Retirement Insights From Morgan Stanley - Morgan Stanley Locator
1Q 2014VOLUME 15, ISSUE 1
lan P Perspectives Retirement Insights From Morgan Stanley cover story
in this issue
What’s Changing in Your 401(k) or IRA for 2014?
1
What’s Changing in Your 401(k) or IRA for 2014?
2 Preparing for an Imminent Retirement 3 Designate a Beneficiary for Your 401(k) 4 Searching for Higher Yields
Unlike last year, 401(k) and IRA contribution and catch-up limits have not increased. The good news is that you may qualify for a number of other opportunities that may enable you to save more for retirement, while reducing current income tax.
plan perspec tives
The maximum contribution you are allowed to make to your 401(k), 403(b) or IRA is the same as it was in 2013. Limits remain as follows: 401(k)/ 403(b)
IRA
Maximum annual contribution
$17,500
$5,500
Catch-up (for contributors age 50 and over)
$5,500
$1,000
At the same time, you should be aware that Uncle Sam has instituted the following changes that will enable many people to save more for retirement this year. Specifically, you may qualify for: Tax-deductible contributions to your Traditional IRA. The amount of
your contributions to your Traditional IRA that you can deduct may be limited if you (or your spouse, if married) are covered by a retirement plan at work. If you are covered by such a workplace plan, tax-deductible contributions to a Traditional IRA may still be fully available for individuals with modified adjustable gross income (AGI) of $60,000 or less and married couples filing a joint tax return with modified AGI of equal to or less than $96,000 (different rules apply for married couples filing separately). Partial deductions may be available if covered by a workplace retirement plan when your modified AGI is between:
• $60,000–$70,000 for individuals • $96,000–$116,000 for married couples
If your spouse participates in an employer-sponsored plan at work and you don’t, and if you file a joint return, you may be able to make tax-deductible contributions to a Traditional IRA that are phased out when your joint modified AGI is between $181,000–$191,000. Roth IRA. You can open a Roth IRA and take advantage of tax-free growth and withdrawals if your modified AGI is equal to or less than $114,000 for individuals and $181,000 for married couples. You may still be able to make a smaller contribution to a Roth IRA if your modified AGI is between: • $114,000 - $129,000 for individuals • $181,000 - $191,000 for married couples Saver’s Tax Credit. You may be able to claim a tax credit of up to $1,000 for individuals and $2,000 for married couples if you participate in either a 401(k) or IRA and your modified AGI is equal to or less than: • $30,000 for individuals • $60,000 for married couples Making the most of these op-
Clearly, the more you contribute to your 401(k) and IRA, the more you’ll have for retirement. However, there are several other less obvious measures you can take to maximize your retirement nestegg:
portunities.
Take advantage of employer matches. Not every 401(k) offers em-
Preparing for an Imminent Retirement Admit it—retirement has been an abstraction. You may have had a vague idea of how you wanted to spend your days but did you really map out the details—whether you’ll work, where you’ll live, what you’ll actually do all day? Before you take the retirement plunge, we urge you to give the following issues some serious thought:
2
morgan stanley
How much will you actually need? If you haven’t taken inventory of
your expenses, now is the time to start.
ployer matching, but if yours does, you are turning away money by not contributing enough to qualify for it. Imagine you earn $75,000 a year and your employer offers a 50% match on up to 3% of your compensation. By contributing $2,250 a year, you will receive a matching contribution of $1,125. Choose low-cost investments.
The Department of Labor (DOL) now requires 401(k) sponsors to divulge all fees associated with plans, including administrative, recordkeeping and investment management costs. These fees are paid automatically out of assets in the fund, so if your plan investments earned 5% this year and fees and expenses amount to say, 1.6%, you’ve really earned only 3.4% (5%–1.6%). Before you choose an investment option, review its expense ratio and factor the fees charged by the fund into your investment decision. Watch those withdrawals. Resist using your 401(k) assets to buy a new car or pay for a vacation, no matter how well deserved. Assets withdrawn from a 401(k) or IRA are subject to income tax and a 10% penalty if you are under the age of 59½. Some exceptions exist. You won’t have to pay a penalty but you will have to pay taxes on withdrawals used for higher education costs, the purchase of a first home (up to $10,000), medical costs or health insurance expenses after a period of unemployment.
