Facebook Instant Articles - Fidelity https://www.fidelity.com This is feed for Facebook Instant Articles en-us 2017-12-21T21:45:26Z 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: $6,000
  • 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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No 401(k)? How to save for retirement https://www.fidelity.com/viewpoints/retirement/no-401k 246810 04/29/2019 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 70½ 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 70½—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
The deadline for contributing for 2019 is the tax deadline next year—April 15, 2020. Every tax year, you get about 15½ months to get your contribution into the account. The deadline is generally set in stone—getting an extension on your taxes won't give you any extra time to contribute to a traditional or Roth IRA.

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—so for 2019 it will be April 15, 2020. But, if an extension is granted for filing the employer's tax return, the employer has until the end of the extension period to set up the account or deposit contributions.

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 01/27/2020 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. The deadline for making IRA contributions for the 2019 tax year is April 15, 2020.

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—so for 2019 it will be April 15, 2020 (for a calendar-year filer). 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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6 habits of successful investors https://www.fidelity.com/viewpoints/investing-ideas/six-habits-successful-investors 261006 01/15/2019 Planning, consistency, and sound fundamentals can improve results. 6 habits of successful investors

6 habits of successful investors

Planning, consistency, and sound fundamentals can improve results.

Fidelity Viewpoints

The power of investing to build wealth and achieve long-term goals has been proven time and again. But not everyone takes full advantage. What separates the most successful investors from the rest?

Here are the 6 habits of successful investors that we've witnessed over the years—and how to make them work for you.

Develop a long-term plan—and stick with it

Talk to us

Call 800-343-3548 to get in touch. 

Tall tales about the lucky investor who hit it big with a stock idea may be entertaining. But for most people, investing isn't about getting rich quick, or even making as much money as possible. It’s about reaching their goals—be they owning a home, sending a kid to college, or having the retirement they have long imagined.

Successful investors know that this means developing a plan—and sticking with it. Why does planning matter? Because it works.

A Fidelity analysis of 401(k) participants found that engaging in planning, either with a Fidelity representative or using Fidelity's online tools, helped some people identify opportunities to improve their plans, and take action.1

Roughly 40% of the people who took the time to look at their plan decided to make changes to their saving or investing strategy. The most common change was to increase savings, with an average increase of roughly 2.6% of pay.1 The next most common action was a change in investments (see illustration below).

A plan doesn't have to be fancy or expensive. You can do it alone, or with the help of a financial professional or an online tool like those in Fidelity's Planning & Guidance Center. Either way, by slowing down, focusing on your goals, and making a plan, you are taking the first and most important step.

Be a supersaver

While lots of attention is paid to how much your investments earn, the most important factors that determine your financial future may be how much and how often you save.

Fidelity's Retirement Savings Assessment analyzed financial information for more than 4,500 families and found that, on average, the single most powerful change that millennials and Gen Xers could make to improve their retirement outlooks was saving more. For workers closer to retirement, a combination of delaying retirement and saving more would have made the biggest difference, on average.2

How much should you save for retirement? As a general rule of thumb, Fidelity suggests putting at least 15% of your income each year, which includes any employer match, into a tax-advantaged retirement account, though your individual situation may be different.

"You can't control the markets, but you can control how much you save," says Fidelity vice president and CFP® Ann Dowd. "Saving enough, and saving consistently, are important habits to achieve long-term financial goals."

Stick with your plan, despite volatility

When the value of your investments falls significantly, it's only human to want to run for shelter due to our inherent aversion to suffering losses. And it can certainly feel better to stop putting additional money to work in the market. But the best investors understand their time horizon, financial capacity for losses, and emotional tolerance for market ups and downs, and they maintain an allocation of stocks they can live with in good markets and bad.

Remember the financial crisis of late 2008 and early 2009 when stocks dropped nearly 50%? Selling at the top and buying at the bottom would have been ideal, but, unfortunately, that kind of market timing is nearly impossible. In fact, a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during the downturn far outpaced those who went to the sidelines.3

From June of 2008 through the end of 2017, investors who stayed in the markets saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. That's twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.3 More than 25% of the investors who sold out of stocks during that downturn never got back into the market—missing out on all of the recovery and gains of the following years. The vast majority of 401(k) participants did not make any asset allocation changes during the market downturn, but, for those who did, it was a fateful decision that had a lasting impact.

If you are tempted to move to cash when the stock market plunges, consider a more balanced, less volatile asset mix that you can stick with. Imagine 2 hypothetical investors: An investor who panicked, slashed his equity allocation from 90% to 20% during the bear markets in 2002 and 2008, and subsequently waited until the market recovered before moving his stock allocation back to a target level of 90%; and an investor who stayed the course during the bear markets with a 60%/40% allocation of stocks and bonds.4

As you can see below, the disciplined investor significantly outperformed the more aggressive investor who pulled back his equity exposure radically as the market fell. Assuming a $100,000 starting portfolio 22 years ago, the patient investor with the 60% stock allocation would have had about $540,000 by October 2018, versus $410,000 for the impatient investor. A difference of $130,000.

Stay the course

Returns in the chart reflect hypothetical portfolio outcomes from 1996 to 2018 using market returns. Stocks: S&P 500® Index return. Bonds: Bloomberg Barclays US Aggregate Bond Index return. All return data above based on a starting wealth level of $100,000 with no subsequent contributions or redemptions. Investor Portfolio: stock allocation was reduced from 90% of total assets to 20% of total assets on Sep. 30, 2002 and on Dec. 31, 2008, and then the stock allocation was increased from 20% to 90% of total assets on Mar. 31, 2004, and June 30, 2013, respectively. Sources: Standard & Poor's, Bloomberg Barclays, Fidelity Investments, as of November 2018.

Be diversified

An old adage says that there is no free lunch in investing, meaning that if you want to increase potential returns, you have to accept more potential risk. But diversification is often said to be the exception to the rule—a free lunch that lets you improve the potential trade-off between risk and reward.

Successful investors know that diversification can help control risk—and their own emotions. Consider the performance of 3 hypothetical portfolios in the 5 years after the financial crisis 2008–2009 financial crisis: a 100% stock portfolio; a diversified portfolio of 70% stocks, 25% bonds, and 5% short-term investments; and an all-cash portfolio.

