When the Going Gets Tough: Remember the Long-Game

LiftingWeights

The recent stock market sell-off reminds us once again what a wild ride investing can be. Like death and taxes, precipitous market drops also seem to be one of those unavoidable, inevitable realities of life. But what we have observed, at least historically, is that markets have a way of clawing their way back.

No matter how much we may try to remind ourselves of this in the moment, watching markets plunge can be painful, even for the most seasoned investors. But if your savings are in a retirement account—with years of work still ahead, nearing retirement or even already retired—it’s important to keep the following four things in mind:

1. You are investing for the long-term

Don’t forget, retirement assets have a major advantage in the face of short term volatility—they are invested for decades. Seeing the value of your retirement assets fall may prompt you to take action, but selling may only lock in your losses—and attempting to time your way back into the market is never easy (all too often this can result in selling low and buying high). In fact, good and bad days tend to cluster together: out of the 25 worst days in the market from 1998-2017, 23 were followed by one of the 25 best days within one month[1].

2. At times like these, diversification can be your best friend

As Harry Markowitz once said, diversification “is the only free lunch in finance.” At no time does this hold truer than in periods of market stress. Having assets that “zig” when others “zag” can help increase portfolio stability and may help you lose less in a sharp downturn. Now is a good time to take a look at your portfolio—if your investments all go in the same direction at the same rate, it may be time to look at some diversifying investment options.

3. Cash has its place–in a savings account

If your retirement savings are invested only in conservative options (like cash or short-term bonds), your savings won’t have the opportunity to grow over longer time periods—and you run the risk that inflation will actually reduce the value of your portfolio. As an alternative, if you think you’ll need to access your money in the next year or two, consider building up a cash cushion separate from your long-term investments—such as in a high yield, FDIC-insured savings account.

4. Target date funds can help you better manage your market risk

Target date funds adjust the amount of risk your assets are exposed to over time—offering more risk (and growth opportunity) when you are younger with a longer investment horizon, and less when you are older and approaching—or are already in—retirement. By adjusting the trade-offs between higher return potential and downside risk management, target date funds can help better position you for a smoother ride throughout your career and in retirement.

Large market drops can rattle any investor, so it’s important to remember your long-term goals and stick with them—in up markets and in down. That’s why for many people, investing your retirement assets in a diversified, all-weather vehicle you can live with for the long haul can be the best strategy of all.

Paul Mele is the Head of Participant Engagement for BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog

 

[1] Source: BlackRock, with data from Morningstar as of 12/31/17

Investing involves risk, including loss of principal.

The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass.

This material is provided for educational purposes only and is not intended to constitute “investment advice” or an investment recommendation within the meaning of federal, state, or local law. You are solely responsible for evaluating and acting upon the education and information contained in this material. BlackRock will not be liable for any direct or incidental loss resulting from applying any of the information obtained from these materials or from any other source mentioned. BlackRock does not render any legal, tax or accounting advice and the education and information contained in this material should not be construed as such. Please consult with a qualified professional for these types of advice.

©2018 BlackRock, Inc. All Rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

Roth or Pre-Tax 401(k): 3 Questions to Ask Now

Eggs

More and more companies are offering their employees a choice of either pre-tax or post-tax (Roth) contributions within their 401(k) plans. According to a recent survey by Callan, the percent of retirement plans that offer a Roth option grew from 49% in 2010 to 71% in 2017.

But as with many aspects of investing, more choices can lead to confusion. If you’re faced with the choice between making a pre-tax or Roth 401(k) contribution, how do you know which one is right for you?

The question is especially timely now, when most of us are in the process of filing our taxes and many may be considering how to reduce their tax payments next year. And the recently passed Tax Cuts and Jobs Act makes the decision even more complicated, as tax rates will be changing from year to year as the new law is fully implemented.

Consider these three questions to help you decide:

1. Taxes – pay them now or pay them later?

Both Roth and pre-tax contributions offer the benefit of tax-sheltered growth while you’re working. When you contribute with pre-tax dollars, qualified withdrawals in retirement are taxed as ordinary income. By contrast, Roth contributions invest post-tax dollars, meaning qualified withdrawals come out tax free.

There are calculators that can help you determine the tradeoffs—check to see if your employer offers one on your plan’s website. But one of the most important variables is your estimated tax rate during retirement. If you think your tax rate will be lower in retirement than during your working years, it may make sense to go with a pre-tax contribution.

