When it comes to retirement planning, the term “pension” is becoming almost archaic. According to the Office of National Statistics (ONS) only 35% of workers in the private sector paid into a company pension fund last year. Most employers have adopted 401k plans and put the responsibility on the employee’s shoulders to take care of funding their own retirement. While having control can be a blessing, it can also be a double-edged sword. Especially, for those that don’t take the time to fully understand all of their investment options. For those people, there just might be a solution. It’s called the DB(k) pension plan and here are the rules on how it works.
401(k) Match + Pension Plan = DB(k)
What exactly is a DB(k) pension plan? Essentially, it combines the benefits of an income stream of a pension with the matching of a 401(k) plan. Many boomers that still have pensions, love them because they know they have an income stream that they can depend on. The DB(k) offers the luxury of that stable income with a matching contribution to boot. Might be the closest example of having your cake and eating it too when it comes to retirement planning.
DB(k)s Could Be Popular to Employees
Many small businesses will bypass a Simple IRA or a SEP IRA and go straight to the 401(k) plan purely because of name recognition. Employees like perks and a potential employer with a 401(k) plan with a match sounds much more attractive that a SEP IRA. The DB(k) has the potential to be the next household name of retirement plans. Most workers that I come across that have 401(k)’s don’t really understand them. Having a pension-style income like the one Mom and Dad had, may be a safer and less complicated solution.
Are DB(k) Plans Expensive for Employers?
It’s tough to say. With the recent adoption of these plans, it doesn’t seem that employers are rushing off to get these started. I’m sure the slumping economy is the largest barrier. For those companies that do start these, they most likely have a very good cash reserve. However, it isn’t as if a business is funding two retirement plans at once. In fact, any businesses that offer both defined benefit plans and 401(k) plans may unite them in this new option.
Less Paperwork Makes Everybody a Happy Camper
Companies with 2-500 employees are eligible to have DB(k)s pension plans. Where 401(k) plans must meet certain “testing requirements” for top-heavy rules, the DB(k) is exempt and with a plan document and one simple form 5500, your business is ready to rock and roll DB(k) style.
These plans are exempt from “top-heavy” rules, and a company can put one in place with just one Form 5500 and one plan document. The cost of the overall plan is the question. Being new plans, it’s hard to say, but based on most reports I’ve read the cost should be cheaper compared to having both a 401(k) and a pension plan.
Employee Benefits from DB(k) Plans
An income stream, an employer match and a really neat tool to save for retirement. In brief, the DB(k) has four compelling attributes:
Monthly Paycheck for Life. The income stream won’t replace an employee’s end salary, but it certainly will help. Employees that have worked for the company for a longer period of time are rewarded: the pension income equals either
a) 1% of final average pay times the number of years of service, or
b) 20% of that worker’s average salary during his or her five consecutive highest-earning years.
Automatic Enrollment for 401k. That employees save for the future by default. (They can choose to opt out.)
The company automatically directs 4% of a worker’s salary into his or her 401(k) account. The company also has to match 50% of that amount, which is vested upon the match. (Employees do have the choice to alter the contribution level up or down from 4%.)
It only takes three years for an employee to become fully vested in a DB(k) pension plan. So even if they leave the company, the money is theirs.
Is the DB(k) the Retirement Savior?
For now, it’s too tough to say. The strongest benefits I see is the ability to offer more to your key employees. If you’re able to offer a sweet retirement package, it may help retain and gather more productive and easier to manage staff.
When I worked for my old brokerage firm, I was a W-2 employee and the retirement plan options were simple. I had the 401k and could also do a Traditional or Roth IRA outside of it. Things changed a bit when I started my own company.
I officially became a small business owner and had man more choices on retirement plans. What options do hands-on owner-operators have and which one is the best for you? If you have a small company and want a retirement program, you want to consider these plan choices.
Traditional or Roth IRA
I know what you’re thinking. A traditional or Roth IRA isn’t exactly a “business retirement plan”. But, if you are self-employed or own a business, you can still take advantage of these retirement accounts. An IRA is an Individual Retirement Account and can be a great way to save for retirement while also taking advantage of tax benefits.
There are two types of IRAs: traditional and Roth. With a traditional IRA, you will make your contributions with pre-tax dollars, reducing your taxable income for the year. The money will then grow tax-free until you withdraw it in retirement, at which point all of the withdrawals are taxed as ordinary income. With a Roth IRA, you will make contributions with after tax dollars (reducing your take home pay). The money will still grow tax-free until you withdraw it in retirement, but the difference is that all of your withdrawals are tax free.
With either type of IRA, there are contribution limits and other rules you should be aware of before setting up an account. It’s also important to do research on different providers so you can find an IRA with low fees and good investment options.
Contributions are made with after-tax dollars and grow tax-free. Distributions in retirement are tax-free.
Contributions are made with pre-tax dollars, reducing your taxable income. Distributions in retirement are taxed as ordinary income.
Contributions are limited based on income. In 2023, the phase-out range for single filers is $130,000-$145,000 and for married filers is $195,000-$205,000.
There are no income limits for contributions, but there are limits on tax deductions based on income and participation in an employer-sponsored retirement plan.
Required Minimum Distributions
Roth IRAs do not have required minimum distributions (RMDs) during the account owner’s lifetime.
Traditional IRAs have RMDs starting at age 72, which require the account owner to take a certain amount of money out of the account each year.
Contributions can be withdrawn at any time without penalty. Earnings can be withdrawn penalty-free after age 59 1/2 and after 5 years of account ownership.
Early withdrawals before age 59 1/2 may be subject to a 10% penalty, in addition to income taxes.
In 2023, the contribution limit is $6,500 per year ($7,000 for those age 50 or older).
In 2023, the contribution limit is $6,500 per year ($7,000 for those age 50 or older).
The SIMPLE IRA
These plans are very easy to create, and they have very low administrative costs and no annual IRS reporting requirements. You set up traditional IRAs for each eligible employee; they can contribute to the IRA on a tax-deferred basis (via payroll deductions, and you can either match the contributions of plan participants or contribute a fixed percentage of all eligible employees’ pay. The employees own the money in their IRAs.
I had considered going with the Simple IRA initially, but the one item I didn’t like is that it has a 25% early withdraw penalty for the first two years. This is well over the standard 10% all other plans have. In the event I did get into a bind, I didn’t like the idea of having to pay the extra to get it out.
The SEP IRA
A Simplified Employee Pension plan lets you make contributions toward your retirement and your employees’ retirements. (You can even have a SEP and another kind of retirement plan at your business simultaneously.) A SEP allows business owners annual tax-deductible contributions equal to 25% of your compensation (if you have a corporation) or 20% of self-employment income (for a sole proprietor).