Look at your check register, credit card expenses, online bill paying activity and ATM withdrawals to determine how much you’re actually spending each month. And be realistic about your future needs. Remember – inflation escalates expenses each year and you may also face unforeseen costs like healthcare. How much income will be avail-
If you’re lucky enough to qualify for a pension at work, contact your Human Resources representative and work with them to project how much you can expect to receive
able to you?
plan perspec tives
from your pension each month. Visit the Social Security website at www.ssa.gov and request a personalized annual statement that estimates your monthly Social Security benefits at various ages. Now review your entire savings, both within and outside of your 401(k). Multiply your total assets by 4% – that’s the amount, according to some experts, that you’ll be able to withdraw annually for 30 years before your assets are depleted. Of course, this 4% rule is hardly ironclad, but it’s a good place to start when you’re seeking a ballpark estimate of how much income your retirement nestegg will generate. Compare your sources of income with your projected expenses. If there’s
a considerable shortfall, you may have to rethink your retirement plans. Will you work part-time? Some people never want to stop working. Others have no choice but to supplement their retirement income with wages. It’s difficult to determine how much income you will earn by working part-time during retirement, but if you do plan to work, you may not be able to rely on Social Security benefits until you reach what the Social Security Administration considers “Full Retirement Age” (age 66 or older, depending on when you were born). Yes, you can begin receiving Social Security benefits as early as age 62, but they will be lower than those you would receive by wait-
ing. Equally important, you will not be able to earn more than $15,480 from part-time work without decreasing your Social Security benefit by $1.00 for every two dollars you earn. This threshold is adjusted annually and does not apply if you wait until Full Retirement Age to begin receiving benefits. Clearly, the decision to actually retire is predicated on how well you’ve answered these and other questions like where will you live and what will you do about healthcare insurance. Professional advice can help you make the right decisions before it’s too late to retrace your steps.
Important: Designate a Beneficiary for Your 401(k) John went through a divorce and forgot to change the beneficiary of his 401(k) plan. When he died prematurely, his ex-wife received the proceeds, instead of his children. Eve needed money when her husband died but discovered she could not access the assets in his 401(k). That’s because Eve’s husband never designated her as beneficiary. As a result, the assets in the 401(k) became part of the estate which was subject to probate. Eve eventually got her inheritance but the process took several months. These names and anecdotes may be fictional, but the situations are not. Failure to designate a beneficiary for your 401(k) can result in delays or worse, the wrong people receiving the assets you meant to leave to loved ones. Who should be your beneficiary?
Clearly there is no right answer to this question, but if you’re torn between leaving your 401(k) to your spouse or another person, consider the following: • Spouses enjoy more flexibility than non-spouses when inheriting 401(k) as-
sets. If the plan allows, the spouse may be able to keep the assets in the plan and avoid taking taxable distributions until he or she reaches age 70½. If the plan does not allow your spouse to participate, he or she can rollover the assets into an IRA and may be able to continue growing the assets on a tax-deferred basis until he or she reaches age 70½. • Non-spouses do not have this option to treat the decedent’s account as “their own” – but just like surviving spouses, they do have the option to transfer their benefits to an “inherited IRA.”
Consult with your tax advisor before you make any decisions, and while you’re at it, make sure you designate a contingent beneficiary just in case you are pre-deceased by your primary one. Finally, don’t forget to let your beneficiaries know that they are indeed your beneficiaries. Ultimately, it will be their responsibility to contact your employer and file a claim.
morgan stanley
3
plan perspec tives
Searching for Higher Yields Bonds are probably an important component of your 401(k) asset allocation and with good reason. Bonds have traditionally provided important diversification. Their historic returns are lower than those provided by stocks, but they have often helped investors preserve capital when stocks haven’t performed well. In 2013, however, the stock market, as measured by the Standard & Poor’s 500, was up an incredible 31.9%. Bonds, as measured by the Barclay’s Aggregate US Bond Index, were down 2.02%. What’s more, the outlook for bonds is not promising. Yields have moved up a bit from their historic lows last year and are expected to rise more as the Federal Reserve tapers its monthly purchases of US government bonds and mortgage-backed securities. Yields, however, have an inverse relationship with bond prices. When yields rise, prices generally fall and vice-versa. If you’ve looked at your 401(k) performance statements lately, you’re probably dismayed by what you’re seeing from the bond components of your portfolio. This does not mean, however, that you should necessarily avoid bonds.
