The Big Eight: Don’t Risk Your Retirement with These Mistakes

During our working lives, we have a cash flow called a “paycheck” that we rely on. A similar cash flow occurs when we retire and start the process of “deaccumulation” or creating income streams from sources that include our retirement funds. However, generating enough income to enjoy a comfortable retirement requires managing that cash flow successfully, says CNBC.com in the article “Here are 8 costly retirement mistakes to avoid.”

Preparing for the risk of a bear market. If markets take a nosedive the year you retire and you stick with your plan to withdraw four percent from your portfolio, your plan is no longer sustainable. Better: have an emergency fund in place, so you don’t have to tap investment accounts until the market recovers.

Investing with inflation in mind. We have been in such a low inflation environment for so long, that many have forgotten how devastating this can be to retirement portfolios. You may want to have some of your money in the market, so you can continue to get rates above any inflation. If inflation runs about 3.5% annually, a moderate portfolio returning 6% or 7% keeps up with inflation, even after withdrawals.

Be ready for longevity. Worries about outliving retirement savings are due to a longer overall life expectancy. There’s a good chance that many people alive today, will make it to 95. One strong tactic is to delay taking Social Security benefits until age 70, to maximize the monthly benefit.

What about interest rates and inadequate returns on safer investments? This is a tricky one, requiring a balance between each person’s comfort zone and the need to grow investments. Current fixed-income returns lag behind historical performance. Some experts recommend that their clients look into high-dividend stocks, as an alternative to bond yields.

Prepare NOT to dump stocks in a temporary downturn. Without strong stomachs and wise counsel, individual investors have a long history of dumping stocks when markets turn down, amplifying losses. We are emotional about our money, which is the worst way to invest. Try working with a financial advisor to remove the emotion from your investments.

Don’t withdraw too much too soon. It looks like a lot of money, doesn’t it? However, even 4% may be too much to take out from your investments and retirement accounts. It all depends upon what other sources of income you have and how markets perform. Be careful, unless going back to work in your seventies is on your bucket list.

Prepare for cognitive decline. This is way harder to conceive of than inflationary risks, but it becomes a real risk as we age. Even a modest level of age-related cognitive impairment, can make managing investments a challenge. Have a discussion with family members, your estate planning attorney and a financial advisor about deciding who will manage your investments, when you are no longer able.

Are you ready for health care costs? If at all possible, wait until 65 to retire, so you will be eligible for Medicare. Even when you have this coverage in place, there may still be considerable expenses that are not covered by Medicare. If you don’t have long-term care insurance, get it as soon as possible.

Reference: CNBC.com (March 5, 2019) “Here are 8 costly retirement mistakes to avoid.”

Are You Retiring in 2019? Here’s What You Need to Know

There are more than few steps you’ll need to complete, before packing up your desk, cubicle or locker and saying good bye to your work family. Even if your 401(k) and IRA is in order, there are things you need to during the last few months of working, says Next Avenue in the article “Tips to Prepare for Retiring This Spring or Summer.”

There’s detailed planning, organization of documents, and additional financial details that need attending. You may also want to start creating your “bucket list” — a list of things you’ve always wanted to do, but never had the time to do while you were working. Getting all of this in order, will speed your waiting time and prepare you better, when the last day of your working life does finally arrive.

Whether you are three months or six months from retirement, here are some tips for your to-do list:

Social Security. Figure out when the best time for you to take Social Security benefits will be. Can you delay it until age 70? That’s when you’ll get the biggest payout. The earlier you start collecting benefits, the smaller your monthly check will be. Take it early, and you are locked in to this lower rate.

Health Care. Figuring out how to manage health care costs, is the single biggest worry of retirement for most Americans. An injury that puts you in a nursing care facility can make a huge dent in your retirement funds, even if it’s just for a short while. This is the time of your life, when focusing on your health is most important, even if you’ve been careless in earlier decades. Evaluate your health status and get check ups with your regular physician and your dentist.

