Weekly Newsletter
What to Do If You Receive a Financial Windfall
How to prepare for those rare occasions when a large sum falls into your lap
For most of your life, money comes in at a slow and somewhat steady pace. Maybe you get a paycheck every two weeks or a Social Security payment once a month. Now and then you might get a bump from a raise, bonus, gift or side hustle. Sometimes, though, you have a genuine windfall, the type with three or more zeros at the end of it: an inheritance, an insurance settlement, a lump-sum pension payout or the proceeds from the sale of a long-held family home. Even a tax refund can seem like found money at times.
At these moments, you’re faced with the challenge of handling the sudden appearance of a large sum of money that could change your life — or be a lost opportunity. Follow this plan to make the most of the moment.
Slam on the brakes
“The first thing to do is take a deep breath,” says New Orleans financial planner H. Jude Boudreaux. “We often rush to make a decision, and quick choices can lead to regret.” You need to give yourself time to process your emotions and plan carefully, especially when a windfall is the result of an unhappy event like the death of a family member or a settlement from a traumatic accident.
While you’re figuring out your next steps, you may want to park the money in a safe place that’s separate from the rest of your savings, making it less tempting to fritter away. Up to $250,000 of a single depositor’s accounts in the same category at a bank or credit union is insured. Alternatively, U.S. Treasury bills are extremely low risk.
Ride out the emotional roller coaster
With an inheritance, you might feel that you don’t deserve the bequest or wish that the deceased person had enjoyed the money while alive; the resulting mixture of guilt and grief might cause you to burn through the money quickly or impulsively give it all away. Even if the source of the money isn’t tragic — perhaps it’s a home sale — your first reaction can be giddily irrational. We have a natural tendency to treat found money differently than income from a paycheck, leading to mindless splurges.
Megan McCoy, a marriage and family therapist who teaches financial therapy at Kansas State University, suggests talking to a friend or therapist to help articulate your emotions and how they might be affecting your financial plans. “Try to have a split in your brain,” she says. “Keep the financially smart things to do and the emotional processing distinct.”
Create a timeline
When you’re sorting out what to do with a windfall, Boudreaux recommends breaking your plan into three parts: now, soon and later. During the “now” period, figure out what you really have to work with, including whether any of the windfall is subject to taxes. Inheritances, for example, can be taxed in six states. Life insurance proceeds, except for interest, generally aren’t taxed, gains on a home might be, and lottery winnings are. Once you determine your net dollar amount, consider shoring up your financial health by paying off high-rate credit card balances and bulking up your emergency fund.
In the “soon” stage, it’s time to develop a full financial plan for the money, including an investment strategy and management of your other debt, such as the mortgage on your home. (Don’t race to pay off that mortgage in the “now” phase, advises Jill Gianola. “Emotionally, it feels good,” she adds. “But from a purely financial point of view, you’re better off not paying off your mortgage, and investing and letting money grow.”)
And the “later” part of the process? That’s deciding on big moves like buying a vacation home, making large gifts to charity or family, and updating your estate plan. “Give yourself time to ensure you’re happy with your decisions before you do anything,” McCoy says.
Prepare for pleas
A windfall may bring friends or family members out of the woodwork, hat in hand, but planning for your own financial security should be your priority. If someone asks for financial help that you’d rather not give, McCoy suggests this defense: First say that you’ll think about it and promise to talk later, then practice your assertiveness skills to stay calm during the upcoming conversation. “If a person truly loves you,” she says, “they should be able to accept no for an answer.” If you’re rejecting a request, articulate your reasons; people like hearing the “because,” McCoy says. And don’t feel guilty about not helping out. “Whatever way you received the money, it is yours to decide what happens to it,” she says. If you decide you do want to help out, you may find that it’s rewarding. Studies have found that spending money on other people makes us happier than spending money on ourselves.
Build on what you have
If you already have a plan in place for retirement and other goals, don’t scrap it. Instead, see how this newfound money fits in. “If you felt you never could retire, an inheritance can make it possible,” Boudreaux says. “Or it might accelerate the timeline or let you move into an encore career.”A cash infusion can also fund smart tweaks to your plan, such as letting you cover the taxes on converting a traditional IRA to a fully tax-free Roth IRA or put off claiming Social Security. “Delaying from age 67 to 70 means a 24 percent increase in benefits for the rest of your life,” Gianola says.
Go slow with the market
If a windfall leaves you with a large amount of money to invest in the stock market, invest over time. “I am not a big fan of investing everything on day one,” says Winchester, Massachusetts, financial planner Catherine Valega. Emotionally, it’s hard to put a large sum at risk all at once. (As is the case anytime you invest, diversification reduces your risk of major losses; a broad-based mutual fund offers far more safety than shares in a handful of individual companies.) If you feel like an inheritance has made you custodian of a parent’s legacy, Gianola notes, “it may hurt more if you invest the money in risky assets and lose it.”
Be intentional in your spending
If you want to reward yourself with some of your newfound money, give in to that impulse — within reason. “It’s dessert, not the main course,” Boudreaux says. “Perhaps carve out 10 percent to 20 percent of the money to spend on stuff.” Deploying the money in a way that honors the source can also help you feel better about a windfall, especially one that carries the emotional residue of an inheritance from a family member. You might want to take your family on a vacation or donate money to a charity that was meaningful to the person who left you the money. “Creating a memory increases the long-term remembrance of that person,” Boudreaux says. “It’s impactful and can be important.”
https://www.aarp.org/money/budgeting-saving/info-2022/financial-windfall.html
Your Inflation Cheat Sheet
Answers to your most pressing questions about the rising cost of living — past, present and future
Prices crept up, then surged higher in the first half of this year. In June, the consumer price index rose to become 9.1 percent higher than it had been a year earlier — the biggest 12-month increase in 40 years. Then in August, food, shelter and health care costs continued to rise. It’s hard for anyone to relax when such basic needs as groceries and rent are so much more expensive than they were not so long ago. But putting inflation in a longer-term perspective may ease some of your worries. Here are answers to some of people’s most pressing questions about what just happened and what might happen next.
What should we blame for our current high inflation rate?
There are several culprits — most recently the war in Ukraine, which has driven up the price of food and fuel around the world. But the current round began with COVID-19. Not only did the pandemic shut down the world economy, as governments restricted movement and people hunkered down at home, but it also created massive problems in what’s known as the global supply chain — the people and processes involved in manufacturing, transporting and distributing goods to the businesses and households that need them. Factories shuttered, raw materials and finished goods sat in ports, and deliveries to stores were erratic. Managing product inventory got even harder for businesses as people changed their buying habits — snapping up household goods like toilet paper and bicycles while shunning services like meals out, movie tickets and air travel. The result was a shortage of goods Americans wanted to buy.
And we sure wanted to buy, sparked by the $5 trillion that the government has poured into the U.S. economy — some $2 trillion of that paid directly to individuals and families — in the hope of staving off a disaster caused by frozen commerce and high unemployment. “Give Americans $2 trillion, and they are going to buy stuff,” says Barry Ritholtz, chairman and chief investment officer at Ritholtz Wealth Management in New York.
In sum, demand went way up as supply came way down. And when that happens, prices rise in a similarly dramatic fashion.
Why does inflation get us so upset?
Largely, it’s because we haven’t had to think seriously about it for many years. “For a long period of time, there was no inflation, and nobody talked about it,” says David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Then suddenly last year, prices of food, energy, housing and everything else began to skyrocket. It’s not just the magnitude of rising prices that’s upsetting; it’s also the frequency with which price increases confront you — every week when you go to the grocery store and every day when you drive your car past a gas station. “There’s nothing that gets people as riled up as the price of gas,” Wessel says.
Who is getting hit the worst?
No surprise here: It’s low-income earners and those living paycheck to paycheck. “If you don’t have the disposable income to keep up with the increases, life is very difficult,” says Collin Martin, fixed income strategist at the Schwab Center for Financial Research.
Retirees are somewhat insulated because Social Security payments are indexed to inflation. But because adjustments are made annually, there has been a lag as prices head higher. The 5.9 percent increase that showed up in the January Social Security checks was based on inflation figures from last year’s third quarter. Current estimates for the 2023 adjustment range from 8 percent to 11 percent.
Homeowners also are generally better off than renters. During the height of the pandemic, many landlords couldn’t evict tenants or raise rents. That has changed. A recent report by real estate brokerage Redfin showed that in July the average asking rent was up 14 percent over last year, with rents in 10 cities — including Nashville, Seattle and San Antonio — rising more than 20 percent year over year. But if you own a home, your monthly cost goes up only if you have an adjustable rate mortgage; otherwise, it holds steady.
What can be done, and who can do it?
In the U.S., the Federal Reserve, the government’s central bank, is charged with managing inflation, Wessel explains. The tool it’s been using is a traditional one: setting policies that cause banks to raise the rates they charge one another for short-term loans. That, in turn, leads banks to hike the interest rates they charge the people and businesses seeking loans. Those higher rates discourage potential customers from borrowing money to make investments or purchases, and that lowers demand for goods or services. That slowdown in economic activity should eventually rein in price increases. But there’s a limit to this strategy: The Fed’s rate hikes primarily affect economic sectors sensitive to interest rates, such as real estate and manufacturing. It can’t do much about either food or energy prices, which tend to go up and down very quickly.
Congress and the president have limited options, not all of them pleasant. One is to raise taxes in order to lower demand. The Inflation Reduction Act passed in August raises taxes on some corporations and increases the IRS’s budget, but those moves are unlikely to have an impact. Some other possible steps, such as releasing oil from the U.S. strategic petroleum reserve, have already been taken.
Other factors influencing inflation are beyond U.S. control. “This is a global situation,” Schwab’s Martin says. “Washington can’t stop China from locking down their regional economies.” And it has limited ability to rein in food inflation, which has been worsened by the war in Ukraine and extreme weather.
How is today’s inflation different from inflation in the 1970s and 1980s?
As painful as today’s price increases may be, they’re nowhere near as bad as they were back then — so far. Inflation hit a high of 14.6 percent in 1980, and some mortgage rates topped 18 percent a year later. But savings instruments also paid higher interest, with a three-month CD yielding 18.3 percent in 1981.
Some of the big inflation drivers of yesteryear have also waned. Back then, a greater percentage of workers were unionized and had contracts with built-in cost-of-living adjustments that automatically raised wages as prices increased, causing a back-and-forth inflation spiral. Today, only 6 percent of private-sector workers are union members. While supply chain issues have been a big factor in today’s inflation, global competition is still much higher than in the 1970s and 1980s, and it remains a force in keeping prices down. Finally, availability of alternate energy resources is limiting the impact of oil shortages. “Fifty years ago, the average family spent 8 or 9 percent of its budget on energy,” Ritholtz says. “Today it is more like 3 or 4 percent.”
What should I be most worried about?
That the economy will slip into a recession triggered by the Fed’s raising of interest rates too high and too fast, leading to widespread job losses. (By one unofficial measure of a recession — two consecutive quarters of a shrinking economy — the U.S. was already in a recession in the summer.) “Pick your poison. Is it high inflation or high unemployment?” Ritholtz asks. The Fed is trying hard to thread the needle, he says, bringing down inflation while avoiding recession.
Another problem: Persistent inflation erodes public trust in government. “Inflation leads people to think things are out of control,” Wessel says, noting that Americans are already facing a lot of things that feel out of control. Yet pundits are expecting inflation to settle between 2 percent and 4 percent a few years from now, he says.
How will this round of inflation end?
Probably with a period of higher interest rates and more hard times. In a closely watched speech made in late August, Federal Reserve Board Chairman Jerome Powell made it clear that his top priority was to establish “price stability” by bringing inflation down to 2 percent, in the neighborhood where it’s been for much of the past three decades. “Without price stability, the economy does not work for anyone,” he said. The process of making that happen will entail not only higher interest rates, but also slower economic growth and a weaker job market — meaning “some pain” for households and businesses. “These are the unfortunate costs of reducing inflation,” Powell told his audience at a Federal Reserve economic symposium. “But a failure to restore price stability would mean far greater pain.”
Much of this strategy, Powell indicated, is based on lessons learned from that stretch of inflation in the 1970s and 1980s. History shows, he said, that the longer inflation continues at a high rate, the more that workers will suffer during the process of bringing it down. “We are taking forceful and rapid steps” to reduce demand via higher interest rates, Powell added. “We will keep at it until we are confident the job is done.”
Is there anything I can do?
Simply be a smart consumer. “If you don’t need it, don’t buy it, and wait a couple of months,” Ritholtz suggests. Merchandise that is now selling at big premiums, he says, may soon be on sale as today’s aggressive ordering leads to overstocked inventory.
Inflationary cycles eventually end, but no one knows when that might happen this time around. So it makes sense for you to have a household plan that outlines the monthly income and savings you currently have and how you will need to adjust your usage of them until inflation gets back to tolerable levels. “You want to know what your options are,” Martin says.
7 Things Singles Nearing Retirement Should Know
Your needs are unique if you are divorced, widowed or never married
Ah, the single life. You can do as you like. There’s no need to deal with a spouse who has opposing views, a different vision of retirement. A spouse who spends too little or too much, or has difficult relatives, problems at work or no job at all.
But there are trade-offs. As a single person, you must navigate the many social events geared toward couples, including vacations. All decisions and expenses are your responsibility, and without a second income, you can’t afford to walk away from a job. Should you become ill, you won’t have a partner to provide support at a moment’s notice. A quiet house can seem like a peaceful oasis — or an empty space.
If you are divorced, a widow or never married, there are many folks like you. According to the Census Bureau, more than half of the adult population of the U.S. is single. A Pew research study estimates that 27 percent of adults 60 and older spend more than half of their day alone. What’s more, a 2019 Pew analysis of Bureau of Labor Statistics data indicated that some adults were spending as much as 10 hours a day by themselves. That was before the pandemic hit.
Shouldering the responsibility for your financial life may be daunting. In a study by Northwestern Mutual, 45 percent of single men and 50 percent of single women said they felt moderately or highly anxious about their finances, compared with 35 percent and 41 percent of married men and women, respectively. “Carrying the burden for all living expenses can be a challenge, not to mention managing the payments and making sure nothing is left undone,” says Lamar Brabham, a wealth management specialist and the founder of the Noel Taylor Agency in Myrtle Beach, South Carolina.
How do you make your financial footing as secure as possible? Experts suggest the following steps. Becoming more organized may give you a greater sense of control over your life.
1. Learn the basics
You may be used to handling money or having a partner do it. Either way, there is much to know. To start, you’ll want to be up to speed on Social Security and Medicare, and on when to take the required minimum distributions (RMDs) from your retirement accounts to avoid tax penalties.
If you’re divorced or you’ve lost your spouse, make sure you understand the rules around spousal and survivor benefits, says Bradley Lineberger, a certified financial planner (CFP) at Seaside Wealth Management in Carlsbad, California. You are eligible for these benefits if you don’t remarry before 60. (Others may be eligible as well.) He suggests attending retirement planning sessions to learn more. “Many of the community colleges offer classes taught by certified financial planners like me who love to teach,” he says. Another thing he recommends is, if possible, waiting until 70 to file for Social Security. You can file early, at age 62, but your benefits will be reduced for each month before your full retirement age. After you reach full retirement age, your benefit increases by 8 percent for each year you delay filing. “Where else can you get a guaranteed return of 8 percent per year?” asks Lineberger.
2. Seek expert advice
Now look for a qualified financial planner to help you develop a plan. Research from Northwestern Mutual shows that two-thirds of single people don’t have a financial adviser and that 49 percent have not spoken to anyone about retirement — double the percentage for married people.
“Financial planners can run scenarios and investigate the lifestyle spending a person has and determine it. This helps the person understand when they can afford retirement or how many more years of work they need to perform,” says Jordan Benold, a CFP at Benold Financial Planning in Frisco, Texas. “Social Security and Medicare can be examined in this analysis.” D. Scott McLeod, a CFP at Brown Financial Advisory in Fairhope, Alabama, also recommends tax planning long before retirement. “Because single filers have lower thresholds in the tax brackets, being very intentional about your savings vehicles, your distribution plan, when you draw Social Security and your required minimum distributions is critical to properly manage your bill.”
Chuck Czajka, a certified Social Security claiming strategist and the founder of Macro Money Concepts in Stuart, Florida, offers another strategy. “You must start taking required minimum distribution at age 72, but you might want to consider taking distributions early. This could be a good way to delay claiming Social Security and maybe even wait to age 70 to claim. Your benefits at 70 will be about 132 percent higher for the rest of your life including cost-of-living adjustments.”
3. Create, and stress-test, your income plan
Laurie Allen, a CFP at LA Wealth Management in Manhattan Beach, California, creates income plans tailored to her clients’ current needs. “What worked for you as a couple may not work now. One of your Social Security incomes may be gone, and possibly a pension, too.” When creating an income plan, Michelle Gessner, a CFP at Gessner Wealth Strategies in Houston, Texas, considers unforeseen events, such as disabilities, family financial issues, investment losses and the maximum spending a plan can support. “I beat the heck out of it to ensure that we have thought of everything.”
4. Assemble a worthy team of advisers
Your financial planner should be just one of a team of experts who advise you on your investments, estate and tax matters, and health care needs. “You may also require a will, perhaps a revocable living trust, a durable power of attorney, a medical power of attorney and a living will,” McLeod says. You must also designate a personal representative or executor to take charge in case you can’t handle things yourself. This role requires some expertise, and the ability to handle multiple details. What if you don’t have a trustworthy or capable family member to handle the job? McLeod suggests designating someone from your advisory team.
5. Think hard about long-term care insurance
Do you need long-term care insurance? Andrew Houte, director of retirement planning at Next Level Planning & Wealth Management in Brookfield, Wisconsin, says such a policy may be important for individuals who don’t have a partner to take care of them in the event of a major illness or if they’re incapacitated. “It may be less important if all your assets can go toward providing your care. You won’t be using funds that a spouse would need in the future.” Lineberger likes some of the newer life insurance policies that offer a permanent death benefit with a long-term care rider. “It’s a nice compromise.”
6. Gather all documents and digital files, write out instructions
Getting your affairs in order will lend peace of mind while providing a “roadmap” for your personal representative or executor. Assemble a binder of all your legal documents, including a list of all financial accounts, utility bills, life insurance policies and work-related benefits. Don’t forget to create a digital plan, so the personal representative named in your will or power of attorney document has the legal authority — allowed in many states — to access your online accounts and digital property. This includes your digital assets (websites, blogs, art, music, writing, business websites, cryptocurrency and more) and digital information (email accounts and social media).
In the event of your death, your representative can use this information to liquidate your assets, finalize your debts and share the news of your passing via your email and social media accounts. Be sure to write out clear instructions for this person, and keep them updated. To protect these vital records and your passwords, use a combination of low-tech (a binder) and high-tech methods (a thumb drive or secure website). Your instructions should include how to locate everything, including keys to your home. You can start by using the Emergency Financial First Aid Kit from the Federal Emergency Management Agency (FEMA).
7. Find a new purpose
Finally, focus on creating a sense of community; it will be vital to your well-being and contentment in retirement, Lineberger says. “Be intentional about creating community in your life, whether that be through places of worship or other civic groups. Find people to spend time with.” McLeod advises planning for a transition that adds significance and meaning. “This is even more important when you’re single, as having a ‘get me out of bed’ purpose might be the difference between a joyful life and a painful, lonely existence. Find your passion and stay engaged.”
https://www.aarp.org/retirement/planning-for-retirement/info-2021/steps-for-singles-to-secure-retirement.html
Will Social Security Retirement Benefits Keep Up with Inflation?
Older adults are concerned about the impact of inflation on Social Security retirement benefits.
Americans have real concerns about being able to make ends meet with Social Security retirement income, even as many admit they have not done much financial planning for retirement, a new survey by AARP shows.
Ninety percent of people age 50 and older who get Social Security retirement benefits now or will in the future say they are worried that their retirement benefits may not keep up with inflation. Among future beneficiaries, 40% worry a lot and 32% worry somewhat, according to the national poll. As for current beneficiaries, 34% say they worry a lot and 27% say they worry somewhat.
Despite these concerns, analyzing Social Security retirement benefits is not a high priority on most older Americans’ financial to-do list. Less than half of those surveyed (47%) estimated their future Social Security retirement benefits annually while 45% took the time in the last three years to review their earnings history on the Social Security Administration’s website. Instead, respondents were more likely to check the balance of their savings (80%), loans (68%), and investment accounts (61%).
Although mapping out finances could ease worry while spurring any needed action, just 54% of Americans age 50-plus report having completed their retirement planning. Another 28% haven’t planned for retirement living despite wanting to do so or knowing they should. Older adults don’t plan because it seems to bring up unpleasant feelings: 7% never seem to get around to it; 7% say it’s too stressful; 6% say it’s depressing, 4% are overwhelmed by information, and 4% don’t know where to start planning.
Methodology
The research is based on a survey of 1,041 adults over age 50, including 469 currently receiving Social Security benefits and 457 who anticipate being future beneficiaries. It was conducted in August 2022.
https://www.aarp.org/research/topics/economics/info-2022/inflation-social-security-retirement-benefits.html
5 Tips for Retiring in the Next 12 Months
You’ll be retired by this time next year. Here’s what to do now
You’ve scrimped and saved and planned for decades, through good times and bad. Now your goal is to retire in this uncertain environment, perhaps in the next year — even though the last six months have been, well, nerve-racking, economically speaking.
In July, the Labor Department reported the Consumer Price Index jumped 9.1 percent in June, its biggest year-over-year increase in 41 years. The Federal Reserve raised its short-term fed funds rate three times in 2022, and has indicated that more interest rate increases may be in the offing to slow the U.S. economy and tame inflation. Russia’s war with Ukraine has rattled the global economy, driven up the price of oil and raised gasoline prices for consumers. The Standard & Poor’s 500 stock index is in a bear market, pummeling retirement accounts, and there’s talk of a recession.
Avoid the headlines and maintain perspective
How can you weather tough times and successfully move on to the next stage of your life? To begin with, focus on what you can control, says Tracy Sherwood, of New York. “In times of market volatility, that’s spending, saving, portfolio diversification and managing your emotions.”
It may also help to review some basic facts. While distressing, bear markets are normal. They occur when the stock market declines 20 percent or more from its most recent high. As of June 13, the Standard & Poor’s 500 stock index, the benchmark for measuring the performance of 500 of the largest U.S. stocks, had dropped 21.8 percent from its peak on January 3 of this year.
And though the past doesn’t predict what will happen in the future, reflecting on past events can be a useful exercise. Since 1926, there have been 17 bear markets, and they’ve lasted an average of three and a half years. Some, but not all, have been accompanied by recessions, which are defined as two consecutive quarters of declines in the gross domestic product (GDP). The last recession, in 2020, which was brought on almost exclusively by the global pandemic, ended after just two months.
Seek expert advice to cover your bases
Can you retire in a matter of months? Should you pull the trigger? That’s a major decision. Some experts say you can do it, provided you take steps to safeguard your nest egg as best you can. “We’re getting the question almost daily from our clients,” says Matthew Boersen, “Our answer is yes!”
Here, financial planners from around the country offer their advice for making this transition wisely, despite the troubling economic and geopolitical news.
1. Stress-test your financial plan
It’s essential to create a well-conceived plan, if you don’t already have one, says Sherwood. “Our clients have clarified their immediate, short-term and long-range goals. We’ve identified a retirement income strategy, retirement income they can rely on, and parameters for when it may be prudent to spend less or more.” If you need an adviser to help you create one, visit letsmakeaplan.org to find one in your area.
Your financial planner may recommend three types of investments — safe cash, such as bank CDS and money market funds; bond funds, which carry a moderate level of risk; and stock funds, which have the most risk. The allocation of these investments in your portfolio should correspond with your tolerance for risk.
Recent losses in the stock and bond markets may be making you uneasy. If you devised your plan in better times, ask your adviser to review it to make sure it’s still on track, says Zachary Bachner. There are retirement forecast tools can help determine whether inflation or the bear market may derail a client’s goals. “If we input higher levels for inflation or updated account values, and they still yield a successful illustration, then it helps to put the client’s mind at ease.”
2. Shore up your position with cash and a realistic budget
Every retiree should have a budget, and if you don’t have one, make one. (AARP has plenty of budgeting tools if you need them.) And although many planners say that you can live on about 85 percent of your pre-retirement income, many early retirees say they spend the same amount as they did before they retired — and sometimes more. Give your budget a test drive before you retired to see if it’s reasonable and if your income and the cash in your savings are enough to sustain your lifestyle. If not, look for expenses you can reasonably reduce,
But how much cash should you have right now? For clients preparing to retire in 12 months, Michael McDaid, suggests three years’ worth of living expenses. If they don’t have it, he encourages adjusting as needed. “Depending on their resources, they may need to reconsider their target retirement date,” he says.
Why so much cash? You shouldn’t take withdrawals in a market downturn, such as the one we’re currently experiencing. Let’s say that your stock fund is down 15 percent and you withdraw 4 percent: Your account drops 19 percent. Once retired, you’ll have no way to cover these losses.
If you have big travel plans, make sure you have the cash on hand to pay for them. “If a large expense can be delayed until the market recovers a bit, then the impact won’t be as great,” Bachner says. Be sure to consult your adviser about the appropriate rate of withdrawal for your situation.
Another option is to find a temporary or part-time job to help reduce the need for retirement withdrawals, Bachner says. “Every dollar earned will allow your assets to remain invested until the market starts to head higher again.” If you do retire soon and must take withdrawals, it’s best to take them from cash.
3. Leverage the opportunities right now
Strange as it may seem, you can make this market downturn work for you, says Boersen. For example, if your traditional, tax-deferred IRA account has dropped in value, now may be the time to convert all or a portion of it to a Roth IRA. You’ll pay less in taxes now than you would have when your account balance was higher. However, if you must rob your cash stash to do so, then you’ll want to reconsider.
In addition, now may be time for tax-loss harvesting, provided you have a taxable account. That is, you sell an investment that’s underperforming and losing money, and use that loss to reduce your taxable capital gains. You can offset up to $3,000 of ordinary income and reinvest those funds according to your asset allocation strategy. Keep in mind, though, that the benefits of tax-loss harvesting don’t apply to your 401(k) or IRA accounts because the IRS doesn’t allow you to deduct the losses that occur in a tax-deferred account. This is another subject to discuss with your financial adviser before making any moves.
4. Make sure you have your health care covered
A major medical event, such as a heart attack, can send your retirement plans off the rails if you don’t have adequate health insurance, either from Medicare or your spouse’s medical insurance or through the private market. If you choose a high-deductible plan, make sure you have enough in savings to pay the deductibles. If you’re using Medicare, make sure you budget for vision or dental care, which Medicare doesn’t cover.
5. Tune out the noise and keep the faith
Finally, Bachner warns against panicking should the market continue to pull back. Remind yourself that any losses you’ve suffered are on paper. Resist the urge to move into cash, as doing so will lock in those losses for good. He says it’s best to remain invested and expect the market to rebound in the future. “That said, we are taking this opportunity to ensure that clients are invested appropriately, according to their risk-tolerance level. This year’s market volatility has made some people realize that they’re not as aggressive as they thought they were.”
As hard as it may be, zoom out and think long-term, Boersen says. “Returns for 2022 may be negative, but if you look at performance over longer periods of time, even two to three years, the returns are still incredibly positive.”
https://www.aarp.org/retirement/planning-for-retirement/info-2022/one-year-countdown.html
What Is the Minimum Salary You Need To Be Happy in Every State?
What’s the price of happiness in your state?
Can money buy happiness? According to a recent Purdue study published in the journal Nature Human Behaviour, income can correlate with emotional well-being and life satisfaction.
“Globally, we find that satiation occurs at $95,000 for life evaluation and $60,000 to $75,000 for emotional well-being,” said the study’s authors in the journal. However, the study also found that the ideal income for life satisfaction in North America is $105,000, as reported by Inc.
To estimate how much money you might need to be satisfied or happy in every U.S. state, GOBankingRates factored in each state’s cost-of-living index and used the $105,000 figure as the “benchmark.” The states were ranked from least to most amount of money needed to be happy. GOBankingRates also included unemployment and crime rates for many states for informational purposes.
It’s important to keep in mind, though, that “happiness” is subjective. The cost to live comfortably can vary from person to person. Keep reading to find out how much it takes to be happy in your state.
Mississippi
7 Reasons You Should Retire Already
Sometimes the writing is on the wall
Retirement may seem untenable with inflation soaring and gas prices skyrocketing, but for some older adults, hanging on to their job can cause more harm than good. Sure, you still have money coming in, but at what price to your mental or physical health?
“In this economy, people are starting to worry that they don’t have a plan,” says Riley Rindo, senior wealth adviser and director at MAI Capital Management. “They are panicking and tending to hang on when they can retire and be perfectly fine.”
The thought of retirement can be scary, especially when it can easily last 20-plus years. Staying employed for as long as possible keeps you socially connected and the cash flowing. Still, sometimes retirement is the better option, especially if any of these signs ring true.
1. You’re disinterested in the job
Work should give you a sense of purpose in addition to a paycheck, but for many people who have been there and done that for decades, it’s lost its luster. If going into the office or logging on for the day conjures up feelings of dread instead of joy, it may be a sign your job has run its course.
That’s particularly true if it’s hard to get motivated at work or if you’ve become resentful of daily tasks. “If you are 60 or 62, a bad day at work can turn into your last day or work,” says Rindo. “Just being motivated because you think you have to work isn’t very productive.”
2. Your health is suffering
Most people have plans for their golden years, whether it’s traveling the world, moving closer to the grandkids, kicking back at home or starting a second career. Those dreams cost money, but they also require decent health. If your health is suffering and you can afford to retire, now may be the time to make the leap. Why wait until you can’t enjoy the things you worked hard to save for?
“Some people feel like they used up precious remaining years, especially if they have chronic conditions or a health shock they weren’t counting on,” says Matthew Rutledge, an economics professor at Boston College and a research fellow at BC’s Center for Retirement Research.
3. You’re burned out
Whether your job is physically taxing or requires a lot of brainpower, feeling burned out is a big reason older adults make the retirement leap. Working too much can cause stress, which can lead to all sorts of health issues, including an increased risk of hypertension, heart attack and stroke. A recent study published in PNAS, a scientific journal, found stress can speed up the natural aging process of the immune system in people of advanced age, increasing the risk of cancer, heart disease and infectious illnesses such as COVID-19.
4. You’ve saved enough for retirement
Every penny counts, but sometimes you may have enough pennies to comfortably exit the workforce but are afraid to make the leap. Sure, inflation is at a record high of 9.1 percent over the past year and yes, gas prices are still soaring, but if you have enough cash in the bank to live comfortably in retirement, hanging on may be counterintuitive. You don’t want your money to outlive you.
5. Technology is causing you stress
Technology plays a leading role in how we work these days. Even if we are back in the office, meetings are still conducted via videoconferencing and chat apps. Answers are expected in real time, and always on is becoming the norm.
For older adults not used to technology, it can be overwhelming and stress inducing. Also a reason to retire. “Remote work will keep some in the workforce and drive others out,” says Rutledge.
6. You have no debt
Having no debt nearing your retirement age is an enviable position to be in. It’s also a reason some people choose to finally retire. They don’t have to worry about a mortgage payment, credit card debt or other recurring bills eating away at their cash flow. They’ve achieved peace of mind, so they take the plunge into retirement.
7. You want to pursue a second act
Continuing to work has a lot of benefits, but that doesn’t mean it has to be in your current career. Plenty of people are retiring to pursue second acts, whether that means a new vocation, part-time work, volunteering or business ownership. Moreover, they want to use the money they’ve amassed to travel, pursue hobbies and otherwise fulfill their dreams.
“While working longer is a good solution for people financially, it comes with a trade-off,” says Rutledge. “It takes away some of the fun they deserve.”
https://www.aarp.org/retirement/planning-for-retirement/info-2022/signs-you-should-retire-now.html
7 Surprisingly Valuable Assets for a Happy Retirement
A long and happy retirement takes more than just money. Here are seven things happy retirees do – besides dutifully saving the money they’ll need to quit the 9-to-5 grind.
Retirement planning is all about numbers. It centers around one question: Do my financial assets — pension, 401(k)s/IRAs, Social Security, property, sale of a business, etc. — provide enough income to fund my desired retirement lifestyle?
At least, that is what most people think. But ask any retiree, and they will likely tell you that it is only half the story. You’ll need enough money to get by, of course, but you don’t have to be super wealthy to be happy. In fact, life satisfaction tops out at an annual salary of $95,000, on average, according to a study by psychologists from Purdue University. Enough money to never have to worry about going broke or paying for medical care is important. But money is not the only or even the most important piece of a fulfilling retirement.
So, once you have a retirement plan in place, it is essential to focus on all those things money cannot buy. Here are seven happy habits that studies show can improve life satisfaction in retirement.
Habit No. 1: Happy retirees work at staying healthy
What good is money if you cannot enjoy it? The majority of retirees say that good health is the most important ingredient for a happy retirement, according to a Merrill Lynch/Age Wave report. Studies show that exercise and a healthy diet can reduce the risk of developing certain health conditions, increase energy levels, boost your immune system, and improve your mood.
Tips to take away: It’s never too late to get moving and eat right. Research shows even those who become physically active and adopt a healthy diet late in life dramatically lower the risk of cardiovascular illnesses and have a lower death rate than their peers. The Centers for Disease Control and Prevention recommends about 150 to 300 minutes of moderate-intensity physical activity a week.
Need some ideas? The National Institute on Aging has all sorts of great information on how to get started with an exercise program and to stick with it. Even a simple routine, such as walking 7,500 steps or more daily, can provide immense physical and mental health benefits. Regular walks are associated with lower blood pressure and reduced risk of dementia, as well as increased longevity and creativity. No wonder walking has been favorite pastime for many influential thinkers throughout history, including Albert Einstein, who walked at least 3 miles every day. (See Habit No. 7 below for one paw-some way to start a daily walking habit.)
Habit No. 2: They foster strong social connections
Hobbies and activities with people we like can boost life satisfaction, especially when our social networks shrink after leaving the workforce. Happier retirees were found to be those with more social interactions, according to one Gallup poll.
Further, social isolation has been linked to higher rates of heart disease and stroke, increased risk of dementia, and greater incidence of depression and anxiety. Believe it or not, a low level of social interaction is just as unhealthy as smoking, obesity, alcohol abuse or physical inactivity.
Tips to take away: You can find many ways to stay connected by participating in social events at your local community center or library. For example, game nights, weekly outings to a movie or museum and book clubs. One positive outcome from the COVID-19 pandemic is that we’ve all found ways to socialize, even from a distance. For those who live in a secluded area or have unreliable transportation, there are many easy-to-use tech tools to help ward off the feelings of social isolation. Zoom and Google Hangouts are great for video chats, and you can even watch TV “together” by using Netflix Party.
Habit No. 3: Happy retirees find a clear sense of purpose
The notion of retirement as time spent golfing, strolling the beach or reading classic novels is outdated. While fun, the stereotypical leisure activities associated with retirement don’t provide a sense of purpose or meaning, which is what many retirees say is important.
One place retirees find a sense of purpose is work. In a Gallup poll, nearly 3 in 4 Americans said they plan to work beyond traditional retirement age, with the majority planning to do so because they “want to,” not because they “have to.”
Retirees also gain meaningfulness and other benefits from volunteering. The same Age Wave/Merrill Lynch study referenced above found that retirees were three times more likely to say “helping people in need” brings them happiness in retirement than “spending money on themselves.” Further, those who donated money or volunteered felt a stronger sense of purpose and self-esteem and were happier and healthier.
Tips to take away: Now that you know volunteering is one of the most fulfilling retirement activities, how do you get started? There is likely a wide array of charities and non-profit groups right in your community that can be found with a simple search online. For example, VolunteerMatch.org lists volunteer opportunities that are searchable by city and category, such as animals, arts and culture, health, literacy and seniors. The service also lets you create a profile detailing your background and skills so that non-profits can match you to their specific needs.
Habit No. 4: They never stop learning
Experts believe that ongoing education and learning new things may help keep you mentally sharp simply by getting you in the habit of staying mentally active. Exercising your brain may help prevent cognitive decline and reduce the risk of dementia.
“Challenging your brain with mental exercise is believed to activate processes that help maintain individual brain cells and stimulate communication among them,” according to Harvard Medical School’s Healthbeat newsletter.
Tips to take away: Exercising your brain isn’t all that different from exercising your body. It requires consistent stimulation. That doesn’t just mean working on crossword puzzles every day (although one study found that people with dementia who did crossword puzzles delayed the onset of accelerated memory decline by 2.54 years). Choose something that is new and that you enjoy. Consider taking a class from a senior center or community college, learning to play an instrument or making it a habit to regularly visit the library and pick up a new book. Or, you could take free college courses from many top universities, such as Yale and Stanford, through an online learning platform like Coursera.
The National Institute on Aging also provides a list of activities that can help improve the health of older adults, ranging from visiting local museums to joining a book or film club.
Habit No. 5: They train their brains to be optimistic
A glass-half-full attitude may pay huge dividends, including lower risk of developing cardiovascular disease and other chronic ailments and a longer life. In an article published in JAMA Network, researchers found that participants who rated highly in optimism were much less likely to suffer from heart attacks or other cardiovascular events and had a lower mortality rate than their pessimistic counterparts.
Another research article, published in the Proceedings of the National Academy of Sciences (PNAS), indicates that people with higher levels of optimism lived longer. Optimistic women had a 50% greater chance of surviving to age 85, and optimistic men had a 70% greater chance.
Tips to take away: Believe it or not, optimism is a trait that anyone can develop. Studies have shown people are able to adopt a more optimistic mindset with very simple, low-cost exercises, starting with consciously reframing every situation in a positive light. Over time, you essentially can rewire your brain to think positively. Since negativity is contagious, it is also important to surround yourself with optimistic people and consider a break from the news. Dr. Nicholas Christakis of Harvard Medical School explains, “Just as some diseases are contagious, we’ve found that many emotions can pulse through social networks.” For more on how to cultivate optimism in your life, check out the six specific tips in this report.
Habit No. 6: Happy retirees practice mindful gratitude
Studies by psychologists Robert Emmons and Michael McCullough show that people who counted their blessings had a more positive outlook on life, exercised more, reported fewer symptoms of illness and were more likely to help others. This is further supported in work by psychologist Nathaniel Lambert that finds stronger feelings of gratitude are associated with lower materialism. Gratitude enhances people’s satisfaction with life while reducing their desire to buy stuff.
Tips to take away: As with optimism, gratitude also can be mastered with practice. One of the most effective ways to cultivate gratitude is by writing in a journal. Take a few minutes each day to write down a few things that you are grateful for; they can be as big as a professional accomplishment or as small as your morning cup of coffee. If you have a hard time thinking about what to write, consider buying a gratitude journal, like the The 5-Minute Gratitude Journal, which is a daily journal created by health psychologist and coach Sophia Godkin, that invites you to acknowledge the good people and events that came into your life each day.
Psychological research suggests that putting feelings of gratitude to paper can provide both mental and physical benefits, such as greater self-esteem, better sleep and improved heart health.
Habit No. 7: They have a furry or feathered friend
It turns out that Fido can provide more benefits to you than grabbing the newspaper. Older dog owners who walked their dogs at least once a day got 20% more physical activity than people without dogs and spent 30 fewer minutes a day being sedentary, on average, according to a study published in The Journal of Epidemiology and Community Health. Research has also indicated that dogs help soothe those suffering from cognitive decline, and the physical and mental health benefits of owning a dog can boost the longevity of the owner.
If a dog is out of the question, cats and birds are lower-maintenance possibilities. Or you could even consider pursuing home visits from a therapy dog. Therapy Dogs International has a home visit program with over 20,000 volunteer dog/handler teams registered throughout all 50 states.
Tips to take away: The companionship of a furry friend can be as beneficial as that of another human being. Finding your next best friend is as easy as visiting your local animal shelter. But if you don’t want or are unable to take on the responsibility of owning a dog full time, becoming a foster parent is a good option. You can usually foster a dog from an animal rescue center from a few days or weeks to a month or more, and ultimately help a dog in need find a caring family. And, no, breed does not matter. Small, large, slobbery or smelly, they’re all good dogs.
Retirement is major transition made up of many financial as well as life decisions. This is why it is important to work with a financial adviser to create a retirement plan as early as possible. That way you can spend more time focusing on everything else that equally matters.
https://www.kiplinger.com/retirement/happy-retirement/601160/7-surprisingly-valuable-assets-for-a-happy-retirement
Beware of Robocalls, Texts and Emails Promising COVID-19 Cures or Stimulus Payments
Coronavirus scams keep coming as fraudsters follow the headlines
The COVID-19 pandemic continues to fuel a parallel outbreak of coronavirus scams, many targeting older Americans.
As of mid-June, the Federal Trade Commission (FTC) had logged nearly 754,000 consumer complaints related to COVID-19 and stimulus payments since the start of the pandemic, 72 percent of them involving fraud or identity theft. These scams have cost consumers $827.6 million, with a median loss of $426.
Criminals are using the full suite of scam tools — phishing emails and texts, bogus social media posts, robocalls, impostor schemes and more — and closely following the headlines, adapting their messages and tactics as new medical and economic issues arise.
For example, when demand for COVID-19 tests spiked amid the omicron variant surge, federal and state authorities warned consumers about scammers selling fake or unauthorized at-home rapid tests online, or charging for tests that are administered for free by medical offices and public health departments.
Here are some coronavirus scams to look out for.
Fake tests and bogus cures
During the omicron wave, authorities in several states reported that scammers were setting up bogus pop-up testing clinics, or impersonating health care workers to approach people waiting in long lines at legitimate sites. Crooks offer quick access to fake or unapproved COVID-19 tests, collecting personal, financial or medical information they can use in identity theft or health insurance scams.
A January Better Business Bureau alert spotlights another common con: Robocalls direct consumers to fake clinic or medical supply websites that collect personal information or credit card numbers in the guise of offering test kits.
The FTC has taken legal action against companies suspected of abetting coronavirus robocalls, and the Federal Communications Commission (FCC) set up a dedicated website with information on COVID-19 phone scams.
Pitches for phony remedies have been a scam hallmark since the start of the pandemic and haven’t abated, even with vaccines and federally approved treatments now available. The FTC and the U.S. Food and Drug Administration (FDA) have sent dozens of warnings to companies selling unapproved products they claim can cure or prevent COVID-19.
Teas, essential oils, cannabinol, colloidol silver and intravenous vitamin-C therapies are among treatments hawked in clinics and on websites, social media and television shows as defenses against the pandemic. In late December, federal officials shut down a New Jersey organization and ordered it to recall “nano silver” products it advertised and sold as a COVID-19 treatment.
Financial phonies
The three economic relief packages passed by Congress in 2020 and 2021 delivered stimulus checks, enhanced unemployment benefits, aid to small businesses and other assistance to tens of millions of Americans. They also unleashed a torrent of schemes to steal aid payments. Criminals have drained nearly $100 billion from the federal relief programs, according to the Secret Service, which in December 2021 named a national coordinator for pandemic fraud recovery efforts.
Watch out for calls, texts or emails, purportedly from the Internal Revenue Service (IRS) and other government agencies, that instruct you to click a link, pay a fee or “confirm” personal data like your Social Security number to secure pandemic aid. Another common con comes via social media, in scam Facebook messages promising to get you “COVID-19 relief grants.”
With economic anxiety high, crooks are also impersonating banks and lenders, offering bogus help with bills, credit card debt or student loan forgiveness. Small businesses are being targeted, too, with scammers reaching out to owners with phony promises to help them secure federal disaster loans or improve Google search results.
The pandemic has also spawned stock scams. The U.S. Securities and Exchange Commission warned investors about con artists touting investments in companies with products that supposedly can prevent, detect or cure COVID-19. Buy those stocks now, the tipsters say, and they will soar in price.
It’s a classic penny-stock fraud called “pump and dump.” The con artists have already bought the stocks, typically for a dollar or less. As the hype grows and the stock price increases, they dump the stock, saddling other investors with big losses.
Phishing and spoofing scams
Email phishing and related scams have been a big part of what the FBI’s Internet Crime Complaint Center has labeled a pandemic-fueled “internet crime spree.”
Following the mid-January launch of a federal website to distribute free COVID-19 home tests to U.S. households, cybercrooks began registering similar domain names, aiming to lure consumers to lookalike sites and harvest their personal information. (Make sure you’re using the correct sites, covidtests.gov and special.usps.com, to order free tests from the government.)
They represent the latest in a long line of pandemic spoofing scams that have seen criminals register tens of thousands of COVID-related URLs, according to Palo Alto Networks, a cybersecurity company. If you contact one of those malicious sites, you could start getting phishing emails from scammers seeking to get personal information from you directly, or to plant malware that digs into files on your computer, looking for passwords and other private data for purposes of identity theft.
Crooks are also:
- Exploiting vaccine mandates in some workplaces. Cybersecurity firm Proofpoint reports that scammers are sending out emails purporting to be from human resources departments, requesting workers’ proof of vaccination. Links in the message direct targets to a fake sign-in page where the criminals can harvest log-in credentials.
- Sending out emails and text messages disguised as surveys about COVID-19 vaccines, according to the U.S. Justice Department. These questionnaires, purportedly from shot producers Pfizer, Moderna and AstraZeneca, promise a “free” reward if you provide bank or credit card information to cover a small fee.
- Posing as Federal Emergency Management Agency (FEMA) officials in texts, calls and emails, seeking personal information to “register” people for a federal program to help cover funeral expenses for victims of COVID-19. The program is real, but any unsolicited contact about it is fake; FEMA says it only reaches out to people who have already contacted the agency about funeral aid.
Protect Yourself From Coronavirus Scams
Tips to Avoid COVID-19 Scams
- Don’t click on links or download files from unexpected emails, even if the sender appears to be a business, government agency or person you recognize. Ditto for text messages and unfamiliar websites.
- Don’t share personal information such as Social Security, Medicare and credit card numbers in response to an unsolicited call, text or email.
- Don’t respond to unsolicited calls, emails, texts or social media messages offering rapid tests and other pandemic-related products. Check the Food and Drug Administration (FDA) website for a list of approved tests and testing companies before buying tests online.
- Talk to your doctor or consult your local health department to find legitimate testing sites. If you attend a pop-up clinic, watch for red flags such as workers being unable to answer questions about the testing process or pressing attendees for personal or financial data.
- Ignore offers to sell COVID-19 vaccination cards. They are scams. Valid proof of vaccination can be obtained only from legitimate vaccine providers.
- Be wary of phone calls, emails and social media messages urging you to invest in a hot new stock from a company working on coronavirus-related products or services.
- Be skeptical of fundraising calls or emails for COVID-19 victims or virus research, especially if they pressure you to act fast and request payment by prepaid debit cards or gift cards.
- Report COVID-19 scams to the Federal Trade Commission, the National Center for Disaster Fraud and local law enforcement.
Sources: U.S. Department of Justice, U.S. Department of Health and Human Services, U.S. Securities and Exchange Commission, Federal Communications Commission, Florida attorney general’s office, Better Business Bureau.
https://www.aarp.org/money/scams-fraud/info-2020/coronavirus.html
‘Solo Ager’ Needs Help Handling Her Financial Affairs
With no spouse and no children, she’s looking elsewhere for backup
The Problem
Elizabeth Spiegler, 68, a retired office manager in New York City, was thinking ahead. She wrote me wondering who could handle her financial affairs if someday she can’t. Spiegler isn’t married, doesn’t have children and isn’t that close to her extended family. Right now her brother has her power of attorney for finances, but she’d like further backup. Some friends will oversee her health care. But she feels having those friends manage her money is asking too much. And her financial adviser doesn’t want her power of attorney.
piegler is what’s called a solo ager: an older person with neither a partner nor surviving children. It’s a growing group. In 2000, 16 percent of Americans 85 and older had no living offspring; by 2040 that number is expected to hit 21 percent. A recent SeniorCare.com study found that 78 percent of solo agers had no one to help with the bills or finances. “I think I may be fine,” says Spiegler, who now manages her own money. “But what if I’m not? I don’t know what to do.”
The Advice
For answers, I turned to attorneys and financial experts who work with older people and their families. Each discussed the risk of elder financial abuse, and how enlisting the wrong helper — maybe even a relative — can lead to disaster. Here are the experts’ best solutions.
1. A TRUST WITH SUCCESSOR TRUSTEES
Spiegler would establish a living (or revocable) trust and put all the assets she could into it now. She’d serve as her own trustee, naming her brother and a financial institution as successor trustees who could take over if necessary. Eventually, the institution would handle her bills and manage her investments. “The benefits of an institutional trustee are professionalism, experience and guidance,” says New York City estate planning attorney Martin Shenkman. “There are tons of checks and balances to protect you. That’s vital for anyone who is vulnerable and isolated.”
This safe solution can be a pricey one. Traditional trust companies sometimes serve only clients with several million dollars. But mainstream financial institutions like Fidelity, Schwab and Vanguard also do this work. Their annual charges start at $4,500 a year (on top of usual investment costs, like fund fees). Even these less expensive alternatives, however, cost more than Spiegler — who has a pension and a retirement account in the low six figures — wants to pay.
2. A FINANCIAL TEAM
What Spiegler needs is a team, says Carolyn McClanahan, who specializes in life-planning issues. “You need people doing the work,” she says. “But you also need people watching the people doing the work.” McClanahan suggests hiring a bill-paying service for the day-to-day money management, then having an accountant or attorney (someone who is also a fiduciary) lined up to make the bigger financial decisions. Because a bill-paying service typically charges less per hour than an accountant or lawyer, this works out financially as well. But, cautions Nancy Sween, National Association of Elder Law Attorneys spokesperson, you don’t want that bill payer to be a random person you find online. “You want to make sure they’re insured, bonded, and that you check out their website and their background,” she says. One such option is SilverBills, a household bill management service that operates nationwide; it reviews bills and authorizes payment for a flat monthly fee starting at $99. Another option is to find a service through the American Association of Daily Money Managers (aadmm.com), a group of individuals and small companies nationwide.
3. A PRIVATE FIDUCIARY
California attorney Stuart Furman, author of The ElderCare Ready Book, suggests Spiegler keep her brother in place as power of attorney as long as possible, while simultaneously setting up a “springing” power of attorney who would take his place if he were unable. Who would do this job? A private fiduciary. These are independent, licensed, bonded individuals. You can interview, check references and hire one in advance, much as you would a lawyer or accountant. A fiduciary acts for the benefit of the client — in other words, putting your interests first. They can serve as powers of attorney for health care as well as finance, executors for an estate, bill payers and even guardians. They typically charge $100 to $150 an hour for their services. This arrangement might work for Spiegler if she lived elsewhere. Unfortunately, licensed private fiduciaries exist only in California and Arizona.
The Outcome
In the end, Spiegler decided to do nothing — yet. “This information is very valuable,” she says. But she acknowledges a psychological block to getting started: “Right now I like being independent and taking care of my own business.”
https://www.aarp.org/retirement/planning-for-retirement/info-2019/solo-aging-financial-plan.html
Do Your Kids Know Where to Find All Your Money if Tragedy Strikes?
Talking about who will control your assets is tricky; doing it slowly may help
My husband and I have never told our adult children, now in their mid-30s, how much money we make, how much we have tucked away and how much we spend in a year. But after talking with more than a dozen lawyers, therapists and financial advisers for this article, I’m cautiously nudging us toward opening up.
The risk of them being caught unawares or without access to our funds, should tragedy befall us, is high. The risk that they will do something unwise with our financial information seems low. Plus, they might learn something.
When a parent’s finances are revealed only after death or dementia strikes, the responsibility can place a lot of stress on offspring, says Bernard A. Krooks. “I see the consequences,” Krooks says. “It’s terrible.” He plans on revealing his financial life to his kids when he turns 60 this year.
But there are good reasons not to tell all, too. An immature or troubled child could try to misuse your money or goad you into handing over assets you might need later. Complicated family dynamics, or just your desire for privacy, may make you hesitant to open up.
Which is to say there’s no one formula for when to open your books to your kids. But the experts I talked with do have some sensible advice on the matter.
Share shortages soon
If you suspect you don’t have enough money to see you through retirement, you owe it to your kids to tell them. Perhaps you will end up needing their assistance. There is no shame in that; family members have helped one another since the beginning of time. But the earlier you involve them, the more time they have to help you find more resources and make plans.
Bigger numbers should wait
You may have barely enough money to support a 25-year retirement and long-term care. But that sum might seem like lottery winnings to a 23-year-old. “I have seen it go completely bad when kids found out there was a lot of money,” says Diane Pearson, a financial planner in Pittsburgh. If you still have a spouse, each of you can manage money and you are relatively young and healthy, it’s fine to tell your children you think you have enough to be independent in retirement without revealing specific numbers. By the time you are in spitting distance of 80, however, your kids or other trusted financial representative should know where your money is and how to access it.
Find the middle ground
Every adviser or attorney who has worked with older clients or estates says you should make a list of all your assets, with account numbers and any other details your heirs or caretakers will need to handle your affairs. Put that info in an envelope and make sure that your children (or whoever will be your eventual representative) know where it is and can get to it. If the information is on your computer, make sure the right people have access to the passwords they will need. By doing this, you’ve put off sharing the numbers but provided assurance to all that, in the moment of need, they’ll have the necessary information and guidance.
Gather the kids
Decided to unveil your retirement or estate plans? Krooks and other experts suggest calling a family meeting with all of your kids present. This is especially important if you’re not going to treat them equally in terms of information and responsibility. If one child has your power of attorney and will be your estate’s executor, you can reassure the others that you love them just as much, but you’ve chosen that sibling because of, say, financial acumen or geographic proximity.
Introduce the family to your adviser
It may be good for your children to meet your financial adviser, if you have one, to get a realistic picture of your situation. When Jorie Johnson, was working with a couple who she thought were endangering their retirement by giving too much to their children, she suggested they invite one of those children to their next meeting. “Which one?” they asked. The one, she replied, that they planned to live with after they ran out of money. When Mom and Dad relayed this to their family, it was enough to persuade the kids to stop requesting so much help.
Ideally, talking about your end-of-life financial plan isn’t the first chat you’ve had with your kids about your finances. “The whole life of your children, you should be talking about money with them,” says Rhonda Holifield. That makes sense to my husband and me. Today we’re working on our list of assets. And as the years go on we’ll be sharing more with our kids.
https://www.aarp.org/money/investing/info-2020/giving-kids-access-to-assets.html
Happy Retirees Have These 7 Habits in Common
A long and fulfilling retirement takes more than just money. Here are seven things happy retirees do – besides dutifully saving the money they’ll need to finally quit the 9-to-5 grind.
Retirement planning is all about numbers. It centers around one question: Do my financial assets — pension, 401(k)s/IRAs, Social Security, property, sale of a business, etc. — provide enough income to fund my desired retirement lifestyle?
At least, that is what most people think. But ask any retiree, and they will likely tell you that it is only half the story. You’ll need enough money to get by, of course, but you don’t have to be super wealthy to be happy. In fact, life satisfaction tops out at an annual salary of $95,000, on average, according to a study by psychologists from Purdue University. Enough money to never have to worry about going broke or paying for medical care is important. But money is not the only or even the most important piece of a fulfilling retirement.
So, once you have a retirement plan in place, it is essential to focus on all those things money cannot buy. Here are seven happy habits that studies show can improve life satisfaction in retirement.
Habit No. 1: Happy retirees work at staying healthy
What good is money if you cannot enjoy it? The majority of retirees say that good health is the most important ingredient for a happy retirement, according to a Merrill Lynch/Age Wave report. Studies show that exercise and a healthy diet can reduce the risk of developing certain health conditions, increase energy levels, boost your immune system, and improve your mood.
Tips to take away: It’s never too late to get moving and eat right. Research shows even those who become physically active and adopt a healthy diet late in life dramatically lower the risk of cardiovascular illnesses and have a lower death rate than their peers. The Centers for Disease Control and Prevention recommends about 150 to 300 minutes of moderate-intensity physical activity a week. Need some ideas? The National Institute on Aging has all sorts of great information on how to get started with an exercise program and to stick with it. Even a simple routine, such as walking 7,500 steps or more daily, can provide immense physical and mental health benefits. Regular walks are associated with lower blood pressure and reduced risk of dementia, as well as increased longevity and creativity. No wonder walking has been favorite pastime for many influential thinkers throughout history, including Albert Einstein, who walked at least 3 miles every day. (See Habit No. 7 below for one paw-some way to start a daily walking habit.)
Habit No. 2: They foster strong social connections
Hobbies and activities with people we like can boost life satisfaction, especially when our social networks shrink after leaving the workforce. Happier retirees were found to be those with more social interactions, according to one Gallup poll.
Further, social isolation has been linked to higher rates of heart disease and stroke, increased risk of dementia, and greater incidence of depression and anxiety. Believe it or not, a low level of social interaction is just as unhealthy as smoking, obesity, alcohol abuse or physical inactivity.
Tips to take away: You can find many ways to stay connected by participating in social events at your local community center or library. For example, game nights, weekly outings to a movie or museum and book clubs. One positive outcome from the COVID-19 pandemic is that we’ve all found ways to socialize, even from a distance. For those who live in a secluded area or have unreliable transportation, there are many easy-to-use tech tools to help ward off the feelings of social isolation. Zoom and Google Hangouts are great for video chats, and you can even watch TV “together” by using Netflix Party.
Habit No. 3: Happy retirees find a clear sense of purpose
The notion of retirement as time spent golfing, strolling the beach or reading classic novels is outdated. While fun, the stereotypical leisure activities associated with retirement don’t provide a sense of purpose or meaning, which is what many retirees say is important.
One place retirees find a sense of purpose is work. In a Gallup poll, nearly 3 in 4 Americans said they plan to work beyond traditional retirement age, with the majority planning to do so because they “want to,” not because they “have to.”
Retirees also gain meaningfulness and other benefits from volunteering. The same Age Wave/Merrill Lynch study referenced above found that retirees were three times more likely to say “helping people in need” brings them happiness in retirement than “spending money on themselves.” Further, those who donated money or volunteered felt a stronger sense of purpose and self-esteem and were happier and healthier.
Tips to take away: Now that you know volunteering is one of the most fulfilling retirement activities, how do you get started? There is likely a wide array of charities and non-profit groups right in your community that can be found with a simple search online. For example, VolunteerMatch.org lists volunteer opportunities that are searchable by city and category, such as animals, arts and culture, health, literacy and seniors. The service also lets you create a profile detailing your background and skills so that non-profits can match you to their specific needs.
Habit No. 4: They never stop learning
Experts believe that ongoing education and learning new things may help keep you mentally sharp simply by getting you in the habit of staying mentally active. Exercising your brain may help prevent cognitive decline and reduce the risk of dementia.
“Challenging your brain with mental exercise is believed to activate processes that help maintain individual brain cells and stimulate communication among them,” according to Harvard Medical School’s Healthbeat newsletter.
Tips to take away: Exercising your brain isn’t all that different from exercising your body. It requires consistent stimulation. That doesn’t just mean working on crossword puzzles every day (although one study found that people with dementia who did crossword puzzles delayed the onset of accelerated memory decline by 2.54 years). Choose something that is new and that you enjoy. Consider taking a class from a senior center or community college, learning to play an instrument or making it a habit to regularly visit the library and pick up a new book. Or, you could take free college courses from many top universities, such as Yale and Stanford, through an online learning platform like Coursera.
The National Institute on Aging also provides a list of activities that can help improve the health of older adults, ranging from visiting local museums to joining a book or film club.
Habit No. 5: They train their brains to be optimistic
A glass-half-full attitude may pay huge dividends, including lower risk of developing cardiovascular disease and other chronic ailments and a longer life. In an article published in JAMA Network, researchers found that participants who rated highly in optimism were much less likely to suffer from heart attacks or other cardiovascular events and had a lower mortality rate than their pessimistic counterparts.
Another research article, published in the Proceedings of the National Academy of Sciences (PNAS), indicates that people with higher levels of optimism lived longer. Optimistic women had a 50% greater chance of surviving to age 85, and optimistic men had a 70% greater chance.
Tips to take away: Believe it or not, optimism is a trait that anyone can develop. Studies have shown people are able to adopt a more optimistic mindset with very simple, low-cost exercises, starting with consciously reframing every situation in a positive light. Over time, you essentially can rewire your brain to think positively. Since negativity is contagious, it is also important to surround yourself with optimistic people and consider a break from the news. Dr. Nicholas Christakis of Harvard Medical School explains, “Just as some diseases are contagious, we’ve found that many emotions can pulse through social networks.” For more on how to cultivate optimism in your life, check out the six specific tips in this report.
Habit No. 6: Happy retirees practice mindful gratitude
Studies by psychologists Robert Emmons and Michael McCullough show that people who counted their blessings had a more positive outlook on life, exercised more, reported fewer symptoms of illness and were more likely to help others. This is further supported in work by psychologist Nathaniel Lambert that finds stronger feelings of gratitude are associated with lower materialism. Gratitude enhances people’s satisfaction with life while reducing their desire to buy stuff.
Tips to take away: As with optimism, gratitude also can be mastered with practice. One of the most effective ways to cultivate gratitude is by writing in a journal. Take a few minutes each day to write down a few things that you are grateful for; they can be as big as a professional accomplishment or as small as your morning cup of coffee. If you have a hard time thinking about what to write, consider buying a gratitude journal, like the The 5-Minute Gratitude Journal, which is a daily journal created by health psychologist and coach Sophia Godkin, that invites you to acknowledge the good people and events that came into your life each day.
Psychological research suggests that putting feelings of gratitude to paper can provide both mental and physical benefits, such as greater self-esteem, better sleep and improved heart health.