Alternatively, you might choose the Roth option if you expect your savings to generate a higher income in retirement than you currently take home. And remember, the total amount you withdraw in retirement will likely be greater than any amount you contributed, given the power of compounding returns.

2. Will your choice impact how much you save?

The choice between a Roth or pre-tax contribution will make a difference in your take home pay. All else being equal, when you make a Roth contribution, your take home pay will be lower than the same contribution made with pre-tax dollars. If a larger paycheck today will encourage you to save more than you would otherwise, you may be better off sticking with a pre-tax contribution.

recent study from the Harvard Business School, however, shows that most people contribute the same amount to a 401(k) regardless of which contribution type they make. This is likely because most of us invest based on a fixed percentage of our pay (such as 10%), rather than by trying to optimize both our take home pay and our retirement savings.

3. How important is future tax flexibility?

Perhaps the best choice you can make is to not pick one over the other, especially since future tax rates are hard to predict. If your employer offers both options, you can always divide your contributions between Roth and pre-tax. That can give you some tax benefit today while enabling you to diversify your potential sources of income—including how much is subject to tax—when you’re retired. Many financial planners refer to this as “tax diversification” and, like investment diversification, can pay dividends today and down the road.

Please note that regardless of which path you choose, any eligible employer match may be contributed pre-tax. Make sure to reach out your employer or recordkeeper for specific plan details.

Paul Mele is the Head of Participant Engagement for BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

 

 

Did your 401(k) win a Nobel Prize?

Money Tree

If you are like me, you may glance at the headlines when the Nobel Prizes are announced. You may even start to read an article about what the honoree did to win the prize. But for the most part, you probably don’t see a connection between these technical disciplines and your everyday life.

Last year was different. One of the prizes is for work that may touch your life frequently and may even help you live a secure retirement. It was the Nobel Prize for Economics given to Richard Thaler of the University of Chicago.

From theory to (retirement) reality

Professor Thaler recognized that, despite people’s best intentions, many (perhaps most) won’t save for retirement without a nudge in the right direction. More importantly, he recognized that once nudged into “doing the right thing,” inertia takes over and most people continue to save.

This innovation is the foundation of behavioral finance. It’s why if you’ve started a new job in the last few years, you were probably automatically enrolled into your 401(k), a development that has boosted the average retirement plan participation rate above 75%. It’s also why your 401(k) may have auto-escalation—which is like signing up today to save more tomorrow through annual increases of 1% or 2% in your retirement contributions.

Five steps to make your 401(k) award worthy

You don’t need to be a Nobel-winning economist to see the benefit of these ideas. But there is even more you can do to help bolster your chances of retirement success, especially if you:

  • Worked for companies that didn’t make enrollment automatic;
  • Were enrolled (and stayed) at a lower savings rate; or
  • Frequently changed jobs, so auto-escalation hasn’t really helped you.

Regardless of your situation, consider these five steps to get your retirement savings on track.

1. Start saving as early as you can

If you haven’t started, start now. When it comes to saving for retirement, time is your best friend. If your company has automatically enrolled you, congrats and keep up the good work. If not, take a few minutes a sign up today.

2. Max out your savings rate

If you can’t save the max ($18,500 in 2018), save as much as you can—and certainly at least as much as your company is willing to match.

3. Increase your savings when you can

Commit to investing at least part of this year’s bonus or raise to your retirement savings plan. And let your company sign you up for a future increase to your savings rate (or, sign up for one yourself). Studies show it’s much easier for people to agree to save more in the future than getting them to save more today.

4. Check to see how you’re invested

No one knows what tomorrow’s markets will do, so be sure you’re well diversified and have an appropriate amount of growth-oriented investments for your age. You’re investing your retirement money for decades, so don’t overly focus on short-term fluctuations in the market.

5. Don’t have the time or interest to manage your own investments?

Consider a professionally managed, age-appropriate choice like a target date fund instead.

The key is to make your retirement investing as automatic as possible. That way, you can let time and the power of compounding work to your benefit. After all, it was another Nobel Prize winner, Albert Einstein, who said, “compound interest is the most powerful force in the universe.”

Paul Mele is the Head of Participant Engagement for BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

College or Retirement? How to Save for Your Child’s Future Without Disrupting Yours

Students' Hands

The cost of post-secondary education is steadily increasing in the U.S., and Millennials – the college-aged kids of today — are finding it challenging to find employment to help them pay for it.