By the end of February 2009, both the all-stock and the diversified portfolios would have declined sharply (50% and 35%, respectively), while the all-cash portfolio would have risen 1.6%. 5 years after the bottom, the all-stock portfolio would have been the clear winner: up 162%, versus 100% for the diversified portfolio and just 0.3% for the cash portfolio. But over a longer period—from January 2008 through February 2014—the all-stock and diversified portfolios would have been neck and neck: up 32% and 30%, respectively.

This is what diversification is about. It will not maximize gains in rising stock markets, but it can capture a substantial portion of the gains over the longer term, with less volatility than just investing in stocks. That smoother ride will likely make it easier for you to stay the course when the market shakes, rattles, and rolls.

A good habit is to diversify among stocks, bonds, and cash, but also within those categories and among investment types. Diversification cannot guarantee gains, or that you won’t experience a loss, but does aim to provide a reasonable trade-off of risk and reward for your personal situation. On the stock front, consider diversifying across regions, sectors, investment styles (value, blend, and growth) and size (small-, mid-, and large-cap stocks). On the bond front, consider diversifying across different credit qualities, maturities, and issuers.

Consider low-fee investment products that offer good value

Savvy investors know they can't control the market—or even the success of the fund managers they choose. What they can control is costs. A study by independent research company Morningstar found that expense ratios are the most reliable predictor of future fund performance—in terms of total return, and future risk-adjusted return ratings. (Read details of the study.) Fidelity research has also shown that picking low-cost funds is one way to improve average historical results of large-cap stock funds relative to comparable index funds.

Fidelity has also found great variation among brokers in terms of commission and execution—by comparing the executed price of a security with the best bid or offer at the time of the trade. The cost of trading affects your returns. Learn more about using price improvement for trading savings.

Focus on generating after-tax returns

While investors may spend a lot of time thinking about what parts of the market to invest in, successful investors know that's not the end of the story. They focus not just on what they make, but also on what they keep after taxes. That's why it is important to consider the investment account type and the tax characteristics of the investments that you have.

Accounts that offer tax benefits, like 401(k)s, IRAs, and certain annuities, can change to have the potential to help generate higher after-tax returns. This is what is known as "account location"—how much of your money to put into different types of accounts, based on each account’s respective tax treatment. Then consider "asset location"—which type of investments you keep in each account, based on the tax efficiency of the investment and the tax treatment of the account type.

Consider putting the least tax-efficient investments (for example, taxable bonds whose interest payments are taxed at relatively high ordinary income tax rates) in tax-deferred accounts like 401(k)s and IRAs. Put more tax-efficient investments (low-turnover funds, like index funds or ETFs, and municipal bonds, where interest is typically free from federal income tax) in taxable accounts.

Read Viewpoints on Fidelity.com: Why asset location matters

Consider the example in the chart. A hypothetical $250,000 portfolio is invested and returns 6% annually for 20 years. The different tax treatments of a brokerage, annuity, and tax-deferred IRA, along with fees for those accounts, could create a significant difference in the final value of the investment.

Location has the potential to improve performance

This hypothetical example is not intended to predict or project investment results. Your actual results may be higher or lower than those shown here. See footnote 5 for details.

The bottom line

There is a lot of complexity in the financial world, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and beware of taxes, you will have adopted some of the key traits that may lead to investing success.

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5 important rollover questions https://www.fidelity.com/viewpoints/retirement/rollover-questions 258430 01/07/2019 Consider cost, investments, services, and convenience. 5 important rollover questions

5 important rollover questions

Consider cost, investments, services, and convenience.

Fidelity Viewpoints

Key takeaways

  • When you leave a job, having a plan for your 401(k) can help ensure that your retirement savings continue to work hard for your future.
  • As you think about your options, these considerations may be top of mind: investment choice, fees and expenses, services, convenience, and when you'll need the money.

Your retirement savings are important. After all, the money you've saved will likely provide a large part of your income in the future. Managing your savings well will mean more choices for you after you stop working.

Take your time to make good decisions for an old 401(k). Before you make any moves, take stock of your options and choose the best one for you.

  • Leave the money in your previous employer's plan
  • Roll your savings to your new employer's plan (if permitted)
  • Roll your savings to an IRA
  • Cash out your savings and close your account

Most people who are still working should eliminate cashing out as a choice: Consider it only if you desperately need money to pay immediate, essential expenses. The reason? Taxes and penalties make cashing out enormously expensive. You'll owe income taxes on withdrawals from pre-tax funds, and typically you must pay an additional 10% penalty if you are under age 59½.

Even if you are already over that age and in retirement, there are still good reasons to keep your retirement savings in a tax-advantaged account—namely the benefit of deferring tax payments and keeping your money invested for your future.

Here are important things to consider as you decide which option may be right for you:

1. What are my investment choices?

Not all retirement accounts provide the same investment options. Some 401(k)s and 403(b)s offer a menu of investments, chosen by the plan's administrator—typically, mutual funds. Some include lower-cost, custom funds not available outside the employer-sponsored plan, and company stock. Plus, some employer-sponsored plans offer a self-directed brokerage option that allows access to brokerage investment options through the plan. Brokerage IRAs typically provide access to a wide variety of mutual funds, exchange-traded funds, stocks, bonds, and other investments. Whatever you decide, make sure that you choose an account option that meets your investment needs.

2. How much are fees and expenses?

Every retirement account—an employer-sponsored plan like a 401(k) or 403(b), or an IRA—has costs, such as administrative fees for maintaining the account, management expenses charged by each investment, and transaction costs associated with trades and other account activity.

After you leave your job, some 401(k) or 403(b) plans may also charge annual or quarterly account recordkeeping fees. On the other hand, large employers might offer institutional-class shares that are less expensive than shares of the same mutual fund in an IRA.

On the IRA side, some providers offer an account with no maintenance fee or annual cost. But there are costs associated with investing in an IRA. You could choose low-cost ETFs, but still be charged a fee for buying and selling them. There may also be costs associated with the purchase of mutual funds. If you're interested in trading stocks, there are costs associated with that as well.

Growth of $50,000 in a retirement account after 30 years

This hypothetical example assumes a real return of 4.5% annually. The ending values do not reflect taxes or fees; if they did, amounts would be lower. Earnings are subject to taxes when withdrawn. This example is for illustrative purposes only and does not represent the performance of any security. Individuals may earn more or less than this example. Investing on a regular basis does not ensure a profit or guarantee against a loss in a declining market.

Be sure to examine the total costs associated with each option carefully—even a small difference in fees can have a big impact.

