Facebook Instant Articles - Fidelity https://www.fidelity.com This is feed for Facebook Instant Articles en-us 2017-12-21T21:45:26Z How and why to build a bond ladder https://www.fidelity.com/viewpoints/investing-ideas/bond-ladder-strategy 10787 02/11/2019 Ladders may offer predictable income and rate risk management. How and why to build a bond ladder

How and why to build a bond ladder

Ladders may offer predictable income and rate risk management.

Fidelity Viewpoints

Key takeaways

  • Staggering bond maturities can help to create a predictable stream of bond income.
  • The rungs help to manage interest rate and reinvestment risk.
  • Build with diverse, high-quality, noncallable bonds.
  • Fidelity's Bond Ladder Tool can help.

Investors looking for steady income have plenty of options, from a simple CD to different flavors of annuities, individual bonds, separately managed accounts, or professionally managed mutual funds. One other option is the bond ladder.

Like all these options, bond ladders have their advantages and disadvantages, but many investors decide to build a bond ladder because it can help to customize a stream of income and manage some of the risks of changing interest rates.

Interest rate risk is the potential for rising rates to cause the prices of bonds to fall. While many investors can live with rate risk in exchange for the benefits bonds can provide a diversified portfolio, uncertainty about rates can be unnerving, especially for investors who look to bonds to create a stream of income. Bond ladders may help to manage these concerns by creating a predictable stream of income.

"Laddering bonds may be appealing because it may help you to manage interest rate risk, and to make ongoing reinvestment decisions over time, giving you the flexibility to invest in different credit and interest rate environments," says Richard Carter, Fidelity vice president of fixed income products and services.

It's worth noting however, that bond ladders don't completely eliminate rate risk, the price of bonds in the ladder continues to fluctuate as rates change, and an investor will still face periodic reinvestment risk for some portion of the portfolio.

Creating a stream of income with a bond ladder

This graphic is intended to illustrate the concept of a bond ladder and does not represent an actual investment option. A bond ladder may require more bonds to achieve diversification.

Managing reinvestment risk

Interest payments from the bonds in a ladder can provide scheduled cash flows. In addition, the ladder can help you manage reinvestment risk. What is reinvestment risk? Say you invest in an individual bond. That bond eventually would mature, the issuer would return your principal, and you'd have to purchase a new bond if you wanted to continue generating income or maintain your portfolio's asset allocation mix. But if interest rates and bond yields had decreased in the meantime, you wouldn’t be able to generate as much income as before with the same amount invested in a similar quality bond. That’s a predicament some investors who rely on investment income won't want to find themselves in.

Building a bond ladder has the potential to diversify this reinvestment risk across a number of bonds that mature at different intervals. Imagine that yields fall as one rung in your ladder approaches maturity. If you choose to reinvest, you will have to invest only a fraction of your bond portfolio at the lower rate. Meanwhile, the other bonds in the portfolio will continue generating income at the relatively higher older rates. So the impact of falling rates may be smaller with a ladder than with a bullet strategy that targets a single maturity date or than with an investment in a small number of bonds.

What if yields and interest rates increase? A bond ladder regularly frees up a slice of your portfolio, so you can take advantage of the new, higher rates. If you have all your money invested in a "bullet" strategy, with a single maturity date, you might be able to reinvest at higher yields. But what if your bonds didn't reach maturity while rates are higher? If none of your holdings mature during the time of higher rates—you might miss out.

"A bond ladder gives you a framework in which to balance the reinvestment opportunities of short-term bonds with the potentially higher yields that longer-term bonds typically offer," says Carter.

Having a well-diversified bond ladder does not guarantee that you will avoid a loss, but it can help protect you the way that any diversified portfolio does, by helping to manage the risk of any single investment.

Bond ladder considerations

While building a bond ladder may help you manage interest rate and reinvestment risk to some extent, there are 6 important guidelines to consider to make sure you are diversified and to attempt to protect yourself from undue credit risk.

1. Hold bonds until they reach maturity

It's important that you have enough money set aside to meet your short-term needs and deal with emergencies. You should also have a temperament that will allow you to ride out the ups and downs of the market. That’s because many of the benefits of bond ladders—such as an income plan and managing interest rate and credit risk—are based on the idea that you keep your bonds in your portfolio until they mature. If you sell early—either because you need cash or you change your investment plans—you will be exposed to additional risks, including the risks of loss or decreased yield from your ladder. In fact, if you don't hold bonds to maturity, you may experience similar interest-rate risk as a comparable-duration bond fund. So, if you don't know how long you can hold the bonds, you may want to consider a shorter ladder, or a bond mutual fund.

2. Make sure you have enough money invested to diversify*

How many issuers might you need to manage the risk of default?

Credit rating # of different issuers
AAA US Treasury 1
AAA-AA municipals 5 to 7
AAA-AA corporate 15 to 20
A Corporate 30 to 40
BAA-BBB 60+

For illustration only. Please note: More or fewer issuers may be required to achieve diversification. Investors may want to consider other diversification factors, including industry and geography.

Because bonds are often sold in minimum denominations of $1,000 or $5,000, it can take a substantial investment to achieve diversification. It may make sense to have at least $500,000 in bond investments in your long-term investment mix.

If you are investing in corporate bonds, particularly lower-quality corporate bonds, the number of  issuers needed to diversify a ladder across sectors and issuers becomes even greater.

The table to the right offers some illustration of how many different issuers may be required to help achieve diversification at different credit ratings.

3. Build your ladder with high-credit-quality bonds

Because the purpose of a bond ladder is to provide predictable income over a long period of time, taking excessive amounts of credit risk probably doesn't make sense. So you may want to consider only higher-quality bonds. You can use ratings as a starting point to find those bonds. For instance, select only bonds rated "A" or better. But even ratings have limits; they could change or be outdated, so you should do additional research to ensure you are comfortable investing in a security you are intending to hold for potentially many years.

How do bond ratings work?

Moody's and Standard & Poor's are independent credit rating services that analyze the financial health of bond issuers. The ratings they assign help investors assess how likely an issuer is to be able to make principal and interest payments to bondholders.

The bonds in a ladder are intended to be held until maturity, so price declines caused by rating downgrades generally won't affect the income stream, though it will impact the underlying value of the ladder. Higher-quality bonds offer another advantage as well: These investments typically come with lower transaction costs, which can help manage the expenses associated with this strategy.

4. Avoid the highest-yielding bonds at any given credit rating

You may feel tempted to choose the highest-yielding bonds for whatever credit rating or maturity you have chosen, figuring they represent a bargain—more yield for the same amount of risk.

Resist that temptation. You need to understand why a bond is offering a higher yield. An unusually high yield relative to similar bonds is often an indication that the market is anticipating a downgrade or perceives that bond to have more risk than the others and therefore has traded the bond’s price down (thereby increasing its yield). That can happen in advance of an official downgrade and may be too risky for your ladder. One potential exception is that in the municipal bond market, buyers often pay a premium for the most familiar issuers, meaning that higher yields may be available from smaller issuers.

5. Keep callable bonds out of your ladder

Part of the beauty of a bond ladder is the scheduled cash flow; you know when the bonds will mature and you know how much you will need to reinvest. But when a bond is called prior to maturity, its interest payments cease and the principal is returned as of the call date—altering both your cash flow schedule and the schedule of principal coming due. You may want to select bonds that can’t be called away early.

6. Think about time and frequency

Another important feature of a bond ladder is the total length of time the ladder will cover and the number of rungs, or how often the bonds in the ladder are scheduled to mature, returning your principal. A ladder with more rungs will require a larger investment but will provide a greater range of maturities, and if you choose to reinvest, this means you will have more opportunities to gain exposure to future interest rate environments.

A case study: building a bond ladder

To see how you can build a ladder using Fidelity's Bond Ladder Tool, let's take a hypothetical case in which Matt wants to invest $100,000 to produce a stream of income for about 10 years. Matt decides to start with his investment amount—though the tool would have let him target a level of income as well. He sets his timeline and asks for a ladder with 9 rungs of about $11,000 each. Then he chooses bond types. In order to be broadly diversified, the rungs each contain a range of bonds and FDIC-insured CDs at different credit rating levels, but all of them are at least investment grade.

Matt elects the option to have the tool suggest bonds for each rung. So on the next screen, the tool suggests a bond for each rung of the ladder and shows a summary of the ladder, including the expected yield and annual interest payments. (Note: The screenshot below is incomplete and only shows 2 of the rungs.)

Another view lets Matt review the schedule of when to expect interest payments and the return of principal—providing a view into the cash flow he could expect if he chooses to purchase the suggested bond ladder.

Matt's expected cash flows appear to decrease over time, as successive rungs of bonds mature, but he may be able to extend that income by reinvesting the returned principal each time one of the bonds matures.

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Ready to retire? You still need a budget. https://www.fidelity.com/viewpoints/retirement/retirement-and-budgeting 710114 09/11/2019 It's important to start your retirement with a spending plan that works for you. Ready to retire? You still need a budget.

Ready to retire? You still need a budget.

It's important to start your retirement with a spending plan that works for you.

Fidelity Viewpoints

Key takeaways

  • Try to match your essential expenses to guaranteed sources of income.
  • Limit withdrawals from retirement savings accounts to 4%–5% in your first year of retirement,then adjust for inflation in subsequent years.
  • Consider consolidating accounts at a trusted provider.

Making a budget may not be the first thing you look forward to in retirement, but it's one of the most important things to do to start your retirement on the right path. Along with an income plan that can deliver a steady "retirement paycheck" and an investing strategy that allows a portion of your nest egg the chance to grow, a realistic budget—based on all the sources of income you have coming every month—is an essential building block of retirement.

If you're ready to begin putting together a retirement budget, here are some tips to help.

Think big picture

For many people, the budgeting process stalls before it really gets started. That's often because they worry about the details of their discretionary (nice-to-have) spending instead of looking at the big picture. Start by understanding your essential (must-have) expenses and how you can use guaranteed sources of income, like Social Security, pensions, and annuities, to pay for them. (See the "Essential expenses" section below.)

Then create your discretionary budget by focusing on categories of spending—such as travel, gifting, and entertainment—rather than trying to account for every dollar you'll spend. A good practice is to match these nice-to-have expenses with income from individual retirement accounts (IRAs) and other tax-deferred retirement savings accounts.

Get organized

Plan ahead and think about the life you want to live in retirement, based on what you can afford. You need to know the details of your recent spending patterns, and determine whether your overall spending will go up, go down, or stay the same in retirement.

To start, tabulate your average monthly expenses like cable, telephone, and electric bills and know how much money is coming in versus going out. If you use credit cards, go online and look at year-end summaries to see where you spent the most money last year. Do the same with online bank statements. Next, identify your ongoing monthly bills and determine whether you need to continue all these services. Then look through your past bills and online bank statements to identify work-related expenses that you may no longer have to pay now that you're retired. Lastly, categorize expenses into "essential" and "discretionary" (see below).

Essential expenses

Cover essentials first. Health, comfort, and security are among life's most important priorities, so you'll want to make health care, housing, transportation, and food your budget priorities.

Health care: Planning for health care costs can be especially daunting with estimated costs for an average 65-year-old couple retiring in 2019 hitting a total of $285,000 (in today's dollars) over their entire retirement period. Even if you're covered by Medicare and an insurance plan from your former employer, supplemental premiums and out-of-pocket costs continue to rise.1

Housing: If your home is paid for, good for you! But don't forget to add utilities, maintenance, and possibly larger home repairs. A good rule of thumb is to budget at least 1 % of your home's value for annual maintenance. So, if your home is worth $400,000, then budget approximately $4,000 per year for standard repairs, general upkeep, or accessibility upgrades.

Transportation: No longer having commuting costs is a big bonus of retiring, but your transportation costs won't drop to zero. Most people don't retire to sit around the house, so remember to include the cost of gas or public transportation for trips to activities, as well as vehicle maintenance expenses. If you are considering buying a new or used car, add that expense too.

Food: Although you may not be eating out at lunch with colleagues, overall expenditures on food will likely remain constant. Now that you're retired, it might be a great time to do some fun things like taking cooking lessons or entertaining for friends and family.

Discretionary spending

Once you have accounted for your "must-haves," you can begin budgeting for discretionary items, such as dining out, going to the movies, and those bucket-list adventures you've been dreaming of.

Travel: How you budget for travel will depend on the types of trips you're contemplating—weekend getaways, long vacations, or visits to family and friends. For short jaunts, you can build a monthly expense into your budget, putting the money you don't use into a pool for spending later. If you are planning for longer vacations, add a vacation fund to the budget.

Entertainment/dining out/gifting: You probably already have a good idea of how much it costs to go to the movies and dine out, but many people forget to include money they use to buy gifts for family and friends. If your budget allows for it, consider larger gifting priorities—such as giving money to future heirs to minimize inheritance taxes or contributing regularly to charities.

Stick to your income plan

A well-designed retirement income plan should be backed by an investing strategy that provides opportunities for your assets to generate earnings and helps your income keep pace with inflation. But investment returns will vary, and that, along with unexpected expenses, may require you to build some flexibility into your budget. One solution is to express your discretionary spending as a range. That way, you can choose to put aside unspent money in months when your costs are at the bottom end of the range and use it during months when your discretionary spending may be higher.

Tip: Fidelity suggests limiting withdrawals from retirement savings accounts to 4%–5% in your first year of retirement, and then adjusting this number in subsequent years.

Keep it simple

Remember why you retired—to have fun and do the things you never had time for when you were working! One way to simplify may be to consolidate your retirement accounts with a trusted financial services provider, which enables you to organize your income, investing, and spending in one place while potentially reducing fees.

