Some Counterintuitive Retirement Strategies

There are way too many people who choose to go with their gut, when planning for retirement. Investopedia’s recent article entitled “7 Counterintuitive Retirement Strategies” discusses some big misconceptions people commonly believe when it comes to retirement planning—along with the correct ways of thinking and approaches.

The first myth is that you should constantly be moving in and out of stocks, timing the market and that a buy-and-hold strategy is really a losing one. However, many studies have repeatedly shown that it is often less risky to hold stocks for longer periods. You know, it’s tough to find a 10-year period when the stock market had a negative return. Stocks and real estate are the two big asset classes that have outpaced inflation over time, and—even with a few bearish periods—they’ve slowly gone up in value and will likely continue to do the same. However, that doesn’t mean you can simply fund and forget. Periodically monitor your portfolio and its performance.

Another misconception is that if I don’t sell a losing position, then I don’t have a loss. That is just hogwash. You’re losing money in a declining stock or other security, despite the fact that don’t sell it. You won’t be able to claim a loss on your tax return, if you don’t actually divest. However, the difference between realized and recognized losses is only for taxes. Your actual loss is the same, no matter what is recognized on your tax return.

Myth Number Three is that you can just let your money managers handle it. While professional portfolio management is a good choice in many cases, you still need to be personally engaged in the management of your finances. You can assign market trading and day-to-decisions to a pro, but don’t leave the overall course of your finances totally with your broker or banker.

Next, don’t sell an investment and then buy it back again. Instead, just hold it. No, you can (and probably should) sell a depressed holding and declare a capital loss prior to year’s end to recognize a tax deduction. Why hold on? If the asset does recover, you could plunge in again. Buying an identical stock 30 days before or 30 days after the date of the sale of the original triggers the IRS’s wash sale rules. As a result, your capital loss claim will be void.

Another misconception is that my Social Security benefits will be enough to pay for my retirement years. This is not true. The average monthly Social Security payment for retirees was only $1,471 in June 2019. Benefits vary a lot, but your benefits were never designed to be more than 40% of your pre-retirement wages.

The next myth is that I should put all of my retirement money in totally secure income-oriented investments, especially after I retire. That is not necessarily true. Low-risk vehicles, of course, are more of a priority at this point in your life. However, most retirees should have at least some of their savings in growth and equities in some form, either through individual stocks or mutual funds.

The final misconception is that retirement is a long way away, and so I needn’t worry about it for a while. This is a very dangerous myth, because you’ll be poor and dependent on relatives if you don’t get this straightened out ASAP. It takes time for your investments to grow to what they’ll need to be to keep you through your retirement. Get going! Talk to your estate planning attorney for more information.

Reference: Investopedia (Oct. 21, 2019) “7 Counterintuitive Retirement Strategies”

Are You One of the Many Headed toward Financial Disaster?

You may be saving for retirement, paying down debt or simply budgeting for your everyday expenses. Whatever your goal is, it’s critical to have a plan in place. Some planning now can go a long way in making sure your finances are as healthy as possible. Without any type of plan, you’re just blindly throwing your money around and hoping for the best.

Motley Fool’s recent article entitled “A Whopping Number of Older Adults May Be Headed Toward a Financial Disaster” says that millions of older adults are making a critical mistake as they plan for the future. If they don’t make any changes soon, it could be extremely expensive.

More than one-third (34%) of baby boomers admit that they haven’t conducted any financial planning whatsoever in the last two years, according to the National Association of Personal Financial Advisors. Therefore, they haven’t planned for retirement, managed a budget, set any goals, reviewed their investments, considered their insurance needs, or done any tax or estate planning. It’s not just baby boomers who aren’t planning. Almost a quarter (24%) of Gen Xers also say they haven’t done any financial planning over the past two years. The generations most likely to have thought about the future are the millennial generation and Gen Z — only 16% and 15%, respectively, said that they haven’t done any recent financial planning.

While all of us should be thinking about our future plans, it’s even more essential for older Americans to focus on their finances. If you’re close to retirement age and haven’t reviewed your investments or thought about your retirement plan recently, you’ll have a hard time knowing if you’re on track. The longer you wait to know if you’re off track, the more difficult it’ll be to make changes and to catch up.

Baby boomers should have plans in place, in case the worst happens. Review your insurance and make an estate plan to be certain that your family is protected if something happens to you. Look at your plans regularly to make sure everything is up to date.