This is currently what I have and should satisfy me for a few more years. I even opened up two separate accounts so I could invest with Betterment and another where I control my own investments. Pretty soon I hope to graduate to the next level…
The Solo 401(k)
Are you ready to fly solo? As in a “Solo” 401(k). Yes, you can have a 401(k) when you are self-employed. A business owner may establish one and include their spouse in the plan, provided the spouse is an employee of the business. A solo 401(k) throws in a profit-sharing twist on the standard 401(k). Solo 401ks may be funded by the employee (deferred compensation) and the business (a percentage of profit).
As an employee of your business, you can contribute an amount up to the standard yearly 401(k) contribution limit (catch-up contributions permissible if you are 50 or older). Additionally, solo 401(k) plans allow you to make tax-deductible profit-sharing contributions equal to 25% of your compensation (corporate entity) or 20% of self-employment income (sole proprietor). It is even possible to have a solo Roth 401(k). These plans do require a TPA (third-party administrator).
Ultimately, the Solo 401(k) will allow me to contribute the most pre-tax, but my income has to get me there first 🙂
Here’s one way to compete with larger companies for prime employees. Contributions are usually deductible at both the federal and state levels, with contribution limits equivalent to a SEP. Contributions aren’t mandatory. If your business has a bad year, you don’t have to make them. The assets placed within the plan grow tax-deferred. Again, annual tax-deductible contributions may be made according to the 25%/20% rule depending on your business entity.
New comparability plans
Basically, this is a form of profit-sharing plan that rewards senior or key employees more than others. The classic situation for this plan is when you have a small business whose multiple owners take home similar earnings but are of different ages. The plan must be tested to meet Internal Revenue Code nondiscrimination requirements, of course. It allows different levels of compensation to different groups within a small business.
An employer-sponsored retirement plan that allows employees to save for retirement on a pre-tax or after-tax basis.
$22,500 per year (2023), with catch-up contributions allowed for those over 50.
Employers can choose to match employee contributions up to a certain amount, or make a profit-sharing contribution.
Employee contributions can be made on a pre-tax or after-tax basis.
Available to any business, including self-employed individuals.
An individual retirement account that allows individuals to save for retirement on a pre-tax basis.
$6,500 per year (2023), with catch-up contributions allowed for those over 50.
None, but some employers may offer a SIMPLE IRA option for employees.
Contributions are made by the individual.
Available to anyone under age 70 1/2 who has earned income.
An individual retirement account that allows individuals to save for retirement on an after-tax basis.
$6,500 per year (2023), with catch-up contributions allowed for those over 50.
None, but some employers may offer a SIMPLE IRA option for employees.
Contributions are made by the individual.
Available to anyone with earned income below a certain threshold.
A Simplified Employee Pension Plan that allows employers to make tax-deductible contributions to a traditional IRA for each eligible employee.
The lesser of $66,000 or 25% of employee compensation for the year.
Contributions are made by the employer.
None, but employees can contribute to a traditional IRA outside of the SEP plan.
Available to any business, including self-employed individuals.
A Savings Incentive Match Plan for Employees that allows employers and employees to make contributions to a traditional IRA.
$15,500 per year (2023), with catch-up contributions allowed for those over 50.
Employers can choose to match employee contributions up to a certain amount, or make a non-elective contribution.
Contributions are made by the employee.
Available to businesses with 100 or fewer employees.
Defined Benefit Plan
A retirement plan that provides a specific benefit amount at retirement, based on factors such as salary and years of service.
Contributions are determined by an actuary based on funding requirements.
Contributions are made by the employer.
None, but employees may be required to meet certain eligibility requirements, such as a certain length of service.
Generally available to larger businesses with the ability to fund ongoing plan obligations.
What plan is best for your business?
If you are reading this, you are probably thinking about putting a plan into place or switching to a retirement program more easily administered than the one you have now? But which one should you choose – and what is the next step? Take a big step today and take advantage of all that is available in the marketplace – consult an independent financial professional and a CPA to review your options and find the program that fits your needs.
Throughout my military career I’ve constantly been surrounded by acronyms. The Army is notorious for them: APFT, MOPP, PMCS, AWOL. These are just a handful of the thousands of them that exist. Some I know. Most I don’t. I was constantly having to research what the heck most of them stood for.
While acronyms were expected in the military, I didn’t imagine how prevalent they would be in the financial services industry. One of the acronyms that I came across that I felt like I was in the military again was QDRO. What makes it even more confusing is that I’ve heard it pronounced both “Quid-dro” and “Quad-dro”. What’s the correct pronunciation? The jury stills out on that one.
What is a QDRO?
And exactly what does it have to do with your 401K or pension plan? A QDRO is a Qualified Domestic Relations Order from the court which indicates the beneficiaries of your retirement account, other than you. These beneficiaries are also called “alternate payees” and this comes into play should you and your spouse get a divorce.
Usually, the beneficiaries of your retirement account(s) might be your spouse, child or other dependent, or a former spouse, and the QDRO will define how each of these people receive distributions from the retirement account through child support or alimony payments and/or property ownership.
It’s necessary that the information in the QDRO is followed exactly in order to minimize your potential to paying penalties on money you don’t even receive from your 401k plan.
The Importance of a Qualified Domestic Relations Order
If you should go through a divorce, the QDRO becomes extremely important. Following the QDRO is the key to avoiding 10% early withdrawal penalties imposed by 401k plans, because if you don’t follow the QDRO you can be taxed on money taken from your 401k even if it landed in the hands of your beneficiaries! Make sure to enlist professional help (either through your 401k plan administrator or a tax professional) to minimize your own tax implications of having to distribute your 401k to alternate payees due to divorce.
Take Steps to Verify Information in the Qualified Domestic Relations Order
If your 401k plan is subject to a QDRO during a divorce (typically if you have been married at least 5 years before getting divorced), you want to give the administrator of your 401k a copy of your QDRO. This allows them to carry out the order. They’ll review the QDRO to ensure it’s valid within 18 months and determine whether or not any payments must be made to beneficiaries. You’ll receive notification of any alternate payee (beneficiary) receiving funds from the 401k, and provided the QDRO was followed correctly, you will not have to pay a 10% early withdrawal fee from the withdrawal of the funds distributed to your beneficiaries.
The few QDRO’s that I’ve dealt with had been drafted directly by the attorney. All I had to was open the appropriate account (in my cases they were IRA’s) and the money was transferred directly in. I like simplicity 🙂
Who Receives Money From Your 401k After Divorce?
Where you live will determine how your 401k funds are distributed after a divorce. Most states have equitable distribution rules, which means your 401k is divided 50/50 between you and your ex-spouse – but it depends on how long you were married and how much was contributed, as well.
Some ex-spouses win 50% of a 401k plan even in states without equitable distribution rules, during the divorce proceedings. If you live in any of the following states, you can count on paying out half of your retirement to your ex-spouse: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. These are “common property” states.
For the QDRO cases I’ve worked in, all have been in the state of Illinois. Although, not a “common property” state, each spouse did receive 50% of the retirement account balance.
What About QDRO’s and Pensions?
