There are many threats to our future, and many are beyond our control, but we hedge against them. We rely on our military to protect us from national security threats. We rely on the FDA to protect us from foodborne pathogens and the CDC to protect us from communicable diseases. We each pay for all of this protection through our taxes. But when it comes to living in retirement, we can only rely on ourselves and must fund this retirement challenge accordingly.
A study on Retirement Security by the USGAO for the US Senate Committee on Health, Education, Labor and Pensions presented in May 2016 revealed that, as a country, the low defined contribution savings mean we must do some serious thinking about our future. What’s most intriguing is that this possibility of being underfunded is quite controllable. As regulations and customs have changed over the years, the preferred method for individuals and business owners to save for retirement has shifted from defined benefit (DB) plans to defined contribution (DC) plans, such as 401(k)s. Although DC plans have become increasingly easy to administer for business owners, unfortunately many workers do not have access to them.
Here are some thought-provoking statistics gathered through the study:
- 40% of US households had some retirement savings in a DC plan in 2013, and account balances varied by household income and race.
- The 60% of households without any DC savings resulted from a number of factors: 39% of working households lacked access to, or were not eligible to participate in, an employer-sponsored DC plan at their job.
- Low-income households were even less likely to have access to a DC plan at their workplaces or to have DC savings.
- 25% of working, low-income households had savings in a DC plan, compared to 81% of working, high-income households.
- Account balances declined for some, but not all, groups during the recent recession and recovery from 2007 to 2013.
What does this mean in the long term?
We have a challenge on our hands, as a country, to fund our individual and collective futures in retirement. The Social Security fund can only supplement a portion of our financial needs in retirement—the rest is up to each of us. Fortunately, the government has provided tax-advantaged options for American workers to help them fund individual and business retirement savings plans.
How much can you save?
We know from this recent study that low-earning households have accumulated on average enough funds to provide $560/month in retirement, which is barely enough to live on, let alone live comfortably. The highest earning group has saved enough to generate 11 times that amount in retirement. A significant factor impacting how much you can save is the amount of money available once bills are paid, but another factor is the type of plan that you establish.
A typical IRA allows $5,500 to be saved with a tax deduction each year ($6,500 if you’re age 50 or over) in 2016. This amount is a starting point for many individuals who do not have access to a DC plan through their employers. Importantly, through “deduction”, you can put the money into your retirement savings before taxes are imposed. For example, putting away $5,500 through payroll deduction may have only a $4,000 impact to your paycheck, depending on your tax bracket, filing status, and other deductions. Importantly, it can grow tax-deferred, meaning that you don’t pay taxes each year on the accumulated funds (unlike a bank account or a CD which require you to declare any interest on your tax forms annually) and you will withdraw your funds in retirement when your earnings and tax bracket are lower. You should consult with a tax advisor for more information.
If you are a small business owner, it’s important for you and for your employees to consider offering a DC plan through your firm. It will help you prepare your employees for retirement and can give you an edge when it comes to recruiting and retaining top talent. Many plans allow contributions of up to $18,000 per year (or up to $24,000 for those age 50 or over), allowing you and your employees to save significantly more than the $5,500 permitted in an IRA. Based on the FinFit Study of September 2014, 85% of employers believe that employees who participate in financial wellness programs are more productive on the job ¾good news for the health of your firm.
If you do not have employees, you may benefit from a special type of DC plan designed for one-person businesses or those who only employ immediate family members. These plans allow you to defer up to $53,000 per year toward retirement ($59,000 if you’re age 50 or over), depending on the business earnings of your firm. This is a significant advantage, as the limits for the Solo 401(k) are one of the highest among qualified plans.
Managing Your Risk
Whether you’re starting a firm, running an established practice, are part of an architectural firm, or are preparing to wind down your practice, the AIA Trust offers retirement savings and distribution vehicles to assist AIA members through AXA Equitable. With over 47 years of association experience – including 25 years serving architects – AXA Equitable can help you review your options and offer you choices to alleviate the burden of establishing and managing a retirement savings plan. It’s one of the many ways that the AIA Trust makes it easier for you to focus on doing what you do best – architecture – your true passion.
You may call 1-800-523-1125 to speak with a Retirement Program specialist or visit www.TheAIATrust.com/retirement-plans/ to learn how to start your retirement plan and saving today.
Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided by this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. AXA Advisors, LLC and AXA Network, LLC do not provide tax or legal advice.
Withdrawals from retirement plans are subject to ordinary income tax treatment and if taken prior to age 59 ½ may also be subject to an additional 10% federal income tax penalty.
The retirement plan would be funded by an annuity contract issued and distributed by AXA Equitable Life Insurance Company (AXA Equitable), New York, NY. Annuities contain certain limitations and restrictions. For costs and complete details, contact a Retirement Program Specialist.
GE-115427 (06/16) (Exp. 06/18)