3. What services do I care about?

Many employer-sponsored plans and IRA providers offer online tools that provide education and advice to help you plan and manage your investments. Managed account solutions that provide investment advisory services to help you invest more effectively have also become more common across many employer-sponsored plans and IRA offerings. Other examples of services you may want to consider when deciding what to do with an old 401(k) are check-writing and wire transfers.

4. When do I expect to need the money?

Workplace retirement plans and IRAs may have different rules for withdrawals. For example, sometimes a 401(k) or 403(b) won't be subject to required minimum distributions (RMDs) while you're still working.

  • If you plan to continue working after age 70½, you might consider a rollover to your new employer's plan.
  • If you're age 55 or older when you leave your job, and you don't plan to go back to work, you might consider leaving the money in your old 401(k), which may allow you to take penalty-free distributions, even if you haven't reached 59½ yet. (Taxes will still apply.) You should contact your plan administrator for rules governing your plan.

5. Is convenience important?

Having your retirement savings in one place could make it easier to track and manage your investments, evaluate fees, and manage distributions in retirement—particularly if you have more than one old workplace retirement account. If you prefer to manage all your finances in one place, you might consider consolidating your savings in a new employer's retirement plan or an IRA.

It's your choice

Everyone has different needs and circumstances. Regardless of your unique situation, make sure to consider costs, investment choices, service, convenience, and other factors, to help determine what may be right for you. Be sure to consider all available options and the applicable fees before moving your retirement assets. And, as always, consult a tax advisor for help with this important decision.

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50/15/5: a saving and spending rule of thumb https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving 164352 03/27/2019 It isn’t about managing every penny. Track your money using 3 categories. 50/15/5: a saving and spending rule of thumb

50/15/5: a saving and spending rule of thumb

It isn’t about managing every penny. Track your money using 3 categories.

Fidelity Viewpoints

Key takeaways

  • Consider allocating no more than 50% of take-home pay to essential expenses.
  • Try to save 15% of pretax income (including employer contributions) for retirement.
  • Save for the unexpected by keeping 5% of take-home pay in short-term savings for unplanned expenses.

Budget. Does anyone like that word? How about this instead—the 50/15/5 rule? It’s our simple rule of thumb for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings. (Your situation may be different, but you can use our rule of thumb as a starting point.)

Why 50/15/5? We analyzed hundreds of scenarios in order to create a saving and spending guideline that can help people save enough to retire. Our research found that by sticking to this guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement. To see where you stand on our 50/15/5 rule, use our Savings and spending check-up.

Essential expenses: 50%

Some expenses simply aren’t optional—you need to eat and you need a place to live. Consider allocating no more than 50% of take-home pay to “must-have” expenses, such as:

  • Housing—mortgage, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees
  • Food—groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
  • Health care—health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
  • Transportation—car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
  • Child care—day care, tuition, and fees
  • Debt payments and other obligations—credit card payments, student loan payments, child support, alimony, and life insurance

Keep it below 50%: Just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up, such as turning the heat down a few degrees in the winter (and turning your AC up a few degrees in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work. Also consider driving a more affordable car, carpooling, or taking public transportation. Consider a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break. If you need to significantly reduce your living expenses, consider a less expensive home or apartment. There are many other ways you can save. Take a look at which essential expenses are most important, and which ones you may be able to cut back on.

Retirement savings: 15%

Savings and spending checkup It’s important to save for your future—no matter how young or old you are. Why? Pension plans are rare. Social Security probably won’t provide all the money a person needs to live the life they want in retirement. In fact, we estimate that about 45% of retirement income will need to come from savings. That’s why we suggest people consider saving 15% of pretax household income for retirement. That includes their contributions and any matching or profit sharing contributions from an employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged retirement savings accounts such as a 401(k)s, 403(b)s, or IRAs.

How to get to 15%: If contributing that amount right now is not possible, check to see if your employer has a program that automatically increases contributions annually until a goal is met. Another strategy is to start by contributing at least enough to meet an employer match, and then if you get a raise or annual bonus, add all or part of these funds to your workplace savings plan or individual retirement account until you have reached the annual contribution limit.

Short-term savings: 5%

Everyone can benefit from having an emergency fund. An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. A good rule of thumb is to have enough put aside in savings to cover 3 to 6 months of essential expenses. Think of emergency fund contributions as a regular bill every month, until there is enough built up.

While emergency funds are meant for more significant events, like job loss, we also suggest saving a percentage of your pay to cover smaller unplanned expenses. Who hasn't been invited to a wedding—or several? Cracked the screen on a smartphone? Gotten a flat tire? In addition to those there are certain category of expenses which are often overlooked, for example; maintenance and repairs of cars, field trips for kids, copay for doctor's visit, Christmas gifts, Halloween costumes to name a few. Setting aside 5% of monthly take-home pay can help with these "one-off" expenses. It's good practice to have some money set aside for the random expenses, this way you won't be tempted to tap into your emergency fund or tempted to pay for one of these things by adding to an existing credit card balance. Over time, these balances can be hard to pay off. However, if you pay the entire credit card balance every month, and get points or cash back for purchases, using a credit card for one-off expenses may make sense.

How to get to 5%: Having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings can help a person reach this goal.

What next?

Our guidelines are intended to serve as a starting point. It is important to evaluate your situation and adjust these guidelines as necessary. If you’re close to the 50/15/5 target spending and saving amounts, good job. And for those staying within the guidelines, any remaining income is theirs to save or spend as they would like. Some ideas: First, pay down high-interest debt. For other goals, like paying for a child’s college or wedding, you could use the remaining income to save for them. And, finally, for those who want to retire early, or haven’t been saving diligently, putting it toward retirement savings may make sense.

The good news is that it isn’t about micromanaging every penny. Analyzing current spending and saving based on our 3 categories can give you control—and confidence. Most everyone's financial situation will change over time. A new job, marriage, children, and other life events may change cash flow. It’s a good idea to revisit spending and saving regularly, particularly after any major life events.

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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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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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4 reasons to contribute to an IRA https://www.fidelity.com/viewpoints/retirement/why-contribute-to-ira-now 249921 02/12/2019 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. The deadline for a 2018 traditional or Roth IRA contribution is the same as the 2018 tax-filing deadline—April 15, 2019. Residents of Massachusetts and Maine have until April 17, 2019 because of local holidays. Time is running out to contribute for the 2018 tax year.

