How Much Do I Need To Save For Retirement?

How much do I need to save for retirement?

Fact of the matter is, it depends on several factors, and there is no one size fits all answer. But today we are going to review important factors when calculating how much you need to save for your retirement.

Retirement Age

The first step will be figuring out when you will retire. Keep in mind that the reality is that many people retire earlier than they expect. The reason for this is because unexpected issues such as new disabilities, work place changes or health problems may get in your way of working as long as you like. Thus, it’s best to keep that in mind when calculating how much you need to save.  And remember, the earlier you retire, the more money you will need to save.

Life Expectancy

We know you can’t know for sure how long you will live. However, you can check your family history and see how long your relatives lived and what diseases are common among your blood relatives. On the other hand, consider that with medical advances many more people are living past their seventies, eighties and even nineties.

Future Health Care Needs

Another important factor to keep in mind is the cost of health care. Costs for healthcare have been on the rise faster than general inflation and less employers are offering benefits to retirees. Consider Long Term Care Insurance.

Lifestyle

Take a few moments to imagine the retirement lifestyle you want. Was it your dream to travel in your later years? Do you plan on working part time? What are some hobbies you’d like to pursue? Would you rather live a simpler life and donate large amounts of money every now and then? Are you going to remain living in the same place you are now?

Consider the expenses needed to live the life you want, when adding up expenses for retirement.

Inflation

If your savings do not keep up with the rate of inflation, the value of your savings might not fully cover your retirement costs. This is because with inflation the purchasing power of your savings will gradually go down as the years go on. If your retirement savings are based on an investment vehicle, make sure that the interest rate is greater than the inflation rate.

Social Security

The reality is, Social Security is in a bit of a strain—more baby boomers rely on it and there are fewer people available to work to pay for their benefits. Additionally, Social Security pays about 40% of the total income of Americans aged 65 and over, which leaves around 60% to be paid in other ways.

The Grand Total

After considering all these factors you should have a much better idea of how much you should have to save for retirement.

For more information about how much you should save for retirement, click here. For a cost of retirement calculator click here. Please note that the calculator alone cannot factor in everything in your personal situation. It is only meant to illustrate a rough estimate.

If you are still unsure of the dollar amount you should have saved for retirement, feel free to call us at Federal National Funding at 201-342-3300 and set up an appointment or teleconference with our financial advisors. 

Property and Casualty Insurance

Today we at Federal National Funding would like to discuss property and casualty insurance.

For starters, property and casualty is designed to help protect your possessions from theft or destruction and your assets from being used up in the event of a disaster or litigation claims brought against you.

The side that handles property side of a policy insures physical items, such as your home, commercial buildings, vehicles, personal items or business inventory. Some forms of property insurance include homeowner’s insurance, fire insurance, flood or earthquake insurance, and automobile insurance.

Insurance contracts such as these may include “open perils” or a “named perils” clause. An open perils clause covers losses for reasons that are not specifically listed in the policy. Typical exclusions are earthquakes, floods, and acts of terrorism or war. A named perils clause on the other hand, requires the actual causes of the loss to be listed in the policy.

Also called liability insurance, casualty insurance covers losses that you may cause to other individual or business. For example, if you have liability insurance on your car and another party is injured in a collision caused by you, your liability insurance will take care of the other person’s medical and repair costs. In addition, if someone sues you because of harm you may have caused to him or to his possessions, your casualty insurance may cover the cost.

Individuals and businesses alike can purchase property and casualty insurance. Personal policies include homeowner’s insurance, renter’s insurance, and automobile insurance. Meanwhile, commercial policies are written specifically for businesses and other organizations.

If you are interested in protecting your assets with property and casualty insurance and wish to learn more, click here or call our office at 201-342-3300. One of our associates will be happy to speak to you. 

Effects of Inflation

If you have long term savings goals such as saving for your children’s college education, or retirement, you’ll want to read today’s blog on the effects of inflation.

To put it simply, inflation is the increase of the price of products over time. The rate of inflation fluctuates over time, sometimes it can run high, other times, it’s so low we don’t notice. But all these fluctuations are generally short term, what we need to focus on is the long term.