QDRO’s are most commonly associated to 401k’s, but while I was doing my research I learned that they can also apply to pensions. According to the PBGC.gov website here are three items that QDRO’s must do:
Identity of the plan participant, each alternate payee, and each pension plan. A QDRO must specify the name and last known mailing address of the plan participant and each alternate payee covered by the order. A QDRO also must identify the name of each plan to which the order applies—this should be the plan’s formal name.
Amount to be paid and when payments start. A QDRO must state how much of the plan participant’s benefit is to be paid to the alternate payee, such as a dollar amount or percentage of the benefit, or make clear the manner in which the amount is to be determined. A QDRO also must specify or allow the alternate payee to choose when payments to the alternate payee will start.
What happens on the death of the plan participant and the alternate payee. A QDRO should specify whether the alternate payee will be treated as the participant’s spouse for purposes of any survivor benefits. A QDRO also should specify what happens to benefits when the alternate payee dies.
What a QDRO Must Not Require
There is sometimes a misconception on what a QDRO must and must not do. The PBGC.gov site offers what a QDRO must not require the PBGC to do:
pay any benefits not permitted under ERISA or the Code;
provide any type or form of benefit, or any option, not otherwise provided by PBGC;
pay benefits with a value in excess of the value of benefits that would otherwise be payable by PBGC;
pay benefits to an alternate payee when those benefits are required to be paid to another alternate payee under an order previously determined to be a QDRO;
pay benefits to the alternate payee for any period before PBGC receives the order;
pay benefits as a separate interest to the alternate payee if the participant is already receiving benefit payments; or
change the benefit form if the participant is already receiving benefit payments.
The report below was prepared by my firm and is part of ongoing effort to provide investors important information on auto sector bonds. My firm LPL Financial does not cover individual bonds but hope the following may help with your investment decision making.
On March 30, President Obama and the Auto Task Force declared that viability plans submitted by both Chrysler and GM did “not establish a credible path to viability”. GM is being provided 60 days of working capital to develop a more aggressive restructuring and credible plan while Chrysler has 30 days to work an agreement with Fiat or face bankruptcy proceedings. The news raises the risk of GM filing for bankruptcy in mid- to late-May and bankruptcy risk increased today (April 1) following a NY Times story indicating President Obama believes a quick, negotiated bankruptcy is perhaps the best path.
For bondholders, GM’s viability plan had included a reduction of debt to two-thirds but the rejection means that bondholders will have to endure deeper cuts. GM bonds dropped several points on the news since the rejection introduces new uncertainty as to how to how much bondholders would receive either via bankruptcy or a debt exchange as both Ford and GMAC have already done. GM senior bondholders had been striving for 50 cents on the dollar while GM was targeting a price in the low 30s (roughly the two-thirds reduction). Prior to the Obama Administration’s announcement GM intermediate and long-term debt traded between 20 and 30 cents on the dollar. So the two-thirds reduction was roughly already priced in but bonds dropped several points given the new uncertainty that bondholders could receive less. GM intermediate and long-term debt is currently trading in the 10 to 17 range.
For bondholders the decision boils down to sell now or wait for more favorable pricing as a result of either bankruptcy or a government led restructuring. Even a government led restructuring may not be as quick and easy as government rhetoric indicates. A March 31, Wall Street Journal points out that prior “pre-packaged” bankruptcies still average seven months in duration, a fair amount of time to go without receiving interest payments.
And this time is likely no different as bondholders will argue their claim versus other parties particularly the UAW. In 2003 GM issued bonds to help make up for a pension shortfall. At the time, the $13 billion deal was the largest bond issue in history. Bondholders essentially helped GM help the UAW and this point will not go without debate.
While its unlikely bondholders get wiped out, they should expect to receive no more than 10 to 30 cents on the dollar absent a prolonged battle in bankruptcy court that turns out favorably. And income-seeking investors should be aware that bondholders will likely receive the bulk of compensation in the form of stock, not bonds, in a newly restructured GM.
Ford Motor Corp bonds benefited from the news as the elimination of one or more of the big three was viewed positively for what looks to be one of the survivors. Long-term Ford bonds still remain deeply depressed at 28 to 30 cents on the dollar, reflecting still high levels of risk to Ford, but are up roughly 10 points over the past month according Trace reporting. Ford Motor Credit Corp (FMCC) bonds were unchanged to only slightly higher. FMCC bonds are viewed as having as higher recovery values in the event of bankruptcy. Ford’s recently completed debt exchange increased its liquidity but should car sales remain at such depressed levels, bankruptcy still remains a longer-term risk. For now, bondholders are focusing on increasing sales as a result of a Chrysler or GM bankruptcy. Longer-term a leaner and more efficient GM may have a competitive advantage to Ford. So Ford still faces substantial risks in addition to those posed by a weak economy.
GMAC is a separate legal entity from GM and should GM file bankruptcy, or be subject of a government-led restructuring outside of bankruptcy court, it does not entail an automatic bankruptcy filing for GMAC. On the surface, a bankruptcy or restructuring would be a negative for GMAC but it depends on which path GM takes. Should GM file chapter 11 bankruptcy it would need to line up private investors for Debtor-in-Possession (DIP) financing. DIP financing is interim financing that provides needed cash while a company is in the process of restructuring. Given the still credit constrained environment such financing would likely be difficult if not impossible to obtain. In such an environment consumers are unlikely to purchase GM cars, justifiably concerned over future viability. A government supervised restructuring, where the Treasury would provide financing while GM restructures, would likely lessen or eliminate that effect as consumers continue to purchase GM autos knowing the entity would still exist in some form. Given GMAC’s reliance on GM auto sales, anything to promote sales would be beneficial.
On that note, the US government announced it would guarantee the warranties of GM vehicles during the restructuring period. This news coupled with President Obama’s statement that, “We will not let our auto industry simply vanish” suggests that some form of GM will exist in the future. Both are positives for continued auto sales during a restructuring. Furthermore, it appears that GMAC, and its role in assisting consumer financing, remains a key tool for the government in efforts to turn around the economy. In late 2008 and early 2009, GMAC reached important milestones by 1) receiving Federal Reserve approval to become a bank holding company and 2) shortly after, receiving a $6 billion capital injection from the US Treasury. Unlike many banks, GMAC prepared to boost lending by lowering minimum FICO scores for loan qualification to 621 from 700. It appears that GMAC has become an important vehicle for Treasury to foster consumer lending. Concurrent with the events above GMAC concluded a debt exchange that reduced its debt load (a requirement for bank holding company status), extended bond liabilities, and subordinated other bond claims. The debt exchange enabled GMAC to post a profit for the fourth quarter but removing the extraordinary item GMAC lost $1.3 billion for the quarter.