Habit No. 7: They have a furry or feathered friend
It turns out that Fido can provide more benefits to you than grabbing the newspaper. Older dog owners who walked their dogs at least once a day got 20% more physical activity than people without dogs and spent 30 fewer minutes a day being sedentary, on average, according to a study published in The Journal of Epidemiology and Community Health. Research has also indicated that dogs help soothe those suffering from cognitive decline, and the physical and mental health benefits of owning a dog can boost the longevity of the owner.
If a dog is out of the question, cats and birds are lower-maintenance possibilities. Or you could even consider pursuing home visits from a therapy dog. Therapy Dogs International has a home visit program with over 20,000 volunteer dog/handler teams registered throughout all 50 states.
Tips to take away: The companionship of a furry friend can be as beneficial as that of another human being. Finding your next best friend is as easy as visiting your local animal shelter. But if you don’t want or are unable to take on the responsibility of owning a dog full time, becoming a foster parent is a good option. You can usually foster a dog from an animal rescue center from a few days or weeks to a month or more, and ultimately help a dog in need find a caring family. And, no, breed does not matter. Small, large, slobbery or smelly, they’re all good dogs.
Retirement is major transition made up of many financial as well as life decisions. This is why it is important to work with a financial adviser to create a retirement plan as early as possible. That way you can spend more time focusing on everything else that equally matters.
https://www.kiplinger.com/retirement/happy-retirement/601160/7-surprisingly-valuable-assets-for-a-happy-retirement
10 Things No One Tells You About Early Retirement
The reality of quitting work can be far different from the fantasy. Here’s what you need to know
Even if you love your job, there are times when you’d rather be alphabetizing the spice shelf than riding a packed train alongside hundreds of sniffling fellow commuters. And as you sway in the car next to a man who has biked four hours to the station, you might be thinking about early retirement.
Unfortunately, early retirement isn’t for everyone. In fact, it isn’t for most people. Just 11 percent of today’s workers plan to retire before age 60, according to an Employee Benefit Research Institute (EBRI) survey. For many of those who do take the plunge, the reality of early retirement can turn out to be far different than the fantasy. Here are a few things to consider before you decide to retire early.
1. Health care is expensive
Medicare, the federal program that provides health coverage for more than 61 million older Americans, doesn’t start until age 65. Until then, you’ll need an alternative — and it won’t come cheap.
“Private health insurance before Medicare kicks in costs an arm and a leg,” says Brian Schmehil, director of wealth management for the Mather Group in Chicago. Current law says your insurance costs can’t be more than 8.3 percent of your household income. For a person with a household income of $50,000, for example, a mid-level silver plan would be $346 a month, or $4,150 per year.
2. Tapping your nest egg early can be costly
If you retire before 59 1/2, you’ll usually pay a 10 percent early withdrawal penalty from most tax-deferred accounts, such as traditional IRAs and 401(k) plans. “There are some options for getting IRA money before 59 1/2, but it’s tricky and can cause major penalties if done incorrectly,” says Matt Stephens, founder of AdvicePoint in Wilmington, North Carolina.
And unless you have a Roth IRA, which is funded with after-tax contributions, you’ll owe income taxes on the amount you withdraw from traditional accounts funded with pretax contributions. If, for example, you withdraw $20,000 from an IRA before age 59 1/2 and are in the 15 percent federal tax bracket, you’ll pay $5,000 in taxes and penalties, leaving you with $15,000.
3. You sacrifice the power of compounding interest
Time is your friend when you are saving for retirement, but not when you are spending. If you sock away $250 a month — $3,000 a year — from age 25 to age 55, you’ll have about $237,000 when you retire, assuming you make no withdrawals and earn an average 6 percent annually on your investments. Seemingly not a bad return on your $90,000 in contributions.
But let’s say you work 10 more years and retire at 65. In that scenario, you’ll have about $464,000, nearly double. Why? The extra decade’s worth of contributions helps, but that only adds up to $30,000. The real growth comes from another 10 years’ worth of interest earned not only on all the principal you contributed but also the interest earned on the interest that has compounded for four decades.
4. You may have a long, long life ahead of you
A woman who retires at 55 will have to make her savings last for 28.6 years, on average, compared to 20.4 years if she retires at 65. A man who retires at 55 will have to stretch his savings for 25.1 years, rather than 17.8. And for couples who make it to 65, there’s a 25 percent change that the surviving spouse lives to 98, according to the Society of Actuaries.
“With improved health care, many people are living longer than the national averages,” says Angela Dorsey, in Torrance, California.
5. You’ll spend more money than you think
A typical rule of thumb is that you’ll spend about 80 percent as much in retirement as you do when you work. After all, you won’t be shoveling money into your retirement account, commuting every day and, for that matter, paying Social Security payroll tax, assuming you have no more earned income. But at least in the early years of retirement, when you’re younger, healthier and newly freed from the constraints of work, you could very well spend as much as or more than you did before retirement. A J.P. Morgan Asset Management study found that there tends to be a “spending surge” by new retirees on travel, home renovations or relocation, and other retirement-related lifestyle changes that levels off after two or three years.
With inflation running at a red-hot 8.6 percent the past 12 months, your spending plans might need considerable revising. According to EBRI, 36 percent of retirees say their overall spending and expenses are higher than expected — an increase from last year. Also up from last year is the share reporting that housing and travel expenses, specifically, are higher than expected.
“Every day is Saturday,” says Sean Pearson, in Conshohocken, Pennsylvania. “Once you don’t work, you wake up and look for things to do — basically, how we all feel on Saturday. Some things might be fun and social. Some things might be work around the house. Most things cost some money, which is why Saturday is often the most expensive day of your week.”
6. Housing expenses don’t retire when you do
Retiring without a mortgage is a common goal for would-be retirees, but it’s a goal that many fail to meet. According to an American Financing survey, 44 percent of retired homeowners between ages 60 and 70 still carry a mortgage.
Even if you have paid off your mortgage, other expenses don’t go away. “Home maintenance and increasing property taxes can take up a large chunk of your budget,” says Dorsey, the California financial planner. New Jersey, Illinois and New Hampshire have the highest property tax rates, according to Rocket Mortgage; Hawaii, Alabama and Colorado have the lowest. As a rule of thumb, homeowners should set aside 1 percent of a home’s purchase price annually to cover repairs and replacement. That’s $3,500 per year on a $350,000 house. Don’t forget that many states offer lower property tax rates for those 65 and older.
7. Extra income can be hard to come by
Working in retirement might not be as simple as you think. While 74 percent of workers plan to work for pay in retirement, according to the EBRI study, just 27 percent of actual retirees reported working for pay. Even part-time work can be a challenge. “One thing early retirees don’t seem to realize is that if they are planning on doing traditional part-time work while retired, those jobs require a commitment to a schedule that sometimes is not very flexible,” says Leslie Beck, in Rutherford, New Jersey. “This can cut into other retirement goals such as travel or visiting with family. I have had retirees surprised by the inflexibility of part-time work.”
If you figure you’ll instead fill the income void with Social Security, remember the earliest you can usually claim retirement benefits is age 62. Even then, you’ll only receive partial benefits. For anyone born in 1960 or later, the full retirement age, when you are entitled to 100 percent of your monthly benefit, is 67. By claiming early at 62, the benefit amount is reduced by 30 percent.
8. There’s a lot of time to kill
When you retire, you have a 40-hour gap in your week that you need to fill. “Are you sure you have enough activities to keep your body, mind and spirituality occupied for the many years you have ahead of you?” asks Catherine Valega, in Winchester, Massachusetts.
How much time do you realistically see yourself spending going on long walks, lounging poolside or curling up on the couch with a good book, especially after the novelty wears off? Think hard and think long term before you retire. Do you want to volunteer? Go back to school? Pick up a new hobby or resume an old one? Come up with a plan in advance of retirement.
9. You may need to make new friends
If you retire in your 50s, you may find that your current friends aren’t around much — because they still have full-time jobs. While you have the luxury of catching a matinee or playing a round of golf midweek, those in your social circle who are working nine-to-five don’t.
If you find new friends, they are likely to be older, says Dennis Nolte, in Oviedo, Florida: “Many of my pre-60-year-old retirees, especially those who are active, lament that their new peer group is significantly older than they are — and thus have a different set of expectations about diet, sleep schedule, even cultural references.”
10. Retirement can be tough on couples
“Retirement is a major life transition, and you have to be patient with yourself and your spouse,” says Patti Black, in Birmingham, Alabama. “Most retired couples do not look like those pictured in ads and commercials.” You’ll have to decide how work around the house will change. Will you really share cooking, cleaning and yard work? And do you honestly want to be together 24-7, particularly if you downsize to a smaller home?
These decisions can have serious consequences for a marriage. “Gray divorce, or divorce after age 50, has doubled since 1990 while declining across all other age groups,” Black warns. “And it is most often the wife who asks for divorce after age 50.”
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.
https://www.aarp.org/retirement/planning-for-retirement/info-2021/pre-early-retirement-reality-check.html
Remarried With Children? 5 Estate Planning Mistakes to Avoid
Couples on their second marriages need to plan carefully for each other and their kids
A second marriage can be a balm for the heartache of losing a spouse, be it through death or divorce. Nevertheless, if there are children or other heirs involved, you should consider carefully what will happen with your money and possessions when you pass on.
You can never guarantee that everyone in the blended family will be happy with the arrangements you have made with a second marriage. But you can at least avoid some mistakes so that your immediate family doesn’t get shut out of an inheritance — or worse, that an ex-spouse gets an inheritance that you didn’t plan on giving.
Most people mean well: They want their spouse to inherit their possessions when they die, and their heirs to split what’s left when the spouse dies. And they want everyone, including their children and their spouse’s children, to be happy. No one wants a brawl to break out when the will is read. Here are five ways to prevent that.
Mistake #1: Not changing beneficiaries
“The most common mistake we see is that people never change their wills or their beneficiary designations,” says Mark Bass, a financial planner with Pennington, Bass & Associates in Lubbock, Texas. “You should see the look on their face — or their new spouse’s face — when you ask, ‘Did you know your first wife is still the beneficiary of your 401(k)?’”
One advantage of changing the name of the beneficiary is that the money will go directly to the intended person — often, the surviving spouse — without probate, which is the legal process of settling an estate. You should go through all of your financial accounts — checking, savings, retirement — to make sure that your spouse is designated the beneficiary if that’s your intention. Check life insurance beneficiaries, too, since these payouts also bypass probate. You can also designate your children as secondary beneficiaries, so they will receive the assets in the event you have both died.
“Basically, change everything with a beneficiary designation,” Bass says. In some instances, federal or state laws may require spousal consent if the primary beneficiary is anyone other than the current spouse.
While you’re poring over important documents, remember to update legal directives — such as a medical power of attorney — to make sure that, say, it’s your current spouse and not your ex who is charge of making medical decisions in case you’re incapacitated.
Mistake #2: Not changing your will
Although changing your beneficiary on financial documents will avoid leaving your 401(k) balance to your ex-spouse, your will determines much of who gets the rest of the assets you and your spouse accumulated during your lifetimes. You probably don’t want your ex-spouse to get your home, either.
Typically, people on their second marriage decide that the surviving spouse gets all the assets, and upon the death of the second spouse, the remaining assets will be divided evenly among all of the children. This assumes, of course, that in five or 20 years everyone will still be getting along — and that your spouse, upon your death, won’t write a new will that shuts out your side of the family.
You could also draw up a contract that would require your surviving spouse to maintain the will as it is. Although some estate lawyers use them, will contracts have their drawbacks. “They’re not valid in every state, and not every state will recognize them,” says Letha Sgritta McDowell of Hook Law Center in Virginia Beach, Virginia. “And the biggest problem we have is that sometimes contractual will provisions can be blurry and not as clear as everyone thought they were when they were first written.”
You should also figure out in advance who will get important family items — even if their value is largely sentimental. You may not want your spouse’s children to inherit your great-great grandfather’s Civil War sword or your mother’s coin collection. You can make those determinations in a codicil to your will or a letter of instruction to your executor, Bass says.
Mistake #3: Treating all heirs equally
Most spouses aren’t financial equals when they marry, and this is particularly true for second marriages. If your new spouse moves into your house, for example, you may want your children to get the proceeds when the house is sold, rather than your spouse or your spouse’s children. Similarly, if you brought more assets to the marriage, you may want more of the money to go to your heirs than your spouse’s heirs.
“There’s no rule that says all children have to be treated equally,” says Jason Smolen, a principal in the Vienna, Virginia, firm SmolenPlevy Attorneys and Counsellors at Law. “There are a number of reasons why parents don’t treat children equally — sometimes it’s an unfortunate situation where a child is disabled, either mentally or physically.” In those cases, you’ll have to discuss with your spouse how to ensure that child is cared for, perhaps through an ABLE (Achieving a Better Life Experience) account or a trust.
Other times, Smolen says, the problem is conduct. A child may have a gambling problem, suffer from addiction or be a compulsive spender. Some parents may simply decide that after death children are responsible for their own actions, and if they lose their inheritance by betting on Seabiscuit in the fourth race at Pimlico, well, that’s the way things go.
Other parents may not be able to stand the thought of an inheritance being squandered. “Essentially, you want to regulate the flow of money to a child like that,” Smolen says. Doing so costs money: You’ll need to create a trust and appoint an executor to manage the assets. A so-called “spendthrift trust” is one solution. It doles out money at regular intervals to the beneficiary and deters creditors from getting the money in the trust.
Mistake #4: Waiting until you’re gone to give
If you’re planning to leave money to your children, you might consider giving it to them now, rather than in your will. You’ll get the pleasure of seeing them use that money while you’re still on the planet.
You can give up to $15,000 per person without having to pay the federal gift tax or deal with the IRS. (Recipients typically don’t pay tax on gifts.) It’s an enormous break.
If you and your spouse have four married children, you can give each child and their spouse $15,000, or $30,000 per lucky couple, without triggering federal gift taxes.
In addition, the giving limit is per giver: Your spouse may also give the same amount. If you and your spouse have four married children, you and your spouse can give $60,000 per couple, for a total gift of $240,000 per year for all eight people, without triggering the gift tax.
You won’t have to alert the IRS unless you exceed the $15,000 per person limit. If you do, you’ll have to file Form 709. But even then you probably won’t have to pay taxes on the gift because of the lifetime gift exclusion of $11.7 million per person (in 2021), or double that ($23.4 million) for married couples. If you exceed those limits, you’ll owe gift taxes on the amount above the lifetime limit.
Mistake #5: Skipping the lawyer
If your assets are few and your circumstances uncomplicated, you can probably get away with going online and drafting a do-it-yourself will. It’s a simple, inexpensive option — and it beats having no will at all.
But if you’re older and on your second marriage, odds are good your life is anything but uncomplicated. Ex-spouses, blended families and comingled assets up the complexity quotient, as does a child with special needs or an aging parent. It may be wise to invest the time and money in getting a thorough estate plan drawn up by a professional.
While consulting an attorney comes at a cost, you’ll get the comfort of knowing that you, and not a probate judge, will decide who gets what when you’re gone. And you’ll also know that your ex won’t be spending your 401(k) money.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.
A 67-year-old who ‘un-retired’ shares the biggest retirement challenge ‘that no one talks about’
In 2007, at age 52, I was forced to retire overnight. An MRI had revealed a tumor, the size of a large eggplant, sitting on my pelvis. In 98% of these cases, my oncologist told me, bone tumors are secondary cancer. He estimated that I had about six months to live.
But after two successful operations, I took a few months to recuperate on crutches and learn how to walk again. After my near-death experience, I had been in retirement for 10 years. I found myself bored, restless and stuck. My enthusiasm and energy diminished. My mental health suffered.
No one else I knew who was retired told me these were things I might experience. But when I shared with them how I felt, they admitted to feeling the same way at times.
That’s when I decided to “un-retire” and launch a mindset coaching company to help people achieve a more fulfilling retirement than I had.
The biggest challenge of retirement
Retirement means different things to different people. I did a deep survey of more than 15,000 retirees over the age of 60, and asked them one question: “What is your single biggest challenge in retirement?”
Below is a small selection of responses I received under the most cited categories:
Regret:
- “I miss doing the work that I love.”
- “I don’t think retiring is for me. I want to go back to teaching.”
- “I’m not sure what to do with my time. I feel lost.”
Health:
- “Keeping my mind healthy and adding value to the world.”
- “Fear of dying in pain and discomfort.”
- “When you’re 70 with a heart condition, you don’t get that many more bites at the apple.”
Identity:
- “Fear of losing my identity created over a lifetime.”
- “People do not see you anymore.”
- “Feelings of rejection — internalized, not voiced.”
Here’s what this tells us: The biggest retirement challenge that no one talks about, in my experience, is finding purpose.
Sure, money is certainly a concern. “I have a fear of poverty and losing dignity,” one person said. Another wrote: “Money goes out, nothing comes in.” But surprisingly, financial worries weren’t among the top three in the list.
People often confuse retirement savings with retirement planning. But these are two different concepts. Google the words “retirement planning” and you’ll mostly see, for pages and pages, savings-and pension-related content.
There is nothing on actual retirement planning, which I believe is more about your life, and less about money. Having steady finances to last you throughout retirement plays a significant role in quality of life, but what’s more important is your life-planning.
In other words, what is it that you are going to do once you leave the workforce? You can retire from your career, but you can’t retire from life.
Finding purpose leads to a more meaningful, healthier life
In the same survey, I asked how people thought they might solve their challenges. A full 35% believed that the answer is in finding purpose in life through a new skill or interest.
In fact, a 2021 study of 12,825 adults over the age of 51 published in the Journal of Applied Gerontology associated a strong purpose in life with healthier lifestyle behaviors and slower rates of progression of chronic illnesses.
Finding purpose can also help retirees find new side hustle opportunities that bring in income, helping to ease financial concerns.
How a Japanese concept saved me from a depressing retirement
I’ve helped countless retirees find their purpose. They didn’t go back to work in the traditional 9-to-5 sense, but they set up new businesses, consulted, volunteered and took on hobbies that brought them joy and satisfaction.
To identify what activities brought me purpose, I referenced the Japanese concept of “ikigai,” which translates to “your reason for being.”
The Westernized version of this concept is based on the idea that there are four components a person must have complete to achieve ikigai.
Each concept is represented by a question. As you actively pursue what you enjoy doing in service of yourself, your family, and your community, think about whether that activity allows you to answer “yes” to any combination of those four questions:
- Are you doing an activity that you love?
- Are you good at it?
- Does the world need what you offer?
- Can you get paid for doing it?
Japanese neuroscientist and happiness expert Ken Mogi also suggests considering if the activity has the five pillars that further allow your ikigai to thrive:
- Does the activity allow you to start small and improve over time?
- Does the activity allow you to release yourself?
- Does the activity pursue harmony and sustainability?
- Does the activity allow you to enjoy the little things?
- Does the activity allow you to focus on the here and now?
On a deeper level, ikigai refers to the emotional circumstances under which individuals feel that their lives are valuable as they move towards their goals.
As for me, I’ve found that my purpose now is to help retirees “un-retire” and create a new life for themselves. Depending on when you plan to retire, you may have another 30, 40, 50 or more years of life — and that’s a hell of a long time to drift aimlessly.
https://www.cnbc.com/2022/06/15/67-year-old-who-unretired-at-62-shares-the-biggest-retirement-challenge-that-no-one-talks-about.html
The Financial Penalty of Losing Your Spouse
Prepare for the monetary shock of widowhood
When you lose your mate, you lose so much—your best friend, your equilibrium, your future together. And just when you’re at your lowest, it hits you: You could lose a lot of money, too.
Your finances may crash in myriad ways just when you’re dealing with grief. Among them:
- If your spouse was still working—and the average age at which women become widowed is 59, according to the Census Bureau—you may lose much or all of your household income.
- If you’re both retired, your household may go from two Social Security benefits down to one.
- Your tax rate may rise, now that you will be filing as single.
- You may lose access to credit cards you thought were yours but that were established under your spouse’s name.
- Availability to savings, retirement accounts and investments could be delayed or even blocked if beneficiary information wasn’t properly filled out.
- You may miss out on expected inheritances if your spouse was unlucky enough to die before his or her parents did.
- You may need to pay someone to do the many things your spouse did for you, from lawn care to home maintenance.
- If you’re widowed from a second marriage, your spouse’s assets may go to first-marriage children, not you.
Of course, the best time to deal with all of this is before the death. Financial advisers are comfortable doling out reams of pre-death planning advice: Update your beneficiaries on all your accounts! Get adequate life insurance! Make a list of accounts and passwords and monthly payments to be made! But after he’s gone? Not so much. (Note that it is usually a “he,” as 58 percent of women and 28 percent of men 75 and older are widowed. I’ll use those genders when writing this, but it applies to all.)
After he’s gone, there’s more pain and fewer options. “I think a lot of people become widowed and lose their mooring so much that they can’t manage the decision-making,” says Karen Altfest, a New York Employee who works with older female clients. But the situation isn’t hopeless, and these financial strategies can protect your bottom line while you navigate your new future and your grief.
GET THE RIGHT KIND OF HELP
Even if you’re a DIY person when it comes to your money, it helps to have a professional look at your whole new financial life. Which accounts need to be switched, moved, renamed or rethought? Can you still afford your home? What’s your optimal insurance and retirement strategy moving forward?
CHECK YOUR OWN INSURANCE
If you are still working and supporting kids, you may need to bump up your own life or disability insurance, says Ken Weingarten, a Lawrenceville, New Jersey, financial adviser. You may also want to take another look at long-term care insurance or make other plans for how you will receive care if you need it down the road, he adds. “My personal experience colors this,” says Weingarten, whose mother died young after several years in a nursing home.
BE SMART ABOUT SOCIAL SECURITY
If you and your spouse were already drawing benefits, you will be able to elect the higher benefit going forward. If you yourself haven’t claimed any benefits yet, you have a choice: You can take either your survivor’s benefit based on your spouse’s work history, or the retirement benefit based on your own record. You then can switch to the other benefit, if it ends up being higher, later on.
KEEP THE 401(K)
Are you still in your 50s? Although it’s possible to roll your husband’s 401(k) or IRA money over to your own retirement account, don’t rush to transfer the 401(k), Weingarten warns. As a widow, you’ll be able to withdraw money from your late husband’s 401(k) whenever you need it, regardless of your age, without paying a 10 percent withdrawal penalty. (It will still be taxable as ordinary income.) If, instead, you move the 401(k) to a rollover IRA, you’ll have to pay a 10 percent penalty on any withdrawals from that IRA before you turn 59 ½, as well as the taxes.
TAKE A TAX OPPORTUNITY
If your family income doesn’t fall substantially when you are widowed, you may be bumped into a higher tax bracket, because the income cutoffs for filing singly are much lower than they are for couples filing joint returns. So make the most of your more generous tax treatment in the year of your spouse’s death, when the IRS still lets you file as a married couple, suggests Carolyn McClanahan, a Jacksonville, Florida, financial planner. In that year, take taxable withdrawals from 401(k) or IRAs so that they take full advantage of whatever bracket you’re in, even if you use the money to create a rollover Roth IRA or just to put some extra in your non-IRA savings account.
LINE UP YOUR CREDIT CARD
You may be surprised to learn that you may not be an equal account holder of your credit cards. You may be listed as just an authorized user of a card that is entirely your husband’s account. If that’s the case, the card issuer will eventually learn of your husband’s death and cancel the account. Don’t wait for that, McClanahan says. Let the company know of your husband’s death. “Most issuers will work with the spouse to get them a card,” she says. Better yet is to take preventive measures while your spouse is still with you: Either establish joint credit card accounts (in which both of you are liable for making payments) or become the primary owner of at least one card.
DON’T RUSH THE BIG STUFF
You’ve heard it before, but don’t be in a hurry to move, sell a house (or even a car) or write big checks for your kids in the immediate aftermath of a death, McClanahan warns. You may regret choices made in haste and grief. And you can always settle your finances and your life later on.
https://www.aarp.org/money/investing/info-2022/financial-plan-for-loss-of-spouse.html
https://www.aarp.org/retirement/planning-for-retirement/info-2020/5-secrets-to-retire-happy.html
Thinking about retiring? The keys to contentment are at your fingertips
Some might say that an ideal retirement would find you waking up in a private Mediterranean villa on a mattress made of freshly ironed $100 bills. And it’s true: Money is a big part of a happy retirement for many.
But most people need other things to be happy in retirement. After all, a pile of cash doesn’t guarantee good health, and it’s a poor substitute for meaningful relationships. Sure, you should keep an eye on your nest egg as you prepare for retirement, but don’t lose sight of everything else you need for a fulfilling life once you leave the nine-to-five behind. Consider these secrets to a happy retirement.
Secret No. 1: Money isn’t everything
You don’t need enormous wealth to be happy in retirement. You just need enough.
What’s enough? Many people think they want the same income in retirement as they have when they retire: If their job paid $100,000 a year, that’s what they want to have when they retire. But that’s high: Not only will you no longer be commuting to work and paying payroll taxes toward Social Security and Medicare, you won’t be shoveling a chunk of every paycheck into a retirement account. Most planners say that 80 to 85 percent of your preretirement income is plenty. And if you’ve paid off your mortgage, you may need even less than 80 percent of your preretirement income.
“People say, ‘I’m afraid of running out of money in retirement,’ but most don’t run out of money unless it’s a family crisis or health issue,” says Ray Ferrara, “What people are really worried about is having to change their lifestyle.”
If you want to have enough money in retirement, make sure your lifestyle matches your budget. How much do you need to cover your bills? How much do you typically spend doing the things you enjoy — such as concerts, dining out and travel? Factor in the cost of health care, too — most people qualify for Medicare coverage at age 65 — to get a more accurate sense of how much is enough for your happy retirement.
And remember that happiness is not just a fabulous vacation or four rounds of golf a week. “Find a way to savor small things,” says Christine Benz, director of personal finance at Morningstar. “Throughout our lives, it’s the little things that get us up in the morning.” It’s a valuable lesson that has been reinforced by the pandemic. Walking your dog, enjoying coffee and the newspaper, having dinner with your spouse — those are what make a happy retirement, and they cost next to nothing.
Secret No. 2: Make health a priority
You can’t control your genetics, which are a big part of how your health will hold up in retirement. But you can actively work to make sure your health is as good as possible.
If you plan on moving to a new place when you retire, check out local hospitals and other nearby health facilities. First consideration: Distance. That place up in the mountains or on a secluded beach may have great views, but how long will it take you to get to a doctor? Even as telehealth has gained popularity amid the coronavirus outbreak, in-person medical care remains essential for certain conditions and during emergencies.
Next is quality of care. If you have a preexisting condition, such as high blood pressure or knee problems, make sure you’re confident in the local specialists. You don’t want to bank on the only orthopedic surgeon in town for a hip replacement.
Find a sport or activity that you like. Biking, tennis, yoga or walking will not only prolong your life, but also help you enjoy it. Frankly, any exercise is better than none. A study of 334,000 Europeans found that the biggest beneficiaries of exercise — those who went from inactive to moderately inactive — had a 16 to 30 percent drop in premature death risk.
And try not to put off doing things you’ve always wanted to do, Ferrara says. “The thing to do is quit planning to do those things you’ve always wanted to do. If you’re healthy and can afford it, do them — because at some point you will have some health issue that will keep you from doing it.” Ferrara’s boat, incidentally, is named “Someday is Today.”
Secret No. 3: Relationships matter
People are social animals, as the pandemic has reminded us all, and people who live in isolation typically don’t live as long, or as happily, as those who get out and socialize. “As much as you like being alone, you might underestimate the benefits of being with people,” Benz says.
According to the Mayo Clinic, the benefits of being with other people are considerable. Adults with strong social support have a reduced risk of many significant health problems, including depression, high blood pressure and an unhealthy body mass index (BMI). Older adults with a rich social life tend to live longer than those who are more isolated, too.
If you decide to move to a new place when you retire, visit it frequently beforehand so you don’t wind up feeling alone. “We tell people that if you want to move somewhere, try living there for three or four months first,” Ferrara says. “Get to know the area, meet people, and see if people are nice. Then make your decision.”
And sometimes, you can even spend money to get new friends. In most cases, buying a new sports car is a bad idea in retirement — but not if it’s because you love being with other people who love sports cars, too, says Benz. “Then it might be money very well spent.”
Secret No. 4: Hone your vision
One of the best ways to get people to save for retirement is to have them make a detailed list of what they actually want from it, says Brad Klontz, founder of the Financial Psychology Institute and an associate professor at Creighton University Heider College of Business. Doing so often results in an immediate increase in retirement savings.
Why? Simply articulating the things you envision for your retirement makes them more real and makes you more likely to achieve those goals. And talking about your vision can even help you understand why you might be nervous about retirement. “Sometimes, people don’t realize that they have a negative vision of retirement,” Klontz says. They may, for example, know people who retired and died shortly thereafter. Or they may have had a parent whose life turned worse after retirement. It’s best to get those negative thoughts out of your head before you retire.
And it’s important that your vision of retirement jibes with the vision of a spouse or partner, if you have one. If your idea is to buy a Winnebago and camp in all 50 states and your significant other wants to live in an apartment in Rome, it’s best to address those issues now, rather than during your retirement party. The coronavirus has disrupted retirement plans for many, so take advantage of the unexpected delay to hone your own vision.
Secret No. 5: Find your purpose
If you want to be happy in retirement, you need to feel like you have a reason for being, aside from playing golf or reading novels.
“In the first six to 12 months after retirement, most people are happy doing things they didn’t have time to do before,” says Klontz. But once the golf season is over and they have finished War and Peace, they become bored and start to wonder why they retired.
“It’s an existential crisis,” Klontz says. “You want to make a difference in the world, and if you don’t have a good answer for why you retired, you end up depressed.”
In earlier societies, people matured into different roles. “You may be too old to be a hunter, but perhaps you’re expected to teach or be a mentor,” Klontz says.
That’s no longer the case in modern society, so you have to plan your own purpose — and that may even be going back to work, says Ferrara. If you like to sail, consider helping to manage a marina, or start a sailing class for adults or teens. Want to make your local community better? Run for town council. “Retirement can be freedom to do what you always wanted to do but never had the chance to do,” Ferrara says.
https://www.aarp.org/retirement/planning-for-retirement/info-2020/5-secrets-to-retire-happy.html
10 Essentials to Protect Your Loved One — and Yourself — From Fraud
Caregivers can play a key role in keeping criminals at bay
It’s a sad fact of life: Criminals target older Americans for fraud.
Many older folks have nest eggs. Cybersecurity is not their second language. They came of age during more trusting times. And they may be coping with isolation, diminished eyesight, hearing loss or other health issues.
Crooks exploit these vulnerabilities, but make no mistake: All of us — young and old — are susceptible to the bad actors who show up uninvited in calls, emails, mail, texts and tweets. Some are so bold as to knock on our front doors.
Fraud “is a crime that rips people’s souls apart,” says Anthony Pratkanis, an authority on the topic and professor emeritus of psychology at the University of California Santa Cruz. When it happens, financial loss is compounded by psychological hurt, feelings of vulnerability and even the death of one’s dreams, he says.
It’s role reversal when a younger person needs to counsel an elder, so you might want to frame these safeguards as steps that you, too, will take, Pratkanis says. As there are many techniques, consider tackling one a week.
Pratkanis and AARP’s Amy Nofziger took the lead in providing the anti-fraud measures below. Nofziger oversees the AARP Fraud Watch Network’s free helpline, 877-908-3360.
Nofziger suggests starting out with a nonconfrontational chat about a common scam and then role playing to game out how to deter it.
Here are the 10 key steps:
1. Start the conversation, if possible, before fraud has occurred. If it has, never blame the victim — it’s the criminal who is at fault.
If a son or daughter has a strained relationship with a parent, they could ask a parent’s friend, other relative or professional to step in, Pratkanis says.
Also, an older person seeking guidance can initiate the discussion by showing this story to someone who can help, he says.
2. Speed and silence will hurt you. The ruses vary: A purported problem with Social Security benefits; a grandchild “in jail” and in need of cash; or a sweepstakes prize “waiting to be claimed” once taxes or fees are paid.
During such deception, crooks often urge you to act fast. Instead, slow down. Many times they insist on secrecy, but the last thing you should do is keep quiet. Instead, talk things over with someone you trust.
3. Safeguard your assets. Never send funds to a stranger — not cash, gift cards, wire transfers, bank payments or, as increasingly is requested, cryptocurrency, no matter how convincing the spiel.
4. Safeguard personally identifiable information (PII), such as your Social Security, Medicare and credit card numbers and information about other financial accounts.
5. Stay safe online. Use unique, complex passwords for each online account. Ensure antivirus and security software is up to date on devices.
Never click on links or attachments in unexpected texts or emails. Beware of look-alike websites with logos and language “cloned” from legitimate sites.
If a pop-up ad appears on your computer or an alarm sounds to warn of a supposed technical problem, take a photo or a screen shot of the warning — and turn the computer off. That alert might be phonier than a $3 bill.
Ensure your anti-malware is up to date and run a system scan. If that’s a challenge, get help from an acquaintance or computer technician.
6. Stay safe on the phone. Prepare a “refusal script” and post it in a convenient place so you’re ready if a shady person calls. It could read: “No, thanks,” “Do not call again,” or “I do not send money or disclose information by phone.”
Another tactic is to hang up — and save your manners for people who deserve them.
7. Monitor credit card and other financial statements. Ask your card issuer for real-time alerts whenever the card is used or when card use meets specified criteria, like hitting a certain dollar amount.
8. Get free copies of your credit reports from the major credit bureaus: Equifax, Experian and TransUnion. Set up a credit freeze to prevent a crook from establishing accounts or borrowing in your name; you can lift the freeze at any time.
9. Be social media savvy. Check privacy settings to restrict who can view your posts — and never accept a friend request from someone you don’t know.
And don’t overshare: There’s no need to reveal your birthday or tell the world you’re off beachcombing in Bora-Bora.
10. Report the crime. If you or a loved one has been victimized, report it to law enforcement and the Federal Trade Commission. You’ll be taking a stand and, hopefully, sparing another person from suffering.
Bonus tip: Stay abreast of emerging frauds by visiting AARP’s website and the Federal Trade Commission’s.
https://www.aarp.org/money/scams-fraud/info-2022/how-caregivers-can-protect-loved-ones.html
U.S. Inflation Jumped 8.5 Percent in Past Year, Highest Since 1981
Steep rises in energy, housing, food
WASHINGTON — Inflation soared over the past year at its fastest pace in more than 40 years, with costs for food, gasoline, housing and other necessities squeezing American consumers and wiping out the pay raises that many people have received.
The Labor Department said Tuesday that its consumer price index jumped 8.5 percent in March from 12 months earlier, the sharpest year-over-year increase since December 1981. Prices have been driven up by bottlenecked supply chains, robust consumer demand and disruptions to global food and energy markets worsened by Russia’s war against Ukraine. From February to March, inflation rose 1.2 percent, the biggest month-to-month jump since 2005.
Across the economy, the year-over-year price spikes were widespread in March. Gasoline prices have rocketed 48 percent in the past 12 months. Used car prices have soared 35.3 percent, though they actually fell in February and March. Bedroom furniture is up 14.7 percent, men’s jackets, suits and coats 14.5 percent. Grocery prices have jumped 10 percent, including 18 percent increases for both bacon and oranges. Even excluding volatile food and energy prices, which have driven overall inflation, so-called core inflation jumped 6.5 percent over the past 12 months, the biggest such increase since 1982.
RUSSIA-UKRAINE WAR
The March inflation numbers were the first to capture the full surge in gasoline prices that followed Russia’s invasion of Ukraine on Feb. 24. Moscow’s brutal attacks have triggered far-reaching Western sanctions against the Russian economy and have disrupted global food and energy markets. According to AAA, the average price of a gallon of gasoline — $4.10 — is up 43 percent from a year ago, though it has fallen back in the past couple of weeks. The escalation of energy prices has led to higher transportation costs for the shipment of goods and components across the economy, which, in turn, has contributed to higher prices for consumers.
The latest evidence of accelerating prices will solidify expectations that the Federal Reserve will raise interest rates aggressively in the coming months to try to slow borrowing and spending and tame inflation. The financial markets now foresee much steeper rate hikes this year than Fed officials had signaled as recently as last month.
“The Fed will be pressing firmly on the brake pedal — not just pumping the brakes — in an effort to slow demand and bring the inflation rate back down,” said Greg McBride, chief financial analyst at Bankrate.
Even before Russia’s war further spurred price increases, robust consumer spending, steady pay raises and chronic supply shortages had sent U.S. consumer inflation to its highest level in four decades. In addition, housing costs, which make up about a third of the consumer price index, have escalated, a trend that seems unlikely to reverse anytime soon.
Economists point out that as the economy has emerged from the depths of the pandemic, consumers have been gradually broadening their spending beyond goods to include more services. A result is that high inflation, which at first had reflected mainly a shortage of goods — from cars and furniture to electronics and sports equipment — has been emerging in services, too, like travel, health care and entertainment.
The expected fast pace of the Fed’s rate increases will make loans sharply more expensive for consumers and businesses. Mortgage rates, in particular, though not directly influenced by the Fed, have rocketed higher in recent weeks, making home buying more expensive. Many economists say they worry that the Fed has waited too long to begin raising rates and might end up acting so aggressively as to trigger a recession.
For now, the economy as a whole remains solid, with unemployment near 50-year lows and job openings near record highs. Still, rocketing inflation, with its impact on Americans’ daily lives, is posing a political threat to President Joe Biden and his Democratic allies as they seek to keep control of Congress in November’s midterm elections.
The American public’s expectation for inflation over the next 12 months has reached its highest point — 6.6 percent — in a survey the Federal Reserve Bank of New York has conducted since 2013.
Once public expectations for inflation rise, they can be self-fulfilling: Workers typically demand higher pay to offset their expectations for price increases, and businesses, in turn, raise prices to cover their higher labor costs. This can set off a wage-price spiral, something the nation last endured in the late 1960s and 1970s.
Economists generally express doubt that even the sharp rate hikes that are expected from the Fed will manage to reduce inflation to anywhere near the central bank’s 2 percent annual target by the end of this year. Luke Tilley, chief economist at Wilmington Trust, said he expects year-over-year consumer inflation to still be 4.5 percent by the end of 2022. Before Russia’s invasion of Ukraine, he had forecast a much lower 3 percent rate.
Inflation, which had been largely under control for four decades, began to accelerate last spring as the U.S. and global economies rebounded with unexpected speed and strength from the brief but devastating coronavirus recession that began in the spring of 2020.
The recovery, fueled by huge infusions of government spending and super-low interest rates, caught businesses by surprise, forcing them to scramble to meet surging customer demand. Factories, ports and freight yards struggled to keep up, leading to chronic shipping delays and price spikes.
Critics also blame, in part, the Biden administration’s $1.9 trillion March 2021 stimulus program, which included $1,400 relief checks for most households, for helping overheat an already sizzling economy.
https://www.aarp.org/money/investing/info-2022/inflation-consumer-price-index-increases.html
A Recession Survival Guide for Retirees
Economic downturns are inevitable. Here’s how to protect your retirement nest egg
Sooner or later, the economy will fall into a recession, because that’s the nature of the economy: Busts follow booms. For many retirees, the biggest challenge is the investment volatility that typically accompanies a recession. For those who haven’t retired yet, the biggest worry tends to be losing their job. If you know what to expect in a recession, however, you’ll know how to survive it. Let’s take a look at what recessions are and how to handle them.
WHAT’S A RECESSION?
Most retirees have lived through several recessions and know that it’s not pleasant. Typically, you’ll see a recession described as “two consecutive quarters of negative economic growth.” In other words, gross domestic product (GDP), adjusted for inflation, has to fall for at least six months. But that’s not a terribly accurate description.
The official arbiter of recessions is the National Bureau of Economic Research (NBER), a private nonprofit made up of economic researchers. Its Business Cycle Dating Committee uses several different indicators to determine when a recession starts and ends. GDP is just one of those indicators. The committee also looks at employment trends, industrial production and retail sales, among other factors.
The NBER’s broad definition of a recession is that it is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” In practical terms, a recession is a period of increasing unemployment, business failures and general economic distress.
Since 1854, the U.S. has had 35 recessions, lasting an average of 17 months, according to NBER. Recessions have been fewer and shorter since 1945, lasting an average of 10.3 months. The recession of 1873 was the big daddy of misery: It lasted 65 months. Here’s how long the last 10 recessions lasted:
WHAT CAUSES A RECESSION?
A classic recession is caused by an overheated economy. Rising demand for goods roars past industry’s ability to produce them, and that, in turn, results in inflation. Low unemployment means that workers can command higher wages, which results in further economic overheating.
How does that turn into a recession? High consumer demand in a ripsnorting economy usually translates into higher interest rates. Rising rates means businesses have to spend more to borrow, which reduces corporate earnings. For retirees, higher mortgage rates means it’s harder to sell a house, and the rates on credit cards and auto loans become more expensive. If businesses and consumers feel the economy is slowing, they reduce spending, and eventually, the economy stops expanding, inflation cools and sometimes the economy falls into recession, as it did in 1981, for example.
At times, an overheated economy leads to enormous run-ups in financial assets — stocks in 1929, tech stocks in 2000 and housing prices in 2006.
Other times, recessions are sparked by unexpected outside events, such as the onset of the COVID-19 pandemic in 2020, which triggered the shortest recession on record — and one of the sharpest. GDP contracted at the fastest quarterly rate ever in the United States. “We shut down,” says Mark Zandi, chief economist for Moody’s Analytics .
Most important for retirees and pre-retirees, a recession means that financial markets often crumble, forcing people to delay retirement — or return to work — in reaction to their shrinking nest eggs. During the Great Depression, stock prices fell 86 percent and didn’t recover until 1954. More than 9,000 banks failed, 4,000 in 1933 alone, because the federal government didn’t guarantee bank deposits as it does now.
RECESSION OR DEPRESSION?
The old joke among economists is that a recession is when somebody you know gets laid off; a depression is when you get laid off. (That’s why you find economists at the NBER and not at the Improv.)
In general, the difference is a matter of degree. A depression is the grizzly bear of the economic world. In the Great Depression, unemployment climbed to nearly 25 percent. The Great Recession of 2007–2009 saw unemployment rise to 10 percent and GDP fall 4.3 percent, adjusted for inflation . The most recent recession, sparked by the COVID-19 pandemic, has been the most severe since the Great Depression, although it was much shorter. In just two months, GDP plunged 19.2 percent and unemployment spiked to 14.7 percent.
One other thing: Because the Great Depression was so terrible, economists have basically stopped using the word “depression.” “We have come up with more targeted terms for the bigger events in history, and so I think the word ‘depression’ has been largely reserved, at least until now, for the Great Depression,” says Mike Englund, chief economist at Action Economics. “With the housing collapse earlier this century, we coined the ‘Great Recession.’ If we have another big adverse economic event, I think the incentive is high for the media to come up with a new clever name again.”
WILL WE HAVE ANOTHER RECESSION?
Absolutely. Someday. Economists are divided as to whether there will be one this year. “Recession risks are high,” Zandi says, “although the odds are that we will avoid one, with luck and deft policy from the Federal Reserve.”
In response to worrisome inflation levels, the Fed typically raises short-term interest rates to slow the economy and — at least officially — tries to keep the U.S. out of recession. Sometimes, however, a recession is the only way to tame inflation, as the nation learned in the 1981–1982 recession, when the Fed, under chairman Paul Volcker, raised short-term interest rates to 15 percent. Jerome Powell, the current Fed chairman, has warned that the Fed is ready to do what it takes to end inflation. That could mean recession. “He’s been channeling his inner Paul Volcker,” Zandi says.
Englund is less optimistic that the Fed can have the economy land on its feet. “The odds are low that the Fed can achieve a ‘soft landing’ given the tightness of the labor market, the elevated level of inflation and the remarkably late start for the tightening process in this business cycle,” he says. The Fed didn’t start raising rates until March, a full year after inflation began to climb. Englund does think, however, that some of the supply-chain problems sparked by the pandemic will ease in 2023, which will do a lot of the work of reducing inflation.
One thing is certain: Sooner or later, the economy will sink into recession, and if you’re retired — or planning to retire soon — you should be prepared for it.
HOW RETIREES AND RETIREMENT SAVERS SHOULD PREPARE FOR A RECESSION
1. Save. “Avoid risk if you think a recession is around the corner,”. The biggest risk for pre-retirees: losing your job. If you’re working, be sure you have an emergency fund you can tap if the paychecks stop. Financial planners often recommend that you have six months’ worth of expenses in your emergency fund.
2. Pay down debt. The money you save in interest can be used to build your emergency fund. And, all things being equal, paying off a credit card that charges 16 percent interest is the same as earning 16 percent on your money.
3. Keep a cash stash. Retirees who are taking withdrawals from their savings should keep about a year’s worth of expenses in cash in their retirement account. Bear markets in stocks typically last about a year. You don’t want to sell stocks when the market is falling unless there’s no other option. If your investments are down 10 percent and you sell 5 percent, your account is down 15 percent.
4. Stay safe. Most cash options pay little to nothing in interest. Money market mutual funds, a typical cash option in brokerage accounts, currently pay 0.61 percent in interest. That’s not much, but it’s better than a 20 to 30 percent loss from stocks in a bear market. If you take cash withdrawals from your retirement account during a bear market, you’ll give your other, riskier investments time to recover.
https://www.aarp.org/money/investing/info-2022/recession-survival-guide.html?intcmp=AE-MON-SI-BB
Tax Breaks After 50 You Can’t Afford to Miss
IRS tax code offers perks to taxpayers of a certain age
If you’re 50 or older, there is one benefit to reaching this milestone that you may be overlooking: tax breaks aimed right at you. Now you can contribute more to your Roth or traditional individual retirement account (IRA), to your employer-sponsored plan or to your health savings account (HSA) than you could when you were younger. You can even exclude more income from your tax computations.
Congress included some of these provisions in the Economic Growth and Tax Relief Reconciliation Act, which took effect in 2002, out of concern that the boomer generation had not saved enough for retirement. Congress included other tax-saving provisions, such as a bigger standard deduction, in the Tax Cut and Jobs Act of 2017.
If you’re behind on your retirement savings, the tax law gives you a chance to catch up. And if you’re in retirement, or near it, the tax code allows you to pay a bit less in taxes. That’s a combination you shouldn’t pass up.
Contribute more to your retirement fund
For 2022, the contribution limit for employees who participate in 401(k), 403(b), most 457 retirement saving plans and the federal government’s Thrift Savings Plan has been increased to $20,500, from $19,500 in 2021. Employees 50 and older can add an additional $6,500, for a total of $27,000.
The contribution limit for a traditional or Roth IRA is unchanged, at $6,000. The catch-up is $1,000, the same as for 2021. It is $3,000 for a Savings Incentive Match Plan for Employees (SIMPLE) plan.
However, many folks are missing this opportunity. Despite generous catch-up provisions for those 55 and older, just 15 percent of those who are eligible are making them, according to the Vanguard Group’s “How America Saves 2021” report.
At the same time, data from the National Retirement Risk Index (NRRI) compiled by the Boston College Center for Retirement Research indicates that half of all American households won’t be able to afford their current standard of living once their regular paychecks stop. As of June 2020, 50 percent of married retirees were relying on Social Security payments for half of their income; for single people, that number was 70 percent. For 2022, the average Social Security retirement benefit is estimated at just $1,657 a month.
Those retirement contributions can lower your tax bill
Aside from making your retirement more comfortable, contributing to a tax-deferred retirement plan, such as an IRA or a 401(k), also reduces your income — which, in turn, reduces your income taxes. Thanks to that reduction in taxes, increasing your contribution won’t take as much of a bite from your paycheck as you might think. If you earn $75,000 a year, for example, a 5 percent contribution to your 401(k) would put $144 into your account, assuming a 25 percent tax rate. But your biweekly paycheck will fall by just $108, according to Fidelity Investments.
Contributions to a traditional IRA are tax-deductible as long as you meet IRS rules, including income limits. IRA contributions are fully deductible if you (and your spouse) aren’t covered by a retirement plan at work. However, the deduction may be limited if you are (or your spouse is) covered by a workplace retirement plan and your income exceeds certain limits. For 2022, IRA deductions for singles covered by a retirement plan at work aren’t allowed after modified adjusted gross income (MAGI) hits $78,000; the deduction disappears for married couples filing jointly when MAGI hits $109,000.
Retirement contributions made to a Roth IRA or Roth 401(k) are done on an after-tax basis: You get no upfront tax break for these contributions, but withdrawals taken from Roths in retirement are tax-free. The pretax money in traditional IRAs and 401(k)s grows tax-free, but you’ll eventually pay taxes when you start making withdrawals in retirement.
Because saving an additional $6,500 to a 401(k) may be challenging for some, Nicole Gopoian Wirick, a certified financial planner (CFP) at Prosperity Wealth Strategies in Birmingham, Michigan, advises her clients to have the catch-up amount divided evenly over each paycheck and deducted automatically. “Contributing $250 over 26 pay periods may seem more attainable,” she says.
Clark Randall, a CFP at Financial Enlightenment in Dallas, Texas, encourages his clients to rethink their budgets to increase their regular retirement contributions throughout the year. “Budgeting for this expense is the same as any other. It takes discipline and compromise.”
If you still want to make catch-up contributions to a traditional IRA or Roth IRA for 2021, you have time. The deadline is April 15, the filing date for your tax return, unless you file for an extension. However, 401(k)s, 403(b)s, Thrift Savings Plans and most 457 plans go by the calendar year, so you’ll be investing for 2022 and have until the end of the year to do so.
You can wait until 72 to start your RMDs
Speaking of which, there’s also good news on required minimum distributions (RMDs), the minimum amount you must withdraw from a tax-deferred retirement plan, such as a traditional IRA. (Roth IRAs don’t require distributions while the owner is alive.)
Under rules that kicked in in 2020, you can wait until the year in which you reach age 72 before having to start taking RMDs. Previously, the age was 70 1/2. If you don’t need the RMD, consider donating it to charity. If you donate your RMD to a qualified charity directly from your retirement account, up to $100,000, you won’t owe income tax on the distribution.
Don’t forget your HSA
If your employer offers a health savings account (HSA), you’ll want to make sure to take full advantage of it. The IRS allows you to deduct your contributions to your retirement account from your gross income, even if you don’t itemize, and those made by your employer are excluded from your gross income, too. Any earnings are tax-free. Your distributions aren’t taxed, provided you use them for qualified medical expenses, of which there are many — from ambulance rides to X-rays. Plus, the account is yours: You can take it with you to a new job and use the funds in retirement.
For 2022, you can contribute up to $3,650 if you have coverage for yourself, or up to $7,300 for family coverage. The catch-up is an additional $1,000 if you reach 55 during the year. However, your contribution limit is reduced by any amount your employer contributed that has been excluded from your income.
You get a bigger standard deduction at 65
The standard deduction, which reduces your taxable income and, in turn, lowers your tax bill, gets better with age. In 2022, when you fill out your federal income tax forms for income earned in 2021, married couples will get a standard deduction of $25,100, up $300 from tax year 2020. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550, up $150 from the previous year.
If you are 65 or older and file as a single taxpayer, you get an extra $1,700 standard deduction for tax year 2021 and an extra $1,750 for tax year 2022. Married and filing jointly? The extra standard deduction is less per person if only one person is 65 or older — $1,350 for the tax year. If both are 65 or older, the standard deduction increases by $2,700. For taxpayers who are both 65-plus and blind, the extra deduction is doubled.
The only drawback for some taxpayers with the higher standard deduction is that it sets a very high bar for itemizing deductions. It doesn’t make sense to itemize if your deductions aren’t higher than the standard deduction. Nevertheless, a deduction is a deduction, and getting a larger standard deduction is something to cheer about.
Bonus: If you’re 65 and up and have a straightforward return, you might be able to use the new simplified Form 1040-SR for seniors. It has larger type for those who still file taxes by paper, there are places to enter such things as Social Security benefits and retirement distributions, and there’s a handy chart that shows the bigger standard deductions.
Take your charitable deduction before it goes away
Because the standard deduction is so high, many people are no longer able to itemize their deductions. (It makes no sense to itemize if you get a bigger bang for your buck from the standard deduction.) For tax year 2021, however, a person filing a single return can take a $300 deduction for cash gifts to qualified charities. Those filing jointly can take $600. You can take this deduction if you take the standard deduction but not if you itemize.
You may want to dab your eyes a bit as you take this deduction: It goes away in tax year 2022.
Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine; a reporter at the Fidelity Publishing Group; and a senior editor at Published Image, a financial education company that was acquired by Standard & Poor’s.
https://www.aarp.org/money/taxes/info-2022/50-plus-taxpayer-savings.html?dicbo=v2-d5a54865e9bd2bdb2387ada4b05e6b94&intcmp=Outbrain&obref=obnetwork
3 Steps to Help You Get out of Debt
How to get control of what you owe
For Gail and Tony Dean, the crisis came as they approached 50. Living in South Florida, they decided to move north, near Orlando, where they bought land and began to build their dream home. Then the debts piled up.
The couple — she worked for Disney, he was in law enforcement — had a construction loan for their new place. The tenant whose rent was covering the mortgage on their old home skipped out. They also carried a second mortgage on the old place, a car loan and credit card debt. In all, they owed more than $250,000.
“It was horrible,” says Gail, now 69. “We were drowning and couldn’t find our way out.”
Tales like the Deans’ are increasingly common. The share of households led by older Americans that carry debt has risen steadily over the past two decades. The problem is especially bad for households led by people 75 and older. In 1989, 21 percent of these households owed money; by 2016, half of them did. The amount of debt has gone up, too, even after adjusting for inflation.
That’s clear to groups that counsel debtors. “It used to be that we had a younger demographic, but we’ve seen it shift to include older people over the last few years,” says Melinda Opperman, executive vice president of Credit.org, a nonprofit debt-management and budgeting organization in Riverside, Calif.
Debt can be more manageable for young adults looking forward to long careers and rising incomes. Older Americans have less time and earnings power, but still can lighten the burdens of multiple loans.
The Deans, for example, cut their spending, directed bonuses and tax refunds to their debts, and sold their old home. By the time they hit their 60s, all they owed was the mortgage on their new place, now down to a $75,000 balance.
“The weight of the world was taken off our shoulders,” Gail says.
Massive debt can feel paralyzing. But inaction is a bad idea, Opperman says. Based on input from counselors and advisers who have worked with debtors, here are some effective moves you can make.
Step 1: Stop the Bleeding
Start with the obvious: You can’t lower debt if you keep adding to it. So don’t let your debts increase any further. One proven tactic is putting your credit cards on ice —literally.
Take any cards out of your wallet or purse, put them in a cup of water and stick them in the freezer. The hassle of pulling out this block of ice later on, and thawing it, can help put the brakes on using plastic for an impulse purchase.
Do a lot of online shopping? Visit your go-to sites and delete any credit card or other payment method on file. (No more one-click ordering!) Don’t commit to taking on a larger debt, like a car payment, until you have remedied your situation.
Next, look at your finances to see how much money is going out each month and how much is coming in. To do that, sit down with a pad of paper or a blank document on your computer to tally it all up.
“We’ve had people print out 12 months of bank account statements to figure out where the money is going. Alternatively, use a smartphone app like Mint to track your spending — or use the low-tech option suggested by Opperman: Carry around a small notebook and write down every purchase.
If your cash outflow exceeds your inflow, you now see exactly how much spending you need to cut — or how much more income you need. Going out to eat or drink less often is an easy place to start. Some other ideas:
- Cut off the kids. “People jeopardize their own retirement by giving adult children money, covering cellphone bills, making their car payments or student loan payments,” Opperman says. “Some have adult children who live with them but are not contributing to the mortgage or other expenses. Show them that you’re in the red and you need to stick to a budget.”
- Cull your charges. Cancel subscriptions you can do without, whether it’s the health club you rarely visit or the 57 TV channels you never watch. Investigate the costs of bundled and unbundled television, internet and telephone services.
- Shop mindfully. “Pay attention,”. “Don’t spend on things that don’t mean anything to you and don’t rationalize that something is necessary when you know it isn’t.” Don’t even window-shop; “just looking” is a slippery slope.
- Assess your insurance. Increasing the deductibles on your car and home insurance can reduce your premiums dramatically. If you no longer need your life insurance, you might think about taking the cash value of a whole life policy or stop paying premiums on a term policy.
- Moonlight. Consider taking on a short-term “debt repayment” job — a part-time role with a paycheck directed solely toward the balances you owe.
Step 2: Start a pay-down plan
Your goals for repayment are simple. You want to satisfy creditors, minimize the interest you pay and retire each debt, one by one.
Keeping creditors happy is key: Once you default on a loan, the trouble begins. You can lose a car to repossession or a house to foreclosure; you might also face legal consequences. So calculate the cash you’ll need each month to make the minimum payment on each of your debts. With that number, you can build a plan (using the previously mentioned tactics) to free up enough cash each month to keep each debt in good standing.
Next, focus on credit cards, since they have the highest interest rates by far — around 18 percent nationally, compared with about 5 percent for car loans. Experts often suggest one of two methods for reducing card debt when you carry balances on more than one card:
- The avalanche. Line up your credit card bills from the one with the lowest interest rate to the highest. Make just the minimum monthly payment on all the cards other than the one with the highest interest, then put as much as you can (more than the minimum, that is) on the highest-rate card. When it’s paid off, repeat with the card that has the next-highest rate, without cutting the total monthly dollars you spend on reducing debt. This strategy minimizes the interest that you pay.
- The snowball. Put the most you can toward the card with the smallest balance and make minimum payments on the rest. Once you’ve paid that off, repeat with the next largest balance — again, without reducing your total monthly card payments. By attacking the smallest debt, you’ll speed up the time it takes to get that first satisfying feeling of cutting one of your balances to zero. “It’s a big boost when you can start scratching accounts off your list,” Opperman says.
Whichever method you choose, automate your payments. “When you forget to pay a bill, the late payment is outrageous, plus you’re paying extra interest,” Opperman says.
Step 3: Work on the Rest
If you have an auto loan, rethink your transportation needs. If your car is worth more than the loan, consider selling it and buying a lower-cost used car with the proceeds. You’ll remove one of your monthly debt obligations, and your insurance costs will drop, too.
Don’t sign a car lease, since that’s a monthly payment you can’t shed. “If you just roll one lease into the next,” Opperman says, “you’ll never own free and clear.”
Finally, consider just getting rid of a car. With the growing availability of ride-hailing apps and hourly car rentals, this won’t necessarily be a sacrifice.
Now turn to any medical debt you may have. Negotiate payment terms with providers, letting them know about the challenges you face. Make it clear that you want to make good on your debt, but you need time.
Investigate the charity and financial-hardship care offered by many hospitals. Medical debt rarely carries interest payments, but it gets handed over to collection agencies relatively quickly. It’s much harder to get a bill reduced after it goes into collection.
Next up is student loans. If yours are federally backed, you probably have a low interest rate. Make regular payments until you’ve paid off your higher-rate debt. Investigate loan consolidation, which can lower both your rate and your monthly payments.
Your mortgage is usually the last spot to direct additional funds. “Just make the payments. Don’t put in anything extra.
https://www.aarp.org/money/credit-loans-debt/info-2019/steps-to-end-debt.html
What Happens to Your Debts After You Die?
5 things loved ones will have to do to settle your accounts
How many times have you told your loved ones that you don’t want to be a burden, and saddle them with a financial mess at the end of your life? It’s a common sentiment.
Despite their good intentions, however, many people do leave a pile of bills. So, what happens to unpaid bills, and how can you make sure that your loved ones don’t have to spend too much time getting those bills paid?
Better to start a plan now, should you become incapacitated or die prematurely. Doing so will lighten the load for your grieving loved ones who must announce your passing, write your obituary, arrange your funeral, empty your home, and disperse your belongings, among other things.
Following are more tasks to consider. Be sure to consult a financial adviser, estate attorney or CPA for advice, as needed.
1. Start by getting — and staying — organized
If you haven’t done so, compile your most important documents — bank, brokerage and retirement accounts; insurance policies; will or estate plan, living will, power of attorney; and your health care, Social Security and Medicare records. In the process, simplify if you can; multiple bank and credit card accounts can make things more complicated, says Martin Hewitt, special counsel at Fried, Frank, Harris, Shriver & Jacobson, LLP in New York, and a commissioner to the American Bar Association’s Commission on Law and Aging.
Don’t forget your digital assets. Hewett recommends making a list of the account numbers, as well as the usernames and passwords for every online account, including email, e-commerce and social media.
Now, familiarize yourself with both the low-tech (a fireproof briefcase or backpack) and digital options (a thumb drive for your laptop or online document storage service) for storing this vital information. Tell two individuals how to access these records — as well as extra house and car keys — in the event of your death or incapacitation, or a natural disaster. The Federal Emergency Management Agency (FEMA) offers a handy checklist for assembling such materials in its Emergency Financial First Aid Kit (EFFAK).
2. Figure out what you owe
Now, create an honest accounting of every liability you have now, or may have in the future, on a spreadsheet, and update it at least once a year. Include your mortgage, credit cards, personal loans, student loans or medical debts, as well as any loans you may have cosigned for others.
A person’s financial obligations are not automatically forgiven once they’ve died. According to the Consumer Financial Protection Bureau, in most cases, any unpaid debts are covered by the person’s estate — the total assets owned at death. If the individual appointed a personal representative, executor or administrator, he or she is responsible for paying any debts from the estate, including medical debt.
Debts must be settled before heirs receive any money. If there is no will, a judge will decide how the assets should be distributed, and will appoint an administrator to carry out those decisions.