The first part of creating a financial plan is to set goals, like preparing for retirement, paying down your debt, or creating an emergency fund. Next, examine your money situation to find extra cash to put toward those goals. Begin monitoring your spending to get a good idea of just where your money is going every month. It’s a lot harder to stay on a budget and save more, if you don’t know how much you’re spending. Once you get into the habit of tracking your spending, it’ll be easier to discover parts of your budget to cut back. You can start reallocating that money toward your financial goals.

You should also remember that you’ll need to review your plan regularly to make adjustments when needed. This is especially vital when saving for retirement, because there many factors to consider as you’re saving. At least once a year, check that your retirement savings goal is still accurate, and decide whether your current savings are on track to reach that goal. Take a look at your investments to see if your asset allocation is still aligned with your risk tolerance.

Reference: Motley Fool (Feb. 8, 2020) “A Whopping Number of Older Adults May Be Headed Toward a Financial Disaster”

Should I Buy a Vacation Home When I Retire?

Taxes, maintenance costs, insurance and potential rental-management expenses are some of the factors that can make the significant difference between a nice passive investment and a real money pit. Depending on where the home is located, the cost of ownership may need to account for property taxes, utilities, homeowners’ fees and other items.

Baron’s recent article entitled “What Retirees Should Know Before Buying a Vacation Home” says that there can be monetary benefits because a vacation home can appreciate in price over time, making it a potentially valuable asset. It also could be an income-generating enterprise, if you rent out the home.  However, you shouldn’t view a vacation home just as an investment. Remember that it’s not as liquid, so it’s not a replacement for stocks and bonds. Don’t rely on selling a vacation home for a top price, when you need the money.

First, before making a purchase, determine if you can afford a vacation home in retirement. Most retirees are living on a fixed income and may forget that the expense of a vacation home can go up faster than their income. You need to have a sufficient nest egg on which to live, so that you don’t need to make an emergency sale of the property.

Remember taxes. If you sell your second home, you can’t claim the capital-gains tax exemption that’s available when selling a primary residence. It’s only available for people who have lived in the home as a primary residence for at least two of the previous five years.

In addition to the tangible costs, if you want to keep the vacation home for the rest of your life, it will become part of your estate and subject to inheritance issues (depending on where you live). If you have children, some may want to keep the house, and others may want to sell. If there’s a split, you must find a way to give the house to those who want it and find another legacy for the others.

You could place the home into a limited liability corporation (LLC) with an operating agreement that defines it. This would allow each child to have a stake in the entity that owns the home rather than the home itself.

Whether you buy a second home for pleasure, profit, or both, think carefully before making a purchase. Ask your estate planning attorney about how to do this with your family situation.

Reference: Baron’s (Jan. 18, 2020) “What Retirees Should Know Before Buying a Vacation Home”

Some Surprising Facts about Retirement

It’s crucial to have a plan for your retirement, so let’s get educated. There are some facts you might not know about retirement, like the way in which your Social Security benefit can be taxed and how to factor in travel expenses.

Kiplinger’s recent article entitled “5 Surprising Facts to Know About Retirement” gives us five important facts to learn about retirement.

Your Social Security May Be Taxed. Your Social Security benefit can be taxed, up to 85% of it. If your provisional income as an individual is more than $34,000 or over $44,000 as a couple, the IRS says that up to 85% of your benefit is taxable. You only have to receive $25,000 in provisional income as an individual or $32,000 as a couple for 50% of your benefit to be taxed. What’s more, there are several states that impose taxes on some or all Social Security benefits including: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.

No Age Limit for Contributing to a Roth IRA. You are able to contribute earned income to a Roth IRA for the rest of your life. You also never have to take required minimum distributions (RMDs) from a Roth. Note that after-tax dollars are contributed to a Roth and qualified distributions are tax-free.

Those 65+ Can Take a Larger Tax Deduction. You don’t have to be retired to get a slightly larger standard deduction. When you turn 65, your standard deduction as an individual goes up by $1,300 and for a couple filing jointly where both members are 65 or older, it increases by $2,600 for the 2019 tax year.

Many Don’t Include Travel Expenses. Many retirees want to travel after they stop working. However, a Merrill Lynch survey found that 66% of those 50 and older say they haven’t saved anything for a trip.

Roughly a Third of Retirees Who Live Independently Also Live by Themselves. Older adults who live outside of a nursing home or hospital are living independently, but about 33% of these adults live alone, according to a study from the Institute on Aging. The study found that the older people get, the more likely they are to live alone. Women are also twice as likely as older men to live alone. This has financial implications, considering the high cost of and likelihood of needing long-term care.

Understanding what your expenses and your income will be in retirement, are the first steps in making a comprehensive plan.