Investments. Check with your HR department about when you’ll need to roll over your 401(k) plan. If you transfer the funds into a low-cost IRA, you may save in fees. Work with your financial advisor to determine what your withdrawal rate will be. You may need to reevaluate some of your retirement goals or consider working part time during retirement for a few years.

Medicare. If you’re almost 65, you can start enrolling in Medicare now. The government lets you start the process within three months of your 65th birthday. Start this process, so you are covered, once you are not on the company’s health care plan.

Expectations. The first six months to a year of retirement can be both wonderful and terrible. While enjoying freedom, many people find it hard to withdraw money from the same accounts they spent so many years building. What if they don’t have enough for a long life? Take a realistic look at your lifestyle, budget, and spending habits, before you retire to make sure you are financially ready to do so. If you think you might work part time, look into the positions that are available in your area and what they pay.

Lifestyle. Often, we are so busy planning for the financial side of retirement, that we forget to plan for the “soft” side: what will you do in retirement? Will you volunteer with an organization that has meaning for you? Write the novel you’ve started on a dozen times? Spend more time with your grandchildren? Travel? What will make you feel like your time is being well-spent, and what will make you fulfilled?

Don’t forget the legal plan. Retired or not, you need to have a will, power of attorney, and health care power of attorney to protect your family, whether you are preparing for retirement or in the middle of your career. Speak with an estate planning attorney to ensure that these important documents are in place.

Reference: Next Avenue (March 6, 2019) “Tips to Prepare for Retiring This Spring or Summer”

Challenges for Women Facing Retirement are Especially Daunting

Add to the challenges facing women in retirement are the rising costs of health care, as well as other deeply-rooted economic factors, says Next Avenue in the article “What Could Help Women Facing financial Challenges for Retirement.” This issue is top-of-mind for many, with a focus from the Senate and the EBRI pushing this public policy matter into the spotlight.

The barriers for women to accumulate wealth are very real. At the Senate hearing, Linda Stone, a WISER member (Women’s Institute for a Secure Retirement) presented some hard facts: there are 5.7 million more women than men at age 65, and of those who are over 85, 67% are female. One out of two women alive right now, will live until age 90. However, many people over age 85, and especially women, end up living in poverty or in near poverty, even if they were never poor throughout their lives.

The longer lifespan of most women comes with a resulting need for more income. Women traditionally have nine years with zero earnings, usually because they are rearing children or caring for elderly parents. Women’s careers also average 29 years compared to 39 years for men.

The gender mortality difference and the tendency for women to marry older men, leads to them outliving their partners and be more likely to live alone. This increases their chances of descending into poverty. Couples’ finances are also often exhausted by caring for the husband’s medical needs.

How can women be helped to achieve financial security in retirement?

  • Study ways to offer retirement protection to women, who spend significant time as caregivers, including considering providing Social Security credits for those years.
  • Encourage employers to offer retirement plans.
  • Allow part-time and temporary workers to participate in employer-sponsored retirement plans.

A briefing presented by the EBRI looked into the reasons why women tend to save less than men. The program referenced a blog post from Kimberly Blanton, of the Boston College Center for Retirement Research, which noted that “if the difference between paychecks for men and women is a gap, then the difference in wealth can be described as a chasm.”

The median net worth for women age 45 to 65 adjusted for inflation has actually declined in recent years. Older women of color have seen the largest decline in their net worth. The study was conducted by the University of Pennsylvania’s School of Social Work and the nonprofit Asset Funders Network.

The takeaway: there is a strong need for more public policy initiatives to help women save more for retirement.

Reference: Next Avenue (February 12, 2019) “What Could Help Women Facing financial Challenges for Retirement”

Retiring Business Owners, What’s Going to Happen to Your Business?
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Retiring Business Owners, What’s Going to Happen to Your Business?