All bonds are not created equal
Look at the fixed income investment options offered by your 401(k). You may see a variety of alternatives like short, medium and/or long duration, high yield, corporate, US government or international. In markets where yields are expected to rise and prices fall, you might want to consider the following options for your bond allocation: Short Duration Duration is a calculation that measures a bond’s sensitivity to interest rate fluctuations. Bonds with shorter durations tend to react less dramatically to rate movements than bonds with longer durations. In this environment, consider avoiding long duration in favor of short. The yields may be lower, but so will price volatility. High Yield High yield bonds are rated below investment grade by major rating agencies like Moody’s and Standard & Poor’s. As a result, they offer higher coupon rates than bonds rated A or higher. If interest rates rise, the price of high yield bonds will generally decline, but the high coupon should help cushion the blow.
Convertible Bonds These securities share characteristics of both bonds and stocks. As their name implies, convertible bonds may be converted to shares of the issuer’s stock at a certain price. As a result, the price of these securities is subject not just to interest rate fluctuations, but changing economic, market and issuer conditions. In today’s low interest rate environment, some stocks are actually offering dividend yields that outpace the yields offered by the same issuer’s bonds. Utility stocks typically offer high yields, but you might also consider investment options that seek stocks with histories of growing dividends. True, these securities are stocks, not bonds, so participating in them will skew your allocation toward equities. Still, they may warrant consideration for at least a small percentage of your bond allocation. Consult with a financial professional before making a decision. Finally, you should remember that investing for retirement requires a long-term perspective. By all means, consider the alternatives presented here, but don’t stray too far from your asset allocation that was created to meet your timeframe, objectives and tolerance for risk.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Asset allocation and diversification do not assure a profit or protect against loss. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. © 2014 Morgan Stanley Smith Barney LLC. Member SIPC.
CRC818595 KP7799276 CS 7799276 03/14
lan P Perspectives Retirement Insights From Morgan Stanley cover story
in this issue
What’s Changing in Your 401(k) or IRA for 2014?
1
What’s Changing in Your 401(k) or IRA for 2014?
2 Preparing for an Imminent Retirement 3 Designate a Beneficiary for Your 401(k) 4 Searching for Higher Yields
Unlike last year, 401(k) and IRA contribution and catch-up limits have not increased. The good news is that you may qualify for a number of other opportunities that may enable you to save more for retirement, while reducing current income tax.
plan perspec tives
The maximum contribution you are allowed to make to your 401(k), 403(b) or IRA is the same as it was in 2013. Limits remain as follows: 401(k)/ 403(b)
IRA
Maximum annual contribution
$17,500
$5,500
Catch-up (for contributors age 50 and over)
$5,500
$1,000
At the same time, you should be aware that Uncle Sam has instituted the following changes that will enable many people to save more for retirement this year. Specifically, you may qualify for: Tax-deductible contributions to your Traditional IRA. The amount of
your contributions to your Traditional IRA that you can deduct may be limited if you (or your spouse, if married) are covered by a retirement plan at work. If you are covered by such a workplace plan, tax-deductible contributions to a Traditional IRA may still be fully available for individuals with modified adjustable gross income (AGI) of $60,000 or less and married couples filing a joint tax return with modified AGI of equal to or less than $96,000 (different rules apply for married couples filing separately). Partial deductions may be available if covered by a workplace retirement plan when your modified AGI is between:
• $60,000–$70,000 for individuals • $96,000–$116,000 for married couples
If your spouse participates in an employer-sponsored plan at work and you don’t, and if you file a joint return, you may be able to make tax-deductible contributions to a Traditional IRA that are phased out when your joint modified AGI is between $181,000–$191,000. Roth IRA. You can open a Roth IRA and take advantage of tax-free growth and withdrawals if your modified AGI is equal to or less than $114,000 for individuals and $181,000 for married couples. You may still be able to make a smaller contribution to a Roth IRA if your modified AGI is between: • $114,000 - $129,000 for individuals • $181,000 - $191,000 for married couples Saver’s Tax Credit. You may be able to claim a tax credit of up to $1,000 for individuals and $2,000 for married couples if you participate in either a 401(k) or IRA and your modified AGI is equal to or less than: • $30,000 for individuals • $60,000 for married couples Making the most of these op-
Clearly, the more you contribute to your 401(k) and IRA, the more you’ll have for retirement. However, there are several other less obvious measures you can take to maximize your retirement nestegg:
portunities.
