Q YOUR QUESTIONS ANSWERED
“What Is a Beneficiary?” A beneficiary is the person you select to inherit your retirement plan assets upon your death. Federal law requires that married plan participants designate their spouse unless the spouse declines in writing. If you do not have a spouse, you can select whomever you choose. Consider reviewing your beneficiary every year or two to make sure it reflects your current situation. Note that your beneficiary designation will supersede the provisions in your will and it is important that they complement one another.
Planning the Withdrawal of Your Retirement Assets Many people work long and hard to accumulate the assets in their employer-sponsored plan, and at some point, it will be time to start drawing down those assets. The draw-down phase requires careful planning to make sure you make the most of your retirement funds and avoid unnecessary taxes.
by the plan sponsor beyond this age. Failure to take an RMD by the applicable deadline results in a penalty equal to half of the required distribution. RMD rules also apply to Traditional IRAs. The size of an RMD is determined by your age and the account balance. An account owner with a spousal beneficiary who is more than 10 years younger can base required minimum distributions on their joint life expectancy.
The first step is to make a precise inventory of all your assets, distinguishing between tax-deferred accounts such as your employer-sponsored retirement plan and individual retirement accounts continued on last page (IRAs), and taxable accounts, such as ordinary bank or brokerage accounts. Estimating the RMD You can then estimate how much cash This is the Uniform Lifetime Table for unmarried owners, married owners you could potentially receive from whose spouses are not more than 10 years younger and married distributions, dividends, interest owners whose spouses are not the sole beneficiaries of their accounts. Other tables apply in other situations. payments and other sources.
Required Minimum Distributions (RMDs) As a participant in an employersponsored retirement plan, you are required to begin annual required minimum distributions (RMDs) no later than April 1 following the year in which you turn 70½. You may be able to delay RMDs if you remain employed
Age of plan participant
Actuarially projected life expectancy 27.4 22.9 18.7 (in years)
RMD (% of assets)
Source: The Internal Revenue Service.
inside: Keep at it and Bond market outlook
IT’S YOUR MONEY
Retirement Planning 101: Keep at It
There’s no question that the past few years have presented challenges for retirement plan participants. Thanks to two bear markets, as of yearend 2010 the S&P 500 ended one of its worst decades ever, gaining an average of only 1.4% a year.1 Although the stock market rebound that began in March 2009 has helped to restore the account balances of many plan participants, as of January 31, 2011, the stock market was almost 18% below its prior peak recorded in October 2007. Investing for retirement requires the ability to stick with it and adopt a long-term perspective. A look back reveals three strategies that could have helped a plan participant build assets during a turbulent decade: • Continuing contributions despite turbulence in the financial markets. • Contributing enough to qualify for an employer match, if available. • Investing a portion of contributions in the stock market to benefit from periodic market upturns.
Experiencing a Rebound The hypothetical example in this chart shows how someone who continued contributions during the stock market downturn, and maintained a portion of contributions in stocks, could have continued to build assets. The example assumes a $50,000 salary at the start of the contribution period, initial contribution rate of 5% of salary and salary increases of 2.5% annually. The investment mix is 80% U.S. stocks and 20% investment-grade bonds. $35,000
$33,878 Balance Total Contributed
Consider Stocks Given the ups and downs that stocks have experienced during the past decade, it may be natural to question a potentially volatile investment. But investing a portion of a retirement plan balance in stocks could enable a participant to benefit from periodic gains over the long term. When considering whether stocks are appropriate for you, and how much you should invest, consider your risk tolerance and time horizon.
Source: Standard & Poor’s. Stocks are represented by the total return of the S&P 500, bonds by the Barclays Aggregate Bond Index. Results are for the period beginning January 1, 2001, and ending December 31, 2010. Example is hypothetical and for illustrative purposes only. You cannot invest directly in an index. Past performance does not guarantee future results.
Employer Match Some employers match a portion of participant contributions up to a threshold, usually a percentage of salary, determined by the employer. Note that employers are not required to provide a match, so it is important to determine whether you are eligible for this benefit. A match of 50% of a portion of a participant’s contribution, for example, means that a plan participant would earn a 50% rate of return on that money.
