The Jacobs Financial Group

Feel Like Un-Retiring? How to Prepare

In October 2008, the MetLife Mature Market Institute released a study that said the over-55 workforce will account for almost 93 percent of the net increase in the U.S. civilian labor force between 2006 and 2016. At the same time, MetLife reported that many American workers plan to stay on the job “at least” until age 69.

The Pew Research Center’s Social & Demographic Trends Project echoed those findings in May 2009, saying that just over half of all working adults aged 50-65 plan to delay their retirement, with 16 percent saying they never plan to stop working. The issue, says the Pew study, is not about what these Americans earn, but how much they lost during the investment meltdown and the worst economic downturn in more than 70 years.

Add all these factors together and you have one of the most interesting labor situations for older Americans ever. That’s why that for every retiree or potential retiree who feels they need to return or stay on the job, it’s particularly important to review investment, insurance and tax issues. Here are some critical points to address:

How are your skills? This is a valid point for current and potential retirees. The best job candidates are those with current skills in technology and procedures specific to an industry, so staying in the workforce may mean retraining. If there’s a way to get an employer to pay, do it. But if you have to pay for your own education, you really need to weigh whether your earnings will justify it.

Be realistic about your demographic in the workplace: While age discrimination is illegal, there are some workplace cultures where older workers frankly seem out of place. You have to ask whether you are going to be happy staying in a field that’s populated by younger workers with different interests or whether you might try another line of work.

Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked? But it may not be the best option after a year or two out of the workplace.

Consider health insurance issues: If a retiree returning to the workforce is already receiving Medicare or is covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial advisor.

Know your tax picture: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact full or part-time income will have on your finances. Most retirees realize that it doesn’t take much income to knock them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.

Consider what earnings will do to all your retirement payments: If you are planning to continue working or returning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. If you are planning to work, it’s important you consider suspending or delaying receipt of those benefits for as long as you can.

Look for work-related incentives: Particularly for public sector workers, there are opportunities to return to state employment and actually augment existing pensions. Keep an eye out for these programs and see if they work for you.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.

July 2010 — This column is produced and is provided by The Jacobs Financial Group. (06-09)

Ways to Afford Your Retirement Account Catch-Up Contributions

Turning 50 might not be everyone’s idea of excitement, but when it comes to saving for retirement, 50 is when things start getting a lot more interesting.

That’s because people age 50 and over can make what are known as “catch-up” contributions to IRAs and most workplace-based retirement plans. These special contributions are in addition to regular contribution limits and allow individuals to maximize the amount of tax-advantaged retirement savings they can stash away.

The catch-up phenomenon has never been more important as American workers attempt to rebuild retirement savings devastated by recent market losses. Taxpayers 50 or older are permitted to make additional contributions beyond standard limits. For calendar year 2010, here are the standard contribution limits with their catch-up amount:

• Traditional and Roth IRAs have a standard contribution limit of $5,000 with an over-50 catch-up
contribution of $1,000 for a total contribution limit of $6,000.

• SIMPLE IRAs have a standard contribution limit of $11,500 with an over-50 catch-up contribution
of $2,500 for a total contribution limit of $14,000.

• 401(k), 403(b), 457(b), Roth 401(k) and Roth 403(b) plans have a standard contribution limit of
$16,500 with a catch-up contribution of $5,500 for a total contribution limit of $22,000.

So, where to find the money? Here are some suggestions to make it happen:

Earn more: Yes, a tall order in a tough economy. But if you can take on extra freelance work or a part-time job that you enjoy, you can work to extinguish debt and maximize your savings.

Cut out the extras: Either on paper or on the computer, write down every dollar you spend in the average week (and cut off credit card use during that week). At the end of that week, start marking out non-essential items just to see how much you could live without. Start with gourmet coffee and restaurant or carryout meals and work backward from there. And don’t forget those regular monthly expenditures that can really add up. Do you really need premium cable? Can you surrender your landline in favor of a cell phone that’s matched to the exact number of minutes you’ll need? Can you afford a higher deductible on your health, home or auto insurance to save on premiums?

Set a budget: Once you’ve established how your income covers the essential expenses you must plan for and a few inexpensive treats that should stay in, build a budget that includes specific amounts you can allocate toward debt. Going forward, keep a running total of your spending and revisit how that budget is working on a monthly basis until you start to see some positive results, and then you can review the performance of that budget a little less frequently.

If you can do it safely, take over home and auto maintenance yourself: The do-it-yourself movement is in a new phase with the economic downturn. For any home or auto maintenance chores you may have during the year, learn as much as you can about those tasks and estimate the cost of materials and your time before doing them yourself. Previous generations made do-it-yourself a necessity. See if that option is right for you and you might save considerable money doing it. Also, for bigger jobs, pair up with friends and family and you can help each other save money.