Take advantage of employer matches. Not every 401(k) offers em-
Preparing for an Imminent Retirement Admit it—retirement has been an abstraction. You may have had a vague idea of how you wanted to spend your days but did you really map out the details—whether you’ll work, where you’ll live, what you’ll actually do all day? Before you take the retirement plunge, we urge you to give the following issues some serious thought:
2
morgan stanley
How much will you actually need? If you haven’t taken inventory of
your expenses, now is the time to start.
ployer matching, but if yours does, you are turning away money by not contributing enough to qualify for it. Imagine you earn $75,000 a year and your employer offers a 50% match on up to 3% of your compensation. By contributing $2,250 a year, you will receive a matching contribution of $1,125. Choose low-cost investments.
The Department of Labor (DOL) now requires 401(k) sponsors to divulge all fees associated with plans, including administrative, recordkeeping and investment management costs. These fees are paid automatically out of assets in the fund, so if your plan investments earned 5% this year and fees and expenses amount to say, 1.6%, you’ve really earned only 3.4% (5%–1.6%). Before you choose an investment option, review its expense ratio and factor the fees charged by the fund into your investment decision. Watch those withdrawals. Resist using your 401(k) assets to buy a new car or pay for a vacation, no matter how well deserved. Assets withdrawn from a 401(k) or IRA are subject to income tax and a 10% penalty if you are under the age of 59½. Some exceptions exist. You won’t have to pay a penalty but you will have to pay taxes on withdrawals used for higher education costs, the purchase of a first home (up to $10,000), medical costs or health insurance expenses after a period of unemployment.
Look at your check register, credit card expenses, online bill paying activity and ATM withdrawals to determine how much you’re actually spending each month. And be realistic about your future needs. Remember – inflation escalates expenses each year and you may also face unforeseen costs like healthcare. How much income will be avail-
If you’re lucky enough to qualify for a pension at work, contact your Human Resources representative and work with them to project how much you can expect to receive
able to you?
plan perspec tives
from your pension each month. Visit the Social Security website at www.ssa.gov and request a personalized annual statement that estimates your monthly Social Security benefits at various ages. Now review your entire savings, both within and outside of your 401(k). Multiply your total assets by 4% – that’s the amount, according to some experts, that you’ll be able to withdraw annually for 30 years before your assets are depleted. Of course, this 4% rule is hardly ironclad, but it’s a good place to start when you’re seeking a ballpark estimate of how much income your retirement nestegg will generate. Compare your sources of income with your projected expenses. If there’s
a considerable shortfall, you may have to rethink your retirement plans. Will you work part-time? Some people never want to stop working. Others have no choice but to supplement their retirement income with wages. It’s difficult to determine how much income you will earn by working part-time during retirement, but if you do plan to work, you may not be able to rely on Social Security benefits until you reach what the Social Security Administration considers “Full Retirement Age” (age 66 or older, depending on when you were born). Yes, you can begin receiving Social Security benefits as early as age 62, but they will be lower than those you would receive by wait-
ing. Equally important, you will not be able to earn more than $15,480 from part-time work without decreasing your Social Security benefit by $1.00 for every two dollars you earn. This threshold is adjusted annually and does not apply if you wait until Full Retirement Age to begin receiving benefits. Clearly, the decision to actually retire is predicated on how well you’ve answered these and other questions like where will you live and what will you do about healthcare insurance. Professional advice can help you make the right decisions before it’s too late to retrace your steps.
