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RETIREMENT PLANNING

Let us be your guide for retirement.

Two-thirds (67%) of Americans between ages 50 and 74 don’t have a formal retirement plan, and 80% lack basic retirement planning knowledge on how to be financially secure.¹

Yikes. Are you in this boat? Do you worry about not being able to retire when you’d like to because you simply don’t think you can afford to? Or maybe you’ve decided when you want to retire, but know you’ll have to sacrifice quality of life because you’ll constantly be up against a budget. And maybe you’re in the 33% who do have a formal, detailed plan and feel confident that you’ll be able to live your later years free of financial worry.

It doesn’t matter which camp you fall into or how comfortable you feel with your retirement plan. The reality is, the way you spend the last 10, 20, 30, or even 40 years of your life is nothing to take lightly. You might be too overwhelmed to set goals and confidently work towards those retirement goals, or you might be too close to your finances to see the big picture and feel assured that you didn’t miss something.

At Baystate, we’re trained professionals whose job it is to help folks plan for retirement, day in and day out. If you’re stressed or have questions about when you’ll be able to retire, what your monthly income will look like, or if you’re choosing the right retirement instruments, we’ll sit down with you, crunch the numbers, look at your current position and where you’d like to end up, and set you on the right track to start working toward those goals.

¹ American College of Financial Services 2020 Retirement Income Literacy Survey: https://retirement.theamericancollege.edu/sites/retirement/files/2020RetirementLiteracyResults.pdf

When should I start saving for retirement?

Now! If you’re 22 or 52, it’s time to start securing that nest egg. 

In 2020, the median household income in the US was $67,521.2 If you’re putting away 15% of your household income into retirement savings (often recommended), you’re saving $10,128 annually ($844 monthly). Assuming a basic model where your income never increases (unlikely), you earn a 8% annual interest rate, and you retire at age 62 (average age of retirement in the US), let’s take a look at how much your nest egg could grow based on when you start saving.*

The power of compound interest is impressive! So yes, it’s time to start saving (or saving more).

US Census Bureau (September 2021)                                                                                                                                                                                                                                                                                                 *This hypothetical example is for illustrative purposes only. This is not a prediction or guarantee of actual results. This example is not intended to represent the value or performance of any specific product.

What retirement plans are available to me?

Employer-Sponsored Plans 

401(k)s

The most common defined contribution plan is the 401(k), a company-sponsored, tax-deferred retirement savings plan. The contributions you and your employer make are automatically withdrawn from your paycheck and invested in funds of your choosing. Your contributions are not taxed until you withdraw them at a later date. The advantage to this is that when you retire, you will belong to a lower tax bracket and your savings will be taxed at a lower rate. 401(k)s have an annual contribution limit of $20,500 in 2022 ($27,000 for those age 50 or older).

403(b)s

A 403(b) plan is a retirement plan for certain employees of public schools, employees of certain Code Section 501(c)(3) tax-exempt organizations and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan. The employer may also contribute to the plan for employees. 403(b) plans are also known as tax-sheltered annuities because contributions, like with IRAs, are pre-tax and are not taxed until withdrawn.

Savings Incentive Match Plan for Employees (SIMPLE)

In this written salary reduction arrangement, eligible employees contribute to an IRA in their name. Your employer is required to make annual contributions for each eligible participant. This type of arrangement is available to self-employed individuals or owners of companies that have 100 or fewer employees and no qualified retirement plan. Employees are eligible for a SIMPLE IRA if they earn at least $5,000 annually during any 2 of the preceding calendar years. SIMPLE IRAs may be funded by annuities.

For 2020, the maximum employee contribution limit is the lesser of 100% of compensation or $13,500. SIMPLE IRA owners age 50 or older (as of December 31 of the tax year to which the contribution relates) may be eligible to make an annual “catch-up” contribution each year of $3,000. The money contributed to a SIMPLE IRA will accumulate tax deferred until money is withdrawn. Withdrawals are subject to ordinary income tax and, if taken before age 59 ½, a 10% federal income tax penalty may apply, and this penalty is increased to 25% for distributions taken within the first two years of participation in the plan.