Why an IRA? An IRA is one of several tax-advantaged options for saving. If you have a retirement plan at work, an IRA could offer another tax-advantaged place to save.

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 $5,500 per year to a traditional or Roth IRA, or $6,500 if they have reached age 50, for 2018 (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. For 2019 the limits increase to $6,000 and $7,000 for those age 50 and over.

Consider this: If you're age 35 and invest $5,500, the maximum annual contribution in 2018, that 1 contribution could grow to $82,360 after 40 years. If you’re age 50 or older, you can contribute $6,500, which could grow to about $17,900 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 $5,500 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 $5,500 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 doing one big one.

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—up to the annual contribution limit. But the deductibility of that contribution is based on income limits. 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 70½, required minimum withdrawals become mandatory, and these are taxable (except for the part—if any—of those distributions that consist of non deductible contributions).

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.3 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.4

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 IRA accounts is still $5,500 (or $6,500 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 make sure

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. 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 contributes 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.3

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.5

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 parent over to them.

Make a contribution

Your situation dictates your choices. But one thing applies to all: 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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Tips for same-sex adoptions https://www.fidelity.com/viewpoints/personal-finance/same-sex-adoption-considerations 382944 06/10/2019 Consider these 8 important steps and lessons from one family’s adoption. Tips for same-sex adoptions

Tips for same-sex adoptions

Consider these 8 important steps and lessons from one family’s adoption.

Fidelity Viewpoints

Key takeaways

  • Get your financial and personal records in order, as your net worth and tax returns may need to be reviewed.
  • Consult a family law attorney to help navigate the path to adoption.
  • Keep your retirement savings strategy on track as you prepare financially for the adoption.

When the phone call came in mid-January, Christopher Wilson-Byrne, 33, and his spouse, Norman Flynn, 43, were overjoyed and, admittedly, a little stunned.

The caller was from the adoption agency they had been working with for the past 5 months. She excitedly told the couple the time had come to fly to Kentucky to meet their new baby, Katie, and bring her home.

What was surprising is that the couple’s application to be considered as adoptive parents had been green-lighted only 5 days earlier. “It was surreal,” says Wilson-Byrne.” We thought we probably had a year or more to go before there would be a match and a birth parent would pick us.”

In truth, the couple, who refer to themselves as the Flynn family and live in Wellesley, Massachusetts, had their hearts set on becoming parents for some time and had been planning for it. When they married 3 years ago, they both agreed that they wanted to have children, either through adoption or surrogacy. For Wilson-Byrne, a vice president at Fidelity Investments, being a parent one day had been on his radar for years. “I had a great childhood growing up with 3 siblings and always assumed I would have kids. But when you’re gay, you realize your family formation will not be the way other families get formed,” he says.

Like the Flynns, LGBTQ+ couples are more likely than heterosexual couples to use adoption or surrogacy as a method for family formation. The percentage of same-sex parents with adopted children has risen sharply in the past decade,1 according to research from the Williams Institute at the University of California, Los Angeles. The think tank is dedicated to conducting independent research on sexual orientation and gender identity law and public policy.

Today, same-sex couples are about 4 times more likely to raise adopted children than heterosexual couples, the Institute’s research has found. Moreover, as of 2016, same-sex adoption is legal in all 50 states and the District of Columbia, so the process is far easier than it was before gay marriage was legalized in all states.

“Now that gay couples are allowed to marry, they are treated like any other married couple who’s adopting,” says Michele Zavos, managing partner and founder of Zavos Juncker Law Group in Silver Spring, Maryland, a firm that specializes in family law for the LGBTQ+ community. “If they’re married, there is really no difference in the adoption process for same-sex and opposite-sex couples.”

If you’re contemplating adoption or surrogacy, here are 8 important steps to consider.

1. Make a future adoption an integral part of your financial plan

“I knew if I wanted to adopt children one day, it was going to be a large out-of-pocket expense,” Wilson-Byrne says. “I realized that I would need to have enough money saved up to be able to pay for it when the time came. I had been saving for years for the possibility.”

According to the Child Welfare Information Gateway, an adoption can cost in excess of $40,000, depending on the type of adoption pursued. Possible adoptions include adoptions through foster care systems, surrogacy arrangements, private agency adoptions, independent direct placement adoptions, and international adoptions.

With lesbian couples, frequently, one partner gives birth to a child born by using one partner’s egg and donor sperm. Donor insemination costs can range anywhere from $300 to $4,000, depending on whether anonymous donor sperm is used. Gay men can do essentially the same thing by using a surrogate to carry a child born from one partner's sperm and a donor egg. Surrogacy rates can easily top $100,000, says Zavos.

The challenge for many couples is figuring out how to save enough money for this sizeable one-time expenditure without abandoning saving for retirement. For the Flynns, the up-front cost was $6,000 for the application process to determine whether the 2 men were viable candidates for adoption. After their daughter was born and the match made, a placement fee of $38,000 was paid to the agency.

“I wish I had guidance from the time I started working,” says Wilson-Byrne. “I could have worked with a financial advisor who could have said, ‘You are a gay guy who is 25 and working, this is how much money you make, and you should be setting aside X amount for retirement and X amount for a family.’”

Fortunately, Wilson-Byrne was a saver by nature. “I was good about saving as aggressively as possible,” he says. “I made sure I lived below my means and was really diligent about saving a good chunk of my salary. I have never, for example, spent a bonus. In the back of my head, I knew there was always going to be this expense that I needed to save for.”

The drawback: Although Wilson-Byrne was saving, by his own account, he didn’t save for retirement very well during that time. “I didn’t know how much I should set aside in my 401(k) or IRA versus how much I would need for the adoption process. Ultimately, I had oversaved in my cash accounts but undersaved in my retirement accounts.”

2. Choose a form of adoption

The Flynns worked with a licensed private agency for their adoption. Private adoption agencies are funded with cash paid by adopting families for their services, which can range from screening applicants, home studies by a caseworker, background checks, matching children and adoptive parents, and legal counsel. In a private agency adoption, birth parents relinquish their parental rights to an agency, and adoptive parents work with an agency to adopt.

Another option is an independent adoption: Expectant parents (or a pregnant woman) are identified without an agency’s help, and in some instances by an attorney who specializes in adoption. The attorney may identify expectant parents who are seeking an adoptive family.