At an average of $20,090 in the 2016/2017 school year, even the cost of attending an in-state, public institution is significantly higher than it was a few years ago. Meanwhile, out-of-state student costs now average $35,070 for the same academic year and students attending private colleges pay an average of $45,370, according to the annual Trends in College Pricing 2016 report published by the College Board.

As the cost of a college education in the U.S. continues to rise, parents may want to help their kids get through school without accumulating a mountain of debtBut how much support is too much when a parents’ retirement goals also need to be accounted for?  

It’s a growing concern given statistics showing retirement savings are “dangerously low” in the U.S., according to the National Institute on Retirement Security. It shows a retirement savings deficit in the U.S. of between $6.8 and $14 trillion.

While many financial experts believe saving for retirement should be a priority over paying for a child’s education, about half of Americans disagree, according to a recent RBC Wealth Management poll, conducted by Ipsos.

The poll shows 49 percent of Americans place a greater importance on helping their children pay for school, over their own retirement.

Millennials are the most likely to put financing their children’s education first. The results say that 60 percent of Americans in the 18-to-34 age group see saving for their kids’ education as more important, compared with 43 percent of those ages 35 to 54, known as Generation X, and 28 percent of Baby Boomers, those ages 55 and older.

Malia Haskins, vice president, wealth strategist at RBC Wealth Management, says that with the gap between how much Americans have saved and what they will need to retire comfortably widening, saving for retirement should be the priority, but families can do both if they plan ahead.

“Ideally, college and retirement should be part of the same plan,” says Haskins, who is based in St. Paul, Minn. “Clients can expect some tradeoffs as they balance these goals.”

That could include parents working longer to save for retirement, deferring the purchase of a vacation home or encouraging their children to finance their education through scholarships and grants.

“With proper planning, it is possible to meet both major goals,” Haskins says.

Haskins offers three main tips for families seeking to balance their retirement savings with the funding of a child’s education:

Set reasonable goals

Haskins suggests starting with a wealth management plan, which can provide families with a better understanding of income and expenses. To make it most effective, she recommends not only looking at today, but also projecting both income and expenses out for the future, as much as possible. “By looking ahead a little bit, it’s easier to get an overall sense of whether their goals are realistic,” Haskins says.

Revisiting that plan regularly is also critical. “It’s important to check in annually and both revisit and modify as income and expenses change,” she says. Haskins encourages families to try to follow a 50/30/20 rule: Allocate 50 percent of income to fixed costs, such as mortgage payments and utilities; 30 percent for flexible spending, like dining out, school trips or entertainment; and then use the remaining 20 percent for an emergency fund as well as saving for retirement and/or education.

Start saving now

Once you have a plan [in place], it’s best to start saving, even a little bit, Haskins says. “The power of compounding is often overlooked, but is pretty compelling,” she says. For example, if a couple saved $50 a month for 18 years, at a 4 percent rate of return, they would have nearly $16,000 in the bank.

“That $50 per month may not be missed, and if you get into the habit of doing it, it can be a great way to set aside some money for education,” Haskins says.

Set a target

How much of the education expenses will the parents pay for, and how much will the child have to cover themselves? Haskins recommends parents have that particular conversation with their kids early, to set expectations. This will also give the kids a financial target and enough time to start saving money through part-time or summer jobs before they head off to college.

Setting a target can also inspire them to apply for grants or scholarships, even for parents who have the means to pay for it all, Haskins recommends having the kids foot some of the bill. “I think it’s a good thing for kids to have some skin in the game,” Haskins says. “Their education becomes more valuable to them. It also provides some discipline in the transition from being dependent to independent.”

Adds Haskins: “I think it’s a noble desire and goal to want to help give your kids and education and make it as painless as possible, but it makes things too easy — sometimes at the sacrifice of the parents’ own future.”

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

Top 4 Retirement Saving Ideas

Mother rubber duck leading several rubber ducklings

It’s America Saves Week, an annual reminder for us all to put good savings habits into practice. Wondering where to start? We asked over 1,000 401(k) investors in our latest DC Pulse Survey. Here are their top retirement saving tips—and advice on how to make them your own.

1. Don’t wait until it’s raining to fix the roof.

Confidence in retirement savings is up 64% compared to last year’s survey, in part, because recent investment performance has been relatively strong. The trouble is, industry forecasts suggest that future returns may be lower than they’ve been previously.