If you need help with budgeting or reviewing your retirement earnings, consider working with a financial advisor. Or, if you are more of a DIY person, check out Fidelity’s online budgeting tools.

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Don't forget to take RMDs by year end https://www.fidelity.com/viewpoints/retirement/december-rmd-deadline 46326 01/27/2020 To avoid tax penalties, be sure to meet the December 31 deadline. Don't forget to take RMDs by year end

Don't forget to take RMDs by year end

To avoid tax penalties, be sure to meet the December 31 deadline.

Fidelity Viewpoints

Key takeaways

  • If you're 721, you may need to take required minimum distributions (RMDs) from certain retirement accounts.
  • The deadline for taking RMDs is December 31 or, for the first withdrawal only, April 1.
  • The withdrawal amount of RMDs also depends on your age.
  • Failure to take RMDs on time can result in substantial tax penalties.

The end of the year is fast approaching. Have you taken your required minimum distributions (RMDs) from your retirement accounts? Lots of people have not. Be warned: This can be a costly mistake, and one that may result in significant IRS penalties.

To avoid these penalties, please note that for certain securities, if you need to sell positions to generate cash for the RMD, you have until market close on December 27. For equities, customers would need to sell by market close on Friday, December 27, to have the cash available on the December 31, and one-day settlement mutual funds would need to be sold by December 30. The RMD must be taken by December 31.

Beginning when you turn 72, IRS regulations generally require you to withdraw a minimum amount of money each year from your tax-deferred retirement accounts, such as traditional IRAs and 401(k) plans. If you don't take enough, you may pay a 50% IRS penalty on the amount not taken.2 This is why it's important that you understand how RMDs work, and the timing of distributions.

How the amount is determined

Your life expectancy factor is taken from the IRS Uniform Lifetime Table. However, if your spouse is your only primary beneficiary and is 10 years younger than you, your life expectancy factor is taken from the IRS Joint Life Expectancy Table.

Tip: For inherited IRAs, the rules are different. (Learn more)

Uniform lifetime table for required minimum distributions
Age 70 75 80 85 90 95 100 105
Years 27.4 22.9 18.7 14.8 11.4 8.6 6.3 4.5
Min. % 3.6% 4.4% 5.3% 6.8% 8.8% 11.6% 15.9% 22.2%
The table above shows, in 5-year increments, the required minimum distribution periods (based on age and the expected number of years for distributions) and percentages for tax. For a more complete picture, please visit the Uniform Lifetime Table.

Deadlines for withdrawals

For IRAs, the RMD deadline is December 31 each year. For your first distribution (and only your first), you get a 3-month extension until April 1 of the following year. However, if you wait until after December 31 to take your RMD, you will have to take 2 RMDs in one year, which could affect your income tax bracket or Medicare premiums.

If you are over 72 and still working, you can generally delay your RMDs from your 401(k) or other qualified retirement plan until after you retire.2 For all subsequent years, distributions must be made annually by December 31. Don't forget to also allow time for any trades to settle if you are selling investments.

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Working in retirement: A rulebook https://www.fidelity.com/viewpoints/retirement/working-in-retirement-part2 199040 07/22/2019 See how to tap into financial, health care, Social Security, and other benefits. Working in retirement: A rulebook

Working in retirement: A rulebook

See how to tap into financial, health care, Social Security, and other benefits.

Fidelity Viewpoints

Key takeaways

  • It may make sense to continue working past age 62, so you can contribute more to your 401(k) and other retirement savings accounts.
  • If you're exploring "second act" employment, consider seeking employment opportunities that offer health insurance for your "retirement job."
  • For many people, working in their 60s and beyond isn't primarily about paying the mortgage and paying down debt; it's about doing something where you can use your knowledge, skills, and experience to be productively engaged and have some fun too.

For 67-year-old Marilyn Arnold, finances played a role in her decision to keep working when she retired 4 years ago from her position as a managing partner at New York Life Insurance Company after 29 years in the insurance business.

"I felt that if I could continue to work doing something I wanted to do and not have to start taking Social Security, or draw from my retirement funds too much, it would be a win all around," she says.

Tapping into her childhood love of sewing, she opened her own small business, Marilyn Arnold Designs, in Lee's Summit, Missouri. Her forte: creating pillows and blankets as keepsakes made from wedding gowns.

Many older Americans are continuing to work during retirement for a plethora of reasons—from a personal reward like rediscovering a childhood passion and staying socially connected with a network of people to doing something that provides a sense of purpose and a chance to give back.

A paycheck, too, is a silver lining for many workers who worry that they will outlive their money. Many people want to continue working well past "normal retirement age." But intentions and reality don't always match when it comes to working in retirement. In fact, according to a Fidelity-sponsored survey, only 3% of pre-retirees and 32% of recent retirees surveyed said they wanted to retire at or before age 60. Most wanted to keep working. However, 38% of recent retirees actually retired at or before age 60–many because of layoffs or forced early retirement. Bottom line: Far fewer people actually work in retirement than say that they want to work in retirement.

For some, saving more money for retirement earlier in their career may be a smart move, especially if they leave the workforce earlier than planned.

"People are clearly concerned about not having enough savings to last for their lifetime, especially since we're living longer, on average," says Chris Farrell, author of Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and the Good Life. "For many people, earning an income well into the traditional retirement years shores up household finances. Their goal is to preserve their quality of life with age."

The payback can be far more than purely financial, though, even if finances are a primary incentive. "The activity of working, of using your brain, of interacting with others is extremely valuable for your health and your happiness," says Steven Feinschreiber, senior vice president of research in Fidelity's Financial Solutions, Inc. "Research suggests that working can actually help you live a longer and healthier life."

Read Viewpoints on Fidelity.com: Ready to work after your primary career ends?

Regardless of why you decide to keep earning a paycheck in retirement, there are certain financial rules and regulations to keep in mind.

Contributing to retirement accounts

A key advantage of ongoing income is that you can regularly contribute to your retirement savings accounts, says Farrell.

For 2019, total contributions to all your traditional and Roth IRAs can be up to $6,000 ($7,000 if you're age 50 or older), or your taxable compensation for the year, if your compensation is less than this dollar limit, per Internal Revenue Service rules.

One caveat: You can't make regular contributions to a traditional IRA in the year you reach 70½ and thereafter. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age. You must also take the required minimum distribution (RMD) from your traditional IRA beginning at 70½, regardless of your work status. If you have a Roth IRA, RMDs don't apply to it during your lifetime.

Your 401(k), or similar employer-based retirement plan, is a different story. In general, you can continue stashing away money in your current employer-provided plan as long as you're still working there, even part-time. And you can delay taking your RMD until after you retire. You will, however, need to take the RMD from any former employer's plan beginning at age 70½, unless the money was rolled into your current employer's plan.

Employees may contribute up to $19,000 to their 401(k) plans in 2019, with a higher total contribution limit (employer plus employee) of $56,000. For those age 50 and older, an additional "catch-up" employee contribution of up to $6,000 is also allowed. "To have enough money to pay for your expenses in retirement, we generally recommend saving at least 15% of your income per year," explains Feinschreiber. "That's total—your contributions and your employer's combined, and assumes working to age 67. It may make sense to continue working past age 62, so you can contribute more to your 401(k) and other retirement savings accounts."

Social Security benefits

Another plus of working longer is that you can delay filing for Social Security benefits. You can begin taking monthly Social Security retirement benefits at age 62, but the amount will be reduced by about 30% versus the amount you would receive if you wait until you're what Social Security calls full retirement age (FRA)—66 or 67 if you were born from 1943 to 1959; 67 if you were born in 1960 or later.

If you can delay Social Security beyond FRA, your Social Security benefits are boosted by 8% a year (over the amount at FRA) for every year you postpone receiving checks from your FRA to age 70. That's a powerful boost.

Earning income after you reach your FRA or older doesn't affect your benefits, no matter how much you earn. For those who opt to apply for benefits before they reach FRA and continue to earn income, there's a temporary hitch. By law, if you're younger than FRA and receiving Social Security benefits, you can earn up to $17,640 in 2019, according to Social Security rules, without a reduction in your benefit amount.

If you're younger than FRA, and earn more than the limit, Social Security deducts $1 from your benefits for each $2 you earn above the threshold. In the year you reach FRA, $1 in benefits is deducted for every $3 you earn above a different limit. After that, there are no earnings tests and no benefit reductions based on earned income.

The "earnings" counted are what you make from your job and/or your net earnings from self-employment. These include bonuses, commissions, and vacation pay, because they're all based on employment, but do not include investments, pensions, and other retirement income, or veterans' or other government or military retirement benefits.

In truth, you don't ultimately lose any of your Social Security benefit due to earning more than the income limits. If you exceed the limit allowed from age 62 to 66, the funds you were docked will be returned to you in the form of a permanent increase that the Social Security Administration (SSA) recalculates for you. The SSA website stipulates that after you reach FRA, "your benefit amount is recalculated to give you credit for any months in which you did not receive a benefit because of your earnings."

"It can be a bit of a shock when the reduction happens," says Farrell. "But you don't lose the benefit. Most people don't understand that."

The good news is that your Social Security benefits can actually ramp up as a result of your employment after you reach FRA, because they are calculated using your highest 35 years of earnings. If your earnings after FRA would replace any of your 35 highest-earning years used to calculate your benefit, then the SSA will do a recalculation, and your monthly benefits will bump up accordingly.

Keep in mind, of course, that SSA benefit could be subject to income tax if you are also earning compensation from a job or self-employment. For more information, review the publication How Work Affects Your Benefits, on the Social Security website.

Tip: Even though your benefits are not lost from working and collecting Social Security at the same time, the earned income you receive while collecting Social Security could result in up to 85% of your Social Security income becoming subject to federal income taxes.

Read Viewpoints on Fidelity.com: Social Security tips for working retirees

Health and medical

If you're planning on your former employer picking up part of the tab for your health care in retirement, think again. Only 25% of large companies offer health care benefits to retirees, down from 35% in 2004, according to a 2017 employer survey by the Kaiser Family Foundation.

So if you're hunting for a new job in retirement, consider seeking an employer who offers health insurance while you are employed at your "retirement job." At the very least, continuing to earn some income can help defray your health care bills before and after Medicare kicks in at 65. "Health care expenses are generally one of the largest expenses in retirement," notes Feinschreiber. Couples retiring at age 65 are expected to incur $285,000 in health care costs on average during their retirement years, according to the 2019 Retiree Health Care Cost Estimate by Fidelity Investments. The estimate doesn't include the added expenses of nursing home or long-term care and assumes traditional Medicare coverage. "This is the money on top of Medicare," Feinschreiber says. "So it's thousands of dollars per year, which may be more than many people can afford. Working longer, even part-time, can help."

Read Viewpoints on Fidelity.com: How to plan for rising health care costs

Traditional pension plans

Although increasingly rare these days, you or your spouse may have qualified for a defined benefit plan that guarantees a specific benefit or payout upon retirement. Make sure you fully grasp how your benefit is determined before you decide to stay or leave your job. If you've maximized your pension income, it may give you the financial freedom to pursue an "encore" career. Some defined benefit plans calculate your benefit based only on a precise number of years you have worked for your employer. So ask your HR representative if your plan stops earning benefits after 30 years, if your benefit is frozen, or whether your pay may impact your final benefit.

In some plans, the pension benefit is calculated as a percentage of earnings during your final years on the job. So if you enter a "phased retirement" working arrangement and trim back your hours and earnings during your last few years, you might shrink your pension benefits too.

For some, staying on job later in your career may have more to do with qualifying for a retiree medical benefit. For example, you may have been offered an early retirement option at age 54. However, if you stayed on the job for another year, you may have qualified for an early retirement subsidy or other benefits at age 55 because you would have worked for at least, say, 10 years for the same employer. Do your homework and know your options.

Lastly, even if your pension benefit has stopped accumulating, you may choose to stay on the job because you want to continue your employer-sponsored health care coverage until you reach Medicare eligibility at age 65.

Tip: Watch a short Fidelity Learning Center video: Choosing your pension payout option

Impact on taxes

According to Farrell, it's possible that staying on the job an extra couple of years might push you into a higher tax bracket, especially if you begin to take taxable distributions from your IRA, or other pension benefits that count as income on top of your salary.

Employees can avoid being tripped up by knowing how close their current earned income level may be to the next tax bracket, advises Feinschreiber. If you need more money to live on than you're earning, or are required to take an IRA distribution, try to avoid using any other tax-deferred accounts (that don't yet require a distribution). Instead, consider taking remaining funds from your after-tax accounts, such as your checking accounts, savings accounts, or brokerage accounts, for which the bulk of the money has already been taxed.

Read Viewpoints on Fidelity.com: Tax-savvy withdrawals in retirement

For many people, like Arnold, the main thing about working in some fashion in their 60s and beyond isn't truly "about paying the mortgage and getting rid of debts—though that can be part of it—but it's typically, ‘Let's do something where I can use my knowledge, my skills, my experience, and have some fun,'" Farrell says.

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Social Security tips for couples https://www.fidelity.com/viewpoints/retirement/social-security-tips-for-couples 22867 07/29/2019 See 3 ways that may help married couples boost their lifetime benefits. Social Security tips for couples

Social Security tips for couples

See 3 ways that may help married couples boost their lifetime benefits.

Fidelity Viewpoints

Key takeaways

  • A couple with similar incomes and ages and long life expectancies may want to consider maximizing lifetime benefits by both delaying their claim.
  • For couples with big differences in earnings, consider claiming the spousal benefit, which may be better than claiming your own.
  • A couple with shorter life expectancies may want to consider claiming earlier.