Over the years, inflation can chew away at the purchasing power of your income and wealth. This means that even as you save and invest, your wealth buys less and less as time goes on. Those who put off investing and saving will feel this impact even more.

While one cannot deny the effects of inflation, there are ways to fight them. For starters, you should own at least some investments whose potential return is greater than the inflation rate. For example, if a portfolio earns 3% when inflation is at 4% the investment will lose purchasing power over time. While past performance isn’t an indicator of future results, stocks have provided higher long term returns than cash alternatives or bonds. Still, one has to be aware that even with that potential, there is greater risk and potential for loss. Because of this volatility stocks may not be the best option for the money you count on being available in the short term. You will also have to think about whether you have the financial and emotional capacity to ride out these ups and downs as you pursue higher returns.

Diversifying your portfolio — spending your assets across a variety of investments that may respond differently to market conditions — is one way to help manage inflation risk. However, diversification does not guarantee a profit or protect against a loss; it is a method used to help manage investment risk.

Remember, all investing involves risk, including the potential loss of principal. There is no guarantee that any investment will be worth what you paid for when you sell.

For more information about the effects of inflation, or for more strategies to fight against it click here, or call Federal National Funding today at 201-342-3300. One of our associates will be happy to speak to you. 

Withdrawing Before Age 59 1/2

What happens if I withdraw money from my tax deferred investments before age 59½?

Generally, withdrawing from a tax deferred retirement account before age 59 ½ triggers a 10% federal income tax penalty on top of any other federal income taxes due. However, there are certain situations where you can make early withdrawals from a retirement account and avoid the tax penalty. Before we list the types of distributions, please note that you should check your specific plan to ensure that such withdrawals are allowed.

IRAs and employer sponsored retirement plans have various exceptions though the rules are generally similar.

IRA Exceptions

•          Death of the IRA owner: distribution to your designated beneficiaries after your death (beneficiaries are subject to annual required minimum distributions).
•          Disability: distributions can be made due to a qualifying distribution. 
•          Unreimbursed medical expenses: distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your gross income in a calendar year.
•          Medical insurance: distributions made to pay for health insurance if you lost your job and are receiving unemployment benefits.
•          Substantially equal periodic payments (SEPPs): Distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You must withdraw funds at least annually based on one of three rather complicated IRS-approved distribution methods. You generally can't change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do, you'll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-59½ SEPP distributions (unless another exception applies).
•          Qualified higher education expenses: these distributions can be made for you and/or dependents.
•          First home purchase: this distribution can be up to $10,000 (lifetime limit).
•          Qualified reservice distributions: certain distributions to qualified military called to active duty.

Employer Sponsored Plan Exceptions

• Death of the plan participant: upon your death, your designated beneficiaries may begin taking distributions from your account. Beneficiaries are subject to annual minimum required distributions.
• Disability: distributions made due to your qualifying disability.
• Part of a SEPP program (see above): distributions you receive as a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary. You generally cannot modify the payments for a period of five years or until you reach age 59½, whichever is longer.
• Attainment of age 55: distributions made to you upon separation of service from your employer. The separation must have occurred during or after the calendar year in which you reached the age of 55 (age 50 for qualified public safety employees).
• Qualified Domestic Relations Order (QDRO): payments made to an alternate payee under a QDRO.
• Medical care (see above): distributions equal to the amount of your unreimbursed medical expenses that exceed 10% of your adjusted gross income in a calendar year.
• To reduce excess contributions: distributions made to correct excess contributions you or your employer made to the plan over the allowable amount.
• To reduce excess elective deferrals: distributions made to reduce amounts you deferred over the allowable limit.
• Qualified Reservist Distributions (see above).

To learn more about withdrawing before age 59½ click here, or for personalized attention, feel free to call the office at 201-342-3300. One of our associates will be happy to speak to you. 

Unforgettable Birthdays

While we like to think and treat every birthday as special, there are special, there are certain birthdays later in life that can affect your tax situation, health care eligibility, and retirement benefits. On today’s blog, we would like to list them and outline what happens as you reach certain birthdays.