If this comes as a shock, you’re not alone—65% of the investors we surveyed hadn’t heard of the forecast. However, almost 15% of our respondents have already started preparing for lower returns. Their best tip? Start saving more now. Time is your greatest asset to compound returns, helping you make up for the possibility of lower returns.

2. Use it or lose it: Take advantage of all available resources.

With age comes wisdom, and better retirement savings habits. We found that baby boomers are 43% more likely than gen x or millennials to take advantage of retirement planning tools, like income calculators. But, regardless of what generational bucket you fall into, you should use every tool at your disposal—especially given the prospect of lower returns.

3. Act your age.

Sixty may be the new forty, but acting your age is still valid when it comes to investment allocation. In fact, our survey found that, compared to those nearing retirement, younger investors are more comfortable with aggressive growth strategies, even if that means they could lose money when the market declines. Baby boomers, on the other hand, were more likely to prefer conservative growth, with smaller returns but less chance of losing money.

Target date funds seek to do just that. They remove some of the guesswork of investing by offering a diversified mix of stocks and bonds that rebalance over time.

4. Don’t just meet the match—beat it.

Most employers will match a portion of your retirement savings on a dollar-for-dollar basis, typically up to the first 3% to 5% of your contribution. If your plan offers this, odds are you’ve heard that you should contribute enough to get the full company match. It’s a rule of thumb that women seem to have latched onto: We found that women are 21% more likely than men to meet their company match.

It’s a big step toward retirement readiness. But for men and women alike, deferring even 5% of your pay is not likely to reach your retirement savings goal. If you can’t beat the match from day one, see if your plan offers auto-escalation, which will increase your contribution rate annually. Your future self will thank you.

For those already on the right track—keep up the good work. And for those of us who may be behind the curve, remember the race is far from over. There are simple steps you can take today to close the gap.

Anne Ackerley is the Head of BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

A New Year’s Resolution You’ll Actually Keep

new-years-2017

I don’t know about you, but I personally am not a fan of New Year’s resolutions. I find that I start off every year excited about my pledge to lead a healthier lifestyle—promises like eating better, exercising regularly and getting more sleep. But then by March, when that gym membership or “healthy eating” regimen hasn’t gone according to plan, I feel guilty for not following through on what I promised. That’s not a great feeling.

The problem is that most resolutions set us up for failure by demanding too big a change in our routine to keep. Fortunately, resolutions to get financially fit for your retirement are easier to keep than heading to the gym at 5 a.m., thanks to a few simple habits that fit easily into your current routine. Here are six steps you can take today to start 2017 off on the right foot and become a more confident retirement saver:

1. Start early

They say people who work out first thing in the morning are more likely to stick to their routine. And the same principle applies to saving for retirement. If you’re early on in your career, starting to contribute now (even just a little bit) is important. If you’re more established in your career, now’s the time to think about upping your contributions.

2. Don’t forget to stretch

If your employer offered you a raise, how likely would you be to turn it down? If you don’t stretch your contribution to maximize the company match, it’s like turning down a raise. Don’t leave any money on the table. Take advantage of all your plan’s benefits.

3. Pace yourself

How do you run a marathon? You warm up, start slow and then pick up the pace as soon as you can. The same goes for retirement saving. Your plan’s auto features (like auto-escalation) are a relatively painless way to help increase the pace of contributions. So is increasing your contributions with your annual raise. Retirement savings is a marathon where the pace you set today pays off tomorrow.

4. Monitor your progress

When you review your investments, remember markets are unpredictable. It’s all too easy to get hung up on a dip here or there. Instead, focus on what you can control: Have you set a retirement income goal? Are you maxing out the match? And, if you’re at the IRS limit for contributions, have you considered saving in other tax advantaged accounts, like an IRA?

5. Know your strengths

Even the most successful athletes need a great coach. They know what they can do, and they know where they need help. Considering the importance of your retirement savings, do you really have the time to actively manage and monitor your asset allocation? If not, your plan probably needs some “coaching.” For example, a target date fund automatically aligns your risk exposure to where you are in your career. There may also be other options to help you manage your portfolio.

6. Keep your eye on the ball

Take advantage of retirement income calculators, like CoRI, to understand how far your savings are actually going to take you. The earlier you identify if you have a gap, the more time you have to get back on track.

This year, let’s all invest in our financial well-being. Use the game plan outlined above to get a head start on saving for retirement. Adopting these habits is easy to do—and can be a New Year’s resolution you actually keep.