Married couples may have some advantages when deciding how and when to claim Social Security. Even though the basic rules apply to everyone, a couple has more options than a single person because each member of a couple1 can claim at different dates and may be eligible for spousal benefits.

Making the most of Social Security requires some strategy to take advantage of the basic benefit rules, however. After you reach age 62, for every year you postpone taking Social Security (up to age 70), you could receive up to 8% more in future monthly payments. (Once you reach age 70, increases stop, so there is no benefit to waiting past age 70.) Members of a couple may also have the option of claiming benefits based on their own work record, or 50% of their spouse’s benefit. For couples with big differences in earnings, claiming the spousal benefit may be better than claiming your own.

What's more, Social Security payments are guaranteed for life and should generally adjust with inflation, thanks to cost-of-living increases. Because people are living longer these days, a higher stream of inflation-protected lifetime income can be very valuable.

But to take advantage of the higher monthly benefits, you may need to accept some short-term sacrifice. In other words, you'll have less Social Security income in the first few years of retirement in order to get larger benefits later.

"As people live longer, the risk of outliving their savings in retirement is a big concern," says Ann Dowd, a CFP® and vice president at Fidelity. "Maximizing Social Security is a key part of how couples can manage that risk."

A key question for you and your spouse to discuss is how long you each expect to live. Deferring when you receive Social Security means a higher monthly benefit. But it takes time to make up for the lower payments foregone during the period between age 62 and when you ultimately chose to claim, as well as for future higher monthly benefits to compensate for the retirement savings you need to tap into to pay for daily living expenses during the delay period.

But when one spouse dies, the surviving spouse can claim the higher monthly benefit for the rest of their life. So, for a couple with at least one member who expects to live into their late 80s or 90s, deferring the higher earner's benefit may make sense. If both members of a couple have serious health issues and therefore anticipate shorter life expectancies, claiming early may make more sense.

How likely are you to live to be 85, 90, or older? The answer may surprise you. Longevity has been steadily increasing, and surveys show that many people underestimate how long they will live. According to the Social Security Administration (SSA), a man turning 65 today will live to be 84.3 on average and a woman will live to be 86.6 on average. For a couple at age 65, the chances that one person will survive to age 85 are more than 75%. Further, the SSA estimates that 1 in 4 65-year-olds today will live past age 90, and 1 in 10 will live past age 95.2

Tip: To learn about trends in aging and people living longer, read Viewpoints on Fidelity.com: Longevity and retirement

Strategy No. 1: Maximize lifetime benefits

A couple with similar incomes and ages and long life expectancies may maximize lifetime benefits if both delay.

How it works: The basic principle is that the longer you defer your benefits, the larger the monthly benefits grow. Each year you delay Social Security from age 62 to 70 could increase your benefit by up to 8%.

Who it may benefit: This strategy works best for couples with normal to high life expectancies with similar earnings, who are planning to work until age 70 or have sufficient savings to provide any needed income during the deferral period.

Example: Willard's life expectancy is 88, and his income is $75,000. Helena's life expectancy is 90, and her income is $70,000. They enjoy working.

Suppose Willard and Helena both claim at age 62. As a couple, they would receive a lifetime benefit of $1,100,000. But if they live to be ages 88 and 90, respectively, deferring to age 70 would mean about $250,000 in additional benefits.

Strategy No. 2: Claim early due to health concerns

A couple with shorter life expectancies may want to claim earlier.

How it works: Benefits are available at age 62, and full retirement age (FRA) is based on your birth year.

Who it may benefit: Couples planning on a shorter retirement period may want to consider claiming earlier. Generally, one member of a couple would need to live into their late 80s for the increased benefits from deferral to offset the benefits sacrificed from age 62 to 70. While a couple at age 65 can expect one spouse to live to be 85, on average, couples who cannot afford to wait or who have reasons to plan for a shorter retirement, may want to claim early.

Example: Carter is age 64 and expects to live to 78. He earns $70,000 per year. Caroline is 62 and expects to live until age 76. She earns $80,000 a year.

By claiming at their current age, Carter and Caroline are able to maximize their lifetime benefits. Compared with deferring until age 70, taking benefits at their current age, respectively, would yield an additional $113,000 in benefits—an increase of nearly 22%.

Strategy No. 3: Maximize the survivor benefit

Maximize Social Security—for you and your spouse—by claiming later.

How it works: When you die, your spouse is eligible to receive your monthly Social Security payment as a survivor benefit, if it's higher than their own monthly amount. But if you start taking Social Security before your full retirement age (FRA), you are permanently limiting your partner's survivor benefits. Many people overlook this when they decide to start collecting Social Security at age 62. If you delay your claim until your full retirement age—which ranges from 66 to 67, depending on when you were born—or even longer, until you are age 70, your monthly benefit will grow and, in turn, so will your surviving spouse's benefit after your death. (Get your full retirement age)

Who it may benefit: This strategy is most useful if your monthly Social Security benefit is higher than your spouse's, and if your spouse is in good health and expects to outlive you.

Example: Consider a hypothetical couple who are both about to turn age 62. Aaron is eligible to receive $2,000 a month from Social Security when he reaches his FRA of 66 years and 6 months. He believes he has average longevity for a man his age, which means he could live to age 85. His wife, Elaine, will get $1,000 at her FRA of 66 years and 6 months and, based on her health and family history, anticipates living to an above-average age of 94. The couple was planning to retire at 62, when he would get $1,450 a month, and she would get $725 from Social Security. Because they’re claiming early, their monthly benefits are 27.5% lower than they would be at their FRA. Aaron also realizes taking payments at age 62 would reduce his wife's benefits during the 9 years they expect her to outlive him.

If Aaron waits until he's 66 years and 6 months to collect benefits, he'll get $2,000 a month. If he delays his claim until age 70, his benefit—and his wife's survivor benefit—will increase another 28%, to $2,560 a month. (Note: Social Security payout figures are in today’s dollars and before tax; the actual benefit would be adjusted for inflation and possibly subject to income tax.)

Waiting until age 70 will not only boost his own future cumulative benefits, it will also have a significant effect on his wife's benefits. In this hypothetical example, her lifetime Social Security benefits would rise by about $69,000, or 16%.

Even if it turns out that Elaine is overly optimistic and she dies at age 90, her lifetime benefits will still increase approximately 34% and she would collect approximately $129,000 more in Social Security benefits than if they had both claimed at 62 (vs. both waiting until age 70 to claim Social Security).

In situations where the spouse's Social Security monthly benefit is greater than their partner's, the longer a spouse waits to claim Social Security, the higher the monthly benefit for both the spouse and the surviving spouse. For more on why it's often better to wait until at least your FRA before claiming Social Security, read Viewpoints on Fidelity.com: Should you take Social Security at 62?

In conclusion

Social Security can form the bedrock of your retirement income plan. That's because your benefits are inflation-protected and will last for the rest of your life. When making your choice, be sure to consider how long you may live, your financial capacity to defer benefits, and the impact it may have on your survivors. Consider working with your Fidelity financial advisor to explore options on how and when to claim your benefits.

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Just 1% more can make a big difference https://www.fidelity.com/viewpoints/retirement/save-more 275987 09/18/2019 Increasing your savings by just 1% now could mean a lot in retirement. Just 1% more can make a big difference

Just 1% more can make a big difference

Increasing your savings by just 1% now could mean a lot in retirement.

Fidelity Viewpoints

Key takeaways

  • Consistently saving a little bit more can add up over time.
  • Whether it's $10 or $100, saving money early in life, doing it consistently, and increasing the amount you're able to save over time can help you live the life you want in retirement.

Often it's the little things in life that can make the biggest difference. That's true when it comes to saving for retirement. Putting just 1% more into a tax-advantaged retirement account like a 401(k), 403(b), or an IRA could make a noticeable difference in your lifestyle in retirement. Whether you choose to make Roth or traditional contributions, the benefits of saving just a little more now can pay off later.

Read Viewpoints on Fidelity.com: Traditional or Roth account—2 tips for choosing.

"Saving for retirement may seem like a steep mountain to climb, but the climb doesn't have to be as steep as it looks," says Jeanne Thompson, senior vice president of retirement insights at Fidelity. "Small steps now can turn into big strides later."

While 1% is a small percentage of your annual earnings today, after 20 or 30 years it can make a big difference in your account balance when you retire. That's because the longer you give your money a chance to grow, the better. And it works no matter how old you are—or how far off retirement is.

Let's look at some examples.

See your numbers

Want to create an example like the ones shown above to see what a difference even a 1% increase can make for you? Use our interactive tool. See how a small change can make a BIG DIFFERENCE.

Consider small steps

As you can see in our examples—and probably in your own too—small weekly amounts like $12, $14, and $16 can make a noticeable difference in your savings. So how do you find the money? We won't say to skip buying something if you really need it, but there are probably places in your spending that may be easy to cut. Even bringing your lunch or using coupons could save you $16 or more. And the beauty of 401(k) contributions is that they come right out of your paycheck, so you may not even miss the spending money.

If a one-time bump-up isn’t ideal now, consider aiming to increase contributions each year. For instance, if your 401(k) lets you set automatic increases every year, consider signing up. If you usually get a raise each year, you may be able to time the increase to happen when you get a bump in pay so you won't feel the impact in your paycheck.

Consider saving 15%

We ran the numbers and determined that aiming to save 15% of income toward retirement annually—which includes any matching contributions or profit sharing an employer may make to a workplace retirement account like a 401(k) or 403(b)—can help ensure that you can maintain your lifestyle in retirement.

Read Viewpoints on Fidelity.com: How much should I save each year?

Not saving that much? Don't fret. Few people get there overnight. Think of planning for retirement as a journey. The key is to save as much as you can now and try to increase savings over time. If possible, save at least enough to get any match from your employer.

"Starting early, saving regularly, and increasing the amount you save as your income increases will help you to achieve the retirement you envision," says Thompson.

Don't have a 401(k)?

You may be self-employed or maybe your employer doesn't offer a 401(k). But you can save in a tax-advantaged account like an IRA. There are several types of IRAs.

If you are already contributing to an IRA, you may not be saving up to the limits. In 2019, there is a $6,000 limit for those under age 50 and the $7,000 limit for those age 50 or older. Saving $50 more a month, or $600 a year, can make a real difference in the long run.

See how you're doing

We made it easy to begin measuring how you are doing when it comes to saving for retirement. Answer 6 simple questions to get The Fidelity Retirement ScoreSM. It's like a credit score for retirement. Whatever your score, you can take some simple, clear steps to stay on track or improve it.

Go for it

Challenge yourself to save a little more. Whether it's a 1%, 3%, or even 5% increase, the extra money saved today could make a big difference in helping achieve the retirement you envision. Think about it this way: Do you want to be worrying about money in retirement?

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Tax reform and retirees https://www.fidelity.com/viewpoints/retirement/tax-reform-implications-for-retirement 551763 02/11/2019 New tax deduction and rate rules may mean lower taxes for many retirees. Tax reform and retirees

Tax reform and retirees

New tax deduction and rate rules may mean lower taxes for many retirees.

Fidelity Viewpoints

Key takeaways

  • Retirees may benefit from higher standard deductions and lower tax rates.
  • The rules for required minimum distributions, Social Security taxes, and charitable IRA distributions have not changed.
  • Some deductions have been eliminated or altered.

If you are retired and thinking about your tax situation, you may wonder what last year's tax reform will mean for you. Most of the changes from the tax law went into effect in 2018. The new tax brackets, tax rates, rules for itemized deductions could all impact retirees. At the same time, the law left the rules for capital gains, tax loss harvesting, Social Security, and required distributions unchanged.

Will senior citizens still get a higher standard deduction?

Perhaps the most important tax rule change for many retirees will be the increase in the standard deduction. For older taxpayers who don’t carry a mortgage and have limited deductions, that standard deduction is often more valuable than itemized deductions. That will be the case for even more people, as the tax law roughly doubled the size of the standard deduction.

At the same time, the additional standard deduction for the elderly will still be available. In 2017, the tax rules allowed individual tax filers over age 65 to claim an additional standard deduction of $1,550, and married couples over the age of 65 could increase their standard deduction by $2,500. The new rules would increase these higher standard deductions for people over age 65 to $1,600 per individual and $2,600 per couple.

On the other hand, the new tax code eliminated personal exemptions. Still, many retirees may come out ahead due to the higher standard deduction, rate cuts, and other changes (see case studies below).

2017 2018 2019
Standard deductions Single $6,350 $12,000 $12,200
Married filing jointly (MFJ) $12,700 $24,000 $24,400
Elderly or blind (single and not a surviving spouse) Additional $1,550 Additional $1,600 Additional $1,650
Elderly (both over age 65 and MFJ) Additional $2,500 Additional $2,600 Additional $2,600
Exemption Personal exemption $4,050 per family member Eliminated Eliminated

What happens to taxes on Social Security?

The new rules would not change the taxation of Social Security benefits. Under current and future laws, Social Security benefits are subject to federal income taxes above certain levels of combined income (see table below). Combined income generally consists of your adjusted gross income (AGI), nontaxable interest, and one-half of your Social Security benefits.

What has changed are the applicable tax brackets—the new law lowered most tax rates and adjusted the income thresholds for the different tax brackets (get details). So the taxes paid on the same Social Security benefit could be lower.

