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player ready...Thanks to inflation, workers will be able to sock away more in retirement accounts next year and retirees will get a modest bump in Social Security benefits.
Also thanks to inflation, retirement is getting costlier.
So while you’re congratulating yourself for the gains in your 401(k) this year, be aware that they might not be enough to cover your retirement expenses.
So concludes recent data from investment firm BlackRock, which calculates what it calls CoRI indexes that track Americans’ retirement savings against inflation targets, longevity expectations, interest rate changes and other measures.
Median retirement savings among 55-year-olds rose about 16 percent in the year ended Sept. 30 — to $271,620 — but the projected cost of retirement jumped by about 18 percent, according to BlackRock. Every $1 of future retirement income for those 55-year-olds, based on current life expectancy, takes savings today of more than $15, the company said. A year ago, the figure needed was about $12.
“That’s a pretty dramatic change,” said Chip Farrell, head of BlackRock’s U.S. Retirement Group. “As interest rates come down, the cost of providing retirement income goes up.” (There was less volatility for investors in their 60s because they have a shorter time horizon to retirement.)
The indexes are constructed to deliver liability-driven results, meaning that a target income number is matched to fixed-income investments. And in a low interest rate environment, it takes more invested dollars to meet future income needs.
The company sells mutual funds based off the indexes that are named for the target year when an investor turns 65. They are predominantly invested in long-duration and corporate bonds and derivatives — somewhat similar to an annuity concept, without the cost or the guarantees of an annuity.
“I think the data show it’s important to concentrate not only on the value of your investments, but on how they move” in relation to factors such as inflation, Farrell said.
Here are some key inflation-based hikes in retirement account savings limits and Social Security benefits that were released recently for 2015:
Benefit hike: Social Security and Supplemental Security Income beneficiaries get a 1.7 percent inflation bump next year, which translates to about $22 per month for average retirees. Average monthly benefits for retirees are estimated to be $1,328, or $2,176 for couples who are both receiving benefits. Maximum individual benefits for workers retiring at full retirement age in 2015 are $2,663 per month.
Pre-retirees: If you’ve started collecting Social Security benefits and are still working prior to your full retirement age, a portion of benefits are withheld for every dollar you earn above $15,720. In the year you reach full retirement age, the earnings limit is $41,880. (Keep in mind these withholdings are worked back into your primary insurance amount after full retirement age, though not as a lump sum.)
Workplace plans: Contribution limits for 401(k), 403(b) and federal employee plans increase by $500, to $18,000.
Catch-up: Workers 50 and older will be able to boost their accounts at work by $6,000, up from $5,500 this year. Catch-up provisions for IRAs didn’t budge from $1,000 because they aren’t tied to inflation.
IRAs: Ditto the contribution limit for IRAs, which remains at $5,500. Tax deductions for contributions are phased out for singles with adjusted gross income between $61,000 and $71,000. Phase-outs on the deductions for married couples begin at income of $96,000, depending on whether the IRA-holder or the spouse is covered by a workplace plan.
Roth IRAs: Income-based phase-outs for making contributions to Roth IRAs, where after-tax money grows and is generally withdrawn tax-free, increase to $183,000 to $193,000 for married couples filing jointly and $116,000 to $131,000 for singles and heads of household.
Saver’s credit: The adjusted gross income limit to qualify for the saver’s credit is $61,000 for married couples filing jointly, $45,750 for heads of household and $30,000 for singles.
Entrepreneurs: Maximum contributions to SEP-IRA and Solo 401(k) plans are $53,000 for 2015, up from $52,000. The employee deferral limit for SIMPLE plans rises to $12,500. Be aware that these plans come with other restrictions that may further limit contributions.
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