Also, consider your insurance needs. Are you planning to self-fund your long-term care, or should you buy insurance? How will your funeral expenses be covered? “Insurance planning can be buy time for grieving loved ones with debts to pay,” says Greg Giardino, a Certified Financial Planner (CFP) at J.M. Franklin & Co., LLC, in Tarrytown, New York. “When life insurance proceeds are paid out, they usually sit in a safe, liquid account. The beneficiary is provided with a checkbook to use to make withdrawals against the account as needed.”
3. Keep your estate plan current
Your personal representative or executor will be responsible for paying your debts, including medical bills, from those assets. If the debt is in the decedent’s name, the decedent’s estate will be responsible, says Rachael K. Pirner, Esq, a lawyer in Wichita, Kansas, and a fellow of the American College of Trust and Estate Counsel.
There are exceptions, however, so Pirner recommends leaving instructions for your representative to consult a probate lawyer before making any payments. Legal fees can be paid by the estate. “Most state bar associations have a lawyer referral service, which is a good place to start,” Pirner says.
Obtaining legal advice may be wise for other reasons. “Parents are responsible for the deceased minor children’s ‘necessaries’ and spouses for the deceased spouse’s ‘necessaries,’” Pirner says. In other words, goods or services required for sustenance or support of that person. A lawyer can define them for you.
In addition, if you cosigned for a loan, your estate will be responsible. Similarly, if you are a joint account holder on a credit card you will be responsible for any balances on the card. To be clear, a joint account holder is different from an “authorized user,” who is not usually responsible for the amount owed.
Creditors, of course, also have their rights, says Hewitt. “They can file claims in probate [i.e., the legal process of establishing the validity of a will] and can sue any of your heirs if they try to bypass the probate process.”
4. Consider state law
While statutes differ, in your state, a spouse may be responsible for certain debts. For example, the law may require the estate executor or administrator to pay an outstanding bill out of property owned jointly by the surviving and deceased spouse, such as a joint checking or brokerage account. In community property states — Alaska (if a special agreement is signed), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — the surviving spouse may be required to use community property to pay debts of a deceased spouse. If there was no joint account, cosigner, or other exception, the estate of the deceased person owes the debt.
What if your debts exceed your estate’s assets? State statute will direct who gets paid and how much, Hewitt says. “An insolvent probate is like a bankruptcy with the unpaid balances being written off by the creditors. On joint accounts, the creditors can generally collect from any joint account holder. Often, the best course of action on an insolvent estate is to turn it over to an attorney or to the court public administrator (if the court has one).”
5. Instruct your representative to take their time
Fortunately, your estate won’t need to be settled immediately, and things should be done step by step to avoid errors. Some final bills, such as those for medical care, may take some time to come. “Generally, there is a minimum period in state probate law for creditors to present a claim, or let the estate know they are owed money,” Hewitt says. “On average this is between three and six months. If there is more than enough money to pay all debts, they can be paid sooner.”
What about debt collectors? To avoid these calls, your representative should advise any creditors that you have passed, and that they are working on settling your estate. If reasonable progress is being made, most will be understanding, says Pirner. “By law, if the estate is filed for probate, the creditors need to file claims, and will do so. If a creditor persists, and the debt is in the decedent’s name only, your representative should consult a lawyer.”
https://www.aarp.org/money/credit-loans-debt/info-2021/what-happens-to-your-debts-after-you-die.html?dicbo=v2-7c9377ca6726957705a6a5f448ae3a3f&intcmp=Outbrain&obref=obnetwork
How Much Can You Contribute to a 401(k) Retirement Account in 2022?
The answer: $1,000 more than you could in 2021
A 401(k) plan is a great way to increase your retirement savings. Your employer will deduct your pretax contributions from your paycheck, and your savings will be tax-deferred until you take withdrawals during retirement. (The exception is a Roth 401(k), which is funded with after-tax dollars and from which withdrawals in retirement are tax-free.) Thanks to some recent adjustments by the Internal Revenue Service, your 401(k) will get a bit better in 2022.
Savers will be able to contribute as much as $20,500 to a 401(k) plan in 2022, an increase of $1,000 from 2021. Those 50 and older will be able to add another $6,500 — the same catch-up contribution amount as 2021 — for a maximum contribution of $27,000.
These limits apply to other retirement plans, such as 403(b) plans for employees of public schools and nonprofit organizations, as well as the federal government’s Thrift Savings Plan.
There is an upper limit to the combined amount you and your employer can contribute to defined contribution retirement plans. For those age 49 and under, the limit is $61,000 in 2022, up from $58,000 in 2021. For those 50 and older, the limit is $67,500 in 2022, up from $64,500 in 2021. You can’t contribute more than your earned income in any year.
Those increases are good news for retirement savers. As pensions become increasingly uncommon, for most workers the proceeds of their retirement savings, plus Social Security, will be their main source of retirement income. According to the Employee Benefit Research Institute, just 1 percent of private-sector employees participated in only a pension plan, also known as a defined benefit plan, in 2018, down from 28 percent in 1979. Just 9 percent participated in both a pension plan and a defined contribution plan, such as a 401(k), and 40 percent participated in a defined contribution plan only.
You can start small
If you can’t afford to contribute the maximum, invest what you can and then try to increase that amount each year. You may find that putting pretax money into a 401(k) doesn’t affect your paycheck as much as you’d think, because of the tax savings.
For example, suppose you had gross pay of $50,000 a year and got paid every two weeks. If you contributed 5 percent of your salary to a 401(k) plan, your contribution would be $96 a pay period, but your pay would fall by $82, assuming you were in the 15 percent tax bracket, according to a calculator from Fidelity Investments. Increase your contribution by one percentage point, to 6 percent, and you’d be saving $115 a month, but your paycheck would fall by $98.
Many employers match 401(k) contributions, which is essentially free money — and can make a big difference in the amount of money in your account at retirement. Let’s say you’re 50 years old and you earn $50,000, you put 5 percent of your salary a year into your 401(k), and you get 3 percent raises each year until you retire at 65. You’ll have $87,376 in your account when you retire, factoring in a 7 percent annual rate of return. Now let’s say your employer matches 50 percent of your contribution, up to 5 percent of your salary. You’ll have $131,064 in your account, according to AARP’s 401(k) calculator.
https://www.aarp.org/retirement/planning-for-retirement/info-2021/401k-contribution-limits.html?intcmp=AE-RET-PRT-LL3
How Long Do You Have to Keep Tax Records?
For many financial documents, just 3 years — for others, practically forever
You may be starting at a heap of paperwork when you finish filing your 2021 federal taxes, which are due April 18. Your first urge may be to sweep them all into a paper bag and put the bag under a stairwell. Don’t do that. Instead, keep only the records you need to keep. And that starts with sorting them out.
Try to stay tidy
Neat, complete, well-organized financial files speed the process of filing your tax return and can keep you from making errors. Maintaining some semblance of order after you’ve filed your return — rather than tossing it into a file cabinet or shoebox — will come in handy if the Internal Revenue Service has questions about your form.
“The biggest blunder is not being organized about what records ought to be kept,” says Neal Stern, CPA, a member of the American Institute of CPAs’ National CPA Financial Literacy Commission. “There are people who somehow believe that they should keep all of their paperwork, but they don’t think through what the important paperwork is that should be kept or how it should be kept or how it should be organized.”
People who keep too many financial papers often struggle just as much to find needed documents as those who don’t keep any files. “They end up having drawers full of old papers,” Stern says. “It’s not much better than not having the paperwork if you can’t figure out what you have and where it is.”
What to keep
For an individual tax return, you’ll need to save anything that supports the figures you entered on your return. You should keep the W-2 and 1099 forms you get from employers, for example, as well as any 1099-B or 1099-INT tax documents from banks, brokerages and other investment firms.
If you lost your job last year and received unemployment benefits from the government, be sure to keep your 1099-G form, which reports the amount you have received. The government is gave a tax exemption of up to $10,200 of unemployment income ($20,400 for married couples filing jointly) received in the 2020 tax year, but that exemption disappears for the 2021 tax year, so you’ll owe federal income taxes on the entire amount.
If you’re itemizing your deductions, keep receipts for these: credit card and other receipts, invoices, mileage logs and canceled checks. If you’ve bought or sold mutual fund shares, stocks or other securities, you’ll need confirmation slips (or brokerage statements) that say how much you paid for the investments and how much you received when you sold them. Keep a copy of all your investments for at least three years after you have sold them.
Similarly, if you’ve sold a home, you’ll need records that prove what you paid and what you received from its sale. And if you’ve sold a rental property, you’ll need detailed records of the amount you’ve invested in the property over the years, as well as how much you deducted for depreciation. It’s wise to keep Schedule E, the form you fill out every year for rental income, as long as you own the property.
How long to keep it
You’ve likely heard that seven years is the perfect period to hold on to tax records, including returns. The actual time to keep records isn’t that simple, according to Steven Packer, CPA, in the Tax Accounting Group at Duane Morris.
“In most cases, tax records don’t have to be kept for seven years because there’s a three-year statute of limitations,” Packer explains. “So assuming there’s no fraud or nothing else wrong, the IRS cannot look at your tax returns beyond that three-year statute.”
The statute of limitations has some important exceptions, and if your tax return has any of these, you’ll need to keep your returns and your records longer than three years. For example, the statute of limitations is six years if you have substantially underestimated your income. The threshold for substantial understatement is 25 percent of your gross income. If you claim your gross income was $50,000 and it was really $100,000, you’ve substantially understated your income.
The six-year rule also applies if you have substantially overstated the cost of property to minimize your taxable gain. Say if you sold a piece of property for $150,000 and claimed you paid $125,000 instead of the actual $50,000, the IRS has six years to take action against you. And if you have omitted more than $5,000 in income from an offshore account, the statute of limitations is also six years.
Keep records for seven years if you file a claim for a loss from worthless securities or bad-debt deduction. If you haven’t filed a return, or if you have filed a fraudulent return, there’s no statute of limitations for the IRS to seek charges against you.
Property records can be forever
When you sell a property at a profit, you’ll owe capital gains tax on that profit. Calculating your capital gain often requires you to hang on to your records as long as you own your investment. You’ll need those records to calculate the cost basis for the property, which is the actual cost, adjusted upward or downward by other factors, such as major improvements to the structure.
Calculating the cost basis on property you live in is relatively simple because most people can avoid paying capital gains tax on their primary residence. If you sell your primary residence, those filing individual returns can exclude up to $250,000 in gains from taxes, and couples filing jointly can exclude up to $500,000. You must have lived in your home for at least two of the past five years to qualify for the exclusion. Even so, you’ll need to save your records of the transaction for at least three years after selling the property.
If your sale doesn’t meet the above criteria, you’ll need to keep records of significant improvements for at least three years after the sale. IRS Publication 523, “Selling Your Home,” spells out what improvements you can add to your cost basis — and reduce your capital gains bill. The same holds true for rental property.
Most brokerages will compute your cost basis for stocks, bonds and mutual funds, although they are only to calculate your cost basis for stock transactions since 2011 and mutual funds since 2012. It’s a good idea to keep all your transaction records, however, in case you change brokers. Your broker is not obligated to hold your records indefinitely. In addition, keep records of any inherited property and its value when the owner died, which will become your tax basis.
There’s nothing wrong with saving your records longer than the legal limits if it gives you peace of mind and you can stand the clutter. You might consider storing some records in the cloud — remote computer storage space that you rent.
Although many people keep paper records, it’s also smart to have the documents converted to electronic files and stored in the cloud. It’s a good idea to have two sets, in case one is destroyed. Finally, remember that your state may have separate rules for keeping records; check with your accountant or state tax department.
https://www.aarp.org/money/taxes/info-2020/how-long-to-keep-records.html?intcmp=Outbrain&obref=obnetwork
How the Fed’s Rate Hikes Will Affect Your Finances
You’ll get better savings rates but higher borrowing costs this year
The Federal Reserve is raising borrowing costs to cool the hottest inflation readings in 40 years. The Fed on Wednesday hiked its key short-term fed funds rate to a range of 0.75 to 1 percent, the second of what the central bank expects to be a steady string of increases this year.
Those rock-bottom rates that have starved your savings accounts but made it cheaper for you to borrow are expected to move steadily higher in 2022 and beyond, according to the Federal Reserve. That means it’s time for pre-retirees and those already in retirement to start mapping out a game plan to keep your finances in good order.
Why rates are projected to rise
At the start of the pandemic in 2020, the economy plunged into a brief, sharp recession. The Fed, whose job is to fight inflation and keep the economy growing, slashed its key short-term fed funds rate to near zero and ramped up its bond-buying program to stimulate growth to revive the economy.
The Fed now has pivoted to a less stimulative policy to cool the economy and combat spiking inflation caused by pent-up demand, supply chain disruptions and, more recently, soaring oil prices caused by Russia’s invasion of Ukraine. In March, consumer prices rose 8.5 percent from a year earlier, its fastest pace since 1982. At the same time, the nation’s jobless rate fell to 3.6 percent, moving the job market closer to the Fed’s goal of maximum employment.
The Fed now projects that it will raise its key rate six more times this year, in quarter-point increments. “It’s clearly time to raise interest rates,” Fed Chair Jerome Powell said at a news conference in March, adding that the economy is very strong and well positioned to withstand higher borrowing costs.
A win for income-starved savers
While the Fed’s stimulus was successful in helping bring the economy back from the brink after the 2020 COVID-19 shutdown, it punished savers, especially retirees who rely on safe, steady income. Money stashed in savings and money market accounts, for example, currently pays just 0.06 percent and 0.08 percent in interest, respectively, and a 12-month certificate of deposit, or CD, yields just 0.17 percent, according to the latest data from the Federal Deposit Insurance Corporation.
“Let’s face it: Low yields have been great for people who want to borrow, but low interest rates have been pretty painful for savers,” says Warren Pierson, managing director and co-chief investment officer at money management firm Baird Advisors.
Some of the pain that savers have suffered will subside as the Fed pushes rates higher. “Retirees tend to benefit when rates move up,” says Gary Schlossberg, global strategist for Wells Fargo Investment Institute.
Still, savers shouldn’t expect a lottery-like windfall overnight. Rates are seen moving higher in 2022, 2023 and 2024 to about 3 percent, but they’re starting from such a low base that the gains savers see on cash sitting in money market accounts and CDs will be modest. A $10,000, 12-month CD, for example, that a year from now might pay closer to 2 percent interest, still would generate only $200 in interest each year. And if inflation remains elevated, the returns on your savings still won’t keep pace with the rise in prices for things you buy such as food, gas and furniture, personal finance pros say. “Rates are low, and modest increases aren’t going to change that,” says Greg McBride, chief financial analyst at Bankrate.com.
Don’t expect the nation’s biggest banks to quickly boost the interest they pay on cash each time the nation’s central bank raises rates by a quarter percentage point, McBride adds. Banks are sitting on a mountain of deposits already and don’t need to raise rates to bring more cash in, he says. If you’re intent on getting the highest yield on your cash savings, your best bet is to shop among online banks, which offer far more competitive rates, McBride says.
Borrowers, beware: Costs are going up
If you borrow money, your interest costs will rise on things tied to the Fed’s key rate, such as adjustable-rate mortgages (ARMs), home equity lines of credit (HELOCs), auto loans and credit cards. “All of those things you borrow money to buy will cost more,” says Bill Schwartz, managing director at Wealthspire Advisors. “Maybe the bigger house you were going to buy at a 3.25 percent [mortgage rate] may not be affordable at a 4 percent or 5 percent rate.” One way to offset the hit to your wallet from higher rates is to make sure your credit score is as high as it can be, as banks and credit card companies offer lower rates to lower-risk customers with high credit scores.
And if you are carrying debt on credit cards, expect to pay more in interest, too. “Higher rates are just another form of inflation,” says Bankrate’s McBride. “It eats into disposable income, and paying down debt requires more work.” But there are ways to avoid paying more in interest even as the Fed moves further along in its rate-tightening cycle. If you have a credit card, for example, the best way to keep a lid on interest costs is to pay your debt down as soon as possible, says Ross Mayfield, investment strategy analyst at Baird. Taking advantage of a zero percent balance transfer offer can also make it easier to pay down high-interest debt.
Time is running out for folks who want to refinance their mortgages. If you have an ARM or a HELOC, mortgage products whose interest rates move higher in lockstep with Fed rate increases, it might make sense to lock into a lower fixed-rate mortgage now before the Fed’s next rate hike, says Bankrate’s McBride.
“Refinancing is still very compelling,” McBride says. “And, especially for seniors living on a fixed income that see inflation pushing their costs higher, the ability to refinance their mortgage to cut the size of their monthly payments provides breathing room in their budgets.”
Rate increases, as it turns out, are not the end of the world. And it’s important to keep the news about the Fed’s pivot to higher rates in perspective, says Andy Smith, executive director of financial planning at Edelman Financial Engines. “Try to make sure that [you] are coming into it in the right way and remove as much emotion from it as possible,” Smith says. That means making tweaks here and there to either take advantage of higher savings rates or reduce your borrowing costs, but keeping your long-term investment portfolio, which should include both stocks and bonds, on autopilot. And while rate hikes often spook the stock market in the short term, “most sectors in the S&P 500 stock index muster positive returns in the year that follows the first hike,” says Gargi Chaudhuri, head of iShares Investment Strategy Americas.
https://www.aarp.org/money/investing/info-2021/rising-interest-rates-impact.html?intcmp=AE-HP-TTN-R2-POS2-REALPOSS-TODAY
How to Live Your Best Life: The Overlooked Habits of Happy Aging
There are probably thousands of articles published every day on how and why to eat well and exercise. And yes, these are critical endeavors for healthy aging. But, they don’t cover everything you need to do to live your best life for as long as possible.
What might be missing? The two most overlooked endeavors for preparing for your future are:
- Carefully fostering intellectual and social habits
- Building and maintaining a comprehensive financial plan
Americans Embrace Habits for Physical Health, But Fewer Have Adopted Financial and Intellectual Habits
The data is pretty clear that Americans have gotten the message on the benefits of diet and exercise. However, they have not yet as widely adopted financial and intellectual habits that are also critical to thriving in old age and are key to how to live your best life.
Let’s take a look at who does what and why each area of self improvement is important.
1. Healthy Eating and Getting Exercise
According to Pew research, a whopping 97% of Americans believe that healthy eating habits are key to a long and healthy life. And, 98% say that it is important or somewhat important to get enough physical exercise.
That is almost everyone who at least believes that taking care of your body is important. (Whether we actually do it every day is a whole other story.)
2. Intellectual and Social Habits
Maintaining your mind through learning and social activities is proving to be as critical to thriving in old age as eating well and exercising. And yet, these activities do not seem to be as widely adopted.
Your Intellectual Habits
Research from UC Berkeley found that when people in their 80s were taught something new over just 6 weeks, they could make their brains up to 30 years younger. Wow. Learning is powerful.
And, while Pew research has found that about 74% of Americans engage in some kind of personal learning, it is not clear that the learning endeavors are focused and sustained in the way that may be necessary to stave aging. In the Pew Research, they reported on the types of activities personal learners undertook:
- 58% read how to publications
- 35% attend a meeting, club, or group
- 30% went to a conference or convention
- 25% took a course
These are great and beneficial activities, but it is important to make learning a focused and conscious habit. And, it doesn’t have to be calculus or rocket science. In the UC Berkeley research, people learned painting, photography, music, and how to use an iPad.
Learning Falls with Age: The Pew study also discovered that people who identify themselves as lifelong learners are likely to be younger and more educated. Take a look at the self identified learners by age:
- 81% of 18-29 year olds
- 76% of 30-49 year olds
- 72% of 50-64 year olds
- 62% of people over 65
Learning is scientifically proven to reduce the intellectual impacts of aging, it is also a time worn concept well understood by artists and intellectuals.
Think back to high school or college English. Do you remember the poem, “Sailing to Byzantium” by William Butler Yeats? The poem essentially calls out to the reader to develop an intellectual and creative life in order to survive the physical downsides of aging. Your body might not be able to keep up, but a nourished brain can enliven life at any age.
Staying Social
The National Institute on Aging finds that 25% of Americans over 65 are socially isolated, and a meta analysis of 277 studies with 177,635 participants from adolescence to old age found that people’s social networks increase through young adulthood, then decrease steadily over the rest of their lives.
Fostering social connections is another critical part of aging well. Research has found that social 60 year olds are almost 12% less likely to develop dementia than less socially active peers. And, the National Institute on Aging links loneliness to higher risks of high blood pressure, heart disease, obesity, depression, cognitive decline, Alzheimer’s disease and more.
3. Financial Planning Habits and Living Your Best Life
According to research from Charles Schwab, only 33% of Americans have a written financial plan, making personal finance, the least adopted habit – by far – that is important to your long term well being and living your best life.
Having a financial plan has myriad concrete benefits:
Confidence: A written plan increases your confidence and reduces your stress. When you have a plan for how to use your money, you know what you need to do to live your best life.
Better habits: When you have a written financial plan, you develop better habits. People with a plan are much more likely to:
- Save more
- Invest appropriately
- Have an emergency fund
- Reduce banking and investment fees
- Avoid credit card balances
- Pay bills on time
- Re-balancing portfolios and regularly updating the financial plan
Improved outcomes: The result of those financial habits? Better outcomes. If you have a financial plan, you are more likely to be able to achieve your retirement goals.
Written Plans Are Important to Everyone, But Especially Those at Low- and Moderate-Income Levels
Research finds that written plans may be especially important for low- and moderate-income levels. One-third of households with less than $48,000 in annual income with a written plan save 10% or more of income, compared with about one in 10 households in that income range without written plans.
https://www.newretirement.com/retirement/how-to-live-your-best-life-the-overlooked-habits-of-healthy-aging/
Biggest Social Security Changes for 2022
Benefits are going up, but so are the Medicare premiums deducted from monthly checks
Social Security beneficiaries will have a lot to cheer about in 2022 — but they may have a few things to grouse about as well. Here’s a rundown of what will change for Social Security beneficiaries in the new year.
Monthly benefits
The biggest change beneficiaries will see in Social Security in 2022 is a 5.9 percent cost-of-living adjustment (COLA) to monthly retirement checks and Supplemental Security Income (SSI) checks. The increase is the largest COLA since 1982.
The COLA will boost the average retirement check by $92, to $1,657 a month. The maximum monthly benefit for a worker who retired at full retirement age will jump by $197, to $3,345. SSI checks, for those with limited incomes and few financial resources, will get a lift, too. The maximum monthly SSI payment in 2022 will be $841 for an individual, up $47 from 2021, and $1,261 for a couple, up $70.
| Estimated Average Monthly Social Security Benefits Payable in January 2022 | ||
|---|---|---|
| Before
5.9% COLA |
After
5.9% COLA |
|
| All Retired Workers | $1,565 | $1,657 |
| Aged Couple, Both Receiving Benefits | $2,599 | $2,753 |
| Widowed Mother and Two Children | $3,009 | $3,187 |
| Aged Widow(er) Alone | $1,467 | $1,553 |
| Disabled Worker, Spouse and One or More Children | $2,250 | $2,383 |
| All Disabled Workers | $1,282 | $1,358 |
Source: Social Security Administration
The annual Social Security COLA is based on the change in prices of a market basket of goods. To measure these changes, the Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For the 2022 COLA, the SSA measured the change in the average CPI-W index from July, August and September of 2021 to the average CPI-W index for the same three-month span in 2020. The percentage change between the two quarterly averages, 5.9 percent, is the COLA starting in January 2022.
The 2022 COLA was so large because prices of goods and services measured in the CPI-W have significantly increased in the past year, due in part to a rebounding economy and COVID-19 outbreaks, which have both driven up energy prices and strained the world’s supply chains.
Because the COLA calculation is backward-looking and fixed in time based on the change from the third quarter of 2020 to the third quarter of 2021, it does not always capture the full increase in goods and services if inflation persists beyond September, which it has. In the 12 months that ended in November, the CPI-W jumped 7.6 percent, and the Consumer Price Index for All Urban Consumers (CPI-U), the most common gauge of inflation, gained 6.8 percent. If inflation continues at this pace, it will erode the future buying power of Social Security payments.
Big hike in Medicare Part B premiums
Although the 2022 increase is substantial, most beneficiaries won’t see the full amount in their checks because Medicare Part B premiums are deducted directly from most Social Security retirement payments. Due to inflation (and because the 2021 Part B increase was limited by Congress), Medicare Part B premiums jumped to $170.10 for 2022, an increase of $21.60, from $148.50 in 2021.
Consider the person who has a $1,657.30 monthly benefit in 2022, up from $1,565 in 2021. They would have a net benefit (after the $170.10 2022 Part B deduction) of $1,487.20.
Those with the smallest Social Security benefit get hit the hardest by the Medicare increase, says Mary Johnson, Social Security and Medicare policy analyst for the Senior Citizens League, a nonpartisan advocacy group. “The folks with the lowest benefits see the smallest increase, yet they may be the same people who depend on Social Security for most, or even all of their income,” Johnson says.
For example, a person with a $1,000 Social Security benefit in 2021 would have gotten $851.50 a month after the 2021 Part B premium of $148.50 a month was deducted. In 2022, the person’s Social Security payment would rise to $1,059. Deduct $170.10 for Medicare, and that person would be left with $888.90 — just $37.40 more than in 2021.
From 2013 through 2022, Social Security COLAs have increased payments by 18.8 percentage points. Part B premiums have increased by 57.2 percentage points during the same period, according to the Senior Citizens League.
Credit for work
In order to get Social Security retirement benefits, you must have earned 40 work credits, or the equivalent of 10 years. Each credit is three months of qualifying work a year. To qualify, you need to make a minimum amount of money per quarter. In 2021, the minimum was $1,470 per quarter. In 2022, the minimum will be $1,510.
Subtraction for work
Social Security retirement benefits are generally designed for those who have stopped working. If you are earning money and collecting Social Security retirement benefits before you reach full retirement age, the SSA may withhold $1 in benefits for every $2 in earnings that exceed the threshold. In 2021, the threshold was set at $18,960 a year before the SSA began withholding money. That threshold rises to $19,560 a year in 2022. Social Security will help you calculate your full retirement age.
In the year in which you reach full retirement age, the SSA will withhold $1 for every $3 you earn above the limit. That limit was $50,520 a year in 2021 and will be $51,960 a year in 2022. The SSA stops withholding money the month you reach full retirement age.
You don’t lose the money that the SSA withholds. Social Security increases your monthly benefit at full retirement age, so that over time you recoup benefits withheld before you reached full retirement age.
Taxes
Social Security is paid for by a 6.2 percent tax on employees, which is matched by a 6.2 percent tax from employers. (The self-employed pay a 12.4 percent combined tax.) The tax rate hasn’t changed. The amount of income that’s subject to that tax, however, has also increased in line with the COLA.
In 2021, you paid Social Security tax (called Old Age, Survivors and Disability Insurance, or OASDI) on up to $142,800 of taxable earnings. That limit will be $147,000 in 2022. Neither you nor your employer will pay OASDI taxes on amounts higher than that.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.
https://www.aarp.org/retirement/social-security/info-2022/monthly-benefits-medicare-premium-payroll-tax-changes.html?intcmp=AE-RET-PRT-LL4
3 murky issues that make retirement planning extra hard in this economic climate
Making a retirement plan requires more knowledge than you might think. You’ll need to understand how inflation affects your investment account; how much income Social Security provides, and how much you need to subsidize it; and how much you can withdraw from investment accounts without draining your nest egg.
Unfortunately, millions of Americans are lacking these basic facts. This is based on a recent report from the Insured Retirement Institute (IRI), which surveyed adults to determine their readiness for their later years. Here’s what the troubling data showed about three crucial retirement realities many people simply don’t know.
1. Americans are confused about how much income growth is needed to offset inflation
According to the IRI data, just 26% of workers were correctly able to identify the level of income growth that would be necessary to offset normal inflation over time.
Unfortunately, a failure to understand the consequences of inflation – or the returns necessary to offset it – can be an especially big problem in today’s environment with prices surging nationwide. If you’re invested too conservatively, your assets may not earn enough to avoid a steep reduction in buying power. And even assuming a normal inflation rate of around 3% per year, if you had $60,000 in income at 65, you’d need around $80,000 by 75 to maintain the same buying power.
Not considering inflation’s impact can also be a major issue when setting long-term retirement goals. If you’re planning to retire in 30 years, $1 million may seem like a generous nest egg, but its inflation-adjusted value would mean you’d actually end up with the equivalent of just $411,987 in 2022 dollars (assuming 3% annual inflation over time).
When setting savings goals, or looking at how far your nest egg will stretch, always take the time to think about how the rising price of goods and services impacts you. The good news is, there are online calculators that can help you develop a better understanding of the ways in which inflation affects your nest egg.
2. Most people don’t know how much income Social Security will provide
Americans aren’t just confused about how far their savings might go.
Only 42% of Americans correctly identified the average Social Security benefit. And close to four in 10 survey respondents overestimated the average, while a small number underestimated income from retirement benefits.
The problem is, the average could be much lower than expected for the millions of Americans who guessed incorrectly. In 2022, for example, it’s $1,657. If you’re anticipating higher benefits, this could leave you with insufficient income to cover the essentials.
The reality every future retiree must come to terms with is that they can expect Social Security to replace around 40% of preretirement income, while they’ll typically need 80% or more. So when setting retirement goals, aim for a nest egg large enough to produce about 40% of what you were earning prior to leaving the workforce – at a minimum.
3. Retirement withdrawal rates are a mystery to many
Finally, IRI found about half of Americans weren’t sure how much they could safely take out of investment accounts without worrying about running out of money while still relying on it. When asked about the amount of monthly income to withdraw from a $100,000 retirement account to make sure they still had funds at 95, only 28% of respondents correctly guessed $325.
If you don’t know how to safely set a withdrawal rate, you could end up taking too much from your account and be left broke as a senior. Or you could take out too little and struggle needlessly. There are a number of techniques to help you figure out a safe amount, but two common ones include following the 4% rule or using required minimum distribution tables from the IRS.
https://www.usatoday.com/story/money/personalfinance/retirement/2022/02/28/retirement-3-issues-making-planning-harder/49859935/
Fixed index annuities: potential plus protection
Fixed index annuities can help you accumulate money for retirement and provide guaranteed income after you retire. A fixed index annuity may be a good choice if you want the opportunity to earn indexed interest, but don’t want to risk losing money in the market.
What is a fixed index annuity?
Six reasons to consider a fixed index annuity (FIA)
1) Accumulate for retirement
2) Protect your principal
3) Grow tax-deferred
4) Get flexibility
5) Receive guaranteed income
6) Leave a legacy
See how fixed index annuities work.
Fixed index annuities have two phases: The first is the accumulation phase, during which your annuity can earn interest and grow tax-deferred.
You buy a fixed index annuity.
Your annuity earns interest.
Your annuity grows tax-deferred.
The second phase begins when you start taking income. We call this the distribution phase.
Your annuity provides income.
We offer several FIAs to help address a variety of financial goals. Your financial professional can help you decide whether one of these may be appropriate for your unique needs.
https://www.allianzlife.com/what-we-offer/annuities/fixed-index-annuities
Facts About Life Insurance: Must-Know Statistics in 2022
Purchasing life insurance is a big deal. If you want to be sure your family is covered if something happens to you, choosing the right policy is imperative. Whether you’re looking for the average policy cost or more in-depth knowledge, such as the largest life insurance companies, you can find answers in the facts about life insurance below.
9 Life Insurance Facts
- 70 percent of people said they needed a life insurance policy in 2020, according to LIMRA.
- The same study found that only 54 percent of Americans actually had life insurance coverage.
- 29 percent of people prefer to purchase life insurance through an online form, an 8 percent increase since 2011, according to the same study.
- After-tax income for the life insurance and annuity industries fell 50 percent in 2020 compared to the previous year, according to S&P Global.
- The average cost of a life insurance premium for a 50-year-old is more than twice as expensive as it is for a 20-year-old, according to data from ValuePenguin.
- COVID-19 prompted 1 in 5 Americans to purchase life insurance, according to a recent survey by LIMRA and Life Happens.
- 33 percent of people don’t think they would qualify for life insurance, according to the same study.
- The above study also found that 50 percent of people overestimate the cost of life insurance more than three times what it actually costs.
- The average life insurance payout is roughly $168,000 in the U.S., according to data collected by Statista.
Average Life Insurance Cost
The cost of life insurance varies depending on your age, medical history and the type of insurance you’re looking for. For example, term life coverage will be more affordable than whole or permanent life insurance.
| Term Life Insurance: | Permanent Life Insurance: |
|---|---|
|
|
No matter which type of policy you sign up for, you’ll have to pay an insurance premium each month to keep the coverage. Look at the average life insurance rates by age chart below to get an idea of how much you may pay per month.
This data was found by Policygenius using sample premiums for non-smokers with a Preferred health rating.
Average Life Insurance Payout
According to the head of customer acquisition at Haven Life, the average life insurance payout, or policy face value, at their company is roughly $618,000.
Keep in mind that every insurance company will likely have different averages based on their location and typical customer demographic. Data from Statista shows an overall average life insurance payout in the U.S. of $168,000.
Your payout value, or face amount, is the sum of money that will be paid to your beneficiaries if you pass away, so it’s important to determine how much you’ll want to leave behind. Maybe it will only be around $168,000, or maybe you’d rather leave closer to $1 million. Whatever you decide, make sure it’s right for your family and circumstances.
How Many People Have Life Insurance?
There are many long-term financial benefits to having life insurance, including tax-free payouts and accumulated cash value that can supplement retirement income. So how many people have life insurance and possibly benefit from such gains?
According to LIMRA, only 54 percent of Americans had a life insurance policy in 2020, even though 70 percent said they needed such insurance. This same study found that 39 percent of people had an individual plan and only 25 percent had an insurance policy from a group plan.
States With the Greatest and Least Life Insurance Coverage
While life insurance companies account for different shares of the market, the same is true for individual states. States with larger populations are more likely to have greater sums of money in the life insurance industry.
Below is a breakdown of the amount of life insurance purchased in each state in 2018, according to data from Statista. The amounts are in billions of dollars.
Life Insurance Claims Statistics
Life insurance claims for 2020 totaled $747 billion, a $14 billion decrease from 2019 and a $35 billion decrease from 2018, according to data from the Insurance Information Institute.
Surrender benefits and withdrawals account for the largest portion of the $747 billion at a total of $323 billion. Disability, accident and health benefits account for $137 billion, and annuity benefits account for $86 billion.
Biggest Life Insurance Companies by Market Cap
Market capitalization is the total value of a company traded on the stock market. Companies with a large capitalization (often $10 billion or more) are more established and well known.
According to Statista, the two largest life insurance companies in the U.S. based on their market cap are MetLife at $53.57 billion and Aflac at $35.5 billion.
Largest life insurance companies by world region include:
https://www.retireguide.com/life-insurance/statistics/
How to survive inflation and save money for a car, home and other big purchases
It hasn’t been an easy couple of months for savers.
At the height of the pandemic in April 2020, Americans’ personal savings rate – the portion of monthly income that households are socking away – hit a record 33.8%. Now that rate hovers around 6.4%, which is below pre-pandemic levels, according to data from the Bureau of Economic Analysis.
This comes as inflation is at a 40-year record high, eating into potential savings. People trying to set aside money for big-ticket purchases, such as a car or a home, may find that it’s a pipe dream when they’re struggling to afford the cost of everyday necessities.
But “even though it is harder now to plan for making big purchases, there are still strategies you can use to achieve your goals,” said Kimberly Palmer, a personal finance expert at NerdWallet.
To combat inflation, for the first time in three years the Federal Reserve raised interest rates by a quarter-percentage point on Wednesday. The central bank also forecast six additional rate hikes this year.
That should help clamp down on inflation as time goes on, but Americans aren’t going to see prices come down in the near future, Federal Reserve Chairman Jerome Powell said.
“We still expect inflation to be high this year,” he said, but it will be “lower than last year,” when the annual rate went above 5%. The war in Ukraine is also putting more pressure on inflation as Americans contend with high gas prices, Powell said during a press conference Wednesday.
In the meantime, the Fed’s rate hike means that Americans will be paying higher credit card, mortgage and loan rates.
Automate savings
More than 93% of U.S. workers have their paychecks deposited directly into bank accounts, according to a 2020 survey of more than 33,000 workers conducted by the American Payroll Association.
Instead of having the entirety of your paycheck direct deposited into one account, consider opening a savings account (if you don’t already have one) and automatically have a portion of your pay set aside. This way you won’t be tempted to use the money for your other purchases, especially if your credit card is linked to a different bank account.
“The upside of rising interest rates is that there are going to be a lot of high-yield savings accounts available, so you can actually earn a little bit of money from putting money in those accounts,” said Colleen McCreary, a consumer financial advocate and executive at Credit Karma.
Timing is everything – when is the best time to buy a car?
When you think about the big purchase you’re aiming to make, it’s also important to pinpoint the best time of year to get a better discount, said Palmer.
For instance, the best time to buy a car tends to be toward the end of each month when dealers are pressed to achieve monthly sales quotas, according to Edmunds, a site that tracks car prices. If you can hold out to the end of the year, you’ll see the highest average monthly discounts on cars, according to Edmunds data.
Analyze your budget – where else can you save?
Look at your credit card bill from last month. Don’t simply glance at what you paid. Really comb through every expense, especially automatic charges to streaming services like Netflix and Hulu, said McCreary.
“Ask yourself: ‘Do I really need these things?’ and look to make cuts in some of those places,” she said.
It’s also worthwhile trying to negotiate rates with your cellphone and cable provider. “Consumers actually have a lot more power than they tend to think about that,” McCreary said. And when you go food shopping, make a list ahead of time so you don’t find yourself wandering around aisles buying more than you intended, she added.
Work on improving your credit score
One of the best ways to save money on a loan is to improve your credit score, said Palmer.
That’s because the interest rate you pay on loans is largely a function of your credit score, which indicates the likelihood you’ll make loan payments on time based on your payment history, debt and other key financial information.
Credit scores range from 300 to 850, with scores above 800 considered “exceptional” by credit rating agency Experian. The average American credit score currently hovers at a record high of 714.
Having a high credit score usually means you’ll be offered a loan with a lower interest rate compared to someone with a lower score.
During the pandemic, many Americans started to see significant improvements in their credit scores. This came as the economy was slowed and Americans received stimulus checks and enhanced unemployment benefits. That enabled consumers to build their savings and pay off credit card debt, which in turn helped boost credit scores.
To continue building your credit score, be sure to make any existing loan and credit card payments on time, NerdWallet’s Palmer told USA TODAY.
And if you’re not sure what your credit score is head to annualcreditreport.com, where you can get a free weekly report. Typically, these reports are free only once a year, but the three major credit reporting agencies are providing free weekly reports through April 2022.
This article originally appeared on USA TODAY: Ways to save money in 2022 with high inflation
https://finance.yahoo.com/news/survive-inflation-save-money-car-100125292.html?guce_referrer=ahr0chm6ly93d3cuz29vz2xllmnvbs8&guce_referrer_sig=aqaaamfjlgznuciw53cknci4dsztmdpd8ujw55dqurt6kabd9ht56dxadegglyukbjrirjvyyxax5_ujqsrejzic4sssqwtak_ty5ko7yfaiksq44k9bnhd3lfmpbb_k77bm5j4kkszxwwa_2b0bfe5pe744hve9s2hjng3-g-gezdtf
What Every Retirement Saver Needs to Know About 2022
Changes in contribution limits, taxes, Social Security benefits, Medicare premiums and more
We all get sentimental from time to time, but unless you hit the lottery or found true love, you probably won’t be looking back on 2021 all too fondly. The COVID-19 pandemic is still with us, inflation is rising, and ABBA, inexplicably, dropped a new album.
Although everyone’s retirement is different, 2022 is going to have some big differences from 2021 that will affect almost every retiree and retirement saver to some degree. You’ll see changes in your tax rates and deductions, for example, as well as a bump up in your Social Security check if you’re already collecting benefits. You’ll also be able to sock away a bit more in your retirement accounts. Here’s a closer look at what you need to know.
Standard deduction goes up
Let’s start with the good news first: Higher standard deductions for your federal income taxes. Taxpayers get to choose between taking a standard deduction and itemizing their deductions. Deductions lower your taxable income and thus your taxes.
Because it’s so large, the standard deduction usually produces a bigger reduction in taxes than itemizing does. Most people choose the standard deduction. In 2022, when you fill out your federal income tax forms for income earned in 2021, married couples will get a standard deduction of $25,100, up $300 from tax year 2020. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550, up $150 from the previous year.
For those who like to plan well in advance, the standard deduction for income earned in 2022 — and which you can claim when you file your return in 2023 — will rise as well. The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900, up $800 from 2021. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400.
If you are 65 or older (or blind) and file as a single taxpayer, you get an extra $1,700 standard deduction for tax year 2021 and an extra $1,750 for tax year 2022. Married and filing jointly? The extra standard deduction is less per person: $1,350 for tax year 2021 and $1,400 for tax year 2022. For taxpayers who are both 65-plus and blind, the extra deduction is doubled.
Special charitable deduction goes away
Now for a bit of bad news on the tax front: A temporary tax break that allowed many Americans to easily write off some donations to charity won’t be around in 2022. On 2021 tax returns, single taxpayers can deduct $300 in certain charitable contributions, and married taxpayers can deduct $600. This break applies to people who take the standard deduction; you can’t take it if you itemize your deductions. The qualifying charitable deductions had to be made by Dec. 31, 2021.
Further, the $300 deduction is for 2021 donations made in cash, which includes currency, checks, credit or debit cards, and electronic funds transfers. You can’t take the deduction for contributions of property, such as clothing or household items. You must also make your contributions to qualified charities. Ask the charity whether it’s a qualified organization per the IRS, or check online using this tool on IRS.gov.
Retirement plan distributions
When you filed your 2020 tax return in 2021, you were able to take advantage of some terrific pandemic-year tax breaks. For example, you didn’t have to take any required minimum distributions (RMDs) from your tax-deferred retirement accounts, such as traditional IRAs and 401(k) savings plans. In addition, the government allowed people younger than 59 1/2 to take up to $100,000 from their retirement accounts in 2020 without the usual 10 percent penalty. Furthermore, it allowed people to spread out the tax on their retirement plan withdrawal over three years — and to replace that money in their accounts if they wanted to.
Well, those tax breaks are gone, even though COVID-19 is still with us. If you were already taking RMDs in 2019, you needed to resume taking them for 2021. Distribution were due by Dec. 31, 2021. However, because the age to start RMDs was raised from 70 1/2 to 72, anyone who turned 72 after June 30, 2021 has until April 1, 2022 to take their first RMD only. Subsequent RMDs are due by the last day of the calendar year. You can find out how much you need to withdraw from your retirement accounts by using AARP’s RMD calculator— or consulting a tax professional.
If you’re younger than 59 ½ and took out money from your tax-deferred retirement savings in 2021, you’ll owe a 10 percent penalty on your entire distribution — as well as ordinary income taxes on the amount you withdraw. Spreading your tax over three years? Nope, sorry. That only applied to 2020 distributions.
Retirement plan contributions
On the other hand, you will be able to contribute more to some retirement plans in 2022 than you did in 2021. For workplace accounts such as 401(k)s and 403(b)s, retirement savers can contribute as much as $20,500 in 2022, an increase of $1,000 from 2021. Those 50 and older can add an extra $6,500 — the same catch-up contribution amount as 2021 — for a maximum 2022 contribution of $27,000.
The 2022 contribution limit to traditional IRAs and Roth IRAs remains the same as 2021: $6,000. Retirement savers 50 and older can add another $1,000 as a catch-up contribution, for a total of $7,000, the same as 2021.
Here are the income limits for deducting traditional IRA contributions and for making Roth IRA contributions, based on your modified adjusted gross income (MAGI).
| Traditional IRAs — 2021 vs. 2022 deduction limits | |||
|---|---|---|---|
| Filing status | 2021 MAGI | 2022 MAGI | Deduction |
| Single or head of household | <$66,000 | <$68,000 | Full deduction |
| >$66,000 and <$76,000 | >$68,000 and <$78,000 | Partial deduction | |
| >$76,000 | >$78,000 | No deduction | |
| Married filing jointly or qualified widow(er) | <$105,000 | <$109,000 | Full deduction |
| >$105,000 and <$125,000 | >$109,000 and <$129,000 | Partial deduction | |
| >$125,000 | >$129,000 | No deduction | |
| Married filing separately | <$10,000 | <$ 10,000 | Partial deduction |
| >$10,000 | >$10,000 | No deduction | |
Source: IRS
| Roth IRA — 2021 vs. 2022 contribution limits | |||
|---|---|---|---|
| Filing status | 2021 MAGI | 2022 MAGI | Contribution |
| Single or head of household | <$125,000 | <$129,000 | Full contribution |
| >$125,000 and <$140,000 | >$129,000 and <$144,000 | Partial contribution | |
| >$140,000 | >$144,000 | No contribution | |
| Married filing jointly or qualified widow(er) | <$198,000 | <$204,000 | Full contribution |
| >$198,000 and <$208,000 | >$204,000 and <$214,000 | Partial contribution | |
| >$208,000 | >$214,000 | No contribution | |
| Married filing separately | <$10,000 | <$10,000 | Partial contribution |
| >$10,000 | >$10,000 | No contribution | |
Source: IRS
Social Security payout rises 5.9 percent
Here’s something you haven’t seen in a long time: A big Social Security cost-of-living adjustment (COLA). The 5.9 percent hike is the biggest since 1982, and it applies to Supplemental Security Income (SSI) benefits, too.
The average retirement check will increase by $92, to $1,657 starting in January 2022. Supplemental Security Income checks will get a boost as well. The maximum monthly SSI payment in 2022 will be $841 for an individual, up $47 from 2021, and $1,261 for a couple, up $70.
The COLA also applies to other parts of Social Security. The maximum Social Security retirement benefit for a worker at full retirement age will rise to $3,345 a month in 2022, up from $3,148 in 2021. The full retirement age for people born in 1956 is 66 years and four months, and rises gradually to 67 for those born in 1960 or later.
If you claim Social Security early and keep working before you reach full retirement age, the Social Security Administration (SSA) will withhold $1 for every $2 you earn above $19,560 a year, up from $18,960 in 2021. If you’re working in the year you reach full retirement age, SSA holds back $1 for every $3 you earn, up to $51,960, up from $50,520 in 2021. After you reach full retirement age, you won’t have any more withheld from your check for working, and your benefit will be adjusted upward to account for the amount of money already withheld.
But Medicare Part B premiums rise, too
If you are 65 or over and already claimed Social Security, Medicare Part B premiums are deducted directly from your monthly check, and those premiums will rise sharply in 2022. Because of inflation (and because the 2021 increase was limited by Congress), Medicare Part B premiums jumped to $170.10 for 2022, an increase of $21.60 from $148.50 in 2021. A beneficiary who has a $1,657.30 monthly benefit in 2022 would pocket a net benefit (after the $170.10 2022 Part B deduction) of $1,487.20.
So will Social Security payroll taxes
Someone has to pay for Social Security, and if you’re working that someone is you and your employer. The payroll tax to fund Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program is set at 6.2 percent for employers and 6.2 percent for employees. The self-employed pay the whole freight: 12.4 percent. The rate won’t change in 2022.
What will change, however, is the maximum amount of income to which that tax applies. In 2022, you pay OASDI tax on income up to $147,000, up from $142,800 in 2021. The rate for Medicare’s Hospital Insurance (HI) program remains at 1.45 percent for employees and 1.45 percent for employers (2.9 percent for the self-employed). It applies to all income.
Estate tax
Odds are very, very good that your estate will not be taxed by Uncle Sam. The basic exclusion amount on the estates of people who die in 2022 is $12.06 million, up from $11.7 million in 2021. It’s double for couples. Keep in mind, however, that some states impose their own estate and inheritance taxes on top of the federal estate tax.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.
https://www.aarp.org/retirement/planning-for-retirement/info-2022/what-every-retirement-saver-needs-to-know.html
2022: The Year Consumers Discover Annuities
What You Need to Know
- The government is confusing.
- Stock market gains are high, for now.
- The Secure Act is turning employer-sponsored retirement plans into income-planning educators.
Have you ever experienced the solution to a problem being in plain sight, only to pass over it? The time for consumers to notice the obvious is coming for annuity products in 2022.
This will be the year that consumers proactively seek information and advice to explore the solutions that annuity products can provide, to address some of their financial challenges. The stars are fully in alignment, and a number of forces are driving increased interest in annuities.
One of the major criticisms of the annuity industry is that is has lacked a national, industry-funded advertising campaign aimed at educating consumers about the value of annuities. In recent years there have been several well-done national efforts, funded by certain life insurance companies and some trade organizations, that have promoted the value of annuity products.
In 2022, a confluence of demographic, regulatory and economic forces will spur a mammoth annuity awareness campaign.
Here are some of the new awareness campaign drivers.
1. The large number of people in or nearing retirement age.
In fact, as our society ages, by 2024 we will reach “Peak 65.” This is the point in time when more Americans will turn age 65 than at any point in history, and the time they will likely end full-time work. These aging individuals have reached the pinnacle of the savings mountain and are looking to convert their accumulated nest eggs into income to fund their expected life span.
2. Provisions of the Secure Act requiring 401(k) and similar defined contribution workplace retirement plans to provide income estimates.
These provisions — which will require plans to send out notices referred to as “lifetime income illustrations” — will offer savers “a realistic illustration of how much monthly retirement income they could expect to purchase with their account balance,” according to the rule.
These income disclosures will, for the first time, highlight the importance of lifetime income to over 600,000 plans and 60 million people who participate in 401(k) plans.
Participants will be introduced to the lesson that it is the income your savings will generate that is most important as you prepare for retirement. These disclosures will likely raise many questions and drive expanded education on saving, investment and lifetime income.
3. Moves by certain 401(k) administrators to make annuity income options available to their plan participants.
The impact of these Secure Act-buoyed annuitization option efforts cannot be underestimated. They should create significant interest and the need for education in generating lifetime income and the value of annuity products.
4. The growing awareness of most people under age 55 that they need new lifetime income sources.
Younger workers are now realizing their age cohort will not benefit from the pension plans that older workers now possess. They know that they need lifetime income, and that their employers will not provide it.
5. The continued low-interest-rate environment.
Low yields on bonds and other fixed income arrangements have upended the conventional 60/40 portfolio allocation.
That shift is requiring that people save more to create the income streams needed to fund longer life expectancies and to look for new sources of income. Many consumers also like the psychological comfort that protected lifetime income offers.
6. The need to protect stock market gains.
With the significant increase in equity markets over the last few years, many savers have equity market gains they want to protect. The principal protection offered by most annuity products provides this.
7. The overall uncertainty we are facing each day with our government, infections and way of life.
We are now entering the third year of a worldwide pandemic that has upended our work, family and relaxation routines. Our federal government has been dysfunctional, constantly creating stress and anxiety for citizens. The comfort of protected lifetime income helps us deal with the chaos we are all experiencing.
The Takeaway
As our society continues to age, annuities are one of the only financial products that provide the features and benefits needed to provide guaranteed protected income options to pay for the costs of lengthening life spans.
Consumers are awakening to this fact. 2022 should be a great year for product discovery and sales.
https://www.thinkadvisor.com/2022/01/05/2022-the-year-consumers-discover-annuities/
How to Retire Like a Millionaire with $500,000
As volatility creeps back into the marketplace the need for the guarantees that only annuities provide is only going to increase.
Retire with $500,000 but Spend Like a Millionaire
Inflation (CPI) went up 7 percent in 2021, the highest annual inflation increase since 1982. A million dollars doesn’t go as far as it used to. In this guide, I will show you how to retire like a millionaire with $500,000.
This strategy works best if began at least 5 years before retirement. If you are approaching retirement you can use this retirement planning worksheet to gather the basic information you’ll need to create a retirement income plan.
If you are very close to retirement, or already enjoying it, you can use one of our annuity calculators to get a general estimate of how much an annuity would pay you.
How to Retire Like a Millionaire with Half the Money
A popular retirement income strategy is the 4% rule. The 4% rule assumes your investment portfolio contains about 60% stocks and 40% bonds. It also assumes your annual spending will remain the same each year in retirement.
Many market analysts now claim the 4% withdrawal rate is no longer feasible due to ultra low-interest rates and increasing inflation. A recent Wall Street Journal Article cited multiple well-respected researchers that claim 3.3% is now the safe spending rate in retirement.
Retiring with $1,000,000 using the 4 Percent Rule
A 4% withdrawal rate became standard in 1994 after Bill Bengen first demonstrated that it succeeded over most 30-year periods in modern history.
Christine Benz, director of personal finance and retirement planning; Jeffrey Ptak, chief rating officer; and John Rekenthaler, director of research, at Morningstar, set out to determine if the 4% withdrawal rule was still relevant today.
Using forward-looking estimates for investment performance and inflation, they found that a 50% stock/50% bond portfolio should support a starting fixed real withdrawal rate of about 3.3% per year, assuming fixed withdrawals over a 30-year time horizon and a 90% probability of success. This is because bond yields are low and stock valuations are high.
How Much Can You Spend if You Retire with $1,000,000?
Given all of the recent debate around the 4% withdrawal rule, I am going to compromise and assume a 3.8% annual withdrawal rate from the $1,000,000 portfolio. This is the most simple of all retirement income planning methods as you see below.
Depending on your school of thought, a one million dollar retirement nest egg could successfully generate $38,000 annually in most scenarios.
$1,000,000 x 3.8% = $38,000 of annual income
Retire with $500,000 and Spend Like You are a Millionaire
Now let’s look at an alternative strategy. It probably goes without saying but the best time to begin planning for retirement is 5 to 10 years before you plan to retire. This retirement income strategy works best if implemented at least 5 years before retirement; however, it improves the chances of success in almost any scenario.
Let’s use 60-year-old planning to retire in 5 years as an example. At age 60 we re-allocate $500,000 to a fixed index annuity with a lifetime income rider.
I researched 56 Annuity Companies and more than 300 riders and found the best possible lifetime annuity payments for a 60-year-old deferring for 5 years. If you purchased this $500,000 annuity at age 60 it provides a guaranteed lifetime income payment of $38,239 beginning at age 65.
That’s slightly higher than the $1,000,000 portfolio assuming a 3.8% withdrawal rate; which may be generous according to the latest research.
$500K Annuity Purchased at 65 = $38,239 Annual Income
How Do You Calculate Lifetime Income Annuity Payments?
Most annuity income riders have what is called a “Guaranteed Roll-Up Rate”. The roll-up rate is a guaranteed interest rate that is applied to the annuity’s income base each year you defer your income payments.
The table below shows how the income base grows. In this example, the annuity pays a 10% bonus to the income base immediately. It also has an annual roll-up rate of 7% simple. The annuity’s lifetime income payments are calculated by multiplying your withdrawal percentage (based on your age) by the income base.
To clarify, you’ll notice the income base is $550,000 in 1 year. That is determined by adding the 10% bonus ($50,000 + $500,000 = $50,000 bonus). The income base grows by 7% ($38,500) simple each year after.
You can see in year 2 the income grew to $588,500 ($38.5K + $550,000). It will continue to grow by the $38,500 annually for 10 years or until income payments begin.
Social Security retirement age stops changing in 2022: What to know
New full retirement age is 67 for anyone born after 1960
There is good and bad news for older Americans: The Social Security full retirement age increased again in 2022 for some individuals – but it marks the last year that the age will change.
The full retirement age – the age at which individuals are eligible to claim their full Social Security benefit – rose to 67 this year for those who were born in 1960 (and who will turn 62 this year). From this year forward, the full retirement age will remain 67 for anyone born after 1960, barring any future changes by Congress.
Congress mandated the changes to the full retirement age in 1983 as part of a law that strengthened the program’s finances. In doing so, lawmakers cited the improvements in the health of older Americans and the increased life expectancy.
Although workers can begin collecting payments when they turn 62, regardless of their full retirement age, there’s a penalty for doing so: A benefit is reduced 5/9 of one percent for each month before the full retirement age, up to three years. If the number exceeds three years (or 36 months), then the benefit is further reduced 5/12 of one percent each month. For instance, if someone chose to collect Social Security at age 62, the benefit would be reduced by 30% on a monthly basis.
Here is the full retirement age for individuals based on their birth years:
1943-1954: 66
1955: 66 and 2 months
1956: 66 and 4 months
1957: 66 and 6 months
1958: 66 and 8 months
1959: 66 and 10 months
1960: 67
Social Security recipients in 2022 received the biggest payment increase in nearly four decades, reflecting the hottest inflation since 1982.
The Social Security Administration announced last year that the cost-of-living adjustment, or COLA, will be 5.9%. That amounts to a monthly increase of $92 for the average retired person, bringing the amount to $1,657, the administration said. A typical couple’s benefits would climb by $154 to $2,754 per month.
The adjustment affects about 70 million people, including Social Security recipients, disabled veterans and federal retirees. About half of seniors live in households where Social Security benefits provide at least half of their income, while roughly 25% rely on the monthly payment for nearly all of their earnings.
The increase – the steepest annual adjustment since 1982, when recipients saw a 7.4% bump – marks an abrupt end to low inflation that saw years of meager COLA increases. Over the past 12 years, the average COLA increase has been just 1.4%. In 2021, recipients received an increase of just 1.3%, or about an extra $20 a month for retirees.
https://www.foxbusiness.com/money/social-security-full-retirement-age-stops-changing
22 Uses for Annuities in 2022
As we head toward 2022 and see more Americans reaching their mid- to late 60s, it is a great time to revisit how annuity products can be used to meet consumer financial challenges.
In anticipation of the new year, here are 22 ideas on how consumers can use annuity products to meet their growing financial needs:
1. Social Security Maximization
Purchase an immediate annuity to provide current retirement income while delaying claiming Social Security retirement benefits in order to qualify and maximize the partially inflation-adjusted monthly Social Security benefit payment.
2. Tax-Deferred Accumulation
Use a deferred annuity for tax-deferred accumulation. Annuity earnings aren’t taxed until they are withdrawn or the buyer starts taking regular distributions.
3. Principal Protection
Use the contractual guarantees of fixed annuity products to protect and never lose the principal paid for the contract.
4. An Alternative to Low-Yielding Bank Products
Use a multiple-year fixed annuity (MYGA) as an alternative to purchasing a certificate of deposit to obtain current higher rates of return.
5. Fund Essential Living Expenses
Purchase an income annuity or use the income options of a deferred annuity to help fund essential living expenses in retirement. This approach can free other assets for investing in potentially higher-yielding or inflation-offsetting asset classes.
6. Create Protected Income From Accumulated Assets
Transfer funds from a 401(k) or other qualified retirement savings plan to an annuity product to utilize the annuitization or optional income riders to turn accumulated funds into a protected, guaranteed income stream.
7. Life Insurance Policy Salvage
Use an income annuity to salvage an underwater life insurance contract by converting the cash surrender value created by paid-in premiums into a lifetime income stream.
8. Source of Long-Term Care Funding
Use a non-qualified deferred annuity to fund premiums for a long-term care (LTC) policy. If set up properly, the owner can obtain a tax-free way to purchase LTC.
9. Minimize Longevity Risk
Use a deferred income annuity or qualifying longevity annuity contract (QLAC) as hedges against outliving savings. The options can provide income in case of an extremely long life.
10. Medicaid Spend-Down Protection
Purchase a Medicaid qualified annuity to preserve assets.
11. Create an Annuity Bucket Approach Using Retirement Funds
Purchase income annuities for the Income Now Bucket, a deferred fixed or variable annuity for Income Later Bucket and a third bucket using the income options of a deferred fixed or variable annuity to satisfy required minimum distribution needs.
12. Market Downside Protection
Purchase a fixed annuity contract as a hedge against downside equity market risk to preserve capital at older ages.
13. Gifting to Family Members
Use an income annuity to create a cash flow for gifting to family members taking advantage of the gifting exclusion with the funds to be used for education funding, lifetime gifting or vehicle lease or purchase payments.
14. Diversification Tool
Utilize the different available indexing options of a fixed indexed annuity or investment options of variable annuities to create a diversified approach to reach consumer accumulation goals.
15. Minimize Sequence of Returns Risk
Use the principal protection of fixed deferred annuities to protect against the risk of major market downturns in the early years of retirement.
16. Create a Lifetime Income Stream
Exchange the cash value of an unneeded permanent life insurance policy for an annuity product using a tax-free exchange.
17. Accelerate Income Creation
Use the tax deferral provision of annuities to earn interest three ways: interest on principal, interest on interest and interest on the tax savings.
18. Supplement to Retirement Income
Use the annuitization and optional income riders of annuity products to create a protected flow of supplemental retirement income.
19. Probate and Estate Advantages
Use the intrinsic features of deferred annuities to have the proceeds of an annuity paid directly to designated beneficiaries and likely avoid the time and expense of probate.
20. Zero Is Your Hero
Use the structure of fixed indexed annuities to guarantee that principal paid for the contract will not be lost due to market downturns. The buyer of a fixed indexed annuity never receives less than zero percent interest in any crediting period.
21. Income Planning for Small Businesses
Use income options of a deferred annuity to create a lifetime income stream for small, qualified plans by making the annuity an investment of the qualified plan.
22. Obtain Living Benefits
Use the contractual benefits and optional riders of deferred annuity products to obtain living benefits such as nursing home confinement waiver of surrender charges, terminal illness waiver of surrender charge benefits or enhanced income withdrawals for chronic illnesses. The living benefits available will depend upon the package of benefits offered by the underwriting life insurer.
The above ideas only scratch the surface of how the tax-advantaged structure, income options, product guarantees and optional product living benefits of annuity products can be used as a tool to help consumers address their financial challenges.
As our society continues to age, annuities are one of the only financial products that provide the features and benefits needed to provide guaranteed protected income options to pay for the costs of lengthening life expectancies.
https://www.thinkadvisor.com/2021/12/06/22-annuity-uses-for-2022/
Expenses You Can Eliminate in Retirement
Eliminating these expenses means substantial savings in retirement.
