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Failure to plan is planning to fail

| Nov 16, 2016 | Retirement Planning

This article originally appeared as a column for the Cleveland Jewish News.

To be sure, these are uncertain times. Of course, presidential elections always bring uncertainty and, without a doubt, the new administration will be different than the last, even if policy specifics aren’t clear at this point. But one thing remains clear: whether your preferred candidate just won or lost, you should ignore your retirement planning at your own peril.

It pays – literally – to have a retirement plan beyond Social Security. For readers working in the public sector or in the trades, hopefully you will be able to count on monthly pension benefits, whether to supplement or use as a primary income source. If you have access to a 401(k), 403(b), IRA or other retirement plan sponsored by your employer, hopefully you are currently funding it and taking advantage of any employer contributions for which you may be eligible. But what about those readers without access to these types of plans? Fortunately, you still have some ways to start saving.

A Roth IRA is a popular choice. These plans are generally available through major brokerage firms. Money invested in a Roth IRA has already been taxed, and these plans allow for tax-free growth – unlike other types of brokerage accounts that may be subject to capital gains tax – giving you the potential for tax-free withdrawals in retirement. Income limits do apply, though, and higher income earners may not qualify for a Roth IRA. Annual contributions are capped, as well.

Traditional IRAs are preferable for other investors. These products often provide for tax-deductible contributions (depending on your income level) and tax-deferred growth, which can help your balance to increase more quickly. There is no income limit on contributions, meaning even high-income earners can take advantage of this investment vehicle. Traditional IRAs do come with early-withdrawal penalties before age 59½ and with mandatory withdrawals beginning at age 70½.

Another relatively new and potentially useful option is the “myRA.” The myRA is available through the United States Treasury Department. While brokerage firms usually require between one and several thousand dollars to open an IRA account, the myRA requires virtually nothing to start and is available even to those with only a few dollars to save each month. With this option, your money is invested in a United States Treasury savings bond. For this reason, the growth rate is almost certainly going to be lower than other retirement investment options. But it is guaranteed growth. A myRA will get converted into a Roth IRA if the account balance reaches $15,000 or if it has been open for 30 years. The myRA is primarily intended to help individuals get started with retirement investing. It probably won’t be right for those who have already starting saving, but it can be a good way to get going.

Without some change, the current Social Security system won’t be able to pay out promised benefits beyond the mid-2030s. No doubt, something will be done by the upcoming administration and by those who follow. That “something” can take many forms, such as increased taxes (perhaps by raising the Social Security maximum base wage), an increased retirement age, decreased benefits, some combination of these or something else entirely. The bottom line is that even when the latest solution is solidified, you may get less than you would like. And, in any event, Social Security benefits generally only represent a fraction of a retiree’s prior income. This means, of course, that you will either have to make a big lifestyle change upon retirement or do a bit of advanced planning to make sure you will have other ways to help you enjoy your retirement and make ends meet.

*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.