Anne Ackerley is the Head of BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

How the Social Security Reboot May Affect You

Arrows

You’ve probably heard the federal government has made changes that may affect the way you can take your Social Security retirement benefits. While there’s still potential for some “tweaking” of the language around these changes, I’d like to share some insight on what we know now and what it may mean for you.

WHAT is Changing with Social Security?

The two strategies affected by the new law (that law being the 2015 budget) are known as File and Suspend and Restricted Application.

File and Suspend allowed you (generally the higher earner in a couple) to file for, but suspend taking, your Social Security retirement benefits while permitting your spouse and/or eligible dependents to collect benefits based on your earnings record. In that way, you earned the 8 percent annual “raise” on your individual benefits, your spouse/dependents received their paychecks based on your earnings record, and the family collectively was able to maximize its Social Security income.

Under the maximization strategy known as Restricted Application, you could file for Social Security benefits at or after full retirement age (FRA), but elect to take only your eligible spousal benefits, allowing your individual benefits to grow until they max out at age 70. At that point, with a raise of up to 32 percent under your belt, you would switch to taking your individual benefits.

WHEN Are the Changes Effective?

Restricted Application is being phased out immediately for anyone born after 1953. You will still have the option to File and Suspend your benefits, but timing is important here, because after April 2016, there are consequences for requesting a suspension of your benefits.

First, the change means that if you request your suspension after April of next year, no one else can collect benefits on your earnings record. (As currently written, this includes ex-spouses. That is one nuance Congress may have to address so that a maximization strategy for married couples does not become a punitive strategy for use by ex-spouses.) Second, if your suspension is requested after April, you can no longer request retroactive payments of those suspended benefits, and that really makes File and Suspend unattractive vs. doing nothing at all.

Here’s why: Before, you could suspend your benefits and then request up to four years of retroactive payments (based on the length of your suspension, of course). Going forward, there will be no retroactive payments under File and Suspend. You may well be better off not filing for your benefits; at least then you have the option to request six months of retroactive payments should you have that need.

Essentially, File and Suspend goes from a “why wouldn’t I?” family maximization strategy to “why would I?” Under the new rules, there generally is no reason or incentive to file and immediately suspend benefits. Come May, the only practical use for suspending benefits would be if you started collecting early (maybe you needed the paychecks) and later wanted to halt those checks to begin earning your delayed retirement credits.

WHO Is Affected?

Restricted Application will be off the menu for anyone born after 1953. You will have to claim your individual benefit prior to collecting a spousal benefit, regardless of age. For those born in 1953 or earlier, Restricted Application remains an available option.

File and Suspend is more complicated. The short answer is that File and Suspend as we know it now will be void for new filers after April 2016. However, anyone who turns 66 by April 30 (perhaps even Aug. 31; we’ll know once the law is interpreted) and requests a suspension prior to April 30, 2016, will likely be grandfathered. The same is true for anyone currently using the strategy—the government is not expected to take away benefits already being received via this strategy.

HOW Should You Adjust?

If you’re among those with a 66th birthday in or before August (or already FRA and not yet collecting benefits), talk to your advisor about whether File and Suspend is an appropriate strategy for you. Do this prior to April, as your window of opportunity to lock in this strategy before it expires is small. Understand, of course, that if your 66th birthday is between May 1 and Aug. 31, that window is questionable. Your ability to use the strategy will depend on how Congress amends the law throughout the appropriations process and how the Social Security Administration (SSA) interprets the law in writing the procedures. (By way of background, the SSA now allows you to file a request four months before it can take effect; thus the potential August birthdate cut off. Keep in mind, August would be the cutoff for your 66th birthday, but you would still need to make the request by April 30, 2016.)

Ultimately, if you and your advisor determine File and Suspend would be a useful strategy for your circumstances, you may want to request it by April 30 even if you have a 66th birthday that falls in the questionable zone of May through August, as you do have a year to turn back the decision by submitting a request for withdrawal of application.

As for Restricted Application, if you’re born prior to 1954, there’s an opportunity to take advantage. I strongly suggest you talk with your financial advisor if you’re thinking about using one or both of these strategies.

For most of the rest of us, now may be a good time to reassess our retirement income strategy overall. Ultimately, Social Security is just one element of a successful retirement income plan, and it shouldn’t be the lynchpin. After all, annual Social Security payments averaged $16,000 for individuals and $25,000 for dual earners in 2014.