Continuity Part of the reason the plan participant in the example experienced a rebound in assets is the continuity of contributions with every paycheck. These contributions accelerated the effect of compounding — investment gains were reinvested in addition to prior gains, which made the account worth even more over the long term. For a plan participant with a longer-term time horizon, such as 10 years or more, compounding can be especially powerful.
There are no guarantees in life, and many people experience setbacks on the way to a secure retirement. But continuing contributions, qualifying for an employer match (if available) and investing a portion of contributions in stocks may help you make progress toward your retirement goals.
Bond Market Outlook: Points to Ponder During the past decade, many long-term fundamentals of investing have been turned upside down, and one example is the performance of U.S. stocks compared with bonds. Over longer time periods, such as 20 or 30 years, stocks exhibited higher average annual returns along with greater volatility. Bonds, in contrast, presented lower long-term returns along with fewer ups and downs. But the past decade has shown the opposite, with the average annual return of investment-grade bonds exceeding stocks by a margin of 5.8% compared with 1.4%.1 No one knows for sure whether the recent outperformance of bonds will continue, but events currently present in the U.S. economy are causing observers to question the outlook in the years ahead. Interest Rates The Federal Reserve has maintained the target for the federal funds rate between 0.0% and 0.25% with the goal of stimulating the economy. Given how low short-term interest rates are, it is likely that they will turn upward at some point, which would present challenges for bondholders. Historically, higher interest rates have caused the prices of existing bonds to fall as investors have pursued newly issued bonds paying higher rates. This scenario presents the potential for losses for existing bondholders. Inflation During 2010, inflation averaged only 1.5%. But if inflation were to increase closer to the 30-year average of 3.2%, or potentially even higher, an investor would lose money on a bond with a yield lower than the rate of inflation.2 Some observers believe that if the U.S. economy begins generating stronger growth, inflation could once again spike upward. Federal Spending Sizeable federal deficits are almost old news as the government looks for ways to stimulate the country’s economic engines. While economic growth is a laudable objective, outsized federal spending may impact the financial markets. If the federal government is forced to pay higher interest rates to entice investors to fund the debt, this action could lead to higher interest rates on other types of bonds as well in response to investor demand. Bonds can help retirement plan participants balance a portfolio weighted to stock funds or other assets. When making decisions about your investments, be sure to weigh both the benefits and the risks associated with bonds and any other assets that you own. Sources: Standard & Poor’s; Barclays Capital. Stocks are represented by the Standard & Poor’s 500 Index, bonds by the Barclays Aggregate Bond Index, volatility by standard deviation. Results are for the 30-year period ending December 31, 2010. You cannot invest directly in an index. Past performance does not guarantee future results. 2 Source: U.S. Bureau of Labor Statistics. Inflation is represented by the Consumer Price Index. Results are for the 30-year period ending December 31, 2010. 1
2% in 2011 Federal legislation signed into law in December 2010 reduced the employee portion of the Social Security tax withheld from most workers’ paychecks from 6.2% to 4.2% for 2011.1 For many workers, this reduction could result in a one-year boost in take-home pay. If you find yourself in this situation, consider allocating the extra money to your employersponsored retirement plan. An increase in your contribution could help bring you closer to your retirement savings goal, especially if it would help you qualify for an employer match. Note that the reduction in Social Security withholding is in effect for 2011 only, and according to current law, is scheduled to revert to 6.2% in 2012 unless changed by Congress. 1 The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law in December 2010.
Employer-Sponsored Health Care: Ways to Save
Planning the Withdrawal of Your Retirement Assets
continued from front
Conservative Withdrawals In 2011, the average worker contribution to an employer-sponsored medical premium is expected to be $2,209 and out-of-pocket costs are expected to total an additional $2,177.1 It’s important for all of us to get the medical services we need, and the following strategies may help you save when it comes to health care expenses: • Use in-network services as much as possible. Most medical plans charge a premium for using services outside of their network of providers. When switching to a new health care provider, check first to determine whether the organization is within the network. • Review a choice of plans. If your employer provides access to more than one level of coverage, consider whether a less expensive plan could meet your needs. Be sure to research charges for emergency room visits, inpatient surgery and other potentially expensive items should the need arise. • Weigh costly academic medical centers versus a competent local provider. Large medical centers may charge considerably more than a local health care professional who offers a similar type of service. Consider this cost differential when you need routine medical care and reserve use of an expensive medical center for out-of-the-ordinary situations such as surgery.