Reference: Kiplinger (Nov. 11, 2019) “5 Surprising Facts to Know About Retirement”

If You Plan to Retire This Year, Be Prepared

If you’re sure that you are going to leave the working world and start your retirement life in 2020, better not put in your notice at work until you’ve done your homework. The Motley Fool article “Retiring in 2020? 3 Things You Need to Know” covers three important steps.

If you were born in 1958, then this is the year you celebrate your 62nd birthday—which means you are eligible to collect Social Security. However, if you do, your benefits will be reduced as you have not yet reached your “Full Retirement Age” or FRA. People born in 1958 need to be 66 and eight months to reach that important milestone. At that point, you can collect your full benefit. Collect earlier, and your monthly benefit is reduced for the rest of your life.

Born in 1954 or earlier? Full retirement age for you is 66, if you were born between 1943 and 1954. If if you were born at the tail end of this range, then you can collect your full Social Security benefit this year. However, it still may pay to hold off on claiming benefits.

The longer you can delay tapping your Social Security benefits, the better. From the time you reach your FRA until age 70, your monthly benefit grows by about 8% each year. Few investments today have that kind of guaranteed yield. Some advisors recommend tapping retirement accounts first and delaying Social Security benefits as long as possible. It’s worth taking a closer look to see how this can be of benefit.

If you are planning to retire, but you’re not 65, you’ll need to find and pay for health insurance until you celebrate your 65th birthday. You can enroll in Medicare a few months before your 65th birthday, but if you’re 62, then you have a three-year health insurance gap. Private health insurance is extremely expensive, there’s no way around it. Before putting in that letter to HR that you’re retiring, get some real numbers on this cost. If your employer will consider having you work part-time so that you can maintain your employer-covered health insurance, it may be a good idea.

If you’re closer to age 65, then COBRA is a consideration, although it may still be expensive. Typically, COBRA allows you to retain your existing health coverage if you change jobs, or are fired, for a certain amount of time. However, you have to pay for the full cost of health coverage.

If your gap is only three months, then COBRA might make sense. However, if your gap is a year or more, then you need to be realistic about health coverage options. Pre-existing conditions and a limited marketplace for individual coverage may make this the reason you keep working until 65. You should also check the rules of going from COBRA to Medicare—they may not be the same as going from an employee plan to Medicare.

The more prepared you are for retirement, the more you’ll be able to relax and enjoy this new phase of your life. If these three points have made it clear that you’re not yet able to retire, understand that it is better to work a little longer to reach your eventual goal of retirement, then to find yourself struggling to pay bills and jeopardize a lifetime of savings because of unexpected expenses.

Reference: The Motley Fool (Dec. 28, 2019) “Retiring in 2020? 3 Things You Need to Know”

Careful–the Silver Tsunami is Coming!

Approximately one in three homes in the U.S. is owned by someone who is 60 and older. As these millions of boomers decide it’s time to sell their homes and move to another location or to a retirement community, that will have an impact on housing markets, says the article from Market Watch “These housing markets will feel the biggest impact from the ‘Silver Tsunami.’”

In the ten years between 2007-2017, around 730,000 homes that had been owned by seniors went on the market every year. That number is expected to grow enormously over the next few decades. A news analysis from Zillow says that as many as 920,000 homes will go on the market between 2017-2027.  In the ten years after that, the figure may go as high as 1.17 million homes per year.

In total, says Zillow, almost a third of currently owner-occupied homes, around 20 million properties, will go on sale as the direct result of a boomers dying or deciding to move to a smaller home or retirement facility.

The wave won’t hit all at once, and it won’t strike all markets equally.

The biggest impact is expected to be in the Tampa-St. Petersburg-Clearwater metropolitan area in Florida. The Tucson, Arizona area is next in line, with the Miami-Ft. Lauderdale-Port Saint Lucie and Orlando metro areas following.

At the far end of the spectrum, Salt Lake City, Utah, is expected to see the smallest impact from the Silver Tsunami. Less than 20% of homes there are expected to go up for sale, because of being owned by aging boomers.

A few other cities are expected to escape this trend with little impact. They include Austin, Houston, and Dallas, all in Texas.

In other cities, there are micro-neighborhoods that will feel the impact within cities. For instance, in greater Phoenix, all will be well. However, in the towns of El Mirage or Sun City, nearly two-thirds of all homes will be on the market, as they are mainly retirement communities.

Those who are planning to relocate for retirement may want to keep the Silver Tsunami in mind, if their retirement finances depend upon the value of their homes.

