When to Retire Matters—A Lot!
In this issue:
- Retirement savings: new IRS annual contribution limit for 2025
- When to retire matters a lot!
- Retirement spending historical calculator
- Pension is back
- Market overview: stocks will experience high volatility as the election is near
New IRS annual contribution limit for 2025
The total 401(k) annual limit for 2025 will be $70,000. This includes both employee and employer contributions.
- Employee elective deferral limit: $23,500
This is the maximum amount an employee can contribute to their 401(k) in 2025, up from $23,000 in 2024 - Catch-up contribution limits:
- For employees aged 50-59: $7,500 (unchanged from 2024)
- For employees aged 60-63: $11,250 (a new provision taking effect in 2025)
- Total combined limit (employee + employer contributions): $70,000
This is an increase from $69,000 in 2024.
It’s worth noting that these limits also apply to 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan. These increases in contribution limits are part of the annual cost-of-living adjustments made by the IRS to account for inflation.
Please note that there is now a significantly larger catch-up contribution amount for individuals aged 60 to 63. This change aims to encourage people to save diligently for their retirement, especially as they approach retirement age.
When to retire matters a lot!
First, let’s take a look at the charts and data from our Retirement Spending Calculator Based on a Portfolio, Fund, or Stock. To achieve a more dramatic and intuitive result, we have chosen the S&P 500 index fund as the investment and applied the 4% rule for annual withdrawals (adjusted for inflation, of course). The following chart illustrates this.
If you had retired in 2004 with $1 million (20 years ago from today), you would have approximately $3 million remaining after withdrawing $1.02 million. It’s important to note that 2004 came right after the bear market induced by the internet bubble, which reached its lowest point in 2003 before beginning to recover.
Now, consider the scenario where you retired in 1999 (25 years ago from today). This was the year when the internet tech-driven bubble was at its peak. In this case, you would have ended up with about $723,000 in 2019 (20 years later) after withdrawing approximately $1.03 million.
Fortunately, nearly five years later, your balance is now back above $1 million. This recovery is largely due to recent strong stock returns, which we believe have been driven by fiscal stimulus and very loose monetary policies.
Of course, one might argue that no one would invest 100% in S&P 500 stocks after retirement. However, as long as you allocate a significant portion of your assets to stocks to extend your retirement income or leave an estate for your heirs, the points made above still hold true.
The charts above reveal a cautionary tale for those currently approaching retirement age. There are several strategies to counter or alleviate the potential risks of retiring at the peak of a bull market, as we are experiencing now.
- Dramatically reduce your stock exposure. While this is a prudent move, it may also lower your potential retirement income.
- Alternatively, you can mentally adjust your current asset value. For instance, if you believe stocks are currently 30% overvalued, treat your stock assets as if they are worth only 70% of their actual value. You would then use this “fair” value to calculate your annual spending amount, whether that’s 4% or another percentage. Essentially, this approach allows you to reduce your spending (withdrawal amount) based on a more realistic asset value rather than the inflated current value.
- Or you can implement a more active tactical strategy to dynamically reduce your stock exposure during market downturns. However, this is a complex topic that requires a more in-depth discussion.
In summary, it’s wise to adjust both your investment exposure and your spending expectations during periods of market euphoria, like we are experiencing now.
Tools & Tips
As demonstrated above, the Retirement Spending Calculator Based on a Portfolio, Fund, or Stock is an invaluable tool for back-testing historical retirement spending results. In addition to adjusting various spending or withdrawal percentages, you can also experiment with different portfolios. By default, the investment is set to the MyPlanIQ Core Three Assets portfolio, which allocates 40% to bonds. However, you can create a different portfolio with a higher allocation to bonds using our Create a static portfolio tool (registration for a free account is required).
Alternatively, you can use a conservative allocation mutual fund as a proxy. For example, the VWINX (Vanguard Wellesley Income Fund) is a well-known conservative allocation fund that typically invests between 25% to 35% in stocks and the remainder in bonds. Many retirees choose this fund for its stability.
If you are very conservative and prefer to invest solely in bonds, you can either input VBMFX (VANGUARD TOTAL BOND MARKET INDEX FUND INVESTOR SHARES) as your investment or select one of the MyPlanIQ fixed-income investment portfolios listed on the Income Investors page.
Regardless of your choice, you can experiment with various timeframes to analyze past bear markets, including the tech bubble bear market of 2000 and the financial crisis bear market of 2008, to see how your investments would have performed.
Pension is back!
IBM announced that, effective January 1, 2024, it will change its retirement plan (IBM 401 (K) PLUS PLAN) employer match from a 5% match and 1% automatic contribution to an automatic 5% contribution to an employee’s Retirement Benefit Account (RBA). Each eligible employee’s RBA will be credited monthly with an amount equal to 5% of their eligible pay, with no employee contribution required. The plan guarantees a 6% interest return through 2026, after which it will earn an amount equivalent to the 10-year U.S. Treasury rate (around 4.5%), with a yearly minimum of 3% through 2033.
We applaud IBM’s move, as we believe a hybrid approach that includes employee-volunteered retirement contributions (401(k)) alongside an automatic pension could better secure employees’ financial futures in retirement!
Market Overview
The following table shows the major asset price returns:
| Asset Class | 1 Weeks | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
|---|---|---|---|---|---|---|
| US Stocks | -1.4% | -0.3% | 7.5% | 12.4% | 33.2% | 10.3% |
| Foreign Stocks | -1.1% | -3.6% | 7.4% | 3.5% | 18.6% | 5.0% |
| US REITs | -2.0% | -0.2% | 7.2% | 18.0% | 28.1% | 10.2% |
| Emerging Market Stocks | -0.9% | -4.8% | 11.1% | 8.1% | 21.0% | 6.9% |
| Bonds | -0.1% | -1.4% | -1.5% | 3.5% | 8.2% | 1.7% |
Both stocks and bonds have shown some weakness as we approach tomorrow’s U.S. presidential and congressional elections. Regardless of the outcome, we anticipate fluctuations in the markets. However, as always, it’s important to maintain a long-term perspective and stay the course!
Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?