Things I Learned While Planning For Retirement
Things I Learned While Planning For Retirement
I’ve been thinking about retiring from my job. So, I started to review my accounts to determine if I’ll have enough money to live on in retirement.
There are many accounts to investigate such as:
Retirements - 401(k), Roth IRA
Pension
Life Insurance
Health Insurance
Social Security
401(k)
I checked my 401(k) balance and discovered that I have Roth 401(k) earnings in this account that cannot be withdrawn prior to 59 1/2 years old. However my contributions can be withdrawn without penalty because they are classified as after tax contributions. I had forgotten about this.
Pension
My employer offers a pension plan and contributes annually on my behalf. Since I’m older than 55 years old and have at least 10 years of employment, I’m eligible to retire and receive a pension payout. The proceeds can be received in one of two ways; a lump sum or in monthly payments.
Now this where things get interesting. Over last few years, I’d often check the balance of my pension account. In 2020, the estimated lump sum amount was much greater than it is now in 2023. I didn’t know why. Well, as it turns out, there is a negative correlation between interest rates and pension amounts. As rates increase, pension lump sums decrease and vice versa.
I was not aware of this fact. In the past year and half, the Federal Reserve has raised the Fed Funds Rate from .50% to 5.25%. This increase has had adverse affect on my pension amount. I calculated that for every 1% increase in interest rates, the lump sum amount has decreased between 5 - 8%. I think employers should point this out to their employees, because I do not believe this is very well known or publicized. There is an old adage that says, what you don’t know can hurt you. This is a classic example of that being true. I hope by pointing this out it will help someone in the future. Now this leads me to my next point.
Life Insurance
I was reviewing my life insurance policy that I had for the last 20 years. It is a Variable Universal Life policy. I built cash value into this policy over that time. I noticed last year that the monthly insurance charge was greater than the monthly premium amount that I paid. As a result, my cash value amount was being reduced to pay the increased cost of insurance. I asked my insurance agent to run a cost illustration to determine how much will I have to increase my monthly premium to cover the rising cost.
To my dismay, I was shocked to learn that my policy would lapse in my early 70s. (Once a policy lapses means that you do not have anymore life insurance). The cost of insurance gets extremely expensive after 70 years old. It was upwards of $3,000 per month in my 70s and over $20,000 per month is my 80s. If you have cash value, the cost of insurance is deducted from it. At $20,000 per year, you will deplete a cash value amount of $100,000 in less than 5 years.
I’m looking to exchange this policy for Indexed Universal Life policy. I also learned that upon death, the insurance company will only pay one of the amounts; the death benefit or cash value, not both. I was not aware of this fact when I purchased the policy.
Conclusion
Now I consider myself to be pretty astute when it comes to finances, however this articles points out that even an experienced person can be unaware of some financial details of a particular account or product. So the moral of the story is to keep learning and review your financial accounts periodically. Ask questions if don’t understand something.
This article is fairly long already, so I’ll have to cover Social Security and Health Insurance in a future article. As always, thanks for reading and I hope you found this information valuable. Share this article with someone who could benefit.
Mike