Turn down the thermostat and park the car: Don’t underestimate the value of energy savings in your budget. Keep the temperature down at home and opt for public transit, biking and walking where you need to go. For a look at how much public transit can save you, go to the American Public Transit Association’s gas savings calculator . And if you’re going to walk or bike, that’s not only going to save your money, it’ll do wonders for your health.

Go debit: Debit cards wearing a bankcard logo are typically welcome at most stores where credit cards are accepted. This way, you pay cash without carrying cash. If you don’t have such a card, you can probably get one from your bank to replace your traditional ATM card, but remember to tell them to limit your buying power on the card to only what you have in your account. And use overdraft protection to avoid fees.

Buy used for yourself: If you need clothing, a car or a new watch to replace the old one that’s past fixing, it might be worthwhile to buy second-hand at shops or on the Internet. Plenty of people have unloaded items in relatively good shape to bring in cash during the recent downturn. Get in the habit of saving money on everything.

June 2010 — This column is produced and is provided by The Jacobs Financial Group. (03-10)

A Guide to Withdrawing Retirement Assets

A lot is being written about how much money Americans can withdraw from their investments to fund their retirement years. Now, a new research institute launched by Fidelity Investments has outlined the order in which money should be withdrawn from various tax-deferred and taxable investment accounts. Described as the ‘withdrawal hierarchy,’ the Fidelity Research Institute suggests the order, with modifications made courtesy of other financial planning experts.

1. Take your minimum required distributions (MRDs) from qualified accounts and IRAs. If you are age 70½ or older, make sure you know which of your accounts require such distributions and how large those distributions need to be, and then meet the requirements and deadlines, avoiding the application of the 50 percent income tax penalty that will be assessed if you fail to make timely withdrawals of required distributions.

2. Liquidate loss positions in taxable accounts. Some investments in your taxable accounts may be worth less than their tax basis. In addition to offsetting realized losses against realized gains, at the federal level you can usually use up to $3,000 ($1,500 for married couples filing separately) of net losses each year to offset ordinary income including interest, salaries, and wages. Unused losses can be carried forward for use in future years.

3. Sell assets in taxable accounts that will generate neither capital gains nor capital losses. Such assets generally include cash and cash-equivalent investments as well as capital assets which have not increased in value. If your withdrawals from this tier in the hierarchy largely come from cash-equivalent investments, sufficient liquid assets holdings should remain intact in order to cover short-term financial emergencies. And be especially mindful of portfolio rebalancing issues.

4. Withdraw money from taxable accounts in relative order of basis, and then qualified accounts or tax-deferred saving vehicles funded with at least some nondeductible (or after-tax) contributions, such as variable annuities and Traditional IRAs that contain non-deductible contributions. The choice depends on the circumstances, and in some cases it might make more sense to tap the tax-deferred vehicle first, but for most retirees, capital gains rates are lower than ordinary income tax rates and generally liquidating capital assets first would be beneficial.

Assuming there is a significant difference in the basis-to-value ratio of the assets to be liquidated in two accounts, the better tactic for choosing between these two types of withdrawals may be to liquidate the assets with the higher ratio. That is, the assets that have generated the smallest gain or the largest loss as a percentage of their basis. If the basis-to-value ratio of the assets to be liquidated in each account is relatively low due to significant investment gains, it often will be preferable to liquidate the assets in the taxable account. Conversely, if the basis-to-value ratio of the assets to be liquidated in each account is relatively high, it may be preferable to liquidate assets in the tax-deferred account if portfolio demands require it. Note that IRAs are generally subject to certain aggregation requirements when allocating basis. When liquidating gain positions in taxable accounts, it usually makes sense to sell assets with long-term capital gains first, since they should be taxed at lower rates than short-term gains.

5. Withdraw money from tax-deferred accounts funded with deductible (or pre-tax) contributions such as 401(k)s and Traditional IRAs, or tax-exempt accounts such as Roth IRAs. It may not make much difference which account you tap first within this category since all withdrawals from any tax-deferred accounts funded

with fully deductible (or pre-tax) contributions are taxed at the same rate. When withdrawing money from tax-deferred accounts funded with fully deductible (or pre-tax) contributions, you may wish to request that taxes be withheld.

If you believe that the withdrawals you make may be subject to different tax rates over the course of your retirement (whether due to changes in tax law or to varying tax brackets as a result of fluctuations in income) you may be better off liquidating one type of account within all of these guidelines before another. For example, it may make more sense to leave your Roth account intact if you thought your ordinary income tax rate was likely to rise in later years, increasing the value of the Roth’s tax exemption.

