Goldstone Financial Group's Blog
Retirement, unfortunately, does not always coincide with the time we’re tired of our jobs, ready to start sleeping in, and looking forward to more time for hobbies. Choosing the right time to retire is largely dependent on our financial situation, and that doesn’t always match up with our mental readiness.
Retiring too early or without a sound financial plan could tarnish your golden years. Here are four factors to consider as you plan your retirement date.
Your debt level
Managing a lot of debt payments on a fixed retirement income can be difficult, especially if your budget is tight. Unexpected expenses will leave you with little wiggle room and could lead to difficult circumstances such as losing your house.
If you are in this situation, a better choice is to work for a few more years and focus your income on paying down debt, especially high-interest loans or credit. This may mean cutting back on extra expenses to pay more toward high-interest debt such as credit card balances. You may also want to downsize or pay off your mortgage altogether, reducing the monthly payments you’ll have to make in retirement.
If you’re not sure whether to dedicate income to your retirement account or debt payments, look at what your retirement portfolio is earning compared to the interest rate you’re paying on your debt. If you’re earning 7 percent in the market and paying a 3.5 percent interest rate on your mortgage, a better choice is to invest your money. If the situation is flipped, paying down your debt would be the wiser choice.
Whether you can pay your monthly bills
It’s generally accepted that you’ll need about 80 percent of your pre-retirement annual income for a financially stable retirement. If you’re already struggling to pay bills while you’re working, retiring with a lower monthly income will only make your situation worse.
Your monthly budget will change in retirement. You’ll receive income from your retirement savings, pensions, and Social Security, and your budget lines for work-related expenses such as community and lunches out will likely drop. However, these changes may not be enough to cover your budget comfortably if you were already living month-to-month. Before you stop working, think through your retirement budget and whether a few more years on the job and decreasing your expenses would put you in a better position to retire.
Your retirement plan
Estimating your financial needs in retirement can be a moving target, as you don’t know how long you will live and what your expenses will be as the years go on. Today, Americans are living longer—if you are nearing retirement age and are in good health, it’s likely you could live to 90. In that case, you’d need to plan for savings that would last as long as 25 years.
If you’ve thought about what retirement will be like but now how exactly you’ll fund it, you’re probably not ready to retire yet. After defining your retirement goals and lifestyle, you’ll need to estimate your retirement living expenses, plus annual inflation. Retirement budgeting can get complicated, as you’ll need to figure out how much Social Security you’ll receive depending on what age you’ll retire and factor in new expenses such as healthcare costs and travel plans.
Retirement also can bring large, unexpected expenses, such as pricey home repairs and vehicle replacements. If you’re not sure whether your retirement income would cover these costs, it may be best to take care of them now instead of factoring them into your retirement budget.
When you have a plan in place, whether you draw it up yourself or work with a financial adviser, you’ll have a better idea of how many years you’ll need to work to have the retirement you want.
Your anxiety level about quitting your job
It can be hard to stop working, even if you’re financially prepared. Plus, you may love your job and not really want to leave it. Work gives our days structure and purpose, and the thought of days on end with no concrete plans may be stressful. This can lead to spending over your retirement budget as you try to fill the time.
If you’re in this situation, you have several options for managing retirement. You can keep working and saving, which will be financially beneficial when you retire. You also can take a part-time job or a regular volunteer shift with a local organization as you ease into retirement. If you’re worried about your retirement budget, you can try living on your retirement income and see if it’s enough for you to manage comfortably.
If you find that you’re not ready to retire, you’ll reap the many benefits of extra years of work. Along with increased savings and more time to pay off debts, you can stay on your work’s healthcare plan and spend a few years preparing for living on a retirement budget.
As more Americans are facing a retirement with inadequate savings or pensions, some are choosing to delay retirement past age 65—and some research has shown working longer could pay off financially. However, critics aren’t sure this is the best route to extending or building your retirement savings.
A study conducted by researchers from the Stanford Center on Longevity and the Society of Actuaries, which was released in 2019, found that retiring later is beneficial. The report states that “delaying retirement, even for a few years, can significantly increase the eventual retirement income.”
Researchers looked at 292 strategies for building retirement income and found the most effective to be delaying Social Security payments until age 70. The longer someone can wait to draw down their retirement and postpone Social Security payments, the more retirement income they’ll have, according to the report.
Here’s what proponents of a later retirement—and their detractors—say about putting off retirement and working longer.
