The Biggest Social Security Blunders in Retirement

Fox News’ recent article entitled “These mistakes will take a huge bite out of your Social Security income” shares what we should and shouldn’t do.

  1. Not working a full 35 years. Your Social Security benefits are calculated based on your wages during your 35 highest-paid years of work. However, for each year you don’t have an income on record, you’ll have a $0 factored into your personal equation. That’s going to mean a lower monthly benefit. Therefore, to avoid this, be sure you put in a full 35 years in the workforce. It may actually help boost your benefit, by avoiding those dreaded $0 years. It will also potentially factor higher wages into your calculation.

Many people earn more money later in their careers. If your earnings are now at their highest, and you work another year to make it a full 35, you may be adding a salary that’s far more than what you earned 30 years before (even though your previous wages will be adjusted for inflation when determining what monthly benefit you get).

  1. Not delaying until your full retirement age to file. You won’t be entitled to collect all of your benefits until you reach full retirement age (FRA). Your FRA will depend on your year of birth, and if you were born in 1960 or later, it’s 67. Born in 1959 or before? It’s 66, or 66 and a number of months.

You can file for Social Security as early as age 62, but for each month you sign up prior to your FRA, your benefits are reduced on a permanent basis. That’s bad news if you don’t have a lot of money in retirement savings and need those benefits to ensure that you’re able to make ends meet in retirement.

  1. Delaying benefits beyond age 70. Just as you get the option to sign up for Social Security before FRA, you can also delay benefits past FRA and boost them by 8% a year in the process. But don’t postpone your filing too long! When you hit age 70, you stop accruing the delayed retirement credits that increase your benefits. Therefore, delaying beyond that point could mean missing out on income.
  2. Retire in a state that taxes your benefits. Social Security benefits may be taxed on the federal level, if your earnings exceed a certain threshold. However, some states also tax Social Security. These 13 states tax benefits to some degree: CO, CT. KS, MN, MO, MT, NE, NM, ND, RI, UT, VT, and WV. Some states have lower earner exemptions.

Don’t slash your Social Security income and struggle in retirement because of these mistakes.

Avoid these mistakes to be certain that you get as much money from Social Security as you’re entitled.

Reference: Fox News (Sep. 14, 2020) “These mistakes will take a huge bite out of your Social Security income’

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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”

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”

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?”

How Does Traveling While on Medicare Work?

CNBC’s recent article, “Planning to travel while on Medicare? Make sure you have coverage at your destination” explains that basic Medicare—which includes Part A (hospital coverage) and Part B (outpatient care)—typically doesn’t cover any medical costs outside of the U.S. and its territories. There are a few Medicare Advantage Plans that cover emergency services overseas, as well as some Medigap plans that also offer protection.

If you’re on Medicare, your coverage away from home depends partly on your destination and if you’re on basic Medicare or receive your benefits through an Advantage Plan. This also can depend on whether the health care you get is routine or due to an emergency.

Travel medical insurance can be the solution to gaps in coverage, but it’s good to first determine whether you need it. Remember that original Medicare consists of Part A and Part B. Retirees who opt to stay with just this coverage—instead of going with an Advantage Plan—typically pair their coverage with a stand-alone prescription-drug plan (Part D). If you fit in this situation, your coverage while traveling in the U.S. and its territories is fairly simple. You can go to any physician or hospital that accepts Medicare, regardless of the type of visit.

However, when you journey beyond U.S. borders, things get more complex.

Generally, Medicare doesn’t provide any coverage when you’re not in the U.S, with a couple of exceptions. These include if you’re on a ship within the territorial waters adjoining the country within six hours of a U.S. port or you’re traveling from state to state but the closest hospital to treat you is in a foreign country. As an example, think a trip to Alaska via Canada from the 48 contiguous states.

Roughly a third of retirees on original Medicare also buy supplemental coverage through a Medigap policy (but you can’t pair Medigap with an Advantage Plan). Those policies, which are standardized in every state, vary in price and offer coverage for the cost-sharing parts of Medicare, like copays and co-insurance. There are some Medigap policies—Plans C, D, F, G, M and N—that offer coverage for travel. You pay a $250 annual deductible and then 20% of costs up to a lifetime maximum of $50,000. However, that may not go very far, depending on the type of medical services you need.

