.

What Do Low Interest Rates Mean For Your Retirement?

Posted On March 7, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

A 2013 study from Prudential considered whether a hypothetical 65-year old female retiree would have enough retirement income to last her lifetime. In their scenario, they calculated a 21% possibility of failure, given market volatility and longevity risk. When they added in a third factor of “an extended period of low interest rates”, the failure rate rose to 54%.