Estate planning considerations may also significantly impact the entire hierarchy. Generally, qualified and tax-deferred assets may be given a higher order within the withdrawal hierarchy in the case of larger estates expected to hold “excess” assets which will pass to heirs or be subject to estate taxes. Capital assets receive a step-up in basis at death, while qualified and tax deferred assets are considered to contain “income in respect of a decedent” and do not receive a step-up. A number of other issues may also have an effect on the recommended order of withdrawal, like if the retiree’s income approaches the threshold of paying taxes on Social Security income.

October 2006 — This column is produced and is provided by The Jacobs Financial Group.

Don’t Let Economic Troubles Threaten Your Retirement Plans

As the economy has worsened, not only have retirement funds dropped in value with the market, but also many people have been tempted to tap savings as a way to cut debt or otherwise shore up their finances after a job loss. Still more have found that employers have dropped matching contributions to shore up their own finances.

Worry about retirement seems to be widespread. A January survey by the National Institute on Retirement Security noted that 83 percent of Americans are concerned about their ability to retire.

Yet the worst thing you can do is tap or give up on your retirement funds. No one can know with any certainty when the investment markets will rebound, but even if you can contribute something, you stand to gain once markets start to rebound. Even more important, you risk penalties and the lost potential for the earnings if you turn your back.

Before you make a move, seek out some advice. It’s a good idea to check in with an expert such as a Certified Financial Planner™ professional to see where your retirement funds stand in light of all your finances before you do anything.

In the meantime, here are things you can do to put your retirement funds in better shape.

Don’t stop funding your 401(k) under any circumstances: In March, the Spectrem Group, a Chicago-based consulting firm, reported that 34 percent of U.S. employers have reduced or eliminated matching contributions to their defined contribution retirement plans – which include 401(k)s and 403(b)s – since January 2008. The Pension Rights Center reports that besides the Big Three automakers, dozens of major companies have cut back their match, including Motorola, Starbucks, and JPMorgan Chase & Co. It’s a significant impact. US News & World Report recently reported that a worker who earns $50,000 annually and receives a full employer match of 50 cents to the dollar on six percent of his or her pay, the match cut means $16,000 less for retirement. An employer dropping its contribution is bad news, but you should make every effort to keep up with your contribution because if you don’t, you’ll miss valuable tax deductions and the chance to build your funds more effectively for the long term.

Stay invested: Because no one precisely knows when the market is headed up or down it’s best to stay invested at a time when everyone is waiting for a rebound. Keep in mind that the market’s top performing days typically come at the start of a recovery, so leave your money in your 401(k) and IRAs.

Keep in mind that withdrawing or borrowing your funds can be costly: If you have an emergency situation, be careful. Workplace 401(k) plans do allow for hardship withdrawals, but you might have an option to take a loan, which would save you the taxes and the 10 percent penalty that accompany hardship withdrawals for account holders under the age of 59. The majority of 401(k) plans allow you to borrow up to 50 percent if your vested account balance or $50,000, whichever is less.

Adjust your spending so you can save more: If you have an existing Roth or traditional IRA or other means of saving for retirement, do whatever you can to get more money into these accounts. It may not come close to meeting the shortfall from losing an employer’s contribution or the chance to add to a 401(k) after you’ve lost your job, but it’s critical to keep some savings going.

June 2009 — This column is produced and is provided by The Jacobs Financial Group..

Veterans Set For a Big Benefits Upgrade in 2009

The Post- 9/11 Veterans Educational Assistance Act, which will become effective in August 2008, will position returning U.S. veterans for one of the biggest upgrades in post-military education benefits since the G.I. Bill was signed in 1944.

The act, signed by President Bush in June, pays up to the full cost of tuition and fees at the most expensive public school in the state in which a veteran enrolls. Some can get a free education if they qualify for the full amount, and it not only extends to the main four branches of the military, but also activated members of the National Guard and the Reserves. Best of all, the new program will allow returning servicemen and women with qualifying service to transfer their benefits to spouses or children if they already have a degree.

The current G.I. Bill pays only 70 percent of the cost of a public education and almost a third of the cost of a private-school education, and it currently costs vets $1,200 to enroll in the program.

Returning veterans might consider this benefits upgrade as part of an overall look at their financial status. A financial planning professional with expertise in military benefits can be a good first stop to re-start civilian life.

To qualify for the new benefits, veterans need to have served at least three months of active duty since 9/11, after which benefits are pro-rated according to months served, up to 36. For veterans who have served at least three years of active duty, they’ll qualify for 36 months worth of in-state tuition and fees, or four academic years. For those who serve 24 months, they’ll qualify for 80 percent of in-state tuition, plus 80 percent of the costs of books and housing. For those who leave the military due to a service-related disability and served at least 30 days of continuous active duty qualify for the maximum benefit. The program will cover in-state tuition and fees and give veterans a housing stipend pegged to area housing prices. It will also pay $1,000 a year toward books and up to $1,200 toward tutoring expenses as long as it’s for an in-state school. Out-of-state students will need to make up the difference between in-state and out-of-state costs.