Lower your expenses.
Many retirees are tempted to spend more money on leisure activities in retirement. Health care costs also tend to increase as people age. But there are many costs that decline in retirement, and a few you can eliminate entirely. Here are some expenses you will no longer have in retirement.
Mortgage
Paying off your mortgage eliminates one of your biggest monthly bills. You no longer need to make interest payments to a lender or worry about late fees. While you will still have to pay for insurance and property taxes and continue to maintain your home, these costs are likely to be a fraction of what you were paying for your mortgage. Keeping your housing costs low will help your fixed income stretch further. There’s also a big emotional payoff when you own your home mortgage-free.
Commuting costs
Gas for your car or train fare is a big expense for employees with long daily commutes to work. Commuting also puts a lot of wear on your car that could necessitate more frequent repairs and maintenance or even a new vehicle. In retirement, all your driving is for personal errands or pleasure. When you drive less often, you may also be eligible for a lower rate on your auto insurance. Some retirees are even able to completely avoid traffic by skipping outings during peak travel times.
A second car
Dual-income married couples often need two cars to get to their respective jobs. If you’re willing to coordinate your respective schedules, you might be able to get by with one car in retirement. Retired couples who share a car will also reduce insurance and car maintenance costs. When you sell a second car, you can add the proceeds to your retirement savings or put some of the money toward occasional taxi or ride-share services when you need to be in different places at the same time.
Professional clothing
Some jobs require expensive professional attire, stylish haircuts and makeup, and formal clothing for special events. Dry cleaning and professional tailoring cost even more. Retirees get to trade in their suits for jeans and don’t have to keep up with the latest fashion trends unless they want to.
Time-saving costs
Time-strapped working people often spend money to save time. This might mean buying expensive convenience food because you don’t have time to cook and outsourcing household chores so you don’t have to spend your weekends doing them. Retirees can invest their time to save money by comparison shopping for good deals and taking on the home improvement chores they used to pay someone else to do. Cutting your own grass and cooking at home takes time but could save you money.
Office costs
Being involved in office social life comes with some costs. You might pay for lunch out with coworkers, chip in for gifts for colleagues or get drawn into the office pool. These costs are often a necessary part of team building with coworkers, but retirees don’t have to pay them. Retirees don’t need to go out for an overpriced coffee to welcome a new colleague or a round of drinks at happy hour to commemorate a coworker’s departure. You can shift your spending to gatherings with close friends you enjoy spending time with.
Paying full price
One of the major benefits of growing older is qualifying for senior discounts. The senior discounts available for travel, hotels and car rentals are well-known. But you may also qualify for discounts at restaurants, retail stores and even grocery stores. Not all senior discounts are advertised. Sometimes you have to ask, and be prepared to show ID. Some senior discounts are available to those as young as age 50, while other discounts require you to be at least age 65 or another age.
Peak travel costs
Many working people cram their travel plans into long weekends and national holidays, and parents tend to vacation during school breaks. Airlines and hotels know this and set prices accordingly. Retirees can travel during weekdays and off-peak seasons, when the prices are lower and the crowds are smaller. Some retirees aim to travel during the shoulder season, which can result in pleasant weather and reduced fares. Retirees with a flexible schedule may also be able to take advantage of last-minute deals.
Unnecessary fees
Take the time to review your investment portfolio, with the goal of reducing your investment costs. Make a note of the expense ratio of each fund, and challenge yourself to find a lower-cost fund that meets your investment needs. Take care to learn the rules for taking penalty-free retirement account withdrawals. You could be retired for several decades. Don’t allow your investment returns to be dragged down by unnecessary costs.
A high tax rate
Many people drop into a lower tax bracket in retirement. There are tax breaks specifically for people age 65 and older, including a bigger standard deduction. Some jurisdictions also have property tax breaks for older homeowners. Take steps to further reduce your taxes by carefully timing retirement account withdrawals. Retirees who continue to work can defer paying income tax on more money in a 401(k) than younger employees. Charitably inclined retirees can avoid income tax on IRA required minimum distributions by making a qualified charitable distribution.
Expenses You Can Eliminate in Retirement
- Mortgage.
- Commuting costs.
- A second car.
- Professional clothing.
- Time-saving costs.
- Office costs.
- Paying full price.
- Peak travel costs.
- Unnecessary fees.
- A high tax rate.
https://money.usnews.com/money/retirement/aging/slideshows/expenses-you-can-eliminate-in-retirement?slide=13
New Year, New 401(k) Limit Increases. What You Need To Know About Your Retirement Savings In 2022
Starting the new year off with a strong, strategic financial plan to kickstart your financial goals for the next 12 months can have a lasting impact on your future beyond 2022. This, of course, includes the ever-important consideration of retirement planning. Luckily, recent legislative changes have increased contribution limits for the 401(k), as well as altered some other retirement investment vehicles to enable increased savings for those who are eligible. Here’s what you need to know about retirement investing as you conduct financial planning for 2022.
New Legislative Changes To Retirement Investments
As of early November, the IRS announced a number of new legislative changes to retirement accounts that take effect this year, much of which can be attributed to the country’s record-high inflation. This includes changes to contribution limits for 401(k) plans, as well as changes in salary eligibility for IRAs, Roth IRAs and Saver’s Credits, all up from the 2021 plan. Certain contribution limits for IRAs and their associated catch-up values have not changed.
The increase in contribution limits for 401(k) plans is the most notable change from the legislation. The 2021 limit of $19,500 has changed to $20,500 in the new year for normal taxpayers; likewise, the catch-up limit has not increased for taxpayers over 50, with the same increase of only $1,000 from $26,000 in 2021 to $27,000. While this affects a relatively small group of people who max out their retirement savings, it’s still an important tool for investors.
There is no change to the IRA contribution limit, which remains at $6,000 for normal taxpayers and $7,000 for taxpayers over 50. However, the income brackets for traditional IRAs, Roth IRAs and Saver’s Credits have increased slightly, giving additional taxpayers the opportunity to contribute more to these retirement accounts. For example, the bracket phase-out for married couples filing jointly increased from $198,000-$208,000 in 2021 up to $204,000-$214,000 in 2022, giving a bit more room for investment.
Understanding Investment Limits
These legislative changes are important to understand for the sake of understanding your personal investment limits. Essentially, there are two ways to treat investment limits, either as constraints or as opportunities. Relative to acting as constraints, exceeding your contribution limit results in an excess tax. Specifically, excess contributions will be taxed at 6% per year as long as they remain in the account. Therefore, avoiding over-contribution is important to maximize your investments.
On the other hand, the contribution limits are important to know as they are an opportunity to maximize your retirement potential. Specific to 401(k)s and other employer accounts, many of these contributions may carry a match opportunity, meaning that your employer will match your contributions up to a certain amount. It’s important to understand this in order to best take advantage of it and maximize your retirement savings. While this is one efficient way to boost your 401(k), there are other great ways to do this too.
How To Max Out Your 401(K) In 2022
As previously mentioned, one of the most important things you can do to max out your 401(k) contribution is to make the most of your own income and employer inputs.
First, leverage your contributions for the tax breaks. Since contributions are non-taxable income until withdrawn, they are valuable for saving additional money. This is likely to result in net savings, given the fact that your retirement income will likely be lower than your current income.
Another great way to do this is to set automatic contributions for your 401(k). This means that you don’t even have to think about your savings when your monthly paycheck hits. Calculate what your monthly contribution needs to be to max out your annual 401(k) investment and begin with whatever amount you can afford. Each year, you should aim to raise your automatic contribution by 1%, which is an amount that you won’t notice missing from your paycheck but will make a big difference in your retirement fund.
Then, try and divert any funds such as bonuses or incentives, into the fund as well. The more that you can leverage your automatic contributions, the easier it will be to maximize your 401(k).
Finally, ensure that you are in a position to actually take advantage of the employer match. Many employment agreements require that employees remain at the company for a certain amount of time until the employee match vests. While a 401(k) investment is always imperative, committing to the company until vesting occurs will help you maximize your contributions.
The 401(k) is a fantastic vehicle for preparing for retirement, and the new legislative changes relative to these accounts provide more opportunity and flexibility than ever to maximize your savings this year. If you have a 401(k) available to you, particularly with employee match opportunities, there’s never been a better time to prioritize this as the foundation of your retirement savings plan. With a fresh start in the new year, plan to the make the most of 2022 by strategizing a strong retirement savings plan early, and executing it throughout the year.
https://www.forbes.com/sites/sap/2022/02/01/quantum-tech-2022-a-stampede-of-unicorns-is-headed-for-your-industry/?sh=1ceb801d1ba9
Social Security Survivors Benefits
This page provides detailed information about survivors benefits and can help you understand what to expect from Social Security when you or a loved one dies.
The Basics About Survivors Benefits
Your family members may receive survivors benefits if you die. If you are working and paying into Social Security, some of those taxes you pay are for survivors benefits. Your spouse, children, and parents could be eligible for benefits based on your earnings.
You may receive survivors benefits when a family member dies. You and your family could be eligible for benefits based on the earnings of a worker who died. The deceased person must have worked long enough to qualify for benefits.
For more information, please read How Social Security Can Help You When a Family Member Dies.
Apply for Survivors Benefits
You should notify us immediately when a person dies. However, you cannot report a death or apply for survivors benefits online.
In most cases, the funeral home will report the person’s death to us. You should give the funeral home the deceased person’s Social Security number if you want them to make the report.
If you need to report a death or apply for benefits, call 1-800-772-1213 (TTY 1-800-325-0778). You can speak to a Social Security representative between 8:00 a.m. – 7:00 p.m. Monday through Friday. Although our offices are closed to the public, employees from those offices are assisting people by telephone. You can find the phone number for your local office by using our Social Security Office Locator and looking under Social Security Office Information. The toll-free “Office” number is your local office.
If you are not getting benefits
If you are not getting benefits, you should apply for survivors benefits promptly because, in some cases, benefits may not be retroactive.
If you are getting benefits
If you are getting benefits on your spouse’s or parent’s record:
- You generally will not need to file an application for survivors benefits.
- We’ll automatically change any monthly benefits you receive to survivors benefits after we receive the report of death.
- We may be able to pay the Special Lump-Sum Death Payment automatically.
If you are getting retirement or disability benefits on your own record:
- You will need to apply for the survivors benefits.
- We will check to see whether you can get a higher benefit as a widow or widower.
Documents You Need to Apply
Please select the benefit you will be applying for from the list below to see what information and documents you may need when you apply:
- Widows/Widowers or Surviving Divorced Spouse’s Benefits.
- Child’s Benefits.
- Mother’s or Father’s Benefits (You must have a child under age 16 or disabled in your care.)
- Lump-Sum Death Payment.
- Parent’s Benefits (You must have been dependent on your child at the time of his or her death.)
If you don’t have all the documents you need, don’t delay applying for Social Security benefits.
In many cases, your local Social Security office can contact your state Bureau of Vital Statistics and verify your information online at no cost to you. If we can’t verify your information online, we can still help you get the information you need.
Mailing Your Documents
If you mail any documents to us, you must include the Social Security number so that we can match them with the correct application. Do not write anything on the original documents. Please write the Social Security number on a separate sheet of paper and include it in the mailing envelope along with the documents.
https://www.ssa.gov/benefits/survivors/
2022 Is The Year Consumers Discover Value Of Annuities
Harry N. Stout, author and podcast host at the FinancialVerse says that 2022 will be the year that consumers proactively reach out for information and advice to explore the solutions that annuity products can provide to address some of their financial challenges.
Here are the forces Stout says will shape the annuity market:
> The large number of individuals in or nearing retirement age. In fact, as our society ages, by 2024 we will reach “Peak 65”. This is the point in time when more Americans will turn age 65 than at any point in history, and the time they will likely end full-time work. These aging individuals have reached the pinnacle of the savings mountain and are looking to convert their accumulated nest eggs into income to fund their expected lifespans.
> Provisions of the 2019 SECURE Act take effect that require 401k and similar defined contribution workplace retirement plans to provide income estimates—referred to as “lifetime income illustrations”—to participants, giving savers “a realistic illustration of how much monthly retirement income they could expect to purchase with their account balance.” These income disclosures will, for the first time, highlight the importance of lifetime income to over 600,000 plans and 60 million individuals who participate in 401k plans. Participants will be introduced to the lesson that it is the income their savings will generate that is most important as they prepare for retirement. These disclosures will likely raise many questions and drive expanded requests for education on saving, investment and lifetime income.
Starting in 2022, certain 401k administrators will make annuity income options available to their plan participants with new retirement income offerings. The impact of these efforts cannot be underestimated. They should create significant consumer interest and the need for education in generating lifetime income and the value of annuity products.
> The growing awareness of most people under age 55 that they need lifetime income sources. These younger workers are now realizing their age cohort will not benefit from the pension plans that older workers now possess. They are becoming aware that they need lifetime income and that their employers will not be providing it.
> The continued historically low interest rate environment is requiring that individuals need to save more to create the income streams needed to fund longer life expectancies and to look for new sources of income.
> The need to protect stock market gains. With the significant increase in equity markets over the last few years, many savers have equity market gains they want to protect. The principal protection offered by most annuity products provides this.
> The overall uncertainty we are facing each day with our government, infections and our way of life. We are now entering the third year of a worldwide pandemic that has upended our work, family and relaxation routines. Our federal government has been dysfunctional and constantly creating stress and anxiety for citizens. The comfort of protected lifetime income helps individuals deal with the chaos they are experiencing.
Stout says that as our society continues to age, annuities are one of the only financial products that provide the features and benefits needed to provide guaranteed protected income options to pay for the costs of lengthening life expectancies. Consumers will awaken to this fact. 2022 should be a great year for product discovery.
Harry N. Stout is a published author, podcast host and former senior executive for several of the nation’s largest annuity companies. He has over twenty years of experience in all aspects of annuity products. A certified public accountant by training, he has industry experience in the U.S. and abroad. He is acknowledged as a national annuity thought leader and has written for numerous financial publications and participated in national media of all types.
He is a past director of the Life Insurance Marketing and Research Association (LIMRA), the National Association for Fixed Annuities (NAFA), the Financial Services Council of Australia and the Insurance Marketplace Standards Association.
https://insurancenewsnet.com/oarticle/author-2022-is-the-year-consumers-discover-value-of-annuities
After 2 tumultuous years, here are 4 financial tips to learn (or re-learn) for 2022
The end of the year provides a good opportunity for reflection. The past 12 months brought plenty of opportunities to make financial strides — and plenty of potholes and challenges.
A lot of Americans struggled with money issues, but others flourished. Whether your final ledger for 2021 puts you in the plus or minus column, these practices and behaviors can help going forward, especially if resurfacing pandemic pressures pose new money obstacles in the new year.
1. Build up that emergency fund
It’s a fairly straightforward tip but many Americans still haven’t achieved it: Amass enough money in reserve to meet unexpected job or other financial demands.
In a recent survey by the Transamerica Center for Retirement Studies, 43% of respondents said they suffered one or more negative employment jolts such as a job loss, furlough, reduced hours, reduced pay or unexpectedly early retirement. All that’s in addition to nonwork financial stresses ranging from an air-conditioner breakdown or an unexpected hospitalization to someone stealing the catalytic converter off your car.
Consequences of not having an emergency fund can include reliance on expensive, short-term check-cashing services or needing to make premature withdrawals from retirement accounts.
If you have had difficulty saving before, it might be better to focus on simply getting started and not worrying about how much you ultimately need to amass. Like a journey of 1,000 miles starting with that first step, the initial goal here is to begin with the first dollar, $50 or $100 — and to keep adding to it over time.
Ultimately, you will want to compile enough money to cover at least three months of routine expenses, though a six-month reserve would put you on sounder footing. Your reserve should be stashed in a liquid vehicle such as a bank savings account or money-market mutual fund, not an investment account that could trigger transaction fees or taxable gains if you needed to access it frequently.
2. Stay ahead of student-loan debt
The federal student loan deferment period was set to end Jan. 31 but recently was extended to May 1. Whenever it ends, plenty of borrowers might need to take action to stave off financial problems. In a new report by Bankrate.com and BestColleges.com, 69% of borrowers anticipated needing to take action to afford the monthly payment. Also, 75% said the resumption of payments in February will negatively affect their finances.
Actions borrowers said they might need to take include cutting back on spending (cited by 32%), finding a higher paying primary job (26%), taking on a second job or side hustle (25%), selling personal belongings (19%), finding cheaper living arrangements (15%) and borrowing elsewhere such as from family members or friends (13%).
Consequences could include having less money to save or less money to spend, along with increased difficulty in paying other debts. Just 36% of respondents said they continued to repay their student-loan debts during the deferment period, and many of these people said they paid less than normal.
3. Take advantage of tax incentives
It goes without saying that everyone wants to minimize taxes. But do investors take advantage of tax-sheltered strategies and vehicles to the extent possible? No.
For reasons ranging from a lack of funds to a lack of knowledge, many people don’t use available incentives. For example, most workers don’t max out contributions to workplace 401(k) plans and many don’t even contribute enough to receive full employer matches. As for Individual Retirement Accounts, only about 1 in 10 account holders contributes money in a given year, even though many more are eligible.
Health Savings Accounts, typically offered as a workplace benefit, are another example. These accounts potentially offer three tax advantages. Contributions go in on a tax-sheltered basis, account earnings grow tax-deferred and the money comes out tax-free if used to pay for any of a multitude of qualifying medical expenses.
To use an HSA optimally, account holders should maximize their contributions, invest in stock funds or other growth investments rather than cash and avoid withdrawing prematurely as much as possible, according to the Employee Benefit Research Institute. But the group contends relatively few people follow all three suggestions. It has called on employers to explain HSA benefits more effectively so workers can better take advantage of them.
4. Keep things in balance
The past two years were anything but routine. For stock market investors, early 2020 was marked by one of the sharpest but shortest declines ever, followed by a steady, powerful rebound. Now, the market is struggling again. It’s a good time to focus on sticking to a long-term investment plan, and rebalancing can help.
That is the idea of making gradual adjustments to keep a portfolio roughly in line with how you set it up and want it to stay. Suppose your long-term goal is to hold 60% of your assets in stocks/stock funds and the rest in bonds/cash. Now, after a stretch of mostly strong gains for stocks and sluggish fixed-income results, suppose the mix is 70%-30%.
If so, you can rebalance by trimming your stock positions and investing the proceeds in bonds or cash to get back to a 60%-40% mix. You can also make other rebalancing changes such as diverting some U.S. stock holdings into foreign markets.
Rebalancing can help keep your portfolio from becoming too risky after long rallies, and it forces you to buy back in after slumps. It’s thus a way to buy low and sell high.
There’s no set formula for rebalancing — you can do it once a year or after your portfolio mix moves out of alignment by perhaps five percentage points. It’s easier to do in tax-sheltered vehicles such as workplace 401(k) plans. In unsheltered accounts, rebalancing can trigger taxable gains or losses.
While rebalancing makes sense, many investors are reluctant to do it. When stocks or other assets are surging, greed sets in and many people don’t like to take profits. When stocks are sliding, investors grow fearful of committing more cash. But as it’s difficult to predict market turning points, especially with emotions in the way, rebalancing is a discipline that can keep you on track.
https://www.azcentral.com/story/money/business/consumers/2021/12/26/4-financial-tips-you-can-follow-make-2022-easier-amid-covid-19/6410040001/
An Overview of Annuities
Understanding the various types of annuities and how they work
If you are considering buying an annuity to provide steady income during retirement, it’s important to understand the different types and how they work. Here’s a look at the fundamentals of annuities and what to consider before making a decision.
KEY TAKEAWAYS
- Investors typically buy annuities to provide a steady income stream during retirement.
- Immediate annuities pay income right away, while deferred annuities pay it at some future date.
- Annuities provide tax-deferred investment growth, but you have to pay income taxes on the money when you withdraw it.
- Most annuities penalize investors for early withdrawals, and many have high fees
Annuities: The Big Picture
An annuity is a contract between the contract holder—the annuitant—and an insurance company. In return for your contributions, the insurer promises to pay you a certain amount of money, on a periodic basis, for a specified period. Many people buy annuities as a kind of retirement-income insurance, which guarantees them a regular income stream after they’ve left the workforce, often for the rest of their life.
Most annuities also offer tax advantages. The investment earnings grow tax-free until you begin to withdraw income. This feature can be attractive to retirement savers, who can contribute to a deferred annuity for many years and take advantage of tax-free compounding in their investments with guaranteed cash flows paid out in the future.
Annuities typically have provisions that penalize investors if they withdraw funds early. Also, tax rules generally encourage investors to postpone withdrawals until they reach a minimum age. However, most annuities allow investors to make withdrawals for qualified purposes without penalty, and some annuity contracts have provision for withdrawals of up to 10% – 15% for any purpose per year without penalty.
Compared with other types of investments, annuities can also have relatively high fees.
How Annuities Work
There are two main categories of annuities, based on when they begin to pay out: immediate and deferred.
With an immediate annuity (also known as an immediate payment annuity), you give the insurance company a lump sum of money and start receiving payments right away. Those payments can either be a fixed amount or a variable one, depending on the contract.
Annuities often have high fees, so shop around and make sure you understand all of the expenses before purchasing one.
Typically, you might choose this type of annuity if you have a one-time windfall, such as an inheritance. People who are close to retirement may also take a portion of their retirement savings and buy an immediate annuity as a way to supplement their income from Social Security and other sources.
Deferred annuities are structured to meet a different investor need—to accumulate capital over your working life, which can then be converted into an income stream for your later years.
The contributions you make to the annuity grow tax-deferred until you take income from the account. This period of regular contributions and tax-deferred growth is called the accumulation phase.
You can purchase a deferred annuity with a lump sum, a series of periodic contributions, or a combination of the two.
Types of Annuities
Within the broad categories of immediate and deferred annuities, there are also several different types from which to choose. Those include fixed, indexed, and variable annuities.
Fixed annuities
A fixed annuity provides a predictable source of retirement income, with relatively low risk. You receive a specific amount of money every month for the rest of your life or another period you’ve chosen, such as 5, 10, or 20 years.
Fixed annuities offer the security of a guaranteed rate of return. This will be true regardless of whether the insurance company earns a sufficient return on its own investments to support that rate. In other words, the risk is on the insurance company, not you. That’s one reason to make sure you’re dealing with a solid insurer that gets high grades from the major insurance company credit rating agencies.
The downside of a fixed annuity is that if the investment markets do unusually well, the insurance company, not you, will reap the benefits. What’s more, in a period of serious inflation, a low-paying fixed annuity can lose spending power year after year.
Your state’s department of insurance has jurisdiction over fixed annuities because they are insurance products. State insurance commissioners require that advisors have an insurance license to sell fixed annuities. You can find contact information for your state’s insurance department on the National Association of Insurance Commissioners website.
Indexed annuities
Indexed annuities, also called equity-indexed or fixed-indexed annuities, combine the features of a fixed annuity with the possibility of some additional investment growth, depending on how the financial markets perform. You’re guaranteed a certain minimum return, plus a return pegged to any rise in the relevant market index, such as the S&P 500. The amount of participation in the index, however, is generally capped.
Indexed annuities are regulated by state insurance commissioners as insurance products; in most states, agents must have both an insurance license and a securities license to sell them. The Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) for the securities industry, also requires that its member firms monitor all products their advisors sell, so if you deal with a FINRA member firm, you might have another set of eyes unofficially watching the transaction. This FINRA investor alert has more details.
Variable annuities
Unlike indexed annuities that are tied to a market index, variable annuities provide a return that’s based on the performance of a portfolio of mutual funds that you, as the annuitant, have selected. The insurance company may also guarantee a certain minimum income stream if the contract includes a guaranteed minimum income benefit (GMIB) option.
Unlike fixed and indexed annuities, a variable annuity is considered a security under federal law and is subject to regulation by the Securities and Exchange Commission (SEC) and FINRA. Potential investors must also receive a prospectus.
When you buy an annuity, you’re gambling that you’ll live long enough to get your money’s worth—or, ideally, more than that.
Tax Benefits of Annuities
Annuities offer several tax benefits. In general, during the accumulation phase of an annuity contract, your earnings grow tax-deferred. You pay taxes only when you start taking withdrawals from the annuity. Withdrawals are taxed at the same tax rate as your ordinary income.
If you fund an annuity through an individual retirement account (IRA) or another tax-advantaged retirement plan, you may also be entitled to a tax deduction for your contribution. This is known as a qualified annuity.
Taking Distributions from Annuities
Once you decide to start the distribution phase of your annuity, you inform your insurance company. The insurer’s actuaries then determine your periodic payment amount by means of a mathematical model.
The primary factors that go into the calculation are the current dollar value of the account, your current age (the longer you wait before taking an income, the greater your monthly payments will be), the expected future inflation-adjusted returns from the account’s assets, and your life expectancy based on industry-standard life-expectancy tables. Finally, the spousal provisions included in the contract are factored into the equation. Most annuitants choose to receive monthly payments for the rest of their lives and their spouse’s lives, in case their spouse outlives them.
If you live for a long time after you start taking distributions, the total value you receive from your annuity contract could be significantly higher than what you paid into it. However, should you die relatively soon, you may not get your money’s worth.
Annuities can have many other provisions, such as a guaranteed number of payment years, otherwise known as a period certain annuity. Under that provision, if you (and your spouse, if applicable) die before the guaranteed payment period is over, the insurer pays the remaining funds to your heirs.
Generally, the more guarantees in an annuity contract, the smaller your monthly payments will be.
The Bottom Line
Annuities may make sense as part of an overall retirement plan, especially if you are uncomfortable with investing or concerned about outliving your assets. But before you buy one, be sure to consider the following questions:
- Will you use the annuity primarily to save for retirement or a similar long-term goal? If not, another investment may be preferable.
- In the case of a variable annuity, how would you feel if the account’s value fell below the amount you had invested because the underlying portfolio performed poorly? That can happen.
- Do you understand all of the annuity’s fees and expenses?
- Are you reasonably certain you’ll be able to hold the annuity long enough to avoid paying surrender charges? Do you have other assets you could draw on if you faced an unexpected financial emergency?
You also may want to consult with a financial advisor, who can help you decide whether an annuity or another type of investment will be best for providing the money you need during retirement.
https://www.investopedia.com/investing/overview-of-annuities
As new Covid uncertainties loom, advisors say it’s ‘super important’ to revisit your financial plan for 2022
- The Covid-19 pandemic has prompted people to rethink both big and small life goals.
- For 2022, it’s “super important” that everyone redo their financial plans, advisors say.
- These tips can help you make sure you’re on track and turn uncertainty into opportunity.
This January not only marks the start of a new year.
It is also the two-year anniversary of the first identified case of Covid-19 in the U.S.
At the time, the pandemic caught most people by surprise. Now, many of our lives do not look the same as they did before Covid-19.
People now are reassessing their retirement timelines, where and how they live and other future goals in the face of the new omicron variant of Covid-19 and continued unknowns.
“This is probably the largest period I’ve ever seen in 30 years … [of] how many people are in a period of self-reflection,” said Ted Jenkin, CEO and founder of Oxygen Financial in Atlanta.
For 2022, it’s “super important” that everyone redo their financial plan, Jenkin said.
“It’s just such a great time to reassess your goals and think about your life priorities and ask yourself, ‘Are you set up to make that happen?’” Jenkin said.
Uncertainties heading into the new year have prompted clients to pause their plans, said Winnie Sun, managing director of Sun Group Wealth Partners in Irvine, California. Her message: “Control the things you can control,” she said.
Rethink your retirement timeline
The Covid-19 pandemic has inspired many people to re-evaluate their relationships with work and careers.
The question many are asking, advisors say, is, “Can I retire earlier?”
People who wanted to retire at 65 now want to know whether they can do that at 60, Jenkin said. And those who planned to stop working at 60 now want to see if they can move that up to 55.
“I think people are telling themselves, ‘I can have millions and millions of dollars in the bank, but it doesn’t do me any good if I don’t have my health and use it to do the things I want to do,’” Jenkin said.
Sun said she’s had one client who retired very young — much earlier than his colleagues — and others can do it, too.
“I tell my clients, if you want to shave off 10 years pre-retirement, that means we really need to hustle now and find other ways to bring in income,” she said.
By picking up a side hustle or freelance work and living off the bare minimum, you can successfully move up your retirement timeline, Sun said. It is also essential that you’re investing for the long-term growth you will need.
“If you don’t want to make that sacrifice, then you’re going to have to work more years,” Sun said.
“There’s really no magical formula,” she added. “It’s really just a plus and a minus.”
Factor big goals into your plan
After spending so much time at home, many people are also eyeing big renovations or relocating altogether.
Before breaking ground on that new home improvement project or picking up stakes, evaluate what it will really cost and how you will pay for it, Sun said.
Keep in mind that one big project could impact your ability to meet other goals, like funding retirement or college savings.
For example, if you put an addition on your home, that may mean you have to work another year or two before you retire. Ask yourself if you’re willing to make that sacrifice, Sun advised.
“You really have to rank what’s most important to you,” Sun said. “But also look at the long term, as well as the short term.”
Also be sure to meet with a financial advisor to go over your decision and make sure you’re on the right track, she said.
Fund future joys
As new Covid-19 uncertainties loom, you may find yourself still giving up things you used to do, such as traveling or attending large-scale events like concerts.
The upside is that this can be a great time to sock away some money, Sun said.
Take the money you’re not spending and set it aside in savings accounts or investment funds named for specific future goals like “vacation fund,” “future entertainment,” or “new house.”
“You still have that exciting goal, but you give yourself a chance for growth, so that sacrifice becomes bigger for later on,” Sun said.
By funding future joys, Sun said it has helped her clients to think positively as they see their money grow. “It gives them hope for the future,” she said.
https://www.cnbc.com/2021/12/03/why-its-super-important-to-revisit-your-financial-plan-for-2022.html
Why Is Inflation Rising Right Now?
Inflation is here. The most recent Consumer Price Index (CPI) inflation report showed that prices rose across the board in November. By a lot.
Overall, prices climbed 6.8% year-over-year, the largest increase since June 1982, and rose 0.8% over the past month. Higher prices were “broad-based,” per the Bureau of Labor Statistics (BLS), with substantial increases seen in the indexes for gasoline, shelter, food and new and used vehicles. The gasoline index alone rose 6.1% in November. Of course, those items are key to the basic financial life of normal Americans, thereby stretching their bottom line even thinner.
When you strip out volatile food and energy prices—so-called core CPI inflation—the picture was somewhat brighter. Prices rose by 0.5% in November, slightly less than the month prior, and climbed by 4.9% over the last 12 months. That’s well above the Federal Reserve’s 2% target, although the Fed prefers a different inflation gauge, PCE inflation.
Certain items contributed mightily to these historic gains, as any driver can attest. New vehicles jumped 1.1% over the past month, and are now 11.1% higher compared to 12 months prior. Grocery prices were 0.8% more expensive in November than in October, continuing an expensive trend. Over the past year, food is 6.1% higher. Shelter costs have risen by 3.8% during the same period, while energy is up 33.3%.
Inflation Isn’t Looking Transitory
One of the Fed’s key jobs is to keep price growth stable, and Fed officials have been telling anyone who’ll listen to expect higher inflation in the near term as the economy gets back to normal. They’re also saying that current inflation pressure should give way to more healthy price growth over the longer haul.
But those calls of “transitory” high inflation have been undermined by persistently high prices. In a recent press conference following the meeting of the Federal Open Market Committee (FOMC), Federal Reserve Chair Jerome Powell said that “transitory” was a tricky thing to define.
“So, transitory is a word that people have had different understandings of,” he said. “Really for us, what transitory has meant is that if something is transitory, it will not leave behind it permanently or very persistently higher inflation.”
Nevertheless, Fed officials have admitted that inflation has persisted longer for higher than expected, no matter your definition of “transitory.”
During recent Congressional testimony, Powell admitted it was time to retire usage of the term.
Workers are especially feeling the sting. Saying that higher prices will moderate once the economy gets back to normal is easier than actually living through the increase. Recent analysis by the Peterson Institute for International Economics (PIIE) showed that inflation-adjusted compensation is 2% below where it would have been had the Covid-19 pandemic not occurred.
Inflation Gains and the Covid-19 Recession
As high inflation first became an issue in the Spring of 2021, the Fed laid out a few reasons to explain what was going on, which included base effects, supply-chain issues and a tricky labor market.
Base effects are perhaps the most intuitive reason for high price growth. That is, prices dropped considerably throughout 2020 as state governments imposed lockdowns in an attempt to slow the spread of Covid, and so any year-over-year comparison was bound to look outlandish when people began spending more as life returned to normal
This was seen most clearly early on in airfare costs.
Once the Covid-19 pandemic began, demand for travel plummeted, which led to a drop in prices. In April 2020, for instance, airfares fell 24% year-over-year, and they would spend most of the rest of 2020 at these depressed levels.
But once a year passes, these year-over-year comparisons turn: The June CPI report, for instance, compared vaccine-era airline prices to what they were after Covid-19 struck. So it’s not terribly surprising that June 2021 airline prices were almost 25% higher than a year before, if only because so few people were buying tickets then.
This was one of the key points that the Fed had been pounding away at: with vaccines widely available, more people were bound to fly. Yes, airline prices are much higher than a year ago, but they remain cheaper than where they were pre-pandemic.
In fact, airfare prices came down after peaking in June and are now 5% cheaper than in October 2020.
Yet overall inflation is soaring, so something else must be going on, too.
Supply chain issues continue to mess with prices. Take used cars and trucks: While prices declined as the economy went into the recession, it is not the case that used cars and trucks became cheaper than they were in February 2020. In fact, they’ve never been more expensive.
The reasons for that hike are tied to the pandemic, to be sure. Supply is limited thanks to new car production being stymied by an ongoing chip shortage, people hanging onto their leases for longer and rental car companies—a major source of used cars—having fewer to unload after limiting their inventory when the pandemic struck. Plus people who put off buying cars last year are suddenly competing for automobiles today.
The Fed has warned the public over these and other supply-chain issues, saying it’ll take time for sectors of the economy to get back to normal. Once these kinks are worked out, the Fed asserts, inflation will stop growing so quickly. The problem is that these kinks will likely last for more than a year, rather than a few months.
Labor issues are another source of concern. Tens of millions of Americans lost their jobs (or left them voluntarily) during the Covid Recession, which resulted in a lot less stuff being produced. American bank accounts were buttressed with expanded unemployment insurance and direct stimulus, but those dollars were ultimately chasing fewer goods and services since fewer people were working.
Businesses, meanwhile, have had a difficult time throughout 2021 hiring enough workers to satisfy demand, and the labor-force participation rate is 1.7 percentage points lower than before the pandemic.
Should You Be Worried About High Inflation?
There was only supposed to be a transitory period of high inflation, according to the Fed. Supply chains and businesses just needed a little bit of time to work out the knots involved in reopening the global economy. While the specific definition of “transitory” wasn’t firmly established, it was talked about in terms of months; things would get back to normal by the end of the summer or perhaps into the winter.
Now we know that “transitory” is much longer than that. Moreover, high prices aren’t specific to cars or air travel. Food, shelter and energy prices have shot through the rough.
That’s one reason why the University of Michigan Consumer Sentiment gauge has dropped to the lows seen right after Covid-19 started spreading across the country.
The Fed recently announced that it will buy fewer bonds over time, which should take some of the rocket fuel out of the economy. But with the labor market not yet recovered from its pandemic losses, it will be a while before the Fed hikes interest rates, a typical maneuver used when inflation runs hot.
But it’s not clear that there’s a monetary policy solution to this inflationary moment.
“The Federal Reserve is starting to taper its stimulus and might be forced to hike interest rates sooner due to rising inflation, but rate hikes might not be enough to reverse inflation because the sources of inflation involve supply chain bottlenecks and fiscal spending, which are two areas that the Federal Reserve doesn’t control,” said Nancy Davis, founder of Quadratic Capital Management.
Consumers, then, will likely have to face higher prices for longer than anticipated, and investors will have to hope the Fed doesn’t raise interest rates more quickly than expected, thereby spooking markets.
Everyone is now left wondering just how transitory this transitory inflation spike is and how long average Americans will stomach it.
https://www.forbes.com/advisor/investing/why-is-inflation-rising-right-now/
Should COVID-19 Change Your Retirement Strategy?
What to do now, as the pandemic surges yet again in the U.S.
COVID-19 is still raging throughout the U.S., and in much of the world it has never stopped doing so. Safe and highly effective vaccines are available, but not everywhere, and even where they are, not everyone who is eligible has gotten them. That means there is still the possibility of accompanying financial volatility, despite steady job growth across 2021. Does that suggest that you should change your retirement strategy? Maybe. If so, how? There are a number of factors to weigh in terms of whether—and how—to change course.
KEY TAKEWAYS
- If you’re still working, you should keep funding your retirement accounts and possibly add even more money to an IRA.
- If you’re out of work, preserving what you have in your retirement accounts should be a high priority.
A Crisis Without Precedent
While it’s often useful to draw on the lessons of the past, history sometimes has little to offer. Unlike the Great Recession of 2007–2009 or the Great Depression of the 1930s, for example, the recent economic crisis in the U.S. wasn’t driven by financial fundamentals, but rather by society’s deliberate effort to shut down large parts of the economy. The closest parallel may be the so-called Spanish Influenza pandemic of 1918, although that played out at a time before Americans gave much thought to retirement and when life expectancy in the U.S. was significantly shorter.
Some economic commentators are predicting a swift economic rebound and even alluding to a new Roaring Twenties akin to the one that followed the end of the First World War and the 1918 pandemic. Others aren’t so sure. And don’t forget what came after the original Roaring Twenties—the Great Depression.
If You Have a Job—or Not
So what’s a conscientious retirement saver to do? That depends in large measure on your current work status.
f you’re working
People who were lucky enough to have money coming in—either from their own work or that of a significant other—were in decent shape to ride out the financial crisis. And happily, many who lost their jobs or were temporarily furloughed in 2020 have since returned to the workforce. If you’re currently working and saving for retirement through a 401(k) or similar plan, it’s smart to stay the course, even if your employer, like many, temporarily suspended its match.
If you’re out of work
People who lost their jobs in 2020 and have yet to rejoin the workforce are obviously in a different situation. Your goal should be to preserve your retirement savings to the extent possible. That means taking advantage of unemployment insurance and any other assistance for which you’re eligible through existing programs. You may also be able to negotiate with your creditors, such as mortgage lenders and credit card companies, to reduce, postpone, or spread out any payments you owe them. If you have an emergency fund, as financial planners often recommend, it should be your first resort. Of course, after 18 months of pandemic unemployment, it would be a hardy emergency fund that wasn’t exhausted.
That said, 401(k) loans and early withdrawals from your retirement plan shouldn’t be your first recourse for cash. A 401(k) loan will typically have to be repaid within five years—and sooner than that if you lose your job. An early withdrawal from an IRA can trigger income taxes and a 10% penalty and also mean you’ll have that much less money saved for retirement. On the other hand, they could cost less than other types of loans, so you should weigh your options.
Whatever you do, don’t neglect your health insurance. A large, unexpected medical bill can be financially devastating and possibly lead to bankruptcy. If you still have health insurance, your insurer may be willing to extend your payment deadlines if you ask.
Finally, if the financial crisis cut into your retirement savings or made it difficult for you to keep contributing, think about retiring a little later than you originally planned, once you’re back in a job. Working a while longer allows you to save more, and delaying Social Security—up to age 70—will mean bigger monthly benefits when you begin to collect them.
If you’re already retired
Those who have already retired from the workforce are in yet another situation. If your retirement income—from Social Security and other sources, such as pensions and systematic withdrawals from your IRAs and other retirement accounts—is sufficient to pay the bills, you may not need to change much of anything.
It could be difficult, however, if you have adult children who saw their incomes evaporate in the pandemic. The impulse to help your kids is an admirable one, but it can become a problem if it causes you to spend savings you’re depending on for retirement. Harsh as it may seem, it’s worth remembering that people who are still of working age have years ahead of them in which to catch up, while retirees have much less time and opportunity.
Preparing for Whatever Lies Ahead
When the worldwide COVID-19 crisis finally comes to an end, we all may want to take stock of our finances. Meanwhile, now could be a good time to:
Review your asset allocation
The pandemic and resulting financial crisis caused some wild swings in the stock market at first, with the Dow Jones Industrial Average (DJIA) up hundreds of points one day and down hundreds of points the next. Still, if you have cash to spare and can live with volatility, stocks may still present the best opportunity for long-term growth, especially as the Dow is more than 5,500 points higher in Dec. 2021 than it was when the pandemic began and has been climbing pretty steadily since Nov. 2020.
If you’re simply trying to safeguard what you have, you should at least make sure your money is allocated the way you want among stocks, bonds, and cash. If you are coming up on retirement fairly soon, you might consider shifting into a somewhat more conservative portfolio and consider Investopedia’s advice on how to achieve optimal asset allocation (including a range of model portfolios from conservative to very aggressive).
Build (or rebuild) an emergency fund
If you didn’t have an emergency fund before 2020, you probably wished you did. If you did have one, you may need to replenish it. There are numerous philosophies about structuring emergency funds. Some suggest saving at least three months of living expenses in a liquid account, while others recommend having six or more months’ worth of cash. Achieving even that lower figure can be painfully difficult when you’re living paycheck to paycheck, but it’s a goal worth building toward at any age.
If you’re about to enter retirement, or already there, you may want a substantially larger emergency fund. Keeping two or three years’ worth of expenses in a money market fund or short-term bond fund, for example, could help you weather another crisis while leaving the rest of your retirement portfolio intact. That could save you from being forced to sell investments at the bottom of the market in a bad year. This is especially true once you reach 72 and have to take out required minimum distributions from tax-advantaged retirement funds.
Consider also keeping a cache of emergency-fund savings in those funds to use if the market plummets. If there is no crisis, no harm done. You’ll just be that much better off.
Should You Change Your Strategy if You’re Employed?
Generally no, but you should make it a point to stay the course with your retirement funds, even if your employer has temporarily suspended its match. Those who have been working from home during the pandemic may have increased funds available due to reduced costs (no commuting, no dining out, fewer expenditures for movies, concerts, and the theatre). If that is the case you might be wise to put additional money aside for retirement.
Should You Change Your Strategy if You’re Unemployed?
Obviously, you need to do whatever is necessary to keep your head above the financial waterline, but you should try to keep your retirement funds intact for as long as possible. Empty other accounts first. Try to eschew early withdrawals, as they can come with penalties and will, of course, reduce the amount of money you have for retirement. Avoid losing your health insurance at all costs, as large medical bills often cause bankruptcy. If you have to interrupt and/or raid your retirement savings, make sure to start again as soon as you are once again employed and consider retiring a bit later than you initially planned to make up for lost time.
Should You Change Your Strategy if You’re Already Retired?
If your retirement income has been enough to live on, then you probably don’t need to change anything. However, be prepared to resist entreaties for cash from your adult children except in the most dire emergency. Helping them out financially could irreparably damage the safety of your retirement. Remember, being younger they have much more time to make up for lost funds than you do.
https://www.investopedia.com/should-covid-19-change-your-retirement-strategy-5069395
Top Retirement Savings Tips for 55-to-64-Year-Olds
There’s still time to give your savings a good boost before you retire
If you’re between 55 and 64 years old, you still have time to boost your retirement savings. Whether you plan to retire early, late, or never ever, having an adequate amount of money saved can make all the difference, both financially and psychologically. Your focus should be on building out—or catching up, if necessary.
It’s never too early to start saving, of course, but the last decade or so before you reach retirement age can be especially crucial. By then you’ll probably have a pretty good idea of when (or if) you want to retire and, even more important, still have some time to make adjustments if you need to.
If you discover that you need to put more money away, consider these six time-honored retirement savings tips.
KEY TAKEAWAYS
- If you’re between 55 and 64, you still have time to boost your retirement savings.
- Start by increasing your 401(k) or other retirement plan contributions if you aren’t already maxed out.
- Consider whether working a little longer might add to your pension or Social Security benefits.
1. Fund Your 401(k) to the Max
If your workplace offers a 401(k)—or a similar plan, such as a 403(b) or 457—and you aren’t already funding yours to the max, now is a good time to rev up your contributions. Not only are such plans an easy and automatic way to invest, but you’ll be able to defer paying taxes on that income until you withdraw it in retirement.
Because your 50s and early 60s are likely to be your peak earning years, you may also be in a higher marginal tax bracket now than you will be during retirement, meaning that you’ll face a smaller tax bill when that time comes. This applies, of course, to traditional 401(k)s and tax-advantaged other plans. If your employer offers a Roth 401(k) and you choose it, you’ll pay taxes on the income now but be able to make tax-free withdrawals later.
The maximum amount you can contribute to your plan is adjusted each year to reflect inflation. In 2021, it’s $19,500 for anyone under age 50, rising to $20,500 in 2022. But once you’re 50 or older you can make an additional catch-up contribution of $6,500 for a grand total of $26,000. If you have more than the maximum to sock away, either a traditional or Roth IRA could be a good option.
2. Rethink Your 401(k) Allocations
Conventional financial wisdom says that you should invest more conservatively as you get older, putting a greater amount of money into bonds and less into stocks. The reason is that if your stocks take a tumble in a prolonged bear market, you won’t have as many years for their prices to recover and you may be forced to sell at a loss.
Just how conservative you should become is a matter of personal preference, but few financial advisers would recommend selling all of your stock investments and moving entirely into bonds, regardless of your age. Stocks still provide growth potential and a hedge against inflation that bonds do not. The point is that you should remain diversified in both stocks and bonds, but in an age-appropriate manner.
A conservative portfolio, for example, might consist of 70% to 75% bonds, 15% to 20% stocks, and 5% to 15% in cash or cash equivalents, such as a money-market fund. A moderately conservative one might reduce the bond portion to 55% to 60% and boost the stock portion to 35% to 40%.
If you’re still putting your 401(k) money into the same mutual funds or other investments you chose back in your 20s, 30s, or 40s, now’s the time to take a close look and decide whether you’re comfortable with that allocation as you move toward retirement age. One handy option that many plans now offer is target-date funds, which automatically adjust their asset allocations as the year you plan to retire draws closer. Remember, however, that target-date funds may have higher fees, so choose carefully.
3. Consider Adding an IRA
If you don’t have a 401(k) plan available at work—or if you’re already funding yours to the max—another retirement investing option is an individual retirement account or IRA. The maximum you can contribute to an IRA in 2021 and 2022 is $6,000, plus another $1,000 if you’re 50 or older.86
Individuals who turn 50 at the end of the calendar year can make their entire annual catch-up contributions for that year, even if your birthday falls at the end of the year.
IRAs come in two varieties: traditional and Roth. With a traditional IRA, the money you contribute is generally tax-deductible upfront. With a Roth IRA, you get your tax break at the other end in the form of tax-free withdrawals.
The two types also have different rules regarding contribution limits.
Traditional IRAs
If neither you nor your spouse has a retirement plan at work, you can deduct your entire contribution to a traditional IRA. If one of you is covered by a retirement plan, your contribution may be at least partially deductible, depending on your income and filing status.
Roth IRAs
As mentioned, Roth contributions aren’t tax-deductible, regardless of your income or whether you have a retirement plan at work. However, your income and tax-filing status do come into play in determining whether you’re eligible to contribute to a Roth in the first place. Those limits are also detailed in IRS Publication 590-A.
Note, too, that married couples who file their taxes jointly can often fund two IRAs, even if only one spouse has a paid job, using what’s known as a spousal IRA. IRS Publication 590-A provides those rules, as well.
4. Know What You Have Coming to You
How aggressive you need to be in saving also depends on what other sources of retirement income you can reasonably expect. Once you’ve reached your mid-50s or early 60s, you can get a much closer estimate than you could have done earlier in your career.
Traditional Pensions
If you have a defined-benefit pension plan at your current employer or a previous one, you should be receiving an individual benefit statement at least once every three years. You can also request a copy from your plan’s administrator once a year. The statement should show the benefits you’ve earned and when they become vested (that is, when they belong fully to you).
It’s also worth learning how your pension benefits are calculated. Many plans use formulas based on your salary and years of service. So you might earn a bigger benefit by staying in the job longer if you’re in a position to.
Social Security
Once you’ve contributed to Social Security for 10 years or more, you can get a personalized estimate of your future monthly benefits using the Social Security Retirement Estimator. Your benefits will be based on your 35 highest years of earnings, so they may rise if you continue working.
Your benefits will also vary depending on when you start collecting them. You can take benefits as early as age 62, although they will be permanently reduced from what you’ll receive if you wait until your “full” retirement age (currently between 66 and 67 for anyone born after 1943). You can also delay receiving Social Security up to age 70, in return for a larger benefit.
While these estimates may not be perfect, they are better than guessing blindly—or too optimistically. A 2019 survey by two University of Michigan researchers found that people tend to overestimate how much in Social Security benefits they were likely to receive.
To put it in some perspective, the average monthly retirement benefit in June 2021 is $1,555.25 while the highest possible benefit—for someone who paid in the maximum every year starting at age 22 and waited until age 70 to start collecting—is $3,895 in 2021.
Although you can take penalty-free distributions from your retirement plans as early as age 50 or 55 in some cases, it’s better to leave them untouched and let them keep growing.
5. Leave Your Retirement Savings Alone
After age 59½ you can begin to make penalty-free withdrawals from your traditional retirement plans and IRAs. With a Roth IRA, you can withdraw your contributions—but not any earnings on them—penalty-free, at any age.
There is also an IRS exception, commonly known as the Rule of 55, that waives the early-withdrawal penalty on retirement plan distributions for workers 55 and over (50 and over for some government employees) who lose or leave their jobs.20 It’s complex, so speak with a financial or tax advisor if you are considering using it.
But just because you can make withdrawals doesn’t mean you should—unless you absolutely need the cash. The longer you leave your retirement accounts untouched (up to age 72, when you must begin to take required minimum distributions (RMDs) from some of them), the better off you are likely to be.
6. Don’t Forget About Taxes
Finally, as you tote up your retirement savings, remember that not all of that money is yours to keep. When you make withdrawals from a traditional 401(k)-type plan or traditional IRA, the IRS will tax you at your rate for ordinary income (not the lower rate for capital gains).
So if you’re in the 22% bracket, for example, every $1,000 you withdraw will net you just $780. You may want to strategize to hold onto more of your retirement funds—for instance, by moving to a tax-friendly state.
https://www.investopedia.com/retirement/top-retirement-savings-tips-55-to-64-year-olds/
Budgeting for the 4 Financial Phases of Retirement
Different phases call for different strategies
If you’re physically healthy and financially prepared, your retirement could last for decades. During that time, it may go through several distinct phases, with changing levels of income and expenses that require different approaches to budgeting. Even with a shorter retirement, you’ll likely experience much the same stages, just in a condensed time frame. While experts give these phases a variety of names and sometimes number them differently, here’s what to expect, based on a four-stage model.
KEY TAKEAWAYS
- Retirement can last for decades if you’re physically healthy and financially prepared.
- Retirement isn’t just one phase of life, but a succession of phases with different spending priorities and budgeting needs.
- A four-phase model for retirement consists of pre-retirement (age 50 to 62 or so), the early period of retirement (62 to 70), middle retirement (70 to 80), and late retirement (80 and up).
Pre-Retirement (age 50 to 62 or so)
Pre-retirement (sometimes referred to as “peri-retirement”) is the decade or thereabouts leading up to retirement. You’re still working, but retirement is approaching and you’re finally getting a clear picture of what your nest egg, income, and expenses will look like. You’re also getting closer to figuring out what you’ll do with your days once you’re free to fill them as you please. What seemed merely theoretical earlier in your working life starts to seem real.
We put age 62 as the end of this period because it’s the age when people first qualify for Social Security payments. But some people might retire at 55 or 60 while others keep working well past 70—or never retire at all. (Incidentally, starting to collect Social Security at 62 is usually a bad idea because if you do, your monthly benefits will be permanently reduced.)
Retirement: The Best Timing Strategies for Couples
Staggering your retirement date from your spouse may benefit you both
Many working couples dream of the day when they can retire and sail off into the sunset together. However, couples should consider whether retiring at the same time is the wise choice. There are both financial and emotional ramifications to retiring simultaneously compared to having one spouse work longer than the other. It’s a good idea to start thinking about these issues earlier than you may realize, when there is still time for each partner to map out a trajectory of how and when they’d like to leave the workforce and how those two plans mesh.
KEY TAKEAWAYS
- Staggering retirements can help couples boost their total retirement assets while decreasing the number of years they draw on them.
- Couples need to consider health insurance options if retiring before one or both of them are eligible for Medicare.
- Retiring at different times may also be beneficial for couples’ emotional and relationship health.
Why Shouldn’t Couples Retire Together?
“Unless couples are the same age, and in the same health, it usually makes more sense for one person to retire earlier. There can be both financial and relationship benefits,” says Morris Armstrong, registered investment advisor, Armstrong Financial Strategies, Cheshire, Conn. Financially speaking, the advantages are threefold. When one spouse works longer and delays the age they claim Social Security benefits to past full retirement age, the amount of those benefits will increase. In addition, the continued income from the working spouse gives the couple a few more years to save for retirement. Finally, a spouse who works an extra three to five years will likely have a shorter period to need their retirement assets, allowing for larger withdrawal amounts each year.
The Financial Impact
“A delay of five years is a hugely positive move for couples who are just on the edge of having enough money saved, for those who have a family history of longevity, or for those who simply need to work five additional years to get to ‘enough,’” says Jane Nowak, CFP®.
Your 2022 Tax Brackets vs. 2021 Tax Brackets
The income ranges, adjusted annually for inflation, determine which tax rates apply to you
You may be making plans for filing your 2021 income taxes, but in a few short weeks you’ll be living in tax year 2022, and tax year 2022 will differ substantially from 2021. Your tax brackets will be slightly higher, for example, as will your standard deduction.
There is still time to reduce your 2021 tax bill, but for many deductions, the door slams shut on Dec. 31. If it looks like you’ll get a big bill on your 2021 taxes, knowing the tax brackets for 2022 can help you make adjustments in the New Year so you don’t get stung again.
How the brackets work
In the American tax system, income tax rates are graduated, so you pay different rates on different amounts of taxable income, called tax brackets. There are seven tax brackets in all. The more you make, the more you pay. For example, a single taxpayer will pay 10 percent on taxable income up to $9,950 earned in 2021. The top tax rate for individuals is 37 percent for taxable income above $523,600 for tax year 2021.
The Internal Revenue Service increases those brackets from year to year to account for inflation and reduce “bracket creep,” when taxpayers get pushed into higher tax brackets, not because they earned more money but because of rising inflation. In tax year 2020, for example, a single person with taxable income up to $9,875 paid 10 percent, while in 2021, that income bracket rose to $9,950. Similarly, brackets for income earned in 2022 have been adjusted upward as well.
Tax brackets for income earned in 2022
- 37% for incomes over $539,900 ($647,850 for married couples filing jointly)
- 35% for incomes over $215,950 ($431,900 for married couples filing jointly)
- 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
- 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
- 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
- 12% for incomes over $10,275 ($20,550 for married couples filing jointly)
- 10% for incomes of $10,275 or less ($20,550 for married couples filing jointly
Married filing separately pay at same rate as unmarried. Source: Internal Revenue Service
Tax brackets for income earned in 2021
- 37% for incomes over $523,600 ($628,300 for married couples filing jointly)
- 35% for incomes over $209,425 ($418,850 for married couples filing jointly)
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly)
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly)
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly)
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly)
- 10% for incomes up to $9,950 ($19,900 for married couples filing jointly)
Married filing separately pay at same rate as unmarried. Source: Internal Revenue Service
Importantly, your highest tax bracket doesn’t reflect how much you pay in federal income taxes. If you’re a single filer in the 22 percent tax bracket for 2022, you won’t pay 22 percent on all your taxable income. You will pay 10 percent on taxable income up to $10,275, 12 percent on the amount from $10,275, to $41,775 and 22 percent above that (up to $89,075).
You should also note that the standard deduction will rise to $12,950 for single filers for the 2022 tax year, from $12,550 the previous year. The standard deduction for couples filing jointly will rise to $25,900 in 2022, from $25,100 in the 2021 tax year. Single filers age 65 and older who are not a surviving spouse can increase the standard deduction by $1,750. Each joint filer 65 and over can increase the standard deduction by $1,400 apiece, for a total of $2,800 if both joint filers are 65-plus. You need to have more tax deductions than the standard deduction to make itemizing your tax return worthwhile.
The IRS uses the chained consumer price index (CPI) to measure inflation, as mandated by 2017 tax reform. Like the more well-known consumer price index, the chained CPI measures price changes in about 80,000 items. The chained CPI takes into account the fact that when prices of some items rise, consumers often substitute other items. If the price of beef rises, for example, people switch to chicken.
If you’re not an economist, the main difference between the two measures is that, over time, the chained CPI rises at a slower pace than the traditional CPI. (Which, to be precise, is the Consumer Price Index for All Urban Consumers or CPI-U.) From September 2011 through September 2021, the CPI rose by 20.9 percent and the chained CPI by only 17.9 percent, a difference of 3 percentage points.
If you get slammed with a big tax bill for 2021, you should talk with a tax adviser about how to reduce that in 2022. It’s probably easier to have extra taken out of each paycheck than face a big tax bill next year. A good first step is to look at how much tax you get taken from your paycheck. The Internal Revenue Service has a free withholding estimator that can tell you how much you should have taken out of each paycheck.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.
https://www.aarp.org/money/taxes/info-2020/income-tax-brackets.html?intcmp=AE-HP-TTN-R2-POS3-REALPOSS-TODAY
Planning for Retirement: Four Factors to Consider
Planning ahead is one of the best ways to prepare for a comfortable retirement. From keeping track of your savings to adopting strategies for generating income, a thoughtful approach can help you sustain your lifestyle as you move into the next phase of your life.
Below, we break down four key factors to consider—and how to develop a retirement plan that works for you.
1. Generate Income in Retirement
For most retirees, a reliable income is the most important need once regular paychecks stop. As you near retirement, taking a close look at your sources of income is a helpful way to ensure that you have enough to cover your expenses. You should also consider the type of lifestyle you want to live and any potential health issues to help determine how much you should save.
Below are common sources of income in retirement
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- Workplace retirement plans: Retirement savings plans such as 401(k)s and IRAs are often the largest source of income for many retirees. An advisor can help you determine the most tax efficient strategy for distributing your retirement savings and how to invest so that you benefit from potential growth but don’t incur more risk than you’re comfortable with.
- Social Security: Backed by the federal government and adjusted for inflation, Social Security provides a consistent source of income throughout retirement. Depending on your circumstances, you may decide to start collecting benefits as soon as you’re eligible or to delay collecting them until you reach the maximum benefit amount. Keep in mind that your monthly benefit amount will be less if you start collecting early so it’s important to consider if your sources of income will cover your essential expenses before you reach full retirement age.
- Pension plans: Though less common than retirement savings plans, pensions can provide a steady stream of income to help you meet expenses and keep up with lifestyle needs.
2. Address Health Care Costs
Another big challenge retirees face are medical expenses. While an increase in medical expenses is common as you age, it can feel overwhelming as it happens. In addition to medical bills, consider your family history to get a sense of life expectancy and potential health issues. Fortunately, there are a few ways to cover those expenses.
- Health Savings Accounts: Also known as HSAs, health savings accounts are tax-advantaged accounts that are available only with a qualified high deductible health plan and allow you to accrue savings during your working years and apply those savings to your medical expenses after you retire. HSAs also have some unique tax benefits including tax-free access to funds if the funds are used to pay for qualified medical expenses.
- Long-term care: Hybrid policies combine life insurance with long-term care benefits that may help you pay for the costs of in-home care, assisted living, a nursing home or other related expenses that Medicare may not cover. Long-term or chronic care riders, available at an additional cost, may also be added to life insurance policies, allowing you to access a portion of your policy’s benefit early for care expenses.
- Medicare: Medicare is a federal health insurance program that provides coverage for people age 65 and older, and for some disabled people under age 65. The program consists of four parts, each of which covers different health-related expenses. Exploring your Medicare options is a great first step when it comes to covering routine costs. These include Part A (hospital insurance), Part B (medical insurance) and Part D (prescriptions). Medicare Part C, or Medicare Advantage, is the equivalent of Parts A and B coverage combined, along with some preventative services such as vision and dental. It is delivered through private insurance companies. This infographic can help you learn more about Medicare eligibility requirements, enrollment periods, and costs.
3. Understand Tax Implications
As your income situation changes, your tax situation is likely to change too. To help reduce your tax impacts, it’s important to have a clear sense of which sources of income are considered taxable and which of them are tax-free. Social Security benefits, pension payments, and withdrawals of earnings from 401(k)s and IRAs are generally taxable, while certain types of withdrawals from Roth IRAs and Roth 403(b)s are typically exempt.
4. Establish an Estate Plan
Establishing a comprehensive estate plan is another important part of the pre-retirement planning process. Your estate plan should take into account your existing assets and how you want them distributed in the event of your death. Although this may be difficult to think about, estate planning has some significant benefits including protecting your assets and ensuring that your wishes are fulfilled. If you currently have dependents, it can also provide certain protections for them. Once you retire, it’s a good idea to revisit your estate plan and make any adjustments as needed.
Charitable giving can also be an important part of the estate planning process and it offers benefits of its own. In addition to helping you build a lasting legacy, a charitable giving strategy can carry certain tax advantages.
https://www.investopedia.com/preparing-for-retirement-why-income-and-health-care-should-be-top-of-mind-5201786
5 Mistakes Couples Make When Planning for Retirement
Steps you can take to avoid disagreements over spending and much more
You’ve looked forward to retirement for decades — the chance to slow down the pace, to live in a different place, to see parts of the world you’ve only dreamed of, to spoil the grandkids just a bit.