Bonds have come under pressure again following the GM/Chrysler news but remain above the lows for the quarter. Still, current bond prices, particularly those maturing beyond one-year, reflect a significant probability of default. In the cash market, GMAC’s benchmark 6.75% due 12/14 closed March 30 at a 45 price, according to Trace, suggesting a 40% probability of default if one assumes a 30 cent on the dollar recovery (Moody’s forecast for high yield bonds). Credit Default Swap (CDS) spreads are bit more bearish and require a 31% upfront payment, an increase from
Despite all the bankruptcy news, a couple of potential positive developments could benefit GMAC. To our knowledge, GMAC has yet to borrow from the Fed. As a bank holding company it could gain access to the Fed’s discount window and even pledge auto loans as collateral. GMAC could also have access to the FDIC’s Temporary Liquidity Guarantee Program (TGLP) and issue bonds at very low government guarantee rates. These liquidity sources could amount to $10 to $80 billion in additional liquidity but remain untapped as of yet.
Lastly, the newly launched Term Asset Lending Facility (TALF) included auto loans as one of the lending areas it directly seeks to improve. The TALF should be a source of liquidity for both GMAC and FMCC.
GMAC Smartnote pricing has been particularly depressed due to market illiquidity. While Smartnotes contain an estate feature, they were issued in small denominations on a weekly basis. Their small size makes them elatively illiquid, particularly in the current environment where bond dealers are reluctant to hold bond inventory let alone illiquid bonds. As a result, GMAC Smartnotes trade, in some cases much lower in price than similar non Smartnote GMAC bonds.
For example, the GMAC Smartnotes 6.75% due 6/2014, a very similar bond to the benchmark issue (same coupon rate but 6-months shorter in maturity) listed earlier has recently traded between 26 and 29 according to Trace reporting, a dramatic difference. GMAC bonds remain a high-risk play due to its dependence on GM and the potential path of any restructuring. The potential path of any GM restructuring (Ch. 11 vs. government led), whether GMAC receives additional capital injections from the Treasury, and the severity of the economic downturn will play a role in GMAC bond pricing. These many moving parts, including a politically influenced government role, make handicapping future bond performance difficult at best.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing.
Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Municipal Bonds are subject to availability and change in price; subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price.High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.Stock investing involves risk including loss of principal.
Last Updated: April 27, 2020 BY Michelle Schroeder-Gardner – 3 Comments
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Retirement is the most complicated time in your life, financially. That’s driven by many factors, including: (1) you don’t know how long your retirement will last, (2) you won’t have a traditional salary coming in the door, and (3) you might not have the same mental capacities as you do now to make financial decisions.
The complicated nature of retirement has increased over time as life expectancy has increased — from around 60 years in 1930 to closer to 80 years today — and pensions have gone away. Maybe your parent or grandparent has a pension? That pension, which might not seem like a big deal when you’re young, makes a big difference in retirement. It fixes all three issues listed above by providing you a continuation of your salary for as long as you live. Now, not only are employers not offering them, but many of us don’t have traditional jobs with benefits in the first place.
Still, for all of us DIYers out there who know how to take control our financial lives and make things happen, there are solutions for us. To make sure we’re financially comfortable and safe in retirement, we need to be aware of the risks and take the right steps to be protected. This of course means thinking about this and planning ahead years before we expect to retire.
Here are the 4 best tools to keep you safe in retirement:
1 – Social Security (I’m serious here…)
Social Security is the golden child of retirement planning. It is THE BEST option we have out there to keep us safe. It’s basically a pension provided by the government. Here’s how it works: While you’re working and paying taxes, you earn Social Security credits. As long as you’ve earned at least 40 credits (1 credit for every $1,320 you make, max of 4 credits per year), you’ll qualify to receive benefits in retirement. The more credits you earn, the more your benefit, which is a monthly paycheck in retirement, will be. That monthly check can start between ages 62-70 and will continue for life, each year potentially increasing for inflation. The longer you wait to start it, the more your benefit will be.
To take full advantage of Social Security, do the following:
Maximize your credits by making sure your reported taxable income is at least $5,280 every year. (This number is based on the 2018 credit value of $1,320 which does go up over time.)
Plan to delay the start of your Social Security to the maximum age of 70. You’ll get an 8% increase in your benefit each year you delay them past full retirement age (67).
Keep track of your Social Security benefit by creating an account. Knowing how much you’ll be receiving each month will make it easier for you to plan how you’ll cover the remaining expenses that exceed your benefits.
2 – Blueprint Income’s Personal Pension
Employers have decided to stop offering pensions, instead providing better access to the stock & bond markets through 401(k)s. But, you can still get yourself the benefits of a pension — steady, guaranteed income that continues for life — independent of what your employer offers. Blueprint Income’s Personal Pension is an account you create and fund just like you fund your 401(k), IRA, or brokerage account. But, instead of putting money in the market, the money in your Personal Pension gets converted into guaranteed, lifelong income backed by insurance companies, of which Blueprint Income has 15 on their platform. (The technical product that makes this possible is called an income annuity, which is what the first generation of pensions used.)
Use the Personal Pension to supplement your Social Security so that all of your most important expenses in retirement will be covered no matter how long you live, and even if the market crashes. Here’s what to do:
Head to Blueprint Income to build a Personal Pension plan. You can set a goal for how much income you want in retirement and they’ll tell you how much to put in over time.
If you have an idea of how much your basic expenses will be in retirement, use that minus Social Security as your income goal. If you don’t know, just set it at $2,000 per month and work with their time to refine it later.
Decide where the money to open the account will come from (minimum of $5,000). You can use existing retirement savings (Traditional IRA, Roth IRA, 401(k) rollover) or new savings from your bank account.
Then, keep contributing over time as little as $100 per month to build up your retirement check. If something happens, you can always skip/cancel/change contributions without penalty.
3 – Tomorrow, The Family Financial Planning App
The first two tools protect you from the risk that you live longer than expected and the risk that the stock market crashes. But, what will happen when you pass away? Not only is that emotionally challenging for your loved ones, it can also create very complicated financial situations for them. The Tomorrow app provides a super easy and user-friendly way to make important long-term financial decisions and set up appropriate wills and insurance contracts.
Here’s what you can do through the Tomorrow app:
Create a last will & testament for free. Having a will is important because it specifies who will be the guardian of your kids and pets and specifies what should happen to your assets.
Create a trust fund, which when paired with a will, has the benefit of protecting your privacy, reducing probate costs, and allowing for better distribution of your assets.
Determine and buy the right amount of term life insurance. This is the simplest form of protection for your family over the period of time that a premature death would harm them financially.
4 – EverSafe, Protection from Fraud, Scams & Financial Exploitation
At the beginning, I mentioned that retirement becomes a risky time in your life because of your potentially diminished cognitive capabilities. This reality makes seniors easy targets for financial abuse and exploitation. Elder financial abuse can take many forms, including petty theft, fraud, scams, misguided home repairs and bad financial advice. EverSafe is a personal detection and alert system that stops exploiters from taking advantage of you.