There’s also no overseas coverage through a Part D prescription drug plan, and Medigap policies don’t cover any costs related to Part D, whether you’re in the U.S. or not. For seniors who get their Medicare benefits—Parts A, B and typically D—through an Advantage Plan, it’s a good idea to review your coverage, even if you’re not leaving the U.S. any time soon. These plans must cover your emergency care anywhere in the U.S., but you may have to pay for routine care outside of their service area or you’ll pay more.

Some Advantage Plans may also have coverage for emergencies overseas, so review your policy. Whether you have an Advantage Plan or original Medicare, travel medical insurance might be a good move if you think your existing coverage isn’t enough. The options are priced based on your age, the length of the coverage and the amount. In addition to providing coverage for necessary health services, a policy usually includes coverage for non-medical required evacuation, lost luggage and dental care required due to an injury.

There’s coverage for a single trip of a couple weeks or several months, or you can buy a multi-trip policy, which could cover a longer time period.

It’s also important to know if your policy covers pre-existing conditions, since some don’t. You should also be aware that some Advantage Plans might disenroll you, if you stay outside of their service area for a certain time, usually six months. In that situation, you’d be switched to original Medicare. If you are disenrolled, you’d have to wait for a special enrollment period to get another Advantage Plan.

Reference: CNBC (July 14, 2019) “Planning to travel while on Medicare? Make sure you have coverage at your destination”

Retirement Planning: Where to Start?

While you may be thinking about retirement for a long time, with visions of tropical beaches or grand trips overseas, when the date starts to get closer, it’s time for some real analysis and planning, says limaohio.com’s recent article “What to consider when starting retirement.”

Start with a realistic assessment of your healthcare needs. At age 65, most people are eligible for Medicare. There are many different parts of Medicare, identified by letters, that are optional add-ons to expand coverage to serve more like the health insurance you have while working. Medicare is not directly charged to individuals, but the parts in which Medicare participants opt into, do require out of pocket payments.

Next, prepare a budget and cash-flow plan that reflects your current cash-flow situation and compare that to your expected cash-flow situation upon retirement. During retirement, income comes from several sources: part-time work, Social Security, distributions from retirement plans and earnings from investments or returns from investments.

As you get closer to retirement age, you can secure an estimate of your benefits from the Social Security Administration. This can be done by going to the government agency’s website and creating a “my Social Security” account, by calling the local office or sending a letter via mail. Note that the estimates are only estimates. Don’t depend on those being the final numbers.

Social Security benefits are based on the number of years you have worked and the amount of money that was contributed to Social Security over a lifetime. Many people mistakenly think that Social Security is a government managed retirement system, where there is a relationship between what gets paid and what is distributed. However, Social Security’s process of determining benefits is based on a formula.

Based on your birthdate, Social Security calculates the age at which you can receive the program’s maximum benefit. If you take benefits before that date, then the monthly amount will be smaller over your lifetime. The longer you can delay taking benefits after your Full Retirement Age (FRA), the larger the monthly payment will be.

Retirement accounts, like 401(k)s and IRAs, allow for withdrawals without penalty after age 59 ½. Unless the account is a Roth IRA, any amounts withdrawn will be subject to taxes. At age 70 ½, account owners are required to withdraw a certain amount from IRAs and 401(k)s, known as Required Minimum Distributions (RMDs).

All this information needs to be considered to plan for retirement, especially with the prospect of needing long-term care, including nursing home or in-home care. This usually involves planning to someday become eligible for Medicaid, if needed.

When you are preparing for retirement, it’s also a good time to make sure that your estate plan is in place. An estate plan that has not been reviewed in three or four years may only need a few tweaks, or it may need a complete overhaul. Speak with your estate planning attorney to make sure you’ve covered all of your retirement bases.

Reference: limaohio.com (Aug. 31, 2019) “What to consider when starting retirement.”

What are the Details of the New SECURE Act?

