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  • Changing Jobs or Retiring? Don’t Forget Your Retirement Savings!

    Key Points

    • What Is a Distribution?
    • Some Distribution Options
    • A Look at Some of Your Choices
    • Retirees Should Consider Tax Consequences
    • Withholding on Cash Payments
    • The Potential Cost of a Cash Distribution
    • Points to Remember

    Your retirement savings plan offers you several choices when you decide to change jobs or when you retire. This report explains some of the options you may be able to choose from in deciding how you want the money in your plan treated when one of these events occurs.

    What Is a Distribution?

    A distribution is simply defined as a payout of the amount of money that has accumulated in your retirement savings plan. This may include amounts you have contributed, the "vested" portion of any amounts your employer has contributed, plus any earnings on those contributions.

    You will want to think carefully before making any decisions about the money in your retirement plan, as some choices may mean you have to pay more in income taxes on your distribution. It's also a good idea to talk with a tax advisor before picking a distribution election.

    Some Distribution Options

    Keep Money in Employer's Plan: Allows continued tax-deferral of any growth.

    Make a Direct Rollover: Allows continued contributions and tax-deferral of any growth. Avoids potential taxes and penalty fees.

    Take a Cash Distribution: Satisfies immediate need for cash. Substantial taxes and penalty fees may apply.

    A Look at Some of Your Choices

    You may be able to leave your money in the plan; move it to another retirement savings account, such as an IRA, or another employer's retirement savings plan if you're changing jobs; or take a cash distribution.

    Keep Your Money in the Plan: You can leave your savings in your employer's retirement savings plan if your account balance was more than $5,000 when you left, depending on your plan's rules. Minimum distributions must begin after you reach age 70½, however. You'll continue to enjoy tax-deferred compounding of any investment earnings and receive regular financial account statements and performance reports. Although you will no longer be allowed to contribute to the plan, you will still have control over how your money is invested among the plan's investment options. You also may still be able to obtain information from the professionals who manage and administer your account.

    When retiring, you might choose this option if your spouse is still working or if you have other sources of retirement income (such as taxable investment income). If you're starting your own business when you leave the company, keeping your retirement money in your former company's plan may help protect your retirement assets from creditors, should your new venture run into unforeseen trouble.

    Example: Sue, 58, is retiring from her full-time job. Her husband is retiring and the family receives his pension and Social Security benefits, which will cover most of their current living expenses. Sue plans to work part-time at her church after "retirement" and does not expect to need her retirement savings for several more years. After consulting with a tax advisor, Sue decided that keeping her money in the company's retirement plan at least until she turns age 59½ will provide her with the greatest flexibility in the future.

    Move Your Money to Another Retirement Account:You can move your money into another qualified retirement account, such as an Individual Retirement Account (IRA), or, if you're changing jobs, your new employer's retirement savings plan. With a "direct rollover," the money goes directly from your former employer's retirement plan to the IRA or new plan, and you never touch your money. With this method, you continue to defer taxes on the full amount of your plan savings.

    Example: Bill is taking a new job at a different company. He elects to roll over balances from his existing plan into an IRA rather than transfer his assets into his new employer's 401(k) plan. This provides Bill with a much broader choice of investment options.

    Take a Cash Distribution: You can choose to have your money paid to you in one lump sum, or in installments of a fixed amount or over a set number of years, depending on your plan's provisions. However, you may have to pay taxes on a cash distribution and, if you're under age 55 at the time when you leave your job, you may also have to pay a 10% penalty for early withdrawal.

    Retirees Should Consider Tax Consequences

    If you're retiring, you will want to take into consideration whether favorable tax rules apply to your lump-sum distribution. To qualify as a lump-sum distribution, you must receive all the amounts you have in all your retirement plans with a company (including 401(k), profit-sharing, and stock-purchase plans) within a one-year period.

    Potentially favorable tax rules that may apply to a lump-sum distribution include the minimum distribution allowance and 10-year forward income averaging if you were born before January 2, 1936.

    Ten-year forward income averaging: The taxable part of the distribution is taxed at special rates based on levels for single taxpayers in 1986.