Consider signing up for EverSafe as you approach retirement, or for your loved ones who are already in retirement, to get the following services:
Analysis of your daily transactions for erratic activity and anomalies like unusual withdrawals, missing deposits, etc.
Alerts by email text, or phone to you and your trusted advocates when suspicious activity occurs.
Tools to manage and resolve any fraudulent activity.
With these tools, plus all of the good day-to-day and long term financial sense I know you already have, you’ll set yourself up for a comfortable retirement where, ideally, you never even have to think about money or risk!
When you first enter the workforce you have many decisions to make in regards to how you will fund your retirement years.
After years of earning an income, soon-to-be retirees also have some major decisions to make regarding how their retirement funds will be distributed once they are no longer in the workforce.
For individuals who have a pension plan in place, the decision of how they will take their pension is an important one with significant consequences.
Lately, I have met with several clients who are faced with a very important question,
“Should I roll my pension into an IRA or take the lifetime payments?”
See, pension plans can be distributed in one of two ways;
Through regular installment payments received throughout your retirement years or
Through one lump sum payment (which can be rolled into an IRA)
There are benefits and drawbacks to each option, therefore it is important to weigh each option carefully before making your final decision. Here we evaluate the pros and cons whether you should or should not take the lump sum option on your pension.
Control of the Pension Distribution
One of the potential benefits of opting for the lump sum is the additional control you have over pension funds. This can be beneficial in that most pension plans do not account for inflation when establishing what your monthly annuity payment will be in the years to come. When you choose the lump sum option, you have control over your pension funds and can invest them as you see fit, which can result in additional growth throughout your retirement years.
Control is the largest driving force that have led to most of my clients choosing to roll their pension money over. Most recently, I had a client that said, “I’ve worked for the company 31 years on their terms, now I want to take my money on mine.” Could not have said it better myself.
When you roll it over, you decide when you want your money on your terms. If you want a little extra to spoil your grand-kids on a trip to Disney World, you have the power to do it.
Having control does come with its risks.
You have to be careful to not go on a spending spree and run the risk of spending down your retirement too soon. By choosing the annuity method, you have a guaranteed paycheck for the rest of your life and possibly your spouse if your pension plan allows for it. For some that have a harder time managing money, not being able to have access to the principal may be a good thing.
I have had cases where the client opted to take the lump sum option thinking they could control their spending. Alas, they could not and blew through their entire savings in a short amount of time. Now they have little savings and only Social Security to depend on during retirement.
Security of the Pension
Choosing to get your pension in one lump sum payment, eliminates the security of receiving a monthly check for the remainder of your life, however you do know exactly how much money you are getting. Consider for example, if the company funding your pension annuity payments finds themselves in financial trouble, this may result in problems with your pension payments. There is a Federal agency; the Pension Benefit Guaranty Corp) that may make up for companies that file for bankruptcy, however there are limits to how much money you will receive.
As of 2009, the PBGC has insured pensions up to $54,000 for those that retire at the age of 65. If you’re pension is for more than that and your company goes bankrupt, you might be regretting that you hadn’t taken the lump sum.
As I mentioned above, security of having all your money up front can be reassuring, but; if you mismanage it, you can go through it quickly leaving you with no security in retirement. It’s important to do a self assessment of yourself and your spending habits to make sure you don’t make this mistake.
Estate planning: Don’t Forget the Kids
Annuity payments will cease once you and your spouse have departed. By choosing to receive your pension in a lump sum payment, you can plan your estate to include beneficiaries of retirement funds that are unused during the lifetime of you or your spouse.
In essence that means that if you unexpectedly passed away and your spouse wasn’t too far behind you, all the money that you had paid into your pension goes back to the company.
Another Example of When You Don’t Take the Lump Sum
As mentioned in the first point, it can be attractive to have control of your money when you want it. I had a client meeting years ago that with a gentleman who was a state employee. He was nearing retirement, but still had a few years left. In an effort to entice some of the employees to retire early, the state was offering early buyouts to those that would retire immediately. In his case, the offer was in the neighborhood of $180,000.
At the time, he was dealing with credit card debt and some medical bills, so the offer was enticing. I reminded him that he takes the check, that he would be giving up his guaranteed paycheck in retirement. If he worked just a few more years till age 55, he and his wife were guaranteed around $2,500 per month with the pension. Just a quick calculation using simple interest revealed that in about 6 more years would be the break even point for taking the monthly payments.
Otherwise stated, that after 6 years, he was in far better shape taking the lifetime annuity payment for he and his wife. No question. In this case, taking the lump sum was not the right decision.
Should You Choose the Lump Sum?
The decision as to how you will receive your pension is one that should not be taken lightly. There are several factors to consider and the decision you make today will outline your quality of life for your remaining years. The benefits listed here could also be considered drawbacks if handled incorrectly, therefore be certain you are capable of managing your lump sum payment to ensure you will have financial security in the years to come.
If you feel you cannot properly manage your funds or simply don’t want the hassle of dealing with investments and long term planning, annuity payments might be the better option for you and your family. What is beneficial to one family may not be perceived the same for another, so make sure your decision is based on your unique situation and future needs. If you’re still not sure, be sure to meet with a qualified financial planner to asses your needs and see what direction is best for you.
For many of my baby boomer clients who are close to retirement, calculating their Social Security Benefits is an important part of the financial planning process.
It’s important to have a good understanding of the monthly benefit so that we know which other retirement buckets will be producing the shortfall (if any) of their income needed for retirement.
In many of my client situations, the husband has been the primary breadwinner, so there isn’t much question on their Social Security Benefit.
What does arise some questions is the spouse’s social security benefit. It can be confusing in situations where the spouse worked some years back and is not totally sure to how much they paid into social security.
If you are married, you can claim social security benefits based on your history of earnings or you can collect social security spousal benefits which are equal to 50% of your spouse’s social security benefit.
There are several advantages for married couples and their social security benefits, and you have the ability to receive benefits for a longer period of time in some cases.
If you’re a widow, you can also claim social security spousal benefits.
How Social Security Spousal Benefits Work
You have the option of claiming your own social security benefits, calculated from your work record, or claiming up to 50% of what your husband or wife will receive as your spousal benefit if your husband or wife has filed for social security.
You can’t collect both your own social security benefits and your spousal benefit at the same time. If you are entitled to both, you’ll receive the larger of the two.
A widow who collects survivor benefits at the normal retirement age (or later) will receive 100% of the deceased spouse’s social security benefit.
If you file for social security spousal benefits between the age of 60 and your normal retirement age, the amount you receive will shrink 71 to 99%.
It’s always better to delay receiving social security benefits for as long as possible to increase the amount you’ll receive.
Early Retirement and the Social Security Spousal Benefit
If you begin collecting the spousal benefit before you reach full retirement age, the benefit is permanently reduced over your lifetime.
Before electing for this option, it’s important to understand the implications by having the reduced benefit so early on in your life.