• Ask whether generic drugs are acceptable substitutes for brand name medications. The price difference could be substantial, especially for medications that are taken regularly. • Determine whether a mail-order pharmacy is less expensive than a walk-in store. For a short-term prescription, you may need to visit a traditional pharmacy, but mail order may be feasible and more convenient for maintenance drugs. • Use a traditional doctor visit only when it is necessary. Certain services, such as flu shots, may be less expensive at a discount pharmacy.
Rules for RMDs are rather specific, but taxable accounts may present more flexibility. Keep in mind that a conservative annual withdrawal rate increases your chances of making your assets last a lifetime. Historically, many planners have recommended a withdrawal rate of 5% or less of your assets, adjusted annually for inflation. However, 5% may not be realistic if financial markets are volatile and your portfolio does not generate a return equal to this amount. Consider whether you could live on less than 5% during years when your investment returns do not support this withdrawal rate.
Losses in Taxable Accounts • Investigate affiliate organizations. Groups such as AAA or AARP may offer access to discounts on eyeglasses and other products. • Maintain healthy habits. Exercising regularly, quitting smoking, keeping a healthy weight, using alcohol moderately and managing stress all help to reduce your risk of diabetes, cancer, heart disease and other serious illnesses. If any of these areas has presented a challenge for you, your employer may provide access to services (such as a weight loss or a stress management program) that could give your efforts a boost.
When tapping taxable accounts, consider whether you have any investments worth less than what you paid for them. Selling these investments may result in a federal tax deduction of up to $3,000 annually that can be applied against gains in other areas or against ordinary income. Losses in excess of this threshold can be used in future years. The IRS has exacting requirements, and all tax laws are subject to change. You may want to review your cash management plans before taking any specific action as you plan your retirement withdrawal strategy.
Source: “Health Savings Accounts Make Insurance Sense for Many,” USA Today, November 15, 2010.
The PNC Financial Services Group, Inc. (“PNC”) provides investment and wealth management, fiduciary services, non-discretionary defined contribution plan services and investment options, FDIC-insured banking products and services and lending and borrowing of funds through its subsidiary, PNC Bank, National Association, which is a Member FDIC, and provides certain fiduciary and agency services through PNC Delaware Trust Company. Securities products and brokerage services are offered through PNC Investments LLC, a registered broker-dealer and member of FINRA and SIPC. Insurance products and advice may be provided by PNC Insurance Services, LLC, and/or National City Insurance Group, Inc., licensed insurance agency affiliates of PNC, or by licensed insurance agencies that are not affiliated with PNC; in either case a licensed insurance affiliate will receive compensation if you choose to purchase insurance through these programs. A decision to purchase insurance will not affect the cost or availability of other products or services from PNC or its affiliates. PNC does not provide legal, tax or accounting advice. PNC does not provide investment advice to Vested Interest plan sponsors or participants. Investments and Insurance: Not FDIC Insured. No Bank or Federal Government Guarantee. May Lose Value. Retirement Directions is published by McGraw-Hill Financial Communications, 111 Huntington Avenue, 6th Floor, Boston, MA 02199, 1-800-326-7697, http://www.visitfc.com. Copyright © 2011, The McGraw-Hill Companies. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Officers of The McGraw-Hill Companies, Inc.: Harold W. McGraw, III, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor, Executive Vice President and General Counsel; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer. The opinions and recommendations expressed herein are solely those of Standard & Poor’s and in no way represent the advice, opinions, or recommendations of the company distributing the publication to its employees or affiliates. Information has been obtained by this publication from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, this publication, or any other, Standard & Poor’s does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Nothing contained herein should be construed as a solicitation to buy or sell securities or other investments. The data in this edition were current as of the time of publication. PNCNEWS032011