Archives For Retirement

403(b) Plan Contribution Limits

Corey —  April 1, 2010

Contribution Limits

       The maximum amount you can contribute to a 403(b) plan depends on your age and years of service. These are the correct 403(b) plan contribution limits for 2009 and 2010. This limit can be split between multiple qualified retirement plans (401(k), 403(b), SIMPLE, or SEP), but the combined total of your contributions cannot exceed this limit. You cannot contribute more than 100% of your compensation.

  • Under age 49 at the end of the year: $16,500
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  • Age 50 or older by the end of the year: $22,000

15 Year Rule

       If you have 15 years of service with a qualified organization, you may be eligible to contribute up to an additional $3,000 per year to your 403(b) plan. However, the rules for this can get tricky, so you should speak with the human resources department at work and read the IRS explanation of the 15 year rule.

Deadline for Contributions

       Elective contributions are generally made from your paycheck, so you need to have your contributions set up within the year. You can choose to contribute everything at the beginning of the year if your plan allows it, or you can just contribute a certain amount or percentage from each paycheck.

Tax Deduction for Contributions

       Your contributions to a 403(b) plan reduce your taxable income, so you do not need to claim a tax deduction on your return. However, you may be eligible for the Retirement Savings Contribution Credit.

401(k) Plan Contribution Limits

Corey —  March 31, 2010

Contribution Limits

       The maximum amount you can contribute to a 401(k) plan depends on your age. These are the correct 401(k) plan contribution limits for 2009 and 2010. This limit can be split between multiple qualified retirement plans (401(k), 403(b), SIMPLE, or SEP), but the combined total of your contributions cannot exceed this limit. You cannot contribute more than 100% of your compensation.

  • Under age 49 at the end of the year: $16,500
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  • Age 50 or older by the end of the year: $22,000 (only if your plan permits catch-up contributions)

Deadline for Contributions

       Elective contributions are generally made from your paycheck, so you need to have your contributions set up within the year. You can choose to contribute everything at the beginning of the year if your plan allows it, or you can just contribute a certain amount or percentage from each paycheck.

Tax Deduction for Contributions

       Your contributions to a 401(k) plan reduce your taxable income, so you do not need to claim a tax deduction on your return. However, you may be eligible for the Retirement Savings Contribution Credit.

       If you’ve made any IRA contributions, you’ll want to keep a record of those in case you ever need to prove it to the IRS. The best record you can have for an IRA contribution is a Form 5498. The custodian of your IRA is required to file this form with the IRS and send you a copy as well. Form 5498 will show any contributions or conversions you’ve made as well as the required minimum distribution (RMD) if applicable. You should receive this form in May or June.

       By keeping a copy of your Forms 5498, you’ll have a record of your IRA contributions. This is especially handy if you ever take an early distribution from a Roth IRA, convert a traditional IRA to a Roth IRA, or make any nondeductible contributions. If the IRS ever questions the information you file when you do one of those actions, you’ll be able to back up your data with those Forms 5498.

       If you lose a Form 5498 or never receive it, simply contact the custodian of your IRA. They should be able to send you a copy for any year they maintained your IRA. While it’s nice to know that, don’t count on your custodian to always have the information you need. You’re best off keeping the records yourself (in an organized manner…) than relying on your custodian to have them for you.

       So that’s what you need to keep if you make any IRA contributions. It may sound trivial, but it can save you from future headaches. If you have any questions, let me know in the comments!

Roth IRA Contribution Limits

Corey —  March 30, 2010

Contribution Limits

       The maximum amount you can contribute to a Roth IRA depends on your age and income. These are the correct Roth IRA contribution limits for 2009 and 2010. This limit can be split between a Traditional IRA or Roth IRA, but the combined total of your contributions to your Traditional and Roth IRAs cannot exceed this limit.

  • Under age 49 at the end of the year: $5,000
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  • Age 50 or older by the end of the year: $6,000

Income Limits

       You are only eligible to contribute to a Roth IRA if your adjusted gross income (AGI) falls under certain limits. These limits depend on your tax filing status.

