Having retirement savings spread across a hodgepodge of accounts isn’t unusual these days, when workers might change employers often throughout a career.
Bellinger, 50, and Hunt, 45, are both federal workers – she is a scientist, and he works in information technology – and they contribute to their thrift savings plans but not currently to any of the other accounts. As they balance retirement planning with other financial goals, they are starting to wonder: Is it time to simplify?
Bellinger wonders if he should roll over some of his savings into his thrift savings plan, a federal plan with low-cost investment options. Using multiple accounts has made it difficult to track their performance – and their fees, he said. “I don’t really know what I’m paying,” he said. “It’s not at all clear in the paperwork.”
Hunt wants to know if they are on track to have enough retirement savings. And they are curious about the best way to start a college savings account for their daughter, Annmarie, who will turn 2 this summer.
We shared their financial details with two financial planners, Jeff Porter, senior director for Sullivan, Bruyette, Speros & Blayney, and Bonnie Sewell, a principal with American Capital Planning. The advisers offered some suggestions for how the two could meet their goals.
The big picture.
The family lives in Falls Church, Va. Combined, Hunt and Bellinger earn about $235,000 a year. In addition to their house they live in, they have two rental properties in Virginia that they are still paying off. They have very little debt outside of the mortgages on those three houses. Both say they consider the rentals to be a part of their retirement plan.
After covering their $3,200 mortgage payment and $350 in utilities bills, including cable, Internet, gas and water, they spend about $700 a month on groceries and $400 for leisure expenses, such as gym memberships, nights out and vacations. Child care and other child-related expenses cost them about $2,000 a month. They use some of the money left over after the bills are paid to make extra mortgage payments for their rental properties.
They each save 10 percent to 15 percent of their pay for retirement, and have enough saved to cover about twice their annual pay. Outside of their retirement savings, they have enough emergency savings to cover about six months of expenses and a taxable investment account that holds about $11,000.
Hunt sometimes worries about being behind when it comes to retirement saving because she spent her 20s in graduate school without a full-time job or a workplace retirement plan. She wants reassurance that they are saving enough. Bellinger wants to know if there are any benefits to having their savings spread out across multiple banks and various types of retirement
Simple is better.
Having different types of savings accounts can give the couple more control over their tax bill when they retire, Sewell says. Money withdrawn from the tax-deferred accounts, such as the TSPs and the traditional IRAs, will be taxed as ordinary income when retirement withdrawals are made – a tax rate that could be as high as 39.6 percent for workers in the top tax bracket. The Roth IRA, on the other hand, can provide tax-free income in retirement. And money withdrawn from their taxable investing account could be taxed at lower rates, such as the long-term capital gains rate of 20 percent, she says. Adding to that account over time can also provide a separate pool of savings and allow them to hold off on tapping their tax-deferred accounts until they are required to do so at age 70.5, Sewell says. That would give those retirement savings more time to grow tax-free.
But consolidating accounts would make it easier for the couple to track where their money is invested and what fees they are paying, Porter says. They can look into rolling over some or all of their IRA savings into their TSP accounts, which typically have more affordable index-based investment options, Porter says. For example, the average expense ratio for a TSP fund, including target-date funds, stock funds and bond funds, was 0.029 percent in 2015, or 29 cents for every $1,000 invested. In contrast, the average 401(k) investor pays an expense ratio of 0.89 percent, or $8.90 for every $1,000 invested, according to a report by BrightScope and the Investment Company Institute. “I have not seen a lower cost plan, so I think you can’t beat that,” Sewell says.
Having fewer accounts could mean fewer websites to visit or statements they receive. But if the couple move more money into the TSP accounts, they should keep in mind that they may need to take on more responsibility for managing the accounts, Porter says.
They might give up the guidance they receive from the adviser running the managed account, he says. Though that may be fine if they feel like the target-date funds available to them in the TSP are a good fit based on their risk tolerance and when they plan to retire, Porter says. A more customized portfolio within the TSP may require the help of an adviser that can help them with their allocation and update their plan as they get closer to retirement, he says.
On track with retirement.
Both Sewell and Porter agree that the couple are on track to have enough income in retirement. By one rule of thumb, workers who are about 20 years from retirement and expect to live about another 30 years after they retire should have roughly three times their pay saved, Porter says. When their retirement savings are combined with the equity in their properties, the couple’s assets meet that threshold.
“So from where you are now and from where you are in terms of future savings, I would say you’re on a fantastic path,” Porter said.
Hunt has been making additional payments on her rental property to lower the balance so that she will no longer need to pay for mortgage insurance. (Generally, homeowners can stop paying mortgage insurance after they have at least 20 percent equity in the home.) Once she gets there, she can consider bumping up her retirement contributions to about 15 percent of her pay, from about 10 percent, Sewell says. Bellinger is saving about 15 percent of his pay, which puts him close to the maximum $18,000 contribution allowed each year. Because he is 50, he could also make catch-up retirement contributions of an additional $6,000 a year, Porter says.
Options for college.
The two also have options when it comes to setting up a college fund for their daughter. They can each open a 529 savings plan in Virginia, and each contribute $4,000 a year, for a total of $8,000, Porter says. (The maximum state income tax deduction allowed per account is $4,000.) They should aim to save about $5,000 a year if they want their daughter to attend an in-state college or $10,000 a year for a private university, Porter says.
Relatives and friends looking for gift ideas on birthdays and holidays could contribute to the college savings plan, Sewell says. And they can adjust their savings as their daughter grows up and learns more about where she might want to study, the advisers said. The couple could even decide later to sell one of their rental properties and to use the proceeds to pay for
her college education, Sewell said.
“College savings is very important,” she said, “but it’s actually part of a larger conversation.”
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