A third option is a public adoption agency. These agencies get their funding from local, state, and federal sources. They typically have a foster care and an adoption component. Children usually enter the system either by a parent surrendering the child to the local child welfare system or a local court terminating a parent’s rights because of abuse or neglect.

Finally, there are international adoptions where adopting parents cover all the cost. The US Department of State and the US Citizenship and Immigration Services set the procedure. Adoptions abroad are governed by the laws of both the US and the adoptee’s home country. In recent years, the US has banned adoption from several countries, including Cambodia, Vietnam, and Nepal, after evidence of fraud surfaced. Guatemala also stopped overseas adoptions. Moreover, many foreign countries don’t allow gay couples to adopt.

Tip: A pre-adoptive family must meet the requirements of their legal state of residence. The Child Welfare Information Gateway2 has resources on licensed, private agency and independent adoption and offers information on state laws regarding consent, as well as detailed information on the process and requirements for different types of adoption.

3. Ask far-reaching questions

In addition to asking the adoption agency about all the costs involved, Wilson-Byrne and Flynn, for example, asked the following: Have you been successful placing children with gay men? Can you provide references from other couples with whom you have placed children in the last 2 years and who we can talk to?

Another upside: The couple was required to participate in group discussions orchestrated by the agency with other potential adoptive parents. The group consisted of gay, heterosexual, and single parents, says Wilson-Byrne, and “some were back for their second adoptions, so we could learn from their experience.”

4. Get your financial and personal records in order

The application process isn’t for the faint of heart. “It was a robust application process,” Wilson-Byrne says. “First, there’s an application, including a personal essay and references. We also put together ‘getting to know you’ material, which included a photo album of Norman and me. We wanted them to know what it would be like to live with us—our home and things we like to do, like cooking and traveling and going to the beach.”

Be prepared for a thorough vetting process. This may include full medical exams and a background check review process similar to an FBI clearance. Importantly, your financial picture is reviewed, including statements of your net worth and tax returns.

Tip: Where to keep important documents can be an issue for any couple. A secure virtual safe, such as FidSafe®, is a good option.

5. Consult a family law attorney

If you are considering same-sex adoption, it’s wise to speak with an attorney in your state to learn the current laws and regulations in your jurisdiction, says Zavos. “We have ongoing relationships with adoption agencies, surrogacy agencies, egg/embryo/sperm donation agencies, fertility centers, and other organizations across the country and around the world that are dedicated to helping people with family formation.”

Some attorneys who specialize in adoption are members of the Academy of Adoption & Assisted Reproduction Attorneys, a professional membership organization with standards of ethical practice.

Every state has different family laws regarding adoption, says Zavos. Some states allow attorneys to actually place children for adoption like an agency would. Other states allow attorneys to only recommend an adoption agency. Some states allow adoptive parents to pay the living expenses and legal and medical expenses for the birth mother or for the child while they are under the care of the adoption agency. There are others that allow only legal and medical expenses and fees.

For surrogacy, a lawyer like Zavos can prepare and review gestational carrier agreements, review contracts with surrogacy agencies, and seek pre- and post-birth orders so that the intended adoptive parents will have legal rights to their child as quickly as possible.

“We also recommend that anyone intending to use an egg/embryo/sperm donor, or obtain an embryo in order to grow a family, prepare a contract that sets out all the agreements reached between the parties, including rights to confidentiality, disclosure of identities, payments, parental rights, court orders, and any other agreements that affect legal relationships to the child,” she says.

The common pitfalls: People are not aware how much it costs, says Zavos. They often forget about the birth father’s rights. They don’t fully understand their agency contracts. For example, a client of Zavos adopted in Texas and paid living expenses through an agency for the birth mother during her pregnancy. At the last minute, the woman decided not to place the child for adoption, which is her prerogative. They wanted all the money back from the agency, but that’s not how it works.

You typically lose your up-front money if the birth mother changes her mind, explains Zavos. Also, many couples don’t realize that they have no recourse if the birth mother decides to change her mind during the revocation period. In Maryland, the revocation period is 30 days after birth. The child may be placed with potential adoptive parents, but if the birth mother changes her mind on the 29th day, there is really no recourse. Every state has a different time period.

While the Flynns’ legal work was handled by the agency’s counsel, many adoptive parents hire their own attorney to smooth the process of adopting a child from another state. People who adopt children from other states must abide by the Interstate Compact on the Placement of Children for the state where the birth takes place and also for the state where the child will live.

Documents are presented first to the state in which the child is born and then to the state where the child will be living. The relocation of a child follows the state regulations of both states. Once both states approve the placement, the child can move to the new adoptive home. This process can be quick. The Flynns’ child, Katie, was born on a Saturday, and the couple was cleared to take her home to Massachusetts 4 days later.

Tip: Consider hiring an attorney to help you update your will, name guardians, and research life insurance needs.

6. Take advantage of employer benefits

Check with your human resources department to find what adoption benefits are available. Some employers will reimburse some or all of the expenses related to adoption. Many employers offer paid parental leave for adoptive parents. Wilson-Byrne, for example, qualified for 6 weeks of paid parental leave from his employer.

The Family and Medical Leave Act (FMLA) provides for a number of benefits, including up to 12 weeks of unpaid leave to care for a newly adopted child. The FMLA applies to all public agencies, including state, local, and federal employers, and local education agencies and schools. It also applies to all private sector employers who employ 50 or more employees. To be eligible for FMLA leave, you must work for a covered employer and have worked for that employer for at least 12 months.

7. Tap tax breaks

Tax benefits for adoption include a tax credit for the qualified adoption expenses paid to adopt an eligible child. The credit is nonrefundable, which means it's limited to your tax liability for the year in which the adoption takes place. The maximum credit for 2019 is $14,080 per child, if your modified adjusted gross income is equal to or less than $211,160. If your modified adjusted gross income is more than $211,160 but less than $251,160, you will receive a reduced tax credit.

Qualified adoption expenses include adoption fees, court costs and attorney fees, and traveling expenses (including amounts spent for meals and lodging while away from home). An expense may be a qualified adoption expense even if it is paid before an eligible child has been identified and you have not adopted in that tax year. Generally, the credit is allowable whether the adoption is domestic or foreign. However, depending on the type of adoption, the timing rules for claiming the credit for qualified adoption expenses differ.

