Social Security Is Just One Slice of Retirement, Not the Whole Pie

Social Security was never designed as a public retirement plan. It doesn’t provide total income replacement for retirement. Those who expect it to do more than fill in the gaps, are often surprised by this, says Fox Business in the news segment “3 Social Security Realities You Need to Face.” Here are three solid facts that everyone needs to know about what Social Security can and cannot do for retirement income.

Social Security will not cover your cost of living in retirement. Many people actually neglect saving for retirement, thinking they can simply rely on Social Security for expenses when they retire. Social Security replaces less than half of the average earner’s pre-retirement income. Most seniors need about 80% of their pre-retirement income to enjoy a comfortable lifestyle.

Don’t believe it? The average Social Security check is $1,461 a month. That’s $17,532 a year. Could you live on that? Even by cutting back on all discretionary spending, that’s not likely to be anywhere near enough for most middle-class Americans. Even a small amount of money set aside during working years will add up over time. What is the best time to start saving, no matter how old you are? Now.

A Social Security reduction is entirely possible. If Social Security doesn’t have enough payroll taxes to draw from, it’s possible that everyone on Social Security will face across-the-board reduction in benefits in the coming years. There are trust funds available to bridge the gap, but those funds are expected to run dry in 2035. Unless and until Congress acts, there might be as much as a 20% reduction in benefits for everyone.

Therefore, if Social Security replaces about 40% of your pre-retirement income and there’s a 20% reduction, you’ll need even more in your nest egg to pay for your retirement.

Claiming benefits earlier than expected happens often. Social Security benefits are based on the 35 highest earning years, but the amount is calculated based on when benefits are first taken. File for benefits at full retirement age (FRA), and you’ll get the full monthly benefit based on your earnings history. If you file for benefits earlier, benefits are reduced for every month they are claimed before FRA.

Some people are impatient to get their benefits and file early, because they want to. However, many end up filing earlier because they have no choice, knowing that they are getting less every month.

Seniors often stop working in their early 60s, and not always by choice. They may have health issues, be laid off or work in a field that is no longer viable. A new job or a part time job may not pay as much as their previous job.

There’s nothing wrong with factoring in Social Security benefits as part of your retirement cash flow. However, it shouldn’t be the only source of income. Setting aside $200 a month over a 30-year period will give you a $227,000 nest egg, if investments generate a 7% annual return. The ideal is to have a long savings period and to save consistently.

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Reference: Fox Business (June 12, 2019) “3 Social Security Realities You Need to Face.”

Retirement-Age Workers Crack the 20% Mark

At some point last century, single income families vanished.  It now seems the idea of Americans being able to retire after age 65 may be headed in the same direction. For the first time in 57 years, the participation rate in the work world of people of retirement age has gone to more than 20%, says Crain’s New York Business in the article “America’s elderly are twice as likely to work now than in 1985.”

As of February 2019, the ranks of people who are 65 and older who are retirement age and either employed or seeking employment has doubled from a low of 10% in 1985. The biggest group of older workers? Those who have a college degree. The share of employees age 65 and older with at least an undergraduate degree is now at 53%, up from 25% in 1985.

The dramatic increase has pushed the demographics inflation-adjusted income to an average of $78,000, which is 63% higher than what older workers earned in 1985. By comparison, American workers below age 65 saw their average income increase only by 38% over the same period.

A study by United Income, which drew on data from the Census Bureau and the Bureau of Labor Statistics, shows a mismatch between older workers who need the money the most and those who are college educated and still working.

The wealthier, college-educated workers who are in better health are working, but the less-educated workers are more in need of the income.

The Bureau of Labor Statistics expects the aging baby boomers to continue to represent the strongest growth in the labor force participation through 2024. At that point, they’ll be between 60–78. Many will likely continue to work, even after starting to receive Social Security benefits.

The outlook for retirement for all Americans is not great. Most people will need at least 80% of their pre-retirement income to maintain their lifestyles, when they stop working. Social Security only covers about 40-50%. The typical worker on the bottom half of the income distribution has no retirement savings and is completely dependent upon Social Security.

People in the middle range have a median of $60,000 saved, so they are not really prepared for retirement either.

