Summer Reading for the 401(K) Crowd
Tax season is over, and hopefully you're not facing any immediate financial crises. So whether retirement is two years on the horizon or twenty, summer could be a good season for investing some time in reevaluating and, if necessary, updating your retirement plans.
Most people don't have time to surf the Web looking for the best retirement information, so I've come up with a few suggestions that could be helpful in addressing some of the most basic, important retirement questions: How worried should I be about getting the retirement income I'll need, either from a traditional pension or a 401(k)? What are the best ways to save? When should I start taking Social Security? And how will state tax policies affect my retirement income?
PENSIONS AND SAVINGS.
A recent PBS episode of Frontline addressed the problem of disappearing pensions, using the United Airlines bankruptcy and the experience of other companies' retirees with their 401(k)s as examples. You can view excerpts from the show and read interviews from experts including Vanguard founder John C. Bogle and retirement researcher Alicia Munnell, both of whom are pretty bearish on the retirement prospects of all but the oldest boomers. If you don't want to watch every segment from the show, I suggest choosing the fourth, “What's Ahead,” which lasts about 13 minutes.
This program stirred up some controversy, especially on the topic of the adequacy—or inadequacy—of 401(k)s for funding Americans' retirement. To get both sides of the debate, check out this response from the Profit-Sharing Council of America in Chicago; and another viewpoint from the Employee Benefits Research Institute, a nonprofit research organization in Washington.
If you want to make sure you've found every conceivable way to save for retirement and get a tax break at the same time, check out the June, 2006, update of the Congressional Budget Office's Online Guide to Tax Incentives for Retirement Saving. The first two sections relate to employer-sponsored retirement plans and IRAs, but don't ignore the others—such as “other tax incentives,” because any strategy that helps bulk up your savings can help with retirement, even if they are not labeled "retirement." The information here is dense, but I find it easier to navigate this than search for similar information on the IRS Web site.
STARTING SOCIAL SECURITY.
Even if you expect Social Security to contribute far less than the 40% of income it represents for the average American retiree, you've earned this benefit and should make the most of it. But if you're one of the legions that plan to continue working and earning some income after retirement, you could actually lose some of your benefit under the earnings test rule. This rule says that if you start receiving benefits before reaching your "normal retirement age,"—which differs depending on when you were born—you'll be docked one of every two dollars of earnings above a certain income limit. In 2006, that limit is $12,480.
If you're thinking of leaving your job and will be least 62 (the minimum age to start collecting Social Security benefits) when you do so, the Social Security Administration's earnings limit calculator can help you decide how soon it makes sense to start drawing your benefit.
Here's an example of how it works: You were born July 1, 1942, which makes you 64 years old, and you retired two years ago. This year, if you made $32,000 in consulting income, Uncle Sam will deduct $9,760 from your Social Security benefit. That's because your "full retirement age" is 65 plus ten months. (You can look up your own retirement age here.)
Depending on where you live, state taxes on your pension and retirement income can make a big difference in your disposable income. To see what you're in for if you stay put or if you move to your dream state, the National Conference on State Legislators' report, State Personal Income Taxes on Pensions and Retirement Income, can give you some clues.
The report offers a state-by-state listing of tax treatment of Social Security income as well as any kind of pension: military, state, or from a local government or municipality. The differences are great. If you have a traditional pension, Florida will not tax the income at all. But if you want to retire in the desert, Arizona will charge income tax on the entire pension.
According to this 2005 data, seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—have no income tax at all. But when you start hunting in earnest for a retirement location , remember that states that go easy on earned income may make up for it with higher property, capital gains, or sales taxes. And on top of those, you'll have local taxes to pay.
I won't promise you that any of the above will be easy reading. But once you've checked out at least one or two of these sources that may pertain to your own planning, you can feel virtuous about packing up the latest Steven King or John LeCarré novel and heading for the beach.