8. Keep the door open

There’s no guarantee you will ever come into contact with the birth parents. The Flynns, however, met Katie’s birth parents on their January trip to Kentucky. “I am happy that we had communication with the birth parents,” says Wilson-Byrne. “It just makes it easier and healthier for us. She will know where she came from and her adoption story, and there will hopefully be less anxiety when she begins asking questions about where she came from.”

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5 common annuity myths https://www.fidelity.com/viewpoints/retirement/facts-about-annuities 206362 08/23/2018 Dispelling myths about annuities may reveal unique investment solutions. 5 common annuity myths

5 common annuity myths

Dispelling myths about annuities may reveal unique investment solutions.

Fidelity Viewpoints

Key takeaways

  • Deferred annuities can help savers.
  • Many annuities are low cost.
  • Certain annuities can help protect your future income.
  • Annuities are the only product that can guarantee a stream of income that you can't outlive.
  • Your beneficiaries may be able to receive payments after you die.

Dispelling myths about annuities can open the door to many unique investment solutions.

Over the years, annuities have gotten a bad rap as being complex and expensive, the kind of investment only an insurance professional could love. Well, some are, but there is still quite a lot to love in these products—no matter what phase of life you are in—if you know what you need and you shop smart.

For example, annuities designed for accumulation let your money grow tax-deferred before and during retirement. You can also buy protection against market losses and, unique to annuities, outliving your savings. These guarantees1 come with a price, but for some investors the price is worth the peace of mind. The key is knowing what you need, the difference between various types of annuities, and how to shop wisely.

Here we debunk 5 of the most common myths and misconceptions around annuities, so you can make better decisions about your financial plan.

Myth 1: Annuities are only for retirees

Reality: Annuities can help savers too.

While immediate annuities are designed to turn savings into an income stream right away—typically, for retirees, deferred annuities (variable or fixed) are a tax-deferred savings vehicle used by investors to save more for retirement. With a deferred annuity, you can grow your investment tax-deferred, then turn it into an income stream at some point in the future. If you have maxed out on contributions to your 401(k), 403(b), other employer-sponsored retirement savings plan, or an IRA, deferred annuities can offer an additional tax-deferred vehicle to help you build wealth.2

You can choose from 2 types of deferred annuities:

Deferred variable annuities have investment options that are very similar to mutual funds. You can typically make unlimited3 contributions and control how you allocate among investment options. To benefit most from a deferred variable annuity’s tax-deferred savings opportunity, use a low-cost annuity—some products are available for fewer than 50 basis points (0.50%) of your investment annually.4

Deferred fixed annuities include single premium deferred annuities (SPDAs), which are similar to a certificate of deposit (CD). You are guaranteed an interest rate for a specific period of time, typically 1 to 10 years. These fixed annuities are insured by the issuing insurance company rather than by the FDIC.

For both types, investors need to be comfortable not taking withdrawals before age 59½.2

"It's important with any annuity product to make sure you're investing with a highly rated company," says Tim Gannon, vice president at Fidelity Investments Life Insurance Company. "A good way to tell is by checking with a rating agency like Standard & Poor's or Moody's. These are independent rating agencies that conduct regular reviews of an insurer’s financial strength and ability to pay its contractual obligations."

For information on how annuities can help savers, read Viewpoints on Fidelity.com: How to invest tax-efficiently.

Myth 2: Annuities cost too much

Reality: Many annuities are low cost. Others offer potentially valuable additional features at higher costs, which you should consider only if you need to address a specific risk.

When it comes to choosing an annuity, first consider what you need the annuity to do: build savings or create income. Be sure to compare the cost against the value of each additional guarantee, feature, and benefit—and only pay for what you need and align it with when you need it to avoid paying surrender charges.

If you need to maximize your tax-deferred savings, choose a low-cost deferred variable annuity. According to Morningstar Annuity Research Center, variable annuity annual fees range widely, from 0.10% to 2.25%, with an industry average of 1.16%.4,5 Of course, you will pay more if you need to address a specific risk with a guarantee, such as a guaranteed living benefit, which provides income or asset protection from down markets.

Generally, variable annuities charge explicit fees, while fixed annuities tend to embed their costs in the interest rate or income payout amount. Focus on finding a competitive payout rate and an insurance company that is reputable and financially sound.

Myth 3: There is no point in buying an annuity for income before retirement

Reality: As you approach retirement, certain annuities can help protect your future income from market volatility, and some annuities can help protect against inflation.

If your retirement is 10 years away or less, you probably worry that a drop in the market could erode the savings you've worked hard to accumulate. There are 2 types of annuities available that may grant you some peace of mind: a deferred income annuity6 (DIA), and a fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB) rider.

When you purchase a DIA, you select the future date on which your payments will begin, providing guaranteed income for the rest of your life no matter what the market does. Because they are designed to create future income, DIAs provide the greatest advantage if you don’t need to access the money until you reach your selected income start date.

You can lock in a future cash flow that starts on the future date you selected when you purchased the annuity. At age 58, to create a $1,000 monthly lifetime income payment beginning at age 70, you would invest approximately $108,000 today. If you waited until you were age 68 to purchase an annuity, you would need to invest slightly more than $170,0007 for the same level of income.

These types of annuities also enable you to plan for inflation by offering a cost-of-living adjustment, known as a COLA. When you purchase the contract and for an additional cost, you can select to have your income increase annually by a percentage, typically 1%–5%. This COLA adjustment takes effect after you begin receiving income, but not during the deferral period.

Another alternative is a fixed deferred annuity with a GLWB, which allows some flexibility with your investment but may offer a slightly lower guaranteed payment. When you purchase this type of annuity, you will lock in predictable, guaranteed lifetime income that begins on a date you select. Your lifetime withdrawal benefit amount will be tied to your age when you begin withdrawing and deferral period—generally, the longer you wait to take your lifetime withdrawal benefit amount, the higher it will be.8

Work closely with your financial consultant as you build a comprehensive retirement income plan to determine whether these annuities are appropriate for your personal situation.

Myth 4: I can easily create lifetime income from my retirement accounts

Reality: Besides Social Security and pensions, only annuities guarantee a stream of income that you can't outlive.

Because you can't predict the markets, you can't be sure that you won't outlive your investment portfolio. Indeed, our research suggests that to have a high level of confidence that that won't happen—even if the markets turn bearish just when you retire—you may consider limiting your withdrawals to 4% a year, adjusted annually for inflation. With an annuity, however, you enter into a contract with an insurance company that will pay you a certain amount for the rest of your life, giving you the peace of mind that comes from knowing that this specific income stream is guaranteed to never run out during your lifetime.