    Example: Ron, born in 1935, is retiring in three months. He met with a financial advisor to determine which distribution method would result in the greatest benefit after taxes. His advisor showed him that, under some assumptions about inflation and future rates of return, his best course would be to take a lump-sum distribution and use 10-year forward income averaging. Under other assumptions, he would benefit from leaving his money in the company plan or rolling it over directly into an IRA. There may be other distribution options available. Contact your plan administrator for information on all options available under your plan.

    Withholding on Cash Payments

    If you choose to physically receive part or all of your money (say, $10,000) when you retire or change jobs, this action is considered a cash distribution from your former employer's retirement account. The cash payment is subject to a mandatory tax withholding of 20%, which the old company must pay to the IRS, and possibly a 10% penalty if you are under age 55 at the time you left the company.1

    You can avoid paying taxes and any penalties on a cash distribution if you redeposit your retirement plan money within 60 days to an IRA or your new employer's qualified plan. However, you'll have to make up the 20% withholding from your own pocket in order to avoid taxes and any penalties on that amount. The 20% withholding will be recognized as taxes paid when you file your regular income tax at year end, and any excess amount will be refunded to you as an IRS refund.

    The Potential Cost of a Cash Distribution

    Distribution -20% Tax Withholding1 = Amount in Your Pocket
    $10,000 distribution -$2,000 Tax Withholding = $8,000 in Your Pocket

     If you are under age 55 when you separate from service with your employer, and choose to take a cash distribution, be aware of how it can immediately whittle away the money you've worked so hard to save. You can take a cash distribution and avoid the 10% penalty so long as you roll over the entire $10,000 within 60 days into an IRA or your new employer's qualified plan, even though you actually received only $8,000 after paying the 20% tax withholding. In that case, $2,000 will have to come out of your pocket.1

    As with all retirement and tax planning matters, be sure to consult a qualified tax and financial planning professional to ensure that your planning decisions coincide with your financial goals.

    Points to Remember

    1. A distribution is a payout of realized savings and earnings from a retirement plan. In general, you must begin taking distributions from your account by April 1 of the year following the year in which you turn 70½, unless you are still working for your employer.
    2. Your distribution options include keeping your money in your plan; enacting a direct rollover; or taking a cash distribution.
    3. If you keep your money in your plan you will no longer be able to make contributions, but you still maintain control over the investments and any growth continues to be tax deferred.
    4. In a direct rollover, you have your money moved directly to a qualified plan or IRA without physically receiving a cent. If you are under age 55 at the time of separation from service, a direct rollover may be a good option, as it avoids the hefty taxes and penalties associated with a cash distribution.
    5. Although a cash distribution is perhaps the most enticing option available, consider that you must pay taxes on the money you receive at then-current rates. And if you are under age 55 when you leave your employer, you may have to pay Uncle Sam 10% of your savings in penalties.

    1Additional taxes may be due, depending upon individual's tax bracket.

    Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

    © 2013 S&P Capital IQ Financial Communications. All rights reserved.

  • How Much Do You Need to Retire?

    Key Points

    • Sources of Retirement Income
    • Saving Is the Key Component of Retirement Income
    • Meeting Your Goals
    • How Much Do You Need to Retire in Style?
    • Pensions, Social Security, and Other Allies
    • Points to Remember

    Picturing yourself as a retiree may be hard if not impossible. But if you could envision those future years, you'd probably see a life full of activity and decades of health, happiness, and prosperity. No rocking chairs and lap shawls need apply.

    The reality, however, is probably somewhere in between. The problem with the picture is that the pleasure and comfort of your later years depend, to an ever-increasing degree, on the actions you take today.

    So many changing facets of the American workplace have made it more important than ever to take control of your financial future. By investing now with a long-term focus, you can greatly improve your chances of having a fulfilling retirement.

    Americans used to count on a pension plus Social Security to get them through those "golden years." These days, people change jobs more often, rely on dual incomes, and manage their own retirement funds through defined contribution plans. By most estimates, you'll need between 60% and 100% of your final working years' income to maintain your lifestyle after retiring.

    Sources of Retirement Income

    Sources of Retirement Income
    This chart represents a breakdown of income sources for all retirees (aged 65 and over).
    Source: Social Security Administration, 2012 (using 2010 data, most recent available).

