Friday, 24 May 2019

11 best retirement plans in 2019 –

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If you have young kids or you’re still building your career, retirement may not be top of mind at this point in your life. But someday, if you’re lucky and save on a regular basis, it will be.

To have the best retirement, it’s wise to create a plan early in life — or right now if you haven’t yet done so. By diverting a portion of your paycheck into a tax-advantaged retirement savings plan, for example, your wealth can grow exponentially to help you achieve financial security for those so-called golden years.

Retirement benefits are so important that they should be a top consideration when you’re shopping for a new job. Yet only about half of current employees understand the benefits offered them, according to the Employee Benefit Research Institute.

“Plan design is individualized, so one company’s benefit formula may not be as generous as others,” explains David Littell, professor of taxation and a retirement planning expert at The American College of Financial Services. “It’s really important that you read the summary plan description that is provided to all participants so that you can understand the design of the plan.”

Bankrate picked Littell’s brain about the best retirement plans available to workers to discover their pros and cons.

Key plan benefits to consider

Virtually all retirement plans offer a tax advantage, whether it’s available up front during the savings phase or when you’re taking withdrawals. For example, 401(k) contributions are made with pre-tax dollars, which reduces your taxable income. Roth IRAs, in contrast, are funded with after-tax dollars but withdrawals are tax-free.

Some retirement savings plans also include matching contributions from your employer, such as 401(k) plans, while others don’t. When trying to decide whether to invest in a 401(k) at work or an individual retirement account (IRA), go with the 401(k) if you get a company match – or do both if you can afford it.

If you were automatically enrolled in your company’s 401(k) plan, check to make sure you’re taking full advantage of the company match if one is available. And consider increasing your annual contribution, since many plans start you off at a paltry deferral level that is not enough to ensure retirement security. Roughly half of 401(k) plans that offer automatic enrollment, according to Vanguard, use a default savings deferral rate of just 3 percent. Yet T. Rowe Price says you should “aim to save at least 15 percent of your income each year.”

If you’re self-employed, you also have several retirement savings options to choose from. In addition to the plans described below for rank-and-file workers as well as entrepreneurs, you can also invest in a Roth IRA or traditional IRA, subject to certain income limits, which have smaller annual contribution limits than most other plans.

Best retirement plans in 2019

1. Pensions

Pensions, more formally known as defined benefit (DB) plans, are the easiest to manage because so little is required of you. Pensions are fully funded by employers and provide a fixed monthly benefit to workers at retirement. But DB plans are on the endangered species list because fewer companies are offering them. Just 16 percent of Fortune 500 companies enticed workers with pension plans in 2017, down from 59 percent in 1998. Why? DB plans require the employer to make good on an expensive promise to fund a hefty sum for your retirement. Pensions, which are payable for life, usually replace a percentage of your pay based on your tenure and salary. A common formula is 1.5 percent of final average compensation multiplied by years of service, according to Littell. A worker with an average pay of $50,000 over a 25-year career, for example, would receive an annual pension payout of $18,750, or $1,562.50 a month.

Pros: This benefit addresses longevity risk – or the risk of running out of money before you die. “If you understand that your company is providing a replacement of 30 percent to 40 percent of your pay for the rest of your life, plus you’re getting 40 percent from Social Security, this provides a strong baseline of financial security,” says Littell. “Additional savings can help but are not as central to your retirement security.”

Cons: Since the formula is generally tied to years of service and compensation, the benefit grows more rapidly at the end of your career. “If you were to change jobs or if the company were to terminate the plan before you hit retirement age, you can get a lot less than the benefit you originally expected,” says Littell.

What it means to you: Since company pensions are increasingly rare and valuable, if you are fortunate enough to have one, leaving the company is major decision. Should you stay or should you go? It depends on the financial strength of your employer, how long you’ve been with the company and how close you are to retirement. You can also factor in your job satisfaction and whether there are better employment opportunities elsewhere.

2. Cash-balance plans

This is a type of defined benefit, or pension plan, too. But instead of replacing a certain percentage of your income for life, you are promised a certain hypothetical account balance based on contribution credits and investment credits (e.g. annual interest). One common setup for cash-balance plans is a company contribution credit of 6 percent of pay plus a 5 percent annual investment credit, says Littell. The investment credits are a promise and are not based on actual contribution credits. For example, let’s say a 5 percent return, or investment credit, is promised. If the plan assets earn more, the employer can decrease contributions. In fact, many companies that want to shed their traditional pension plan convert to a cash-balance plan because it allows them better control over the costs of the plan.

Pros: It still provides a promised benefit, and you don’t have to contribute anything to it.  “There’s a fair amount of certainty in how much you’re going to get,” says Littell. Also, if you do decide to switch jobs, your account balance is portable so you’ll get whatever the account is worth on your way out the door of your old job.

Cons: If the company changes from a generous pension plan to a cash-balance plan, older workers can potentially lose out, though some companies will grandfather long-term employees into the original plan. Also, the investment credits are relatively modest, typically 4 percent or 5 percent. “It becomes a conservative part of your portfolio,” says Littell.