The top 10% of earners have a median amount of $200,000 saved. While this number does not include real estate or other tangible assets (and it does not include any potential inheritances), they aren’t fully ready either.

With most experts recommending people have at least $1-2 million saved to retire comfortably, it’s no wonder that most Americans will be working well into their so-called “golden years.”

Reference: Crain’s New York Business (April 22, 2019) “America’s elderly are twice as likely to work now than in 1985”

Could You Lose Your Social Security Benefits to Creditors?

What if you are retired and the only income you have is your Social Security benefit? “Can Creditors Come After Your Social Security Benefits” is the question posed by Yahoo! Finance. While for the most part, you don’t have to worry about creditors coming after your Social Security benefits, there are others who can get them, if you haven’t paid certain debts.

Personal loan payments, credit card payments, or medical bills are usually not able to take your Social Security benefits. But there are some exceptions you’ll need to know about:

  • The IRS will not blink at taking up to 15% of your benefits, if your taxes are not paid.
  • If you owe on student loans, the loan companies can come after your Social Security benefits, even if the debt is decades old.
  • The same is true if you are behind on either child support or alimony payments.

As long as your outstanding debt is not tax-related, the first $750 of your benefits is protected from being garnished. However, if you’re behind on child support or alimony, you could lose more than 50% of those benefits.

There are steps to take if debt is an issue. First, if you owe money to the IRS, contact the local IRS office to work out a payment plan. They will almost always work with people to reach an agreement on an installment payment agreement. This will avoid having your benefits garnished.

If you’re behind on student loan payments, reach out to the lender and work out an arrangement. If you can prove that your financial situation is dire, you might be able to come up with a deferred payment plan or change the repayment schedule.

If things are really bad, consider filing for bankruptcy. If you do, realize that not all your debt will be dischargeable. For the most part, the same debts that can cause Social Security benefits to be garnished, like overdue taxes and student loans, are not forgivable by a bankruptcy. If those are your key issues, bankruptcy is not your best option.

This might be a situation where a bankruptcy attorney or a debt settlement firm is needed. Be very cautious about working with a debt settlement firm, to be sure that they are credible and trustworthy. The firm or the attorney will be able to help negotiate the debts. Remember that the ultimate goal of any creditor is to get paid, and sometimes getting paid half of the amount is better than not being paid at all.

Your best bet is to approach this problem and tackle it before you file for Social Security. If your sole source of retirement income is compromised, you want to contact the local county Office for Aging services to find out what kind of help is available in your community. Don’t leave this hanging and hope that it will be resolved by itself.

Reference: Yahoo! Finance (April 27, 2019) “Can Creditors Come After Your Social Security Benefits”

What is Congress Doing for Seniors?

House Majority Leader Steny Hoyer, a Democrat from Maryland, informed the House Democratic Caucus in an April 25th “Dear Colleague” letter that he intends to bring H.R. 1994,the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, to the House floor in May.

Think Advisor’s recent article, “SECURE Act to Get House Vote in May,” explains that the SECURE Act passed the House Ways and Means Committee on April 2. There’s been action on the companion bill—the Retirement Enhancement and Savings Act (RESA) of 2019. That legislation has yet to be scheduled by the Senate Finance Committee.

In discussing the actions taken during the first 100 days of the 116th Congress, Representative Hoyer said that the House will soon take up H.R. 9, the Climate Action Now Act, “to affirm the principles of the Paris Climate Agreement, in spite of President Trump’s pledge to withdraw the United States.”

Hoyer signaled that a vote on the SECURE Act would follow “over the coming work period,” and noted that with the flood insurance program set to expire at the end of May, “I expect the House to take action to address that as well.”

Hoyer said in the next few weeks, “as committees continue to markup legislation, the House will also take up legislation to strengthen the Affordable Care Act and to address rising prescription drug costs.”

Another possibility for consideration in May by the full House is Financial Services Committee Chairwoman Maxine Waters’ Consumers First Act, H.R. 1500. That bill passed out of that committee on March 28. Waters’ bill is aimed at reversing the damage done to the Consumer Financial Protection Bureau, under former acting director Mick Mulvaney.