But if your spouse or partner has a different vision, if you don’t agree on financial issues or avoid them completely, then conflicts are inevitable. Left unattended, these problems may become so serious that they threaten your relationship.
A survey of more than 1,000 individuals by The Cashlorette, a website owned by Bankrate.com, showed that 48 percent of those who were married or living with a partner admitted that they had such fights. Most involved spending habits, dishonesty about money, and a lack of agreement about who should pay which bills, forgetting to pay an important bill, or financial priorities. A 2018 study by TD Ameritrade showed that 41 percent of divorced Gen Xers and 29 percent of divorced boomers said they ended their marriage due to disagreements about money. Here are five mistakes couples make when planning for retirement.
1. Not talking about money
Experts agree that talking through money issues carefully will give you a better chance of clearing up any misconceptions and keep your relationship on solid ground. You may think you’re in agreement, but the opposite may be true.
Lili Vasileff, President of Association of Divorce Financial Planners, says couples don’t always agree on when to retire, whether to support adult children and how much leisure spending is the right amount.
Couples may often differ when it comes to deciding how to spend extra money, says Matt Stephens, “Sometimes the spouse who wasn’t the primary breadwinner doesn’t speak up,” he says. “We try to help by asking open-ended questions and making sure both spouses offer input. Fairly often one spouse is surprised to hear an answer from the other, since it never came up in conversation at home.”
Here, financial advisers from across the country offer their advice for dealing with a variety of common retirement-related money issues.
2. Not sharing details
Confusion often occurs when the bill-paying spouse does not tell the other spouse how they’re handling payments, says Jorie Johnson. It can be a nightmare when the non-bill-paying spouse has to take over.
Also, says Sarah Carlson, one partner may assume the other person knows what is going on, when they don’t. “If talking about your current situation and future financial goals is a challenge, consider hiring a financial planner to help you bridge differences, and feel supported in that communication,” she says.
Lack of communication can really sting after the death of a spouse. Sometimes, the wife has no idea about the couple’s finances. Then, upon the death or disability of the husband, she must learn quickly, says Patricia Hausknost. Sometimes the husband purposely does not involve the wife, or she does not want to know. “The husband must make sure the wife is knowledgeable about their financial situation, and provide a document that tells her who to get in touch with — their insurance agent, CPA, banker, attorney and others — in the event that something happens to him,” she warns.
3. Not agreeing on investment strategy
Just as it can be hard to agree on the new paint color for the living room, couples may also differ on how to invest their retirement portfolio, says Sandy Adams. So it helps to open a dialogue about the overall financial plan — what they can afford to spend with the resources they have, and how aggressive or conservative they can or need to be, considering the long term. “Often clients come to agreement once they actually have the opportunity to think about their future retirement — which they may not have given much thought to,” Adams says.
In that respect, Carlson finds that older people can be too cautious. Couples need an overall plan that’s tied to their time horizon and risk tolerance. “Your investments need to be diversified and balanced, more now than ever,” he says.
What’s more, it’s not unusual for the person who has made the investment decisions to want to stick with them, says Nate Wenner. As a result, “the portfolio may not be terribly diversified, or a little outdated, leading to risks, some of which the couple is not fully aware.” The other spouse may want to diversify or update the portfolio to put them in a somewhat safer position. “It’s important for neither spouse (or the adviser helping them) to be judgmental, but rather be matter-of-fact about the current state, and the needs and comfort level of each spouse,” Wenner says.
4. Helping the next generation — or not
Then there’s the question of family — one partner does not want to take care of the children or grandchildren and the other does, Hausknost says. But the would-be retirees need sufficient income and assets to last both of their lives. “If there is money at the second death, then you can take care of the next generation. The best way to resolve this is for the couple to understand what they have, and that it will be enough.”
In addition, spouses may disagree about what’s to be done with their funds once they’ve died, warns Marisa Bradbury, : “I see it a lot in second marriages, where each spouse has children from a prior one, and things might not be equally divided. Or children can have different needs monetarily, and their parents have different definitions of what is fair. I work with clients to have the tough conversations, and then involve the estate attorney to make sure things are set up according to their wishes.”
5. Accepting the effects of aging
Hausknost points out still another scenario: The husband or wife exhibits dementia, and the healthier spouse takes care of the other, rather than considering assisted living. But if the healthy spouse dies first, the surviving spouse is unable to handle things. “Eventually, one of the children takes responsibility for caring for the surviving parent,” she says. “Or, the children may make a group decision to place the parent in a facility. Having frank discussions with your children and planning for care in later life are important to avoiding family discord.”
Right now, Neal Van Zutphen, is working with a couple that would benefit from assisted living: “They are both experiencing cognitive decline, and are getting assistance from children. But the burden is creating significant caregiver fatigue. They are choosing to ‘die in their home’ because they don’t want to spend the money to make their final years better. Part of the problem is that they are no longer capable of seeing what others see. They could easily afford to move.”
For older spouses, “look for red flags like bills not being paid or being paid twice,” says Patti Black. She suggests putting yourself in your spouse’s place and proceeding in a way that allows them to retain their dignity and some level of control.
Work as a team
In the end, says Carlson, couples often live lives that are too separate financially. “Take the taboo out of the money conversation, and there is an opportunity to build intimacy by creating a life map of financial goals. I recommend having a ‘money date,’ perhaps a dinner at a nice restaurant. Make it romantic, so you will look forward to those dates in the future.”
Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine; a reporter at the Fidelity Publishing Group; and a senior editor at Published Image, a financial education company that was acquired by Standard & Poor’s.
https://www.aarp.org/retirement/planning-for-retirement/info-2021/5-mistakes-couples-make.html?intcmp=AE-RET-BB-LL1-CTSG
Financial Independence, Retire Early (FIRE)
What Is Financial Independence, Retire Early (FIRE)?
Financial Independence, Retire Early (FIRE) is a movement of people devoted to a program of extreme savings and investment that aims to allow them to retire far earlier than traditional budgets and retirement plans would permit.
Borne out of the 1992 best-selling book Your Money or Your Life by Vicki Robin and Joe Dominguez, FIRE came to embody a core premise of the book: that people should evaluate every expense in terms of the number of working hours it took to pay for it.
KEY TAKEAWAYS
- Financial Independence, Retire Early (FIRE) is a financial movement defined by frugality and extreme savings and investment.
- By saving up to 70% of annual income, FIRE proponents aim to retire early and live off small withdrawals from their accumulated funds.
- The FIRE movement was born from a 1992 book Your Money or Your Life, written by two financial gurus.
Understanding FIRE
The FIRE movement takes direct aim at the conventional retirement age of 65 and the industry that has grown up to encourage people to plan for it.
By dedicating up to 70% of their income to savings, followers of the FIRE movement hope to be able to quit their jobs and live solely off small withdrawals from their portfolios decades before they reach 65.
To cover their living expenses after retiring at a young age, FIRE devotees make small withdrawals from their savings, typically around 3% to 4% of the balance yearly. Depending on the size of their savings and their desired lifestyle, this requires extreme diligence to monitor expenses as well as dedication to the maintenance and reallocation of their investments.
Several variations have evolved within the FIRE movement that dictates the lifestyle its devotees are willing and able to maintain:
- Fat FIRE: This is for the individual with a traditional lifestyle who aims to save substantially more than the average worker but isn’t willing to, say, dumpster-dive for fun and profit.
- Lean FIRE: Requires stringent adherence to minimalist living and extreme savings, necessitating a far more restricted lifestyle.
- Barista FIRE: This is for people who have quit their traditional 9-to-5 jobs but use part-time work to obtain health coverage and put off dipping into their retirement funds.
What Does FIRE Really Mean, Briefly?
The acronym “FIRE” means Financial Independence, Retire Early and is a term from the book Your Money or Your Life by Vicki Robin and Joe Dominguez was first published in 1992. A revised and updated version was released in 2008 and again in 2018.
The real aim of the book, according to comments by Vicki Robin, is not to convey a master plan for early retirement. It is to show people how to live well while consuming less in order to have a more rewarding life while wasting less of the world’s resources. Or, as Robin put it, “If you live for having it all, what you have is never enough.”
How Does FIRE Work?
Followers of FIRE (Financial Independence, Retire Early) plan to retire much earlier than the traditional retirement age of 65 by dedicating up to 70% of income to savings while they are still in the workforce full-time.
Once their savings reach approximately 30 times their yearly expenses, or roughly $1 million, they may quit their day jobs or completely retire from any form of employment.
To cover their living expenses after retiring at a young age, FIRE devotees make small withdrawals from their savings, typically around 3% to 4% yearly.
Both during their working years and in retirement, FIRE followers aim to reject over-consumption and enjoy a simpler lifestyle.
What Are Some FIRE Variations?
Within the FIRE movement are several variations. Fat FIRE is a more easy-going attempt to save more while giving up less. Lean FIRE requires true devotion to minimalist living. Barista FIRE is for those who want to quit the 9-to-5 rat race and are willing to cut back their spending to do so.
Naturally, more traditional financial advisers have been willing to jump in with their own variations on a FIRE goal and how to achieve it. One strategy requires a FIRE investor to include both U.S. and international stocks and bonds in their portfolio, potentially increasing their success rate by 20%.
https://www.investopedia.com/terms/f/financial-independence-retire-early-fire.asp
In One Year, Pandemic Forced Millions of Workers to Retire Early
Working at 50+
From flight attendants to grocery store managers, older adults made the tough decision to end careers
Retirement is supposed to be a happy time, but Lucie Desmond expects there will be tears when her paperwork comes through.
Desmond, 62, has been a flight attendant for 36 years, most recently on the American Airlines route between Phoenix and London. But after repeated leaves forced by the COVID-19 pandemic, she has put in to retire much earlier than she had planned.
“I could have done that till I was 70,” Desmond says. “Then COVID hit.”
Her friends who have already retired early from the airline went through the same anguish. “They cried. They literally cried,” says Desmond. “It hasn’t honestly sunk in yet. It’s very sad.”
There are also financial considerations. Although she’ll get a payout from the airline, “I won’t be getting my salary, so I have to dip into my savings.” She hasn’t yet decided when to claim Social Security, since monthly benefits are lower for people who claim them before they reach the program’s full retirement age.
In the meantime, “I won’t be getting a paycheck, which is scary for me.”
A year after the COVID-19 pandemic was declared a national emergency, many of the disproportionate number of older Americans pushed out of the workforce by the combined health crisis and economic downturn are retiring earlier than planned, risking long-term financial insecurity because of lower-than-anticipated savings and payouts from pensions, Social Security and other sources.
“Older workers, millions of them, are going to be downwardly mobile from the comforts of middle-class life,” says Teresa Ghilarducci, a labor economist at The New School and director of its Schwartz Center for Economic Policy Analysis, who specializes in retirement security.
“People plan their retirement years and they look at their spreadsheets. They assume raises. They assume they will pay off their debts. Then this recession hits and they’re forced out of the labor force, and all of those assumptions disappear at once.”
Two million older adults have stopped looking for work
The number of people affected by this problem is beginning to come into focus.
In a reversal of previous recessions, when they were protected by their longevity, older Americans are more likely than mid-career workers to be out of work this time, according to the Center for Retirement Research at Boston College.
More than a quarter of all workers say COVID has prompted them to move up their retirement date, found a survey released in February by the National Institute for Retirement Security.
Nearly 2 million older workers have left the labor force for good since the start of the pandemic, the Schwartz Center says. That means the number of older workers still employed is down by about 5 percent, compared to less than 2 percent for workers ages 35 to 54.
The rate at which older workers continue to participate in the workforce, either by staying in their jobs or by seeking new ones, fell in January to its lowest point since the start of the pandemic, the Schwartz Center says. The Center estimates that 3 million more older workers would be working now if the pandemic did not happen.
The proportion of all Americans who will be financially insecure when they retire — meaning they will be unable to maintain their pre-retirement standard of living — has also increased, from 50 percent to 55 percent, according to the Center for Retirement Research.
“These workers were already at risk for downward mobility, but [the pandemic] accelerated this trend,” Ghilarducci says. And that will bring “a lot of silent and solitary misery as people cut down their spending.”
Job losses have hurt some groups more than others
Lower-income older workers are the most affected.
“People in higher-paid tracks have kept their jobs. At the same time, the folks at the bottom are involuntarily losing their jobs,” says Dan Doonan, executive director of the National Institute on Retirement Security.
Those older workers who have jobs that can be done from home are typically the ones with greater education and higher incomes, the Center for Retirement Research estimates.
Unemployment for people in lower-paying jobs and for Black, Hispanic and Asian older workers has been more than twice that of higher-income older workers during the pandemic.
“The other side of this is the inequality of it,” says Siavash Radpour, associate director of The New School’s Retirement Equity Lab. “Many who have lost their jobs are in the bottom half of income. They didn’t have much retirement savings anyway. If they had the prospect of wage growth, they have lost it by losing their jobs.”
This leaves many people to depend exclusively on Social Security. Yet the earlier a recipient claims Social Security, the lower his or her lifetime benefits will be.
“If you go out early and take Social Security early, that reduction is for the rest of your life,” says Doonan. “You’ll be living with low income for the rest of your life.”
The average monthly Social Security benefit for retired workers is $1,503. But 67 percent of retirees on Social Security get less than that because they claimed their benefits before they reached full retirement age — 67 for people born in 1960 or later — the Social Security Administration says.
“Even in good times, most retirements are involuntary,” Ghilarducci says, because of issues including layoffs, business closures and health problems. “When you ask people if they retired at the age they thought they would, most people say they retired earlier.”
Tough financial decisions in a difficult year
Before she retired last year from her job as a dental hygienist, Katy Pompe and her husband consulted a financial adviser and decided to delay putting in for Social Security until their monthly benefits have time to increase.
“My husband is a great saver, and he’s converted me into being a great saver,” Pompe says as she walks her border collie, Lotus, in her neighborhood near Phoenix.
Now 62, she moved up her timetable for retiring from her job of 17 years soon after the start of the pandemic, in part because of worries about the health risks.
“The straw that really broke the camel’s back was the PPE we had to wear,” she says of the heavy personal protection equipment required in the dentist’s office where she worked, which made it hard to communicate with patients.
Still, she says, early retirement was a big step. “I was really concerned about not working, because I’ve done it for so many years, and I loved it.”
Other Americans are already burning through their financial resources or reducing the amount they’re saving for retirement. Twenty-two percent say the pandemic has forced them to spend their emergency savings, 10 percent have reduced their retirement plan contributions, and 12 percent have withdrawn money from their retirement accounts, according to a survey by the National Institute for Retirement Security.
The CARES Act temporarily allowed people with pandemic-related hardships to withdraw up to $100,000 from tax-deferred retirement accounts without penalty.
A quarter of workers say their employers have also cut their retirement matches. Among the companies that suspended their 401(k) matches are Amtrak, BestBuy, Choice Hotels, Dell Technologies, Expedia, Knoll, Norwegian Cruise Line, Quest Diagnostics, RE/MAX, Stein Mart and VMWare.
More and more older workers are carrying mortgage debt into their retirement, thanks in part to the last recession. Forty-six percent of older Americans have mortgage debt, nearly twice the proportion of three decades ago.
Skip Kelley wanted to pay off some debt before he retired, which he intended to do in another year or two. “I wasn’t quite there yet,” says Kelley, who is 61.
Then the local television station he managed, in hard-hit Las Vegas, offered early retirement buyouts.
“I had a three-week period to make a decision about whether I was going to end my career or not,” says Kelley.
In the end, he took the buyout, which was enough to pay off those remaining debts. As for the lower monthly amount he would get for claiming Social Security early, “It actually was a big concern. Yes, my benefit is less than it would have been. But in the long run, it’s the right decision, and I’ve adjusted already to what’s coming in.”
Unlike younger people living in poverty, most retirees have little or no prospect of upward mobility. Social Security and pensions are adjusted only to keep up with the rate of inflation. “That means you are locked in for the rest of your life” to the same basic income, Radpour says.
Concerns about caregiving also led to retirements
Anxieties about all these things have been heightened by the pandemic. More than half of Americans say their concerns about retirement have increased over the past year, that National Institute for Retirement Security survey found.
The trend is likely to create a downward spiral by putting more strain on younger relatives, who may have to retire earlier themselves to care for their parents.
Even before the pandemic, 40 million people, or 16 percent of the population, were caring for an older person without pay, according to the Bureau of Labor Statistics. Of those, nearly 60 percent are women, delaying or interrupting their own careers, and a quarter are over age 55.
“Younger generations are going to be impacted by their parents going into retirement if they don’t have the resources. So are safety net programs,” says Doonan.
Pete Ramirez moved up his own retirement over concerns about being exposed to COVID-19 in his job as assistant director of a Tucson supermarket. He was especially worried he might pass it on to his parents, for whom he is a caregiver. Both are 90.
“At first you didn’t see a lot of people getting sick” at work, Ramirez says. “But then they started getting sick, and I was thinking, ‘I’m taking this home.’ “
Ramirez retired on Jan. 1, just before turning 62, instead of at 65, as he had planned.
“My parents are more important than my job,” he says. And when an employee in her 20s died of COVID-19 the day after he left, “I thought to myself, ‘Now I know I made the right decision.’ “
Still, it was a decision that cost Ramirez $500 a month, which is how much less he says he’ll get from Social Security than if he’d waited. But his house and cars are paid off and he has two IRAs, one from his 19 years at the supermarket and another from an earlier job.
The situation for many older workers isn’t anywhere near that good.
Only about half of American households have 401(k) or retirement accounts, according to the Center for Retirement Research; the rest have to rely entirely on Social Security.
Half of Americans ages 56 to 61 had less than $21,000 in retirement savings in 2016, the most recent year for which the figure is available, the Economic Policy Institute reports.
All these trends are very troubling for the near retirees,” says Doonan. “It’s a bit late to start saving.”
Desmond, Pompe, Kelley and Ramirez say they have few regrets about their new lives.
“At first, I was really concerned about not working, because I’ve done it for so many years, and I loved it. But I’ve actually embraced retirement. I really like it,” says Pompe, who bought an e-bike that she tries to ride every day.
Desmond has become active in pickleball, a paddleball sport with elements of tennis, badminton and table tennis. Kelley has a pile of stones in his driveway he plans to use to build a new retaining wall, and a shop behind the house where he restores classic cars.
Ramirez, whose hobby is woodworking, is building a porch and shelves, and planning with his wife for future travel. “My wife keeps saying I’ll get bored. I don’t foresee it,” he says.
Even for those who have managed to save enough money for retirement, the huge exodus of people who haven’t risks slowing broader economic growth.
“A well-pensioned elderly person in your neighborhood is a good thing. Just ask Arizona and Florida,” says Ghilarducci. “But we won’t have that source of aggregate demand because elders will have a lot less income.”
Social Security was an economic lifeline
Not everyone is convinced that the pandemic recession has significantly increased retirement insecurity.
“Pandemics are bad. Recessions are bad. Everyone has suffered during this in one way or the other,” says Alicia Munnel, director of the Center for Retirement Research and a former assistant secretary of the treasury for economic policy. But the crisis also proves that the Social Security retirement safety net “basically works,” she says.
“It’s well designed. The checks went out every month as the world was falling apart. The program stood up for older people who couldn’t find jobs,” she says. “The protections we would want are there. I’m not meaning to minimize the fact that there’s a group of older people whose plans have been disrupted and who are more vulnerable.”
More important to the long-term well-being of retirees, Munnel says, is to ensure that Social Security remains viable past 2035, when it is projected to fall short of being able to pay the full amount of benefits.
For some people, money played only a minor role in their decisions to retire during the pandemic.
Derek Manes, 57, director of graduate outreach and recruitment at the University of Minnesota, took an early retirement buyout to travel the world.
His parents “always said, ‘When we retire we’re going to go to Europe, and we’re going to do this or going to do that,’ “ Manes says. “And both of my parents died early, and I didn’t want to make that mistake.”
He plans to live on his savings and not even touch the retirement fund he’s been building for at least another five years. And he won’t apply for Social Security until after that.
“I’m really unusual, I think,” says Manes. “I have friends who say, ‘I’m going to work until I die, because I have no savings.’ And they’re older than me. They’re expecting to live on Social Security, and that’s just not going to work.”
Jon Marcus is higher-education editor for The Hechinger Report, where he has written about higher education for The Washington Post, USA Today, Time and The Boston Globe. He is the former editor of Boston magazine and a journalism instructor at Boston College.
https://www.aarp.org/work/working-at-50-plus/info-2021/pandemic-workers-early-retirement.html
Financial Health
What Is Financial Health?
Financial health is a term used to describe the state of one’s personal monetary affairs. There are many dimensions to financial health, including the amount of savings you have, how much you’re putting away for retirement, and how much of your income you are spending on fixed or non-discretionary expenses.
KEY TAKEAWAYS
- The state and stability of an individual’s personal finances and financial affairs are called their financial health.
- Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments, and a cash balance that is growing.
- To improve your financial health, you need to assess your current net worth, create a budget you can stick to, build an emergency fund, and pay down your debts.
Understanding Financial Health
Financial experts have devised rough guidelines for each indicator of financial health, but each person’s situation is different. For this reason, it is worthwhile to spend time developing your own financial plan to ensure that you are on track to reach your goals and that you’re not putting yourself at undue financial risk if the unexpected occurs.
Measure Your Financial Health
To get a better grasp of your financial health, it might help to ask yourself a few key questions—consider this a self-assessment of your financial health:
- How prepared are you for unexpected events? Do you have an emergency fund?
- What is your net worth? Is it positive or negative?
- Do you have the things you need in life? How about the things you want?
- What percent of your debt would you consider high interest, such as credit cards? Is it more than 50%?
- Are you actively saving for retirement? Do you feel you’re on track to meet your long-term goal?
- Do you have enough insurance coverage—whether it be health or life?
How Financial Health Is Determined
An individual’s financial health can be measured in a number of ways. A person’s savings and overall net worth represent the monetary resources at their disposal for current or future use. These can be affected by debt, such as credit cards, mortgages, and auto and student loans. Financial health is not a static figure. It changes based on an individual’s liquidity and assets, as well as the fluctuation of the price of goods and services.
For example, an individual’s salary might remain constant while the costs for gasoline, food, mortgages, and college tuition increase. Despite the good state of their initial financial health, the person may lose ground and lapse into decline if they do not keep pace with rising costs of goods.
Why Financial Literacy Is So Important
Few are prepared as financial decision-making grows more complex
Many consumers have little understanding of finances, how credit works, and the potential hit to financial well-being that poor financial decisions can create for many, many years. In fact, a lack of financial understanding has been signaled as one of the main reasons many Americans struggle with saving and investing.
Should COVID-19 Change Your Retirement Strategy?
What to do now, as the pandemic surges yet again in the U.S.
COVID-19 is once again raging throughout the U.S., and in much of the world it has never stopped doing so. Safe and highly effective vaccines are available, but not everywhere, and even where they are, not everyone who is eligible has gotten them.
That means there is still the possibility of accompanying financial volatility, despite steady job growth across the summer of 2021. Does that suggest that you should change your retirement strategy? Maybe. If so, how? There are a number of factors to weigh in terms of whether—and how—to change course.
KEY TAKEWAYS
- If you’re still working, you should keep funding your retirement accounts and possibly add even more money to an IRA.
- If you’re out of work, preserving what you have in your retirement accounts should be a high priority.
A Crisis Without Precedent
While it’s often useful to draw on the lessons of the past, history sometimes has little to offer. Unlike the Great Recession of 2007–2009 or the Great Depression of the 1930s, for example, the recent economic crisis in the U.S. wasn’t driven by financial fundamentals, but rather by society’s deliberate effort to shut down large parts of the economy. The closest parallel may be the so-called Spanish Influenza pandemic of 1918, although that played out at a time before Americans gave much thought to retirement and when life expectancy in the U.S. was significantly shorter.
Some economic commentators are predicting a swift economic rebound and even alluding to a new Roaring Twenties akin to the one that followed the end of the First World War and the 1918 pandemic. Others aren’t so sure. And don’t forget what came after the original Roaring Twenties—the Great Depression.
If You Have a Job—or Not
So what’s a conscientious retirement saver to do? That depends in large measure on your current work status.
If you’re working
People who were lucky enough to have money coming in—either from their own work or that of a significant other—were in decent shape to ride out the financial crisis. And happily, many who lost their jobs or were temporarily furloughed in 2020 have since returned to the workforce. If you’re currently working and saving for retirement through a 401(k) or similar plan, it’s smart to stay the course, even if your employer, like many, temporarily suspended its match.
In fact, if you’ve been working from home this past year and a half, you may actually have more cash available because of reduced commuting expenses, less frequent dining out, and so forth. That could be an opportunity to put additional money aside for retirement by contributing to an individual retirement account (IRA). For 2021 the maximum contribution is $6,000, or $7,000 if you’re 50 or older.
If you’re out of work
People who lost their jobs in 2020 and have yet to rejoin the workforce are obviously in a different situation. Your goal should be to preserve your retirement savings to the extent possible. That means taking advantage of unemployment insurance and any other assistance for which you’re eligible through existing programs. You may also be able to negotiate with your creditors, such as mortgage lenders and credit card companies, to reduce, postpone, or spread out any payments you owe them. If you have an emergency fund, as financial planners often recommend, it should be your first resort. Of course, after 18 months of pandemic unemployment, it would be a hardy emergency fund that wasn’t exhausted.
That said, 401(k) loans and early withdrawals from your retirement plan shouldn’t be your first recourse for cash. A 401(k) loan will typically have to be repaid within five years—and sooner than that if you lose your job. An early withdrawal from an IRA can trigger income taxes and a 10% penalty and also mean you’ll have that much less money saved for retirement.
On the other hand, they could cost less than other types of loans, so you should weigh your options.
Whatever you do, don’t neglect your health insurance. A large, unexpected medical bill can be financially devastating and possibly lead to bankruptcy. If you still have health insurance, your insurer may be willing to extend your payment deadlines if you ask.
Finally, if the financial crisis cut into your retirement savings or made it difficult for you to keep contributing, think about retiring a little later than you originally planned, once you’re back in a job. Working a while longer allows you to save more, and delaying Social Security—up to age 70—will mean bigger monthly benefits when you begin to collect them.
If you’re already retired
Those who have already retired from the workforce are in yet another situation. If your retirement income—from Social Security and other sources, such as pensions and systematic withdrawals from your IRAs and other retirement accounts—is sufficient to pay the bills, you may not need to change much of anything.
It could be difficult, however, if you have adult children who saw their incomes evaporate in the pandemic. The impulse to help your kids is an admirable one, but it can become a problem if it causes you to spend savings you’re depending on for retirement. Harsh as it may seem, it’s worth remembering that people who are still of working age have years ahead of them in which to catch up, while retirees have much less time and opportunity.
Preparing for Whatever Lies Ahead
When the worldwide COVID-19 crisis finally comes to an end, we all may want to take stock of our finances. Meanwhile, now could be a good time to:
Review your asset allocation
The pandemic and resulting financial crisis caused some wild swings in the stock market at first, with the Dow Jones Industrial Average (DJIA) up hundreds of points one day and down hundreds of points the next. Still, if you have cash to spare and can live with volatility, stocks may still present the best opportunity for long-term growth, especially as the Dow is more than 6,000 points higher in Aug. 2021 than it was when the pandemic began and has been climbing pretty steadily since Nov. 2020.11
If you’re simply trying to safeguard what you have, you should at least make sure your money is allocated the way you want among stocks, bonds, and cash. If you are coming up on retirement fairly soon, you might consider shifting into a somewhat more conservative portfolio and consider Investopedia’s advice on how to achieve optimal asset allocation (including a range of model portfolios from conservative to very aggressive).
Build (or rebuild) an emergency fund
If you didn’t have an emergency fund before 2020, you probably wished you did. If you did have one, you may need to replenish it. There are numerous philosophies about structuring emergency funds. Some suggest saving at least three months of living expenses in a liquid account, while others recommend having six or more months’ worth of cash. Achieving even that lower figure can be painfully difficult when you’re living paycheck to paycheck, but it’s a goal worth building toward at any age.
If you’re about to enter retirement, or already there, you may want a substantially larger emergency fund. Keeping two or three years’ worth of expenses in a money market fund or short-term bond fund, for example, could help you weather another crisis while leaving the rest of your retirement portfolio intact. That could save you from being forced to sell investments at the bottom of the market in a bad year. This is especially true once you reach 72 and have to take out required minimum distributions from tax-advantaged retirement funds.
Consider also keeping a cache of emergency-fund savings in those funds to use if the market plummets. If there is no crisis, no harm done. You’ll just be that much better off.
Should You Change Your Retirement Strategy Due to COVID-19 if You’re Employed?
Generally no, but you should make it a point to stay the course with your retirement funds, even if your employer has temporarily suspended its match. Those who have been working from home during the pandemic may have increased funds available due to reduced costs (no commuting, no dining out, fewer expenditures for movies, concerts, and the theatre). If that is the case you might be wise to put additional money aside for retirement.
Should You Change Your Retirement Strategy Due to COVID-19 if You’re Unemployed?
Obviously, you need to do whatever is necessary to keep your head above the financial waterline, but you should try to keep your retirement funds intact for as long as possible. Empty other accounts first. Try to eschew early withdrawals, as they can come with penalties and will, of course, reduce the amount of money you have for retirement. Avoid losing your health insurance at all costs, as large medical bills often cause bankruptcy. If you have to interrupt and/or raid your retirement savings, make sure to start again as soon as you are once again employed and consider retiring a bit later than you initially planned to make up for lost time.
Should You Change Your Retirement Strategy Due to COVID-19 if You’re Already Retired?
If your retirement income has been enough to live on, then you probably don’t need to change anything. However, be prepared to resist entreaties for cash from your adult children except in the most dire emergency. Helping them out financially could irreparably damage the safety of your retirement. Remember, being younger they have much more time to make up for lost funds than you do.
https://www.investopedia.com/should-covid-19-change-your-retirement-strategy-5069395
One-third of Americans plan to retire later due to Covid-19, study finds
- The Covid-19 pandemic has hurt some Americans’ confidence that they can meet their retirement goal date on time.
- Among those feeling the most negative effects are women and pre-retirees.
- Even so, many Americans say the pandemic was a financial wake-up call that prompted them to rethink how they plan for their futures.
It’s no secret that Covid-19 has upended people financially at all stages of life.
Now, one new report shows just how the pandemic has changed the way people think about retirement.
The study from Age Wave and Edward Jones finds that about 1 out of every 3 Americans who are planning to retire now say that will happen later due to Covid.
About 69 million Americans now say Covid prompted them to change their retirement timing. That’s up slightly from 68 million as of May 2020.
The results come from three tracking surveys that were conducted between May 2020 and March 2021. The latest poll was conducted in March, and included 2,042 adults ages 18 and up.
The research shows people have adjusted their approaches to retirement in some important ways.
Retirement savings disrupted
About 14 million Americans have stopped contributing to their retirement accounts every month as of this March, the research found.
That’s an improvement from December, when 22 million people said they had paused their retirement savings.
Women’s saving suffers
A so-called she-cession is poised to make the already existing financial gender gap worse.
Just 41% of women say they are saving each month for retirement, versus 58% of men.
Meanwhile, the retirement savings confidence gap between genders has grown wider. The study found that 56% of male pre-retirees say they are secure in their retirement savings, compared with 40% of women. While confidence has improved, it still hasn’t reached pre-pandemic levels from January 2020, when 61% of men and 54% of women said they were sure of their retirement savings.
Pre-retirees feel negative effects
The research also found that pre-retirees were more negatively impacted by the pandemic compared with retirees, 44% versus 22%. respectively.
Retirees fared better because they were able to fall back on Social Security and Medicare. At the same time, 78% own their own homes.
Health-care costs, including long-term care, consistently ranked as the No. 1 retirement concern for pre-retirees, with 66% in both May 2020 and March 2021.
Financial wake-up call
Of those surveyed, 61% of retirees said they wish they had done a better job planning for retirement financially.
Overall, 70% of Americans said the pandemic has been a financial wake-up call that has prompted them to pay more attention to their long-term money plans.
Meanwhile, Americans’ financial confidence seems to be bouncing back, with 57% now giving themselves an A or B grade on their finances, up from 50% in May 2020.
Retirement aspirations strong
Despite savings challenges, many Americans still have big hopes for their golden years.
Of those surveyed, 56% said they see retirement as a new chapter in life, while 21% said it’s a time for rest and relaxation.
https://www.cnbc.com/2021/06/14/a-third-of-americans-plan-to-retire-later-due-to-covid-19-study-finds.html
Here’s why our brains make it so hard to start saving for retirement
Studying behavioral economics has taught me that our brains don’t make it easier for us to save.
Psychology is often just as important in personal finance as are the numbers — the way we save, spend and invest are all influenced by the way we think and feel, especially when it comes to preparing for future events like retirement.
Saving money for retirement is important because you’ll need a nest egg when you’re no longer working. The best way to guarantee an income when you’re in your golden years is to save and invest as much as you can now while you are still working.
It can be tough to realize at first — and our brains don’t make it any easier for us to get the ball rolling on saving for something that may seem so far away. There are the many psychological pitfalls our minds are subject to when it comes to saving, investing and taking the actions that will benefit us long-term.
Here’s a breakdown of how our brains play a role in saving for retirement.
We don’t make enough decisions with the future in mind
If you’re in college or in your 20s, you probably aren’t planning to retire for another 40-plus years. And if you’re in your 30s, retirement is likely 30 years away. In fact, the average American retires around age 64, according to the Center for Retirement Research at Boston College.
Because of this, it’s easy to feel like retirement is so far into the future and that we have plenty of time before we need to start preparing for it. As a result, many would rather treat themselves to things they can enjoy right now instead of stocking away money for a future that’s decades away.
This thought process is called hyperbolic discounting and it happens when we’re more inclined to make decisions that come with a more immediate reward instead of decisions that come with a future reward.
Put another way, we’d rather have $5 right now instead of $10 a week from now. Or we’d prefer to use our money to enjoy a shopping spree now rather than invest the same money (which would grow) to spend in retirement.
Of course, that’s not to say that we should never spend for enjoyment in the present. Creating a budget can help us figure out how much we can comfortably spend on the things we love now and how much we need to sock away for retirement. You can use budgeting tools like the Mint app and Personal Capital to track your net worth, spending and create a budget for free.
It’s easier to do nothing than it is to make a change
Not only does retirement feel like it’s decades away, but it can also feel a little daunting when it comes to figuring out which accounts to open and the rules around each investment vehicle. For example, you can only contribute up to $6,000 per year to an IRA or Roth IRA if you’re under age 50 (after age 50, that limit increases to $7,000). But you can’t contribute to a Roth IRA if your income is over $140,000.
And even after you finally nail down all the specifics, it’s time to pull the trigger, sit down and actually open an account — and that’s where some people falter.
“I’ll do it tomorrow” becomes “I’ll do it this weekend,” which then becomes “I’ll do it next weekend.” Before you know it, you’ve gone a month or more and still haven’t opened up your IRA account. And this doesn’t just occur when it comes to saving for retirement; we’re certainly guilty of repeating this thought process for just about any task — returning a package for a refund, cleaning our room or even canceling subscriptions and memberships.
This is often because people have a tendency to stick with their current situation since it’s often easier to keep things as they are than it is to take the steps to make a change. This is called the status quo bias and one of the main causes of this bias is a lack of attention, as Richard Thaler and Cass Sunstein describe in their book, Nudge: Improving Decisions About Health, Wealth and Happiness.
People tend to say, “yeah, whatever” to situations where sticking with their default or current circumstance doesn’t immediately hurt them or cause a large loss. So they continue paying $10 for a gym membership they don’t use, let the dirty clothes pile up in the corner of their room and let the package sit until it’s past the return date.
Of course, these situations do have some level of consequence (spending money you didn’t need to spend on something you aren’t using, for example). We just don’t think the magnitude of that consequence is big enough or immediate enough for us to take action.
By the way, opening up a retirement savings account actually isn’t something you need to reserve your entire day to do. I opened up my Fidelity Roth IRA and my parents’ Roth IRA in a total of about 20 minutes — all I needed was birthdate information, address, social security number and some bank account details for transferring money. Then the accounts were up and running and ready for the first contribution.
We underestimate how long it will take for us to achieve our desired savings
How many times have you said you can get an assignment done in a certain amount of time only to realize that it actually took you longer (sometimes even double your initial prediction) to complete it? This is called the planning fallacy and it’s all too common — especially when it comes to our finances. We tend to underestimate how long it will take to complete a future task, often despite knowing that previous similar tasks have taken longer to complete than planned.
Because of this, many people put off saving for retirement until their 30s or 40s thinking that they should be able to amass as much as they’ll need for their golden years in just two decades. But once they factor in their current expenses and financial obligations, they find that it’ll actually take a lot longer than they initially believed to build a comfortable retirement fund. This is what one Select contributor experienced when he put off saving for retirement until he was 31.
It also doesn’t help that, according to the Journal of Accountancy, 54% of people underestimate how much money they will need to retire. Underestimating how much money you need for retirement and how long it will take you to save that money can be a recipe for an underfunded nest egg.
You can get an idea of how much you should have saved by every age, but the most important age to start saving for retirement is your current age. Your employer-sponsored 401(k) plan is a great start (just make sure you’re contributing at least the minimum required to receive the employer match). But also having a Roth IRA can help your contributions grow tax-free, even when you make withdrawals in retirement.
You’ll, of course, have to invest your contributions, which can be tricky if you’re new to investing. But apps like Betterment and Wealthfront take some of that confusion away by investing your money in a pre-determined, diversified portfolio that adjusts based your needs, interests and risk tolerance.
Bottom line
Saving for retirement is one of the most crucial financial steps you’ll need to take. Taking steps to save today can guarantee you an income in retirement when you’re no longer working. Though we often experience setbacks as a result of our human psychology, understanding what’s at play can help us take the first step in understanding and improving our habits.
https://www.cnbc.com/select/why-retirement-saving-is-hard-according-to-behavioral-economics/
How much is capital gains tax? It depends on how long you held the asset and your income level
If you earn money from the sale of a capital asset — your home, part of a business, stocks, or bonds, for example — that profit may be subject to capital gains tax.
There are two categories of capital gains: short term (assets held for a year or less) and long term (assets held for longer than one year). The day you acquire the asset isn’t included in your holding period, but the day you sell it is.
Any net gain resulting from the sale of an asset with a short-term holding period will be added to your gross income and taxed as ordinary income at rates between 10% and 37%. Net gains considered long term are usually taxed at 15% or 20% depending on your total taxable income.
How much is capital gains tax?
The capital gains tax is generally favorable; you’ll never pay a higher tax than what you would pay on your ordinary income.
Here are the federal long-term capital gains rates for 2020:
Capital gains resulting from the sale of collectibles, like fine art or a coin collection, are taxed at the highest rates: 28%.
The short-term capital gains tax rates are the same as your federal income tax bracket as follows:
How do you calculate capital gains?
Every capital asset you own has a basis, which is generally the amount you paid for the property initially, plus any taxes or commissions. If you received the asset as a gift or from inheritance, there’s a special calculation for figuring out your adjusted tax basis.
To calculate the amount of gain (or loss), simply subtract the proceeds received on the date of the sale from your adjusted tax basis. If the proceeds are more than your basis, you’ll generate a gain. If the proceeds are less than your basis, you’ll generate a loss.
The capital gains tax rates apply to your net capital gains. If you had capital losses during the tax year (or from a previous year that you carried over), you may be able to use it to offset your gains.
For example, let’s say you had a $2,000 capital loss from the sale of a stock you held for 18 months — that’s a long-term capital loss. And you also had $3,000 in capital gain from the sale of another stock you held for 24 months. Since both assets were held long-term, you can net them against each other: $3,000 gain – $2,000 loss = $1,000 net gain taxed at long-term capital gains rates.
How much is capital gains tax on the sale of a home?
Selling a home can generate a large capital gain, especially if you owned it for several years. Thankfully, single filers can exclude up to $250,000 of the gain and married filers can exclude up to $500,000 of the gain.
To qualify for the maximum exclusion, the taxpayer must have owned the home and used it as their personal residence for two of the last five years before selling. Partial exclusions are allowed if you sold your residence for a job or health reasons, or if you’re married but only one spouse passes the ownership and use tests.
How do I pay capital gains taxes?
If you sold an asset that generated a large capital gain, you may be required to pay estimated quarterly taxes. You can complete a short questionnaire on the IRS website to figure out how to pay your capital gains tax.
What is the Net Investment Income Tax?
If you’re someone with substantial investment income — including capital gains passive income, certain annuities, dividends, interest, rents, and royalties — you may have to pay an additional tax that goes toward supporting America’s healthcare program.
The Net Investment Income Tax applies a flat rate of 3.8% to your investment income if your adjusted gross income (AGI) is above the following amounts for your filing status:
- Married filing jointly and qualifying widow(er): $250,000 or more
- Married filing separately: $125,000 or more
- Single and head of household: $200,000 or more
https://www.insider.com/personal-finance/how-much-is-capital-gains-tax
What Will Long-Term Care Cost You?
Most people over 65 will eventually need some form of paid care. Here are some ways to plan ahead.
Many people are frightened of long-term care costs — for good reason.
Most people over 65 eventually will need help with daily living tasks, such as bathing, eating or dressing. Men will need assistance for an average of 2.2 years, while women will need it for 3.7 years, according to the U.S. Department of Health and Human Services’ Administration on Aging.
Many will rely on unpaid care from spouses or children. However:
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More than one-third will spend time in a nursing home, where the median annual cost of a private room is now over $100,000, according to insurer Genworth’s 2018 Cost of Care Survey.
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Four out of 10 will opt for paid care at home, and the median annual cost of a home health aide is over $50,000.
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Overall, half of people over 65 will incur long-term care costs, and 15% will incur more than $250,000 in costs, according to a study by Vanguard Research and Mercer Health and Benefits.
Medicare won’t help
Medicare and private health insurance typically don’t cover these “custodial” expenses, which can quickly wipe out the $126,000 median retirement savings for people age 65 to 74. People who exhaust their savings could wind up on Medicaid, the government health program for the indigent that pays for about half of all nursing home and custodial care.
People who live alone, are in poor health or who have a family history of chronic conditions have a greater-than-average likelihood of needing long-term care. Women face special risks, since we tend to outlive our husbands and thus may not have anyone to provide unpaid care. If our husbands need paid care that wipes out our savings, we could face years or even decades living on nothing but Social Security.
Certified financial planner Margarita Cheng persuaded her parents to buy long-term care insurance when her dad was 68 and her mom was 54. Five years later, he was diagnosed with Parkinson’s disease. The policy paid for $225 of the $260 daily cost of his 24-hour care in the final months of his life, she said.
“My dad’s disease could have been devastating financially for my mom,” Cheng says. “Her mom lived to be 94, so my mom could easily have 30 more years in retirement.”
Everyone needs a plan
Everyone approaching retirement age should consider their potential risks and have a plan to deal with long-term care expenses, financial planners say.
“The earlier they start planning, the more choice and control they have,” Cheng says.
The options include:
Long-term care insurance. The average annual premium for a 55-year-old couple was $3,050 in 2019, according to the American Association for Long-Term Care Insurance. Premiums are higher for older people, and those with chronic conditions might not qualify. Policies typically cover a portion of long-term care costs for a defined period such as three years. In the past, big premium hikes forced many people to drop their policies after they became unaffordable. Financial advisors say the insurance is now more accurately priced, although people should still plan on premiums that could rise 50% to 100%.
Hybrid long-term care insurance. Life insurance or annuities with long-term care benefits now outsell traditional long-term care insurance by a rate of about 4-to-1. With these products, money that isn’t used for long-term care can be left to heirs. These products typically require you to commit large sums: $100,000 upfront, for example, or paid in installments over 5 to 10 years, although some now have “lifetime pay” options that average about $7,000 a year.
Home equity. People who move permanently into a nursing home may be able to sell their houses to help fund the care. Reverse mortgages may be an option if one member of a couple remains in the home. These loans allow people to tap home equity but must be repaid if the owners die, sell or move out.
Contingency reserve. People with substantial investments could earmark some of those assets for long-term care. The investments can produce income until there’s a need for long-term care, and then be sold to pay for a nursing home or home health aide.
Spending down to Medicaid. People who don’t have much saved, or who face a catastrophic long-term care cost that wipes out their savings, could end up depending on Medicaid. There are ways to protect at least some assets for spouses, but those typically require planning with an elder law attorney’s help. You can get a referral from the National Academy of Elder Law Attorneys.
This article was written by NerdWallet and was originally published by The Associated Press.
https://www.nerdwallet.com/article/investing/long-term-care
4 ways to save enough now to retire in 10 years
- If you want to retire in the next 10 years, lower your spending and increase your income.
- Paying off debt can give you more money to save and invest, and free up your budget later.
- Increasing your income with a raise or side hustle could give you more money to save.
If you want to retire in 10 years, it might be possible. But it’ll require some work.
Getting your finances in order now can help you meet your goal later. While everyone has a different budget and circumstances, it might be possible to retire comfortably sooner than you think. However, it might take more time than 10 years, depending on your starting point.
Whenever you want to retire — whether at typical retirement age in your 60s, or much earlier — these four suggestions can help you work towards that goal.
1. Cut your living expenses
If you’re able to downsize your living expenses, it could allow you to save more. While this may mean moving from one home to another, it could also be as simple as slashing your spending and revisiting your budget to see where you can cut back.
Early retiree and blogger A Purple Life (who is anonymous online) cut her costs by moving from New York City to Seattle. Retiring just five years after she started saving, the move helped her progress. “I cut my living costs in half just by moving out of Manhattan,” she told Insider.
By cutting her expenses, she was able to retire quickly. Doing something similar to lower your expenses might help your retirement journey, too.
2. Pay off any debt
If it’s possible for you to pay off debt, it will benefit your retirement goals twofold.
You’ll be able to save more money each month with one less responsibility. Freeing up several hundred dollars each month means you’ll have more cash to save and invest.
And, there’s a long-term benefit. Going into retirement without debt can help to keep costs low, and stretch the money you already have saved. The combination can put you years ahead on your retirement journey.
3. Earn more income
Whether you’re thinking about asking for a raise at work or starting a side hustle, earning more means saving more.
High school teacher Brian Weitzel found ways to earn more with a side hustle on his journey to early retirement, Insider’s Tanza Loudenback reports. Starting a side photography business and investing in real estate helped boost his income enough to max out six retirement accounts, and save for early retirement in another investment account.
Earning more could help you boost your income and save more now, and help establish a side hustle you can continue after you’ve left work.
4. Downsize your lifestyle and make a budget
Spending less means saving more, and that could be the key to retiring earlier than you anticipated.
Simply paying attention to your spending can make a big difference. Avoiding lifestyle creep, or spending more when you earn more, can make a significant difference. Additionally, living below your means can help you save more and create a lifestyle now that will be sustainable in retirement later.
Making a budget can be a good place to start, and it will give you an idea of where to cut back. List out all of your spending, and categorize things into essential and non-essential costs. Look at the non-essential spending, and see if you’re able to cut back in any specific area. Investing the difference could help you save more and get closer to your goal.
https://www.businessinsider.com/personal-finance/save-enough-now-to-retire-in-10-years-2021-6?r=US&IR=T
27 Tips for Saving Money After Retirement
More people are retiring with less savings than they need to be comfortable. Much less. According to Northwestern Mutual, 21% of Americans have no retirement savings at all. The Government Accountability Office (GAO) says around 29% of households age 55 and older have neither retirement savings nor a pension.
These numbers may sound surprising and even daunting, but it’s important to remember that it’s never too late to save, even after retirement. Here are a few things you should know about saving money after retirement.
What you need to know about retirement
Retirement is on the rise. A 2018 report by Yahoo! Finance stated there are nearly 10,000 people turning 65 years old every day. Within the next 10 years, the number will reach nearly 12,000 people a day.
Americans are living, on average, more than two decades after the traditional retirement age of 65. A report by the Miami Herald found the average 65-year-old American man will live to be nearly 86 years old, while the average 65-year-old American woman will live to nearly 88 years old.
Nearly half of Americans aren’t sure how much they need for retirement. The 19th Annual Transamerican Retirement Survey, released in 2019, found 46% of Americans are guessing at how much money they need.
With increasing life expectancies and financial uncertainties leading up to retirement, here’s how to get on track once you’re retired.
Is it too late to start saving? Some last-minute tips
It’s never too late to start saving. If you’ve retired and realize you haven’t saved enough, consider these ideas.
1. Get out of retirement
Maybe it’s not feasible to return to the last work position you once had. There are still work options available. You can take a part-time job in retail or hospitality. If you’ve always been the crafty type, start selling your artwork. You can work with a temp agency to get short-term work, and commit to saving part of what you earn.
2. Delay drawing Social Security
For those who were born in 1943 or later, there’s a strategy that will get your more Social Security. For every year you delay taking out benefits after you reach retirement age, your benefits increase by 8% until you reach the age of 70. You automatically save more money when you delay drawing Social Security.
3. Consider a reverse mortgage
If you own a home and have equity, you might consider a reverse mortgage. This type of loan is borrowed against the value of your home. You receive funds as a lump sum, a line of credit or a fixed monthly payment.
4. Downsize
Consider what you own, what you need and what you’d be OK doing without. Maybe it’s selling a big home and moving to a senior retirement community, selling an extra vehicle or selling your designer clothes and handbags. Put what you make into savings.
5. Update your 401(k) and individual retirement account (IRA) contributions
According to Investopedia, once you turn 70½, you are no longer allowed to contribute to a traditional IRA. You can still contribute to a Roth IRA, however, so make sure you have one set up. If you do opt out of retirement and continue to work, you can contribute part of your salary to a 401(k).
6. Consider Social Security options for married couples
If you do need to take out Social Security benefits, and you are married, you can still increase savings. The best way to do so is for the higher earner to delay claiming benefits longer and suspend paying contributions. The spouse with lower earnings can claim the spousal benefit. This tactic still results in savings, while also providing benefits.
7. Become a roommate
Embrace your inner Golden Girl. Look for a roommate. You’ll get companionship, lower cost of living, help with housework (hopefully) and less space to take care of.
8. Trim your lifestyle and spending
Take a look at your purchases over the past few months. Identify spending habits that you can eliminate. It might be a membership you don’t use any more, or maybe you start cooking more meals at home instead of going out to eat as often. Keep a diary to track your spending. Note extravagant purchases and see ways to save.
9. Move somewhere with a lower cost of living
You could save tens of thousands of dollars a year in cost of living by moving to a new state, city or even country.
10. Ask your loved ones for help
You spent years raising your children. If you have a good relationship with them, you can communicate your financial needs honestly with them and see how they can help. Other family members, like siblings, may be able to provide assistance, too.
11. Look into public benefits
The National Council on Aging has a benefits checkup website where you can view public programs that can help with decreasing your expenses. You may be eligible for benefits including care assistance, transportation, medical assistance and health care.
12. Research debt reduction options
If your debt is too difficult to manage, talk with a financial advisor, credit counseling agency or bankruptcy lawyer to discuss your options. You may qualify for debt relief options that can help you better adjust to life in retirement.
How to cut lifestyle costs during retirement
You could well outlive the average life expectancy. The world’s oldest living person is Kane Tanaka, who will turn 117 years old in 2020. Save now by decreasing your lifestyle costs to ensure you have enough for the future. Use these techniques.
13. Manage your debt
Managing your debt is a good first step to cutting lifestyle costs. In some cases, it may be better to keep debt like a home loan so that you have more to spend now. As mentioned, a reverse mortgage may be a viable solution that can help you save even more.
14. Seek out bargains and discounts
Cut coupons. Use deals websites. Take advantage of senior citizen discounts. The money you save adds up over time.
15. Use public transportation
Using public transportation provides lots of benefits if it’s accessible to you. You can get exercise by walking to the transportation stop. You lessen your environmental footprint when you don’t drive a car. And it’s a nice way to get out in the community life and see some new sights along the way. If you use transportation like a subway or light rail, you’ll always know how long it will take you to get somewhere, since you don’t have to worry about traffic. That can reduce stress in your life, too.
16. Vacation for less
Experiencing new homes away from home doesn’t have to be expensive. Check out destinations within driving range of your town. You might be able to encounter an entirely different climate and change of scenery just an hour away. Also, explore options like home-sharing services to save money on hotel rooms when traveling. Book vacations in off seasons to save more.
17. Consider government and nonprofit assistance
There is no shame in seeking out financial help. There are numerous government and nonprofit programs designed for seniors. Do an online search for senior services in your city to see what’s available.
18. Stay healthy
One of the easiest ways to save money is to prioritize your health. Preventive care is a big money-saver. The Centers for Disease Control and Prevention recommends that adults ages 50 years and older get at least 150 minutes of moderate-intensity aerobic activity a week, plus at least two strength-building sessions a week.
19. Learn how to sell online
Get rid of things you don’t need by selling them online. There are tons of broad and niche online marketplaces like eBay and OfferUp where you can make some quick cash by selling your things.
20. Prioritize entertainment needs
Entertainment is nice to have, not a necessity. Life should be fun, though. Look for free entertainment options like art fairs or movies in the park. If you’re looking for entertainment because you’re bored, explore free or lower-cost hobbies, like yoga or reading books from the library.
How to handle your money during retirement
Avoid stress about money in your retirement by consciously managing it. You’ll want to have a nice nest egg to continue enjoying life, pay for medical expenses and cover any emergencies that come up. Follow these steps.
21. Understand how much you’re spending
Look at your spending over the past 3 months, using your banking statement. If you primarily use cash, write down what you think you spent on purchases. Start keeping a spending diary so you get an accurate view of your expenses.
22. Budget for now and the future
Saving is always important, even after you’ve retired. In your budget, allot funds for savings. Try to build a solid emergency fund that could cover at least 3 months of your expenses in your savings.
23. Reduce your debt
Use the money-saving tips in this article to put those savings toward debt. Debt is stressful and can climb quickly when it builds interest. Pay off growing debts like credit card debt as soon as possible.
24. Consider some guaranteed income
Talk with a financial planner about setting up guaranteed income, perhaps part of your retirement savings through a tool like a guaranteed annuity income. This way, you’ll still be generating income, even in retirement.
25. Plan for your taxes
You’ll still owe taxes even when you’re not working. Work with a financial planner to get organized for taxes. Set aside money accordingly.
26. Invest wisely
At this point in life, you’ll want to make less risky investments than you did when you first started working. But you’ll still want to invest. You can get a much higher return on investment by investing in stocks compared to waiting for a savings account to grow. After the age of 50, you can take advantage of catch-up contributions to IRAs and 401(k)s, too.
27. Maximize credit card points
Look at the perks your current credit cards offer, like points for travel or cash back, and make sure you’re taking advantage of them. You might also consider signing up for a new credit card that has a bonus offer you want, like extra travel miles if you are planning a trip.
Start Saving More Today
It’s not too late to start saving and maximize what you already have. Use these tips to make your retirement more comfortable.
*This content is for informational purposes only. This information should not be considered to be legal, tax, or tax advice.
https://www.seniorlifestyle.com/resources/blog/27-tips-for-saving-money-after-retirement/
When It’s Time to Stop Saving for Retirement
Going from saver to spender is mostly a matter of psychology
It’s Time to Wind Down
You’ve done all the right things—financially speaking, at least—in saving for retirement. You started saving early to take advantage of the power of compounding, maxed out your 401(k) and individual retirement account (IRA) contributions every year, made smart investments, squirreled away money into additional savings, paid down debt, and figured out how to maximize your Social Security benefits.
Savings by Age: How Much to Save in Your 20s, 30s, 40s, and Beyond
No matter what stage of life you’re in, one thing will always remain the same: You’re never too young — or too old — to save money.
Using your age can be a helpful way to calculate your potential savings and estimate how much money you should save for various life events. Just remember: Don’t get discouraged if you haven’t started yet, need to hit pause, or fall behind. You can always get back on track.
If you’re wondering, “How much should I have saved?” now is the time to flip your mindset. Think, “How much could I save?” Read on to see just how much your savings today can turn into down the road.
1. So, how much money should you have saved?
2. Adventure Awaits: Savings for Retirement by Age
3. Rainy Day Fund: Savings for Emergencies by Age
4. Saving for a Wedding, Vacation, Puppy and More
5. Smart tools and strategies for savers of all ages
So, how much money should you have saved?
Fast Answer:
- The amount of money you should save is unique to your lifestyle.
- You can reach savings goals by creating specific target amounts and dates.
- Find extra money to save by cutting back spending and/or picking up a side gig.
First things first: There isn’t a one-size-fits-all number. It’s important your savings — and savings goals — connect to your lifestyle. That includes everything from your income and the way you like to shop, to where you live, if you have a car, if you’re raising kids, pay rent or have a mortgage, and more. Everyone has their own magic number based on their budget.
You can find your magic number by creating specific savings goals. For example, you want to save for a treadmill that costs $1,000 to complete your home workout routine within the next six months. Being specific about your goals — and when you hope to accomplish them — will give you a framework for how much you need and how long it could take you to get there. Smart savings tools like buckets let you easily set goals, organize your savings and keep track of your priorities.
Remember, the key to saving for goals that are quickly approaching and those far off isn’t putting away massive amounts of money at a time. (Although a windfall of cash, like a tax return, can help you from time to time). It’s really all about finding a savings amount that works for you — and staying consistent.
Expert tip: Finding extra money can be possible. Start by looking at your weekly or monthly spending. You might find areas you can cut down on expenses to free up cash for saving. Even if it’s just a few bucks a week, that’s a win! Or, you might realize increasing your income is a better option. You could consider a side gig or explore ways to make money online.
Savings for Retirement By Age
Fast Answer:
- A general rule of thumb is to have one times your income saved by age 30, three times by 40, and so on. See chart below.
- The sooner you start saving for retirement, the longer you’ll have to take advantage of the power of compound interest.
- Aim to save 5% to 15% of your income for retirement — or start with a percentage that’s manageable for your budget and increase by 1% each year until you reach 15%.
The thought of saving a couple million dollars by your 60s or 70s can sound daunting, we know. That’s where breaking up your retirement savings with age-based benchmarks may help. By looking at your savings in 10-year increments, it’s easier to plan financially and put actionable savings steps in place.
One popular age-based savings recommendation is that you should aim to save one times your salary by age 30 and increase your savings by your annual salary every five years.
| By Age… | You Should Aim to Save… |
|---|---|
| 30 | 1 x your income |
| 40 | 3 x your income |
| 50 | 5 x your income |
| 60 | 7 x your income |
| 70 | 9 x your income |
| 80 | 11 x your income |
Keep in mind the above is more of a guide than a strict plan. The amount you should save for retirement should be based upon factors including:
- your income
- your planned retirement age
- the kind of lifestyle you want to have in retirement
For example, if you want to retire at age 62 and travel the world, you might need a bigger retirement account than if you plan to retire at 70.
So, how do you begin to aim for these goals? You could start by investing 5% to 15% per paycheck in a tax-advantaged retirement account until retirement.
The Power of Retirement Investing
Your retirement savings rate can have a big impact on your total return. See below how much could be stashed away with consistent saving. The following example is based on the U.S. median household annual income of $68,703 (according to 2019 U.S. Census Bureau data) and assumes an average annual return of 6%.
| Starting at Age | Annual Retirement Savings Rate | By Age 65 You’d Have… |
|---|---|---|
| 25 | 5% | $531,607 |
| 10% | $1,063,261 | |
| 15% | $1,594,896 | |
| 35 | 5% | $271,565 |
| 10% | $543,153 | |
| 15% | $814,732 | |
| 45 | 5% | $126,358 |
| 10% | $252,728 | |
| 15% | $379,093 |
Dedicating 5% to 15% of your pre-tax income to retirement isn’t always possible. You may be starting a new career, paying back student loans, or have other financial obligations and aren’t able to save that much of your salary all at once. And that’s okay, because saving for retirement isn’t all or nothing. If that is the case, start with a percentage you’re comfortable with and increase your savings rate gradually by 1% each year until you reach the 15% mark. If you’re getting a 1% annual raise at the same time, you won’t even miss the extra money from your paychecks.
Don’t panic if you’re currently paying back loans or other debts. If you have room to save for retirement at the same time, that’s great — aim to put away what you can while sticking to your loan repayment schedule. Once you’ve paid off a debt (like a car loan, student payments, credit card debt, etc.) consider transferring that monthly payment amount toward retirement instead.
No matter your age, tax-advantaged savings and investment accounts, such 401(k)s and Roth or traditional IRAs (Individual Retirement Account), could be used to your advantage at any point in time.
If you’ve been saving for a while, make sure to give your retirement accounts regular checkups to see if you’re on track for your goals.
Expert Tip: You can increase your contributions to your 401(k) by saving enough to qualify for your employer’s full match (if one is available). For example, if you set aside 5% of your annual paycheck in your 401(k) and your employer matches 100% of your contributions up to 5%, the annual contribution to your retirement fund will be 10% of your yearly salary. Employer-sponsored retirement programs differ, so check with your employer for eligibility.
Feeling behind? Consider a “catch-up contribution.”
If financial constraints or other priorities keep you from saving for retirement until later in life, you can consider taking advantage of what’s called a “catch-up contribution.” That is when retirement plans let you make an extra yearly contribution to your tax-advantaged retirement account once you hit age 50. (The amount allowed is determined by the IRS.)
When saving for retirement, automate monthly transfers from your checking account to a savings account or an IRA (if it makes sense tax-wise) for a hassle-free way to watch your retirement savings grow. Be sure to consult your tax professional to see if it makes sense for you. And remember to check in on your savings (ideally, at least once a year) to see how your efforts are paying off.