Individual – combined income Individual – taxable SS benefits Couple MFJ – Combined Income Couple – MFJ taxable SS benefits
<$25,000 0% taxable <$32,000 0% taxable
$25,000–$34,000 Up to 50% may be taxable $32,000–$44,000 Up to 50% may be taxable
>$34,000 Up to 85% may be taxable >$44,000 Up to 85% may be taxable

Can IRA withdrawals still be treated as charitable distributions?

The existing rules for IRA distributions to charity have not changed. If you are over age 70½, you may distribute up to $100,000 per year directly to charity from your IRA, and the IRS will count that money as a qualified charitable distribution. The IRS will not include the funds as taxable income, but the distribution can satisfy your required minimum distribution (RMD).

What happens to the deduction for medical expenses?

The new tax rules preserve the deduction for medical expenses, and for the 2017 and 2018 tax years the AGI threshold for that deduction will be lowered from 10% of AGI to 7.5%. That could make this deduction available to more people with significant health issues. In 2019, the threshold will revert to 10% of AGI.

At the same time, the higher standard deduction may make this deduction irrelevant for many people, because the standard deduction may be greater than their total itemized deductions, which would include the itemized deduction for medical expenses.

Do the taxes on investment gains and investment income change?

2019 capital gains and qualified dividends

Long-term capital gains tax rate and qualified dividends AGI
0% <$39,375 single
<$78,750 MFJ
15% $39,376-$434,550 single
$78,751 to $488,850 MFJ
20% >$434,551 or more single
>$488,851 or more MFJ

*Note: Tax rates do not reflect the 2.3% Medicare surtax.

The short answer is no, the same rules exist for short- and long-term capital gains, qualified and ordinary dividends, and interest income. The rules for tax losses are left unchanged.

However, the tax rates have changed. Short-term capital gains, ordinary dividends, and interest income from most bonds are generally taxed at ordinary income tax rates, so those rates will change along with the new tax brackets (get details).

Hypothetical case studies – the new rules in action
Here are some simplified case studies to see how these changes may play out.

Higher standard deduction
Let’s take a hypothetical couple over age 65 that has already been claiming the standard deduction. Their income included pension payments worth $12,000 a year, and an RMD of $50,000 from a traditional IRA and $24,000 a year from Social Security.

Because their combined income exceeds $44,000, 85% of their $24,000 Social Security benefit is taxable, equal to $20,400.

Their itemized deductions include charitable contributions, state and local taxes, and investment interest expenses totaling $11,000. In 2017, the couple opted for the standard deduction of $12,700, plus the additional standard deduction for the elderly of $2,500, and the personal exemptions totaling $8,100.

In 2017, the couple had a marginal tax rate of 15% and had to pay income taxes on $59,100 of income. In 2017, the federal income tax bill would have been $7,933.

Assuming the same income and deductions, in 2018 the couple would again use the standard deductions and additional deduction for the elderly, but those are now worth $24,000 and $2,600, respectively. The personal exemptions are no longer available.

The increased deductions reduce the income they are taxed on to $55,800. And tax reform lowered the tax rates—they are now in the 12% marginal tax bracket. So their new tax bill is $6,315. That’s a tax cut of about $1,600, or about 20%.

No longer itemizing
Let's look at a hypothetical higher-income couple over age 65 that had itemized their tax returns. This couple earns $50,000 a year from Social Security, withdraws $120,000 a year from a traditional IRA, and still earns $20,000 a year from a position on a board. Their total income was $190,000. Only 85% of Social Security was taxable, or $42,500.

Their mortgage interest, charitable giving, and local tax deductions totaled $18,000. 

In 2017, the couple claimed the personal exemption of $8,100 and itemized deductions worth $18,000, a total of $26,100. That left $156,400 in income, a marginal tax rate of 28%, and a tax bill of $30,676.

In 2018, the new standard deduction would be worth more than the itemized deductions, and the personal exemption is gone. The standard deductions would total $26,600, leaving them with $155,900 in income, but the tax brackets changed and they would now have a marginal income tax bracket of 22%, and a tax bill of $26,177. That’s a tax cut of $4,499, or 15%.

The bottom line

The tax law changed a large number of rules, but many of the provisions most important to retirees were unaffected. Many retirees will see their tax bill go down, but not everyone. The complex changes will affect individuals differently, so be sure to consult a tax advisor.

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No 401(k)? How to save for retirement https://www.fidelity.com/viewpoints/retirement/no-401k 246810 04/06/2020 Don't worry—there are tax-advantaged options for people without a 401(k). No 401(k)? How to save for retirement

No 401(k)? How to save for retirement

Don't worry—there are tax-advantaged options for people without a 401(k).

Fidelity Viewpoints

Key takeaway

  • Freelancers and independent contractors have some of the same retirement plan options as small-business owners including the IRA, SEP IRA, SIMPLE IRA, and self-employed 401(k).

When it comes to saving for retirement, the advice is usually, "Save in your 401(k)." But lots of people don't have a 401(k), 403(b), or other workplace retirement savings account. About 30% of working households don't have access to workplace retirement plans, according to data from the Department of Labor.1

If you are one of the millions of freelancers, entrepreneurs, workers with a side gig—or an employee with no workplace retirement plan—you can still save for retirement. As long as you have some earnings, you have some tax-advantaged saving options.

IRA

You've probably heard of IRAs, short for individual retirement accounts. If not, or you're not sure how they work, here are the basics. An IRA is a type of retirement savings account that comes with some nice tax benefits, including tax-free or tax-deferred compounding. Other tax breaks depend on the type of IRA you choose—the basic types are a traditional IRA and a Roth IRA.

Who can open one?
Anyone with earned income (including those who do not work themselves but have a working spouse) can open an IRA. You can contribute up to $6,000 in 2019 ($7,000 if you’re age 50 or older). The Internal Revenue Service (IRS) periodically adjusts the contribution limit for inflation.

There are some income limitations on both traditional and Roth IRA contributions.2,3

How it works
Contributions to a traditional IRA might be fully deductible, partially deductible, or entirely nondeductible depending on whether you and/or your spouse are covered by a retirement plan through your employer. If a taxpayer is covered by a retirement plan at work, their income determines whether their IRA deduction will be limited. Retirement plans at work include 401(k) plans, 403(b) plans, and pensions.

Deductibility of traditional IRA contributions depends on your modified adjusted gross income (MAGI). Deductibility is phased out at applicable MAGI levels.

After age 59½, you can withdraw contributions and earnings without penalty—but your withdrawals will be taxed as ordinary income. An exception to this occurs if your contributions were not deducted from your taxable income when you made them. In that case, the portion of your withdrawals that corresponds to the nondeductible contributions will be tax-free. After age 724 you can no longer contribute to the traditional IRA and must begin taking required minimum distributions (RMDs).

A Roth IRA contribution does not give you a current tax deduction—contributions are made with after-tax money. But when you withdraw money after age 59½ (provided that the 5-year aging requirement has been satisfied), no taxes are due on earnings or contributions as long as you have met the 5-year holding requirements for the account. The Roth IRA does allow you to withdraw up to the total amount of your contributions from the account at any time tax-free and penalty-free—but not the earnings on these contributions. If you have earned income, you can contribute up to that amount past age 72—with no required minimum distributions at any time during the lifetime of the original owner.

Who it may help
The IRA—either a traditional or Roth IRA—is good for nearly everyone with an earned income, or a nonworking spouse. High earners who have, or whose spouses have, workplace plans may not be able to get a deduction for a traditional IRA contribution, and those who have high incomes may not qualify for a Roth contribution, either—but they may be able to convert a traditional IRA into a Roth IRA.2,3 Other than that, the only drawback is, that compared with other retirement accounts, the IRA has a relatively low contribution limit.

Things to keep in mind

Though there is typically a 10% penalty imposed on early withdrawals, some situations like disability and first-time home purchases qualify for a waiver of the early withdrawal penalty. Visit IRS.gov for more information about qualified early distributions.

Read Viewpoints on Fidelity.com: Traditional or Roth account —2 tips to choose

SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA. Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA.

Who can open one?
The SEP IRA is available to sole proprietors, partnerships, C-corporations, and S-corporations.

How it works
The SEP IRA, like a traditional IRA, allows contributions to potentially be tax-deductible—but the SEP IRA has a much higher contribution limit. The amount you can put in varies based on your income. In 2019, the most an employer can contribute to an employee's SEP IRA is either 25% of eligible compensation or $56,000, whichever is lower. (Note that the rules on determining eligible compensation, which are different for self-employed and employee SEP participants, can be complex. Consult a tax expert or the IRS website for details.)

If you have employees, you have to set up accounts for those who are eligible, and you have to contribute the same percentage to their accounts that you contribute for yourself. Employees cannot contribute to the account; the employer makes all the contributions.

The employer contributions to a SEP IRA won't affect your ability to contribute to an IRA as an individual. So, depending on your eligibility, you could still contribute to a traditional or Roth IRA.

Who it may help
This account works well for freelancers and sole entrepreneurs, and for businesses with employees (as long as the owners don't mind making the same percentage contribution for the employees that they make for themselves). The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are generally no tax forms to file.

Things to keep in mind
Catch-up contributions aren't allowed with the SEP IRA, nor are employee deferrals. As the employer, you can contribute up to 25% of each employee's eligible compensation, up to $56,000 per employee—as long as the same percentage is contributed for all employees. The deadline to set up the account is the tax deadline.

Self-employed 401(k)

A self-employed 401(k), also known as a solo 401(k), can be an option for maximizing retirement savings even if you're not making a ton of money. Before-tax and after-tax employee contributions are technically allowed in a self-employed 401(k) but not all financial institutions offer the option.

Who can open one?
If you are self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A spouse who works in the business can participate as well.

How it works
You get 2 opportunities for contributing to a self-employed 401(k)—first as the employee, and again as the employer.

As the employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $19,000 in 2019. Once you're over age 50, you can also make catch-up contributions—for 2019 you can save an extra $6,000, for a total of $25,000.

As the employer, you can contribute up to 25% of your eligible earnings The employer contribution is always made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.)

Who it may help
The self-employed 401(k) is another account that offers a high potential contribution limit for self-employed people. The total that can be contributed for employee and employer is $56,000, plus an additional $6,000 for people age 50 and over.

Things to keep in mind
The self-employed 401(k) can be a little complicated to run. After the plan assets hit $250,000, you have to file Form 5500 with the IRS.

The deadline for setting up the plan is the end of the fiscal year, generally the last business day of the year, which in 2019 is Tuesday, December 31. You can make employer contributions to the account until your tax-filing deadline for the year, including extensions.

SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is another option for people who are self-employed. Like a 401(k), this account offers tax-deferral and pretax contributions, plus an employee contribution and an employer match.

Who can open one?
Anyone who is self-employed or a small-business owner can open a SIMPLE IRA. Small businesses with 100 employees or fewer can also open a SIMPLE IRA plan.

How it works
Like the self-employed 401(k), you get 2 chances to contribute.

  • As the employee, you can contribute up to 100% of your compensation, up to $13,000 in 2019.
  • As the employer, you must either put in a 3% matching contribution or a 2% non-elective contribution. The latter is not contingent on the employee contribution, the way a matching contribution to a 401(k) typically is.

But be aware that a SIMPLE IRA can require the employer to make contributions to the plan even if the business has no profits.

Who it may help
The SIMPLE IRA is an inexpensive plan for businesses with fewer than 100 employees. It also allows for salary deferrals by employees and there are no tax forms to file.

The SIMPLE IRA also allows those age 50 and over to save an additional $3,000 a year.

Things to keep in mind
The deadline to set up the plan is October 1. You can make matching and nonelective contributions until the company's tax filing deadline—including extensions.

Pick a plan and start saving

There's a wide variety of retirement saving options. After evaluating your choices, get started saving. Time is one of the most important factors when it comes to building up your retirement fund. While you're young, time is on your side. Don't let the absence of a workplace retirement plan like a 401(k) stand in your way. There are plenty of other retirement savings options—pick a plan and start saving and investing.

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7 things you may not know about IRAs https://www.fidelity.com/viewpoints/retirement/IRA-things-to-know 220372 04/06/2020 Make sure you aren't overlooking some strategies and potential tax benefits. 7 things you may not know about IRAs

7 things you may not know about IRAs

Make sure you aren't overlooking some strategies and potential tax benefits.

Fidelity Viewpoints

Key takeaways

  • IRAs are available to nonworking spouses.
  • IRAs allow a "catch-up" contribution of $1,000 for those 50 and up.
  • IRAs can be established on behalf of minors with earned income.

It's the time of year when IRA contributions are on many people's minds—especially those doing their tax returns and looking for a deduction.

Chances are, there may be a few things you don't know about IRAs. Here are 7 commonly overlooked facts about IRAs.

1. A nonworking spouse can open and contribute to an IRA

A non-wage-earning spouse can save for retirement too. Provided the other spouse is working and the couple files a joint federal income tax return, the nonworking spouse can open and contribute to their own traditional or Roth IRA. A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family. For 2019 and 2020, the limit is $6,000, or $7,000 if you're over 50. The amount of your combined contributions can't be more than the taxable compensation reported on your joint return.

2. Even if you don't qualify for tax-deductible contributions, you can still have an IRA

If you're covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your 2019 modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution to a traditional IRA might not be tax-deductible.1 But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax-free until the time of withdrawal. You also have the option of converting those nondeductible contributions to a Roth IRA (see No. 7, below).

3. Beginning in 2019, alimony will not count as earned income to the recipient

Unless the new tax rule changes, you will likely not be able to use money received as alimony to fund an IRA beginning in tax year 2019.