For example, a single premium immediate annuity (SPIA) or a DIA can play that important role in your retirement income plan. A key benefit of SPIAs and DIAs is that they ease money management as you enter your 80s or 90s. That’s because when you invest a lump sum with an insurer today, the insurance company guarantees you will receive a monthly income payment for the rest of your life. No maintenance is required.

"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." Just be aware that once you purchase an SPIA or a DIA, you generally lose access to these assets after the "free look" period—a brief period of time immediately after purchasing a contract when you can cancel the contract and have your money refunded.

For more on lifetime annuities, read Viewpoints on Fidelity.com: Create income that can last a lifetime.

Myth 5: The insurance company gets my money when I die

Reality: Your beneficiaries can receive payments after you die.

Most deferred annuities are designed to pass the account value on to your heirs. Income annuities offer options that can also provide for your beneficiaries in some situations. With income annuities, as long as you don't select the largest payout option of "life only," you can arrange to have income payments continue on to your beneficiaries if you were to pass away prematurely. Of course, this adds to the cost, but it could be worth the extra price, depending on your situation. Be sure to work with your financial consultant and discuss the beneficiary options available to you for each type of annuity you're considering.

Bottom line

Annuities can offer flexibility both in how you save for and receive money in retirement. It all comes down to understanding that there are several different types of annuity products, each of which is designed to address a specific need or life stage. And remember, the best way to explore how they might complement your investment strategy is to work with your trusted financial consultant.

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Beware of cashing out a 401(k) https://www.fidelity.com/viewpoints/retirement/cashing-out 116442 05/10/2019 Evaluate all of your options before cashing out a 401(k). Beware of cashing out a 401(k)

Beware of cashing out a 401(k)

Evaluate all of your options before cashing out a 401(k).

Fidelity Viewpoints

Key takeaways

  • There can be an immediate cost to cashing out a 401(k): federal and state income tax, and for those younger than 59½, a 10% early withdrawal penalty.
  • If you run into financial trouble, a loan from your 401(k) may be an option. A hardship withdrawal (if the plan offers it) could be as well.
  • Long-term consequences include the lost opportunity for tax-deferred growth.

Have you ever cashed out your 401(k) when changing jobs? If so, you may have been stunned to find an incredibly shrunken balance, the victim of taxes and early withdrawal penalties that can approach 50% for people in the top income tax bracket.

All too often, people make that painful mistake when managing their 401(k) savings—they cash out. Fidelity data finds that 1 in 3 investors has cashed out of their 401(k) before reaching age 59½, often when changing jobs.

Long-term consequences

For many, cashing out a 401(k) seems like a relatively easy way to solve a short-term cash crunch, whether it's due to temporary cash-flow problems created by the loss of a job, or simply paying down a credit card or covering an emergency home repair. But while doing so may not seem like a big deal, especially if you have a small balance, over a long period of time, the consequences of cashing out can be significant.

"Once you withdraw those savings, they’re gone from your plan—and they can be very difficult to replace," says Ken Hevert, Fidelity senior vice president of retirement products. "While it can be pretty tempting to cash out your 401(k) and use the money to pay off a car or your credit card bill, you may want to think twice before doing so, and weigh the impact of that decision."

The power of tax-advantaged accounts such as 401(k)s is that they allow contributions to be made pretax and allow for tax-deferred compounding (in the case of traditional 401(k)s) or for Roth accounts, they allow tax-exempt compounding and withdrawals.* In either case, your contributions have the potential to compound without taxes eroding that growth. Over time, earnings can generate their own earnings, helping you accumulate more money than you would in an ordinary taxable account.

Why every year counts

Hypothetical pretax growth of one IRA contribution

This hypothetical example assumes the following: (1) one $6,000 IRA contribution made on January 1, (2) an annual rate of return of 7%, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. A distribution from a Roth IRA is tax-free and penalty-free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death. IRA distributions before age 59½ may also be subject to a 10% penalty. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have the potential for a 7% annual rate of return also come with risk of loss.

Younger investors who cash out lose that opportunity, potentially setting their retirement savings back considerably. The average cash-out amount for those changing jobs under age 40 is $14,300, according to a Fidelity study on 401(k) participants.

Older 401(k) investors who choose to cash out may be eliminating a key part of their retirement income picture. The older a 401(k) investor is when withdrawing assets—and therefore subjecting those assets to taxes and potential penalties—the less likely they may be to generate a sustainable income in a retirement that could last 25 years or more. Older investors may have higher balances with larger tax liabilities, plus they may have fewer years to recover their savings before retirement.

If you've run into financial trouble and need money, and have no other recourse, consider taking a loan from your 401(k) if your plan allows it. A 401(k) loan will let you pay yourself back with interest, plus you get to avoid paying taxes and penalties.

If you're able to keep up your saving while you pay the loan back, the impact on your retirement may be relatively minimal—especially compared to cashing out.

Before taking out a loan, it’s important to know that if you leave your job, voluntarily or otherwise, you will have to pay back the loan in full or report it as income and pay taxes and a potential 10% early distribution penalty. But you do potentially have some time to come up with the money. You’ll have until the tax-filing deadline (with extensions) for the year you left the job, or when the loan offsets, to roll over the balance of your former loan. If you left your job in December 2019 and the loan was offset in February 2020, you would have until October 15, 2020.

You can repay yourself by rolling your account out of your former employer’s plan and into an IRA or a new employer’s plan. If you are able to put the outstanding amount of the loan back (the amount of the loan offset) into an eligible retirement plan within the allowed time frame, no taxes or penalties would be due.

A hardship withdrawal may be an option as well if it's allowed by your plan. A withdrawal will be subject to taxes and may be subject to the 10% penalty unless you qualify for an exception.

Taxes and early 401(k) withdrawal penalty

There also is an immediate cost to cashing out. For one, it can generate a large tax bill. Your plan administrator is typically required to automatically withhold 20% of your withdrawal and send it directly to the IRS to cover the federal income taxes you may need to pay on that withdrawal. "That means you just gave the IRS a huge chunk of the money you've been saving for years," says Hevert. "That's money you're no longer saving for retirement." In addition to federal and state income tax, investors younger than 59½ who cash out may have to pay a 10% early withdrawal penalty.