Widows and Social Security Benefits
If your spouse passes away, you’re eligible for the spousal benefit from the age of 60.
If you begin receiving social security benefits before your spouse passes away, you will continue receiving whichever benefit is greater – your own social security benefit or the spousal benefit – but you can’t get both at the same time.
Advantages for Married Couples and Social Security Benefits
If you’re a married couple and can’t afford to postpone receiving your social security benefits, you can use a strategy to help maximize the amount of social security benefits you receive over the long term.
The technique is called the “62/70 Strategy”, and it makes use of the social security spousal benefits.
The spouse who earned less over their lifetime will file for social security benefits at 62 while the higher-earning spouse delays his or her benefits until the age of 70 when the maximum benefit will be received.
The higher-earning spouse’s benefit will continue to grow. If one of you should pass away, the smaller social security benefit will die off as well – leaving the survivor with the higher paying benefit.
When the higher-earning spouse reaches the age of 70, you drop the social security spousal benefits and start collecting the larger benefit of the higher earning spouse.
How to Claim Social Security on a Divorced Spouse
While the above scenarios are relevant to married couples and widowers, you may be wondering how spousal benefits work after a divorce has occurred. Here’s a quick overview.
Do You Qualify for Social Security Benefits under Your Ex-Spouse?
Eligibility requirements for collecting your Ex-spouse’s benefits include the following:
You must be age 62 or older.
You must have been lawfully married to your spouse for a minimum of ten years.
You must be divorced for a minimum of two years.
You cannot collect if you are remarried.
Your Social Security benefits must be less than your spouse’s.
You will collect 50% of your spouse’s entitled benefit.
If your spouse has remarried you can still collect.
Even if your ex-spouse is not yet collecting you can still collect the benefit as long as you meet all of the requirements.
What If Your Ex-Spouse is Deceased?
If your ex-husband or wife is no longer living you can still collect on their benefits as long as you meet all of the above-stated requirements with a few minor differences.
The main difference is that you will be entitled to collect 100% of your ex-spouse’s benefit if he/she is deceased. You will also be able to start collecting earlier at age 60.
Mike Piper from ObliviousInvestor.com who writes a ton on Social Security (Ex. Social Security for Married Couples) adds, “but if you do claim at age 60, the amount you receive will be reduced.”
Special Circumstances to Consider
There are some special circumstances that you may need to consider. First, if you have been married and divorced more than once you can choose which ex spouse you want to collect on.
As long as you meet all requirements on multiple ex-spouses, you will receive your social security benefit based on the highest collector.
Next, if your benefit is higher than your ex-spouse’s benefit you can delay collecting on your Social Security and collect on theirs instead.
This can be very advantageous allowing your benefit to grow and pay out at a higher amount down the road.
Delaying your benefit by just a few years can make a big difference. At any time you can make the switch to collecting on your benefit rather than your ex spouses’.
Everything Else About Social Security for Divorced Spouse
Finally, if you are planning to collect on your ex spouse’s Social Security benefits here are some other things you will need to know.
To apply for the benefit, you will need to supply both a marriage license and divorce decree.
You can apply on line, by phone or in person at your local Social Security Office.
If you continue to work while collecting on your spouse’s benefits their earning limits will apply to you.
If you are collecting a pension the amount of your benefit may be lower.
Collecting on your ex spouse’s Social Security will not cost your ex any money or alter what they are entitled to collect.
If you did remarry but your new marriage has ended either due to your spouse’s death, a divorce or an annulment you are entitled to collect on your ex’s benefits. You can apply and collect benefits any time after your marriage has ended as long as you meet all other requirements.
To get some exact calculations on your social security benefits when divorced, I would suggest that you contact your local social security office. That way there’s no question on how much your entitled to.
Need Social Security Assistance?
If you’re having a tough time trying to understand your Social Security benefits, your best resources are to visit www.ssa.gov or call your local Social Security office.
I had an instance where I had a question on Social Security benefits and wasn’t sure who to call.
Knowing nowhere else to turn, I called our local office and got to someone right away. They were able to answer my question immediately – and it was a fairly complicated question.
If you work for a company that has a pension, should you be worried?
What protections do you have?
Will all the money you have been paying into your retirement just be gone?
Recently, American Airlines filed for Chapter 11 bankruptcy leaving many wondering “What happens to their pension?“.
Whether you’re an employee of theirs or any other company that offers a pension, here’s what you need to know.
Insurance On Your Pension Plan
Fortunately, it is not as bad as most people think…maybe. There are safeguards in the United States to prevent you from losing your pension plan.
In the United States, every defined-benefit retirement plan is insured, at least to a point. Most will receive all or at least most of their company pension even if your company goes bankrupt. However, in some cases, it may not be every penny you expected.
(Also, be sure to check out my article on, Should I Roll My Pension Into an IRA for some options on your pension plan.)
What Happens When a Company Goes Bankrupt?
When a company goes bankrupt they have two choices. They can reorganize and try to stay in business by reducing costs and attracting new investors, or they can liquidate.
The pension plan is usually terminated in reorganization and always terminated in liquidation.
So, then what happens? A federal insurance agency called the Pension Benefit Guaranty Corporation (pbgc.gov) takes over the pension payments.
Here’s some information on the PBCG taken from their site:
The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.
Only employees with the largest pensions actually take a hit. The Pension Benefit Guaranty Corporation maximum annual payment, which rises with inflation, is $54,000 this year for workers who retire at age 65.
As with any insurer, the PBGC has some restrictions. For example, it prorates recent pension increases.
However, in all, 84 percent of retirees get their full pension even after bankruptcy.
A Few Rare Cases Under Reorganization
In a few rare cases of a company bankruptcy reorganization, the employer maintains his/her pension plan. That normally only happens for one of three reasons.
The benefit is low
Employee turnover is high
The pension plan is new
Avoiding Bankruptcy is Better For The Company
In most cases, however, it is always better for the company to avoid bankruptcy altogether. In December of last year, Congress gave some help in this direction by relaxing the 2006 Pension Protection Act’s strict rules governing pension funding.
As counter-intuitive as it may seem, this is one move that endangered workers should embrace.
As a result of this move, according to Dallas Salisbury, president of the non-partisan Employee Benefit Research Institute, “Given the economic downturn, employees are better off than if the company was forced to make a large pension contribution. It’s better to stay in business than make a pension contribution.”
American Airlines Pension
In American Airline’s case, they are filing for Chapter 11 bankruptcy protection. In this case, the PBGC may need to step in and assist with their pension obligations.
The Pension Benefit Guaranty Corp., created to protect private retirement benefits, may be unable to cover the loss because Congress has limited the size of pensions it can pay, Director Josh Gotbaum said in a statement.
“Unfortunately, when the agency assumed airline plans in the past, many people’s pensions were cut, in some cases dramatically,” Gotbaum said in the statement. The PBGC will encourage American to “fix its financial problems” and keep its pensions intact, he said.