What it means to you: The date you retire will impact your benefit. “Retiring early can truncate your benefit,” says Littell. Working longer is more advantageous. Also, you’ll get to choose from a lump sum or an annuity form of benefit. When given the option between a $200,000 lump sum or a monthly annuity check for $1,000 for life, says Littell, “Too many people,” he says, choose the lump sum when they’d be better off getting the annuity for life.”

If you’re married and don’t want to leave your spouse in the lurch in the event you predecease him or her, consider a joint-life annuity rather than a single-life annuity.

3. Profit-sharing plans

Some companies offer a profit-sharing plan to their workers as an incentive for them to be productive so that they can both help boost and share in the company’s profits. This is another hands-off benefit, in the sense that you can’t contribute to it; only the employer can. But here’s the catch: your employer has discretion as to whether to contribute from year to year. However, the government does insist that contributions be “recurring and substantial.”

Pros: “It doesn’t cost you anything,” says Littell.  “In some profit-sharing plans you can choose the investments you want and in others, the trustees handle the investment decisions.”

Cons: Profit-sharing plans are not a fail-safe way to ensure your financial security. “It’s difficult to predict how much benefit you’re going to get in retirement,” says Littell. “You don’t know how much the company will contribute from year to year, and you don’t know what the investment experience will be.”

What it means to you: When you’re planning for retirement, it’s a good idea to look at the history of company contributions to get a sense of what to expect. You don’t have to make a lot of decisions unless the plan allows you to determine how to invest the money. One important caveat: “At the time of distribution, as with any account, you want to make sure it’s rolled into an IRA so you defer income tax,” says Littell.

4. Defined contribution plans

Since their introduction in the early 1980s, defined contribution (DC) plans, which include 401(k)s, have all but taken over the retirement marketplace. Roughly 80 percent of Fortune 500 companies offer DC plans rather than traditional pensions. While 401(k) plans are the most ubiquitous DC plan among employers of all sizes, the similarly structured 403(b) plan is offered to employees of public schools and certain tax-exempt organizations, while the 457(b) plan is most commonly available to state and local governments. The employee’s contribution limit for each plan is $19,000 in 2019 ($25,000 for those 50 and over).

Pros: They allow you to save on a pre-tax basis. That means the amount you contribute goes into your retirement savings account and isn’t counted as part of your taxable income, reducing your tax liability with the IRS. Many DC plans provide matching contributions as well. “They sometimes provide nonelective contributions, meaning you don’t have to contribute anything to get employer contributions,” says Littell. However, you might have to work for the employer for a certain period of time before those employer contributions are vested.

Cons: You assume all the risk, since you bear the responsibility of deciding how much to contribute and what types of assets to invest in. And there’s no guarantee that the savings you accrue will adequately prepare you financially for retirement. “When you give people a lot of choice, they might get it wrong,” says Littell.

What it means to you: Contribute enough to at least get the company match, which amounts to free money. “And generally, you need to save more than that in order to accumulate enough for retirement,” Littell adds. Many DC plans offer a Roth version, in which you use after-tax dollars to contribute, but you can take the money out tax-free at retirement. “The Roth election makes sense if you expect your tax rate to be higher at retirement than it is at the time you’re making the contribution,” says Littell. So, young people who aren’t earning a lot early in their careers would benefit by going the Roth route.

5. The Federal government plan

The Federal Employees Retirement System, or FERS, offers a secure three-legged retirement-planning stool for civilian employees who meet certain service requirements:

  •       A basic defined benefit plan
  •       Social Security
  •       The Thrift Savings Plan, or TSP

Only two of these are portable if you leave government work – Social Security and TSP, the latter of which is also available to members of the uniformed services. The TSP is a lot like a 401(k) plan on steroids. Participants choose from five low-cost investment options, including a bond fund, an S&P 500 index fund, a small-cap fund and an international stock fund — plus a fund that invests in specially issued Treasury securities. On top of that, federal workers can choose from among several lifecycle funds with different target retirement dates that invest in those core funds, making investment decisions relatively easy.

Pros: Federal employees are eligible for the defined benefit plan. Plus they can get a 5 percent employer contribution to the TSP, which includes a 1 percent nonelective contribution, a dollar-for-dollar match for the next 3 percent and a 50 percent match for the next 2 percent contributed. “The formula is a bit complicated, but if you put in 5 percent, they put in 5 percent,” says Littell. “Another positive is that the investment fees are shockingly low – four hundredths of a percentage point.” That translates to 40 cents per $1,000 invested – much lower than you’ll find elsewhere.

Cons: As with all DC plans, there’s always uncertainty about what your account balance might be when you retire.

What it means to you: You still need to decide how much to contribute, how to invest, and whether to make the Roth election. However, it always makes sense to contribute at least 5 percent of your salary to get the maximum employer contribution.

6. Simplified Employee Pension (SEP) plan

This is like a traditional IRA for small business owners and their employees. Only the employer can contribute to this plan, and contributions go into a SEP IRA for each employee rather than a trust fund. Self-employed individuals can also set up a SEP IRA. Contribution limits in 2019 are 25 percent of compensation or $56,000, whichever is less. Figuring out contribution limits for self-employed individuals is a bit more complicated.

“It’s very similar to a profit-sharing plan,” says Littell, because contributions can be made at the discretion of the employer.

Pros: For employees, this is a freebie retirement account. For self-employed individuals, the higher contribution limits m