January 6, 2020
FIGURING OUT HOW MUCH YOU NEED TO SAVE for retirement was never easy—and it’s becoming even more complicated.
These days you have to factor in increasing longevity, rising health care costs, low interest rates, job shifting, and a changing global economy. Now even the rules are changing. On December 20, 2019, the SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law. The Act, which goes into effect in 2020, significantly changes the rules regarding 401(k)s, IRAs and other savings and estate planning vehicles, making it potentially easier for people to save more. (Read “SECURE: Retirement Legislation” to see how the changes might affect you and discuss them with your advisor.)
“All of these factors have combined to create new complexities for people as they save for the retirement they want,” says Surya Kolluri, managing director, Retirement and Personal Wealth Solutions, at Bank of America. “More than ever, it makes sense to have regular conversations with your advisor to see where you stand and what adjustments you might need to make from year to year.”
Kolluri suggests focusing your conversations with your advisor on the following three areas:
Together, review how much you currently have in your 401(k), IRA, brokerage and any other savings accounts. Based on that total, as well as the amount you’re currently putting away each year, and taking into consideration your age and investing style, plus your estimated Social Security benefits, your advisor can project how much income you may have by your desired retirement age.
“See how working a few years more—or less—might affect your retirement income. And be sure to ask your advisor whether the provisions of the SECURE Act might provide you with new opportunities to save more,” says Kolluri. For instance, the act removes the age cap for contributing to traditional IRAs1 and extends the age at which you must begin taking minimum distributions to 72 from 70 ½, allowing your assets to potentially grow tax-deferred a little while longer.2
The traditional rule of thumb has been to save enough so that you can withdraw 4% of your savings annually without running out of money. But, says Kolluri, “There’s no one-size-fits-all spending rate, and many factors can complicate that math.” With medical advances increasing longevity, you may live longer than you anticipate. Rising health care costs could eat into your savings. And in today’s persistent low interest rate environment, your portfolio may not generate the cash flow you could be counting on. What’s more, many retirees find themselves offering financial support to kids or other family members, Kolluri notes. “Many times you can find yourself serving as the family bank—make that one of your line items.”
Your advisor will run the numbers on a variety of scenarios, based on your individual situation, taking into account guaranteed sources of income (such as Social Security, a pension or annuity) and other potential sources of retirement income (such as your home equity or an inheritance,) to help you figure out how much you might need to save in order to live the secure and comfortable retirement you want.
Ideally, you should be stashing away 12% to 15% of your pay each year towards retirement, says Ben Storey, director, Retirement Thought Leadership, at Bank of America. One easy way to boost your savings is to sign up for automatic increases to your contribution rate. The SECURE Act allows employers to automatically increase employees’ savings rates to 15% of annual earnings over time, up from a 10% cap now, if they’re enrolled in certain 401(k) plans. It also gives employers more incentive to offer retirement plans that include annuities, which can provide guaranteed income payments.3 Check with your employer about these changes.
Ask your advisor whether you might benefit from a health savings account (HSA), Kolluri adds. Funding an HSA, paired with an eligible high-deductible health insurance policy, is more than a way to save for medical expenses, he notes. “After age 65, you can use HSA money to pay for basic living expenses in retirement as well.”
Finally, have a serious conversation with your advisor about risk. You may prefer relatively safe investments like bonds and cash, particularly as you near retirement, but bear in mind that the trade-off for safety is often that your assets have less potential to accumulate—which can, in turn, heighten the risk that you’ll run out of money in retirement.
It’s always been a good idea to have an annual retirement checkup, says Kolluri. “But this year, the rule changes make having that conversation even more important. Don’t wait. Schedule it today.”
1 If you were age 701/2 or older in 2019, you would not be able to make a traditional IRA contribution for 2019. Effective January 1, 2020, in accordance with new legislation, anyone may make a traditional IRA contribution for 2020 if they have earned income regardless of their age. Note that a spouse can also contribute on behalf of a spouse who has no earned income, provided the contributing spouse has enough earned income to cover the contributions.
2 If you were age 701/2 or older as of 12/31/2019, you would be required to take a required minimum distribution (“RMD”) for 2019. Effective 1/1/2020, in accordance with new legislation, the required beginning date for RMDs for individuals who turn age 701/2 oron or after 1/1/20 is age 72. You may defer your first RMD until April 1st in the year after you turn age 701/2 or 72, as applicable, but then you’d be required to take two distributions in that year.
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