    Saving Is the Key Component of Retirement Income

    The accompanying pie chart shows the importance of saving now toward a retirement fund. Not only are Social Security benefits less significant, but the sums are diminishing and the age at which you can begin to receive benefits is higher. You can contact Social Security at 1-800-772-1213 to learn what you can expect in benefits, and when. Benefits are calculated on your earnings, with certain variable factors.

    Alas, the responsibility for the bulk of your nest egg rests with you. Social Security represents approximately 37% of the aggregate income of Americans aged 65 and older, according to the Social Security Administration.

    Also, as you begin thinking about how much you'll need for a comfortable retirement, you may be startled to learn the impact of inflation. At an average inflation rate of 3%, your cost of living would double every 24 years. Your annual income will need to increase each year even during retirement in order to keep up with the gradual rise in prices of everyday goods.

    You'll also have to consider the likelihood of increased medical costs and health insurance as you grow older. The average nursing home stay, for instance, now costs more than $90,000 a year and could rise to over $150,000 per year by 2030, assuming an annual inflation rate of 3%.1

    Meeting Your Goals

    Now that you have an idea how much you'll need to finance your retirement years, of which there can easily be 25 or more, you may better understand the urgency to build your assets.

    How Much Do You Need to Retire in Style?

    Financial experts estimate that most of us will need about 60% to 100% of our annual preretirement income to live on each year after we retire. Find out how close you are to meeting this goal by completing the exercise below.

    1. Estimate your last working year's salary. Multiply your current salary by the inflation factor from the table below, based on the number of years you have until retirement. This represents the future value of your salary, assuming 3% annual inflation.

      Example: If you are currently making $40,000 and have 20 years until retirement, your formula is $40,000 x 1.81 = $72,400

    2. Determine what percentage of your current income you expect to need after retirement. If 100% seems high, consider that while you may be able to stop paying some expenses, like mortgage payments, other expenses will likely increase, such as health and travel expenses. Multiply that percentage by the amount in #1.

      Example: $72,400 x .80 = $57,920

    3. Estimate your future Social Security and retirement benefits. The best source for Social Security benefit projections is the Social Security Estimator at (If you cannot readily access the official calculator, you can also get a very rough estimate of your benefit from Table 2 below.)
      1. If you are using the calculator, multiply the monthly amount listed under "wait to start your benefits at your full retirement age" by 12, then multiply that figure by the inflation factor from Table 1 below.

        Example: If the calculator shows an estimated monthly benefit of $1,153, your formula is $1,153 x 12 x 1.81 = $25,043

      2. If you are using Table 2, take the number corresponding to your annual salary and years to retirement.

        Example: If you currently earn $40,000 and have 20 years to retirement, your estimated benefit would be $25,000

      3. Subtract your Social Security benefits and other retirement benefits from the annual amount calculated in #1. This will give you an estimate of how much of your own savings you will have to use each year in retirement.

        Example: $57,920 - $25,000 = $32,920

    4. Estimate the total amount that you will have to put aside in retirement accounts such as 401(k) plans, IRAs, and personal savings. To determine how much you will need to save, multiply 19.3 by the annual amount you calculated in #3. This multiplier represents how much savings you would need to last 28 years at 3% inflation and earning a 6% annual return. A healthy, 65-year-old male has a 10% chance of living longer than 28 years.

      Example: $32,920 x 19.3 = $635,356

    5. Enter the amount of your current savings and investments and multiply it by the growth factor from the accompanying table. This is what your savings would be worth by the time you reach retirement, assuming an 8% return compounded annually.

      Example: $30,000 x 4.66 = $139,800

    6. If line 5 is larger than line 4, congratulations! You are on your way to meeting your retirement goal. Keep saving! If line 4 is larger than line 5, subtract line 5 from line 4. Enter that amount here. This is the additional amount you'll need.

      Example: $635,356 - $139,800 = $495,556

    7. Divide #6 by the multiplier in the table below for the number of years until your retirement. The multiplier represents how large your savings will grow based on your annual contribution, assuming an 8% annual return. The result is the approximate amount you may want to set aside each year.

