Planning changes for your retirement years
Reducing your expenses during your retirement years is an important way to reduce financial pressure. Think about ways your life can change and make plans for a smooth transition by considering these points:
- Where to live: I encourage workers approaching retirement to consider how and where they will live after they retire. Start thinking about where you’ll live a few years before you retire because this can have a significant impact on your future financial needs.My wife and I went through this process in our late 50s. We both grew up in rural south-central Pennsylvania, but we spent the first 37 years of our married lives in the Philadelphia area. We lived in suburban Bucks County for 32 of those years. None of our three married children had settled in that area. We no longer needed our large house, which was highly taxed and was going to get much worse with $100 million of new schools, so we began considering alternatives.
Our son Steve and his wife Laura were in Potter County in the north-central part of the state without any family within hundreds of miles of them. We decided to move into that area, eventually buying a nice stone ranch home on beautiful Pine Creek. Steve and his wife Laura blessed us with two lovely granddaughters who spent a lot of time with us during their growing-up years. Relocating to a smaller house in a lower cost area enabled us to reduce our expenses by close to 50 percent.
- What to do: Planning how to spend your time is one of the many things to consider. Not having to work every day earning a paycheck sounds great, but having little or nothing to do can get boring pretty fast, especially when you may live for another 20 to 30 years. Planning some productive activities before retiring can help make this transition easier. I don’t recommend going cold turkey from full-time employment one day to full-time retirement the next day.
- How to get around: I have done other planning to accomplish getting around efficiently. For example, I buy upscale used cars for a fraction of their original price instead of new ones. I bought my share of new cars when I did a lot of business traveling and image was a more important issue, but I no longer need to do that.
Adding advice on your retirement investments with mPower
The first effort to provide actual investment advice to 401(k) participants was an online version offered by mPower. Rather than just educating participants about investments, mPower offered them investment recommendations. I served on their board both as a member and as a consultant.
One of the main challenges was getting the major 401(k) service providers to integrate investment advice into their services. The head of one of the major service providers told us there wasn’t any way they wanted an independent firm telling participants they serviced how to invest because this could adversely impact the fees they received. But things changed as participant interest in advice grew and when the service providers realized this was a way to make more rather than less in fees. They accomplished this by adding an additional layer of fees — usually in the 0.5 to 1.0 percent range.
Around this time, I was speaking at a meeting hosted by one of the largest service providers. The audience was a group of financial advisors. A representative of the service provider explained to the advisors how they could receive an additional 0.25 percent in fees by adding investment advice. This is when 401(k) fees for smaller plans pushed into the 2 to 3 percent range.
The same thing has occurred with IRAs offered by financial advisors who are generally called wealth managers today. Their typical offering is called a managed account. These accounts are generally a prepackaged mix of mutual funds with total fees in the 1.5 to 2.0 percent range. They include a fee on top of the normal mutual fund fees, often called a wrap fee.
Gaining from Ted Benna Guides
A small employer recently used a guide I have prepared to shift from a 401(k) to an IRA-based plan. The employer eliminated more than $1,500 in annual fees, and annual fees for participants were reduced from 2.75 percent to 0.15 percent. The new plan is also much easier for the employer to administer, and the participants have much broader investment options.
There are four different guides that contain detailed information about how to set up an IRA-based plan:
- For payroll-deduction IRAs: The first two are for a small business wanting to set up a payroll-deduction IRA either with or without an employer contribution.
- The guide for the payroll-deduction IRA with an employer contribution explains two different ways for providing an employer matching contribution.
- For SEP IRAs: The third guide explains how to set up a SEP IRA to get the biggest tax advantage. A SEP IRA is of greatest value to solo entrepreneurs and family businesses. A solo entrepreneur recently used this guide to transition from a Solo 401(k) to eliminate a $99 annual fee and to save $2,450 in additional taxes.
- For SIMPLE IRAs: The fourth guide explains in detail how to set up a SIMPLE IRA and to package it effectively for your employees. SIMPLE stands for Savings Incentive Match Plan for Employees and is a great starter plan for a small business but it is a bit more complicated than the name implies. It requires contributions from employees and employer.
Learn more about the guides at [email protected].
Benefitting from bundling for 401(k)s
Bundling wasn’t an option in the early days of 401(k)s. Administration of a typical 401(k) included several different organizations to handle the maintenance of participant accounts and all the other services required to administer the plan. Investments were usually limited to two or three options — an equity mutual fund, a Guaranteed Income Fund (GIC) issued by an insurance company, and employer stock. Participant accounts were updated monthly, quarterly, semi-annually, or only once a year. Participants received paper statements four to six weeks after the accounts were updated.
Participants had to split their investments between these funds in 25 percent multiples: 100/0, 75/25, 50/50, 25/75 or 0/100. Requests to change investments had to be submitted in writing to the HR department and then submitted to the record keeper. Investment changes occurred only on the valuation dates when participant accounts were updated. This was a slow, cumbersome, error-prone process; however, fees were unbundled. Employers typically paid all recordkeeping and administrative fees and participants paid only the investment fees
By the mid-1980s, the major mutual fund companies (Fidelity, Vanguard, T. Rowe Price) and some insurance companies (MassMutual, New York Life, Principal Financial) realized 401(k) plans were generating a lot of money to be invested. They began to offer bundled services. A company with a 401(k) plan could select one of these entities to handle all functions — record keeping, investments, and all other administrative procedures. Services weren’t the only things that were bundled. Fees were also bundled and all paid by participants.
Plans began to expand investment options, update participant accounts daily, and permit investment changes 24/7/365. Participants were also able to access their accounts anytime first via voice response and later via the internet.
