Pensions for ex-pat UK in US

[jwkr]

I am in the UK and a close friend’s daughter is CTO for a small (less than 15 staff members) company in the southern US. She came to the US 6 years ago as a post-doc and then progressed to the start-up. She is about 30.

Yesterday my friend asked me about what I knew about pensions saving in the US. I was a little concerned at question because while I have a little knowledge of the UK system my knowledge of the US system extends to only issues I have read about on this forum. Additionally, I wondered why his daughter was not being advised appropriately in the US? In the UK there is quite strong legislation about getting people into workplace pension schemes, people are automatically enrolled and have to actively ‘opt out’ every three years.

So the question is this; can someone point me to a really simple (low jargon) guide to the US pension system please?

Alternatively would it be worthwhile that my friend and his daughter go to see a ‘financial adviser’ of some type when he is in the US over Easter? I am guessing that financial advice is regulated by law in the US so what type of professional should he be looking for in order to obtain appropriate unbiased advice? Many thanks!

 

[gerntz]

- There is no USA-wide pension system. Even Social Security - which most Americans pay into - doesn't apply to everyone as some groups such as railroad workers & teachers in some states pay into their closed system instead. Federal workers?
- For just about everyone else, Social Security & Medicare - medical insurance for those 65+ - are paid for out of payroll taxes if you're employed. If you're self-employed, you must pay those on your own from your income. The benefits levels, starting at as low as age 62, are skewed to favor low income workers. The benefits levels are meager compared to the average person's working years lifestyle, maybe 40-50% is typical, such that added retirement income is needed.
- Most (all?) public workers are part of some pension system sponsored by that employer. Those can be anything from defined benefit - a traditional USA pension & which I think UK folk would be familiar with - to defined pay-in by the public employer & maybe worker too with the benefit being dependent on the success of the investments the pay-in buys. It can be an add-on to SS too.
- Many/most capitalist companies have some types of pension as described for public workers, but there are some that provide nothing beyond the Social Security requirement.
- Some companies give their stock in retirement plans.

 

[OldShooter]

... Additionally, I wondered why his daughter was not being advised appropriately in the US? ... So the question is this; can someone point me to a really simple (low jargon) guide to the US pension system please? ...

Well, sorry to say GB is ahead of the US in this case. If her company has a savings plan, there will be a custodian like Fidelity, etc. Normally, the custodian offers individual consultations on maybe a once-a-year basis. I'd try that first.

... I am guessing that financial advice is regulated by law in the US so what type of professional should he be looking for in order to obtain appropriate unbiased advice? ...

Sadly, again, this is not true. The word you are looking for is "fiduciary." A fiduciary is legally obligated to put the client's interests ahead of his/her own. Typically, a fiduciary relationship is established when a client is paying the advisor. And, actually, the term "financial advisor" means nothing. I teach an adult-ed investing class and one of the slides I'll be using tonight is titled "Financial Advisor" and features a picture of a golden Labrador retriever wearing horn-rim classes and showing a business card that says: "J. G. 'Duke" Hund, Financial Advisor and Planner." Basically, in the US anyone with $15 of headroom on a credit card can become a "Financial Advisor" by buying a box of business cards at vistaprint.com.

One option for the lady would be to go to https://www.napfa.org/ and look for a planner who will advise her as a fiduciary for an hourly fee. Avoid FAs who are employed by brokerage houses; look for independent companies. Another, probably better, would be to network with her bosses and friends to find a Certified Public Accountant to advise her. CPAs know all the tax implications and all the options but they do not sell investment products and hence have no conflicts of interest.

 

[mageedge]

basics in both countries are similar - there is a mandatory government-sponsored contribution scheme that provides an 'old age pension' and numerous voluntary 'tax advantaged' options that wage earners can choose to utilize.

Social Security - employer and employee contribute a mandarory amount each paycheck (there are a few exceptions not relevant to your friend). Provides a monthly retirement check which depends on lifetime earnings and age at retirement. Check is adjusted for inflation each year.

401k - a defined contribution option frequently offered by private companies - meaning employee chooses to contribute an amount from each paycheck, (companies will frequently offer a match to employee contribution). Tax on the contribution (and earnings on it) is deferred until withdrawal. Generally large financial companies will manage the 401k and offer various types of investment options for the employee to choose.

IRA - indivdual retirement account - entirely voluntary, any wage earner is eligible to establish one, usually done through large financial institution most often a mutual fund provider. Vanguard and Fidelity are 2 of the largest such companies in the USA. Similar to 401k - contributions and earnings are tax deferred. There is also a variation called Roth IRA in which contributions are not tax deferred but earnings and distributions are tax free.

Perhaps start at websites of Fidelity/Vanguard (or many other such companies) and look at their "investment advice - getting started" variations. Or any number of books, such as the "dummies" series, will offer explanations.

A little reading ahead of time will help decide whether she needs to visit a financial advisor.

 

[Big_Hitter]

So the question is this; can someone point me to a really simple (low jargon) guide to the US pension system please?

https://www.usa.gov/retirement

 

[jwkr]

Thank you everyone for your responses. I will pass them onto my friend & colleague and hopefully he will be able to support his daughter.