Substantially equal periodic payments

There is a way to take distributions from your retirement account that avoids the 10% penalty but it’s a bit complicated and it’s a long-term commitment.

You can avoid the early withdrawal penalty by arranging to take "substantially equal periodic payments" from the account. The amounts of your withdrawals are based on your age and account balance.

There are 3 methods of calculating the amount allowed by the IRS: required minimum distribution, fixed amortization, and fixed annuitization. You must take at least 1 withdrawal per year for 5 years or until you reach age 59½, whichever is longer.

If you’re interested, consider this calculator: Substantially equal Periodic Payments / 72(t) Calculator.

Not all workplace savings accounts allow substantially equal periodic payments so you would have to check with your plan administrator.

Alternatives to cashing out

Fortunately, there are easy alternatives to liquidating your 401(k) that keep your savings intact—and, potentially, growing. If you've left a job and are considering what to do with your 401(k), here are the options:

A traditional IRA rollover. In both traditional 401(k) and IRA accounts, contributions and earnings can grow tax-free until you begin making withdrawals, when you'll pay income tax on those distributions.

The rollover process is relatively easy—but every plan has different rules and the process can vary. Be sure to request a direct rollover, whereby a check is made payable directly to your IRA provider. "The benefit of a direct rollover is that taxes will not be withheld," says Hevert.

You can also choose to do an indirect rollover, in which a check is made payable to you. However, in this case it's up to you to make sure the money finds its way to a tax-advantaged account such as a traditional or Roth IRA.

When you cash out your plan in an indirect rollover, your 401(k) administrator may withhold 20% of your pre-tax account balance. You may need to come up with that 20% out of your own pocket to put the full amount of your 401(k) balance into your IRA. Otherwise, the IRS may categorize the difference between your plan balance and your rollover contribution as a withdrawal—even though they actually have possession of that money in the form of withholding.

This process can be complicated, and any missteps may trigger penalties and taxes. For example, if you don’t deposit the money into a tax-advantaged account within 60 days, it may be taxed as a withdrawal. "With an indirect rollover, it's up to you to prove at tax time that you did everything right," says Hevert. "With a direct rollover, you don’t have to deal with that."

A Roth IRA rollover. You may choose to roll your 401(k) directly into a Roth IRA to take advantage of the tax-free growth and withdrawals offered by these accounts. That move may trigger a sizable tax bill. You'll generally owe taxes on the 401(k) amount you convert to a Roth if you made only pretax contributions to the 401(k).

Say you have $100,000 in a 401(k). Rolling the money into a Roth IRA may lead to a tax bill of up to $37,000 in federal income taxes, and you may owe state/local income taxes as well, depending on where you live. In that case, it's often a good idea to pay the tax out of your own savings, if possible, rather than dipping into your tax-advantaged retirement savings. "After all, you want to keep as much of your retirement savings intact as possible," says Hevert.

A Roth conversion may make sense for people who expect to face higher taxes in retirement. But there are other factors to consider, such as the other accounts you hold and your individual retirement goals. Consider meeting with a financial advisor or your tax professional to discuss the short- and long-term pros and cons of rolling your 401(k) savings into a Roth IRA.

Stick with a 401(k). Leaving a former employer doesn't necessarily mean you have to leave that company's retirement plan. Many plans allow former employees to leave their 401(k) account active even after they leave the company.

Keep in mind that you won't be able to make new contributions to that plan or benefit from any employer matches. But your money will still enjoy the tax-deferred growth in that plan and you'll be able to keep your investments. Check with your plan administrator to learn more about the rules, fees, and expenses. For example, many plans require that accounts smaller than $5,000 be cashed out or rolled over.

Another option is to roll your old plan balance into your new employer's plan. Doing so can make it easier to keep track of your retirement savings. Before choosing this option, review your new plan's fees, expenses, and investment options and compare them with your old plan and those in an IRA.

Here are some of the factors to consider when deciding whether to keep your savings in a 401(k) or roll the funds into an IRA.

  • Fees and expenses. Compare the underlying fees and expenses of the investment options in your old and new plans with those in the IRA. Some plans offer participants access to lower-cost or plan-specific investment options. Also, consider any fees charged by the plans, such as quarterly administration fees. Those should be compared with any fees that may be assessed in the IRA. Each IRA provider's fees are different, so it is important for people to look carefully at the provider. Examples include annual fees that may be charged at the account level, fees associated with the investments, and any fees associated with services being performed by the broker-dealer.
  • Investment options. In general, 401(k) plans offer a limited menu of funds, selected by the plan, while IRAs offer broad access to mutual funds and individual securities. Do-it-yourself investors may appreciate choosing from a larger universe of investments, while others may prefer the ease of choosing from a smaller menu.
  • Liquidity and security. Keeping money in a 401(k) may provide protection of very large balances from creditors, whereas creditor protection for IRAs is limited to $1,362,800 as of April 2019 (the amount is adjusted every 3 years).

    At the same time, you may have more access and flexibility in an IRA when you need to withdraw money. For example, some 401(k) plans may not allow a partial withdrawal. Be sure you understand the rules of your 401(k) plan, as each plan can vary.

If you decide to leave money in your old 401(k), make sure you keep your personal records—from beneficiaries to contact information—updated with the plan administrator. "You want to make sure you don't leave your money there and forget about it," says Hevert.

Whether you choose to move your old 401(k) to an IRA or a new 401(k), or just keep it in your old plan, the key is keeping your savings intact and benefiting from the tax-advantaged growth these plans allow. It might be tempting to withdraw some money now, but beware of cashing out your 401(k). You'll avoid the early withdrawal penalty and potentially have much more savings for your retirement. If you leave your money in your 401(k) until retirement, you'll avoid early withdrawal penalties and potentially have much more savings accumulated by the time you need to start using your 401(k) for retirement income.

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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?

Two of the major independent credit rating services are Moody's and Standard & Poor's. They research the financial health of each bond issuer (including issuers of municipal bonds) and assign ratings to the bonds being offered. A bond's rating helps you assess that bond's credit quality compared with other bonds.

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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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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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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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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Create income that can last a lifetime https://www.fidelity.com/viewpoints/retirement/income-that-can-last-lifetime 12180 03/11/2019 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 provides for annual increases in the payment amount beginning on the anniversary following your initial payment. The annual increase can be based on a fixed percentage or linked to changes in the Consumer Price Index (CPI), referred to as "inflation." 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, 1953, and started receiving income on December 1, 2018.

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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