      Example: $495,556 ÷ 49.42 = $10,027

    Table 1 -- Factors*

    Years Inflation Growth Multiplier
    5 1.16 1.47 6.34
    10 1.34 2.16 15.65
    15 1.56 3.17 29.32
    20 1.81 4.66 49.42
    25 2.09 6.85 78.95
    30 2.43 10.06 122.35
    35 2.81 14.79 186.10
    40 3.26 21.72 279.78

    Table 2 -- Social Security Income

    Years to Retirement
    Current Salary 40 35 30 25 20 15 10 5
    $20,000 29,500 27,000 25,000 22,500 20,500 19,000 17,500 16,000
    30,000 32,500 30,000 27,500 25,000 22,500 21,000 19,000 17,500
    40,000 35,500 32,500 30,000 27,000 25,000 23,000 21,000 19,000
    50,000 38,500 35,500 32,500 29,500 27,000 25,000 22,500 21,000
    60,000 41,500 38,000 35,000 32,000 29,000 26,500 24,500 22,500
    70,000 44,500 41,000 37,500 34,000 31,000 28,500 26,000 24,000
    80,000 47,500 43,500 40,000 36,500 33,500 30,500 28,000 25,500
    90,000 50,500 46,500 42,500 39,000 35,500 32,500 29,500 27,500
    97,500 + 53,000 48,500 44,500 40,500 37,000 34,000 31,000 28,500
    *Assumes 3% annual inflation and a 5% annual return.

    Pensions, Social Security, and Other Allies

    Traditional pensions (private and government) are estimated to supply about 18% of the aggregate income of today's retirees, while Social Security is estimated to supply 37%, although nearly two-thirds of retirees rely on Social Security for 50% or more of their income, according to the Social Security Administration (2011; using 2009 data, most recent available). Still, you'll probably fall far short of your goal. A radically reduced standard of living for a quarter century or more is hardly the stuff "golden age" dreams are made of.

    Fortunately, you have some allies. First is the power of compounding, which takes advantage of time. Tax deferral is another ally. Using investment vehicles such as 401(k) plans or individual retirement accounts (IRAs), you can put off paying taxes on your earnings until you are retired and potentially in a lower tax bracket. Meanwhile, your contributions may be pretax or tax deductible, helping reduce current tax bills.

    For example, an investment of $10,000 would grow to more than $100,000 after 30 years, at an annual return of 8%, if all the returns were reinvested and the account grew tax deferred. As with all hypotheticals, this example does not represent the performance of any specific investment and the earnings would be subject to taxation upon withdrawal at then-current rates and subject to penalties for early withdrawal.

    The more time you have until retirement, the more fortunate you may be. Delaying just months -- never mind years -- can significantly reduce your results. Consider this example: Jane begins investing $100 a month in her employer-sponsored 401(k) plan when she's 25. Mark does the same -- beginning when he's 35. Assuming a 7.5% annual rate of return compounded monthly, when Mark retires at 65, he'll have $135,587. Jane will have $304,272.

    While this is only a hypothetical and there are no guarantees any investment will provide the same results, you can see the remarkable difference starting early can potentially make.

    By starting early, investing systematically, and benefiting from the potential of compounding and tax deferral, you may pack a lot more punch into your portfolio.

    Another advantage of today's retirement planning options is that you can control how your money is invested.

    Investment plans need to be customized because different people have different degrees of risk they will accept as well as varying time frames they intend to hold their investments. Keep in mind, all investments involve risk including the possible loss of principal. A tailor-made portfolio can be diversified to take these factors into account. It's a wise idea to consult a professional financial advisor for complete information.

    Points to Remember

    1. The rising cost of living means you need to plan on an annual retirement income that could be substantially higher than what you spend now.
    2. You may have higher expenses in some things such as medical care, but lower expenses in others. You can estimate your "personal inflation rate" by looking at your expected living costs in retirement.
    3. You may need between 60% and 100% of your final working years' salary.
    4. Retirement income may be made up of pension benefits, Social Security benefits, personal savings and investments, and income from part-time work.
    5. Your financial advisor can help you develop an estimate of your needs and a plan to help you accumulate a retirement fund to provide income you'll need.

    1Sources: MetLife Market Survey of Nursing Home and Assisted Living Costs, October 2011; Standard & Poor's, 2012.

    Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

    © 2013 S&P Capital IQ Financial Communications. All rights reserved.

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