Important: Designate a Beneficiary for Your 401(k) John went through a divorce and forgot to change the beneficiary of his 401(k) plan. When he died prematurely, his ex-wife received the proceeds, instead of his children. Eve needed money when her husband died but discovered she could not access the assets in his 401(k). That’s because Eve’s husband never designated her as beneficiary. As a result, the assets in the 401(k) became part of the estate which was subject to probate. Eve eventually got her inheritance but the process took several months. These names and anecdotes may be fictional, but the situations are not. Failure to designate a beneficiary for your 401(k) can result in delays or worse, the wrong people receiving the assets you meant to leave to loved ones. Who should be your beneficiary?
Clearly there is no right answer to this question, but if you’re torn between leaving your 401(k) to your spouse or another person, consider the following: • Spouses enjoy more flexibility than non-spouses when inheriting 401(k) as-
sets. If the plan allows, the spouse may be able to keep the assets in the plan and avoid taking taxable distributions until he or she reaches age 70½. If the plan does not allow your spouse to participate, he or she can rollover the assets into an IRA and may be able to continue growing the assets on a tax-deferred basis until he or she reaches age 70½. • Non-spouses do not have this option to treat the decedent’s account as “their own” – but just like surviving spouses, they do have the option to transfer their benefits to an “inherited IRA.”
Consult with your tax advisor before you make any decisions, and while you’re at it, make sure you designate a contingent beneficiary just in case you are pre-deceased by your primary one. Finally, don’t forget to let your beneficiaries know that they are indeed your beneficiaries. Ultimately, it will be their responsibility to contact your employer and file a claim.
morgan stanley
3
plan perspec tives
Searching for Higher Yields Bonds are probably an important component of your 401(k) asset allocation and with good reason. Bonds have traditionally provided important diversification. Their historic returns are lower than those provided by stocks, but they have often helped investors preserve capital when stocks haven’t performed well. In 2013, however, the stock market, as measured by the Standard & Poor’s 500, was up an incredible 31.9%. Bonds, as measured by the Barclay’s Aggregate US Bond Index, were down 2.02%. What’s more, the outlook for bonds is not promising. Yields have moved up a bit from their historic lows last year and are expected to rise more as the Federal Reserve tapers its monthly purchases of US government bonds and mortgage-backed securities. Yields, however, have an inverse relationship with bond prices. When yields rise, prices generally fall and vice-versa. If you’ve looked at your 401(k) performance statements lately, you’re probably dismayed by what you’re seeing from the bond components of your portfolio. This does not mean, however, that you should necessarily avoid bonds.
All bonds are not created equal
Look at the fixed income investment options offered by your 401(k). You may see a variety of alternatives like short, medium and/or long duration, high yield, corporate, US government or international. In markets where yields are expected to rise and prices fall, you might want to consider the following options for your bond allocation: Short Duration Duration is a calculation that measures a bond’s sensitivity to interest rate fluctuations. Bonds with shorter durations tend to react less dramatically to rate movements than bonds with longer durations. In this environment, consider avoiding long duration in favor of short. The yields may be lower, but so will price volatility. High Yield High yield bonds are rated below investment grade by major rating agencies like Moody’s and Standard & Poor’s. As a result, they offer higher coupon rates than bonds rated A or higher. If interest rates rise, the price of high yield bonds will generally decline, but the high coupon should help cushion the blow.
Convertible Bonds These securities share characteristics of both bonds and stocks. As their name implies, convertible bonds may be converted to shares of the issuer’s stock at a certain price. As a result, the price of these securities is subject not just to interest rate fluctuations, but changing economic, market and issuer conditions. In today’s low interest rate environment, some stocks are actually offering dividend yields that outpace the yields offered by the same issuer’s bonds. Utility stocks typically offer high yields, but you might also consider investment options that seek stocks with histories of growing dividends. True, these securities are stocks, not bonds, so participating in them will skew your allocation toward equities. Still, they may warrant consideration for at least a small percentage of your bond allocation. Consult with a financial professional before making a decision. Finally, you should remember that investing for retirement requires a long-term perspective. By all means, consider the alternatives presented here, but don’t stray too far from your asset allocation that was created to meet your timeframe, objectives and tolerance for risk.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Asset allocation and diversification do not assure a profit or protect against loss. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. © 2014 Morgan Stanley Smith Barney LLC. Member SIPC.
CRC818595 KP7799276 CS 7799276 03/14