  • Married Filing Jointly or Qualifying Widow(er): You can make a full contribution if your AGI is less than $166,000 (or $167,000 in 2010). If your AGI is more than $176,000 (or $177,000 in 2010), you cannot make a contribution to a Roth IRA. If your AGI is between $166,000 and $176,000 (or between $167,000 and $177,000 in 2010), then the amount you can contribute is reduced proportionately.
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  • Married Filing Separately but you lived with your spouse at any time during the year: If your AGI is more than $10,000 (same in 2010), you cannot make a contribution to a Roth IRA. If your AGI is between $0 and $10,000 (same in 2010), then the amount you can contribute is reduced proportionately.
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  • Single, Head of Household, or Married Filing Separately and you did not live with your spouse at any time during the year: You can make a full contribution if your AGI is less than $105,000 (same in 2010). If your AGI is more than $120,000 (same in 2010), you cannot make a contribution to a Roth IRA. If your AGI is between $105,000 and $120,000 (same in 2010), then the amount you can contribute is reduced proportionately.

Deadline for Contributions

       Contributions for a year can be made any time that year or until the due date of your tax return for that year. Contributions for 2009 must be made between January 1, 2009 and April 15, 2010. Contributions for 2010 must be made between January 1, 2010 and April 15, 2011. You can designate for which year (current or previous) you are making contributions if you contribute between January 1 and April 15.

Tax Deduction for Contributions

       There is no tax deduction for Roth IRA contributions. However, you may be eligible for the Retirement Savings Contribution Credit.

Contribution Limits

       The maximum amount you can contribute to a Traditional IRA depends on your age. These are the correct Traditional IRA contribution limits for 2009 and 2010. This limit can be split between a Traditional IRA or Roth IRA, but the combined total of your contributions to your Traditional and Roth IRAs cannot exceed this limit.

  • Under age 49 at the end of the year: $5,000
  •  

  • Age 50 or older by the end of the year: $6,000

Deadline for Contributions

       Contributions for a year can be made any time that year or until the due date of your tax return for that year. Contributions for 2009 must be made between January 1, 2009 and April 15, 2010. Contributions for 2010 must be made between January 1, 2010 and April 15, 2011. You can designate for which year (current or previous) you are making contributions if you contribute between January 1 and April 15.

Tax Deduction for Contributions

       How much of this contribution you can deduct on your tax return depends on your adjusted gross income and whether or not you are covered by an employer-sponsored retirement plan at work.

       You may also be eligible for the Retirement Savings Contribution Credit.

       A while back I released my free retirement calculator designed to take your current age, retirement age, life expectancy, income needs, current savings, and market volatility into account in order to tell you how much you should be saving each year to reach your retirement goals. I designed it to be a more accurate retirement calculator than most of the ones you find online, but I also wanted to make it easy to use. Because of this, it’s not the most accurate calculator available, but it should do a good job for you if you follow the directions and revisit it every 3-5 years.

       What I hadn’t done, though, was to test the advice it gives against historical investment periods. I based the calculator on historical market data and ran millions of simulations to build the back-end of the calculator (which you don’t see when you use it). But I didn’t have a chance to test how it would have actually worked out for people until recently. So using historical performance numbers for a diversified portfolio along with historical inflation rates (all from 1927-2009), I tested what your results would have been if you had followed the advice given by my free retirement calculator. I tested two different scenarios:

  1. If you had saved the target amount the calculator estimates, would that have lasted throughout your retirement?
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  3. If you had annually saved the amount the calculator tells you to, would you have reached that target amount by your retirement date?

       Basically, I wanted to see if this calculator would work in telling you how much to save and how much you can safely withdraw in retirement. Click here if you don’t want to read the nitty gritty and just want to get to the point.