In the meantime, AMR employees seem to be protected. But a quick look at the numbers doesn’t seem too reassuring.
Recent numbers show that they have about $8.3 billion in assets to cover the $18.5 billion in pension liabilities. If AMR has no choice and has to terminate the plan, that would leave the PBGC on the hook for a cool $17 billion.
Chump change for the PBGC, right? Don’t be so sure…
Strength of the Pension Benefit Guaranty Corporation
Just like the FDIC, the financial strength of the PBGC hardly ever gets questioned. Unfortunately, these are unique times and it seems that no entity is out of harm’s way.
Lowering interest rates and rising corporate defaults has led to a $33.5 billion deficit in the first quarter of 2009 for the PBGC. This is the largest deficit for the 35-year-old agency which is an increase from the $11 billion deficit ending fiscal year 2008.
Acting director Vince Snowbarger says,
“The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.”
The Deficit Continues
For 2011, the PBGC just encountered it’s largest deficit while insuring 1 out of every 7 Americans. The Pension Benefit Guaranty Corp. was quoted as saying it ran a $26 billion imbalance for the budget year that ended Sept. 30.
Their pension obligations rose by $4.5 billion as they currently insure over 44 million Americans. Does it make you nervous? It would make me.
How Does This Affect You?
If your company files for bankruptcy or you fear that it will, I would contact the PBGC and talk to them directly.
Be sure to visit their website frequently and check for updates. You are basically in their hands and you have limited choices.
If you have the option, consider rolling your pension into an IRA to get it out of your company’s hands. I’ve had many clients do this so that they never had to worry about this.
Be sure to consult a financial planner and/or tax advisor before implementing this step.
Being a financial planner comes with a certain amount of stress.
Most would contribute the schizophrenic stock market as the leading culprit of the high stress levels.
And that is absolutely correct. Dang you market!
Coming in at a very close second is helping a client strategically plan for their early retirement.
What do I define as an early retirement?
Any client that is retiring before they can attain social security (and don’t have a pension). Trying to help ease the income needs for retirement puts added stress to make sure they don’t run out of money in their golden years.
An additional level of stress occurs in making clients stick to the plan.
Too often clients start viewing their retirements accounts as ATM machines, and I have to make sure they don’t get too crazy with their spending habits.
Oh yes, early retirement can be very stressful for all parties involved.
The BIG Mistake
When it comes to making the biggest mistake in retiring early, I’ve seen it done countless times and it can be a very costly one.
So, what’s the big mistake? Let me illustrate by sharing a recent conversation I had with an individual that had recently changed jobs and had to make a decision with his old 401(k).
This individual was 50 years of age and had a decision to make with his 401(k). He had been at his previous job for a number of years and his 401(k) had collected a nice sum of approximately $500,000. He was trying to make the decision whether to roll the 401(k) to his new 401(k) or roll it over to an online brokerage like TD Ameritrade or E*Trade. In the conversation, I could tell a lot of his focus was on fees, where to invest the money, access to the money, etc.
The one part that he failed to consider is what happens if he wanted to retire early. After some initial fact finding, I asked a simple question:
Do you plan on retiring early?
He quickly shot back and said
“Yes, my hope is that I can retire somewhere around the age of 57.”
That simple statement leads to ultimately the biggest mistake that many people make when changing jobs and retiring early. A little known IRS rule allows folks that retire early, starting at the age of 55, to take premature distributions from their employer sponsored plan while avoiding the 10% early withdrawal penalty.
How is this all a mistake? The mistake has everything to do with the technicality of the term “employer sponsored plan”. Employer sponsored plan would include your 401(k), 403(b), TSP, or 457. What that does not include is your IRA’s.
That’s right, your IRA, according to the IRS, is not an employer sponsored plan, so if you roll that over into an IRA, you lose the ability to take out your money and avoid the 10% early withdrawal penalty. And the last time I checked, no one likes to pay a 10% penalty just for the fun of it.
Had this individual rolled over his 401(k) into an IRA, he lost this inherent gift from the IRS.
Not Just About Job Change
It doesn’t just have to happen when you change jobs. I’ve seen several people that prior to working with me had retired early and rolled their 401(k) into an IRA not knowing about the 10% free withdrawal rule. Unfortunately, the majority of the time that I’ve seen it, the individual is working with a financial advisor that failed to disclose this. Either the advisor wasn’t up to speed on the rules, or I think their eyes were on the prize, meaning that they would only get paid if that client rolled over the money into an IRA that they managed. Do I have proof? No, just call it a hunch.
If you’re planning on retiring early, please keep in mind that to avoid paying an unnecessary 10% early withdrawal penalty, you must leave your money in the 401(k). Don’t make that mistake.
Note: Within in IRA, you are allowed to take premature distributions if you follow rule 72t or meet certain conditions. 72t is a more complex planning strategy that ties up your money for a minimum of five years. If you want more rules about 72t, feel free to check out another post where I wrote about the 72t rules and ways to avoid penalty on withdrawals from your IRA.
Are you planning on retiring early? Have you thought about rolling your 401k into an IRA? If so, be careful!
With 12 million members, Navy Federal Credit Union services U.S. military members, veterans, Department of Defense members, and their spouses. Navy Federal offers a full suite of services, including checking accounts, savings accounts, certificates of deposit accounts (CDs), and money market accounts.
But even if you qualify for an account, it’s not your only choice. It’s important to take a close look at the fees, interest rates, and overall bank experience to make sure it’s the best choice for your finances.
Navy Federal Credit Union is available for service members, veterans, Department of Defense employees, and their families. Although Navy Federal does offer fee-free accounts and competitive rates on loans, their interest rates on savings, CDs, and credit cards aren’t competitive with online banking options. It’s important to shop around before settling on any lender, and Navy Federal is no exception.
What Is Navy Federal Credit Union?
Credit unions are like banks in that you can deposit and withdraw funds, earn interest on your savings, and borrow money. But banks are for-profit institutions. Credit unions, on the other hand, are nonprofits that typically limit membership to a specific business, organization, club, or geographic location. Members are considered owners, with a voice in how the credit union operates.
Navy Federal Credit Union began in 1933 as a lender serving a small group of naval officers and their families. Over the decades, though, membership expanded. Today, membership is open to:
Enlisted members and veterans of all branches of the military
Family members of former and enlisted military
Department of Defense members and their families
Navy Federal is member-owned, which means that any earnings go back to members. Often, these dividends are put toward reducing interest rates and improving offerings, but they’re also given to members in the form of account credits. Cashflow is publicly disclosed on Navy Federal Credit Union’s website.
Types of Accounts
Navy Federal Credit Union’s members have access to a variety of account options, from checking to savings to money markets and CDs. Their fee-free structure is typical of credit unions, and with most accounts, you’ll have no minimum deposit or balance requirement.
Here are some details on the accounts Navy Federal offers:
Navy Federal Credit Union offers a free checking account option to members. There are several checking accounts to choose from, and your choice will likely relate to your own unique needs.