Age 50

If you are a qualified public safety employee, you can begin to take out penalty free withdrawals from your qualified retirement plan after leaving your job if your employment ends after of the year you turn 50.

Age 55

If you're not a qualified public safety employee, you can take penalty-free withdrawals from your qualified retirement plan after leaving your job if your employment ends during or after the year you reach age 55.

Age 59½

At this point, all withdrawals from qualified retirement plans are penalty free after you reach this age regardless of whether you are still employed or not.

Age 62

When you reach age 62 you are eligible for a reverse mortgage. For more information on reverse mortgages, you can click here. You may also start collecting Social Security Benefits, though please note that they will be reduced by 30%. For full benefits you must wait until “full retirement age”, which can range from 66 to 67 depending on the year you were born.

Age 65

At age 65 you are eligible to enroll in Medicare. One should note that Medicare Part A hospital insurance benefits are automatic for those eligible for Social Security. Meanwhile, Part B benefits are voluntary and have a monthly premium. We recommend that to get coverage as early as possible, you should enroll about 2-3 months before turning 65.

Age 70½

You must start taking minimum distributions from most tax-deferred retirement plans or face a 50% penalty on the amount that should have been withdrawn. Annual required minimum distributions are calculated according to life expectancies determined by the federal government.

To learn more about important birthdays, click here, or call our office at 201-342-3300. One of our associates will be happy to speak to you. 

Biweekly Mortgages

Typically, homeowners will make monthly payments for their mortgage and are under the impression that there aren’t other options. But did you know that paying your mortgage biweekly can reduce the amount of interest you will pay over time?

It’s true! With a biweekly mortgage, instead of making one payment every month, you can pay half and half ever two weeks. For example, if your mortgage is $2,000 per month, you will pay $1,000 every two weeks under a biweekly system.

If you maintain the biweekly payment schedule you’ll end up making an extra month’s payment each year (26 payments per year, which is the equivalent of 13 full monthly payments rather than 12). You’ll also pay less interest because your payments are applied to your principle balance more frequently.

The effects of biweekly mortgages can be dramatic. For example, if you currently have a $150,000 loan at 8 % fixed interest, you will have paid approximately $396,233 at the end of 30 years. However, if you use a biweekly payment system, you would pay $331,859 and have it completely paid off in 21.6 years. You would save $64,374 and pay the loan off 8.4 years earlier!

For many, paying off their mortgage earlier can take a great financial load off their shoulders. Plus they can enjoy more of their income or even use the excess money to for investing.

If you are looking to save money and pay off your mortgage faster, call us at Federal National Funding at 201-342-3300 today to get started with setting up biweekly mortgage payments. One of our associates will be happy to speak to you. 

Wealth Replacement Trusts

Today’s blog is centered around wealth replacement trusts. You may find this blog helpful if you choose to gift your property to a charity after you’re gone.

Charity Remainder Trusts

To create a charitable remainder trust, you first have to transfer appreciated property to an irrevocable trust and list the charity of your choice as the remainder beneficiary of the trust. Later, the property is sold and reinvested to provide income. Generally, you can retain a lifetime of interest in the income generated by the trust, and when the trust expires at your death, the remaining property is transferred to the charitable organization.

While subject to certain limits, you are entitled to a current income tax deduction for the charitable gift. And because the property was sold within the charitable trust, you will not have to pay tax on any capital gains (although any distribution you get from the trust is generally subject to income tax). This allows the value of the property to be reinvested, which will increase the income generated by the trust.

One major drawback is that since the beneficiary is listed as a charity, any heirs you have will not be receiving anything.

Replacing Gifted Assets

Another solution to a gifting situation could be a wealth replacement trust.

When you use a wealth replacement trust, you use a portion of the income from a charitable remainder trust to buy a life insurance policy. Then you get to decide how much of the charitable gift tot replace. You may purchase enough insurance to replace only a portion of the property that will pass to charity, or you may prefer to replace all of the property in the charitable remainder trust.

If you are interested in wealth replacement trusts, learn more about them by clicking here, or call our office today at 201-342-3300. One of our associates will be happy to speak to you.