When the business owner retires, what happens to employees, clients and family members all depends on what the business owner has planned, asks an article from Florida Today titled “Estate planning for business owners: What happens to your business when you leave?” One task that no business owner should neglect, is planning for what will happen when they are no longer able to run their business, for a variety of reasons.

The challenge is, with no succession plan, the laws of the state will determine what happens next. If you started your own business to have more control over your destiny, then you don’t want to let the laws of your state determine what happens, once you are incapacitated, retired or dead.

Think of your business succession plan as an estate plan for your business. It will determine what happens to your property, who will be in charge of the transition and who will make decisions about whether to keep the business going or to sell it.

Your estate planning attorney will need to review these issues with you:

Control and decision-making. If you are the sole owner, who will make critical decisions in your absence? If there are multiple owners, how will decisions be made? Discuss in advance your vision for the company’s future, and make sure that it’s in writing, executed properly with an attorney’s help.

What about your family and employees? If members of your family are involved in the business, work out who you want to take the leadership reins. Be as objective as possible about your family members. If the business is to be sold, will key employees be given an option of buying out the family interest? You’ll also need a plan to ensure that the business continues in the period between your ownership and the new owner, in order to retain its value.

Plan for changing dynamics. Maybe family members and employees tolerated each other while you are in charge, but if that relationship is not great, make sure plans are enacted so the business will continue to operate, even if years of resentment come spilling out after you die. Your employees may be counting on you to protect them from family members, or your family may be depending upon you to protect them from disgruntled employees or managers. Either way, do what you can in advance to keep everyone moving forward. If the business falls apart the minute you are gone, there won’t be anything to sell or for the next generation to carry on.

How your business is structured, will have an impact on your succession plan. If there are significant liability elements to your business, risk management should also be built into your future plans.

To make your succession plan work, you will need to integrate it with your personal estate plan. If you have a Last Will and Testament in a Florida-based business, the probate judge will appoint someone to run the business, and then the probate court will have administrative control over the business, until it’s sold. That probably isn’t what you had in mind, after your years of working to build a business. Speak with an estate planning attorney to find out what structures will work best, so your business succession plan and your estate plan will work seamlessly without you.

Reference: Florida Today (Feb. 12, 2019) “Estate planning for business owners: What happens to your business when you leave?”

Suggested Key Terms: Business Owner, Succession Plan, Estate Planning Attorney, Key Employees

Timing Is Everything Where Medicare’s Concerned
Timing is Everything

Timing Is Everything Where Medicare’s Concerned

There are many complex rules about transitioning from employment-based health care coverage to Medicare, and mistakes are expensive and often, permanent. That’s the message from a recent article in The New York Times titled “If You Do Medicare Sign-Up Wrong, It Will Cost You.”

Tony Farrell did all the right things — he did the research and made what seemed like good decisions. However, he still got tripped up, and now pays a penalty in higher costs that cannot be undone. When he turned 65 four years ago, he was still working and covered by his employer’s group insurance plan. He decided to stay with his employer’s plan and did not enroll in Medicare. Four months later, he was laid off and switched his health insurance to Cobra. That’s the “Consolidated Omnibus Budget Reconciliation Act” that allows employees to pay for their own coverage up to 36 months after leaving a job.

Medicare requires you to sign up during a limited window before and after your 65th birthday. If you don’t, there are stiff late-enrollment penalties that continue for as long as you live and potentially long waits for coverage to start. There’s one exception. If you are still employed at age 65, you may remain under your employer’s insurance coverage.

What Mr. Farrell didn’t know, and most people don’t, is that Cobra coverage does not qualify you for that exemption. He didn’t realize this mistake for over a year, when his Cobra coverage ended, and he started doing his homework about Medicare. He will have to pay a late-enrollment penalty equal to 20% of the Part B base premium for the rest of his life. His monthly standard premium increases for Mr. Farrell from $135.50 to $162.60.