All of Navy Federal Credit Union’s checking account holders enjoy checking with no monthly fees, a Navy Federal debit card with zero-liability protection, and access to 30,000 ATMs located throughout the U.S. and Canada.
Here are the current checking account options at Navy Federal:
Free Active Duty Checking: For both active duty and retired military members, this bank account issues ATM fee rebates, 0.05% annual percentage yield (APY), and a 0.05% dividend rate.
Free Easy Checking: For all your everyday banking needs, there’s this account, which includes ATM fee rebates, a 0.05% annual percentage yield, and a 0.05% dividend rate. This account comes with overdraft protection options.
Free Campus Checking: Designed for service members and family of service members ages 14-24, this account also includes ATM fee rebates, a 0.05% annual percentage yield, and a 0.05% dividend rate.
Free EveryDay Checking: This account is available to all credit union members as a simple, fee-free everyday checking account that has all the basics. It only comes with a 0.01% APY and a 0.01% dividend rate, however.
Flagship Checking: A Flagship checking account is for those members who want to earn more on their money. You’ll get a 0.35% to 0.45% APY and a dividend rate of 0.35% to 0.45%. However, this account comes with a balance requirement of $1,500 or more. A service fee of $10 a month applies for balances of less than $1,500.
A Navy Federal savings account comes with 0.25% APY. There is a $5 minimum balance requirement for the account to earn dividends, but it’s fee free. You can also divide this basic savings account into segments, naming each one. This allows you to set up an emergency fund, a vacation fund, a home buying fund, a Christmas gift account, or whatever else you need.
If you have specific savings goals, Navy Federal Credit Union also offers both Traditional and Roth IRAs. Self-employed members and those who work for participating employers can set up a simplified employee pension (SEP). These have higher contribution limits than IRAs.
Navy Federal members with children may want to take a look at the education savings accounts offered by the credit union. These Coverdell Education Savings Accounts (ESAs) allow you to put money into a tax-advantaged account for the specific purpose of paying for education expenses.
Certificates of Deposit
Investing can be a valuable part of financial planning. One low-risk way to boost your earnings is through a certificate of deposit (CD). Current rates range from 4.55% APY. Navy Federal has four tiers of CDs, each with its own yield and terms:
Standard Certificate: Get started saving with this CD that offers a competitive interest rate with terms of up to seven years. You can earn as much as 4.55% with only a $1,000 minimum deposit.
EasyStart Certificate: You can add money to this CD at any time, making it a great savings vehicle. Yields go as high as 4.45%, and you can choose terms from 6 to 24 months. Best of all, you can deposit as little as $50 to start.
Special EasyStart Certificate: Another CD that allows a $50 opening deposit, this option can earn up to 4.85%. It only comes with a 12-month term.
SaveFirst Account: Step up from a basic savings account with this CD, which offers up to 4% interest with terms of only three to 60 months. You can set up this account with a deposit as low as $5.
Money Market Accounts
If you want to boost your earnings without locking your money down, a Navy Federal money market account could be the perfect solution. You’ll need at least $2,500 to earn interest, but once you reach that threshold, interest rates are higher than the Navy Federal basic savings account.
Navy Federal Credit Union offers the following current rates on money market accounts:
$2,500-$9,999: 0.95% APY
$10,000-$24,999: 1.06% APY
$25,00-$49,999: 1.10% APY
$50,000 and over: 1.50% APY
If you have at least $100,000 to put into your account, you can earn even higher rates with one of the jumbo money market accounts Navy Federal offers. Those rates are as follows:
$0-$99,999: 0.25% APY
$100,000-$249,999: 1.65% APY
$250,00-$499,999: 1.85% APY
$500,000-$999,999: 2.05% APY
$1 million and over: 2.25% APY
As a federal credit union member, you’ll get access to a variety of other account offerings. One such offering is a full suite of credit cards. Currently, you can earn $200 cash back with the CashRewards card as long as you spend $2,000 in the first 90 days.
Although Navy Federal Credit Union has cards that can help you build credit or earn cash back, you can find better deals through online banks and local lenders. Most come with high interest rates and no zero-interest introductory period.
If you’re looking for a loan for home improvements or debt consolidation, this is where Navy Federal shines. The credit union offers competitive rates on personal loans with flexible terms. Personal expense loans start as low as 7.49% APR for a 36-month term.
Once you have some money in your savings account or CD, you’ll have a source of funding. You can borrow against the money and repay the funds with rates as low as your savings rate plus 2.00%.
Navy Federal is a full service credit union with all the amenities. But it’s best for those searching for active duty checking. Branches and ATMs tend to be located near bases. Still, mobile banking and free access to a nationwide network of ATMs make it easy for armed forces veterans and their families to find in-person customer service when they need it.
Navy federal credit union’s website and mobile app offer a full suite of online banking options. You can transfer money, deposit checks, manage your credit and debit cards, and set up alerts to monitor account activity.
The mobile app is available for iOS, Android, and Amazon devices. You’ll also have access to Apple Pay and Google Pay using your Navy Federal Credit Union checking account on those supported devices. These are the same options you’ll have with other lenders, but they’re convenient if you like Navy Federal’s other options.
Fees and Penalties
One of the best reasons to go with a credit union is the lack of fees. For the most part, Navy Federal has fee-free services, but you will pay a monthly fee if you choose Flagship checking and can’t keep a $1,500 balance.
Navy Federal Credit Union does charge fees if your account goes into the negative. You can avoid the $29 insufficient funds fee by investing in overdraft protection, but Navy Federal charges a fee for moving the money. Some other lenders don’t charge for that.
Annual Percentage Yield on Accounts
Although Navy Federal has plenty of benefits, their interest rates on their high-yield savings accounts, CDs, and even checking accounts are lower than competitors. The money market savings account currently only pays up to 2.25% APY, and that’s with a $1 million balance.
Service members and veterans should shop around to make sure you’re getting the best rates. You might even keep your checking and basic savings with Navy Federal, then have a money market savings account or CD with one of the many online banks paying competitive rates.
Minimum Balance Requirement
With any Navy Federal Credit Union review, checking balances are worth a mention. For the most part, you won’t have a minimum balance or a minimum deposit requirement with any of Navy Federal’s accounts. There is one exception, though. If you choose the Flagship Checking Account, you’ll need to deposit at least $1,500 and maintain that balance over the life of your account. Otherwise, you’ll pay a $10 monthly service fee.
There is a minimum deposit requirement with Navy Federal’s savings account options, though. To earn dividends, you’ll need to deposit at least $5 and maintain that. To maintain a money market savings account with Navy Federal, you’ll need a balance of at least $2,500 to earn dividends.
If you qualify for a Navy federal credit union account, it’s well worth a look. But pay close attention to the offerings and compare them to other financial institutions to make sure you’re getting the best solution for your needs.