Finally, don’t forget about Social Security, which you may qualify for starting at age 62. These monthly payments, as well as another retirement account, like an IRA can be used to supplement your retirement savings.
Open an IRA Account Today
Savings for Emergencies by Age
Fast Answer:
- Rather than using your age as a guide to determine how much you should have saved for emergencies, you could start with the amount you spend each month on expenses.
- A popular mindset is that emergency savings account should ideally hold three to six months’ worth of expenses in easy-to-access cash.
- To keep your emergency savings accessible, consider an online savings account (not a CD or investment account).
It’s inevitable: Life throws you financial curveballs.
That’s when your emergency fund can save the day.
An emergency fund is cash you set aside in a savings account only for unexpected expenses. If your dog swallows a chew toy and needs a trip to the vet, for example, or your car breaks down and needs a new transmission, the funds in your emergency account can pay for those just-in-case moments.
Emergency Funds: It’s all about Your Monthly Spending
The ideal size of your emergency fund will likely fluctuate throughout your life based upon your monthly expenses. Rule of thumb? Aim to have at least three to six months’ worth of expenses set aside.
We know this can feel impossible, especially if you’re just starting out. Remember, you don’t have to build an emergency fund overnight. Instead, focus on consistently putting away what you can afford. It’s perfectly okay to start with a smaller savings goal, whether it’s one month of expenses, a $1,000, $100, or even $10. Strategies like microsaving can help you find safe-to-save money you might’ve not realized you had.
To figure out how much you should have saved for emergencies, simply multiple the amount of money you spend each month on expenses by either 3 or 6 months to get your target goal amount. See example below.
If you spend…
| Monthly spending examples: | 3 months of emergency savings | 6 months of emergency savings |
|---|---|---|
| $1,190 | $3,570 | $7,140 |
| $2,380 | $7,140 | $14,280 |
| $3,120 | $9,360 | $18,720 |
| $4,760 | $14,282 | $28,560 |
| $6,240 | $18,722 | $37,440 |
| $7,140 | $21,420 | $42,840 |
| $9,360 | $28,080 | $56,160 |
The chart above is based on 2019 Consumer Expenditure Survey data from the United States Bureau of Labor Statistics. Note that these expenditures include both essential expenses (like rent or mortgage, groceries, insurance payments and education) and nonessential purchases (like entertainment and clothing).
Keep in mind: The numbers above are simply examples and may not resonate with your lifestyle, as everyone’s situation is different. While you might choose to use these numbers as a benchmark, it’s more important to determine how much of your own monthly spending goes toward essential purchases and aim to save three to six times that amount.
Expert tip: Don’t know how much you spend each month? Find out by tracking your own spending to see how much you actually need month-to-month. Once you have a good idea, plug your numbers into our emergency savings account calculator. You’ll even get an estimate of how long it will take to reach your goal based on how much you put away each month. Learn more about how to start saving for an emergency fund.
Where to stash your emergency cash
Where you keep your money is also important. An emergency savings account could be kept in a deposit account that earns interest and is liquid (like our Online Savings Account), instead of a certificate of deposit (CD) or an investment account.
Why? It’s simple. Your emergency savings needs to be accessible.
With most CDs, you may have to wait until its maturity date to pull money out. Or, if you withdraw it early, you may have to pay a penalty. Drawing money out of an investment account could also trigger tax consequences, plus it usually takes several days before the cash hits your bank account.
Keeping your emergency fund in a savings account that earns a competitive interest rate means you don’t have to jump through any extra hoops to get cash when you need it. Plus, your money could earn interest at a potentially competitive rate — meaning it’s growing all the time.
Expert Tip: Take advantage of tools and technology to help you reach your goals. With Ally Bank’s Online Savings Account, you can supercharge your savings with smart savings tools like Recurring Transfers and Surprise Savings, so you can reach your savings target even faster.
Saving for a Wedding, Vacation, Puppy and More
Fast Answer:
- The costs for additional life expenses, like new homes, cars, weddings, children, etc. vary.
- Use our savings goal calculator to help set your savings goals and plans for five of life’s major milestones, including a baby, a house and a car .
- Prioritize your savings when aiming to save for multiple large expenses at once.
As you make progress saving for emergencies and retirement, you’ll probably have other goals in the interim that’ll require saving up cash to accomplish.
Maybe you’re renting now and want to become a homeowner — which means you’ll need cash for a down payment and closing costs. Or you’re in a serious relationship and would like to put a ring on it. Or maybe there’s a baby in a baby carriage on the horizon. You’ll want to start saving for college (and lots and lots of diapers).
And that’s not all. You might one day hope to refurnish your living room, upgrade to a more spacious vehicle, or splurge on your dream vacation — Saint-Tropez, anyone?
Of course, saving for these items will vary. But looking at the average cost of each expense and mapping out a timeline of when you hope to achieve your savings goal can give you an idea of how much you need to set aside.
| If You’re Saving For… | Plan to Save… |
|---|---|
| A summer vacation (including travel, lodging, food, etc.) | $1,979/person |
| New living room furniture | $2,500 |
| Down payment for an average small car | $2,000 |
| A treadmill | $500 to $3,000 |
| Down payment for a home (5% to 20% and based on May 2020 median home price) | $14,230 to $56,920 |
| A wedding (based on 2020 average) | $19,000 |
| College for your kids (average for four years at in-state public school) | $102,460 |
| A puppy (average first-year cost for small to large dog) | $1,471 to $2,008 |
These are just a few examples of some popular savings goals and how you might save for them, based on their national average costs.
Smart tools and strategies for savers of all ages
Fast Answer:
- Smart savings tools like Ally Bank’s Buckets, a feature of our Online Savings Account, let you easily set goals, organize your savings and keep track of your priorities.
- Microsaving can help you reach your savings targets even faster.
- When in doubt, consider automating your savings with recurring transfers or direct deposits.
Prioritizing and staying organized can keep you from stressing over not saving enough for all the things you want to do with your money. If you’ve got a plan for saving toward multiple goals, it reduces the chance that something slips through the cracks.
For example, say you want to adopt a dog a year from now and purchase a home three years after that. You can afford to save $800 a month towards both items. In this instance, you might sock away $100 each month for puppy preparation and $700 for the down payment on a house. After you adopt your new fur-ever friend, you can redirect that $100 over to your home savings fund.
The buckets tool in our Online Savings Account helps you organize your savings into separate digital envelopes and set specific goals for each, eliminating the need to open multiple savings accounts to track your progress.
To make saving go even smoother, consider going on autopilot. By automatically diverting a portion of your paycheck, initiating recurring transfers into your respective savings accounts, or using the Surprise Savings booster in our Online Savings Account, you can ease some of the stress of reaching your goals.
Finally, remember that when you’re saving money, any little bit counts. If you aren’t able to put away larger chunks of cash at a time, like $500 or $100 or even $50, that doesn’t mean saving is out of the question. By using microsaving strategies (or stashing away small amounts of money, usually less than $2 at a time), you can consistently add to your savings without the pressure of putting big amounts away all at once.
You’ve got this.
When mapping out your financial future, age may act as your savings compass. Let it point you in the right direction and help you visualize what today’s savings can look like later on. And remember, you’re never too young or too old to save for the goals that matter most to you.
https://www.ally.com/do-it-right/money/savings-by-age-how-much-to-save-in-your-20s-30s-40s-and-beyond/
4 ways to save enough now to retire in 10 years
If you want to retire in 10 years, it might be possible. But it’ll require some work.
Getting your finances in order now can help you meet your goal later. While everyone has a different budget and circumstances, it might be possible to retire comfortably sooner than you think. However, it might take more time than 10 years, depending on your starting point.
Whenever you want to retire — whether at typical retirement age in your 60s, or much earlier — these four suggestions can help you work towards that goal.
1. Cut your living expenses
If you’re able to downsize your living expenses, it could allow you to save more. While this may mean moving from one home to another, it could also be as simple as slashing your spending and revisiting your budget to see where you can cut back.
Early retiree and blogger A Purple Life (who is anonymous online) cut her costs by moving from New York City to Seattle. Retiring just five years after she started saving, the move helped her progress. “I cut my living costs in half just by moving out of Manhattan,” she told Insider.
By cutting her expenses, she was able to retire quickly. Doing something similar to lower your expenses might help your retirement journey, too.
2. Pay off any debt
If it’s possible for you to pay off debt, it will benefit your retirement goals twofold.
You’ll be able to save more money each month with one less responsibility. Freeing up several hundred dollars each month means you’ll have more cash to save and invest.
And, there’s a long-term benefit. Going into retirement without debt can help to keep costs low, and stretch the money you already have saved. The combination can put you years ahead on your retirement journey.
3. Earn more income
Whether you’re thinking about asking for a raise at work or starting a side hustle, earning more means saving more.
High school teacher Brian Weitzel found ways to earn more with a side hustle on his journey to early retirement, Insider’s Tanza Loudenback reports. Starting a side photography business and investing in real estate helped boost his income enough to max out six retirement accounts, and save for early retirement in another investment account.
Earning more could help you boost your income and save more now, and help establish a side hustle you can continue after you’ve left work.
4. Downsize your lifestyle and make a budget
Spending less means saving more, and that could be the key to retiring earlier than you anticipated.
Simply paying attention to your spending can make a big difference. Avoiding lifestyle creep, or spending more when you earn more, can make a significant difference. Additionally, living below your means can help you save more and create a lifestyle now that will be sustainable in retirement later.
Making a budget can be a good place to start, and it will give you an idea of where to cut back. List out all of your spending, and categorize things into essential and non-essential costs. Look at the non-essential spending, and see if you’re able to cut back in any specific area. Investing the difference could help you save more and get closer to your goal.
https://www.businessinsider.com/personal-finance/save-enough-now-to-retire-in-10-years-2021-6?r=US&IR=T
27 Tips for Saving Money After Retirement
More people are retiring with less savings than they need to be comfortable. Much less. According to Northwestern Mutual, 21% of Americans have no retirement savings at all. The Government Accountability Office (GAO) says around 29% of households age 55 and older have neither retirement savings nor a pension.
These numbers may sound surprising and even daunting, but it’s important to remember that it’s never too late to save, even after retirement. Here are a few things you should know about saving money after retirement.
What you need to know about retirement
Retirement is on the rise. A 2018 report by Yahoo! Finance stated there are nearly 10,000 people turning 65 years old every day. Within the next 10 years, the number will reach nearly 12,000 people a day.
Americans are living, on average, more than two decades after the traditional retirement age of 65. A report by the Miami Herald found the average 65-year-old American man will live to be nearly 86 years old, while the average 65-year-old American woman will live to nearly 88 years old.
Nearly half of Americans aren’t sure how much they need for retirement. The 19th Annual Transamerican Retirement Survey, released in 2019, found 46% of Americans are guessing at how much money they need.
With increasing life expectancies and financial uncertainties leading up to retirement, here’s how to get on track once you’re retired.
Is it too late to start saving? Some last-minute tips
It’s never too late to start saving. If you’ve retired and realize you haven’t saved enough, consider these ideas.
1. Get out of retirement
Maybe it’s not feasible to return to the last work position you once had. There are still work options available. You can take a part-time job in retail or hospitality. If you’ve always been the crafty type, start selling your artwork. You can work with a temp agency to get short-term work, and commit to saving part of what you earn.
2. Delay drawing Social Security
For those who were born in 1943 or later, there’s a strategy that will get your more Social Security. For every year you delay taking out benefits after you reach retirement age, your benefits increase by 8% until you reach the age of 70. You automatically save more money when you delay drawing Social Security.
3. Consider a reverse mortgage
If you own a home and have equity, you might consider a reverse mortgage. This type of loan is borrowed against the value of your home. You receive funds as a lump sum, a line of credit or a fixed monthly payment.
4. Downsize
Consider what you own, what you need and what you’d be OK doing without. Maybe it’s selling a big home and moving to a senior retirement community, selling an extra vehicle or selling your designer clothes and handbags. Put what you make into savings.
5. Update your 401(k) and individual retirement account (IRA) contributions
According to Investopedia, once you turn 70½, you are no longer allowed to contribute to a traditional IRA. You can still contribute to a Roth IRA, however, so make sure you have one set up. If you do opt out of retirement and continue to work, you can contribute part of your salary to a 401(k).
6. Consider Social Security options for married couples
If you do need to take out Social Security benefits, and you are married, you can still increase savings. The best way to do so is for the higher earner to delay claiming benefits longer and suspend paying contributions. The spouse with lower earnings can claim the spousal benefit. This tactic still results in savings, while also providing benefits.
7. Become a roommate
Embrace your inner Golden Girl. Look for a roommate. You’ll get companionship, lower cost of living, help with housework (hopefully) and less space to take care of.
8. Trim your lifestyle and spending
Take a look at your purchases over the past few months. Identify spending habits that you can eliminate. It might be a membership you don’t use any more, or maybe you start cooking more meals at home instead of going out to eat as often. Keep a diary to track your spending. Note extravagant purchases and see ways to save.
9. Move somewhere with a lower cost of living
You could save tens of thousands of dollars a year in cost of living by moving to a new state, city or even country.
10. Ask your loved ones for help
You spent years raising your children. If you have a good relationship with them, you can communicate your financial needs honestly with them and see how they can help. Other family members, like siblings, may be able to provide assistance, too.
11. Look into public benefits
The National Council on Aging has a benefits checkup website where you can view public programs that can help with decreasing your expenses. You may be eligible for benefits including care assistance, transportation, medical assistance and health care.
12. Research debt reduction options
If your debt is too difficult to manage, talk with a financial advisor, credit counseling agency or bankruptcy lawyer to discuss your options. You may qualify for debt relief options that can help you better adjust to life in retirement.
How to cut lifestyle costs during retirement
You could well outlive the average life expectancy. The world’s oldest living person is Kane Tanaka, who will turn 117 years old in 2020. Save now by decreasing your lifestyle costs to ensure you have enough for the future. Use these techniques.
13. Manage your debt
Managing your debt is a good first step to cutting lifestyle costs. In some cases, it may be better to keep debt like a home loan so that you have more to spend now. As mentioned, a reverse mortgage may be a viable solution that can help you save even more.
14. Seek out bargains and discounts
Cut coupons. Use deals websites. Take advantage of senior citizen discounts. The money you save adds up over time.
15. Use public transportation
Using public transportation provides lots of benefits if it’s accessible to you. You can get exercise by walking to the transportation stop. You lessen your environmental footprint when you don’t drive a car. And it’s a nice way to get out in the community life and see some new sights along the way. If you use transportation like a subway or light rail, you’ll always know how long it will take you to get somewhere, since you don’t have to worry about traffic. That can reduce stress in your life, too.
16. Vacation for less
Experiencing new homes away from home doesn’t have to be expensive. Check out destinations within driving range of your town. You might be able to encounter an entirely different climate and change of scenery just an hour away. Also, explore options like home-sharing services to save money on hotel rooms when traveling. Book vacations in off seasons to save more.
17. Consider government and nonprofit assistance
There is no shame in seeking out financial help. There are numerous government and nonprofit programs designed for seniors. Do an online search for senior services in your city to see what’s available.
18. Stay healthy
One of the easiest ways to save money is to prioritize your health. Preventive care is a big money-saver. The Centers for Disease Control and Prevention recommends that adults ages 50 years and older get at least 150 minutes of moderate-intensity aerobic activity a week, plus at least two strength-building sessions a week.
19. Learn how to sell online
Get rid of things you don’t need by selling them online. There are tons of broad and niche online marketplaces like eBay and OfferUp where you can make some quick cash by selling your things.
20. Prioritize entertainment needs
Entertainment is nice to have, not a necessity. Life should be fun, though. Look for free entertainment options like art fairs or movies in the park. If you’re looking for entertainment because you’re bored, explore free or lower-cost hobbies, like yoga or reading books from the library.
How to handle your money during retirement
Avoid stress about money in your retirement by consciously managing it. You’ll want to have a nice nest egg to continue enjoying life, pay for medical expenses and cover any emergencies that come up. Follow these steps.
21. Understand how much you’re spending
Look at your spending over the past 3 months, using your banking statement. If you primarily use cash, write down what you think you spent on purchases. Start keeping a spending diary so you get an accurate view of your expenses.
22. Budget for now and the future
Saving is always important, even after you’ve retired. In your budget, allot funds for savings. Try to build a solid emergency fund that could cover at least 3 months of your expenses in your savings.
23. Reduce your debt
Use the money-saving tips in this article to put those savings toward debt. Debt is stressful and can climb quickly when it builds interest. Pay off growing debts like credit card debt as soon as possible.
24. Consider some guaranteed income
Talk with a financial planner about setting up guaranteed income, perhaps part of your retirement savings through a tool like a guaranteed annuity income. This way, you’ll still be generating income, even in retirement.
25. Plan for your taxes
You’ll still owe taxes even when you’re not working. Work with a financial planner to get organized for taxes. Set aside money accordingly.
26. Invest wisely
At this point in life, you’ll want to make less risky investments than you did when you first started working. But you’ll still want to invest. You can get a much higher return on investment by investing in stocks compared to waiting for a savings account to grow. After the age of 50, you can take advantage of catch-up contributions to IRAs and 401(k)s, too.
27. Maximize credit card points
Look at the perks your current credit cards offer, like points for travel or cash back, and make sure you’re taking advantage of them. You might also consider signing up for a new credit card that has a bonus offer you want, like extra travel miles if you are planning a trip.
Start Saving More Today
It’s not too late to start saving and maximize what you already have. Use these tips to make your retirement more comfortable.
https://www.seniorlifestyle.com/resources/blog/27-tips-for-saving-money-after-retirement/
What Is an Annuity?
Annuities are contracts issued and distributed (or sold) by financial institutions where the funds are invested with the goal of paying out a fixed income stream later on. They are mainly used for retirement purposes and help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.
KEY TAKEAWAYS
- Annuities are financial products that offer a guaranteed income stream, used primarily by retirees.
- Annuities exist first in an accumulation phase, whereby investors fund the product with either a lump-sum or periodic payments.
- Once the annuitization phase has been reached, the product begins paying out to the annuitant for either a fixed period or for the annuitant’s remaining lifetime.
- Annuities can be structured into different kinds of instruments—fixed, variable, immediate, and deferred income—which gives investors flexibility.
Understanding Annuity
Annuities were designed to be a reliable means of securing steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk of outliving one’s assets. Annuities can also be created to turn a substantial lump sum into steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.
HOME SWEET HOME – AMERICANS WANT TO AGE IN PLACE
IDENTIFY RETIREMENT STRATEGIES TO PUT IN PLACE NOW—LIKE ANNUITIES— TO LIVE RETIREMENT ON YOUR TERMS.
As the pandemic thankfully wanes, we are starting to see its impact and long-term repercussions on retirement planning and security.
One thing that hasn’t changed is Americans’ overwhelming desire to age in place. The U.S. Centers for Disease Control defines “aging in place” as “the ability to live in one’s own home and community safely, independently and comfortably, regardless of age, income or ability level.”
In other words, living your retirement years on your own terms, on your own turf.
With about 40% of Covid-related deaths in the U.S. occurring in long-term-care facilities, new fears associated with long-term care facilities have emerged, intensifying the preference to age in place. The pandemic also underscored how essential access to in-home care is and the need to expand the availability of home health services.
As we approach 2024, there will be an unprecedented surge of Americans turning age 65, aptly dubbed Peak 65. This demographic milestone will put substantial pressure on an already strained retirement system, buckling under the weight of Americans retiring prematurely due to layoffs and other pandemic-related factors.
Peak 65 presents several challenges and unanswered questions, including where people will live and how they will obtain the care they need. Amongst a host of other issues, the rising demand may increase national health expenditures, further strain Social Security and stretch the healthcare workforce thin.
There is also growing alarm that the enormous bump in America’s elderly population will force many children, particularly daughters, out of the labor market to care for their aging parents. To help address this, President Biden recently advanced a proposal to spend $400 billion over eight years on home and community-based services—a major part of his $2 trillion infrastructure plan.
You can start preparing today to determine exactly what needs to be done to your home to allow you to age in place safely and comfortably, and what the costs surrounding those changes will be. Research by AARP shows that only 1% of home environments are conducive to aging in place, so planning now will pay off big later.
“When we’re not planning ahead, we need to react quickly,” Dr. Rodney Harrell, vice president of family, home and community at the AARP Public Policy Institute, and a recent guest on the Alliance’s Your Money Map show, told The New York Times.
There are many easy and inexpensive home renovations and adjustments to help maximize your home’s usefulness throughout your life. Adding dimmable lights to improve visibility at night and to upgrading to a smart, keyless lock system for easy entry, for example, are two easy upgrades. AARP recently introduced Home Fit, a free augmented reality smartphone app that can also scan a room and suggest safety improvements to help turn a house into a forever home.
It is also more important than ever to identify what retirement strategies you should put in place now—like annuities—to help ensure you have protected lifetime income later. Careful financial planning can help ensure you have a protected income stream to cover maintenance and care expenses, and more, as you age.
There are a variety of options in and choices of annuities to help cover various essential monthly expenses, so enlist a financial professional to help evaluate your exact needs and recommend an annuity and plan that’s right for you.
https://www.protectedincome.org/ymm-housing/
HOW AN ANNUITY WORKS
YOU MAY NOT BE FAMILIAR with annuities, but they have a rich history dating back to Ancient Rome. In fact, millions of Americans currently use annuities to help their retirement savings grow and to create protected income that can help cover essential expenses and contribute to a more enjoyable retirement.
In its simplest terms, an annuity is a contract between an individual (or married couple) and a life insurance company. You can purchase an annuity with a portion of your retirement savings in either a single payment or with multiple payments, depending on the type of annuity. Once you own an annuity, any growth in your account may be on a tax-deferred basis while you continue to have control of your money, as needed.
Annuities can be an important part of a diversified retirement portfolio because they can ensure that your retirement income is protected even when there are downturns in the market. So no matter how your other retirement investments perform, annuities can provide you with a source of protected lifetime income that few other financial products can offer.
When you’re ready to take income, you may receive payments in a variety of ways depending on your needs and the type of annuity you purchased. You can choose to receive income immediately, or at a later date. Payments can be in lump sums of your choosing, in a series of payments for a specified period of time or you may choose to receive guaranteed payments for as long as you live. Certain types of annuities offer you the flexibility to receive protected lifetime income while maintaining access to your money.
One of the key advantages of annuities is that they are offered by life insurance companies and can offer protection and guarantees not generally found in other products. Depending on the type of annuity and the options you choose, you can get a guaranteed rate of return for your retirement money, protect your nest egg and income from drops in the market, secure a death benefit for your loved ones and, of course, have protected lifetime income for you. It’s important to remember that these guarantees are dependent upon the financial strength of the insurance company, so be sure to talk with your financial professional.
Annuities have been a reliable and trusted option for centuries. During the Great Depression, annuities saw a spike in popularity as stock market volatility threatened retirement savings and Americans were looking to protect their assets with more conservative financial products.
Today, with fewer people covered by traditional pension plans, annuities can fill a critical gap in retirement portfolios by providing a guaranteed monthly check for as long as you live, no matter how the markets perform.
“Annuities are long-term financial products designed for retirement purposes. Early withdrawals may be subject to withdrawal charges. Partial withdrawals may reduce benefits available under the contract. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply. Optional income protection features are subject to additional fees, requirements and other limitations. Keep in mind, for retirement plans and accounts (such as IRAs and 401(k)s), an annuity provides no additional tax-deferred benefit beyond that provided by the retirement plan or account itself. Contract and optional benefit guarantees are backed by the financial strength of the issuing insurer.”
https://www.protectedincome.org/how-an-annuity-works-signature-series/?gclsrc=aw.ds&gclid=Cj0KCQjw2tCGBhCLARIsABJGmZ4tk8OvnSVt_Eb2arvIjQP1vAhdxXONQIlM1z59zkN6O1nplJdmDa4aAkTDEALw_wcB&gclsrc=aw.ds
Trend: More Americans now want to retire early
Workers want to retire at 55, but are they positioned to successfully do so?
The category of “pre-retirees” is being redefined as more than one-third of workers younger than 54 saying they aspire to retire by age 55.
In 2020, more consumers (39 percent) anticipated retiring before age 65 than in any year since in 2010, with 18 percent of those saying they plan to retire by age 59, according to the research firm Hearts & Wallets.
At the same time, interest in part-time work declined. In 2020, more Americans want to stop full-time work at a certain age, now at 33 percent, up 2 percentage points from 2019. Conversely, 53 percent of Americans want to “work full time as long as health permits,” up 3 percentage points from 2019.
Workers who say they want to stop full-time work by age 55 are well positioned in some ways but may need assistance to achieve their early retirement goal, the study found, These households are more likely to use various investment products, have lower student debt, spend less on housing and are more open to personal financial advice.
Their saving rate and other financial behaviors, such as carrying credit card debt, suggest an early retirement goal may be unrealistic without behavioral change.
Future retirees anticipate a higher number of income sources than current retirees. Nearly half of future retirees expect four-plus sources of income, with even more sources for wealthier future retirees. The average retiree household has 2.4 sources of income. The more income sources consumers anticipate, the more value they see in paying for financial advice.
“More income sources allow retirees to weather inflation, stock market volatility and other nest-egg pressures,” said Amber Katris, Hearts & Wallets subject matter expert.
“Firms should understand which sources matter most to individual consumers. Consumers with a higher number of income sources are more receptive to paying for financial advice. Consider assets-to-income ratios, which are more concrete and easier to understand than replacement- rate projections.”
The study also found that participation and saving in employer-sponsored retirement plans were up in 2020. “To save for retirement” and “to get the company” match are the main reasons for participating.
Having “reliable choices screened by my employer” is less important nationally but relatively more motivating to Black participants in comparison to Asian or white participants.
More-generous plan matches increase overall household saving rates, especially at lower income levels.
This finding indicates matches should be differentiated by income, which has myriad implications for those who work with employer-sponsored retirement plans and public policy.
“The pandemic has disrupted many lives and jobs,” said Laura Varas, CEO and founder of Hearts & Wallets. “One repercussion is a renewed appreciation for building financial security and planning for possible end of work. Firms should assist consumers in understanding their personal work viability and provide support to achieve retirement goals without making assumptions about target dates, either earlier or later than the traditional mid-60s.”
https://www.benefitspro.com/2021/05/04/trend-more-americans-now-want-to-retire-early/
The Financial Institution That Gets Longevity, COVID, and The New Retirement
Like previous pandemics, COVID-19 has touched off profound changes for our societies, economies, workforces, and overall life models, not least of which are people’s shifting expectations for later-life work, purpose, health, and finances. Bank of America’s Lorna Sabbia and Surya Kolluri recently explored these trends in a wide-ranging discussion on the emerging shifts and signals that people are rethinking the period once known as retirement.
COVID-19 has accelerated many of the trends that were already challenging the outdated study-work-retire model, as individuals and families, financial services institutions, and policymakers grapple with the issues — and explore the opportunities — of funding lives that now routinely stretch for twenty, twenty-five, or thirty years after traditional retirement age. As you might expect, many people are now feeling less secure about their finances and future medical costs due to the pandemic, which has upended key industries, challenged health systems, and generated trillions of dollars in economic impacts.
However, there is an even deeper shift playing out in our societies, which has been underway for at least decade linked to the profound transformation of longer lives and more old than young across society. The trend is formally built into formal endorsement through the Decade of Healthy Ageing, recognized by Fortune 100 corporate leaders such as Bank of America in their commitment to healthier longevity. These shifts already embedded in the Decade of Healthy Ageing are further prompted by COVID-19 from which tens of millions of older adults have been reflecting on what they want to get out of their later years. They are rejecting outdated notions of retirement but instead asking how they can continue to lead productive, purposeful, healthy, and financially secure lives for decades after 60. This broad shift in mindset may be one of the most enduring legacies of the pandemic, helping to permanently retire the 20th-century notions of retirement that were on their way out even before COVID-19.
While there’s still a long way to go to control and end COVID-19, some fundamental lessons are emerging for how people and institutions can reinvent retirement in the post-COVID era:
· Planning for a full century of financial and healthcare needs. As Bank of America’s experts highlight, people must consider how they will fund living expenses and healthcare costs across the full span of modern longevity. For example, a healthy 65-year-old couple has a fifty-percent chance that one of the partners will live to 92 or older. It’s perhaps no surprise, then, that just 14% of Gen X is confident that they are saving enough for lifetime healthcare costs. To meet their needs, people need to consider their own longevity-informed roadmap, with a combination of saving, investing, and working longer, supported by innovative financial vehicles and education.
· Addressing the gender gap in investing and saving. Women, on average, live significantly longer than men, yet they also face a “pay gap” and work interruptions that mean a woman at retirement age may have earned a cumulative $1,055,000 less than a man. Addressing this disparity requires increasing financial empowerment among women, as well as solutions to mitigate or avoid work interruptions, often due to family care — including supportive employer policies and professional home care.
· Extending “health span” to equal life span. Bank of America’s research has highlighted that there is currently a 10-year gap in the U.S. between the average lifespan versus the average “health span,” or the number of years lived in good health. New healthcare innovations, especially better treatments for Alzheimer’s and other age-related conditions, can help to close this gap, so people can enjoy all of their later years. Elder caregiving is a critical path for this particular challenge and a model for enabling healthier aging generally. This can also help people to work for longer, launch second careers, or start their own businesses — providing additional income and continued activity and engagement in a virtuous cycle.
· Expanding the silver economy. People are increasingly rejecting the idea that aging should mean they retire, become less active, and disengage from their activities or communities. Instead, they want their later years to be purposeful and even profitable. This opens new opportunities for the $17-trillion global silver economy, which can empower older adults as both employees and consumers, while driving the post-COVID recovery with products, services, and innovations designed for the needs and interests of this huge market and pool of talent.
These key tenets point a path forward for rethinking retirement during and after the COVID-19 pandemic. By shaping individual expectations, market offerings, and policy for the dynamics of longer lives, we can step forward into a healthier and wealthier world for decades to come. It’s a conversation that can find national and global actions in the UN/WHO Decade of Healthy Ageing, itself the single most transformational policy framework for healthier longevity.
https://medium.com/global-coalition-on-aging/the-financial-institution-that-gets-longevity-covid-and-the-new-retirement-c15bc234fe7d
These five steps will help you toward a safe, secure, and fun retirement
Retirement planning is a multistep process that evolves over time. To have a comfortable, secure—and fun—retirement, you need to build the financial cushion that will fund it all. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.
Planning for retirement starts with thinking about your retirement goals and how long you have to meet them. Then you need to look at the types of retirement accounts that can help you raise the money to fund your future. As you save that money, you have to invest it to enable it to grow. The surprise last part is taxes: If you’ve received tax deductions over the years for the money you’ve contributed to your retirement accounts, a significant tax bill awaits when you start withdrawing those savings. There are ways to minimize the retirement tax hit while you save for the future—and to continue the process when that day arrives and you actually do retire.
We’ll get into all of these issues here. But first, start by learning the five steps everyone should take, no matter what their age, to build a solid retirement plan.
KEY TAKEAWAYS
- Retirement planning should include determining time horizons, estimating expenses, calculating required after-tax returns, assessing risk tolerance, and doing estate planning.
- Start planning for retirement as soon as you can to take advantage of the power of compounding.
- Younger investors can take more risk with their investments, while investors closer to retirement should be more conservative.
- Retirement plans evolve through the years, which means portfolios should be rebalanced and estate plans updated as needed.
1. Understand Your Time Horizon
Your current age and expected retirement age create the initial groundwork of an effective retirement strategy. The longer the time between today and retirement, the higher the level of risk your portfolio can withstand. If you’re young and have 30-plus years until retirement, you should have the majority of your assets in riskier investments, such as stocks. Though there will be volatility, stocks have historically outperformed other securities, such as bonds, over long time periods. The main word here is “long,” meaning at least more than 10 years.
Additionally, you need returns that outpace inflation so you can maintain your purchasing power during retirement. “Inflation is like an acorn. It starts out small, but given enough time, can turn into a mighty oak tree. We’ve all heard—and want—compound growth on our money. Well, inflation is like ‘compound anti-growth,’ as it erodes the value of your money. A seemingly small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years. Doesn’t seem like much each year, but given enough time, it has a huge impact,” says Chris Hammond, a Savannah, Tenn., financial advisor and founder of RetirementPlanningMadeEasy.com.
In general, the older you are, the more your portfolio should be focused on income and the preservation of capital. This means a higher allocation in securities, such as bonds, that won’t give you the returns of stocks but will be less volatile and provide income you can use to live on. You will also have less concern about inflation. A 64-year-old who is planning on retiring next year does not have the same issues about a rise in the cost of living as a much younger professional who has just entered the workforce.
2. Determine Retirement Spending Needs
Having realistic expectations about post-retirement spending habits will help you define the required size of a retirement portfolio. Most people believe that after retirement, their annual spending will amount to only 70% to 80% of what they spent previously. Such an assumption is often proved to be unrealistic, especially if the mortgage has not been paid off or if unforeseen medical expenses occur. Retirees also sometimes spend their first years splurging on travel or other bucket-list goals.
“In order for retirees to have enough savings for retirement, I believe that the ratio should be closer to 100%,” says David G. Niggel, CFP, ChFC, AIF, founder, president, and CEO of Key Wealth Partners, LLC, in Litiz, Pa. “The cost of living is increasing every year—especially health care expenses. People are living longer and want to thrive in retirement. Retirees need more income for a longer time, so they will need to save and invest accordingly.”
As, by definition, retirees are no longer at work for eight or more hours a day, they have more time to travel, go sightseeing, shop, and engage in other expensive activities. Accurate retirement spending goals help in the planning process as more spending in the future requires additional savings today. “One of the factors—if not the largest—in the longevity of your retirement portfolio is your withdrawal rate. Having an accurate estimate of what your expenses will be in retirement is so important because it will affect how much you withdraw each year and how you invest your account. If you understate your expenses, you easily outlive your portfolio, or if you overstate your expenses, you can risk not living the type of lifestyle you want in retirement,” says Kevin Michels, CFP, EA, financial planner, and president of Medicus Wealth Planning in Draper, Utah. Your longevity also needs to be considered when planning for retirement, so you don’t outlast your savings. The average life span of individuals is increasing.
Additionally, you might need more money than you think if you want to purchase a home or fund your children’s education post-retirement. Those outlays have to be factored into the overall retirement plan. Remember to update your plan once a year to make sure you are keeping on track with your savings. “Retirement-planning accuracy can be improved by specifying and estimating early retirement activities, accounting for unexpected expenses in middle retirement, and forecasting what-if late-retirement medical costs,” explains Alex Whitehouse, AIF, CRPC, CWS, president and CEO, Whitehouse Wealth Management, in Vancouver, Wash.
3. Calculate After-Tax Rate of Investment Returns
Once the expected time horizons and spending requirements are determined, the after-tax real rate of return must be calculated to assess the feasibility of the portfolio producing the needed income. A required rate of return in excess of 10% (before taxes) is normally an unrealistic expectation, even for long-term investing. As you age, this return threshold goes down, as low-risk retirement portfolios are largely composed of low-yielding fixed-income securities.
If, for example, an individual has a retirement portfolio worth $400,000 and income needs of $50,000, assuming no taxes and the preservation of the portfolio balance, they are relying on an excessive 12.5% return to get by. A primary advantage of planning for retirement at an early age is that the portfolio can be grown to safeguard a realistic rate of return. Using a gross retirement investment account of $1 million, the expected return would be a much more reasonable 5%.
Depending on the type of retirement account you hold, investment returns are typically taxed. Therefore, the actual rate of return must be calculated on an after-tax basis. However, determining your tax status when you begin to withdraw funds is a crucial component of the retirement-planning process.
4. Assess Risk Tolerance vs. Investment Goals
Whether it’s you or a professional money manager who is in charge of the investment decisions, a proper portfolio allocation that balances the concerns of risk aversion and return objectives is arguably the most important step in retirement planning. How much risk are you willing to take to meet your objectives? Should some income be set aside in risk-free Treasury bonds for required expenditures?
You need to make sure that you are comfortable with the risks being taken in your portfolio and know what is necessary and what is a luxury. This is something that should be seriously talked about not only with your financial advisor but also with your family members. “Don’t be a ‘micro-manager’ who reacts to daily market noise,” advises Craig L. Israelsen, Ph.D., designer of Twelve Portfolio in Springville, Utah. “‘Helicopter’ investors tend to over-manage their portfolios. When the various mutual funds in your portfolio have a bad year, add more money to them. It’s kind of like parenting: The child that needs your love the most often deserves it the least. Portfolios are similar. The mutual fund you are unhappy with this year may be next year’s best performer—so don’t bail out on it.”
“Markets will go through long cycles of up and down and, if you are investing money you won’t need to touch for 40 years, you can afford to see your portfolio value rise and fall with those cycles,” says John R. Frye, CFA, chief investment officer and co-founder, Crane Asset Management, LLC, in Beverly Hills, Calif. “When the market declines, buy—don’t sell. Refuse to give in to panic. If shirts went on sale, 20% off, you’d want to buy, right? Why not stocks if they went on sale 20% off?”
5. Stay on Top of Estate Planning
Estate planning is another key step in a well-rounded retirement plan, and each aspect requires the expertise of different professionals, such as lawyers and accountants, in that specific field. Life insurance is also an important part of an estate plan and the retirement-planning process. Having both a proper estate plan and life insurance coverage ensures that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial hardship following your death. A carefully outlined plan also aids in avoiding an expensive and often lengthy probate process.
Tax planning is another crucial part of the estate-planning process. If an individual wishes to leave assets to family members or a charity, the tax implications of either gifting the benefits or passing them through the estate process must be compared.
A common retirement-plan investment approach is based on producing returns that meet yearly inflation-adjusted living expenses while preserving the value of the portfolio. The portfolio is then transferred to the beneficiaries of the deceased. You should consult a tax advisor to determine the correct plan for the individual.
“Estate planning will vary over an investor’s lifetime. Early on, matters such as powers of attorney and wills are necessary. Once you start a family, a trust may be something that becomes an important component of your financial plan. Later on in life, how you would like your money disbursed will be of the utmost importance in terms of cost and taxes,” says Mark T. Hebner, founder and president, Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.” “Working with a fee-only estate planning attorney can assist in preparing and maintaining this aspect of your overall financial plan.”
The Bottom Line
The burden of retirement planning is falling on individuals now more than ever. Few employees can count on an employer-provided defined-benefit pension, especially in the private sector. The switch to defined-contribution plans, such as 401(k)s, also means that managing the investments becomes your responsibility, not your employer’s.
One of the most challenging aspects of creating a comprehensive retirement plan is striking a balance between realistic return expectations and a desired standard of living. The best solution is to focus on creating a flexible portfolio that can be updated regularly to reflect changing market conditions and retirement objectives.
https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp
How to Retire in 2021
How to Retire in 2021
When you are ready to retire, there are certain basic things you should do before you leave the comfort and security of your old job. You need to make final adjustments to your financial plan and make important decisions about Social Security and health insurance.
Here’s a checklist for retiring in 2021:
- Decide when to start Social Security.
- Sign up for Medicare or other health insurance.
- Check your retirement benefits.
- Take advantage of last-minute benefits at work.
- Consider rolling over your 401(k) to an IRA.
- Make a financial plan.
- Decide what to do next.
Remember to do these things if 2021 is the year you’re finally going to take the leap into retirement.
Decide When to Start Social Security
You’re eligible to claim Social Security payments beginning at age 62. However, you will receive a reduced payment unless you begin collecting benefits at your full retirement age, which varies depending on when you were born. For example, the full retirement age is 66 and 10 months for people born in 1959.
You can increase your monthly payments if you sign up for Social Security after your full retirement age. Each year you wait, your monthly benefit grows by about 8%, up to age 70. Sign up for a my Social Security account to view how much you will receive from Social Security if you start payments at various ages.
Sign Up for Medicare or Other Health Insurance
Medicare coverage begins at age 65, regardless of your Social Security full retirement age. When you enroll in the program you will need to make decisions about Medicare supplement plans and prescription drug coverage or Medicare Advantage plans.
Check Your Retirement Benefits
Confirm eligibility for a pension or other retirement benefits you earned at work. Also, check to see if you qualify for benefits from a previous employer. You might collect income from two or three places where you worked during your career. Find out if you’re eligible for retiree employer-subsidized health insurance. Check to see if retirees can take advantage of any other company-sponsored benefits, from life insurance to membership in a health club to employee discounts on company products.
Take Advantage of Last-Minute Benefits at Work
If you have dental and vision coverage at work, you may want to visit the dentist and pick up a new pair of glasses before you retire. If the company matches any charitable giving, then make your annual contributions before you retire. If your child has an employer-sponsored college scholarship, see if the scholarship will continue after you leave. This is your last chance to use the benefits the company offers.
Consider Rolling Over Your 401(k) to an IRA
Employers typically allow you to keep your 401(k) account with the company after you retire. However, you might be better off transferring the money to an IRA or Roth IRA. IRAs typically have more investment options, and you can shop around for lower-cost or better-performing funds.
If you own company stock, either inside or outside a retirement plan, now may be the time to sell some to diversify your holdings. You may also want to tweak your investment strategy and make a plan to minimize taxes as you draw down your retirement assets.
Make a Financial Plan
There’s more to financial planning than tending to an IRA. Try to make a budget that details your expected income from Social Security, pensions, retirement savings, other investments and part-time work. Then estimate how much you’re going to spend. The estimate may have contingencies, such as spending less by moving to a lower-cost community or spending more if you’re planning to travel, but you should have some idea of what your expenditures are going to be, at least for the next few years. Don’t forget to include an emergency fund in case of unexpected bills like a medical emergency or major home repair.
Decide What to Do Next
There’s more to retirement than your finances. Try to imagine what your retirement life is going to look like. There are major decisions to be made about what you are going to do each day. Perhaps you are planning to move to a new location, buy a beach cottage or extensively travel. Maybe you’re going to play golf, learn a foreign language, start a second career or take care of your grandchildren. When you’re retired, you have the freedom to do what you want, which means you have to identify something meaningful that will keep you active and engaged in life.
https://money.usnews.com/money/retirement/baby-boomers/articles/how-to-retire
What Every Retirement Saver Needs to Know About 2021
New rules for savers, beneficiaries and taxpayers
Most people will miss 2020 about as much as they miss mosquito season. For many retirees and retirement savers, the year had a few benefits, such as some COVID-19 relief measures. Even without those, however, most of the retirement changes in 2021 are for the better. Here’s a look at some of the most important you need to know.
Retirement savings plans
The Coronavirus Aid, Relief, and Economic Security Act, better known as the CARES Act, gave some big breaks to retirement savers. They are deader than Marley’s ghost in 2021.
- Required minimum distributions (RMDs). The CARES Act gave savers the ability to skip RMDs in 2020. An 80-year-old man who had $50,000 in his individual retirement account (IRA) at the end of 2019, for example, would have normally been required to withdraw $2,673.80 in 2020 and pay income tax on that withdrawal. He didn’t have to do that in 2020, but he will have to restart taking RMDs in 2021.
- Retirement plan withdrawals. The CARES Act also allowed people younger than 59 1/2 to take up to $100,000 from their retirement accounts in 2020 without the usual 10 percent penalty. Furthermore, it allowed people to spread out the tax on their retirement plan withdrawal over three years — and to replace that money in their accounts if they wanted to. (The withdrawals had to be COVID-related.) The early withdrawal penalty is back in 2021, and income on withdrawals will count as income for the 2021 tax year. However, the COVID-Related Tax Relief Act of 2020 (COVIDTRA) allows for the same treatment of retirement plan withdrawals made because of qualified disasters. To qualify, taxpayers must have lived in a qualified disaster area and suffered financial loss because of that disaster.
- Retirement plan loans. The CARES Act allowed savers in 401(k) plans to borrow as much as $100,000 from their accounts, up from $50,000 in 2019, and to defer payments on those loans for a year. That change has been expanded into 2021, but you must meet the qualified disaster requirements listed above.
The amount you can contribute to retirement plans won’t change in 2021. IRA investors can sock away $6,000 a year in 2021, and those 50 or older can add another $1,000, for a total annual contribution of $7,000. Investors in 401(k) plans and other similar workplace retirement plans, such as 403(b) plans, can invest $19,500 in 2021, also the same as 2020, with an additional $6,500 for those 50 and older.
Is there any good news for savers in 2021? A bit. Although the amount you can contribute to an IRA is unchanged, the income limits on deducting a traditional IRA or contributing to a Roth IRA have risen modestly.
2021 Income Limits for Deductible Contributions
Traditional IRA Accounts
Filing status: Single
- 100% deductible income limit = $66,000
- Not deductible for incomes above $76,000
- Those with incomes between upper and lower limits may make partially deductible contributions
Filing status: Married filing jointly (contributor has work retirement plan, spouse doesn’t)
- 100% deductible income limit = $105,000
- Not deductible for incomes above $125,000
- Those with incomes between upper and lower limits may make partially deductible contributions
Filing status: Married filing jointly (contributor does not have a work retirement plan, spouse does)
- 100% deductible income limit = $198,000
- Not deductible for incomes above $208,000
- Those with incomes between upper and lower limits may make partially deductible contributions
If you, (or you and your spouse if filing jointly) don’t have a retirement plan at work, 100% of your contribution to a traditional IRA is deductible regardless of income.
Roth IRA Accounts
Roth IRA contributions are not tax deductible, but withdrawals are tax free in retirement. Annual contributions are limited by income:
Filing status: Single
- Full contribution below = $125,000
- No contribution above $140,000
- Those with incomes between upper and lower limits may make partial contributions
Filing status: Married filing jointly
- Full contribution below = $198,000
- No contribution for incomes above $208,000
- Those with incomes between upper and lower limits may make partial contributions
Social Security
Most Social Security beneficiaries will get a modest cost-of-living adjustment (COLA) in 2021.
In October, the Social Security Administration (SSA) announced a 1.3 percent COLA for Social Security and Supplementary Security Income (SSI) beneficiaries starting in January 2021. The average monthly Social Security retirement payment is up $20 to $1,543 from $1,523 in 2020. The maximum monthly Social Security benefit for a worker at full retirement age has risen $137 to $3,148 from $3,011 in 2020. Full retirement age is 66 years and 2 months for people born in 1955, and gradually rises to 67 for those born in 1960 or later.
The COLA affects other parts of Social Security as well. If you are receiving benefits before full retirement age and you work, you’ll have $1 withheld from your benefits for every $2 you earn above $18,960 a year in 2021, up from $18,240 a year in 2020. Beginning at full retirement age, your benefits won’t be reduced, no matter how much you earn, and your monthly check will be adjusted to compensate for any benefits withheld previously.
Even with the COLA, however, some see slightly lower increases in their monthly checks, because Medicare premiums are usually deducted from Social Security checks. Standard monthly premiums for Part B costs $3.90 more, rising to $148.50 in 2021, up from $144.60 in 2020.
Taxes
Taxes, too, will be different in 2021. Unfortunately, “different” doesn’t mean “lower.”
- Social Security payroll taxes. Start with the taxes for Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI). The payroll tax to fund the program is set at 6.2 percent for employers and 6.2 percent for employees. The self-employed pay the whole freight: 12.4 percent. The rate won’t change in 2021. What will change, however, is the maximum amount of income to which that tax applies. In 2021, you pay OASDI tax on income up to $142,800, up from $137,700 in 2020. The rate for Medicare’s Hospital Insurance (HI) program remains at 1.45 percent for employees and 1.45 percent for employers (2.9 percent for the self-employed). It applies to all income.
- Standard deduction. The standard deduction for couples filing joint federal income taxes in 2021 will rise to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150. Are you at least 65 years old or blind? If so there’s an additional standard deduction of $1,350 apiece for married couples, up $50 from 2020. It’s $1,700 for filers who are single or heads of households. The amounts double if you are both 65 or older and blind.
- Medical expense deduction. For those who have heavy medical expenses, there’s good news: Congress made permanent a temporary reduction in the income floor for deducting medical expenses. In 2020 and following tax years, you’ll need to have medical expenses of at least 7.5 percent of adjusted gross income (AGI) to claim the deduction (vs. 10 percent in the past). If your AGI is $50,000, for example, you’ll be able to deduct the amount that’s above $3,750 from your federal income taxes. (And that’s only if your total deductions are higher than the standard deduction.)
- Federal estate tax. The basic exclusion amount on the estates of people who die in 2021 is $11.7 million. That’s up from $11.58 million for estates of people who died in 2020. It’s double for couples. Keep in mind, however, that some states impose their own estate and inheritance taxes on top of the federal estate tax.
https://www.aarp.org/retirement/planning-for-retirement/info-2021/what-every-retirement-saver-needs-to-know.html
Financial lessons learned from COVID-19
The pandemic may have hit your wallet hard. Here are some lessons we can learn from this unprecedented time.
he reverberations of the COVID-19 global pandemic have been a wake-up call for many of us as we scratch our heads over our finances: Are our wallets in disarray or have we come through this pandemic well? Are we prepared for what comes next or should we re-evaluate our outlook? Ryan Lanaus, a financial planner with TD Wealth Financial Planning, says many of us may not focus on our finances until a crisis hits.
“I’ve talked to many people over the past month, some incredibly anxious, and once I’ve talked to them about how well-balanced their portfolio is, the nervousness goes away,” he says. “I’ve found that when you put events into perspective and give them faith in the decisions they’ve made, they are relieved.”
Lanaus says now can be a good time to look at your overall financial picture and even make some changes. Here are five lessons we’ve learned during the COVID-19 pandemic that could help you gain confidence during any financial crisis
Lesson No. 1: Spread your investments out
The market drop in the wake of the COVID-19 pandemic has shown us the wisdom in diversifying our investments, Lanaus says. That means not putting all our eggs into one basket in case that basket gets upset. In recent months, some investments performed considerably worse than others. For example, travel-related companies such as airlines, for example, were struck harder than gold mining companies. Some types of investments offer different characteristics such as income or dividends, and some types are by their nature less volatile than others, such as utilities (low) vs technology shares (high). By putting a percentage of your funds into different types of investments, as you can through balanced mutual funds, for example, you minimize the chance that one economic event will harm all your investments equally. But if all you own are growth-oriented mutual funds or high-tech funds, depending on your situation, you may wish to expand your investments into different classes.
Lesson No. 2: Invest for the long term
It may not seem fair to see investments you’ve held for years lose a good chunk of their value in a couple weeks, but the short, sharp drop only emphasizes the long-term nature of successful investing. It takes time, patience — and these days — an abundance of resilience to build up a portfolio for a long-term goal. Investing is a focused business and there are few elements more important than the effect that compounding interest can have on small but regular savings over the years. To see how compound interest works and to learn how your investments could grow over time, check out this compound interest calculator. There will be setbacks, like the one we are now moving through. But we know looking at historical data, that even in the darkest days, the markets bounce back and go on to greater heights. Lanaus recalls the last recession when giant companies were falling: The world survived, and we have thrived. He points out that abandoning some investments during a downturn may temporarily ease a sense of panic, but believes many stocks will rebound. Those who sold at the bottom of the market would miss the chance to enjoy the comebacks that follow. If you had sold then, you would have had to deal with losses and not enjoyed any of the comebacks we are now experiencing.
Lesson No. 3: Check your risk tolerance
The markets may have also played a role in raising your personal anxiety, so we should also talk about how you, the investor, may be reacting. Your level of worry has to do with how much risk you can manage, both in your investing plan and as a human with your money on the line. Every investment carries some level of risk. While Guaranteed Income Certificates (GICs) carry less risk, they may not be enough to achieve the investment goal you want. On the other end of the scale, shares of junior resource companies can conceivably bring stunning returns, but are hazardous as many fail to become profitable. Most investors should have a balance of investments to mitigate risk and align to their tolerances. So, if you were comfortable with your investments during the recent market weakness, you may not need any changes to your investments. If you are still biting your finger nails, perhaps it’s time to settle on what investments make you feel comfortable through good times and bad.
Lesson No. 4: Debt can drag you down
Your personal pocketbook may have been hit hard in the past few months. For many impacted by the recent economic turmoil, living paycheque-to-paycheque may have made things worse. This is especially true if it forces you into racking up high-interest credit card debt to see yourself through. It may be shocking how easily unnecessary spending can eat into our finances. The lesson learned is to avoid getting yourself into that vulnerable position in the first place. Lanaus says that could mean it’s time to re-evaluate your budget and financial plan. One simple way to see if you are in good shape is if you are able to pay off your credit cards monthly. If not, tracking how much money is coming in and going out can be one way to get back on track. You can connect a savings plan with some sound goals, such as a retirement plan, an education plan for your kids, and even an emergency plan. If you are meeting the needs of sensible goals, you may be in good shape. If you’re not, your spending and saving habits may need work. In many cases, you can track your spending habits using a banking app, such as TD Myspend.
Lesson No. 5: Reflect on this unique time
There’s no doubt that this has been a sobering experience for Canadians and the whole world. But if you have escaped the brunt of COVID-19 and its economic consequences, you might think about non-financial lessons that are to be had. Perhaps you are spending more time with family than ever before — maybe under uncomfortably close circumstances. Hopefully we’ve all learned how to be efficient and happy while living on top of each other, how to cope with your own and each other’s stress and how to handle a world where toilet paper is a hot commodity and the hockey season just…stops and…starts up again in a bizarre new form. If you are cooking more and eating out less, you are probably saving more money (and becoming a better cook). You might want to consider making that a permanent lifestyle change along with taking a daily walk and calling your mom every few days. Everybody’s experience of this time will be unique, and everyone will have a different story to tell. With any luck, this time has reminded us what’s really vital to us.
Investing, saving, and planning activities, as well as taxation, life insurance and an estate plan, must be closely connected to one another and be directed towards your goals, such as retirement at a certain age with a certain amount of funds. We may all have dreams but if you really want to make them happen, Lanaus says, it’s time to start working out what they will cost. If you do have a retirement plan in mind, you may want to run some numbers through this retirement calculator. Without a well-rounded plan, individual tactics may actually work against you. With all the lessons you’ve learned during this time, you may want to give your finances a new start, whether by yourself or with a financial professional to help ensure you’re in good shape to make your financial plans become realities.
https://www.moneytalkgo.com/financial-lessons-learned-from-covid-19/
How the pandemic has shaken up retirement
Pandemic-related job losses forced many older Americans out of the workplace in the past year, perhaps permanently. But the COVID-19 crisis also seems to have delayed some retirements.
Remote work eliminated commutes and often allowed more flexible schedules with fewer interruptions. At the same time, the pandemic restricted many traditional retirement activities, including travel and visits with family. While some employed older workers look forward to retiring when restrictions ease, others say teleworking has made staying on the job more tenable.
Tax accountant Larry B. Harris of Asheville, North Carolina, found a lot to like about working from home, including more flexibility and less time in his car.
“I’d never worked from home except in a snowstorm. I found that I loved it,” says Harris, 67. “I think it will keep me working longer.”
Uneven recovery, uneven retirement impact
Economists talk about a K-shaped recovery, where a portion of the nation’s industries and population bounce back quickly from recession while others stagnate or continue to sink. Something similar may be happening with baby boomer retirements, as better-off workers gain more options while those with fewer choices lose ground.
The pace of retirements among baby boomers, those born from 1946 to 1964, accelerated during the pandemic, a Pew Research Center analysis of monthly labor force data found. The number of boomers who reported that they were out of the labor force due to retirement grew 3.2 million in the third quarter of 2020 compared with the previous year. Before the pandemic, the number of retired boomers had been growing an average of 2 million each year since 2011, when the first boomer turned 65.
Some people retired to avoid COVID-19 exposure, while others may have been nudged to “seize the day” by the pandemic’s reminder of our mortality. But massive job losses may have forced many into early retirement, economists and financial planners say.
A certified financial planners client, a woman in her late 50s, lost a well-paying job in the hospitality industry. Most people who lose a full-time job in their 50s never recover financially, according to research by nonprofit newsroom ProPublica and the Urban Institute, a nonprofit research organization.
“It’s difficult to find a new position of similar caliber,” says Van Zutphen of Tempe, Arizona. “She hopes to work part time at something.”
Pandemic recession hit older workers harder
Older workers lost jobs faster and returned to work slower last year than midcareer workers, according to a study by The New School’s Schwartz Center for Economic Policy Analysis that tracked unemployment from April through September last year. The study found that for the first time since 1973, workers 55 and older faced persistently higher unemployment rates than workers ages 35 to 54.
Certain older workers — women, Black people and those without college degrees — were even more likely to lose their jobs. And these workers tend to have less saved, so they are also more exposed to retirement risks such as downward mobility and poverty, the study said.
At the same time that the pandemic was pushing millions out of the workforce, lockdown orders gave millions of others a crash course in working from home. About 75% of federal government employees, for example, were working remotely in September, according to a survey conducted by the Government Business Council, a research group.
So it may not be a coincidence that far fewer federal employees retired in 2020 compared with the two previous years, according to an analysis of monthly data from the Office of Personnel Management by Federal News Network, a media outlet that covers the federal government. The analysis found that 92,008 federal employees retired in 2020, the fewest since 2010. The office processed 101,580 retirements in 2019 and 107,612 in 2018.
A small delay can have a big impact
Employees don’t always get to decide when to retire, but delaying it, when possible, can help shore up finances. Early exits from the workforce can heighten the risk of long-term financial insecurity. Retirees may not have saved enough, and they might get lower payments if they start pensions or Social Security benefits earlier than planned.
Working an extra year or two allows people to save more for retirement and take advantage of higher “catch-up” limits on 401(k)s, IRAs and health savings accounts.
Staying on the job also can help with one of the most important retirement decisions: when to start taking Social Security benefits. Applying before full retirement age, which ranges from 66 to 67, permanently reduces the checks that comprise a big chunk of most people’s retirement income.
Some people have little choice, though, because they don’t have enough other income to live on while they wait, says John Boroff, director of retirement and income solutions for Fidelity Investments.
“If you’re still working, it’s an easier decision to put off Social Security,” Boroff says.
Top 10 Retirement Tips For 2021
For many Americans, retirement may look different in 2021 than it has in years past. The severe economic impact of the Covid-19 pandemic could push many people to consider retiring early, with less saved than they may need.
Whether or not your retirement plans are looking secure, the new year is a great time to review where you stand. Regardless of your particular financial situation, the same retirement principles apply this year as always: reduce spending, plan for surprises, make conservative decisions on retirement savings and Social Security, and keep earning income if you can.
Here are 10 tips to help you tune up your retirement planning in the new year. Some might sound familiar; some will sound brand-new, thanks to Covid-19. All of them are essential—as is getting started on them as soon as possible.
1. Be Ready for Early, Unplanned Retirement
It’s a fact of life—many workers are forced to retire before they want to. According to a 2019 Employee Benefit Research Institute (EBRI) survey, nearly half of retirees left the workforce before their target retirement age. Covid-19 has accelerated this trend, says Desmond Henry, a Topeka, Kansas-based certified financial planner (CFP).
“Sometimes it’s involuntarily, due to layoffs, or older workers who are at higher risk not feeling comfortable returning to their offices and potentially exposing themselves to the virus. Unfortunately, no matter what the case, the timing is earlier than many had planned,” says Henry.
That strongly suggests that workers in their 50s and 60s should start making contingency retirement plans. With luck, a vaccine-led economic recovery in 2021 will make jobs easier to find and layoffs less common. But hope is not a plan, so even if retirement seems far off, now is a good time to start making a break-glass-in-case-of-emergency strategy for early retirement.
2. Deal with Your Debt Immediately
The best time to pay off debt is while you’re still working. If you plan to retire within the next 12 months—or even if retirement is a more remote possibility—prioritize eliminating those credit card balances, student loans and car loans, and even mortgages.
The number of 60 and 70-somethings with mortgages, credit card debt, and student loans has skyrocketed. It’s very challenging to pay down debt when you’re on a fixed income, so put in the extra overtime while you can to ease the debt burden later.
3. Prepare a Health Insurance Strategy
Americans are eligible to enroll in Medicare at age 65—there can even be penalties for failing to enroll on time. Make a plan to sign up in the months leading up to your 65th birthday, giving the coverage time to kick in.
Medicare enrollment is only the beginning of your retirement healthcare strategy. Fidelity estimates that a typical American couple will spend almost $300,000 on things like co-pays, additional premiums and other uncovered medical expenses during their retirement years. You’ll probably be paying any out-of-pocket expenses from your retirement savings, so you should factor them into your plans.
If you are forced to retire before age 65, you’ll also need to obtain health insurance on your own until Medicare kicks in. Can COBRA provide a bridge? The Affordable Care Act? Does your company provide some kind of retiree health coverage? Make a plan now, before these choices are forced upon you.
4. Maximize Your HSA Contributions
One way to pay for health insurance premiums in early retirement or other uncovered expenses later in life is with a robust nest-egg socked away in a health savings account (HSA). If you started funding an HSA this year, your contributions could grow tax free for up to two or three decades, providing a great pot of emergency cash later in life.
“Health savings accounts offer a triple and sometimes quadruple benefit,” says Liz Weston, a CFP, columnist and author of several books, including The 10 Commandments of Money. “Contributions are tax-deductible, the money grows tax-deferred from year to year and withdrawals are tax free if used for qualified medical expenses. Plus, many employers will contribute cash to the accounts as an inducement to sign up.”
HSAs are generally tied to high-deductible health insurance plans, so they aren’t for everyone. But Weston points out that they are a good option for both consumers who are very healthy, with few healthcare expenses, and for patients who often exceed their annual deductible.
5. Understand Your Retirement Income Options
You can start collecting Social Security benefits at age 62. But should you? You can start taking 401(k) distributions penalty-free at age 59 ½. Is that too early? Many people are better served putting off both for as long as possible. But by age 72, most savers have to start making required minimum distributions (RMDs).
