Matters Column

Make time to revisit retirement plans

July 28, 2017
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Summer brings many things — baseball, outdoor barbeques, Fourth of July festivities, vacations and time to spend with family and friends. This time of year seems to pass by so quickly. This is evidenced by the fact we already can see the back-to-school promotions starting up and sports practices for fall sports are not far behind.

Beyond some of the traditional summertime events we all enjoy and participate in, it may be a good time to give some thought on some personal finance items. The stock market has had a nice performance in 2017, and when we look back to the bottom of the market at the height of the last recession in 2008, there has been significant appreciation in stocks and mutual funds. For many, the increase in financial asset values has allowed retirement account balances to grow — and grow in significant measure. Granted, some of the growth in these assets has been the result of contributions by the account owners or their employers, but a significant amount of the growth in these balances can be attributed to asset value appreciation.

At some time this month, many of us will be receiving in the mail or via electronic distribution our quarterly statement for our individual retirement account, 401(k) account or similar retirement account. Often, many of us don’t take the time to actually read and reflect on the information, as it doesn’t necessarily impact our ability to do anything today. I am sure that, in many homes, the statements may be unopened in an email inbox or placed on a pile of other documents on a desk.

A retirement account, such as a 401(k) or IRA, may represent the single largest asset that someone owns. In many situations, a retirement account balance exceeds the value of the equity in one’s principal residence. Earlier this year, the Employee Benefit Research Institute reported the average balance in IRAs in its survey sample has increased from $92,000 in 2010 to $134,000 in 2014. It is likely the balances have grown in the past three years given the rise in the securities markets. Fidelity Investments, the mutual fund group, also reported earlier in 2017 that the average 401(k) balance under its administration increase to nearly $93,000 in 2016 and that balance was up from $69,000 five years earlier. IRA accounts held at the same group had grown from $69,000 to nearly $94,000 in the same five-year period. The account balances continue to grow by employee and employer contributions and investment appreciation.  

Though retirement assets continue to grow, some account owners temporally access those funds. The data from Fidelity Investments also indicated that 21 percent of 401(k) account holders had outstanding loans from their 401(k) accounts. It was noted this is the lowest level since 2009. The use of loans that are permitted under many 401(k) plans often avoid a taxable distribution for the account owner.

The retirement account balances mentioned above are averages, and obviously, there are differences in balances for the many account owners. Account balances tend to be higher for older individuals than for younger individuals. This makes sense as older individuals have contributed for a longer period and have had the benefit of the long-term appreciation in assets held in the accounts. However, for many older individuals, their retirement savings may not be adequate to fund their needs in retirement.

For those of us who are homeowners, we tend to keep up with some of the required maintenance and capital outlays to maintain our homes so their value is maintained or enhanced. Whether it is replacing shingles on a roof or power washing and painting the deck, those tasks come with home ownership. I am not sure it is same with retirement assets. How much time do the same individuals spend on their single largest asset, their retirement account? In many cases, the answer may be not much time at all. For many of us, we may be on autopilot when it comes to retirement accounts. Many individuals have made the deferral election with respect to the amount to be deducted out of our paycheck and have made investment selections with respect to what mutual funds to invest the funds. The question here may be how long ago has it been that the deferral election or the investment selection was made? And, on what basis were those decisions made?  Facts and circumstances change often in one’s working years. These changes may have long-term consequences that can impact retirement savings.

We all know or have heard and read about the issues confronting the social security system. Benefit payments currently are close to equaling or exceeding the annual revenues. The trend for benefit payments is to outpace revenues as the share of retired workers to current employees continues to grow. In addition, the inability for any significant reform or change in social security leaves some question to many on its long-term viability. These facts alone probably should prod many of us to take a more focused and active look at our retirement planning.

Retirement planning should consider not only the decisions on what to defer and invest in within one’s 401(k), IRA or other retirement accounts, but also how those decisions impact the overall retirement plan for an individual. We are often too busy with the tasks of today (getting kids to school and athletic events, what is the next meeting on my schedule and what home or car repair or maintenance item needs to get completed) to think about what will be the financial requirements of our retirement. This includes the consideration of what does the retirement account balance need to be at retirement and working back from that to determine what to invest each year and how and where to invest it. This all takes time, effort, and in many cases, consulting with a qualified professional.

As the summer rolls on by, it may serve us all well to take a few moments and review the June 30 retirement account quarterly statement and begin to reflect on the many items that should be taken into consideration with respect to one’s retirement account and how that account fits into one’s overall retirement planning. Such knowledge and foresight may prove beneficial, as Benjamin Franklin confirmed when he wrote, “A penny saved is a penny earned.”

William Roth is a tax partner with the local office of international accounting firm BDO USA LLP.

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