That's due to changes in the law introduced by the Tax Cuts and Jobs Act of 2017: Alimony payments from agreements entered into January 1, 2019 or after, are no longer considered taxable income to the recipient—and the source of IRA contributions must be taxable earned income. Alimony agreements entered into prior to December 31, 2018 are grandfathered in; they are tax-deductible for the person making the payments, and count as income to the recipient. It is the date of the agreement that decides the taxation of the alimony payment; not the year of receipt of the funds.

4. Self-employed, freelancer, side-gigger? Save even more with a SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.

Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA. The SEP IRA is similar to a traditional IRA where contributions may be tax-deductible—but the SEP IRA has a much higher contribution limit. The amount you, as the employer, can put in varies based on your earned income. For SEP IRAs, you can contribute up to 25% of any employee's eligible compensation up to a $56,000 limit for 2019 contributions and $57,000 for 2020. Self-employed people can contribute up to 20%2 of eligible compensation to their own account. The deadline to set up the account is the tax deadline. But, if you get an extension for filing your tax return, you have until the end of the extension period to set up the account or deposit contributions.

5. "Catch-up" contributions can help those age 50 or older save more

If you're age 50 or older, you can save an additional $1,000 in a traditional or Roth IRA each year. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for retirement. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $44,000 more in your account than someone who didn't take advantage of the catch-up contribution.3

6. You can open a Roth IRA for a child who has taxable earned income4

Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give them a head start on saving for retirement. That's because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to persuade a teenager with income from mowing lawns or babysitting to put part of it in a retirement account, gifting money to cover the contribution to a child or grandchild can be the answer—that way they can keep all of their earnings and still have something to save. The contribution can't exceed the amount the child actually earns, and even if you hit the maximum annual contribution amount of $6,000 (for 2019 and 2020), that's still well below the annual gift tax exemption ($15,000 per person in 2019 and 2020 or with gift splitting, a married couple could gift their child $30,000 a year.)

The Fidelity Roth IRA for Kids, specifically for minors, is a custodial IRA. This type of account is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in their name. This age varies by state. Funds in the custodial IRA do not count toward assets when considering Expected Family Contributions for college. Bear in mind that once the account has been transferred, the account's new owner would be able to withdraw assets from it whenever they wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.

7. Even if you exceed the income limits, you might still be able to have a Roth IRA

Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available anytime without tax or penalty, all qualified withdrawals are tax-free, and you don't have to start taking required minimum distributions at age 72.5,6 But some taxpayers make the mistake of thinking that a Roth IRA isn't available to them if they exceed the income limits.7 In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.

If you don't have a traditional IRA you're still not out of luck. It's possible to open a traditional IRA and make nondeductible contributions, which aren't restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings—if any—between the time of the contribution and the conversion.

However, if you do have any other IRAs, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account.

Read Viewpoints on Fidelity.com: Answers to Roth conversion questions

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Create income that can last a lifetime https://www.fidelity.com/viewpoints/retirement/income-that-can-last-lifetime 12180 01/27/2020 Generate a "retirement paycheck" that isn't vulnerable to market ups and downs. Create income that can last a lifetime

Create income that can last a lifetime

Generate a "retirement paycheck" that isn't vulnerable to market ups and downs.

Fidelity Viewpoints

What a lifetime income annuity can do

  • Lifetime annuities can hedge against market swings.
  • They can provide guaranteed income for life.
  • Also, lifetime annuities can help diversify your income sources.

The face of retirement in America has changed radically in recent decades. People are living longer. Pensions are increasingly rare. Add in market volatility, as well as questions surrounding the long-term financial health of Social Security, and it's no wonder many people feel anxious about funding their retirement.

If you were a newly hired employee at a Fortune 500 company in 1998, you had a 59% chance of having access to a pension plan. But, by 2017, only 16% of employees did. Over that same 19-year stretch, 42% of Fortune 500 employers froze their primary pension plan and 24% closed pension plans to new hires.1 Today, the responsibility of financing your retirement is likely to fall squarely on your shoulders.

But there is a way to create a plan that can give you a regular "retirement paycheck"—through a lifetime income annuity. Resembling a traditional pension plan,2 this investment vehicle can provide a guaranteed3 stream of income that lasts a lifetime and is not vulnerable to the inevitable ups and downs of the market.4

An added benefit is that by locking in some guaranteed income, you will have more freedom to invest the remainder of your retirement assets for growth potential as part of a diversified income plan. Investors might want to consider an income annuity to cover the portion of their essential expenses not covered by other guaranteed income sources like Social Security or a pension.

"What people may not realize is, once you have your essential expenses covered by guaranteed lifetime income, you gain peace of mind and the freedom to pursue the things you love in life," observes Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. "Additionally, you may invest your remaining assets for growth, rather than worrying about how to preserve and stretch your portfolio for the rest of your life."

A lifetime income annuity represents a contract with an insurance company that allows you to convert a portion of your retirement savings (an amount you choose) into a predictable lifetime income stream. In return for a lump-sum investment, the insurance company guarantees to pay you (or you and your spouse) a set amount of income for life. You also have the option of starting your income either immediately or at a date you select in the future.

Because an annuity's guarantees are only as strong as the insurance company providing them, you should consider the strength of the company you select and its ability to meet its future income obligations.

Having the backing of an insurance company can help mitigate 3 key retirement risks that, generally, can be very challenging to manage by yourself:

  • Market risk – Regardless of whether the market goes up or down, the insurance company is obligated to provide you with income payments every year.
  • Longevity risk – Rather than trying to figure out how much of your savings you can spend each year before running out of money, the insurance company assumes the responsibility for paying you as long as you live.
  • Inflation risk – By including an annual increase option, where available, you can reduce the risk that inflation will diminish your purchasing power over time.

But not all lifetime income annuities are alike—some might provide higher levels of income with little or no flexibility in accessing assets, while others may provide lower levels of income with greater flexibility.

So you'll want to take the time to understand the differences among them and figure out which features might best meet your particular needs. Let's take a closer look at 2 categories of lifetime income annuities, namely, a fixed lifetime income annuity and a fixed annuity with guaranteed lifetime withdrawal benefits.

What is a fixed lifetime income annuity?

As part of a diversified income plan, a fixed lifetime income annuity can provide you with guaranteed income for the rest of your life with payments starting immediately or at a future date that you select when you purchase the annuity.

These annuities offer:

  • Lifetime income – Avoid outliving your assets by ensuring you will receive a guaranteed stream of income beginning on a date you choose, up to 40 years from your time of purchase. You will also have the security of steady payments regardless of market fluctuations and downturns.
  • Personalization – You may choose to receive guaranteed income for your lifetime (or for the lives of you and another person for joint accounts). In addition, you have the choice to purchase optional features to include protection for your beneficiaries or add an annual payment increase feature to help your payment keep pace with inflation.

The trade-off with an income annuity is that you typically must give up control of the portion of the savings you use to purchase one. In exchange, you don't have to manage your account to generate income, and you can secure a predictable income that lasts the rest of your life. However, be sure to ask your financial advisor about withdrawal features that are available on some income annuities, which may alleviate liquidity concerns. What's more, fixed lifetime income annuities are often able to provide higher income payments than other products, such as bonds, CDs, or money market funds, due to the "longevity bonus" they can provide (see the chart below). While the payments from traditional income solutions are limited to return of principal and interest from an investment, fixed lifetime income annuities also make available the ability to share in the longevity benefits of a "mortality pool." Effectively, assets from annuitants with a shorter life span remain in the mortality pool to support the payouts collected by those with a longer life span. Put simply, the longer you live, the more money you will receive.

Hypothetical example: Immediate fixed income annuity

This hypothetical example assumes an investment by a 65-year-old male in a single-life immediate fixed income annuity with a 10-year guarantee period. Taxes are not reflected in this example.

This hypothetical example is for illustrative purposes only. It is not intended to predict or project income payments. Your actual income payments may be higher or lower than those shown here.

What are the payment options and features?

Fixed lifetime income annuities offer various options that pay different amounts of income, based on the types of guarantees they provide. The 3 most common payment options are:

  1. Life with a cash refund – With this option, the priority is ensuring that you never get back less in payments than your original investment. As with many income annuities, you get a lifetime income payment (but typically lower than a life-only option). If you pass away before receiving payments that total your original investment, the remaining value will be paid to your beneficiaries. This means, for example, that if you purchase an annuity for $100,000 and are paid only $10,000 of income during your lifetime, the remaining $90,000 is paid to your heirs.
  2. Life with a guarantee period – You'll receive income payments for your lifetime. However, if you pass away before the guarantee period ends, any remaining income payments will continue to your beneficiaries until the end of the guarantee period. Here, you get a somewhat lower payment than life only, because the insurance company is guaranteeing to make payments for a minimum number of years.
  3. Life only – You'll receive income payments over your lifetime. The life-only option offers the highest possible income payment because it's only for as long as you live; no money goes to your heirs. This option typically works well for those in good health and who anticipate a long life.

In addition to different payment options, annuities can include different features. One example is an annual increase option. This feature is based on a fixed percentage and provides for annual increases in the payment amount beginning on the anniversary following your initial payment. Note that the initial payment amount for an annuity with this option may be lower than an identical annuity without the option.

Let's take a look at how these payment options might differ, using Fidelity's Guaranteed Income Estimator tool. Shown below are the results for a hypothetical 65-year-old man who invests $100,000 in a lifetime income annuity starting today. We assume that he was born on November 1, 1954, and started receiving income on January 9, 2020.

What's right for you? Choosing a payment option means focusing on the specific features of a fixed lifetime income annuity and your personal goals. "Consider what's most important to you regarding your retirement plans. Do you need the most guaranteed income available, or are you willing to accept a slightly lower payment to help provide additional protection for your beneficiaries?" says Ewanich.

What is a fixed annuity with a guaranteed lifetime withdrawal benefit?

As part of a diversified income plan, a fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB) can provide guaranteed income for the rest of your life, starting on a date you select when you’re ready to start receiving income.

These annuities offer:

  • Lifetime income – Avoid outliving your assets by guaranteeing a lifetime withdrawal benefit amount, beginning on a date you select.
  • Flexibility – You choose when you would like to start receiving income, but if your situation changes and you need some or all of your money sooner, you have access to any accumulation value in your contract.5

From the time of purchase, you will know how much income you are guaranteed (or you and your spouse for joint contracts) at any age you decide to start lifetime withdrawals. Most importantly, you will have the security of a guaranteed cash flow, regardless of market fluctuations and downturns. Finally, in the event of your death, your beneficiaries will receive any remaining balance in your policy.

How do lifetime income annuities fit into a retirement portfolio?

A lifetime income annuity can help diversify your retirement income portfolio so a portion of your income is shielded from market volatility. Generally, Fidelity believes that assets allocated to annuities should represent not more than 50% of your liquid net assets. Why? Well, even though these products provide guaranteed income for life, they may also require that you give up some liquidity and access to that part of your portfolio.

Ultimately, your overall portfolio may benefit from a lifetime income annuity to help meet essential expenses throughout your retirement.

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A way to secure retirement income later in life https://www.fidelity.com/viewpoints/retirement/rmds-to-retirement-income-for-life 209432 01/08/2020 Turn some of your traditional IRA or 401(k) into lifetime income. A way to secure retirement income later in life

A way to secure retirement income later in life

Turn some of your traditional IRA or 401(k) into lifetime income.

Fidelity Viewpoints

Key questions

  • Are you nearing age 72or already taking required minimum distributions (RMDs)?
  • Can you cover expenses without needing to take your full RMD?
  • Would you like a stream of guaranteed income to start later than age 72?

Turning age 72 is an important milestone if you have a traditional IRA or 401(k). That's when you must begin taking mandatory minimum yearly withdrawals, known as required minimum distributions (RMDs) from these accounts.2 But what if you don’t need that money for current living expenses and would prefer to receive guaranteed lifetime income later in retirement? Fortunately, the US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity3 (DIA) and not have that money be subject to RMDs starting at age 72.

What is a QLAC?

A QLAC is a DIA that can be funded only with assets from a traditional IRA4 or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b). At the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations.

"The creation of the QLAC has opened up the opportunity to defer income past age 72, the RMD start age, using tax-deferred savings like an IRA or 401(k)," explains Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company.

QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings. After all, more than 30% of American workers aren't confident they'll have enough money to maintain their standard of living through retirement, according to the 2019 Retirement Confidence Survey conducted by the Employee Benefit Research Institute.

A QLAC delivers a guaranteed5 stream of lifetime income beginning on a date you select. For instance, you may purchase a QLAC at age 65 and have your payouts begin at age 75. Typically, the longer the deferral period, the higher your payout will be when you're ready to start receiving income payments.

Prior to the 2014 ruling on QLACs, funding a DIA with qualified funds from an IRA posed a problem: IRAs and other tax-deferred plans such as 401(k)s include RMD rules that require you to begin taking withdrawals after you reach age 72. There are rules, however, about how much money you can use to fund a QLAC. Currently, you're subject to 2 limitations: Total lifetime contributions cannot exceed $135,000 across all funding sources, and QLAC contributions from a given funding source cannot exceed 25% of that funding source's value.6

How a QLAC can create steady, later-in-life income

Let's say you own one or more traditional IRAs with a total balance of $200,000 as of December 31 of the previous year. You would be limited to using $50,000, which is 25% of $200,000 and is less than $135,000, to fund the QLAC. (Some 401(k) plans offer access to QLACs; check with your employer or plan sponsor to learn more about the rules for your plan.) But if your total IRA balance is worth $540,000 or more, the maximum you can contribute to a QLAC is $135,000. Keep in mind that in both cases the money that remains in your IRA or 401(k) is still subject to RMDs.