There are some general guideposts for retirement spending, like the 4% rule, but it’s best to make a long-term plan with a financial advisor who understands the nuances of these choices, including the tax and estate planning consequences. It’s best to get started on spending plans well in advance of retirement.
A professional might suggest you spend your last working year converting some of your retirement savings into Roth accounts, for example. You may face extra taxes upon conversion, but you’ll be able to make tax-free withdrawals in the future, which could make sense for your plans.
Even with all this talk of drawing accounts down, you still need to maintain an investing strategy: Retirement can last for decades, so you need to keep investing for the future, even as you begin to spend your savings.
“I like to use a bucketing strategy with my clients, which involves planning your withdrawals with different time segments, or buckets,” says Henry .
One bucket might be for the next couple of years, which you’d accordingly invest very conservatively. “This ensures that (retirees) have a ‘war chest’ of safe money to survive a market downturn without having to sell their stocks at the lows,” Henry says. Another bucket might be intended for spending after 2030, so it can be put into riskier investments.
6. Practice Retirement Spending Now
A common guideline you’ll hear is that retirees should be prepared to replace 80% of their income in retirement. Rules of thumb can be useful, but this one is fairly random. It’s better to develop a plan around real spending needs.
Over the course of the next year, meticulously track your spending to provide yourself a realistic picture of your income requirements in the first year of retirement. Make adjustments as needed—you might not spend as much on commuting costs when you aren’t working; perhaps you’ll spend more on travel—but you’ll find this to be a good guide to what life may cost during early retirement.
On this front, there is a silver lining to the Covid-19 crisis. “One positive I’ve seen from the pandemic is that discretionary spending has decreased because people are staying at home, and the savings rate is at an all-time high,” says Henry. While this may help those behind on retirement savings catch up some, keep in mind that it may also mean spending during the coming year may not be a good metric for estimating future spending patterns.
7. Did You Take Out a Coronavirus Hardship Withdrawal?
The Coronavirus Aid, Relief and Economic Security Act (CARES) Act eased the rules for taking early withdrawals from tax-advantaged retirement accounts. People who were impacted by Covid-19 were permitted to withdraw up to $100,000 from retirement accounts like 401(k)s and IRAs. CARES waived early withdrawal penalties, but you still owed any applicable income taxes on the amount—although you had the option to spread the tax bill over three years.
Liz Weston advises you to pay the tax bill all at once, if you can.
“If you took the withdrawal because you lost your job but you’re re-employed by the time your taxes are due, you might want to go ahead and pay the whole tax bill when you file your next return. That’s because your tax bracket is likely to be lower in 2020 than afterward” due to your temporary loss of income, says Weston.
Savers also have three years to repay the money into their retirement accounts, which prevents you from owing any taxes and, even more important, allows that money to get back to work compounding your investment returns for retirement. If you are planning to retire soon, you should focus on replenishing early withdrawals.
8. Reassess Your Post-Crisis Risk Tolerance
We’ve all been through a major trauma in 2020, and that included watching our retirement savings swoon. That’ll never happen again, right? Wrong, according to Bobbi Rebell, CFP and host of the Financial Grownup podcast.
“Be really honest about whether you could—and how you would—course correct if another ‘surprise’ like a pandemic impacted your income streams,” says Rebell. “I would proceed cautiously and with a big safety net.
Desmond echoes the same concerns. “We’ve always faced uncertainty and that’s not going to change. It’s almost inevitable that a recent retiree will have to withstand multiple financial crises during their retirement, which is why it’s so important to prepare for them.”
How can retirees and those approaching retirement plan for risks like this? It’s not easy at the moment. Old-fashioned safe retirement tools like certificates of deposit (CDs) or Treasury bonds offer paltry returns, thanks to the historically low interest rates. That’s probably not going to change any time soon.
“This makes it tough for those trying to preserve wealth or generate income from their investments,” says Henry. “It’s an even bigger problem for those retirees who don’t have enough money saved for retirement and pension funds without enough capital to cover their obligations.”
He believes the low-rate environment is pushing people to take on more risk, which could lead to some “interesting asset allocation decisions” in the years ahead.
9. Consider Part-Time Work for Retirement
Whether you’re already retired or you’re making plans for retirement, now’s a good time to think about how you might earn additional income in retirement by taking a part-time job.
If you are planning to retire in the next 12 months, you should be forging relationships that might lead to occasional consulting gigs down the road or negotiating some form of part-time work wind-down.
“Are you going cold turkey or keeping some part-time work options?” asks Rebell.
Another option: Get to work figuring out how a hobby or skill might turn into extra income. The gig economy, for all its flaws, also offers retirees plenty of choices to earn a few extra dollars. Now might be the time to turn the basement into an Airbnb rental or to try out a ridesharing service.
Remember, every extra dollar you earn is a dollar that can keep gaining value in a retirement account for another 10, 20 or even 30 years.
10. Should You Postpone Retirement?
Lists of retirement tips like this one might make you gun-shy about leaving the workforce in 2021. That’s OK. Given all the economic uncertainty facing the United States and the world, it could be wise to temporarily postpone your retirement plans.
“If you haven’t saved enough for retirement, the harsh reality is you might need to consider delaying it, even if it’s for a year or two,” says Henry. “If you’ve been laid off, try finding any work, even part-time work, that can help postpone the time when you start your Social
Security benefits and begin tapping into your retirement savings.” Then you can save all the thinking you did today for 2022 or 2023, so you’ll be even more ready when the time comes.
https://www.forbes.com/advisor/retirement/top-10-retirement-tips-2021/
The How-Tos And Benefits Of A Minor Participating In 401(k)s
The 401(k) has become the go-to retirement plan for many Americans and continues to gain traction. The flexibility, tax savings and scale of 401(k) plans have made it attractive to employers and employees alike. But A 401(k) plan doesn’t need to be just for large corporations.
It can be used to help small business owners save for their future in a tax-advantaged way and allow minor children to participate. You read that correctly – even your minor children could participate in a 401(k).
How can a minor save for retirement in a 401(k)? The long answer is complex, as is the case with many things in the tax and legal world of retirement plans.
Ultimately, there is no too-young age restriction under Internal Revenue Code section 401(a), which sets the requirements for a tax-qualified plan, or under the Employee Retirement Income Security Act (ERISA) of 1974. However, other constraints like plan design, income limits and testing rules could make it impractical or impossible for a minor to participate in a 401(k).
A common misunderstanding with 401(k)s is that there’s a minimum age of 21. The minimum-participation rules state that a plan must not impose a minimum age condition beyond 21. But nothing in federal law precludes setting a plan’s minimum age at a younger age. These choices are ultimately up to the plan’s sponsor.
So what does this all mean with regard to minors? Plans don’t have to allow someone under age 21 to participate. The minimum participation rules don’t prohibit when someone can join, but rather sets a minimum requirement for when a plan must let someone participate. Federal law doesn’t set a required minimum age you must reach in order to participate in a 401(k).
However, many plans put an age condition in the plan document. An IRS interim report on 401(k)s found that 64% of reviewed plans had a minimum participation age of 21. Another 4% of plans had a minimum age of 19 or 20; 13% set the age at age 18; and roughly 20% had no minimum age requirement at all.
This means that roughly 80%of plans don’t allow minors to participate by setting a minimum age requirement at age 18 or higher. However, that leaves about 20% or roughly one out of every five plans open to allowing minors to participate.
Now, there is concern about state laws regarding minors. In most states, the age of competence is 18. I have seen some arguments that minors can’t enter into a contract to defer or participate in a 401(k). This misstates the common law about contracting under the age of majority. Upon reaching the state’s age of competence, individuals can disaffirm or get out of the contract. However, ERISA section 514(a) preempts state laws that relate to an employee benefit plan, and might supersede a state law that otherwise could allow a participant to disaffirm an election made under an ERISA-governed employee benefit plan. Or, a cautious employer and plan administrator might ask that a minor’s conservator or guardian (often, a parent as a natural guardian) approve the minor’s acts.
Usually, this isn’t a practical problem. Retirement plans lawyer Peter Gulia, the shareholder of Fiduciary Guidance Counsel, explains why. “Not many big-business employers have more than a few employees younger than 18 without excluding them through an age, service, or other condition. But many small-business employers write a plan with no minimum age, so business owners’ children not only can earn wages but also get retirement benefits,” Guila told me. “If mom’s business gives her son a paycheck, a tax-favored savings opportunity, and a matching contribution, how likely is it that a first-year college kid will disaffirm his teenage years’ 401(k) contributions? And if he did, mom could get back her matching contributions and the investment gains on them.” So, while a state’s law of contracts could still be of some concern, it need not practically preclude a minor from participating in a 401(k) plan.
There is still one more point to consider. The minor has to be employed and receive reasonable compensation for the services they provide to the employer. Some states do limit jobs a minor can have. Clerical or farming work for a child’s parent is usually acceptable.
Another strategy people employ is paying their children for modeling services and using their photographs on websites and other marketing materials. Obviously, this would still require reasonable compensation. A business owner might check with a lawyer and CPA to ensure it’s done right.
Minors wouldn’t be excluded from annual 401(k) testing requirements like contribution limits and salary-deferral limits. There are instances where adding a minor child of the plan owner could present complications for the plan, depending on how the plan is set up, its goals and who the other participants in the plan are.
For instance, a minor participant can only have a salary deferral up to $19,500 in 2021, and the total amount that goes into the participant’s account per year cannot exceed 100% of the participant’s compensation or $58,000 for anyone under age 50 in 2021. So, if a minor is earning $15,000 a year and wants to defer the whole amount, they could, but they couldn’t receive any other real matching contributions. Additionally, employers can have limits on how much they can contribute and deduct into a plan per year, typically up to 25% of compensation paid.
When would it make sense to let a minor participate in a 401(k)? For family-owned firms, it can be a smart strategy to allow their minor children who work in the business to participate in a 401(k). It could allow the minor to defer his or her salary into the 401(k) and allow the employer to also contribute to the minor’s account through a match or non-elective provision. It might also be wise to consider allowing Roth savings inside the 401(k).
The child’s tax rate could be extremely low, allowing him or her to save in an after-tax fashion with valuable long-term tax and investment benefits.
If allowing a minor to participate in a family-dominated 401(k) seems like too much complexity, effort, risk or cost, you can still allow them to work in the family business, generate earned income and fund a traditional or Roth IRA. This minor IRA strategy is much more established and pervasive in the financial planning world. In fact, many large custodians provide options for parents, grandparents, or any adult to set up an account for a minor child who has earned income. The adult can manage the account until the child reaches the required age in which the account must be turned over to the child. (Again the age varies by state.)
Getting your children into a retirement account at such an early age sets them up for long-term savings, investing, and retirement planning success.
https://www.forbes.com/sites/jamiehopkins/2021/03/15/the-how-tos-and-benefits-of-a-minor-participating-in-401ks/?sh=7cd1429d5a48
Covid-19 Is Most Certainly A Retirement Story
The Covid-19 recession, like all recessions, threatens the wealth and retirement security of millions of workers. Job loss prompts people to stop saving, raid their nest eggs or go into debt by falling behind on their rent and mortgage payments. Most workers nearing retirement had insufficient retirement savings even before the recession, and many planned to delay retirement and work longer to save more. But the Covid-19 pandemic and recession made that hopeful plan to work longer even more difficult.
Older Workers: Joblessness and Dropping Out
Even in normal times, the older workers have a harder time finding new jobs after leaving or being tossed out of work. In addition to a virus that puts older workers at much higher risks of death or disability, the “virus recession” put about 3 million jobless older workers at higher risk of never finding another job. About 7.4% of the 38 million older workers would be working today if the economy was as strong as it was in January 2020.
Older workers (ages 55 and over) were hit harder than mid-career workers (ages 35 to 54) in the initial rough phase of the pandemic recession between March and April. The nation enjoyed a partial recovery between May and August, but older workers’ labor force participation rate kept on falling since. The older labor force participation rates reached their lowest point in January 2021.
During 2020, the Covid-19 pandemic and recession forced 1.9 million older workers out of the labor force. During the same period, the labor force participation of mid-career workers declined by less than 2%. When we add the 1.1 million unemployed older workers who were unemployed in January because of Covid-19 to the 1.9 million who were out of labor force, we estimate 3 million older workers who would have been employed today if not for the Covid-19 pandemic and recession.
The recovery also seems to be much slower for older workers, if it is happening at all. The participation rate of mid-career workers (ages 35-54) slipped just 0.5 percentage points between August 2020 and January 2021 relative to the January 2020 pre-pandemic rate. During the same time, older workers’ participation rate dropped by about 3 percentage points.
What is happening to older workers makes Covid-19 a retirement story. Some of these older workers will return to the labor force in coming months and years, but older workers who return to the labor market after a prolonged absence are likely to face earnings cuts in their new jobs. Older workers who cannot return will be forced to retire early even though they are not prepared for it.
The good news for older workers is that the Social Security Administration data does not show any substantial increases in claiming Social Security benefits early. This is probably thanks to the increase in unemployment benefits and stimulus checks that helped unemployed older workers delay claiming their retirement benefits. But the recession is not over, and if we fail to continue supporting those who are affected, the situation may change for those who are experiencing long-term unemployment.
The Covid-19 Recession Will Likely Short-Change Retirement Savings
The initial March 2020 losses in the stock market have since recovered by March 1 2021, so the portfolios of those who did not withdraw their savings when asset prices were at their lowest point did not suffer from the recession. But flows into retirement accounts matter as much as rates of return.
We still do not know much about the overall impact of the Covid-19 on retirement savings because contribution rates are wobbly. Reports from Vanguard and Fidelity show that many workers who kept their jobs were able to maintain their contribution rates or even increase them.
On the other hand, a November 2020 Plan Sponsor Council of America poll of employers about how the Covid-19 crisis affected their retirement policies found that roughly 9% of employers have suspended or reduced retirement contributions for their employees, with the largest reduction (12%) among firms with fewer than 50 workers.
These cuts will still affect millions of workers. As the report notes, “if only 10 percent of the roughly 600,000 employers that currently offer workplace retirement plans suspended or reduced their contributions, the long-term impact on retirement security would be significant.” As of November, we were just a hair shy of that number.
We know even less about what happened to retirement savings of those who lost their jobs. Because of how dysfunctional our retirement system is, many low-income workers (who are hit the hardest by the recession job loss) were not even covered by a plan while working.
Almost half of these low income workers did not have any retirement savings to begin with. But exactly because they do not have any savings, unemployment means they stop paying their mortgage or rent and accumulate more debt. This additional debt will prevent them from saving for retirement when they start working again or will remain with them going into retirement and keep eating from their already small retirement income.
The drastic job loss experienced by older workers in the wake of the Covid-19 crisis reveals the risk older workers face when working longer is the policy substitute for an effective retirement security system.
Older Workers Can’t Go It Alone
One of the many warning signs of the oncoming retirement crisis is how often people are told to fix it on their own: save more, work longer. Since the recession is K-shaped, the strategy of working longer and saving more is available only to the lucky few who had substantial 401(k) savings and other assets. The rest of workers (which is not surprisingly the majority of them) can only rely on timely and effective economic policy. Without the stimulus payments and expanded unemployment benefits, the situation could be much worse right now, but the recession is not over yet.
Because Covid-19 is a retirement story, immediate policy support is still necessary for older workers who have lost their jobs, as well as systemic reforms to end retirement insecurity for generations to follow. The former includes reinstating early withdrawal penalties (and providing real support to those facing financial difficulties instead), lowering the Medicare eligibility age, increasing and extending unemployment benefits, and enforcing anti-age discrimination regulations.
Much-needed systemic reforms include expanding Social Security and creating Guaranteed Retirement Accounts that give workers access to a secure and accessible way to save for their retirement and supplement their Social Security benefits.
https://www.forbes.com/sites/teresaghilarducci/2021/03/01/covid-19-is-most-certainly-a-retirement-story/?sh=27bc901b1750
IRA Contributions Might Lower Your Taxes. What’s The Right Strategy For You?
You now have an extra month to lower your tax bill with contributions to your individual retirement account (IRA).
Just like last year, the IRS has extended the 2020 tax filing deadline to May 17, allowing Americans an extra month to make IRA contributions that can potentially ease their IOU to Uncle Sam while also helping them save for retirement.
But are these contributions the best way for you to save for retirement? And just because you can effectively go back in time to lower your tax bill, should you?
How to Reduce Your Taxable Income with IRA Contributions
First, a few IRA contribution basics. Each year you can put a total of $6,000, or $7,000 if you’re 50 or older, into your individual retirement accounts.
With a traditional IRA, you’re generally able to deduct any contributions you make from your taxable income now. Investments you purchase with this money then grow tax-free until you start making withdrawals after you turn 59 ½, when you’ll pay income taxes on everything you take out (Roth IRAs are different, but more on that in a sec).
Traditional IRA contributions can save you a decent amount of money on your taxes. If you’re in the 32% income tax bracket, for instance, a $6,000 contribution to an IRA would shave $1,920 off your tax bill. This helps you not only decrease your current tax burden but also provides a strong incentive to build your retirement nest egg.
You have until tax day, generally April 15 of the following year, to make IRA contributions (and therefore also reduce your taxable income).
Note: If you have access to other certain other types of IRAs, like a SEP IRA, you can also make last-minute contributions to these. SEP IRAs, which are designed for small businesses or the self-employed, offer contribution limits that are almost 10 times the limits of normal IRAs, and you can contribute to both a SEP IRA and a personal IRA. You can even file an extension and get until October 15, 2021 to make a 2020 SEP IRA contribution, giving you almost 10 months to lower your taxes for the prior year.
How to Get a Tax Deduction with IRA Contributions
Anyone with earned income can open a traditional IRA, contribute the max and benefit from tax-deferred investment growth. But there are strict rules about who’s eligible to reap tax deductions from contributions that can lower your income tax.
Anyone not covered by a workplace defined contribution plan, like a 401(k), can deduct all of their traditional IRA contributions from their taxes. It’s a bit more complicated if you and/or your spouse are covered by a retirement plan at work.
If you’re a single filer in this situation:
- You may fully deduct all your IRA contributions from your taxes if your modified adjusted gross income (MAGI) is $65,000 or less
- Partially deduct your IRA contributions if your MAGI is between $65,000 and $75,000
- You cannot deduct any of your IRA contributions if your MAGI is greater than $75,000
For married filing jointly households where both spouses have a 401(k):
- You may fully deduct all your IRA contributions if your MAGI is $104,000 or less
- Partially deduct your IRA contributions if your MAGI is between $104,000 and $124,000
- You cannot deduct any of your IRA contributions if your MAGI is greater than $124,000
For married filing jointly households where your spouse has a 401(k) but you don’t:
- You may fully deduct your IRA contributions if your MAGI is $196,000 or less
- Partially deduct your IRA contributions if your MAGI is between $196,000 and $206,000
- You cannot deduct IRA contributions if your MAGI is greater than $206,000
Does A Last-Minute IRA Contribution Make Sense For You?
Just because you can make one of these last-minute IRA contributions doesn’t mean you necessarily should.
If you’re a high earner eligible for a full or partial deduction, getting a contribution under the wire could make a lot of sense. Out of all the retirement tax moves at your disposal for the previous year, you might stand to benefit from this the most.
And if you’re not in one of the higher tax brackets now? You certainly can still contribute to a traditional IRA, but your deduction may not be that great. Someone in the 12% tax bracket, for instance, might only save $720. Nothing to sneeze at, sure. But you might actually get better tax advantages in the long run from what’s called a Roth IRA instead.
Roth IRAs Can Save You Big on Taxes Later
A Roth IRA is funded with dollars that have already faced Uncle Sam’s wrath. That means no upfront tax deductions (and no decreases to your taxable income now), but you never have to pay a dime on qualified withdrawals made after you turn 59 ½.
If you’re in a lower tax bracket now, then, you could save potentially upwards of double of the taxes you’d owe later if you move into a higher bracket in retirement, assuming you moved from a 10% or 12% to any of the other brackets. That’s why a Roth IRA makes a ton of sense for younger earners who are in a lower tax bracket today than they’ll see once they hang up their boots.
In fact, anyone who’s able to contribute to a Roth now may stand to benefit long term. “If you’re eligible for a Roth IRA, you’re probably better off paying taxes now,” says Wealthfront CPA Tony Molina. “We’re in a period of historically low tax rates.”
Unfortunately, not everyone can contribute to a Roth IRA. Much like the traditional IRA tax deduction limits we covered earlier, there are income cut-offs that put the Roth IRA out of reach of high earners. Single filers earning less than $125,000 in 2021 can contribute up to $6,000, or $7,000 if you’re 50 or older, while those making between $125,000 and $139,999 can save a reduced amount. If your income is over $140,000, you’re out of luck.
While Roth contributions today won’t lower your taxes today, there’s more to retirement savings strategies than saving a few bucks on your tax bill in the here-and-now.
When a Traditional IRA Makes More Sense for Low Earners
Still there may be some scenarios where it makes sense for those without the biggest incomes to use a traditional IRA.
To see if these might be right for you, start by preparing your 2020 tax return to determine your adjusted gross income. Once you have that number in hand, you can see if you’re close to qualifying for an income-based tax deduction, says Mike Piper, a St. Louis-based certified public accountant (CPA), which would make utilizing a traditional IRA more appealing to save substantially more money in the here and now.
You might even get a tax break you’ve never heard of, like the saver’s credit, which less than half of taxpayers know about but that could credit you with up to $2,000.
How would contributing to an IRA help you qualify?
Well, the amount of the credit depends on your specifics, but married couples filing jointly with an AGI between $43,001 and $66,000 receive a credit worth 10% of their contribution (up to $2,000) to a retirement account. If that couple earned even $66,001 in 2020, however, they’d get nothing.
But if they contribute $4,000 to an IRA, they could not only lower their potential income tax liability by $480, but they’d also lower their AGI enough to qualify for a $400 bonus from the saver’s credit.
Even if you can’t qualify for an additional tax break by making a last-minute contribution for 2020, running through the steps to figure out which deductions and IRAs you might take now positions you to fully take advantage of them next tax year.
https://www.forbes.com/advisor/retirement/last-minute-ira-contributions/
After One Year Of Covid-19, America’s Retirement Crisis Is Little Changed
A year has come and gone since the beginning of the Covid-19 pandemic in the United States in March 2020, upending all of our lives.
Hundreds of thousands of Americans have lost their lives, millions have lost their jobs and practically every kid (and parent) in America has endured school at home for months on end. We’ve changed how we work, how we shop and how we socialize.
But there’s one thing that hasn’t changed: retirement. Despite concerns that folks might raid their 401(k)s or companies would axe benefits en masse, most workers saved for retirement in 2020 much as they would any other year.
To be sure, there are nuances to this outlook, and surveys show that some respondents have altered their views on their retirement plan thanks to pandemic dislocations or job loss.
But the big picture remains roughly the same today as it was a year ago. About half of Americans are still caught up in a retirement crisis without end, with little access to workplace retirement plans, forgoing retirement saving to meet more pressing needs. Many still lack the wherewithal to get started in the first place.
Covid-19 and Social Security
Social Security remains the most important retirement savings vehicle for most Americans.
Half of Americans still rely on Social Security checks for half of their income—nothing about Covid-19 and massive policy responses from Washington, D.C., have changed this stubborn fact. And Social Security still delivers a lower standard of living for the beneficiaries who rely upon it most since it typically replaces only about 40% of a beneficiary’s pre-retirement income.
Social Security is a pay-as-you-go plan: Workers pay taxes that fund the benefits of people receiving checks today. But these Social Security taxes still aren’t enough to fully fund those payments—the balance comes out of the Old Age and Survivors Insurance (OASI) Trust Fund, which holds surpluses from years past.
The math nerds at the Social Security Administration use two measures to show the state of Social Security’s finances: An estimate of when the trust fund will run out of money and the overall program’s 75-year surplus/deficit ratio.
The Covid-19 crisis hasn’t impacted either measure all that much, especially compared to what happened during the Great Recession a decade ago. During the last crisis, millions were out of work for years on end. Economists expect a much faster recovery this time.
Social Security reform is a Biden administration priority that will require some combination of higher taxes and lower benefits to ensure payments don’t drop off a cliff when the trust fund is depleted.
One big driver of Social Security’s woes is that Americans are having fewer kids than they used to. Since it’s a pay-as-you-go plan, fewer kids means fewer future taxpayers, which means less revenue for Social Security.
U.S. fertility rates have been on the decline for 30 years, but they moved sharply lower after the Great Recession. A recent paper published in Frontiers of Public Health looks at past epidemics and projects fertility rates will decline in the immediate term following the current pandemic, with a recovery due at some point in the future.
Of course the U.S. could also allow more people into the country.
“There are other ways to add people, like immigration,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “If we get worried about our population, we have this option.”
Social Security’s long-term solvency is one thing; when you decide to claim benefits is another altogether. The earliest you are eligible is when you turn 62, and you must start taking checks by the time you turn 70. The longer you wait, the higher your monthly benefit, but delaying is tough for those who can’t work any longer or have insufficient retirement savings.
Before the pandemic, 62 was far and away the most popular age to claim Social Security—that trend will likely continue.
A 2021 survey from Allianz, the European insurance behemoth, found that 68% of respondents said they had retired earlier than they wanted, up from 50% the year prior. Meanwhile a recent Pew Research Center survey found the pace of retirement among Baby Boomers rose dramatically: In 2019, 1.5 million more Boomers retired than the year before. In 2020 that figure jumped to 3.2 million.
Covid-19 and Retirement Accounts
Social Security is a key part of America’s retirement tool kit, but tax-advantaged retirement accounts are equally important. As the U.S. slid into crisis one year ago, analysts were worried that Covid-19 would undercut people’s long-term savings in 401(k)s and individual retirement accounts (IRAs).
In dark economic times, companies tend to reduce benefits like employer 401(k) matching contributions. Meanwhile, workers tend to cash out their retirement accounts when they leave a job or need to pay bills. Withdrawing retirement savings means forgoing long-term gains from appreciation. It can also result in additional taxes and IRS fees.
The good news is that contrary to these worries, employers and workers left their retirement accounts alone for the most part.
According to a November 2020 survey by the Plan Sponsor Council of America, nearly 95% of employers indicated they had not changed their retirement plans. That’s a much better outcome than what went down during and after the Great Recession.
The CARES Act made it easier for people to take an emergency withdrawal of up to $100,000 from their IRA or 401(k) in 2020 if they were impacted by Covid-19. Among other changes, CARES nixed the 10% IRS penalty on certain early withdrawals and allowed you to spread the tax burden on withdrawals over three years. Pre-Covid, some employer-sponsored retirement plans let you borrow up to $50,000 from your workplace plan balance. The CARES Act doubled that limit to $100,000.
Despite these special allowances, the Plan Sponsor Council of America survey showed only a minor increase in the number of people taking withdrawals or loans.
A recent report by investment giant Vanguard puts an even finer point on the subject. Among the firm’s employment plan sponsors:
- 73% allowed their employees to dip into their retirement funds
- Of those, just 5.7% of participants took out money
- The median withdrawal was $13,300
Nevertheless, Vanguard turns up some troubling trends:
- The average withdrawal consisted of 55% of a participant’s balance
- 25% of those who made a withdrawal took out their entire balance
Plan participants who left their money alone enjoyed a banner year for stocks, with the S&P 500 total return jumping 16% in 2020.
While there was no mass exodus of people cashing out their retirement savings, those who took money out of their savings are less likely to reach their retirement goals.
According to Vanguard, the typical person making a withdrawal was a 42-year-old earning a bit more than $61,000. If we take this median withdrawal of $13,300 and age of 42, and assume a 4% inflation-adjusted rate of return for 25 years—when the average saver would reach full-retirement age—they’d miss out on about $35,000 in retirement savings.
This back-of-the-envelope calculation gets bleaker when you consider that people who were taking emergency distributions may have lost their jobs and spent months looking for work, further cutting into financial solvency.
Covid-19 and Housing
A home can be both a valuable retirement asset and a money pit. Oddly, the events of the past year may have improved both sides of the coin for homeowners.
According to the BLS, roughly four out of five seniors are homeowners. Nearly a quarter of senior homeowners are still paying off a mortgage while 55% own their home outright. A little more than a fifth of seniors rent their homes.
Home equity represents about 12% of the wealth of a median household helmed by someone between 55 and 64, according to Boston College’s latest calculations. This makes home equity the third biggest asset for the median household approaching retirement, after future Social Security claims and pensions. It’s a bigger asset than the median retirement account balance.
This means that the vicissitudes of the housing market are critical for retirement planning—and home prices usually plummet in a recession. One year ago, senior homeowners were justifiably anxious that a dramatic increase in joblessness—the unemployment rate nearly hit 15% in April 2020—would crush demand and undercut their home values.
Looking back at the Great Recession, history shows that the median home price dropped from about $240,000 before the crisis to about $214,000 in its aftermath.
A strange thing happened during Covid-19, however: Home prices surged.
- Before the pandemic, the median sales price for a home was $329,000. The most recent data from the U.S. Department of Housing and Urban Development found the average home sold for almost $347,000 at the end of 2020.
- The December 2020 S&P CoreLogic Case/Shiller 10-City Composite Home Index painted an even rosier picture, showing home prices up almost 10% year-over-year.
During the Covid-19 recession, the largest source of wealth for seniors outside of guaranteed income from Social Security or a pension rose appreciably. One reason is historically low borrowing costs: Mortgage rates were already low heading into the pandemic and only declined during the crisis.
Cheap money meant that homeowners could refinance their mortgage and lower their monthly principal and interest payments, a huge boon for seniors living on a fixed income.
“Housing is the number one expense in retirement,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. Households helmed by someone 65-years-old or older spent an average of almost $17,500 on housing, according to the 2019 Bureau of Labor Statistics Consumer Expenditure Survey, roughly 35% of their annual spending.
Older homeowners typically make up a large section of the refinancing market, according to the National Community Reinvestment Coalition: Those aged 55 and older account for almost half of refinancing demand.
These borrowers were able to take advantage of the refinancing bonanza: The Mortgage Bankers Association’s Refinance Index for the week ending January 1, 2021 increased by 100% compared to the same week in the year prior.
Covid-19 and Retirement Confidence
While the data above suggest the pandemic has not wreaked havoc on the nuts and bolts of retirement planning, you might wonder if the Covid-19 crisis has shaken overall confidence in retirement.
After all, the most dire health impacts of Covid-19 have been borne disproportionately by seniors. The CDC reports that more than four out of every five Covid-related deaths have been someone aged 65 or older.
But even here, there has been no marked decline in retirees’ confidence in their retirement prospects, nor did they become more pessimistic about what the future holds. Despite all that’s happened over the last year, the financial grit of America’s retirees—a key ingredient for financial health—held steady, especially compared to those who are still working.
The Principal Retirement Security Survey found that almost nine out of 10 retirees (86%) said they were at least somewhat confident they’d have a positive state of mind in the next few months, compared to 71% of people who were still working.
Today’s workers are tomorrow’s retirees, naturally. But here’s another bright spot: Workers have done a great job saving money during the pandemic. This is thanks in large part to federal stimulus checks and increased unemployment benefits, which disproportionately went to people lower on the economic scale.
https://www.forbes.com/advisor/retirement/retirement-after-covid-19/
Benefits of Fixed Index Annuities
See how the benefits of a fixed index annuity work together to keep retirement income planning on track. We look at six top fixed index annuity benefits: principal protection, tax deferral, growth opportunities, liquidity, guaranteed income and beneficiary payments.
In a relay race, the strength of the team outweighs the abilities of a single athlete. For each leg of the race, a runner plies their abilities to benefit the next and position them for success. By leveraging a combination of skills, the group outperforms the individual. As a result, the world record for the 4×100-meter sprint relay is more than six seconds faster than the individual 400-meter dash.
A sound retirement income plan is like a relay race: benefits working in concert help position you for success through each leg of the run up to and past the retirement finish line. As part of a comprehensive strategy, fixed index annuities offer a combination of benefits that can help build, secure and sustain retirement income.
Below, we highlight six key fixed index annuity benefits that help fund each leg of the run up to and through retirement.
1. Principal protection is a fixed index annuity benefit, helping secure long-term stability.
A fixed index annuity is an insurance product designed to ensure retirement income. Funds contributed to a fixed index annuity can never be lost due to market volatility.
This can be an especially vital benefit for many Americans who are facing their golden years with trepidation about their savings. A 2018 Index Annuity Leadership Council (IALC) study found 71 percent of today’s older workforce’s top concern in retirement is principal protection. As part of a comprehensive strategy, a fixed index annuity can go a long way in protecting those hard-earned dollars.
2. Tax deferred growth potential from a fixed index annuity is a great opportunity to help build up a revenue source.
Along with protection from index decreases, most fixed index annuities also help shield money from annual taxation on interest, as long as funds remain in the annuity. Instead, funds held in an annuity are generally taxed as ordinary income when withdrawn. This allows a nest egg to grow tax-deferred with compounding interest through the accumulation phase, further shoring up resources for when you choose to take an income.
Because a fixed index annuity offers the opportunity to earn interest on principal, on interest earned and taxes deferred, it offers a path to jump start retirement assets that may not be available with a non-tax deferred account. That can be a welcome hand up for the many Americans; according to data released by the IALC in 2017, 90 percent of Americans lack confidence in their retirement savings.
3. Growth opportunities are a key appeal for those looking for increased asset potential without risk exposure.
In addition to protection of principal, any interest credited to a fixed index annuity is also protected. As an insurance product, a fixed index annuity is not directly invested in the market. Rather, interest is credited based on the performance of an external index (e.g., S&P 500®). Contract owners typically have the flexibility to choose among a variety of index-linked crediting strategies, many of which include a cap or participation rate. Once interest is credited, it can never be decreased due to market volatility.
4. Liquidity is an important benefit of the fixed index annuity’s long-term design.
Fixed index annuities offer a variety of liquidity options to allow the owner to access funds in an annuity. Many fixed index annuities allow the owner to withdraw up to 10 percent. Many annuities also offer increased or full access to the contract value for qualified care needs.
5. Guaranteed income with a fixed index annuity provides long-term income stability.
Following the accumulation period, income payments can begin. These payments can be taken as a lump-sum, fixed installments over a specified period (e.g. 20 years) or as guaranteed payments for the rest of the annuitant’s life.
A basic fixed index annuity typically does not have any associated mortality and expense fees, management fees or administrative fees, which are typically associated with variable annuities. Fixed index annuities are typically intended to be long-term investments, so there may be fees for withdrawing more than the allotted penalty-free amount.
Many contract owners elect to add optional riders to their fixed index annuity, such as a lifetime income benefit rider. A lifetime income benefit rider provides increased payout flexibility by allowing the owner to receive lifetime income payments during the annuity’s accumulation phase. Some riders come with no fee, and others come with a small annual fee.
6. Take care of loved ones by ensuring fixed index annuity funds are paid directly to a named beneficiary.
A fixed index annuity allows contract owners the opportunity to designate a beneficiary to receive a death benefit upon the owner’s death, instead of requiring funds be paid to the owner’s estate. This helps loved ones avoid the expense and time of probate. If a contract owner dies during the accumulation or distribution phase, the annuity guarantees direct payment to the named beneficiary. Depending on the contract, these payments may be in the form of a lump-sum, series of payments, or lifetime payments.
Reliable Retirement Benefits
By design, fixed index annuities aim to protect and help grow money over time in order to deliver a stream of reliable income payments. A product with a simple and transparent design can be an integral part of a retirement income strategy. Over the next 10 years, an entire baby boomer generation will reach retirement age. For those looking for safe money options, a fixed index annuity may be the right product at the right time to help fund retirement from start to finish.
https://www.american-equity.com/resources/blog/top-fixed-index-annuity-benefits
16 Retirement Numbers You Need to Know for a Secure Future
Figuring out if you can retire securely can sometimes feel like the most complicated math problem ever. Just figuring out which retirement number to worry about can be perplexing. And then there is the further complication of knowing how they all fit together.
Here is your guide to the 16 retirement metrics that are most important.
Retirement Number 1: Your Financial Independence Number
Financial independence (FI) is achieved when you have enough savings or passive income to cover your expenses for as long as you will live.
Most FI proponents suggest that you can achieve FI when you have amassed enough savings to cover 25 times one year’s worth of living expenses. So, if you spend $100 thousand every year, then you need $2.5 million to achieve FI. (Don’t worry if you intend to live much longer than another 25 years, the calculation assumes that returns on your savings will enable you to withdraw adequate funds forever.)
This FI standard may or may not apply to you depending on who you are now and what your future holds. For example, if you have a pension or you intend to downsize your home in the future, you may need less in savings to achieve Financial Independence now.
The best way to figure out when you can declare financial independence is by creating and maintaining a detailed financial plan. Recommended by ChooseFI, JD Roth, CanIRetireYet, EarlyRetirementNow and the Retirement Manifesto, the NewRetirement Retirement Planner is the best tool for tracking FI.
Retirement Number 2: Financial Independence or FI Ratio
Your Financial Independence or FI ratio will tell you how close you are to achieving FI.
You calculate your FI ratio by dividing your net worth by your FI number. The resulting percentage will mark your progress toward FI.
So, if you need $1 million to achieve FI and your net worth is currently $500 thousand, then you are 50% of the way to FI.
NOTE: Your FI Ratio is a good way to measure your retirement readiness. Discover your FI in the NewRetirement Planner.
Retirement Number 3: Your Social Security Start Age
You probably know that the later you start Social Security, the higher your monthly benefit will be. Even so, a lot of people start getting checks as early as possible because they think they will get more money from the additional years of collecting benefits than they will from a bigger benefit later on.
Use the NewRetirement Retirement Planner to assess different Social Security start ages on your overall finances. Try out different start ages and look to see how your out of money age, lifetime debt, cash flow, estate value and lifetime taxes are impacted.
Did you know? Did you know that the lumpsum value (the amount you could get if you were to receive all of your Social Security in one lump sum today) of your Social Security is likely to be greater than the total of all of your savings?
In 2014 the average lump sum Social Security benefit was around $300,000. The maximum benefit was around $575,000 for males and around $680,000 for females. Compare these numbers to the average amount of savings held by a 66 year old — $67,000 — and you’ll appreciate just how valuable Social Security can be.
Retirement Number 4: How Long You Will Live
Another important retirement number is knowing how long you will live. Estimating your longevity will impact your decisions about how much savings you need — the longer you live, the more life you need to pay for.
Of course, no one can really predict how long they will live. However, there are some good longevity calculators that can help you make a relatively good prediction — you may just want to add 5 or 10 years to any estimate just in case!
Retirement Number 5: How Much Monthly Guaranteed Lifetime Income You Have
Guaranteed lifetime income — money that you will receive every month (no matter what) for the rest of your life (no matter how long you live) — is the real secret of financial security.
In fact, retirees who report having guaranteed income that exceeds their spending report less stress and an overall happier retirement.
Common sources of guaranteed lifetime income include: Social Security, some pensions, and lifetime annuities — add them all up to get this important retirement number.
Many retirees who have adequate savings buy a lifetime annuity to insure their retirement income. You can estimate how much income your savings could buy or how much desired income would cost with an annuity calculator. You can also model an annuity purchase in the NewRetirement Planner as part of your overall plan.
Retirement Number 6: Inflation Outlook
Inflation is an economic concept that describes the increase in prices. If inflation is rising at 3% annually, then something that costs $100 today will cost $103 a year from now, $106.09 in two years and it keeps accumulating.
Inflation can be less noticeable when you are working because your salary generally keeps pace with the increases in costs. However, inflation in retirement – when you are living off a fixed set of assets – is a whole other matter. You have a fixed amount of money that can buy less every year.
Here are some funny quotes that describe the dangers of inflation:
- “Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars when you had hair.” -Sam Ewing
- “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” -Ronald Reagan
- “Inflation is the crabgrass in your savings.” -Robert Orben
Predicting inflation is an important component of preparing for retirement. According to this chart, inflation in the United States was 2.28% in 2019. That’s much lower than the highest rate of 13.29% in 1979. The average rate of inflation in the U.S. in the 21st century is 2.4%, though since the Great Recession of 2008 the average is only 1.7%.
The NewRetirement retirement planning calculator enables you to make your own predictions about inflation and easily change them to see the impact on your finances now and well into your future. You can even put one number for general inflation, another for housing inflation and yet another for medical costs which have been rising much faster than other services. This can greatly increase the accuracy of your retirement plans.
Retirement Number 7: Rate of Return on Investments
If you have retirement savings, knowing how much that money will earn for you is important.
Ideally, you are earning a rate of return that is better than average. What is average you ask? The answer is, “it depends.”
According to Ycharts, average returns over the last few years look like this:
- For the last 5 years, the average return for the S&P 500 has been 75.15% while the average return for mutual fund investors has been 8.9%.
- Over the last 10 years, the average return for the S&P 500 has been 16.85% and 7.12% for the mutual fund investor.
- Over the last 15 years, the average return for the S&P 500 has been 11.26% and a mere 6.02% for the mutual fund investor.
As you can see, the rate of return varies greatly depending on the time period you are looking at as well as the type of investment. And, this is just a simple comparison of two investment options. However, depending on how much retirement savings you have, predicting a rate of return can be critical to your financial security.
The NewRetirement retirement planning calculator lets you enter a rate of return for each individual account — you can even put in an optimistic and a pessimistic prediction — and it is easy to change and immediately see the impact any change would have on your financial well being.
Retirement Number 8: Out of Pocket Healthcare Costs
This number is easy — if you want to go with averages and the opinions of various experts in the field.
According to Fidelity’s Retiree Health Care Cost Estimate,
a 65-year old couple retiring in 2019 can expect to spend $285,0001 in health care and medical expenses throughout retirement compared with $280,000 in 2018.
And, this does not include any money that may need to be spent on a long term care need.
However, if you want a more personalized estimate, use the NewRetirement retirement planner. You can calculate current medical costs, see what early retirement medical might cost you and get a detailed estimate of your out of pocket Medicare expenses. The system will also help you figure out how to cover long term care.
Retirement Number 9: Estimated Monthly Retirement Spending
Knowing how much you will spend is another critically important retirement number. The more you will spend, the more savings and income you will need.
There are various ways to predict your spending. Different experts have different suggestions for figuring out your spending, some say that you will spend:
- 85% of what you spent while working.
- The same as you spent while working.
- More when you first retire, then less as you grow older.
- Much less in retirement, because you dramatically cut costs to make ends meet.
The NewRetirement Planner enables you to plan for any of these spending possibilities. You can even create a detailed projected budget in over 75 different categories, varying your spending (as well as tax treatment) by year. You can even set necessary and optional spending levels.
For a very basic view of your average retirement expenses, use the simple retirement calculator.
Retirement Number 10: How Much is Your Home Worth
Many 50, 60 and 70 year olds today have put more effort into buying a home and paying their mortgage than they did on saving for retirement. As such, your home is an important source of retirement wealth.
More and more retirees are downsizing or getting a reverse mortgage as a way to use their hard earned home equity to fund retirement. You can use the NewRetirement planner to see the impact of tapping into your home’s value.
Retirement Number 11: How Much You Have Saved
This should be easy. How much do you have saved for retirement?
The trickier part is knowing how much those savings will be valued in the future. When will you make withdrawals and for how much? What kind of rate of return will you get? Will you add anything to your savings?
Retirement Number 12: Your Retirement Age
Retirement age used to be 65 for most everyone. These days we aren’t even sure exactly what “retirement” means anymore. Many more people are quitting their job only to get another career or part-time gig. Other people are phasing out of work by reducing their workload before they fully retire. And retirees are more active now than ever before.
You might be able to define your retirement age as when you stop earning income from work, but then we get into the definition of work. Many people these days have side hustles and passive income sources.
So maybe the new idea of a retirement age is the age at which you need to start really relying on withdrawals from savings to make ends meet.
Retirement Number 13: How Much Savings You Need for Retirement
This is THE retirement number — the question that everyone wants answered.
Of course, the answer to this question depends entirely on your answers to all the other questions. And the best way to get a reliable answer from this jumble is to use a good retirement calculator — one that is detailed and that can be completely personalized.
Retirement Number 14: Your Net Worth
Net worth is all of your assets (savings, home equity and more) minus all of your debts.
Net worth is considered the most accurate measure of wealth. It is a precise number that is an accurate gauge of your financial health and it can be easily tracked.
Want to know your net worth? Use the NewRetirement Planner to track your number and discover ways to improve upon where you are right now.
Retirement Number 15: Projected Estate Value
It is useful to know your net worth now, it can also be useful to know your net worth at your projected life expectancy. This is the projected value of your estate.
Knowing your projected estate value is useful for planning to minimize taxes and for making plans for your heirs.
See your projected estate in the NewRetirement Planner.
Retirement Number 16: Value of Your Emergency Funds
If 2020 has taught us anything, it is that we definitely need emergency funds.
A cash account may be the best source for a finite amount of money, but there are other ways to cover unexpected costs. Consider this guide to the best and worst sources of emergency funding.
https://www.newretirement.com/retirement/retirement-numbers/
Times Have Changed: How To Save For Retirement Today
his story is part of a series in support of America Saves Week 2021. Since 2007, this initiative has provided a call to action for U.S. consumers to save intentionally. Today’s theme is: Save to Retire.
Once you reach a certain age, nearly every dinner party you attend features a conspicuous conversation about the stock market. It’s an odd ritual, given that so few Americans own individual stocks or invest with brokerage accounts.
This may have more than a little to do with how Americans save for retirement now. Not so long ago, most workers could count on the guaranteed income of a pension—and they had virtually zero insight into how their pension plan was invested. Today, most workers have defined contribution plans like a 401(k) that require them to choose from a menu of mutual funds and do the lion’s share of the actual saving.
That turns most of us into market watchers. The more gray hairs on your head and the fewer years left on the job, the more you may find yourself fixating on the stock market and praying for good fortune when it comes time to hang up your spurs.
The obsession with markets is understandable, but it distracts retirement savers from what they should really be worrying about: outliving their money. And there’s a simple cure for that risk, except no one seems particularly interested.
Saving for Retirement Is Really Hard
You can only worry about a 401(k) balance or a pension plan if you have one to begin with. Many Americans have neither.
That’s not a new phenomenon: In 1989, 53% of workers had neither a 401(k) nor a pension, according to Boston College’s Center for Retirement Research. By 2019, this figure had ticked up a percentage point to 54%. So for the last 30 years, about half of Americans have been part of a continuing retirement crisis.
That’s not for a lack of trying. In the intervening three decades, Congress has passed a slew of laws and regulations to make it easier for people to enroll in employer-sponsored retirement plans, provide savings options for low-income Americans (i.e., the Roth IRA) and make it cheaper for small businesses to offer a retirement plan.
The result? The typical American family remains mostly dependent on Social Security for income once they stop working.
How dependent? The researchers at Boston College found that as of 2016, the average household led by someone between the ages of 55 and 64 has a total wealth of about $776,000. That may seem like a lot—until you understand that 60% of that figure (almost $470,000) is tied up in future Social Security payments. Another 17% is owned in a pension plan; just 5% is held in a 401(k) or individual retirement account (IRA). That number becomes even more concerning when you realize that Social Security typically replaces just 40% of someone’s pre-retirement income. And most people will need about 70% of their working years’ income to fund a comfortable retirement.
That’s why experts want you to start saving as soon as possible, no matter what amount you can afford to put away. The first goal is to simply get into the habit of putting money away for the future because it’s the future before you know it. And Social Security is only getting less generous. The second is to take advantage of as many compounding returns as you can: The longer your money is invested in the market—even if it’s a smaller amount—the longer it has to grow and generate increasingly larger returns. If you expect you’ll be in a retirement bind, every little bit of growth you can manage helps.
Out With the Pensions, In With Defined Contribution Plans
Half the country has either a pension or some kind of retirement plan. But there are important differences in how the lucky half of the country goes about saving.
In 1989, nearly one-third of workers had pension coverage, according to the Center for Retirement Research at Boston College’s analysis of Federal Reserve data. Thirty years later, only 12% of Americans have a pension. Meanwhile, more than a third of workers have defined contribution plans.
A pension guarantees a certain level of income for the rest of your days. Combined with Social Security and a decent amount of home equity, many Americans could enjoy a secure retirement with little planning.
“This paradigm excluded large swaths of Americans, but those with company pensions enjoyed comfortable retirements largely free of financial anxiety,” wrote Martin Neil Baily of the Brookings Institute and Benjamin Harris of the Kellogg School of Management in a recent paper.
Today, managing retirement and juggling your funds is not so simple. Regardless of the amount you have saved, you face the very serious issue of determining how much you can safely withdraw each year without depleting your funds prematurely.
You’ll need to factor in how long you may live, potential rates of return, inflation and future tax rates, among other issues. Nobody’s sending you a check each month; you have to figure it out yourself.
“That point from accumulation to decumulation is very complex, and timing it all is so difficult,” Mike Mansfield, program director at the Aegon Center for Longevity and Retirement, says.
The Stock Market Is a Distraction
Rather than divide your attention among these complex particulars, which have no easy answers, you might respond by over-indexing concern about stock market performance and volatility. After all, if the market returns are generous, you don’t have to worry so much about outliving your funds.
That said, what people believe they should be afraid of regarding retirement isn’t the same as what people should actually be afraid of, suggests research by Wenliang Hou, a former research economist at the Center for Retirement Research.
Hou’s research shows retirement savers are most concerned with market risk—that the value of their investments and home are declining. According to Hou, this is because people overestimate stock market volatility. But the biggest risk they should actually be concerned about is longevity—the risk of outliving their money. Compared to national averages, most people, Hou found, underestimate how long they will live. This can have enormous implications for retirement planning.
Remember that complicated list of considerations you need to make when withdrawing from a defined contribution plan? Life expectancy is chief among the factors that determine how much you can safely withdraw. If you underestimate how long you’ll live, you may find yourself in a situation where you’ve overspent in the early years of your retirement and are now left with just Social Security income in your later years. This phenomenon simply cannot happen with a pension plan—you’re guaranteed regular income payments for the rest of your, and sometimes even your spouse’s, life.
Make Your Own Pension With Annuities
Pension plans have largely withered away, but most workers can create their own pensions by choosing an annuity. Unfortunately, over the years, annuities have developed something of a bad reputation for high fees, overly complicated contracts and some sleazy sales tactics.
Annuities come in all shapes and sizes, and some, like a single premium immediate annuity (SPIA) or a deferred income annuity, can provide reliable, consistent monthly payments until your death, just like a pension. In fact, a qualified longevity annuity contract (QLAC) is specifically designed to help you stretch 401(k) funds into guaranteed lifetime income payments.
Despite this, most Americans aren’t buying annuities.
The U.S. retirement market had a little more than $33 trillion in assets in the third quarter of 2020, according to the Investment Company Institute. More than $20 trillion of that was in either IRAs or defined contribution plans. Government and private pensions took up about another $10 trillion. Just $2.4 trillion, or 7% of the total, was held in annuity reserves.
What’s even more concerning about this is that most of the appetite for annuities isn’t for the reliable pension-like version, but rather variable annuities, which more closely resemble a 401(k) by offering returns dependent on the stock market, according to the Brookings Institute. This introduces the potential for loss of income, just as you’d find in an investment account, which somewhat defeats the purpose of “guaranteed” income in retirement. These annuities are also more likely to charge high fees and structures confusing to the average consumer.
The Annuity Puzzle
Lack of consumer interest in annuities isn’t a new problem. Almost 60 years ago, Israeli economist Menahem Yaari coined the term “annuity puzzle,” noting that retirees would be happier using annuities, but few actually did. This annuity puzzle has now lasted well into the 21st century. This is an understandable, but unfortunate, phenomenon.
When you buy an annuity, you hand over a very large chunk of change for the promise of checks in perpetuity. Parting with so much cash immediately, giving away “your money,” is a difficult thing for some people to do.
People are also worried they’ll die before they get on the better end of the deal—annuities parcel out your payments based on an average life expectancy, and an early death could mean the annuity company makes a profit instead of you.
Depending on how your annuity contract is written, you also may forfeit your ability to pass on money to family, as in many cases the annuity company retains all unpaid funds when you die. This is unlike with a 401(k) or IRA, which is readily inheritable. There’s also the risk that you might give up better returns from a mutual fund or market investment that takes on more risk—but offers potentially greater returns—than annuity products do.
It’s easy to see why many hold these reservations. But lifetime payments are less about maximizing your gains than ensuring that you have money to spend if you live longer than you think you might. And depending on your situation, this certainty you gain may actually enable you to take on more risk in equities.
Let’s say you and your spouse have $1 million in an IRA, an amount that may or may not last as long as you do. If you bought an annuity with 40% of your portfolio, you could guarantee a monthly income of a little more than $2,000, depending on current rates. When combined with two monthly Social Security checks of about $3,750 or so, you can receive about $70,000 a year in guaranteed checks.
You’ll still have the rest of your portfolio, and you can invest the rest in equities, perhaps more aggressively than you would if you didn’t have $2,000 a month guaranteed by an annuity. In this case, then, an annuity is more like insurance that protects you against the (ironic) hazard that you’ll live longer than you imagined.
Should you be blessed with a long life, you don’t want to worry about how to pay for it.
https://www.forbes.com/advisor/retirement/retirement-planning-annuity/
6 Social Security Changes for 2021
These changes in Social Security taxes and benefits take effect Jan. 1
Every October, the Social Security Administration (SSA) announces its annual changes to the Social Security program for the coming year. Here are the Social Security changes that were announced in Oct. 2020 to take effect on Jan. 1, 2021, according to the SSA’s annual fact sheet. Keep them in mind when you update your Social Security information.
KEY TAKEAWAYS
- Social Security recipients got a 1.3% raise for 2021, compared with the 1.6% hike beneficiaries received in 2020.
- Maximum earnings subject to the Social Security tax also increased—from $137,700 a year to $142,800.
- Other changes for 2021 included an increase in how much money working Social Security recipients can earn before their benefits are reduced and a slight rise in disability benefits.
- Social Security tax rates remain the same for 2021—6.2% on employees and 12.4% on the self-employed.
- It now takes $1,470 to earn a single Social Security credit, up $60 from 2020.
1. Beneficiaries Received a 1.3% Increase
For 2021, nearly 70 million Social Security recipients are seeing a 1.3% cost-of-living adjustment (COLA) to their monthly benefits. The adjustment helps benefits keep pace with inflation and is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as calculated by the Bureau of Labor Statistics (BLS). If the CPI-W increases more than 0.1% year-over-year between the third quarter of the previous year and the third quarter of the current year, Social Security will raise benefits by the same amount.
The 1.3% bump for 2021 compares with the previous year’s (2020) 1.6% COLA. In 2019, the COLA was 2.8%, the largest increase since 2012.3 For the average Social Security recipient, the 1.3% raise amounts to just $20 per month on an average monthly payout of $1,543 vs. $1,523 in 2020.
2. Maximum Taxable Earnings Rose to $142,800
In 2020, employees were required to pay a 6.2% Social Security tax (with their employer matching that payment) on income of up to $137,700. Any earnings above that amount were not subject to the tax. In 2021, the tax rate remains the same at 6.2% (12.4% for the self-employed), but the income cap has increased to $142,800.
The flip side is that as the taxable maximum income increases, so does the maximum amount of earnings used by the SSA to calculate retirement benefits. In 2020, the maximum monthly Social Security benefit for a worker retiring at full retirement age was $3,011. In 2021, the maximum benefit increases by $137 per month to $3,148.
Social Security recipients can receive a 32% larger payment each month if they claim benefits at age 70 rather than at their regular full retirement age.
3. Full Retirement Age Continues to Rise
The absolute earliest you can start claiming Social Security retirement benefits is age 62. However, claiming before your full (or normal) retirement age will result in the payout being permanently reduced. For those who turned 62 in 2020, the full retirement age was 66 and eight months.
Under current law, retirement age for Social Security purposes is set to increase by two months each year until it hits 67. If you turn 62 in 2021, your full retirement age is 66 and 10 months. Unless the law changes, anyone born in 1960 or later will not reach full retirement age until they are 67.
If you delay collecting Social Security past your full retirement age, you can collect more than your full, or normal, payout. In fact, if you put off claiming until age 70, you will receive up to a 32% higher annual payout than if you started receiving benefits at full retirement. After age 70, there is no further incentive for delaying.
4. Earnings Limits for Recipients Were Increased
If you work while collecting Social Security benefits, all or part of your benefits may be temporarily withheld, depending on how much you earn. However, those income limits have increased slightly for 2021.
Prior to reaching full retirement age, you will be able to earn up to $18,960 in 2021. After that, $1 will be deducted from your payment for every $2 that exceeds the limit. The 2021 annual limit represents a $720 increase over the 2020 limit of $18,240.510
If you reach full retirement age in 2021, you will be able to earn $50,520, up $1,920 from the 2020 annual limit of $48,600. For every $3 you earn over the 2021 limit, your Social Security benefits will be reduced by $1, but that will only apply to money earned in the months prior to hitting full retirement age. Once you reach full retirement age, no benefits will be withheld if you continue working.
5. Social Security Disability Benefits Increased
Social Security Disability Insurance (SSDI) is an insurance program in which workers can earn coverage for benefits by paying Social Security taxes through their paycheck. The program provides income for those who can no longer work due to a disability to help replace some of their lost income. Payments increased slightly in 2020 for the nearly 10 million Americans who receive Social Security disability benefits.
Disabled workers will receive, on average, $1,277 per month in 2021, which is up from $1,261 in 2020. However, for a disabled worker, a spouse with one or more children, they’ll be paid on average $2,224 per month, which is an increase of $29 from 2020.
6. Credit Earning Threshold Goes Up
If you were born in 1929 or later, you must earn at least 40 credits (maximum of four per year) over your working life to qualify for Social Security benefits. The amount it takes to earn a single credit goes up slightly each year. For 2021, it will take $1,470 in earnings per credit, up $60 from 2020. The number of credits needed for disability depends on your age when you become disabled.
Looking Ahead to 2035
According to the most recent Social Security and Medicare Boards of Trustees annual report, both trust funds will be depleted as of 2035. If these predictions hold, beginning in 2035, beneficiaries will receive about three-quarters (75%) of their scheduled benefit until at least 2093. The report concludes by tasking lawmakers with enacting legislation to address these financial challenges “sooner rather than later.”
https://www.investopedia.com/retirement/social-security-changes/
How COVID-19 is Affecting 2021 Retirement Planning
CORONAVIRUS
Reactions to COVID-19 and the impact on consumer confidence is prompting many consumers to reassess their retirement and financial plans.
A majority of today’s workers and retirees range from feeling cautious to pessimistic about the economic outlook for 2021, according to the Principal Financial Group’s latest Retirement Security Survey, which explores consumer attitudes surrounding saving for retirement, market volatility and COVID-19. Nearly 75% of workers anticipate the pandemic is affecting their path to retirement and the same percent of retirees anticipate an impact on their accumulated retirement savings.
When asked whether they believe they have enough money saved to live comfortably in retirement years, 57% of respondents overall said they are either “very or somewhat confident,” but that number drops to 44% among workers, which is down 10 percentage points from the previous quarter.
As such, both workers and retirees plan to make changes to help improve their financial health, such as:
- spending less (35%);
- saving more (29%);
- paying down debt (25%); and
- planning to look at financial accounts more frequently (24%).
When asked which account they plan to save additional money, workers favored standard savings accounts and employer-sponsored plans:
- standard savings account (57%)
- employer-sponsored retirement plan (54%)
- standard checking account (31%)
- traditional IRA (23%)
- Roth IRA (20%)
Consumers say health and financial security are their two top priorities this year. They also cite a need for advice as they navigate their financial plans. And despite citing uncertain feelings about what 2021 may bring, 71% of workers and 87% of retirees said they’re confident they’ll remain in a positive state of mind for the next few months.
Retirement Preparedness
Principal found that the percentage of respondents who work with financial professionals jumped several percentage points compared to pre-pandemic survey findings—from 37% (Q1) to 40% (Q4) for workers, and from 45% (Q1) to 57% (Q4) for retirees.
Based on the survey results, the firm identifies several areas in which financial professionals and those in the retirement industry may be able to offer support to help individuals feel more prepared for retirement:
- Help improve their retirement picture. More than 60% of workers do not feel prepared to imagine their life in retirement, and more than half say they do not know how they will spend their time once they retire.
- Support development of a retirement savings plan. Nearly 50% of workers surveyed do not feel prepared to plan their retirement income or to make the most of their retirement. Further, only 14% of them feel very confident they will have enough money saved to live comfortably.
- Meet consumers where they are on their financial journey. Retirees and workers alike cite two common areas in which they need financial advice: investment selection (29% of workers and 30% of retirees) and how to manage retirement savings once they have retired (41% of workers and 30% of retirees). Retirees also say the topics of Medicare and Medicaid plans are a top financial advice need (30%), while workers cite needing help determining when to start receiving Social Security benefits (31%).
- Increase education about guaranteed income. Retirees using guaranteed or anticipated income sources during the COVID-19 pandemic say it has enabled them to feel their basic expenses are covered (89%) and be less concerned during bouts of market volatility (56%). While many retirees are benefiting from guaranteed lifetime income sources, Principal emphasizes that there continues to be a need to increase education and access to these solutions to help more Americans feel more secure about retirement.
Principal’s latest “pulse” survey was conducted in November 2020 among nearly 1,200 U.S. residents (35% retirees and 65% workers) who have at least one financial product or service with the firm.
https://www.napa-net.org/news-info/daily-news/how-covid-19-affecting-2021-retirement-planning
Retirement Services
FERS INFORMATION
How to Minimize Social Security Taxes
Your Social Security benefit may be taxable. Try these strategies to reduce your tax bill in retirement.
MOST WORKERS PAY INTO the Social Security program throughout their career. Many people also pay taxes on part of their Social Security payments in retirement.