Withdrawal Results

       I found that my calculator was extremely good at estimating how much you should have by retirement so you don’t run out of money before you die. What I wanted to avoid was having any historical period where you would have run out of money before you hit your life expectancy. In most cases, you end up with quite a bit of money left over at your death. But in a few, you barely make it. All of these withdrawal scenarios assume you need $36,000/year in retirement income and you retire at age 65. I looked at three different scenarios: you die at age 85 (20 years of withdrawals), you die at age 80 (15 years), and you die at age 75 (10 years). You’ll need to click the graphs to get a clear, full-size picture. Here are the results for withdrawing from age 65-85 (20 years):

Withdrawals 65 to 85

Here are the results for 65-80 (15 years):

Withdrawals 65 to 80

And here are the results for 65-75 (10 years):

Withdrawals 65 to 75

       As you can see, you never would have run out of money if you had saved what the calculator estimated you would need. Now there’s no guarantee that would always be true, but it is good to see that it would have worked out historically. In many cases, you would have ended up with way more money than you needed, which illustrates why this isn’t a perfect calculator. (No calculator is going to figure this out perfectly for you, and this is why you have to revisit the calculation every so often.)

Savings Results

       Where I found the calculator needed some work was how much it was telling you to save every year. I was running a scenario where you start saving at age 25, retire at 65, and die at age 85 (40 years of saving, 20 years of withdrawals). What I found was that many times you’d end up with waaaaaay more than you needed to retire. You could have either retired earlier or saved less. This kind of result is almost as bad as finding out you didn’t save enough – simply because of all the sacrifices you would have made to meet your savings goal. I don’t have the results here to show you, but let’s just say you ended up with anywhere from 2-6 (yes 6!) times what you would have needed to retire.

       After a long process of studying the results, figuring out where it went wrong, debugging, and retesting, I made one small tweak to the calculator and now it works great. Historically speaking, you’d still save too much most of the time (anywhere from 1.25 to 2 times more than you need). But it cut the required savings rate back to a much more manageable and realistic level. So I’ve run four different scenarios and included the results here to show you how it worked out. These scenarios assume you retire at age 65 and die at age 85 while needing $36,000/year during retirement. The four scenarios differ in the age you start saving (with no savings to start): age 25 (40 years to save), age 35 (30 years), age 45 (20 years), and age 55 (10 years). Here are the results if you start at age 25:

Savings starting at Age 25

       On average, you would have saved about 50% more than necessary. Assuming you have 40 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 15% of your target retirement income every year. Here are the results if you start at age 35:

Savings starting at Age 35

       On average, you would have saved about 50% more than necessary once again. Assuming you have 30 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 29% of your target retirement income every year. Here are the results if you start at age 45:

Savings starting at Age 45

       On average, you would have saved about 50% more than necessary once again. You would have fallen a little short of your retirement goal 8 times out of 64 historical 20 year periods, which would have required you to retire on a slightly smaller retirement income or wait one more year to retire. Assuming you have 20 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 63% of your target retirement income every year. And here are the results if you start at age 55:

Savings starting at Age 55

       On average, you would have saved about 30% more than necessary. You would have fallen just short of your retirement goal 6 times out of 74 historical 10 year periods, which would have required you to retire on a slightly smaller retirement income or wait one more year to retire. Assuming you have 10 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving an astounding 170% of your target retirement income every year.

       Though it’s not necessary to get the point of this article, I threw in those required savings amounts to show you why you need to start saving for retirement early in life. If you start at age 25 (when you have 40 years to invest), you only need to save 15% of your target retirement income every year. But if you wait until you’re 45 or 55, you’re looking at 60-170%. Ouch!!! Start early and save yourself from scrambling at the end!


The Point

       While it worked great for withdrawals (during retirement), I’ve made the retirement calculator a bit more accurate and realistic while you’ll be saving – especially if you follow the instructions and run through the calculations again every 3-5 years. I hope you find it useful. If you have any questions, please feel free to leave them in the comments here or on the calculator’s page. Thanks!

I don’t ask this question in order to set strict guidelines for how all Christians should live out their final years. I ask it to prompt us all to examine how we will live out our faith during retirement. I’ve talked about why I was rethinking my views on retirement and whether or not Christians should even retire. What I want to look at today are the things we should be considering when we’re planning what we’ll do in retirement and how much income we’ll need in retirement. Then, I want your help. (Oh, and this isn’t just for retired people. Young Christians should be thinking about this too because it will affect how much they should be saving for retirement.)

What Should We Do?

