As the year turned from 2019 to 2020, there stealthily rolled in several of the most sweeping reforms to retirement and tax legislation in a decade or so (outside of the 2017 Tax Cuts and Jobs Act, or TCJA). The recent changes apply to IRA, 401k and other retirement savings accounts. If any of these apply to you then please read on:
Turning 70½ this or next year
Own a business with or proposing a 401k plan
Working for a small company and do not have access to a 401k plan
Need an early distribution for reasons of qualified birth or adoption
Most people would define their primary savings goal as “retirement.” …Or would they?
Of course, retirement is often a primary long-term savings goal, but not always. The definition of retirement itself has morphed over the recent decade with people living longer lives. “Retirement” encompasses more than simply stopping work and being on a “permanent vacation.” In fact, recent research published in the Journal of Financial Planning* reports that quitting work cold turkey often is not reality – for a number of reasons.
The beginning of October means we are in the 4th Quarter… and the countdown begins to year-end. The following are excerpts from the Year-End Tax Planning Checklist.* Several of these items, if addressed now, could make a big difference to your 2019 tax filing AND add to your savings.
Here is a “fun fact” in the form of a question to ponder over the Labor Day holiday weekend: How much do you think you will need to have saved to pay your cable bill over the course of your retirement? (Answer is below*)
First, some context. I do get questions like this one often from my smarter clients who are truly goal-oriented and who realize how breaking down various retirement (or other) goals into bite-sized pieces makes the whole “affording retirement thing” much easier. Questions like:
How much should we be saving monthly in order to retire or slow down someday?
What kind of annual income can we expect from our portfolio someday?
How much will we need to have saved to afford future healthcare costs? (You can substitute other costs such as cable, vacations, kids’ costs, etc.)
More on the topic of 401k saving: Can there be an “optimal amount” to have in a traditional 401k? At the very least, adjustments can be made to get close-to-optimal. And timing wise with the calendar approaching mid-year there is ample time (unless you have already maxed out your 401k) to make meaningful adjustments to your 2019 401k elections and start the optimizing process.
This topic is especially important for those who take saving seriously and who have at least $400,000 TODAY in a 401k or IRA Rollover accounts combined with a 401k account. (For those with less, these concepts still matter but with less urgency.)
First: How old are you?
Age matters because TIME is one of the biggest determinants of how much a 401k balance can potentially grow.
If you are younger than 40, these concepts could affect you A LOT as the power of compounding can kick in over multiple decades (this does not mean trading; rather saving, allocating and allowing compounding to do its work).
If you are older than 60 and nearer to retirement or selling a business, these concepts matter greatly but the solutions will be slightly different.
If you are in your 50’s, a combination of strategies can work – and keep in mind the “catch up” that allows you to save more.