Legislative efforts and savings habits to help build your nest egg for retirement.
Most Americans dream of the day they can retire, spending their newfound free time sunbathing on a beach in Florida, exploring the historic cities of Europe, or making memories with loved ones. No matter the dream, there is one item essential to making these golden years a reality: a robust retirement savings account.
Saving for retirement is one of the most significant financial challenges facing Americans today. For this reason, U.S. legislators have made it a priority in 2019 to facilitate and uncomplicate the retirement planning process.
At the end of May, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Senate is currently working on similar legislation and the result will likely be a compromise of the two proposals.
As financial advisors, it is our responsibility to help ensure that our clients start saving early and contribute the maximum, financially feasible amount to their 401(k)’s, IRAs, or brokerage accounts to build a comfortable nest egg for retirement.
While the SECURE Act and other legislation are great starting points, a successful retirement ultimately comes down to one’s savings and spending habits. Keep reading to learn more about which provisions of the SECURE Act are most likely to impact retirement savings plans, and how clients can adapt their habits to set themselves up for a successful retirement.
The SECURE Act
The SECURE Act aims to help Americans prepare for their long-term financial future by making it easier to contribute to 401(k) plans and other tax-qualified accounts. The legislation provides greater flexibility, reduced red tape for the adoption of 401(k) safe harbor plans and more employee protection.
Under automatic-enrollment safe harbor plans, the cap on auto-escalation for an employee’s income is now 15%, up from 10%. In addition, the SECURE Act eliminates the 70 ½ age limit for contributing to an IRA, while increasing the age at which plan distributions become required to 72.
The proposed legislation also modifies existing annuity rules regarding lifetime income, offering more portability to ensure the preservation of lifetime income investments, as well as mandated annual lifetime income disclosures.
Additionally, the SECURE Act provides a fiduciary safe harbor for sponsors in the process of selecting a lifetime income provider. Other key provisions of the legislation include penalty-free withdrawals from a retirement account in the case of qualified births or adoptions and allowing long-term, part-time workers to participate in 401(k) plans.
Lastly, the SECURE Act makes offering retirement savings options more efficient and affordable for small employers by encouraging multiple employer plans (MEPs). By allowing two or more employers to join a pooled employer plan (PEP), the legislation could result in the creation of 600,000-700,000 new retirement plans.
While this legislation certainly provides benefits, it may not be enough to make a real difference in helping the 64% of Americans who don’t have their retirement savings on track.
Spending and savings habits
The SECURE Act alone is not going to make a significant impact on the average American saving for retirement. Building an adequate nest egg often requires a fundamental shift in the way people manage, save and spend their money. This process should begin early — young adults need to start saving right away and increase their contributions annually as they age.
There are a few best practices to follow when it comes to contributing to a 401(k). As a starting point, it’s important to take advantage of a company’s 401(k) match and contribute at least up to the maximum to receive the match.
Younger employees should also consider investing with a higher allocation to equities for maximum growth. Those without access to a 401(k) plan can benefit from contributing to an IRA or Roth IRA. Self-employed individuals can look to tax-advantaged accounts such as a SEP IRA or SIMPLE IRA.
In addition to contributing to a savings account, Americans need to adapt their financial habits, aiming to save at least 15% of their salary each year. While this may seem daunting, there are simple budgeting steps to limit expenses.
For example, an appropriate goal is to spend no more than 50% of take-home pay on essential expenses such as housing, food, utilities, transportation and any debt payments. It is important to put aside 5% of take-home pay for an emergency savings fund to help cover three to six months of living expenses. If possible, it is recommended that clients automate the savings process by establishing a reoccurring transfer from a checking account to a savings account (If you don’t see the money, you won’t spend the money!).
A secure retirement may currently appear to be a pipe dream to many, but it could become a reality with some legislative assistance, financial guidance and a disciplined savings strategy.
It is important to be aware of the legislative advantages available under the SECURE Act; however, a fundamental shift in the way clients spend and save money is likely to offer the biggest long-term reward.
We encourage clients to keep their eyes on the horizon: a stress-free, happy and healthy life in retirement.