There’s also the Yellow Ribbon G.I. Education Enhancement Program, where the federal government matches institutional grants offered by participating schools to vets who qualify for the maximum benefit.

Other things returning vets should remember:

Getting back to retirement planning: Military service counts toward vesting for all civilian retirement plans. And thanks to the Heroes Earned Retirement Opportunities (HERO) Act enacted in 2006, military and their families can actually put more money into their traditional or Roth IRA accounts. The act allows tax-free combat pay to be considered as earned income for determining the contribution amount for traditional and Roth IRAs. Before, a military person who earned only combat pay wasn’t allowed to contribute to either form of IRA.

Plan proper use of accumulated pay: For returning military receiving accumulated military pay or compensation from civilian employment, it’s tempting to take the money and blow it. It makes sense to sit down with a financial and tax adviser before a dime gets spent.

Understand tax issues: Activated and deployed military personnel receive special tax breaks at the federal and sometimes state level. Military income earned by soldiers in combat zones is tax-free and they don’t have to file taxes until 180 days after their return. Activated military personnel also are entitled to an extension on the period of time allowed for a tax break on the profits from the sale of a home. They’re also entitled to tax breaks on childcare assistance and certain travel. Nontaxable combat pay can also be considered for the Earned Income Credit.

Know your rights if problems occur: The Servicemembers Civil Relief Act of 2003 provides a variety of financial protections for active duty personnel. The act provides stays on civil litigation including bankruptcy and divorce and prevents wage attachments while military personnel are away. Coverage requires active duty confirmation from a commanding officer but expires 90 days after that status has been terminated. The law also makes it tougher – but not impossible – for landlords to evict military families for nonpayment of rent.

October 2008 — This column is produced and provided by The Jacobs Financial Group.

What if Your Employer Wants You to Retire Slowly or Come Back From Retirement? Be Ready with a Plan

Roughly 25 percent of the U.S. workforce is nearing retirement age, according to a recent survey by Hewitt Associates. This has important ramifications for the retirement many Americans will have in the future.

The consulting firm reported that out of 140 mid-size and large employers, 55 percent already had evaluated the impact that potential retirements could have on their organization, and 61 percent have developed or will develop special programs to retain targeted, near-retirement employees. Only one in five said that phased retirement is critical to their company’s human resources strategy today, that number more than triples to 61 percent when employers look ahead 5 years.

What’s phased retirement? Conventionally, it’s the process of allowing employees who have reached 59 ½ to cut their hours while voluntarily receiving a pro-rata portion of their pension annuities. The company gets to keep its intellectual capital in place a little longer while the worker gets to segue into retirement gradually while accessing some of their retirement assets along the way. Provisions in the Pension Protection Act of 2006 made it easier for companies to create phased retirement strategies.

Hewitt said that in addition to retaining current employees, employers are reconsidering their policies toward rehiring retirees. While 45 percent indicated they currently have policies in place that limit the ability to rehire retirees, 46 percent said they were likely to review their rehiring policies in the future.

What kind of consideration process should you undertake if your employer offers this option? A good first step is to consult a financial planner to talk through the possibilities:

Envision how a phased retirement or return to your workplace would affect your life: If you’re reviewing your retirement planning at any age, it makes sense to ask yourself under what conditions you’d leave the workplace or return to it. If you were offered phased retirement, how would you deal with the cutback in responsibility and hours? Some people thrive on work relationships and might not know what to do with significant time outside the office. You obviously need to know based on current projections how much money you’re likely to gather from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life and for how many years you’ll earn that income.

Check what returning to work will do to your total retirement income: You obviously need to know based on current projections how much money you’re likely to gather from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life and for how many years you’ll earn that income. Early retirement transitions can have some adverse effects particularly where pensions are involved. But, if the place where you spent your career comes calling, you might get some attractive pension incentives to get people to come back. Talk these options over with both financial and tax experts.

Can you negotiate for benefits? If you’re investigating post-retirement employers, including your own, see what benefits you’ll qualify for, and take a close look at educational benefits that may allow you to upgrade your skills for free. If your company will pay you to go to school and give you the time to actually work on a degree, that might be a very nice incentive indeed.

Consider insurance issues: If you are a retiree returning to the workforce and you’re already receiving Medicare or covered by a “Medigap” policy, you may be able to lower your costs or improve your coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial expert.

Keep saving: If you return to the workplace, see what you can do to take advantage of any new wrinkles in your employer’s 401(k) plan or any other tax-advantaged retirement savings benefits, particularly if they match your contribution. Don’t miss a chance to enhance your retirement savings, even if you’ve already retired once.

December 2008 — This column is produced and provided by The Jacobs Financial Group.