Reference: Market Watch (December 3, 2019) “These housing markets will feel the biggest impact from the ‘Silver Tsunami’”

Tips for Seniors Who Are Moving to Assisted Living

When you are planning your move into assisted living, you can quickly get overwhelmed with the endless list of things you need to do. If you are moving out of a home where you have lived for many years, the thought of having to downsize and get rid of most of your possessions can produce anxiety. If thinking about all the work ahead of you makes you feel sad or tired, it can help to have a roadmap. Here are some organizational tips for seniors who are moving to assisted living.

You will be dealing with two situations – your current house and your new home. Each one needs a tailored game plan.

How to Minimize the Stress of Packing Up Your House

When you move from a large home to a smaller environment, the logistics dictate that everything will not fit into the new space. You will have to part with some of your items.

Rule #1 is you should be the one to decide what you keep and take with you to your new home. No one should dictate what you can have. These strategies can help:

  • Some of the bulk of your items will be a simple matter, because you will have no use for some things in assisted living. For example, since the facility will likely take care of the yard work, all the lawn and gardening equipment can go to a new home. You can save someone a lot of money, by giving them these items when they buy a house.
  • If you move to a warmer part of the country, you might not need your winter gear anymore. Donating those things can help keep someone in need from being cold and reduce how much you have to move.
  • Walk into one of your rooms and make a list of the three or four things you love the most in that room. If you only keep your favorite things, when you are in your new home, everything you see will bring you joy.

Changing how you think about the process, can make it less emotional for you. Instead of thinking about losing most of your belongings, imagine how liberating it will be when you are not tied down by so many things. Most people discover a lightness and freedom, when they get rid of the clutter and things that do not matter.

Settling into Your New Home

When you pack up at your previous house, visualize how the items you keep will fit into the new space. Make sure you hold on to the things that will make you feel comfortable and at home. Arrange your favorite things, so you can see familiar items from every angle throughout your space. With a little planning, you can recreate the feel of your old home environment. Keepsakes matter. While you do not want to be crowded by clutter or create tripping hazards, a cherished clock, photographs, books and artwork can help you feel as if you belong from the first day.

If you are planning to move to an assisted living facility, reach out to your qualified elder law attorney. They may be able to help you with government benefits and are familiar with the process of transitioning.

References:

A Place for Mom. “Moving Seniors: Settling in to Senior Care.” (accessed November 21, 2019) https://www.aplaceformom.com/planning-and-advice/articles/moving-seniors

American Life Expectancy Has Gone Down

The good news is, people might not need to save quite as much money for retirement as before. The bad news is the reason for that statement. The life expectancy for the US is in a decline. In fact, American life expectancy has gone down for the last three years in a row.

This undesired streak marks the first time in 100 years that the life expectancy in the U.S. has declined for three or more consecutive years. American life expectancy declined for four years in a row from 1915 to 1918. To appreciate those circumstances and put our current decline into perspective, both the worldwide epidemic of Spanish Flu and World War I occurred during those four years.

The Numbers

Life expectancy is a curious beast. You will have one life expectancy at birth and a significantly different likelihood, if you live to age 25. Surviving to age 25 increases your life expectancy, and making it to middle age extends the projections even farther.

For example, a baby born in 2016 had a life expectancy of 76 years for a male and 81 for a female. Once that baby turns 25, the estimates are 89.5 years for a female and just under 87 years for a male. People who were middle-aged in 2016 had a good chance of living beyond these years. The projections in 2016 saw a decrease of six months, compared to 2015. The lowered life expectancy projections for our country are continuing.

Factors Driving the Decline in Life Expectancy

The Centers for Disease Control (CDC) suggests that, while many elements go into the calculation of life expectancy, these three issues might be responsible for some of the downward slide of the American life expectancy:

  • Increased suicide rates. Suicide in the United States has skyrocketed during the last 20 years. The suicide rate is 33 percent higher now than it was in 1999. You might attribute the increase to the Great Recession, but the most dramatic surge in numbers was in 2017, with a 3.7 percent jump. On a side note, worldwide suicide rates went down by almost 30 percent during the same time.
  • Drug overdoses. The epidemic of drug overdoses is now so massive that it is affecting national life expectancy. Within the last ten years, fatal drug overdoses increased by 72 percent. These numbers include deaths from street drugs and prescription drugs. More than 70,000 people in the U.S. died from drug overdoses in 2017. Over 47,000 of those deaths involved opioids, like heroin and prescription painkillers. Doctors today prescribe three times as many opioids as they did in 1999.
  • Liver disease. Deaths from cirrhosis and other chronic liver diseases have gone through the roof during the last decade. Genetics and the heavy consumption of alcohol get much of the blame for this phenomenon.