The Senior Security Act of 2019 would require the SEC to create a Senior Investor Taskforce. That bill could be up for a House vote very soon. The House docket also has a resolution on Supporting the Protection of Elders Through Financial Literacy.

The bill includes a provision requiring law enforcement and regulatory agencies to work together to understand and detect elder frauds and scams.

Reference: Think Advisor (April 29, 2019) “SECURE Act to Get House Vote in May”

What’s The New Top Retirement Destination?

Watch out, Florida, and step aside Arizona. CNBC’s recent article, “Retirees are flocking to these 3 states — and fleeing these 3 states in droves” says that New Mexico is the new top retirement destination.

Those were the results of a survey by United Van Lines of nearly 27,000 of its customers who moved last year, through Nov. 30, 2018. Among those who moved to New Mexico, 42% said they did so because of retirement, making the state a top destination. Good old Florida was second, with 38% of people moving there citing “retirement” as a reason. Then, Arizona followed in third.

On the flip side, retirement is also a main reason why people fled New Jersey, with a third of households citing that as a reason for leaving the Garden State. Maine and Connecticut were the next states people are moving away from for retirement.

There are a number of reasons why people near retirement might want to relocate. One of the biggest is the need to stretch their savings and their Social Security checks. A top reason for leaving California is more favorable income tax rates in other states.

Another consideration is how your destination state treats retirement income. These states tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah and Vermont.

In addition, there are other taxes to consider. For example, New Jersey has an effective property tax rate of 2.13%, which is the highest in the country. It also has a top individual income tax rate of 10.75%, which is applied to income exceeding $5 million.

Affordability is an important factor when deciding where to live in retirement. However, there are also other considerations. This includes whether you want to be close to nearby family and friends.

Before you pack up the moving van, take an extended visit in your potential retirement location. Get to know what your destination is like, before you settle down.

In addition, take a hard look at your finances to be sure your move is financially sensible, and ask your estate planning attorney to review your estate plans.

Reference: CNBC (April 17, 2019) “Retirees are flocking to these 3 states — and fleeing these 3 states in droves”

What is a Transfer on Death (TOD) Account?

Most married couples share a bank account from which either spouse can write checks and add or withdraw funds without approval from the other. When one spouse dies, the other owns the account. The dead spouse’s will can’t change that.

This account is wholly owned by both spouses while they’re both alive. As a result, a creditor of one spouse could make a claim against the entire account, without any approval or say from the other spouse. Either spouse could also withdraw all the money in the account and not tell the other. This basic joint account offers a right of survivorship, but joint account holders can designate who gets the funds, after the second person dies.

Kiplinger’s recent article, “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning,” explains that the answer is transfer on death (TOD) accounts (also known as Totten trusts, in-trust-for accounts, and payable-on-death accounts).

In some states, this type of account can allow a TOD beneficiary to receive an auto, house, or even investment accounts. However, retirement accounts, like IRAs, Roth IRAs, and employer plans, aren’t eligible. They’re controlled by federal laws that have specific rules for designated beneficiaries.

After a decedent’s death, taking control of the account is a simple process. What is typically required, is to provide the death certificate and a picture ID to the account custodian. Because TOD accounts are still part of the decedent’s estate (although not the probate estate that the will establishes), they may be subject to income, estate, and/or inheritance tax. TOD accounts are also not out of reach for the decedent’s creditors or other relatives.

Account custodians (such as financial institutions) are often cautious, because they may face liability if they pay to the wrong person or don’t offer an opportunity for the government, creditors, or the probate court to claim account funds. Some states allow the beneficiary to take over that responsibility, by signing an affidavit. The bank will then release the funds, and the liability shifts to the beneficiary.

If you’re a TOD account owner, you should update your account beneficiaries and make certain that you coordinate your last will and testament and TOD agreements, according to your intentions. If you fail to do so, you could unintentionally add more beneficiaries to your will and not update your TOD account. This would accidentally disinherit those beneficiaries from full shares in the estate, creating probate issues.

TOD joint account owners should also consider that the surviving co-owner has full authority to change the account beneficiaries. This means that individuals whom the decedent owner may have intended to benefit from the TOD account (and who were purposefully left out of the Last Will) could be excluded.