There are several pitfalls like this and very few early warnings. Moving from Affordable Care Act coverage to Medicare is also complex. There are also issues if you have a Health Savings Account, in conjunction with high-deductible employer insurance.

Here are some of the most common situations:

Still employed at 65? You and your spouse may delay enrollment in Medicare. However, remember, Cobra does not count. You still need to sign up for Medicare.

If you have a Health Savings Account (HSA), note that HSAs can accept contributions only from people enrolled in high deductible plans, and Medicare does not meet that definition. You have to stop making any contributions to the HSA, although you can continue to make withdrawals. Watch the timing here: Medicare Part A coverage is retroactive for six months for enrollees, who qualify during those months. For them, HSA contributions must stop six months before their Medicare effective date, in order to avoid tax penalties.

There are many other nuances that become problematic in switching from employer insurance to Medicare. If this sounds complicated, at least you are not alone. Moving to Medicare from other types of insurance is seen as complicated, even by the experts. The only government warning about any of this comes in the form of a very brief notice at the very end of the annual Social Security Administration statement of benefits.

There are advocacy groups working on legislation that would require the federal government to notify people approaching eligibility about enrollment rules and how Medicare works with other types of insurance. The legislation was introduced in Congress last year – the Beneficiary Enrollment Notification and Eligibility Simplification Act — and will be reintroduced this year.

Reference: The New York Times (Feb. 3, 2019) “If You Do Medicare Sign-Up Wrong, It Will Cost You”

Using a Health Savings Account for Retirement Health Care Costs

If it’s done right, the older American worker has an opportunity to save additional money for health costs during retirement. That’s if they do it right, according to CNBC’s article Over 55? Maximize your savings in this tax-advantaged account.” Over 55? You can put away an additional $1,000.

Starting in 2019, people with self-only coverage in a high-deductible health insurance plan will be allowed to save up to $2,500 in a Health Savings Account (HSA). If you’ve got family coverage, you can save $7,000.

HSAs permit users to put away money that is pre-tax or tax deductible. The funds accumulate interest on a tax-free basis, and then the account owner can withdraw the money tax-free for qualified medical expenses. Catch-up contributions for those 55 and older of $1,000, make this an even more attractive way to save for health care costs.

However, there are a few complications you’ll need to know about, if you are married and if you are getting close to being eligible for Medicare.

Keeping one HSA, if you’re married and in a high-deductible health plan works, until one of the spouses celebrates a 55th birthday. If the spouse under 55 years has the HSA account, but the older spouse is eligible for the catch-up contribution, the spouse who is over 55 should open their HSA and put away the additional $1,000. There are no joint HSAs, so only the older spouse can make that contribution.

If both spouses are 55, the only way each can make a $1,000 contribution, is if they have separate HSAs. If both spouses have family coverage, they can split the total plan contribution of $7,000 between the two accounts. However, those $1,000 catch up contributions still have to go into the account of the spouse permitted to make that contribution.

Once you or your spouse turns 65 and you enroll in Medicare, you are no longer permitted to make contributions. You can use the funds for qualified medical expenses, but no more contributions.

Let’s say you celebrated your 65th birthday in July and enrolled in Medicare. You were in a plan with self-only coverage. In that case, you are only permitted to make contributions until June—one month before you enrolled in Medicare. The most you are permitted to contribute to your HSA account for that year would be $2,250.

Contribute too much, and you’ll need to get the money out of there. Your deadline to do so is April 15.

One last detail: you are permitted a one-time-only rollover from your IRA to your HSA. There’s a limit, of course: $3,500 if you have self-only coverage or $7,000 if you have a family plan—and the $1,000 catch-up contribution if you’re over 55. It’s a smart move, taking taxable money and making it nontaxable, as long as it’s used for qualified medical expenses.

ReferenceCNBC (Dec. 24, 2018) Over 55? Maximize your savings in this tax-advantaged account”