Use our interactive widget below and adjust the green options in the white box to match your situation:


To make it easier to understand how a QLAC might fit into your retirement income plan, enter your personal information in the interactive widget. It assumes you're age 70 and investing $135,000 in a QLAC. You can personalize whether you're male, female, or purchasing as a couple. Then you can adjust when you want to start receiving income, as early as age 75 or as late as age 85. Finally, you can see what the amount of total lifetime payments would be if you lived to age 90, 95, or 100.

To provide a working example, let's assume a woman is approaching age 70½ and does not need her full RMD to cover current expenses. By investing a portion of her traditional IRA assets in a QLAC at age 70, she would not have to take RMDs on the assets invested in the QLAC, and she would receive guaranteed lifetime income starting at a date of her choice, up to age 85. During the deferral period, she would rely on Social Security, RMDs from the remaining money in her IRA, withdrawals from investments, and other income, such as part-time work or a sale of a business, to cover expenses. If she invests the $135,000 in a QLAC and defers to age 80, her guaranteed income would be $15,200 a year no matter what happens over time, and she would receive a total of $228,000 in payments if she lived to age 95—or more if she lived longer.

Decisions, decisions

Purchasing an annuity can be complicated, with many kinds to choose from. "Fortunately, QLACs don't add a layer of complexity," says Ewanich. "The restrictions within the US Treasury Department's QLAC rule simplify the process."

Consider these options:

Single or joint life? If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first.

Should you include a cash refund death benefit? When purchasing a QLAC, the income lasts for your lifetime (joint contracts pay income for you and your spouse, as long as one of you is alive). You may also want to consider adding a cash refund death benefit. This provides for a lump sum paid to your beneficiaries if your lifetime payments do not exceed the dollar amount you invested in the QLAC. While a contract without the cash refund death benefit may provide higher income payments, it does not include beneficiary protection for your heirs. Compare QLAC options, including a cash refund death benefit, with Fidelity's Guaranteed Income Estimator tool.

When do you want income to start? A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:

  • A 70-year-old retiree with an existing income stream that will stop at age 75 (for example, proceeds end from the sale of a business, the retiree stops working part time, inheritance income ceases) might start income at age 76 for the QLAC to replace the income that is ending.
  • A couple in their late 60s might like to include an income stream that begins at age 80 or 85 as part of their overall plan, to help cover higher anticipated health costs later in retirement.
  • A couple at age 65 might be comfortable taking withdrawals from their investment portfolio to cover their expenses at the beginning of their retirement, but they are concerned about the potential need for it to last 30 years or more. They might consider a QLAC that provides lifetime income starting at age 85 to help address these concerns.

Can I change the income start date? For contracts that include a cash refund death benefit, you typically have the ability to change the income date by up to 5 years in either direction (subject to an age-85 maximum). For example, if you initially select age 78 as your income start date, you could subsequently change this date to any time from age 73 to age 83. Of course, the amount of income that you will receive will typically be adjusted to a lower amount if you decide to change the date to an earlier age, and a higher amount if you change the date to a later age.

Should I consider a QLAC?

Ewanich notes that the decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? "A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it," explains Ewanich.

In terms of when to make a decision about purchasing a QLAC, Ewanich suggests weighing the options before reaching age 72: "While the QLAC rule allows you to purchase after age 72, it's a good decision to make when you're initially planning your RMD strategy."

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4 reasons to contribute to an IRA https://www.fidelity.com/viewpoints/retirement/why-contribute-to-ira-now 249921 06/10/2020 Saving in an IRA comes with tax benefits that can help you grow your money. 4 reasons to contribute to an IRA

4 reasons to contribute to an IRA

Saving in an IRA comes with tax benefits that can help you grow your money.

Fidelity Viewpoints

Key takeaways

  • Give your money a chance to grow.
  • Get tax benefits.
  • The earlier you start contributing, the more opportunity you have to build wealth.

It can pay to save in an IRA when you're trying to accumulate enough money for retirement. There are tax benefits, and your money has a chance to grow. Every little bit helps and you can still put money into an IRA for the 2019 tax year.

If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense.

Read Viewpoints on Fidelity.com: No 401(k)? How to save for retirement

Here are some reasons to make a contribution now

1. Put your money to work

Eligible taxpayers can contribute up to $6,000 per year, or your taxable compensation for the year (whichever is less), to a traditional or Roth IRA, or $7,000 if they have reached age 50, for both tax years 2019 and 2020 (assuming they have earned income at least equal to their contribution). It's a significant amount of money—think about how much it could grow over time.

Consider this: If you're age 25 and invest $6,000, the maximum annual contribution in 2019, that one contribution could grow to $89,847 after 40 years. If you’re age 50 or older, you can contribute $7,000, which could grow to about $19,313 in 15 years.1 (We used a 7% long-term compounded annual hypothetical rate of return and assumed the money stays invested the entire time.)

The age you start investing in an IRA matters: It's never too late, but earlier is better. That’s because time is an important factor when it comes to compound growth. Compounding is what happens when an investment earns a return, and then the gains on the initial investment are reinvested and begin to earn returns of their own. The chart below shows just that. Even if you start saving early and then stop after 10 years, you may still have more money than if you started later and contributed the same amount each year for many more years.

2. You don't have to wait until you have the full contribution

The $6,000 (or your compensation limit) IRA contribution limit is a significant sum of money, particularly for young people trying to save for the first time.

The good news is that you don't have to put the full $6,000 into the account all at once. You can automate your IRA contributions and have money deposited to your IRA weekly, biweekly, or monthly—or on whatever schedule works for you.

Making many small contributions to the account may be easier than making one big one.

It's important to note that you don't have to contribute up to the limit each year. Save what you can on a regular basis—even small amounts can make a big difference over time.

3. Get a tax break

IRAs offer some appealing tax advantages. There are 2 types of IRAs, the traditional and the Roth, and they each have distinct tax advantages and eligibility rules.

Contributions to a traditional IRA may be tax-deductible for the year the contribution is made. Your income does not affect how much you can contribute to a traditional IRA—you can always contribute up to the annual limit as long as you have enough earned income to cover the contribution. But the deductibility of that contribution is based on your modified adjusted gross income (MAGI) and the access you and/or your spouse have to an employer plan like a 401(k). If neither you nor your spouse are eligible to participate in a workplace savings plan like a 401(k) or 403(b), then you can deduct the full contribution amount, no matter what your income is. But if one or both of you do have access to one of those types of retirement plans, then deductibility is phased out at higher incomes.2 Earnings on the investments in your account can grow tax-deferred. Taxes are then paid when withdrawals are taken from the account—typically in retirement.

Just remember that you can defer, but not escape, taxes with a traditional IRA: Starting at age 72, required minimum withdrawals become mandatory, and these are taxable (except for the part—if any—of those distributions that consist of nondeductible contributions).3 If you need to withdraw money before age 59½, you may be hit with a 10% penalty unless you qualify for an exception.4

On the other hand, you make contributions to a Roth IRA with after-tax money, so there are no tax deductions allowed on your income taxes. Contributions to a Roth IRA are subject to income limits.5 Earnings can grow tax-free, and, in retirement, qualified withdrawals from a Roth IRA are also tax-free. Plus, there are no mandatory withdrawals during the lifetime of the original owner. If you need to take an early withdrawal from a Roth IRA, withdrawals of earnings before age 59½ may be subject to both tax and early withdrawal penalties if withdrawn before the qualifying criteria are met.6

As long as you are eligible, you can contribute to either a traditional or a Roth IRA, or both. However, your total annual contribution amount across all IRAs is still $6,000 (or $7,000 if age 50 or older).

What's the right choice for you? For many people, the answer comes down to this question: Do you think you'll be better off paying taxes now or later? If, like many young people, you think your tax rate is lower now than it will be in retirement, a Roth IRA may make sense.

Need help deciding? Read Viewpoints on Fidelity.com: Traditional or Roth IRA, or both?

4. You may think you can't have an IRA, but maybe you can

There are some common myths about IRAs—especially about who can and who can't contribute.

Myth: I need to have a job to contribute to an IRA.

Reality: Not necessarily. A spouse with no earned income can contribute to a spousal Roth or traditional IRA as long as their spouse has earned income and the couple files a joint tax return. Note, however, that all other IRA limits and rules still apply.

Myth: I have a 401(k) or a 403(b) at work, so I cannot have an IRA.

Reality: You can, with some caveats—as mentioned earlier. For instance, if you or your spouse have access to a retirement plan like a 401(k) or 403(b) at work, your traditional IRA contribution may not be deductible, depending on your modified adjusted gross income (MAGI).2 But you can still make a nondeductible, after-tax contribution and reap the potential rewards of tax-deferred growth within the account. You can contribute to a Roth IRA, whether or not you have contributed to your workplace retirement account, as long as you meet the income eligibility requirements.5

Myth: Children cannot have an IRA.

Reality: An adult can open a custodial Roth IRA (also known as a Roth IRA for Kids) for a child under the age of 18 who has earned income, including earnings from typical kid jobs such as babysitting or mowing lawns, as long as this income is reported to the IRS.7

An adult needs to open and maintain control of the account. When the child reaches the age of majority, which varies by state, the account's ownership switches from the adult over to them.

Make a contribution

Your situation dictates your choices. If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense. But one thing applies to everyone: the power of contributing early. Pick your IRA and get your contribution in and invested as soon as possible to take advantage of the tax-free compounding power of IRAs.

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5 ways to help protect retirement income https://www.fidelity.com/viewpoints/retirement/protect-your-retirement-income 93195 04/10/2019 These rules of thumb can help keep your retirement on track. 5 ways to help protect retirement income

5 ways to help protect retirement income

These rules of thumb can help keep your retirement on track.

Fidelity Viewpoints

Key takeaways

  • Plan for health care costs.
  • Expect to live longer.
  • Be prepared for inflation.
  • Position investments for growth.
  • Don't withdraw too much from savings.

If you're approaching the off-ramp to retirement—or already there—it's important to think about protecting what you've saved and helping to ensure that you'll have enough income throughout your retirement. After all, you worked hard to get to retirement. So you want to be able to enjoy it without having to worry about money. That means thinking ahead and planning for a retirement that may last 30 years or longer.

Here are 5 rules of thumb to help manage some things that can affect your income in retirement.

1. Plan for health care costs

With longer life spans and medical costs that historically have risen faster than general inflation—particularly for long-term care—managing health care costs is important for retirees. Retirement planning conversations should include a discussion of the impact long-term care costs have on individuals and their family’s future.

According to Fidelity's annual retiree health care costs estimate, the average 65-year-old couple retiring in 2019 will need an estimated $285,000 to cover health care costs during their retirement, and that is just using average life expectancy data.1 Many people will live longer and have higher costs. And that cost doesn't include long-term care (LTC) expenses. Having a dedicated pool of monies for long-term care expenses may be an important consideration to cover long-term care expenses, ultimately protecting your retirement income.

As reported by the US Department of Health and Human Services, about 70% of those aged 65 and older will require some type of LTC services—either at home, in adult day care, in an assisted living facility, or in a traditional nursing home.2 According to the Genworth 2018 Cost of Care Survey, the average cost of a semiprivate room in a nursing home3 is about $89,297 per year, assisted living facilities4 average $48,000 per year, and home health care homemaker services5 are $48,048 a year.

Consider long-term-care insurance: Insurers base the cost largely on age, so the earlier you purchase a policy, the lower the annual premiums, though the longer you'll potentially be paying for them. It is also important to research the strength of the company you select, as well as investigate other potential options for funding LTC costs.

Read Viewpoints on Fidelity.com: Long-term care: Options and considerations

If you are still working and your employer offers a health savings account (HSA), you may want to take advantage of it. An HSA offers a triple tax advantage:6 You can save pretax dollars, which can grow and be withdrawn state and federal tax-free if used for qualified medical expenses—currently or in retirement.

Read Viewpoints on Fidelity.com: 3 healthy habits for health savings accounts

2. Expect to live longer

As medical advances continue, it's quite likely that today's healthy 65-year-olds will live well into their 80s or even 90s. This means there's a real possibility that you may need 30 or more years of retirement income. And recent data suggests that longevity expectations may continue to increase. People are living longer because they're healthy, active, and taking better care of themselves.

Without some thoughtful planning, you could outlive your savings and have to rely solely on Social Security for income. And with the average Social Security benefit for a retired worker currently at just over $1,419 a month, it may not cover all your needs.6

Read Viewpoints on Fidelity.com: Longevity and retirement and How to get the most from Social Security

Consider annuities: To cover your income needs, particularly your essential expenses  (such as food, housing, and insurance) that aren't covered by other guaranteed income like Social Security or a pension, you may want to use some of your retirement savings to purchase an income annuity. It will help you create a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.7

Read Viewpoints on Fidelity.com: Smart retirement income strategies

3. Be prepared for inflation

Inflation can eat away at the purchasing power of your money over time. Inflation affects your retirement income by increasing the future costs of goods and services, thereby reducing the future purchasing power of your income. Even a relatively low inflation rate can have a significant impact on a retiree's purchasing power.

Consider cost of living increases: Social Security and certain pensions and annuities help keep up with inflation through annual cost-of-living adjustments or market-related performance. Choosing investments that have the potential to help keep pace with inflation, such as growth-oriented investments (e.g., stocks or stock mutual funds), Treasury inflation-protected securities (TIPS), real estate securities, and commodities, may also make sense to include as a part of an age-appropriate, diversified portfolio that also reflects your risk tolerance and financial circumstances.