If the decedent’s will doesn’t rely on TOD account planning, and the account lacks a beneficiary, state law will govern the distribution of the estate, including that TOD account. In many states, intestacy laws provide for spouses and distant relatives and exclude any other unrelated parties. This means that the TOD account owner’s desire to give the account funds to specific beneficiaries or their descendants would be thwarted.

Ask an experienced estate planning attorney, if a TOD account is suitable to your needs and make sure that it coordinates with your overall estate plan.

Reference: Kiplinger (March 18, 2019) “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning”

Are You Behind in Your Retirement Saving?

Can you believe that almost half (48%) of American households over the age of 55 still have no retirement savings? Even so, it’s better than previous years, according to the U.S. Government Accountability Office.

CNBC’s article, “These people are on the verge of retiring—and they have nothing saved,” says that the congressional watchdog group based its conclusions on an analysis of the Federal Reserve’s Survey of Consumer Finances.

In 2013, roughly 52% of households over age 55 had zero saved for retirement. While the over-55 crowd may have a big savings shortfall to make up, there are steps they can take. Let’s look at what they need to do.

Catch up on contributions to retirement plans: Workers can defer up to $19,000 in a 401(k) plan at work. Those employees who are over 50, can save an extra $6,000. Older savers can also sock away more money in an IRA, since the contribution limit for IRAs is $6,000 in 2019. people who are 50 and up, can save an additional $1,000.

Increase the funds in your health savings account: If you’re still working and have a high-deductible health plan at work, you most likely have access to a health savings account or HSA. HSA’s have a triple tax advantage: (i) you contribute money on a pretax or tax-deductible basis; (ii) your savings will accumulate tax-free; and (iii) you can take tax-free withdrawals to pay for qualified medical expenses. In 2019, participants with self-only health insurance can contribute $3,500. Those with family plans can save $7,000. Account holders age 55 and older can save an extra $1,000 in an HSA.

However, remember that when you’re enrolled in Medicare, you can no longer contribute to your HSA. However, you can use those funds to cover health-care costs in retirement.

Work a little longer and generate income: You could earn money from a part-time job to increase your income and ramp up your retirement savings.

If you get a raise, throw most of it into your savings account. If you get a raise to your pay at work, save two-thirds of it. Increase your 401(k) deferrals, so that you’re saving more of that pay increase.

Living on less than you make, is something that many people don’t learn until late in life—but as long as you are working, you can save.

Reference: CNBC (April 5, 2019) “These people are on the verge of retiring —and they have nothing saved”

How Big or Small Will Your Retirement Paycheck Be?

You’ve spent years saving for retirement, and maybe you’ve gotten that down to a science. That’s called the “accumulation” side of retirement. However, what happens when you actually, finally, retire? That’s known as the “deaccumulation” phase, when you start taking withdrawals from the accounts which you so carefully managed all these years. However, says CNBC, here’s what comes next: “You probably don’t know how much your retirement paycheck will be. New technology is working to change that.”

Unless you are a trained professional, like a financial advisor or a CPA, chances are good that you have no idea how to transform a lifetime of savings into a steady, tax-efficient income stream. A study for the Alliance for Lifetime Income asked pre-retirees, if they have done the math to figure out how much money they’ll need for retirement. About 66% say they haven’t done the calculations. Just 38% of households can count on having a pension or an annuity to provide a steady stream of cash.

In response to this common question, one company has launched a feature that was created to help you create a steady paycheck in retirement. The company, Kindur, was founded by a woman whose career included nearly two-decades in asset management at J.P. Morgan. She was inspired by her own experience helping her father decide how to draw down his assets. After devoting hours to Social Security books, she realized that technology could solve this problem. Throughout her career, she saw how financial institutions used technology to present and manage complex information. The goal of her company was to take this complexity out of retirement income planning.

Kindur, however, is not alone in this space. The founder of Social Security Solutions and Income Strategy found himself wishing there was a way to coordinate retirement income some ten years ago. He teamed up with the investment strategy chair at Baylor University, for what he thought would be a short project. In the end, it took years to sort through all the rules of Social Security. However, a platform was created to help people figure out claiming strategies. His second company analyzes   the accounts from which they should withdraw and when.

Another company, Income Strategy, provides users with help to figure out how to withdraw money and provides the option of how that transaction will be executed.