Individual Retirement Accounts

IRAs

An IRA is a tax-deferred personal savings account that allows you to save for retirement without a company-sponsored plan. Throughout your lifetime, you can make tax-deductible “contributions” (subject to limitations) to your IRA, which you can then invest in basic securities such as stocks and bonds. For 2020, the annual amount you can contribute to an IRA is the lesser of 100% of earned compensation or $6,000, or $7,000 if you are age 50 or older.

With a traditional IRA—the most common type of IRA—income taxes are deferred until you withdraw them, so you don’t pay annual federal (and, in many cases, state) income taxes on your earnings. At age 59 ½, you can make taxable withdrawals from the account called distributions for your retirement. If you choose to take distributions before you turn 59 ½ years old, the government imposes a premature distribution penalty of 10% on your withdrawal. Additionally, when you turn 72 years old, you are required to take distributions by April 1 of the following calendar year.

Roth IRA Account

Unlike the traditional IRA, contributions to the Roth IRA are considered “after-tax” and therefore not deductible, but you can generally take distributions from the Roth IRA tax-free. The maximum annual contribution to the Roth IRA for 2018 is $6,000, $7,000, for individuals age 50 and older (as of December 31 of the tax year to which the contribution relates). The advantage to a Roth IRA is that your dollars are taxed in increments of your paycheck before they're invested instead of as large lump sums when taken out.

The Roth IRA became an option after the Taxpayer Relief Act of 1997, and allows for investors filing single on their taxes with a modified adjusted gross income in 2020 of less than $139,000 or married couples filing jointly with a combined adjusted gross income of less than $206,000 annually, to make limited, annual contributions toward retirement. There is no mandatory age at which you are required to take distributions from the Roth IRA, and there is no premature distribution penalty for amounts you withdraw from the principal, subject to certain requirements

What's an annuity?

An annuity is a tax-deferred investment offered by an insurance company. In exchange for a purchase payment or series of payments, the insurance company guarantees to pay a stream of income in the future in exchange for a purchase payment or series of payments. There are two stages of an annuity called the accumulation period and the annuitization period. The accumulation period is a specified period of time when the policy owner makes payments into the annuity. Once the annuity reaches the annuitization period, it begins paying the annuitant the principal back with interest.

There are two types of annuities—Immediate and Deferred.

Immediate Annuities

An immediate annuity is usually purchased with a large single premium and begins a stream of income within the first 12 months from the date of issue. You decide when payments will begin within that period and how long to receive income. There are two types of immediate annuities: fixed and variable.

Immediate Fixed 

An immediate fixed annuity provides a guaranteed and predictable stream of income during the payout period.

Immediate Fixed and Variable

An immediate fixed and variable annuity provides a guaranteed stream of income. The variable income payments fluctuate based on the performance of the variable investment choices selected. A fixed account is also usually offered as an investment choice within this type of contract.

Deferred Annuities

A deferred annuity is specifically designed to help accumulate assets for retirement. It also offers the ability to turn those assets into a guaranteed stream of income at some point in the future. You decide when payments begin and how long to receive income. There are two types of deferred annuities: fixed and variable.

Deferred Fixed Annuity

A deferred fixed annuity earns interest during the contract's accumulation period. The interest rates are set by the issuing company and are guaranteed not to be lower than the minimum guaranteed interest rate shown in the contract. A contract's accumulated assets can be converted into a guaranteed stream of income for the future.

Deferred Variable Annuity

A deferred variable annuity offers variable investment choices (and usually a fixed account) in which the contract owner can invest. During the accumulation period, the investment return and value of the annuity will fluctuate in accordance with the investments selected. A contract's accumulated assets can be converted into a guaranteed stream of income for the future.

Things to Keep in Mind...

Annuities are not appropriate for everyone. There are fees and charges associated with owning an annuity. They also do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying an annuity to fund a qualified plan for the annuity's additional features, such as lifetime income payments and death benefit protection. If a distribution is taken prior to age 59 1/2, a 10% federal income tax penalty may apply.

*This information is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. MassMutual, its employees, and representatives are not authorized to give legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

Still have questions about what retirement plan(s) would be right for you, or think you’re ready to start saving? Book a complimentary consultation with our financial professionals. We’re here to help.

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