The cost of inflation

Even a low inflation rate can reduce the purchasing power of your money.

For illustrative purposes only. Estimated future cost of $50,000 worth of goods or services over 25 years at inflation rates of 2%, 3%, and 4%.

4. Position investments for growth

Overly conservative investments can be just as dangerous as overly aggressive ones. They expose your portfolio to the erosive effects of inflation, limit the long-term upside potential that diversified stock investments can offer, and can diminish how long your money may last. On the other hand, being too aggressive can mean undue risk of losing money in down or volatile markets.

An investment strategy (asset mix) that seeks to balance growth potential and risk (return volatility) may be the answer. You should determine—and consistently maintain—an asset mix that reflects your investment horizon, risk tolerance, and financial situation.

The sample target investment mixes below show illustrative blends of stocks, bonds, and short-term investments with different levels of risk and growth potential. With retirement likely to span 30 years or so, you'll want to find a balance between risk and growth potential.

Find an investment mix with the right amount of growth potential and risk for you

Data source: Morningstar Inc., 2019 (1926-2018). Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or implied performance of any investment option.

The purpose of the target asset mixes is to show how target asset mixes may be created with different risk and return characteristics to help meet a participant's goals. You should choose your own investments based on your particular objectives and situation. Remember, you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your goals.

Consider diversification: Build a diversified mix of stocks, bonds, and short-term investments, according to how comfortable you are with market volatility, your overall financial situation, and how long you are investing for. Doing so may provide you with the potential for the growth you need without taking on more risk than you are comfortable with. But remember: Diversification and asset allocation do not ensure a profit or guarantee against loss. Get help creating an appropriate investment strategy by working with a Fidelity advisor or utilizing our Planning & Guidance Center.

5. Don't withdraw too much from savings

Spending your savings too rapidly can also put your retirement income at risk. For this reason, we believe that retirees should consider using conservative withdrawal rates, particularly for any money needed for essential expenses.

We did the math—looking at history and simulating many potential outcomes—and landed on this guideline: To be confident that savings will last for 20–30 years retirement, consider withdrawing no more than 4%–5% from savings in the first year of retirement, then adjust that percentage for inflation in subsequent years.

Consider a sustainable withdrawal plan: Work with a Fidelity advisor to develop and maintain a retirement income plan or consider an annuity with guaranteed lifetime income7 as part of your diversified plan, so you won't run out of money, regardless of market moves.

Read Viewpoints on Fidelity.com: How can I make my retirement savings last?

You can do it

After devoting many years to saving and investing for your retirement, switching from saving to spending that money can be stressful. But it doesn't have to be that way if you take steps leading up to and during retirement to manage these 5 key rules of thumb for your retirement income.

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How to grow old in your own home https://www.fidelity.com/viewpoints/retirement/aging-in-place 217128 01/16/2018 Know these 6 success factors to help you age in place. How to grow old in your own home

How to grow old in your own home

Know these 6 success factors to help you age in place.

Fidelity Viewpoints

Key takeaways

  • Develop a housing strategy that will serve your needs as you age. Staying in your home with modifications can be less expensive than moving to an assisted-living community.
  • Run a complete safety check, looking for potential hazards, including area rugs that may cause you to trip, loose stair railings, or furniture that obstructs pathways.
  • Avoid isolation. Find ways to stay in contact with friends, family, and neighbors on a daily basis—both via technology and in person.

When Marguerite Sullivan's spouse passed away, the 78-year-old had no interest in moving. She’s healthy, has many friends, and her 2 sons live nearby. Plus, she’s a confident driver and gets herself to doctor’s appointments and the grocery store.

Those are all important prerequisites for people who want to stay in their homes as they grow older, or "age in place."

According to an AARP survey , nearly 90% of those over age 65 want to stay in their homes as long as possible. But Sullivan and others like her "need to have a housing plan—and a support system—in place to ensure that they’re living safely and independently," explains Suzanne Schmitt, vice president for family engagement at Fidelity.

Here are 6 things that aging singles or couples—and their children, other family members, or caregivers—should keep in mind when assessing the living situation. For more detail, read our "Aging well: A planning, conversation, and resource guide."

1. Develop a real estate and housing strategy

As you plan for living in your later years in retirement, you should have a strategy for how to leverage any real estate assets along with a plan to support your need for future housing.

Real estate is an asset often used to fund retirement and to help pay for long-term health care expenses. Some people find it necessary to sell the family home to pay for higher levels of care or senior living accommodations. Some decide to sell after a spouse dies. Others may have a family member who moves back in to help take care of both the aging parent and the property. Whatever your situation, it makes sense to work with a financial advisor to help determine the role of real estate in your overall financial planning (see Senior Housing Options chart below).

"As people age, housing and caregiving go hand in hand. If your loved one will require higher levels or care, you’ll need a housing strategy that can serve their needs," says Schmitt. "Keep in mind that what works today in terms of independent living, living with relatives, assisted living, or skilled nursing care may not work for you or your loved one indefinitely."

2. Explore the benefits of staying put

There are many reasons why aging in place can be a win. For starters, staying in your home can be less expensive than moving to an assisted-living community. There are the upfront costs of moving, an often steep entrance fee, and monthly payments for room and board, which can easily top $3,000 a month.

Even more important are the psychological payoffs of not moving away from one’s friends, medical professionals, and faith community. Though these factors are hard to place a financial value on, they are a vital component of healthy aging.

"The single most predictive factor of whether you’re going to age well—meaning be able to be independent and live a long and healthy life—isn't money," says Schmitt. "And it isn’t even necessarily your health. It’s your social connections, which may get lost if you move."

3. Do a home safety check

The first step in an "aging in place" plan is to run a complete safety check of your home. "Many people don’t know what to look for," says Schmitt. "There are some hazards that you might take for granted—for example, furniture obstructing pathways or stairs."

Sullivan’s children did just that. They walked around her house with an eye for any potential hazards that might cause trouble should her vision or mobility begin to deteriorate. Then they hired a home modification professional to help make needed changes.

The good news is that many of the improvements that may make it easier to stay in your house—such as raising electrical outlets to make them more accessible, and installing brighter outdoor lighting—aren’t expensive.

Sullivan’s home was retrofitted by installing secure handrails alongside the stairs to the front door, switching doorknobs to levers, adding automatic lights to hallways, removing rugs that might become tripping hazards, and placing grab bars in the shower.

"There are plenty of easy and relatively low cost options to modify a home," says Schmitt. "The sooner you start preparing, the better."

4. Assess transportation

"Driving may be your lifeline and independence," Schmitt points out. "Coming to the ‘I don't think I can drive’ moment is tough, but it can’t be avoided." If you are at the point that you can no longer drive or walk to the grocery store or reach other important services, consider other transportation options.

If you have access to public transit, great. But it doesn't exist in a lot of places. Meanwhile, the driverless car may still be a few years away. So you may need to make other arrangements, such as ride sharing with friends and neighbors, or transportation assistance that many companion-care services offer. When it comes to groceries and getting things like prescriptions filled, automatic delivery or online delivery can be a great option. A family or friend can help manage orders and accounts and can track order history to help make sure you are getting what you need.

Senior Housing Options

When assessing the option that's right for you, consider the following:

  1. Health: How is your overall health?
  2. Activity level: How active and independent are you?
  3. Life stage and style: What kinds of access and activities are important to you?

Housing option Description
Age 50+ communities
$
Also known as active adult communities, retirement communities, and livable communities, 50+ options typically offer physical spaces, services, and amenities geared toward older adults who do not need nursing or medical care. Because floor plans are designed with older adults in mind, occupants may be better able to age in place. And many offer access to shared or public transportation as well as group activities that help residents get and remain engaged.
Continuing care retirement community (CCRC)
$$
CCRCs offer a range of living and caregiving options that keep pace with residents’ changing needs. Because they typically offer a full range of services from periodic personal care to full-time skilled nursing, the CCRC can be a good option for couples with different levels of need or in instances where one is caring for the other.
Assisted living facility (ALF)
$$
ALFs typically offer help performing one or more activities of daily living—bathing, dressing, transferring, toileting, eating, and medication management—to residents who are still able to perform some of these tasks on their own. Because most don’t offer 24-hour skilled nursing care, some residents may need to transfer to a skilled nursing facility if they require more care.
Skilled nursing facility (SNF)
$$$
Also known as nursing homes, SNFs are medical facilities that provide 24-hour care and supervision. An SNF may become necessary if your loved one requires round-the-clock oversight, medical care, and supervision.
Memory care
$$$$
Memory care refers to a relatively new type of secure unit—typically on a separate floor or in a separate wing—of continuing care retirement communities, assisted living, or skilled nursing facilities. Residents typically have a diagnosis such as Alzheimer’s disease that necessitates care by professionals specially trained to work with the memory impaired. The physical spaces are also structured in ways that uniquely support residents living with memory loss.

For illustrative purposes only.

5. Ensure a supportive community or network

Isolation can be a stumbling block to aging well. And it can creep up slowly. No matter how safe the inside of a home is, if there isn’t enough interaction with a community, a plan can fall apart.

"Part of aging in place successfully is being able to stay connected, and not fall into the depression that many people experience because they are isolated," says Schmitt.

Getting comfortable on a computer so you connect online with your children, grandkids, and others is a good strategy. You might also investigate some of the companionship services available in the community, through websites such as Caregiving.org or tap into local Council on Aging resources.

Pull together a list of friends and relatives who can take you to a doctor’s appointment, or someone to help with errands. If your family doesn’t live nearby, you may want to have a pipeline to neighbors you can call for periodic checkups, especially if you live in an area of the country that experiences power outages and severe weather.

A growing number of communities use the "village" concept for services and support to seniors. The idea, originating in the Beacon Hill neighborhood of Boston, is to create a nonprofit organization that arranges for services—including transportation, home repair, and social activities—for a fee.

6. Make it an ongoing process

"One of the living in retirement myths is that people think they can make a plan once, and they’re done," says Schmitt. "This is something that needs to be reviewed regularly by you and your family member or caregiver."

What if you experience a health event, such as a bout of pneumonia that requires a lengthy hospital stay, or a fall that affects your cognitive ability or mobility? These are going to be very important points when you have to take a look at whether the plan you put in place is still going to work going forward.

Are you a concerned friend or family member? If so, check the home of your loved one after it is retrofitted and keep an eye open to see how your loved one is adapting to the changes. You may want to look out for any unexplained bruising on the aging person’s arms or legs. "It can be an indicator that they may be having trouble moving around," Schmitt notes. Also, look around the home when you visit. Is there a pile of mail? Are things in disarray? Check the refrigerator. Is it bare? Is food spoiling?

"In an ideal world, we will age gracefully in place, but that doesn't happen very often without careful preparation," says Schmitt. "Take the time to sit down and get the aging-in-place conversation going."

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50 or older? 4 ways to catch up your savings https://www.fidelity.com/viewpoints/retirement/catch-up-contributions 276675 03/26/2019 Learn ways to save more in tax-advantaged retirement accounts. 50 or older? 4 ways to catch up your savings

50 or older? 4 ways to catch up your savings

Learn ways to save more in tax-advantaged retirement accounts.

Fidelity Viewpoints

Key takeaways

  • If you're over age 50, taking full advantage of catch-up provisions in tax-advantaged savings accounts can help boost your income in retirement.
  • Traditional and Roth IRAs and 401k(s) offer catch-up contributions for those age 50 and over.
  • Even if you're on track with your retirement savings, tax-advantaged accounts can help you build more assets.

2020 catch-up opportunities

  • Traditional and Roth IRAs: $1,000
  • 401(k), Roth 401(k) or similar plan: $6,500
  • SIMPLE IRA: $3,000
  • Health savings account (HSA): $1,000

The notion that turning age 50 means starting to slow down is likely a young person's opinion. People who have hit "the big five-oh" know better. The prospect of retiring is getting closer, and there's a lot of living ahead. So it's important to ensure you have the money to live the life you've planned.

Fortunately, the federal government recognizes that people approaching retirement age often need to pick up the pace to ensure they have saved enough for retirement. The tax code provides "catch-up" savings opportunities so that people age 50 and older can increase their tax-advantaged contributions to IRAs, 401(k)s, and HSAs (starting at age 55).

Taking advantage of catch-up contributions can deliver a significant boost to your retirement saving. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $48,000 more in your account than someone who didn't take advantage of the catch-up.1 And the impact can be even greater for a 401(k) or similar plan, where the catch-up contribution opportunity is larger.

Ready to start catching up with your retirement savings? Here's how:

1. Know if your retirement saving is on track

More than half of US households are at risk of not covering essential expenses in retirement, according to a recent Fidelity study of Americans' retirement preparedness.2 Some 41% of respondents have considered postponing retirement to make sure they can afford health care in retirement.

Are you on track? The first step is to find out how your savings—and savings rate—stack up. To get an indication of how prepared you really are, get your Fidelity Retirement ScoreSM. It takes about 60 seconds to answer 6 simple questions.

Whatever your score or your age, you can take some simple steps to stay on track or improve your retirement readiness. Fidelity Retirement ScoreSM can show you how adjustments to monthly savings, investment style, and other factors could impact your preparedness.

Tip: Want a more in-depth analysis of your retirement readiness? Visit Fidelity's Planning & Guidance Center.

2. Make the most of catch-up provisions

Once you reach age 50, catch-up provisions in the tax code allow you to increase your tax-advantaged savings in several types of retirement accounts.