Retirees with low incomes or whose only source of income is Social Security generally don’t pay income tax on their Social Security benefit. The average Social Security payment to retired workers was $1,411 in March 2018, or $16,932 for the year, which is considerably below the taxable threshold of $25,000 for an individual. However, some 40 percent of Social Security beneficiaries have to pay federal income tax on part of their benefit, according to the Social Security Administration. The income cutoffs for Social Security taxes are not adjusted for inflation each year, so more retirees will need to pay tax on their Social Security payments over time.
Here’s how to reduce or avoid taxes on your Social Security benefit:
- Stay below the taxable thresholds.
- Manage your other retirement income sources.
- Consider taking IRA withdrawals before signing up for Social Security.
- Save in a Roth IRA.
- Factor in state taxes.
- Set up Social Security tax withholding.
There are a variety of factors that determine whether your Social Security benefit will be taxed in retirement. Consider each of these strategies to minimize taxes on your Social Security payments.
Stay Below the Taxable Thresholds
Social Security benefits become taxable if the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit exceeds $25,000 as an individual and $32,000 as a married couple. If these income sources are between $25,000 and $34,000 ($32,000 and $44,000 for couples), income tax will be due on half of your Social Security benefit. Retirees with incomes that top $34,000 ($44,000 for couples) pay income tax on up to 85 percent of their Social Security benefit.
However, you will not have to pay tax on your entire Social Security benefit, regardless of your income. “Many retirees are surprised to find that they have to pay taxes on up to 85 percent of the Social Security benefits they receive,” says Dana Anspach, a certified financial planner and CEO of Sensible Money in Scottsdale, Arizona. “The good news is, no matter what, 15 percent of the Social Security benefits you receive are tax-free.”
Consider Taking IRA Withdrawals Before Signing Up for Social Security
You have some control over when to take withdrawals from retirement accounts during your 60s, because you can begin taking penalty-free distributions after age 59 1/2 (and in some cases age 55), but aren’t required to take minimum withdrawals until after age 70 1/2. You might be able to reduce your Social Security income tax bill if you withdraw money from your traditional 401(k) or IRA in the years before you sign up for Social Security. “For many retirees, changing the order they tap their savings to generate income can minimize taxes on Social Security,” says William Meyer, founder and managing principal of Social Security Solutions, a company that analyzes Social Security claiming strategies. “Many middle income retirees should consider withdrawing their IRA account first before starting Social Security. This reduces their IRA account balance by the time required minimum distributions start, and many times the amount of Social Security taxes that typically increase as retirees withdraw more IRA money at the age of 70 and beyond.”
Some retirees take a large retirement account distribution in the year before signing up for Social Security, while others take IRA distributions for several years in order to delay claiming Social Security and qualify for higher Social Security payments in the future. “Managing or controlling your income for a particular year means timing withdrawals other than required minimum distributions such that the income for the year is stacked in one year, with the following or preceding year having a lower amount of distribution income,” says Jim Blankenship, a certified financial planner and founder of Blankenship Financial Planning in New Berlin, Illinois.
After age 70 1/2, you might be able to avoid paying income tax on your IRA required minimum distribution if you donate it directly to a qualifying charity. “RMDs could be eliminated or partly eliminated from the tax return by use of qualified charitable distributions,” Blankenship says. When you donate a required distribution to charity, it is not counted as income and does not contribute to the taxation of your Social Security payments.
Save in a Roth IRA
Distributions from Roth 401(k)s and Roth IRAs after age 59 1/2 from an account at least 5 years old are not taxable and don’t contribute to the taxation of your Social Security benefits. Saving for retirement in an after-tax Roth account sets you up for tax-free withdrawals in retirement, and also allows you to minimize taxes on your Social Security payments. “Money that comes out of Roth IRA accounts does not count in the formula that determines how much of your Social Security is subject to taxation,” Anspach says. “By the time you begin Social Security, if you have more money in Roth IRAs, and less money in tax-deferred accounts, you will have more flexibility in when you draw money out of what type of account. With planning, you can draw money out in a way that reduces your tax liability over the course of your retirement years.”
Factor in State Taxes
Where you live can play a role in whether your Social Security payments will be taxed. Most states don’t tax Social Security income. However, 13 states tax Social Security income, often with exceptions for low income retirees, according to Wolters Kluwer data. The states that tax Social Security income include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.
https://money.usnews.com/money/retirement/social-security/articles/how-to-minimize-social-security-taxes
Laid Off During the Pandemic: Should You Tap Into Social Security Early?
Why you should look for other solutions first
More than 4 of 10 jobs lost during the pandemic may never come back, the Becker Friedman Institute for Economics at the University of Chicago predicts. That grim statistic means many pre-retirees may not find work again. As a result, they could be pushed into early retirement, possibly creating an unexpected cash crunch.
And that raises a key question: If you’re 62 or older, and you’re one of the 17.8 million Americans still out of work because of COVID-19, is taking Social Security early a smart option if you need to produce fresh income to pay the bills?
“Although there are a few exceptions, this is a one-time decision that will impact you and family members relying on you for the rest of your life,” says Joel Eskovitz, director of Social Security and Savings Policy at the AARP Public Policy Institute. “Every month you delay adds value to your lifetime monthly benefit, so if you have other ways to fill the gap that don’t involve huge penalties or interest rates, you should seriously entertain those options first. That said, Social Security is intended to be a safety net, and if you are in a position where you have few or no choices, claiming benefits early may be a critical lifeline to help get you through tough times.”
Look at alternatives first
If possible, you should do what you can to avoid tapping Social Security early to avoid the prospect of locking in a lower monthly benefit during retirement, financial advisors and social security experts say. But not everyone has the financial cushion to avoid doing so.
The good news? If you eventually land a new job, there are options available that may enable you to boost your monthly benefit even if you opted to start receiving payments early, Social Security experts say.
“People need to understand that the decision to start collecting Social Security benefits early doesn’t have to be an irrevocable one,” says Kurt Czarnowski, principal of Norfolk, Massachusetts-based Czarnowski Consulting. “Social Security enables them to tap into and receive a revenue stream to help them through periods of job loss,” adds Czarnowski, who worked 34 years at the Social Security Administration (SSA).
Much-needed cash
Still, there are pros and cons to tapping this government-funded income before you reach full retirement age, which is 66 or 67, depending on the year you were born.
The biggest plus of taking your benefit early is that you’ll get an immediate and regular infusion of cash, albeit a lower one, to help fill any income gaps.
When evaluating tradeoffs, you should first determine how big a financial hole your job loss has put you in, and if you can replace the lost monthly income from other sources, says Denise Nostrom, in Medford, New York. If your monthly bills total, say, $4,000, and you’re now $2,000 short, first see if you can temporarily make up the difference with unemployment benefits, or dipping into your savings or 401(k), or trimming expenses to help shrink the gap. Many people will say, “’I want to take [Social Security] as soon as I can,’ but sometimes it is not the best plan,” Nostrom says.
Like any financial decision, it’s best to analyze all your options before tapping Social Security early, says William Meyer, founder and managing principal of Social Security Solutions. “This is a scary time and people [62 or older] naturally say, ‘Hey, I’ve got Social Security, I’m going to turn it on,’” Meyer says. “Social Security is really valuable. Retirees can find a lot of additional money. [But] don’t turn on Social Security without doing a thorough evaluation of the tradeoffs.”
For example, people 55 and older who have been separated from service can tap defined contribution retirement plan, such as a 401(k), with no early withdrawal penalty. The Coronavirus Aid, Relief, and Economic Security Act (CARES) gives you three years to either pay the money back or pay the taxes, provided you withdraw the money in 2020. Although most employers don’t let you take loans from a 401(k) once you’ve left the company, the limit on loans from retirement accounts has been increased to $100,000, from $50,000, and payments on both new and existing loans can be deferred for a year. So if you were counting on two incomes to get by and you lose one, the spouse who is still employed could take a loan to help the family get by.
Still, it’s important to plan for the worst. After the Great Recession, workers 62 and up were about half as likely to become employed again compared with people between the ages of 25 and 34, according to the Urban Institute. “A career reboot isn’t as easy as it sounds,” says Alissa Quart, author of Squeezed: Why Our Families Can’t Afford America.
“We believe in these second acts and believe we can always start over again,” Quart adds. “It’s an encouraging idea, but it’s not always possible.”
What if I find work?
The major drawback of turning on the Social Security income spigot early is that you run the risk of receiving a lower monthly benefit that over time could cost you money. For example, a person who takes Social Security at 62, the earliest age possible, would see a $1,000 monthly benefit at their full retirement age of 67 reduced to $700, or 30 percent less, according to SSA. What’s more, your Social Security payout rises by 8 percent for each year past your full retirement age up until age 70 that you delay taking benefits. In 2020, the maximum benefit at age 62 is $2,265 per month, at 66 it’s $3,011, and at age 70 it swells to $3,790, according to SSA.
But you do have options if you take Social Security after getting laid off, Meyer says. Here are some scenarios and options to consider when deciding on whether to take Social Security benefits early.
No job, scant savings. If you lost your job because of the coronavirus-driven economic shutdown, and you have zero emergency funds or investments to tap, then taking Social Security early makes sense.
The reason? It’s the only financial lifeline available to you.
“If you’re someone who can’t make ends meet and have nothing saved up and no cash flow coming in and no prospects for getting a job, and taking Social Security early is your only option, you have to take it,” says Len Hayduchok, founder and president of Dedicated Financial Services, with offices in Hamilton, New Jersey, and Rehoboth Beach, Delaware. “We have to survive now; we’ll figure out what we need to do down the road. Future planning doesn’t feed your stomach.” This option is best for workers who have no other options.
You’re rehired within a year. Just because you take Social Security early may not mean you’re stuck with that decision — and smaller benefit — forever. If you apply for Social Security before your full retirement age, but you’re lucky enough to land a new job and have been receiving benefits for less than 12 months, you can ask Social Security to undo your application. This process, known as a “withdrawal,” halts payments and allows you to reapply for Social Security benefits later. The only catch is you must repay all the benefits you and your family received, according to Social Security rules.
“It’s a complete do-over,” says Czarnowski. “It’s a way to completely start from scratch. It’s as if the earlier application never occurred.” Your monthly benefit will reset at a higher amount based on your older age at the time you reapply. Workers eligible for Social Security, however, are limited to one withdrawal per lifetime. This option is a good one for workers who get a pink slip but then get a new job that provides them with a sizable enough salary to be able to repay the benefits they’ve already received.
Social Security may adjust your monthly benefit
For those who claim benefits prior to full retirement age but later find a job and earn enough money above a certain threshold, current Social Security rules may result in a higher monthly lifetime benefit. The SSA temporarily withholds Social Security benefits for annual earnings prior to full retirement age above the threshold of $18,240. Beyond that amount, a person sees $1 deducted from his monthly benefit payments for every $2 earned. An additional higher limit, at which $1 is deducted for every $3 earned, is set for a threshold of $48,600. Beginning at full retirement age, SSA increases benefits to pay back the amount withheld over a person’s life. The bottom line is that this reduction of benefits prior to full retirement age due to increased earnings will have a long-term benefit, as the benefits are recalculated and increased to account for this activity.
The bottom line?
Do your homework before deciding when to take Social Security, says Nostrom.
“Explore all [your] options,” she says. “This is a huge decision. Your retirement will last a long time. You don’t want to make mistakes now that will hurt down the line.”
https://www.aarp.org/retirement/social-security/info-2020/claiming-benefits-due-to-job-loss.html
Equity Growth and Asset Protection
The author offers an introduction to how annuities can help.
For investors, the last twenty years have been something of a roller coaster.
The dot-com bubble, 9/11, the financial crisis, and now the recession associated with the COVID-19 pandemic have roiled stock markets enough to make any investor apprehensive about the consequences of the next big crisis — whatever it is and whenever it comes.
That concern is even more acute for people near retirement, who, after a lifetime of work, want a reasonable measure of assurance that their accumulated assets will last for the remainder of their lives, and, possibly, leave an estate to pass on to their heirs or a cause close to their hearts.
How financial professionals can help clients navigate this uncertain and complex path, though, can be a challenge.
If you have already been helping clients with annuities, you know that annuities can play an important role in helping clients balance the need for asset growth with the need to protect asset value.
If you are new to the use of annuities in retirement income planning, here’s a look at strategies that can help clients protect what they have accumulated, while still helping them address the possibility that their savings will lose value to inflation or face depletion.
What to Do in the Face of Uncertainty
So, how do you help your clients think about retirement in the face of uncertainty?
No two retirement goals are the same, but most people have similar priorities: Preservation of wealth, regular income, and keeping up with inflation.
This strategy has traditionally meant a combination of high-quality fixed income, an allocation towards equities, some cash, and other assets like real estate or precious metals.
But equity markets, as we’ve seen, can be too volatile to rely on completely going forward. The other primary traditional retirement asset — fixed income — is unsatisfying for a different reason: Yields on the safest assets, like 10-year U.S. Treasury bonds, have been at historic lows for years, and there’s little reason to think that will change soon. Even high-yield or “junk” bonds are offering historically small risk-adjusted returns.
Plus, most retirees want some asset growth, whether for a better lifestyle, to save for unexpected emergencies, or leave an estate to heirs. This combination of uncertain markets and low yields means advisors need a new playbook when talking to clients.
The “Protected Equity” Strategy
The good news is there are a lot more options today than even a few years ago.
The rulebook hasn’t changed completely — you should still talk to clients about a balanced asset allocation that may include stocks, bonds, real estate and other investments — but the emphasis might need to be less on diversification for its own sake, and more on downside protection that still allows for exposure to equity growth potential.
A “protected equity” strategy in particular isn’t new but is especially relevant to our current uncertain economic climate.
A protected equity strategy aims to split the difference between risk and security, leaving just enough market exposure to participate in equity growth, but also having enough hedges in place to make sure any losses are well-cushioned, and that clients can be sure they won’t lose their invested assets even in the worst-performing markets.
A core part of protected equity is a product long ignored in retirement portfolios: insurance. This rethinking of insurance (and more specifically annuities) in retirement is, frankly, overdue, as the right insurance product can help stabilize a portfolio in the face of volatile markets while still offering room for asset growth.
Think of insurance as an asset class of its own, with a place in every portfolio. And, within insurance itself, there are several options that can play a role in a balanced and diversified portfolio, including protected equity, guaranteed income, and tax protection. I’d argue that you can’t serve the best interest of your client as we head into 2021 if you’re not talking about insurance.
There are a number of relevant insurance products to help with a “protected equity” strategy, and attractively priced annuities from insurance companies with strong balance sheets are one way to achieve one or a few client goals depending on the specific type of product.
Certain types of annuities or life insurance products can provide one or more of the following:
- Asset Appreciation Potential: Clients still have exposure to equity, either through indexes or actively managed funds.
- Downside Protection: Coverage of up to as much as 30% declines in equities.
- Guaranteed Lifetime Income: Clients can assume a basic standard of living to cover essential expenses.
- Family Protection: Family members will be guaranteed an inheritance and a measure of financial security.
Is a protected equity the right strategy for your client? The answer, of course, is “it depends.” Ask your client about what standard of living they hope to maintain, how long they need their wealth to last, and how much they may hope to leave behind. Factor in their current age, how soon they plan to retire, and their overall risk tolerance. It’s also a financial professional’s responsibility to put clients first, and no one should concentrate all investments into a single strategy.
The best financial professionals take each client scenario and develop a clear, well-thought financial plan. By changing the conversations around insurance as an asset class and seriously considering its role as a part of a retirement plan, you can help your clients live a safe, secure, and prosperous retirement.
https://www.thinkadvisor.com/2021/01/20/equity-growth-and-asset-protection/
Top 10 Retirement Tips For 2021
For many Americans, retirement may look different in 2021 than it has in years past. The severe economic impact of the Covid-19 pandemic could push many people to consider retiring early, with less saved than they may need.
Whether or not your retirement plans are looking secure, the new year is a great time to review where you stand. Regardless of your particular financial situation, the same retirement principles apply this year as always: reduce spending, plan for surprises, make conservative decisions on retirement savings and Social Security, and keep earning income if you can.
Here are 10 tips to help you tune up your retirement planning in the new year. Some might sound familiar; some will sound brand-new, thanks to Covid-19. All of them are essential—as is getting started on them as soon as possible.
1. Be Ready for Early, Unplanned Retirement
It’s a fact of life—many workers are forced to retire before they want to. According to a 2019 Employee Benefit Research Institute (EBRI) survey, nearly half of retirees left the workforce before their target retirement age. Covid-19 has accelerated this trend, says Desmond Henry.
“Sometimes it’s involuntarily, due to layoffs, or older workers who are at higher risk not feeling comfortable returning to their offices and potentially exposing themselves to the virus. Unfortunately, no matter what the case, the timing is earlier than many had planned,” says Henry.
That strongly suggests that workers in their 50s and 60s should start making contingency retirement plans. With luck, a vaccine-led economic recovery in 2021 will make jobs easier to find and layoffs less common. But hope is not a plan, so even if retirement seems far off, now is a good time to start making a break-glass-in-case-of-emergency strategy for early retirement.
2. Deal with Your Debt Immediately
The best time to pay off debt is while you’re still working. If you plan to retire within the next 12 months—or even if retirement is a more remote possibility—prioritize eliminating those credit card balances, student loans and car loans, and even mortgages.
The number of 60 and 70-somethings with mortgages, credit card debt, and student loans has skyrocketed. It’s very challenging to pay down debt when you’re on a fixed income, so put in the extra overtime while you can to ease the debt burden later.
3. Prepare a Health Insurance Strategy
Americans are eligible to enroll in Medicare at age 65—there can even be penalties for failing to enroll on time. Make a plan to sign up in the months leading up to your 65th birthday, giving the coverage time to kick in.
Medicare enrollment is only the beginning of your retirement healthcare strategy. Fidelity estimates that a typical American couple will spend almost $300,000 on things like co-pays, additional premiums and other uncovered medical expenses during their retirement years. You’ll probably be paying any out-of-pocket expenses from your retirement savings, so you should factor them into your plans.
If you are forced to retire before age 65, you’ll also need to obtain health insurance on your own until Medicare kicks in. Can COBRA provide a bridge? The Affordable Care Act? Does your company provide some kind of retiree health coverage? Make a plan now, before these choices are forced upon you.
4. Maximize Your Health Savings Account (HSA) Contributions
One way to pay for health insurance premiums in early retirement or other uncovered expenses later in life is with a robust nest-egg socked away in a health savings account. If you started funding an HSA this year, your contributions could grow tax free for up to two or three decades, providing a great pot of emergency cash later in life.
“Health savings accounts offer a triple and sometimes quadruple benefit,” says Liz Weston, a CFP, columnist and author of several books, including The 10 Commandments of Money. “Contributions are tax-deductible, the money grows tax-deferred from year to year and withdrawals are tax free if used for qualified medical expenses. Plus, many employers will contribute cash to the accounts as an inducement to sign up.”
HSAs are generally tied to high-deductible health insurance plans, so they aren’t for everyone. But Weston points out that they are a good option for both consumers who are very healthy, with few healthcare expenses, and for patients who often exceed their annual deductible.
5. Understand Your Retirement Income Options
You can start collecting Social Security benefits at age 62. But should you? You can start taking 401(k) distributions penalty-free at age 59 ½. Is that too early? Many people are better served putting off both for as long as possible. But by age 72, most savers have to start making required minimum distributions (RMDs).
There are some general guideposts for retirement spending, like the 4% rule, but it’s best to make a long-term plan with a financial advisor who understands the nuances of these choices, including the tax and estate planning consequences. It’s best to get started on spending plans well in advance of retirement.
A professional might suggest you spend your last working year converting some of your retirement savings into Roth accounts, for example. You may face extra taxes upon conversion, but you’ll be able to make tax-free withdrawals in the future, which could make sense for your plans.
Even with all this talk of drawing accounts down, you still need to maintain an investing strategy: Retirement can last for decades, so you need to keep investing for the future, even as you begin to spend your savings.
“I like to use a bucketing strategy with my clients, which involves planning your withdrawals with different time segments, or buckets,” says Henry .
One bucket might be for the next couple of years, which you’d accordingly invest very conservatively. “This ensures that (retirees) have a ‘war chest’ of safe money to survive a market downturn without having to sell their stocks at the lows,” Henry says. Another bucket might be intended for spending after 2030, so it can be put into riskier investments.
6. Practice Retirement Spending Now
A common guideline you’ll hear is that retirees should be prepared to replace 80% of their income in retirement. Rules of thumb can be useful, but this one is fairly random. It’s better to develop a plan around real spending needs.
Over the course of the next year, meticulously track your spending to provide yourself a realistic picture of your income requirements in the first year of retirement. Make adjustments as needed—you might not spend as much on commuting costs when you aren’t working; perhaps you’ll spend more on travel—but you’ll find this to be a good guide to what life may cost during early retirement.
On this front, there is a silver lining to the Covid-19 crisis. “One positive I’ve seen from the pandemic is that discretionary spending has decreased because people are staying at home, and the savings rate is at an all-time high,” says Henry. While this may help those behind on retirement savings catch up some, keep in mind that it may also mean spending during the coming year may not be a good metric for estimating future spending patterns.
7. Did You Take Out a Coronavirus Hardship Withdrawal?
The Coronavirus Aid, Relief and Economic Security Act (CARES) Act eased the rules for taking early withdrawals from tax-advantaged retirement accounts. People who were impacted by Covid-19 were permitted to withdraw up to $100,000 from retirement accounts like 401(k)s and IRAs. CARES waived early withdrawal penalties, but you still owed any applicable income taxes on the amount—although you had the option to spread the tax bill over three years.
Liz Weston advises you to pay the tax bill all at once, if you can.
“If you took the withdrawal because you lost your job but you’re re-employed by the time your taxes are due, you might want to go ahead and pay the whole tax bill when you file your next return. That’s because your tax bracket is likely to be lower in 2020 than afterward” due to your temporary loss of income, says Weston.
Savers also have three years to repay the money into their retirement accounts, which prevents you from owing any taxes and, even more important, allows that money to get back to work compounding your investment returns for retirement. If you are planning to retire soon, you should focus on replenishing early withdrawals.
8. Reassess Your Post-Crisis Risk Tolerance
We’ve all been through a major trauma in 2020, and that included watching our retirement savings swoon. That’ll never happen again, right? Wrong, according to Bobbi Rebell, CFP and host of the Financial Grownup podcast.
“Be really honest about whether you could—and how you would—course correct if another ‘surprise’ like a pandemic impacted your income streams,” says Rebell. “I would proceed cautiously and with a big safety net.
Desmond echoes the same concerns. “We’ve always faced uncertainty and that’s not going to change. It’s almost inevitable that a recent retiree will have to withstand multiple financial crises during their retirement, which is why it’s so important to prepare for them.”
How can retirees and those approaching retirement plan for risks like this? It’s not easy at the moment. Old-fashioned safe retirement tools like certificates of deposit (CDs) or Treasury bonds offer paltry returns, thanks to the historically low interest rates. That’s probably not going to change any time soon.
“This makes it tough for those trying to preserve wealth or generate income from their investments,” says Henry. “It’s an even bigger problem for those retirees who don’t have enough money saved for retirement and pension funds without enough capital to cover their obligations.”
He believes the low-rate environment is pushing people to take on more risk, which could lead to some “interesting asset allocation decisions” in the years ahead.
9. Consider Part-Time Work for Retirement
Whether you’re already retired or you’re making plans for retirement, now’s a good time to think about how you might earn additional income in retirement by taking a part-time job.
If you are planning to retire in the next 12 months, you should be forging relationships that might lead to occasional consulting gigs down the road or negotiating some form of part-time work wind-down.
“Are you going cold turkey or keeping some part-time work options?” asks Rebell.
Another option: Get to work figuring out how a hobby or skill might turn into extra income. The gig economy, for all its flaws, also offers retirees plenty of choices to earn a few extra dollars. Now might be the time to turn the basement into an Airbnb rental or to try out a ridesharing service.
Remember, every extra dollar you earn is a dollar that can keep gaining value in a retirement account for another 10, 20 or even 30 years.
10. Should You Postpone Retirement?
Lists of retirement tips like this one might make you gun-shy about leaving the workforce in 2021. That’s OK. Given all the economic uncertainty facing the United States and the world, it could be wise to temporarily postpone your retirement plans.
“If you haven’t saved enough for retirement, the harsh reality is you might need to consider delaying it, even if it’s for a year or two,” says Henry. “If you’ve been laid off, try finding any work, even part-time work, that can help postpone the time when you start your Social
Security benefits and begin tapping into your retirement savings.” Then you can save all the thinking you did today for 2022 or 2023, so you’ll be even more ready when the time comes.
https://www.forbes.com/advisor/retirement/top-10-retirement-tips-2021/
How retirement planning needs to change in the new year
Considering annuities, insurance, new investments and delaying Social Security?
With all the changes 2020 brought and a new year around the corner, it may be time to revisit traditional approaches to retirement planning. The pandemic and near-zero interest rates dramatically changed the environment, but few advisers have similarly transformed their advice. How should advisers be reworking client retirement plans in 2021?
David Blanchett:
This year has been a doozy. One item that is likely to significantly impact retirement plans is lower returns. Yields on 10-year Treasurys have dropped about 1% since year-end 2019. While yields have starting creeping back up, I think it’s unlikely we’re going to get back to the long-term average yield of around 5% soon, if ever. That forces retirees to try to do more with less. This new bond yield environment requires advisers to look for new opportunities to generate retirement income since the relative benefit of strategies changes in different market environments. For example:
1. Delaying claiming Social Security benefits. While other forms of guaranteed income have payouts that tend to move with interest rates, the more interest rates change the more Social Security retirement benefits stay the same. This means Social Security is a great “deal” today.
2. Improving portfolio returns. I’m leery of the idea of increasing returns through taking on more risk (e.g., a higher equity allocation) so it’s important to be strategic about where to seek additional return. One type of asset that has become relatively more attractive over the past few years is fixed rate annuities, also called multiyear guaranteed annuities. These products are guaranteed and are offering yields well above bond indexes with similar credit ratings that aren’t guaranteed.
3. Improving portfolio longevity. Assuming delaying Social Security isn’t an option, other approaches to improve longevity are worth considering. One example would be an annuity that offers some form of guaranteed lifetime income stream — a more traditional product like an immediate annuity, or something more modern, like a product with a Guaranteed Lifetime Withdrawal Benefit (GLWB). Annuity payout rates decline as interest rates decline, but actually become more attractive to fixed income, relatively speaking, in a low rate environment. Therefore, retirees looking to invest in something safe are going to be better off today considering annuities than investing in other safe assets, like government bonds.
Michael Finke:
Low returns can lead retirees to make two very different types of mistakes.
Those uncomfortable spending down their savings will naturally spend less because they refuse to see their nest egg get smaller. It is more expensive to create income from a balanced portfolio of stocks and bonds than it has ever been in U.S. history. It costs over $100,000 to receive $1,000 in yields from 10-year Treasury bonds and $1,000 in dividends from the S&P 500 SPX, 1.55%. Conservative investors hoping to skim income from their savings will spend less than they could safely spend, especially if they got rid of the risk of running out of money by setting aside a portfolio of their portfolio to buy an income annuity.
The other mistake is to plug historical numbers into a Monte Carlo safe retirement withdrawal rate simulator. This will result in recommended spending amounts that may have been safe when interest rates were 4% or 5%, but aren’t safe when interest rates are 1% or 2% and stock prices are twice their historical average.
Advisers especially need to consider how much income they can buy with the 50% or 60% of a retirement portfolio that’s invested in bonds. At today’s negative after-inflation rates, a retiree will run out of safe assets after about 21 years by following the 4% rule. And nearly two-thirds of healthy retirees will still be alive at that age. In a low interest rate environment, an adviser needs to look for any way to create more income from safe savings. Annuitization can provide as much as 40% more income compared with spending down bonds to the age at which a retiree has a 10% chance of outliving their savings. In fact, annuitization becomes even more valuable when interest rates on other safe investments fall.
David Lau:
With interest rates declining for the past decade, retirement duration expanding, and most Americans required to self-fund the majority of their spending, funding a secure retirement — the primary financial goal of most Americans — has never been more challenging and 2020 added an exclamation point.
The traditional investment approach to retirement has been to migrate from equities to fixed income when nearing retirement to safeguard assets and provide income. In the historically low interest rate environment we are in, that simply doesn’t work any longer without adding meaningful risk to the portfolio.
So when the risk-mitigating, income-generating portion of the portfolio can’t even keep up with inflation any longer, you need to look to other instruments to fill that requirement. Some people look to dividend stocks and other alternative investments that provide income, but these add risk for the retiree. A safe alternative to these investment approaches is to add insurance in the form of a low-cost annuity that can provide an income stream for life and take pressure off investments to generate income.
The fact is today, with interest where they are, to safely fund a 30+ year retirement requires a combination of investments and insurance.
Wade Pfau:
We can think about funding retirement in three basic ways. The baseline is using bonds — build out a bond ladder for the entirety of the potential retirement horizon. Because it is important to use a planning age that extends well beyond life expectancy to guard against outliving your assets, a bond ladder will not support much spending.
There are two ways to potentially spend more than bonds alone. In the investments world, build a diversified portfolio with the expectation of earning capital gains on riskier assets to support a higher spending rate. In the annuity world, provide lifetime income protections through risk pooling and mortality credits.
An annuity can pay out more than a bond ladder because the insurance company can pool longevity risk. This risk pooling can be competitive with the stock market. And deferred annuities with living benefits provide the potential to invest for upside while also holding downside protection through a lifetime income benefit that can outlive the contract value in the annuity. People often think lower interest rates reduce the case for using an annuity, here’s why that’s not the case: Lower interest rates will lower the spending rate on any retirement income strategy, but because the mortality credit component of annuities is not connected with interest rates, the benefits of risk pooling become relatively stronger. In other words, the cost of funding retirement with bonds will grow faster than the cost of funding retirement with annuities.
In the same manner, capital gains become relatively more important as a spending source with diversified investments, but this acts to increase the sequence of returns risk because with low rates, investors are more vulnerable to having to sell principal at a loss to fund their expenses. In this context, one should not overlook the potential role for an annuity to help fund retirement expenses.
David Lau is founder and chief executive of DPL Financial Partners; David Blanchett, Ph.D., is head of retirement research at Morningstar Investment Management, and Michael Finke, Ph.D., and Wade Pfau, Ph.D., are both professors of retirement income at American College of Financial Services.
https://www.marketwatch.com/story/how-retirement-planning-needs-to-change-in-the-new-year-2020-12-28
5 Things You Need to Know About Finances When Turning 65
It’s a pivotal age for retirement planning — even if you aren’t ready to retire yet
Gone are the days when most people retired at 65, received a gold watch, then lived off their pension and full Social Security benefits. But 65 is still an important age financially for retirees and near retirees — both in terms of what you get and what you don’t get. It’s essential to know the new rules for Social Security, health care, taxes and retirement savings for age 65 so you can make the most of your benefits and avoid costly mistakes.
1. You still haven’t reached full retirement age for Social Security
This is a big change from your parents’ retirement. For decades, 65 was the magic age for receiving full Social Security benefits. But that age started to increase for people born in 1938 and later. It’s age 66 for people born in 1943-54, and then rises by two months every year until it tops out at age 67 for people born in 1960 and later.
You can still take early benefits starting at age 62, but your payouts will be reduced for your lifetime, based on the number of months before your full retirement age. For someone born in 1955, the full retirement age is 66 and 2 months. If they sign up for Social Security at age 65 this year, they’ll be enrolling 14 months early.
“Someone taking benefits 14 months early would see their full retirement age benefit reduced by about 7.82 percent,” says Tim Steffen, advisor education consultant for PIMCO Investments. Taking benefits early can also reduce the survivor benefits your spouse could receive after you die. (You can get a estimate of your benefit at different ages with AARP’s Social Security Calculator.)
Also, if you’re still working and are younger than full retirement age, your Social Security benefits may be reduced based on your income.
2. You can sign up for Medicare
That one hasn’t changed — you can still get Medicare coverage at age 65. But the sign-up rules are tricky if you haven’t started receiving Social Security benefits yet. If you enrolled in Social Security early, you’ll automatically be enrolled in Medicare at 65. But if you haven’t signed up for Social Security, then you need to take steps to enroll in Medicare.
“If you’re not getting Social Security, you won’t get automatically enrolled — you need to be proactive,” says Joanne Giardini-Russell, owner of Giardini Medicare in Howell, Michigan, which helps people with Medicare issues and supplemental coverage.
You have a seven-month window to sign up for Medicare — the three months before your birthday, your birthday month and three months after that. You can sign up for Medicare online at the Social Security website, even if you aren’t signing up for Social Security benefits yet. (You can learn more in AARP’s Medicare Made Easy guide.)
Unless you’re working and have health insurance from your employer (or spouse’s employer), then you usually need to sign up for Medicare at age 65. Medicare Part A, which covers hospitalization, is free for most people, so they generally sign up at 65 even if they’re working (unless they want to contribute to an HSA).
But Medicare Part B, which covers doctor and outpatient services, costs $144.60 per month in 2020 (more for high earners), so some people delay signing up for Part B while they are working. But you must sign up within eight months after you leave your job and lose your employer’s coverage, or else you could have a late enrollment penalty of 10 percent of the cost of Part B for every 12 months you should have been enrolled in Medicare but were not.
Also, if you don’t have health insurance from an employer with 20 or more employees, Medicare generally becomes your primary coverage at age 65 and your other insurance becomes secondary (including retiree health benefits and COBRA coverage). If you don’t sign up for Medicare at that point, you could have expensive gaps in coverage.
3. You can use your HSA for more expenses
A health savings account (HSA) can provide a triple tax break: your contributions are tax-deductible (or pre-tax if through your employer), the money grows tax-deferred, and you can withdraw it tax-free for eligible medical expenses at any time. And when you turn age 65, you can withdraw the money tax-free for even more expenses.
You have to stop making HSA contributions when you enroll in Medicare Part A or Part B, but some people who are still working for a large employer delay signing up for Medicare so they can contribute to an HSA. To be eligible to make HSA contributions in 2020, your policy must have a medical insurance deductible of at least $1,400 if you have self-only coverage or $2,800 for family coverage.
But even after you have to stop making new HSA contributions, you can keep the money growing in the account for future expenses. You usually have to pay taxes and a 20 percent penalty if you withdraw HSA money for anything other than qualified medical expenses, but the penalty goes away at 65. At that point, you just have to pay taxes on nonmedical withdrawals. “I always preach to my clients that they can use it as a second 401(k),” says Steven Hamilton, an enrolled agent in Grayslake, Illinois.
And you have more ways to avoid the taxes. After you turn 65 you can also take tax-free HSA withdrawals to pay premiums for Medicare Part B, Part D prescription-drug coverage, and Medicare Advantage (but not Medigap) for yourself and your spouse, as long as the HSA account owner is 65 or older, says Roy Ramthun, president of HSA Consulting Services.
4. You get a bigger standard deduction and other tax breaks
Starting in the year you turn 65, you qualify for a larger standard deduction when you file your federal income-tax return. The standard deduction for 2020 is generally $12,400 for single filers, $18,650 for head of household, and $24,800 if married filing jointly. Single filers and head of household who are 65 or older qualify for an extra $1,650 standard deduction. Married couples can get an extra $1,300 for each spouse who is 65 or older ($2,600 if both spouses are 65 or older).
Low-income people 65 or older may also qualify for the Tax Credit for the Elderly or Disabled. The IRS has more tips for older taxpayers.
You may also qualify for extra state or local tax breaks at age 65. “A lot of state and local jurisdictions freeze property tax assessments for people age 65 and older,” says Hamilton. Some states may subtract a fixed dollar amount from your home’s assessed value or your property tax bill. Contact your state and county to find out if you are eligible for any breaks.
5. You can still save for retirement
If you’re still doing any work at 65 — even if it’s just part-time or freelance — you can continue to save for retirement. You can contribute to a Roth or a traditional IRA at any age, as long as you earned some income from working. You can contribute up to $7,000 to an IRA in 2020 if you’re 50 or older (or up to the amount of money you earned from working for the year, if less). If you’re working but your spouse is not, you can also contribute up to $7,000 to a spousal IRA on his or her behalf, if they are 50 years old or older.
Your later-in-life savings can still make a difference, even in your 60s or 70s. “It’s definitely still helpful to keep saving if they have the ability to,” says Patrick Carney, a certified financial planner in Lancaster, Pennsylvania. “If someone works from age 65 to 75 and contributes $7,000 each year to a retirement account that grows at 5 percent a year, by age 75 they’d have almost $100,000 saved.”
Your contributions may also make you eligible for the retirement savers’ tax credit, if your 2020 adjusted gross income is $32,500 or less if single, or $48,750 for head of household, or $65,000 if married filing jointly. The lower your income; the larger the credit. The maximum credit is $1,000 per person.
Also of Interest
- AARP retirement calculator: Are you saving enough?
- How much can you contribute to an IRA?
- How to start saving for retirement with just $50 and an IRA
https://www.aarp.org/retirement/planning-for-retirement/info-2020/5-things-to-know-at-65.html
2020 Year End Review of Recent Retirement Plan Changes
Over the last year, both before and after the current pandemic, there have been multiple law changes that have impacted retirement plans and retirement benefits. There have been many articles and constant commentary on these changes, but as we reach the end of 2020, it is a good time to review all of the changes.
On December 20, 2019, Congress signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is designed to increase access to retirement plans, encourage more people to invest in retirement plans, and account for Americans’ longevity including increased time spent actively working. The SECURE Act contains provisions that affect owners of retirement plans during their lives and potentially impacts their estate plans.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress on March 27, 2020. The CARES Act provided economic assistance for small businesses and individuals, which included provisions related to retirement accounts.
Here is an overview of some of the important provisions:
COVID-19 Specific Provisions
- Penalty Free Withdrawal in 2020: Under the CARES Act, a plan sponsor may choose to allow participants to take early withdrawals totaling up to $100,000 before December 31, 2020 without incurring the normal 10% penalty, if one of the following conditions are met:
- The plan participant or the participant’s spouse or dependent is diagnosed with COVID-19 by a CDC-approved test; or
- The plan participant “experiences adverse financial consequences” as a result of being quarantined, furloughed, laid off or having work hours reduced due to COVID-19; or
- The plan participant is unable to work due to child care issues; or
- The plan participant is a business owner and operator who has had to close or reduce business hours; or
- The plan participant has experienced other factors as determined by the Secretary of the Treasury.
These penalty free distributions may be re-contributed to the retirement plan, or to another retirement plan within three years from the date of the distribution and such re-contribution will not count towards annual contribution limits without consequence. If the distributions are not re-contributed within the three year time period, the distribution will be taxable (though not subject to penalties) and the participant may spread the income tax over a three year period.
- Increase in Potential Loan Amounts and Payback Time: If the plan sponsor chooses and if the plan document permits loans, the CARES Act allows participants to borrow the lesser of 1) 100% of his or her vested account balance, or 2) $100,000. It also allows borrowers an extra year (from 5 to 6 years) to pay back loans and no payments are due in 2020.
- Required Distributions: For 2020, Required Minimum Distributions (“RMDs”) that would otherwise be required are no longer required and do not need to be made in 2020. The waiver of RMDs applies to all defined contribution plans (i.e. 401(a) plans, 401(k) plans, 403(a) plans, 403(b) plans, etc.).
- Charitable Distributions: Although RMDs are not required to be taken in 2020, a participant may still take a qualified charitable distribution (“QCD”) up to $100,000. The QCD made directly to a charity will not be includable as taxable income.
The CARES Act increases the deductible limit of cash gifts to public charities to 100%, up from 60% for 2020.
There is also a new above-the-line deduction up to $300 for charitable deductions, which allows those taxpayers who do not itemize to gain some benefit from charitable contributions.
Additional Provisions
The SECURE Act impacts on retirement account holders extend beyond 2020. Some important provisions are as follows:
- RMDs will start at Age 72: For participants who have not yet begun taking their RMDs, they will now be able to let their retirement funds grow an extra 1.5 years before starting to take their RMD. The SECURE Act pushes back the age that triggers RMDs from 70 ½ to age 72. Unfortunately, clients who have already begun taking their RMDs, but have not yet attained age 72 must continue to take their RMDs, though not in 2020, as discussed above.
- Extended Time to Make IRA Contributions: The SECURE Act repealed the rule that prohibited taxpayers who were age 70 ½ and older from making contributions to traditional IRAs. For clients who continue to work into their 70s and older they may continue to contribute to their IRAs as long as they are working.
- Ability to Use Retirement Account for Birth or Adoption of Child Without Penalties. Following the birth or adoption of a child, a new parent or parents may now withdraw up to $5,000 each from his or her account without incurring the usual 10% penalty on early withdrawals. Additionally, parents may make this withdrawal up to one year after the birth of the child and may put the money back into the retirement fund at a later date. When adopting a child, the penalty-free withdrawal is available as long as the adoptee is under 18 years of age, a spouse’s child, or is physically or mentally incapable of self-support.
- Expansion of Annuity Information and Options. The SECURE Act now requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants. The lifetime income disclosure statements will show plan participants how much money they could get each month if their total 401(k) account balance was used to purchase an annuity. Additionally, the SECURE Act makes it easier for 401(k) plan sponsors to offer annuities and other lifetime income options to plan participants.
Considerations for Post-Mortem Planning
One of the biggest changes caused by the SECURE Act for plan holders dying after December 31, 2019 is the end of the “stretch” IRA as we know it.
Prior to the enactment of the SECURE Act, qualified beneficiaries of inherited IRAs were able to use their lifetime, rather than the deceased owner’s, lifetime as the basis for making the RMDs. The SECURE Act still allows spouses, minor children, disabled beneficiaries (within the definition of IRC §72(m)(7)), chronically ill beneficiaries (within the definition of IRC §7702B(c)(2)), and beneficiaries less than ten years younger than the plan holder to stretch the RMDs over their lifetimes.
For all other beneficiaries, such as non-minor children or a trust, the entire retirement plan must be distributed out to the beneficiary by the end of the tenth year after the plan holder’s death. It should be noted that the plan does not have to be distributed pro rata over the ten years and may instead be taken out as lump sums as the inherited beneficiary needs so long as it is entirely withdrawn within ten years. Distributions are taxed as ordinary income in any year(s) that the beneficiary withdraws from the plan.
Given these changes, there are pros and cons to naming a trust or individual(s) as a beneficiary, especially when considering income tax ramifications and family dynamics. For example, a plan holder may want to delay a beneficiary from receiving retirement plan funds for as long as possible, but if a beneficiary receives the entire retirement fund in one lump sum at the end of ten years he or she may be stuck with a hefty income tax bill or even be pushed into a higher tax bracket. On the other hand, if a retirement plan is distributed out over ten years to mitigate the income tax responsibility it may result in a beneficiary having access to funds much sooner than the plan holder anticipated or wanted.
If you have any questions about what strategy might be best for your family and tax situation, such as leaving your retirement plans to a trust, please reach out to us and make an appointment to go over your current plan.
https://www.rackemann.com/2020-year-end-review-of-recent-retirement-plan-changes/
The special retirement plan rules of 2020: What you need to know as year comes to end
The COVID-19 pandemic has upended just about everything this year, including retirement planning. Enough new rules governing Individual Retirement Accounts and workplace 401(k) plans were introduced that a year-end review is in order.
Congress enacted many of these regulations with the aim of making it easier for people to tap into their accounts, if necessary, to stay afloat financially. Some of these rules apply to 2020 only. Others will last longer. Some provisions already have expired.
Here’s a recap of four relevant planning tips and whether you might be able to take advantage of them down the road.
Easing withdrawal penalties
Background: Workers participating in 401(k)-style plans and investors in traditional Individual Retirement Accounts have long faced a deterrent to pulling out money early — a 10% penalty that applies generally on withdrawals taken prior to age 59 ½. (Roth IRA investors don’t face this penalty on money that represents contributions — it can be pulled out penalty free at any time — and earnings typically grow tax free, too.)
COVID-19 change: Congress made retirement funds more accessible by waiving the 10% penalty and by not requiring tax withholding (which normally applies) on up to $100,000 of withdrawals made in 2020. These rules apply to people meeting any of several coronavirus medical or economic hardships including diagnosis of the disease, a layoff, a reduction in work hours, a business closure or inability to work because of difficulty in finding child care.
In addition to the penalty waiver, anyone making such withdrawals may treat them as having been taken over three years, to ease the tax bite, and people have the option of rolling some or all the money back into retirement accounts to avoid any taxes due.
These liberalized withdrawal rules are available for 401(k)-style accounts if employers adopt the changes. About half of respondent companies now allow them, according to a recent survey from the Plan Sponsor Council of America. Employers that have adopted the rules report that few workers so far have pulled out money.
“Knowing that (people) could access those retirement funds in an emergency may well have tempered actual withdrawals to date, though we’re not out of those woods just yet,” noted Nevin Adams, head of research for the American Retirement Association.
2020 deadline? The 10%-waiver and accompanying rules are temporary. They can be utilized only through the unusual deadline of Dec. 30, 2020, said Ed Slott, a certified public accountant and retirement-planning specialist at IRAhelp.com.
Greater access to 401(k) loans
Background: Workplace 401(k) plans typically allow employees to borrow some of the money from their accounts. Loans typically are quick and easy to set up and often can be taken out with modest interest expenses and fees. Prior to the COVID-19 pandemic, federal rules typically limited borrowings from a 401(k) to a maximum of $50,000 or 50% of vested account balances.
COVID-19 change: Sensing that people would be pinched by the pandemic and economic fallout, Congress allowed employers, if they chose, to boost the dollar amount of loans to $100,000 (or to an employee’s vested amount, if less than that). Similarly, the CARES Act allowed loan repayments to be delayed up to one year.
As noted, employers had to have embraced the increased loan amounts, and about one-third adopted the changes, according to the Plan Sponsor Council of America survey. As with the 10% penalty waiver, you could utilize this provision if you were directly affected by COVID-19 such as having been diagnosed with the virus, losing work because of it and so on.
2020 deadline? The higher loan-amount rules were temporary and expired in September. Thus, 401(k) loans are still available, but under the lower borrowing limits as before.
Slott doesn’t see this as a big problem for most people, arguing that direct withdrawals are a better option given their expanded flexibility — namely, the ability to spread the tax bite over three years and ability to roll money back into an account. By contrast, he said, 401(k) loans, if not repaid, can trigger taxes and a 10% penalty in some cases.
“Loans are a commitment” that don’t make as much sense for people who might face heightened financial uncertainty ahead, he said.
RMDs waived, for now
Background: People owning IRAs and other tax-deductible retirement accounts (but not Roth IRAs) usually must start withdrawing money as an RMD, or required minimum distribution, upon reaching a certain age. Those who don’t comply face a 50% tax on what should have been taken out but wasn’t. For years, RMDs applied to investors after reaching age 70 ½, but recently 72 was adopted as the new starting age.
The money withdrawn is taxed as ordinary income, so people who don’t require these distributions to make ends meet often prefer to delay them as long as possible.
COVID-19 change: Congress suspended the RMD requirement for 2020. It even allowed people who made withdrawals earlier this year to put the money back into their accounts to delay the tax bite (though the deadline for doing that has since elapsed).
2020 deadline? RMDs were waived for 2020 only. But as before, account owners still may make voluntarily withdrawals from IRAs or 401(k)-style accounts.
Charity transfers still allowed
Background: Several years ago, Congress decided to allow people 70 1/2 and up to transfer up to $100,000 each year from IRAs to favored nonprofit groups. These donations can satisfy the RMD rules listed above. Donors wouldn’t receive a tax deduction on these gifts, known as Qualified Charitable Distributions, but most taxpayers no longer qualify for donation deductions anyway.
Rather, there are other tax reasons to consider making a QCD, if you can afford to do so and want to help charities.
In particular, the amount transferred doesn’t get included as adjusted gross income. That might help you avoid paying tax on some of your Social Security income, Slott said. It also might prove handy in lowering premiums for Medicare Part B or D coverage and avoiding the surtax on net investment income (for wealthier seniors). Using a Qualified Charitable Deduction “helps get money out of IRAs at zero tax cost,” Slott said.
COVID-19 change: Though they tie in with RMDs, Qualified Charitable Deductions weren’t directly affected by coronavirus-relief efforts. They still may be used by older IRA owners who want to support nonprofits.
2020 deadline? The QCD option doesn’t expire this year.
https://www.azcentral.com/story/money/business/consumers/2020/12/13/retirement-rule-changes-know-401-k-plans-and-iras-2020-ends/6488225002/
Marshmallows and Social Security
Should US retirees delay claiming Social Security until age 70, even if they have to spend savings until then? The Center for Retirement Research at Boston College proposes that strategy as a default option in retirement plans.
What do Social Security benefits and marshmallows have in common? When placed squarely in front of most people, both are hard to resist.
Almost everyone knows about the famous “marshmallow test.” In the late 1960s, Dr. Walter Mischel of Stanford put marshmallows under the noses of preschoolers and asked them to wait 15 minutes before popping them in their mouths. Some were promised a reward if they “delayed gratification.” Most kids couldn’t go the distance.
Similarly, Social Security benefits become available to most Americans at age 62, and people who retire in their early- to mid-60s tend to file for Social Security right away. Few retirees delay claiming until age 70, when the monthly benefit is as much as 76% higher than at 62.
Experts at the Center for Retirement Research (CRR) at Boston College would like to help people stop treating Social Security like a marshmallow. In a new paper, they recommend adding a default option to 401(k) plans that would make it easy for retirees who retire before age 70 to use their tax-deferred savings for living expenses so they don’t have to claim Social Security until then.
This “bridge” strategy isn’t new. But the authors of the new paper, led by CRR director and retirement thought-leader Alicia H. Munnell, offer calculations proving that, over the long run and for many mass-affluent Americans, this approach beats other common strategies, such as buying an immediate or deferred income annuity with part of one’s savings.
“[We] would introduce a default into 401(k) plans that would use 401(k) assets to pay retiring individuals ages 60-69 an amount equal to their Social Security Primary Insurance Amount (PIA) – the monthly amount at an individual’s full retirement age,” write Munnell, Gal Wettstein, and Wenliang Hou in “How Best to Annuitize Defined Contribution Assets?”
Defaulting participants receive “their PIA (the benefit at full retirement age) for as many years as their balances will permit and are assumed to claim once their balances are exhausted or at age 70, whichever is later.” In a footnote, the authors concede that underfunded retirees should ideally work longer, save more and claim later. The bridge strategy, they say, would be their best alternative to that.
The “bridge” concept has enjoyed episodes of popularity in academic and public policy circles over the past 15 years. It partly reflects the low interest-rate environment. Better to decumulate fixed income investments that are earning under 4%, the logic goes, than to forego an annual 8% rollup in Social Security benefits.
That strategy faces a couple of potential headwinds in the financial services world, however. In a kind of corollary to Gresham’s Law (which dictates that “bad money drives out good”), most new retirees are inclined to spend the “government’s money” first and conserve their own liquid savings for later. Fee-based planners aren’t likely to recommend that strategy; the spend-down from a retirement account would lower the advisers’ own asset-based income.
The CRR’s bridge policy doesn’t harmonize with the bottom-line interests of annuity issuers and distributors either. The strategy relies on using savings to maximize Social Security benefits, not to buy commercially available income annuities. There’s a reason for that: buying “extra” Social Security benefits is much cheaper.
The bridge concept, in essence, would prevent early retirees from unwisely locking in a lifetime of minimal Social Security benefits. “Providing a temporary stream of income to replace an individual’s Social Security benefit would break the link between retiring and claiming,” the paper said. “As a result, retirees could delay claiming Social Security in order to maximize this valuable source of annuity income.”
“As with any default,” the paper said, “the worker would retain the ability to opt out in favor of a lump-sum or other withdrawal, including leaving the funds in the plan. Even if the payments had started, workers would still be entitled to change their mind and change the size of the distribution, or switch to a lump sum for their remaining 401(k) balances, rolling the lump sum to an IRA as a tax-free transaction.”
The CRR team ran an analysis comparing the bridge strategy with other strategies, which are listed below.
- Applying 20% or 40% of tax-deferred savings to the purchase of an immediate income annuity beginning at age 65.
- Applying 20% or 40% of tax-deferred savings to an income bridge between age 65 and 70.
- Applying 20% of tax-deferred savings to the purchase of a deferred income annuity with income starting at age 85, and either spending down the remaining 80% between ages 65 and 85, or spending only required minimum distributions from age 70½ to age 85.
For single men, single women, and couples with tax-deferred wealth at the 75th percentile level ($106,000, $110,000 and $275,000, respectively) and assumed Social Security benefits of $15,348, $14,514, and $28,569 (respectively), the income bridge was the least expensive way to finance retirement over the long-term.
The optimum strategy for a specific man or woman would of course vary, depending on factors such as total household wealth, expenses, and “shocks” (financial or health-related) during retirement. The authors didn’t even try to calculate the optimal strategy for couples because too many variables were involved.
There’s a lot besides the “bridge” proposal in this comprehensive 40-page paper. The authors venture an explanation for the long-standing “annuity puzzle” (i.e., low immediate income annuity sales). They also offer useful updates on existing private sector solutions to the challenge of turning 401(k) savings into lifetime income.
For instance, the paper describes United Technologies Corp.’s (UTC) novel solution, TIAA’s 403(b) group annuity approach, and the solution marketed by Prudential, Great-West and Transamerica to 401(k) plans, which involves attaching an optional guaranteed lifetime withdrawal rider (GLWB) to a plan participant’s target date fund.
The UTC defined contribution plan design, which replaced a defined benefit pension plan, resembles a GLWB rider but with three life insurance companies offering the option instead of one. The three companies bid against each other once a year to offer the highest annual lifetime floor income to each participant in the program, based on the participant’s contributions in the prior year.
About third of UTC’s participants have opted for what is called the Lifetime Income Strategy (LIS), but they’ve transferred less than 10% of their assets into the program. “At the end of July 2019, the company’s defined contribution plan had over 140,000 participants and $28.5 billion in assets. The LIS, which was introduced as the default for new hires in 2012, had about 45,000 participants and $1.9 billion in assets,” the paper said.
The paper includes a number of interesting factoids, such as:
- During retirement, support from spouses and other relatives has significant financial value. “Marriage provides 46% of the protection offered by a fair annuity for a 55-year-old individual,” the paper said. “Adding risk sharing between parents and children, the risk-sharing potential within families is substantial.”
- People with annuities live, on average, about 3.5 years longer than the rest of the population.
- Commercial annuities cost about 15% to 20% more than they would if the issuers added no administration or marketing costs, and calculated the benefits solely on the bases of life expectancy tables, premium size and discount rates.
https://retirementincomejournal.com/article/of-marshmallows-and-social-security/
Benefits of Fixed Indexed Annuities
Fixed indexed annuities (FIAs) address many basic retirement concerns: protection of hard-earned dollars, tax-deferred growth, balance, and lifetime income.
Get some peace of mind — no matter what happens in the market. Consider these five key benefits:
Guaranteed Income Stream
With Americans living longer and spending more time in retirement, many retirees are concerned about outliving their savings. In turn, they are searching for a product that can help ensure a steady income stream. Fixed indexed annuities (FIAs) are designed with guaranteed lifetime income so you can never outlive your earnings.
Diversification of Portfolio
A balanced portfolio is essential for managing risk and reward in the financial markets. Designed for the long term, fixed indexed annuities (FIAs) are a great retirement vehicle to ensure you are not putting all your eggs in one basket. FIAs offer the ability to make some money, without the risk of losing it.
Principal is Secure
Even with market volatility, investors will not lose value on their fixed indexed annuities (FIAs). Your savings aren’t exposed to market fluctuations, so even in a negative market return, interest credited will never fall below zero. You can never lose your interest once it’s credited to your principal.
Predictable Earnings
Because fixed indexed annuities (FIAs) offer predictable income, Americans feel more comfortable when withdrawing funds from these retirement vehicles, as opposed to an IRA or 401(k). Choosing an FIA is an efficient way to plan for your future, as your interest earnings rate always remains somewhere between the interest rate floor and the cap. In turn, no matter what happens in the market, you can count on payments throughout your golden years.
Tax-Deferred Growth
Fixed indexed annuities (FIAs) offer long-term tax-deferred savings. As long as your money stays in the annuity, you will not be taxed on interest earnings. Once you receive a payout, the annuity is taxed as ordinary income.
https://fiainsights.org/benefits-of-a-fia/
9 Signs You Are Not Financially OK to Retire
And one other reason to keep working
Being ready to retire means more than being ready to stop waking up at 6:00 a.m. to put in long hours at a job you’re not thrilled about. If it were that simple, most of us would retire at 25. What it really takes to retire is a solid grasp of your budget, a carefully considered investment and spending plan for your life savings, debt that’s under control, and a plan you’re excited about for how you’ll spend your days. With that in mind, here are 10 signs you might not be ready to retire yet.
KEY TAKEAWAYS
- Your financial situation should be stable before you decide to retire.
- A detailed projection of your retirement income and expenses is key.
- Understand how taxes, inflation, and healthcare will affect your nest egg.
- If you’re still happily working, don’t let an arbitrary age determine when to retire.
1. Struggling to Pay Current Bills
It goes without saying that if you’re struggling to pay your bills with a paycheck from work, retiring won’t make things easier.
Power-of-Attorney Abuse Can Drain Your Retirement Savings. Choose One Wisely.
Durable power of attorney is one of the most important and useful documents you will ever sign. It is also one of the most dangerous if it falls into the wrong hands.
Your will controls what happens to your money after your death. But the power of attorney can determine what happens to it while you’re still alive. If abused, there may not be any money for anyone to inherit.
“It really is essential that the person giving the power of attorney understand how powerful the document is,” says Vincent Casiano, a San Diego estate lawyer.
Legally, a person with power of attorney has a fiduciary duty to serve the best interests of the person on whose behalf he or she is acting. But the reality is that nobody polices how most power-of-attorney agreements are used. While the vast majority are used correctly, estate lawyers say that unscrupulous people have used the designation to pay personal expenses, move real estate into their name, or loot the assets of the person they’re representing.
Kerry Peck, a Chicago lawyer who specializes in litigating estate and trust cases, says his firm handles a half dozen or so power-of-attorney abuse cases a year. Some involve caregivers who enter into relationships with ailing clients.
Peck handled a case some years ago where a well-to-do man in his 70s began going to physical therapy after suffering a stroke. He soon became involved with the therapist, a woman in her 40s, and gave her power of attorney. The therapist used the man’s money to go on a spending spree, including buying a car and making a down payment on a vacation home. In all, she took close to half a million, Peck said.
His firm was alerted by relatives and it eventually got the man placed in a court-monitored guardianship to safeguard his assets. Peck said lawyers were able to recover only a part of what the therapist had taken from the man.
“When you pick your agent under power or attorney, you need to pick someone who loves you more than they love your money,” Peck said.
Power-of-attorney agreements for various purposes have existed for centuries, but the durable power of attorney is a relatively recent development. Previously, if you gave power of attorney to someone to represent you in financial dealings, the agreement became invalid as soon as you were incapacitated.
Your financial affairs would then be handled by court-monitored guardianships, which are still used today in cases where there is no power-of-attorney agreement. But guardianships are cumbersome, expensive and can take many weeks to set up. In the 1950s, states began permitting a durable power of attorney that would persist even after a person was incapacitated.
Lawyers say the durable power of attorney is an improvement from the delays of a court-monitored guardianship. But with greater ease can come greater abuses—even from trusted loved ones.
Ken Russell, an estate lawyer from Huntington Valley, Pa., was involved in a case years ago in which an 87-year-old woman who had recently inherited nearly $1.8 million in assets gave power of attorney to her daughter. Sixteen months later, the mother had little more than $100,000 remaining in her account, Russell said.
The lawyer went to court on behalf of the mother to demand the daughter account for her power-of-attorney transactions. The accounting showed that the daughter had transferred hundreds of thousands of dollars to herself, Russell said.
The mother and daughter reached a settlement in which the daughter transferred back almost $800,000, Russell said. The rest of the money was gone, and the mother didn’t want to pursue further legal action against her daughter, he said.
Because of the experience, Russell now drafts power-of-attorney agreements mandating quarterly or yearly accountings to other siblings or heirs. People with power of attorney tend to be more careful if they know they are being watched, he said.
There are other safeguards that lawyers use to limit power-of-attorney agreements. Andrew Hook, a Virginia Beach, Va., estate lawyer sometimes drafts power of attorney agreements with two agents, so each can keep an eye on the other.
For other clients, he drafts springing power-of-attorney agreements, which aren’t effective until the client is certified as incapacitated. Many estate lawyers dislike springing powers of attorney because they’re more cumbersome, but Hook says some clients want “a speed bump.”
When it comes to his own affairs, Hook has a power-of-attorney agreement without limits for his wife.
“I’ve been married since 1978,” he says. “My power of attorney is effective immediately. If my wife was going to run off with the assets, she would have done this a long time ago.”
Power-of-attorney disputes frequently occur as siblings quarrel over control of their parents and their finances. Deborah Tedford, a Mystic, Conn., estate lawyer handled a case where a brother and sister shared power of attorney for their father, who was in his 90s and had an estate over $1 million.
Then their younger brother moved in and persuaded the father to switch power of attorney to him without his siblings’ knowledge, Tedford says. The younger brother soon became the joint owner of his father’s bank accounts, effectively disinheriting his older siblings, Tedford says.
Eventually the brother moved the father out of state, and his two siblings don’t know where their father is living now or even if he is still alive.
https://www.barrons.com/articles/power-of-attorney-abuse-can-drain-your-retirement-savings-choose-one-wisely-51605445201?refsec=retirement