A financial advisor, armed with the most innovative tools in retirement income planning, can help you identify your income goal in retirement and assess where you stand today. From there, you can develop a plan to close any gap. And be sure to visit BlackRock’s Retirement Center for a wealth of information on retirement planning, including dedicated resources related to Social Security collection strategies.

WHY (Oh Why)?

Now that we’ve covered the what, when, who and how, you may be wondering why these changes are being implemented. It’s no secret the Social Security system is underfunded and in need of a lifeline. The 2015 Social Security Trustee Report estimates the combined Retirement and Disability Trust funds will be exhausted in 2034. At that point, if no changes are made, the report estimates the system will have enough incoming revenue to cover only 79 cents of every dollar owed.

The presumption is that these changes now on the table will increase the sustainability of the system. One estimate was that if every eligible person were taking advantage of these two collection options, it would cost the Social Security system roughly $9.5 billion a year. (As a point of reference, Social Security paid out approximately $725 billion in retirement-related benefits in 2014.)

That said, it is unclear how many people are actually using one or both of these options. In fact, I’ve been talking to people about Social Security for seven years now and a great many have been unaware that these strategies existed; the Social Security Administration doesn’t necessarily advertise them. So, in reality, the potential savings are yet to be determined, though the SSA Chief Actuary has offered a long term estimate.It is clear, however, that these changes alone won’t come close to addressing the magnitude of the problem. Congress still has a lot of work to do over the next 18 years.

Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age.

 

The above commentary is based on Social Security laws in effect as of November 2015. Congress has made changes to the laws in the past, and can do so at any time in the future.

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice. BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

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How Much Should You Put Into Retirement Accounts?

Piggy Bank

Taxes can be one of the main drags on the growth of your portfolio. That’s why tax-advantaged accounts such as 401(k) and IRA accounts can be such a boon when you’re saving for retirement. But how much should you put into these accounts as opposed to regular taxable accounts? The answer is “as much as you can” in order to minimize your tax bill, though there are a couple key constraints on how much you “can” allocate to these accounts.

This first constraint is that there are usually large penalties if you withdraw money from tax-advantaged retirement accounts when you’re under the age of 59 ½. Therefore any money you think you’ll need to pay for expenses before that age shouldn’t be put in a tax-advantaged account. You should also make sure you have money set aside outside of retirement accounts to act as a buffer against unexpected expenses. Once you’re established this buffer, you should put as much money into tax-advantaged accounts as you can afford to.

The second constraint is legal: the government puts a cap on how much you can put into retirement accounts each year. The annual limit on how much you can contribute depends on the type of retirement account. In 2014 the contribution limit for 401(k) accounts is $17,500, for example, while the limit for IRA accounts is $5,500. These contribution limits are higher for people over the age of 50.

Putting as much money into tax-advantaged retirement accounts as you can, while avoiding the penalties you’d have to pay if you withdraw money early or exceed the annual contribution limits, can make it substantially easier to meet your retirement goal.

The Importance of Taking Inflation into Account

There are lots of reasons to try to grow your wealth, from retirement to education to starting a business. One thing these goals have in common is that the amount of money needed to achieve them doesn’t stay constant. The prices of almost everything change over time, which is why it’s important to take inflation into account when setting your financial goals.

The inflation rate (typically measured using the Consumer Price Index) reveals how much prices have risen (or fallen) on average for the things consumers spend their money on, such as food, rent, clothing, and medical care. If prices increase, your “purchasing power” falls, since the same amount of money can buy fewer items. Over long periods of time purchasing power can change dramatically: you would need almost $2,400 to buy the same amount of goods and services that you could have bought with $100 a century ago.

When “inflation” is discussed as a general concept, it’s referring to this average price increase. For specific items, however, price increases or decreases can be substantially different. According to the College Board, for example, since 1971 the average cost of college at a private non-profit four-year school increased by 2.1% per year more than the overall inflation rate.

College Costs

So how much inflation should you plan for when setting your financial goals? There’s no universal answer. The Federal Reserve, which controls interest rates to manage economic growth and inflation, aims for a 2% inflation rate. For a broad goal, such as retirement, this number is probably a reasonable assumption. For goals more focused on a specific purchase—such as funding a college education or buying a home—the right inflation assumption will depend on the details of the goal, and could be much higher or lower than 2%.