Chicago -- Many members of the next generation of retirees are expected to face a large decline in their standard of living when they retire, according to a new report from the Society of Actuaries, which found that making retirement decisions based on averages increases the risk of running out of money. Moderate and higher-income households can successfully retire with 20 percent less savings if they are willing to cut their discretionary budgets by 15 percent, according to the report. Purchasing an annuity must be balanced against the need for an adequate emergency fund. Purchasing long-term care insurance reduces emergency fund needs for both lower-income and wealthy households.
The report also found that continuing mortgage payments in retirement increases the likelihood of income shortfall. Social Security benefits are extremely important at lower income levels, and delayed retirement is the most impactful risk-mitigation strategy, especially for the median family.
"Many of the next generation of retirees are facing a big drop in their standard of living when they retire, and individuals need to be aware that attempts to over-simplify the retirement planning process can be very dangerous if used for personal decision-making," said actuary Anna Rappaport, who co-authored the report. "Planning for so-called shock events, such as expensive health shocks or ill-timed financial market downturns, must be taken into consideration, since they are more likely to derail a retirement plan, especially at lower income levels. Less than one third of median households will have positive wealth at death."
The median American married couple at retirement earns approximately $60,000 a year and has approximately $100,000 in non-housing wealth, the report noted. There is a 29 percent chance that median households will have positive wealth at death. The assets needed to meet cash flow needs 50 percent of the time would be approximately $170,000, compared to approximately $686,000 for a 95 percent success rate.
DETAILS ON IRA PROVISIONS OF THE FISCAL CLIFF DEAL
Washington, D.C. -- The American Taxpayer Relief Act of 2012 extended the ability to do tax-free IRA rollovers to charities. The new law also expanded the ability to do in-plan Roth IRA rollovers, permitting more funds to be rolled into designated Roth accounts.
The extension of tax-free rollovers to charities allows IRA owners age 701/2 or older to transfer tax-free up to $100,000 for both 2012 (by Feb. 1, 2013) and 2013 to eligible charities. The ATRA extended the qualified distribution, or QCD, provisions for 2012 and 2013. Several transition rules were included in the ATRA to enable taxpayers to have a donation made before Feb. 1, 2013, treated as a 2012 QCD. An IRA owner can treat a contribution made to a qualified charity in January 2013 as a 2012 QCD in either of the following circumstances:
The contribution is a cash contribution to the charity of all or a portion of an IRA distribution made to the IRA owner in December 2012, provided that the contribution would have been a 2012 QCD if it had been paid directly from the IRA to the charity in 2012.
The contribution is paid directly from the IRA to the charity, provided that the contribution would have been a 2012 QCD if it had been paid in 2012.
A QCD made in January 2013 that is treated as a 2012 QCD will satisfy the IRA owner's unmade 2012 required minimum distribution if the amount of the QCD equals or exceeds the 2012 RMD. However, no part of such a QCD can be used to satisfy the 2013 RMD, even if the 2012 RMD had already been made. In determining the RMD for 2013, the 2012 QCD must be subtracted from any Dec. 31, 2012, IRA account balances.
For the past few years, plans with designated Roth accounts could allow an individual to roll over an amount from a non-Roth account into the designated Roth account in the same plan, but only amounts that the individual could have had distributed from the plan, usually because the individual had attained age 591/2 or had severed from employment, according to the IRS.
Beginning in 2013, a 401(k) plan can permit this type of rollover for an amount that is not eligible for distribution at the time of the rollover, such as an amount in a regular (pre-tax) elective deferral account when the individual is not eligible for a distribution from that account. A similar expansion applies to 403(b) plans and governmental 457(b) plans.
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