The future will likely hold more of these kinds of platforms, as the next generation becomes more comfortable with allowing AI (Artificial Intelligence) to manage their money and their withdrawals. For now, most people are still more comfortable with a person providing financial guidance, although that guidance is often helped by AI. Together, AI and an experienced professional make the best advisors.

As you plan for the future, remember to include the estate planning component. There have are many online legal drafting platforms, but so far, they have fallen short.

Reference: CNBC (April 7, 2019) “You probably don’t know how much your retirement paycheck will be. New technology is working to change that.”

How are Baby Boomers Doing with Their Retirement Planning?
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How are Baby Boomers Doing with Their Retirement Planning?

The baby boomers—those born between 1946 and 1964, ages 55 to 73—have about half (47%) of their group already in retirement.

CNBC’s recent article, “Baby boomers face retirement crisis—little savings, high health costs and unrealistic expectations,” says that the Insured Retirement Institute’s annual report, Boomer Expectations for Retirement, highlights the fundamental issues of too little savings, underestimating healthcare costs and unrealistic expectations of how much retirement income they’ll actually need.

Too little savings. The three “legs” of the retirement “stool” are Social Security, private pensions and personal savings. These aren’t in great shape, as the average Social Security check is $14,000 a year, and just 23% of boomers ages 56-61 expect to receive income from a private company pension plan, with only 38% of older boomers expecting a pension. Most boomers haven’t saved nearly enough in their personal savings, with 45% of boomers having absolutely nothing saved for retirement.

Underestimating health care costs. Retirees frequently underestimate health expenses, especially long-term care costs. Many people don’t understand the system: half of the survey respondents say they haven’t calculated the cost of long-term care insurance, because they say they’ll rely on Medicare. However, Medicare has no coverage for long-term care. Just eight percent of boomers say they have purchased a long-term care policy.

Underestimating retirement income. The average amount spent by Americans 65-74 is $55,000 annually. However, most baby boomers don’t believe they’ll need near that amount. To that point, about 60% say they will need less than that on which to live. Their backup plan is to downsize, go back to work, or ask their children for help.

Of those who aren’t confident they did an adequate job preparing for retirement, the top two things they wish they’d done differently were to have saved more (63%) and to have started saving earlier (58%).

Reference: CNBC (April 9, 2019) “Baby boomers face retirement crisis — little savings, high health costs and unrealistic expectations”

When Should I Start My Estate Planning?

Only 42% of Americans have a will or other estate planning documents, according to a 2017 Caring.com study. Among parents of children under 18, only 36% have created a will.

USA Today’s recent article, “Estate planning: 6 steps to ensure your family is financially ready for when you die,” explains that if you die without a will, state laws will decide what happens to your property or who should be legally responsible for minor children. That might be OK in some circumstances, but in others, a grandchild with special needs might not receive the resources you want him to have, or an estranged family member might get your house.

For some reason, people believe that if they don’t do anything, things will “work out.” They often do not. Here is what you should consider:

Create a will. This document states who should get your money and possessions, as well as who would become a guardian to your minor children, if both parents die.

A living will. This legal document states what medical procedures you want or don’t want, if you’re incapacitated and can’t speak for yourself, such as whether to continue life-sustaining treatment. Powers of attorney let you appoint someone you trust to make legal, financial and health care decisions for you, if you are unable.

Trust. This is a legal entity that holds any property you want to leave to your beneficiaries. With a trust, your family won’t have to go through probate. Trusts also let you to set up instructions for how and when property is distributed. A trustee will manage the trust. Make sure you let people know, when you’ve designated them as a trustee. Name a secondary trustee, in case the primary trustee cannot or will not serve.

Beneficiaries. If you have investment accounts and retirement plans like a 401(k), make certain that the individual you’ve listed as the beneficiary is the person you want to receive those funds.  Remember to appoint a contingency or secondary beneficiary, just in case.

Work with an experienced attorney. Estate planning can be complicated, so get some professional legal help.

End-of-life planning isn’t really fun, but it’s necessary, if you want to have full control over your life and your assets.

Reference: USA Today (April 1, 2019) “Estate planning: 6 steps to ensure your family is financially ready for when you die”