The SECURE Act proposes a number of changes to retirement savings. These include changes to parts of IRAs and 401(k)s. The Act is expected to be passed in some form. Some of the changes look to be common sense, like broadening access to IRAs and 401(k)s, as well as including updating the rules to reflect that retirement is now a longer period of life. However, with these changes come potential limitations with stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” You should know that an IRA is a tax-wrapper for your investment that is sheltered from tax. Your distributions can also be tax-free, if you use a Roth IRA. That’s a good thing if you have an option between paying taxes on your investment income and not paying taxes on it. The IRA, which is essentially a tax-shield, then leaves with more money for the same investment performance, because no tax is usually paid. The SECURE act isn’t changing this fundamental process, but the issue is when you still have an IRA balance at death.

A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield of the IRA is then “stretched,” for what can be decades, based on the principle that an IRA is used over your life expectancy. This is important because the longer the IRA lasts, the more investment gains and income can be protected from taxes.

Today, the longer the lifetime of the beneficiary, the bigger the stretch and the bigger the tax shelter. However, the SECURE Act could change that: instead of IRA funds being spread over the lifetime of the beneficiary, they’d be spread over a much shorter period, maybe 10 years. That’s a big change for estate planning.

For a person who uses their own IRA in retirement and uses it up or passes it to their spouse as an inheritance—the SECURE Act changes almost nothing. For those looking to use their own IRA in retirement, IRAs are slightly improved due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree.

For many people, the bulk of IRA funds will be used in retirement and the Stretch IRA is less relevant.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”

Things That Can Drain Your Retirement Savings

You can follow all the rules, work hard and save the amount of money the experts recommend for your retirement and still get blindsided by an unexpected situation that wipes out your retirement savings and leaves you on shaky financial ground. There is a limit to how much money anyone can save for retirement, so advising you to save even more money for retirement might not be the solution.

Becoming aware of the threats to your retirement savings might allow you to avoid some of them or develop strategies, in case you find yourself in one of the situations one day. Here are some of the things that can drain your retirement savings.

Inflation and the Cost of Living

Remember what a newspaper, loaf of bread, or house cost 25 or 30 years ago? Chances are, those and many other things cost significantly more today than they did then. Many people live for two or three decades after they retire. If, for example, $4,000 of income would have provided a comfortable lifestyle in the year a person retires, it might not be adequate in 15 or 20 years.

The good news is that you can inflation-proof some of your living expenses. If you have a fixed-rate mortgage, you will lock down the amount of your housing cost. Of course, paying off your mortgage before retirement is an even better option. People who rent instead of buy, however, will face ever-rising payments for rent. That lovely apartment that cost $2,000 a month when you moved in could cost double that price after a few decades.

You can also press the pause button on some other expenses, like insurance. Some disability and long-term care policies offer a cost-of-living protection option. You should also check to see if your retirement plan administrator offers any fixed rate or guaranteed return investments that come with cost-of-living adjustments.

Spend Your Time, Not Your Money

When you are no longer working full-time, you might decide to get involved in activities you wanted to engage in before but did not have the time. Joining a local service club like Rotary or the Lion’s Club can be a wonderful way to connect with like-minded people and serve your community, but it can also be expensive. You will have membership dues, but those are just the start.

Many service clubs meet at mealtimes, so you will have to pay the cost of the meal, which is usually at a restaurant. Because service clubs perform projects to help deserving causes, there will be constant fundraisers and appeals for contributions. This is not intended to discourage people from joining service clubs, rather, to inform you about the costs involved if you choose to do so. Your community probably has a volunteer corps you can participate in at no charge, if your goal is to help others without going broke.

Stay Healthy

Face it. If you are retired, you cannot afford to get sick. The cost of healthcare goes up every year. Current retirees pay on average about $5,000 to $6,000 a year for Medicare premiums, copays, and prescription drugs. A significant medical crisis can wipe out your retirement savings.

Do everything you can to stay healthy. Eat well and stay hydrated. Talk regular walks and avoid falls. Stay away from sick people. You should also keep a positive attitude. Maintaining your health is one of the most effective ways to make sure you do not run out of money in retirement.

References:

AARP. “5 Threats to Your Retirement Savings.” (accessed July 16, 2019) https://www.aarp.org/retirement/planning-for-retirement/info-2019/5-threats-to-your-retirement-savings.html