  • For a traditional or Roth IRA, the annual catch-up amount is $1,000, which boosts your total contribution potential to $7,000 in 2019.
  • If you participate in a 401(k), Roth 401(k), 403(b), or similar workplace retirement savings plan, the catch-up opportunity is even greater: up to $6,000 a year. That means you can contribute up to $25,000 in 2019.
  • Participants in a SIMPLE IRA or 401(k), designed for self-employed individuals and small businesses, can take advantage of a $3,000 catch-up contribution, bringing their total contribution potential to $16,000 for 2019.

3. Harness the power of tax-advantaged accounts

Even if you're on track with your retirement savings, tax-advantaged accounts are attractive long-term investment vehicles and tax-efficient planning tools.

With traditional IRAs or 401(k)s, contributions reduce your taxable income in the current year, as long as you are eligible, though withdrawals are taxable.4 These traditional accounts also offer tax-deferred compounding. With Roth IRAs, you pay taxes up front but withdrawals are tax-free when you reach age 59½, assuming certain conditions are met.4 Roth IRAs offer the potential for tax-free compounding. That means you'll have more tax-free money available to work for you than in a fully taxable account.

Tip: Compare IRA options—traditional or Roth—to see which might be right for you.

If your employer offers a high-deductible health care plan (HDHP) with an HSA, you may want to consider electing the HDHP and opening an HSA. HSAs have a unique triple tax advantage5 that can make them a powerful savings vehicle for qualified medical expenses in current and future years: Contributions, earnings, and withdrawals are tax-free for federal tax purposes.

To make the most of your HSA (if you have access to one and you can afford it), you may want to consider paying for current-year qualified medical expenses out of pocket, and letting your HSA contributions remain invested in your HSA. That way, the money has the potential to grow tax-free and be used to pay for future qualified medical expenses, including those in retirement.

For more on HSAs, read Viewpoints on Fidelity.com: 5 ways HSAs can fortify your retirement

Tip: Learn more about HSAs and consider opening a Fidelity HSA. Since HSAs are portable, you can transfer account balances in HSAs from any of your previous employers to a Fidelity HSA.3

4. Invest for the future

While regular contributions to tax-advantaged retirement accounts may help keep you on track to reach your retirement savings goal, your investment mix (asset allocation) is an important factor too. Consider whether investing a significant portion of your savings in a mix of US and international stocks and stock mutual funds may help you reach your long-term savings goals, since stocks have historically outperformed bonds and cash over the long term. You may want to think about gradually reducing the percentage of investments that you allocate to stocks as you get older.

Whatever your projected retirement date, your goal should be to have a portfolio with exposure to various types of investments that can provide the opportunity for growth and the potential to outpace inflation, along with investments that offer some degree of risk-reducing diversification. Of course, stocks come with more ups and downs than bonds or cash, so you need to be comfortable with those risks. You should always make sure that your investment mix reflects your time horizon, tolerance for risk, and financial situation.

Read Viewpoints on Fidelity.com: 3 reasons to invest in stocks

Goal: Enjoy retirement

As you plan for the day you retire, taking full advantage of tax-advantaged savings accounts, including catch-up provisions, may help you arrive in a significantly stronger position to enjoy the retirement lifestyle you envision.

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Your bridge to Medicare https://www.fidelity.com/viewpoints/retirement/transition-to-medicare 260785 05/31/2019 Explore 4 health care coverage options as you transition to Medicare at age 65. Your bridge to Medicare

Your bridge to Medicare

Explore 4 health care coverage options as you transition to Medicare at age 65.

Fidelity Viewpoints

Key takeaways

  • You might retire a few years earlier than anticipated: Explore your health care options before you become eligible for Medicare at age 65.
  • Health care options between retirement and Medicare coverage include COBRA, private insurance, the public marketplace, and a spouse's plan.
  • Once you've bridged the gap to Medicare coverage, you need to understand Medicare basics: eligibility, enrollment, and penalties.

Although you may have done a good job of planning your retirement, approaching age 65 is still full of complexities—including how your health care coverage will change and how you will pay for it.

According to Fidelity's Decision to Retire research, conducted with the Stanford Center on Longevity,1 people retire an average of 4 years sooner than they had planned. For many who do have gap years between when they actually retired and when they had planned to retire, it can be a mad scramble to find affordable, quality health care coverage until they are eligible for Medicare at age 65.

Even after Medicare eligibility kicks in, there are still additional costs to cover. Health care is one of the biggest expenses for retirees. Fidelity's 2019 Retiree Health Care Cost Estimate2 pegs the total out-of-pocket cost of health care in retirement at $285,000 for a couple both aged 65. This is up from $280,000 in the 2018 study.

4 key health care options between early retirement and Medicare

"With more and more employers dropping their pre-65 retiree medical plans,3 the questions of where and how to get the right coverage did not disappear with the Affordable Care Act, and may still create indecision and uncertainty in someone who is otherwise ready to retire," says Greg Gagliano, vice president of health solutions at Fidelity.

If you are retiring before you're 65 and don't have access to retiree health care coverage from your employer, there are 4 main ways to obtain health care coverage to bridge the period between retirement and Medicare:

  1. COBRA coverage. The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to continue your current health care coverage for a certain amount of time, but you may be required to pay the full cost of your health coverage plus an additional 2% charge. While you are working, your employer will typically cover a significant portion of the cost of your coverage, reducing the cost for active employees, but that is rarely the case for those who continue coverage through COBRA.
  2. Spouse's plan. If your spouse or partner is employed and has health coverage, you may be able to get covered on their employer's plan—and this may be your best and most cost-effective option. If your spouse or partner is already retired and has retiree medical coverage, you may be able to be added to that coverage as well.
  3. Public marketplace. The marketplace was established by the Affordable Care Act and provides plan options available to anyone who is not yet eligible for Medicare. You can no longer be denied coverage for any reason, including a pre-existing condition. This was often a significant issue for those contemplating early retirement because affordable health insurance coverage was hard to find and obtain, particularly for those with pre-existing medical conditions. Costs for these plans can vary widely, but some people qualify for government-provided subsidies through premium tax credits that can make the coverage more affordable.
  4. Private insurance. To obtain coverage, you can also look to your local health insurance agent, trade or professional associations, and other so-called "private exchanges" that offer plans from multiple carriers. You may have more plan options available to you through these outlets than the public marketplace, but note that government-funded premium tax credits cannot be applied to these plans.
See which health care options are right for you

"The public marketplace is usually a good outlet for pre-65 retirees who do not have access to an employer-sponsored retiree medical plan, but these exchanges are still very new and many insurance companies have withdrawn from the market," says Gagliano. "The good news is that there are other outlets available to you, such as private exchanges, which can offer coverage regardless of your health status."

Use our widget at the right to answer a few questions and find out what choices may be available to you until you can enroll in Medicare.

Getting ready for Medicare

Once you've figured out how to bridge the gap to Medicare, you'll need to explore Medicare itself as you approach 65, the age when most people become eligible. There's a lot to learn. If you're like most people, you may be confused about how and when to transition from your interim coverage to Medicare—and when you need to do it. And remember, Medicare coverage is provided to each eligible individual who enrolls—you cannot cover your spouse under your Medicare coverage; they will have to enroll on their own when eligible. Here are answers to 6 common questions:

  1. I'm eligible to claim my Social Security benefit as early as age 62. Will Medicare kick in at the same time?
    The answer is generally no. For most of us, the age to qualify for Medicare is 65, with a few exceptions: People with certain disabilities, end-stage renal disease (ESRD), or amyotrophic lateral sclerosis (ALS) may qualify at a younger age.
  2. Will Medicare contact me directly prior to my becoming eligible?
    If you are already receiving Social Security benefits or railroad retirement benefits, Medicare will mail you a Medicare enrollment kit a few months before you become eligible. If you are within 3 months of turning age 65, reside in the United States or one of its territories or commonwealths, and don't want to apply for monthly Social Security retirement benefits just yet, but do still want to apply for Medicare benefits, you can enroll in Medicare online.
  3. Are there deadlines for Medicare sign-up?
    Yes. Retirees who are already receiving Social Security benefits are automatically enrolled in Medicare Parts A and B, and coverage generally begins the month they turn 65. But retirees who haven't claimed Social Security will need to take action to sign up for Medicare. You can first sign up for Medicare Part A hospital insurance and Medicare Part B medical insurance during the 7-month initial enrollment period that begins 3 months before the month you turn 65. If you enroll in Part A and/or Part B the month you turn 65 or during the last 3 months of your initial enrollment period, the start date for your Medicare coverage may be delayed.

    Regardless of how you get Parts A and B, you must sign up for Part D if you want prescription drug coverage. (See the section below about Medicare Part D for important information about penalties.) Or, if you prefer, sign up for a Medicare Advantage Plan (Medicare Part C), which replaces parts A, B, and often D. Medicare Advantage Plans, a private-sector alternative to original Medicare, have the same initial enrollment period, as does Part D for prescription drug coverage.

    If you don't enroll in Medicare during the initial enrollment period around your 65th birthday, you can sign up between January 1 and March 31 each year thereafter for coverage that will begin on July 1. However, you could be charged a late-enrollment penalty when your benefit starts. For example, if a penalty applies, monthly Part B premiums increase by 10% for each 12-month period you delay signing up for Medicare after becoming eligible for benefits.
  4. How do I sign up for Medicare if I am still working at age 65?
    If you retire after age 65 and have employer-sponsored health coverage, you will have an 8-month special enrollment period to sign up for Part A and/or Part B, which starts the month after your employment ends or the group health plan insurance based on current employment ends, whichever happens first. Usually, you don't pay a late-enrollment penalty if you sign up during a special enrollment period.
  5. Can I make changes every year?
    Yes. The Medicare open enrollment period runs from October 15 through December 7 annually. This gives you the opportunity to re-evaluate your situation every year and make any changes.
  6. If I retire outside the United States, can I bring my Medicare coverage with me?
    In most cases, no. The US government generally precludes Medicare from paying for medical services for retirees outside the country and its territories. A possible silver lining: You may be able to purchase affordable health insurance in some countries or tap into their private health care systems. But, some insurance companies operating outside of the United States and its territories may limit your participation or acceptance based on your age.

Read Viewpoints on Fidelity.com: 6 key Medicare questions

You may have to pay more

High-income retirees—in 2019, individuals with a modified adjusted gross income (MAGI) over $85,000 or married couples with a combined MAGI of more than $170,000—pay higher monthly premiums for both Medicare Part B and the Medicare Part D prescription drug plans, and in some cases, a lot more.

There are 5 Medicare premium brackets for Parts B and D. In addition to the standard $135.50 monthly premium, surcharges for Part B may apply. The brackets are based on the income from your latest tax return, so your 2018 tax return filed in 2019 will be the basis for your Medicare premiums paid in 2020.

"Pre-65 retirees—particularly affluent ones who are unlikely to qualify for federal premium tax credits—need to know that even under the provisions of the Affordable Care Act, coverage is likely to cost significantly more than when they were active employees or when they become eligible for Medicare," adds Gagliano.

Remember to also sign up for Medicare Part D

Whether you are currently taking prescription medications or not, you need to know the ins and outs of Medicare Part D—the Medicare Prescription Drug Plan. Prescription drug coverage may be included as part of a Medicare Advantage plan. There are lots of options to compare. When you first enroll in Medicare, it's important to plan for your future needs. Take the time to look into Medicare Part D prescription drug coverage.

Keep these 2 additional things in mind when enrolling in Medicare Part D:

  1. If you don't enroll in Medicare prescription drug coverage when first eligible, you may be hit with a late-enrollment penalty, which will apply for the rest of your life. If you waited for more than 63 days since you were first eligible for Part D coverage and did not have "creditable coverage" (such as employer-sponsored coverage with prescription drug coverage that is as good as or better than what is offered under Medicare Part D), you will be subject to permanent financial penalties of an additional 1% per month that you go without coverage. This penalty is added to the premium for the plan you enroll in.

    Tip: Don't delay signing up for Medicare Part D if you don't have other prescription drug coverage. Say you delay enrolling for 20 months from when you no longer have creditable prescription coverage; when you finally sign up, your premium will be 20% higher.
  2. You may have heard of the so-called "donut hole." If you fall into this "coverage gap," you may have to pay more for medications because there is a temporary limit on what the drug plan will cover for prescription drugs. In 2019, once you and your plan have spent $3,820 on covered drugs, you're in the coverage gap. This amount may change each year.

    For generic drugs:
    Medicare will pay 63% of the price for generic drugs during the coverage gap. You'll pay the remaining 37% of the price.

    For brand-name drugs:
    You'll pay no more than 25% of the plan's cost for covered brand-name prescription drugs.

    Tip: You may want to consider scheduling a Medication Therapy Management consultation with your local pharmacist to explore combinations of prescriptions that may help you maintain your health, but at a lower cost. Then go back and discuss the pharmacist's recommendations with your doctor. All Medicare prescription drug plans (Part D) cover this consultation.

There are lots of health care and financial decisions to make as you transition to retirement. In addition to needing a strategy to generate retirement income and claim Social Security, you may need to develop a strategy to help you bridge the gap until you are eligible for Medicare coverage at age 65. Once you are eligible to enroll in Medicare, be sure to get the health care part of the equation right.

The Medicare system is different in many ways from employer-sponsored health coverage, so take time to understand the basics of Medicare. You and your spouse or partner may have different needs and may be better off choosing different Medicare plans. So do your homework, shop around, and compare prices. Remember, as long as you remain enrolled in the Medicare system, you can make changes every year as your situation and health care options and needs change and evolve.

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