Many other factors contribute to life expectancy. Lifestyle choices, like nutrition and activity, can help a person live a longer, healthier life. We spend more on healthcare per person than any other country. While the life expectancy in our country has decreased, the projected lifespan is still increasing in France, Sweden, the Netherlands, and Germany, albeit at a much slower rate than before.

References:

CNBC. “US Life Expectancy has been declining. Here’s why.” (accessed November 14, 2019) https://www.cnbc.com/2019/07/09/us-life-expectancy-has-been-declining-heres-why.html

Financial Advisor. “U.S. Life Expectancy Now 6 Months Shorter.” (accessed November 14, 2019) https://www.fa-mag.com/news/u-s–life-expectancy-now-6-months-shorter-29781.html

Are You Ready for Retirement?

While retirement planning may seem daunting, it’s critical to be certain that you have enough savings set aside for your golden years.

According to the Federal Reserve, 26% of non-retirees say they have nothing saved for retirement. Zero.

CNBC’s recent article, “Make these 6 moves now to be financially prepared for retirement,” provides the steps you should take right away to start building your retirement savings.

  1. Put on your thinking cap. Picture as accurately as you can what your ideal retirement will look like—and what it will cost. Use an online retirement savings calculator to help you see if you’re on the right spending and savings path.
  2. Get a checkup. Get educated about Medicare and weigh the alternatives for long-term care, such as long-term care insurance.
  3. Be sure your estate plan is up to date. See your attorney and be sure that all your estate documents work with the laws of the state where you’re retiring. Look at any possible concerns about estate taxes. Keep beneficiary designations up to date because, regardless of what’s said in your will, beneficiaries listed on specific accounts, such as IRAs, will inherit those funds.
  4. Think of charities now. With more time on your hands, consider selecting a cause or two. You can lend a hand or make a donation.
  5. Review your portfolio. You may have your money primarily deposited in a target-date fund that keeps your investment mix of stocks, bonds, cash, and other assets appropriate for your retirement time horizon. However, it’s a good idea to make certain that your asset allocation is where you want it. Remember that portfolio growth and market shifts can change your allocation at any time, and the closer you get to actual retirement—or if you’re already there—the more conservative an allocation you’ll want to have. You should also monitor the account fees you’re paying in funds and consider lower-cost alternatives.
  6. Get professional advice. If you’re not already working with a money and tax expert, consider it.

Reference: CNBC (November 11, 2019) “Make these 6 moves now to be financially prepared for retirement”

What Worries Retirees the Most?

Retirees don’t want to run out of money. However, homeowners over 62 who have considerable equity in their homes may want to look at a strategy that can minimize their money anxiety. A reverse mortgage will let them tap into home equity, by providing funds to keep them financially stable. Could the reverse mortgage payments take a bite out of their Social Security or Medicare benefits?

Motley Fool’s recent article asks, “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?” The article explains that reverse mortgages, also called home equity conversion mortgages (HECM), were created in 1980 to help seniors stay solvent, while remaining in their homes.

You know that in a regular mortgage, you pay the bank monthly installments. However, with a reverse mortgage, the bank pays you. You take out money against the equity in your home, and the loan doesn’t come due until you sell the home, move out of it, or die. The amount you can get is based on a formula that takes into account your age, the equity in your home, its market value and the interest rate you’ll be paying. You can get your reverse mortgage funds as a lump sum, a monthly payment, or a line of credit.

There are some drawbacks to a reverse mortgage. This type of loan can have big fees, including origination fees, closing costs (similar to a regular mortgage) and mortgage insurance premiums.  These fees can usually be rolled into the loan. It will, however, increase the amount the bank is entitled to receive once the loan ends.

A reverse mortgage isn’t for you, if you want to leave your home to your family. Perhaps they can pay off the balance of your HECM once you die or move out, but that could be costly. If you want to sell it (perhaps to simplify the splitting up of that inheritance), the share your heirs will receive from the proceeds may not be as much as you’d anticipated. If you’re having a hard time keeping up with the day-to-day costs of running the house, a reverse mortgage may not be the best option. However, if you’re just looking to add to your retirement income for peace of mind, it’s a decent financial planning tool to consider.

The good news is that it has no impact on your Social Security benefits, because the program is not means-tested. Therefore, the amount of income you have won’t affect your monthly benefit when you file. As a result, you don’t need to take Social Security into account when you’re thinking about this type of loan.

Likewise, Medicare is a non-means-tested program. However, a reverse mortgage can have an impact on Medicaid and Supplemental Security Income (SSI) benefits, because those are based on your current financial assets. If you’re receiving either of those, talk to an elder law attorney or estate planning attorney to discuss how a reverse mortgage might have an effect on your specific circumstances.

Reference: Motley Fool (November 1, 2019) “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?”