Assuming we agree that God does not call Christians to a leisurely, luxurious retirement where we sit around and do nothing all day, we have to start looking at what we should be doing during retirement. Let’s compare and contrast with typical retirement goals:

    • Pursuing Hobbies – Many people plan to pick up new hobbies or spend more time on their favorite hobbies in retirement. While there’s nothing inherently wrong with this, Christians must be looking at how much time they’re spending focused on themselves and how much of their money they’re putting toward their own wants. We must look for a balance – and we must look to God to find that balance.

 

    • Travel – This is a major goal for many retirees. As Christians, we need to look at recreational travel versus missional travel. I’m not saying vacations are sinful, but we have to consider two things. First, our desires to spend on ourselves while others are in desperate need. And second, we must listen to God’s unique call for our lives. For some Christians, this will mean limiting travel in retirement so they can give more or spend more time volunteering. For other Christians, this may mean allocating more than they would have to travel so they can take or fund mission trips. (This is not to say that you should ignore God’s call for you to be a missionary until retirement. If He’s calling you now, you should go now.)

 

    • Volunteering – Volunteering is a great way for both Christians and non-Christians alike to spend their time in retirement. Besides transportation costs, volunteering requires little money but can provide great rewards. The caution here is to avoid volunteering to every cause or postponing volunteer activities until retirement. Seek God’s will for where you should serve now and in retirement.

 

    • Entertainment – It’s easy to spend more on entertainment during retirement because you’ve got so much free time. But for Christians, again, we must look at how we’re using the money God has entrusted to us. Some entertainment is fine, but we need to seek God’s guidance for what we should plan on in this category.

 

  • Spending Time with Family – Another noble pursuit regardless of whether you’re a follower of Christ or not. However, we still must seek God’s will and be sure to balance this activity against the other things God wants us to be doing. Strong families are encouraged by the Bible, but we must not become so focused on our own families that we ignore God’s family.

 

How Should We Spend in Retirement?

The decisions we make in the “What Should We Do?” category will greatly impact how much income we’ll need in retirement. But there are a few other areas we should consider as well:

    • Housing – Will you stay where you are now, move to a larger place, or choose to downsize? Also, will you buy a second home (vacation home)? Again, I challenge you to pray for God’s will on this matter. Many retirees dream of owning a vacation home in the Bahamas, but Christians must be looking at how such a decision fits in with God’s call to care for the poor. Should we be building a larger house or buying a vacation home while people are starving? Maybe that sounds ascetic, but it’s a legitimate and serious question for those who wish to follow Christ.

 

    • Shopping – Shopping for the sake of shopping excites some people. How should we approach this issue? Again, I’m not advocating an ascetic lifestyle where you never buy anything for yourself. But we must seek the guidance of the Holy Spirit. Should we deny some of our wants so we can give more? I feel like that’s a definite yes. But where we draw that line can only be determined through communion with God. He calls some to deny many or all of their wants while others only a few. (Personally, I think that call to deny yourself increases more as our faith and maturity increase.)

 

    • Insurance – Overinsurance can indicate that we are placing our trust in money and not God. Underinsurance can be a sign of folly. We must seek God’s will on this matter, as all others, and perhaps help from others. Health insurance is likely a necessity, but what about life insurance, long-term care insurance, homeowner’s/renter’s insurance, etc. There can be legitimate needs for these during retirement, but we can also buy them out of fear or ignorance.

 

  • Health Care – While some or most of this may be covered by health insurance, there’s another aspect I want us to think about as Christians. Where do we draw the line between pursuing health within God’s will and pursuing longevity for fear of death? Should we fear death as much as our society does? Indeed, part of the reason health care costs so much is because we try so hard to stay alive. I’m not saying we should kill ourselves, but it is something we should think and pray about (even when we’re young). The world seeks after eternal life but will not find it. We (Christians) already have it promised to us in Heaven – so why do we seek it so much on Earth?

 

What’s Your Take???

What did I miss? What did you think about my thoughts? What do you think a Christian retirement should look like? What are your plans? Please, please, please share your thoughts in the comments. I’m hoping we can all help each other think about these issues from a Biblical and eternal viewpoint rather than the American/worldly ideals.