More savings: While logic says that the more years you work, the more time you’ll have to save, there may be additional benefits to putting off retirement until age 70. Working in the second half of your 60s could be a time of higher earnings than in the past, and you may be able to save more if you’re old enough to have paid off your children’s college tuition, your mortgage, or your car loan. This could leave you with more money to put away for your impending retirement.
The rules for IRAs also benefit older workers. People who are working and age 50 and older can make catch-up contributions to their retirement accounts, allowing them to save more in their IRA or 401(k) at a time when their earnings are high: up to $26,000 annually in a 401(k) and $7,000 annually in an IRA. If you work for a company that matches IRA savings, you’ll add some free savings to your growing retirement contributions.
Some research backs this strategy. According to the Center for Retirement Research at Boston College, 86 percent of people who work until age 70 will be financially comfortable in their retirement.
Expanded Social Security benefits: Current rules allow workers to retire at age 66 or 67 and receive their full Social Security benefits. While claiming Social Security is allowed as young as 62, some experts say that working a few years past official retirement age can reap substantial benefits.
For example, your payments will increase by 8 percent for every year you are eligible for Social Security benefits but don’t take them. This incentive ends when you are 72, the required minimum distribution age, but let’s say you wait until age 70 to retire. Here’s how it would work: If your monthly benefit is $1,500 and your full retirement age is 66, waiting until age 72 to claim Social Security would increase your monthly Social Security payment to $1,980—a lifetime benefit.
Fewer retirement years to fund: According to the Social Security Administration, people are living longer, which means they will face a longer period of retirement. The agency estimates that men who are 65 will live, on average, to about 84 years, while 65-year-old women will live on average to almost 87 years. About one-fourth of all people who are 65 years old will live past 90.
As life expectancy lengthens, so does the expected period of retirement. That means that working a few years gives you more time to increase your savings without spending it and decreases the number of years your retirement savings will need to provide an income. Here’s an example: At age 65, say you have saved $500,0000. If your savings earn a 4 percent annual return (a conservative amount), when you are 70, your savings will have grown by about $62,000.
70 is the new 60? If you are generally in good health, putting off retirement until you are 70 shouldn’t be cutting into your remaining years of health. Modern medicine and life expectancy rates mean you that you likely will have many years after age 70 to enjoy your retirement.
In addition, working a few more years might actually be good for your health. Researchers have found that working keeps you physically and mentally sharp, and one study even concluded that people who work longer might live longer, too.
Some financial experts, however, disagree that 70 is a better age to retire. Many people retire in their early to mid-60s because of health reasons, or they are pushed out of their job and don’t have the option to work longer. Some simply don’t enjoy their job and don’t want to spend their sixties unhappy in their employment.
Considering a later retirement is fine, but don’t bank your savings plan on it by waiting until you’re 60 to start seriously saving. The earlier you can put away money, the better. This will help you build a retirement savings that will allow you to retire when you want—regardless of your age.
With 2019 over, there’s no better time to build up your retirement savings than now. The arrival of a new year is an excellent opportunity to review your savings plan, especially if you are nearing retirement age.
While it’s always wise to start saving as early as possible, putting away money for retirement is a good move no matter when you start. You can start taking advantage of compounding interest, building your retirement nest egg as much as you can. Many financial advisors stress the importance of these savings, as Social Security will not likely provide a viable retirement income by itself. A retirement savings plan will provide the needed income to cover monthly expenses in retirement.
Here are five smart moves you can make with your retirement savings in 2020.
Save early and often
While Vanguard reports that more millennials are joining 401(k) plans (some thanks to employers’ automatic enrollment programs), many aren’t checking in on their plan’s growth after they enroll. That means they also aren’t increasing their contributions, staying educated about what they’re investing in, or making sure that they aren’t paying high management fees that are taking away from their returns.
It’s smart to open a 401(k) plan when you’re young, but it’s equally important to keep tabs on your account and commit to regular contributions and, if possible, increase your contributions. Ideally, you will save between 10 percent and 15 percent of your income and maximize your employer’s 401(k) match. However, if that’s not possible right now, try a small increase in your contribution this year and increase it by 1 percent every time you receive a raise.
Make saving a habit
Prioritizing retirement savings can be difficult, especially when you’re faced with monthly bills and a budget devoted to paying down expenses. However, to build a strong retirement fund, it’s imperative to save now so you won’t have to play catch-up later. One way to ensure that you’re putting money away each month is to treat your savings contribution as a monthly bill.
If you create a monthly budget, add a line for savings alongside your allocation for electricity, the mortgage payment, and the water bill. Your savings are equally as important, and adding this budget line will prompt you to allocate money each month toward your retirement before spending money on “extras” such as entertainment and vacations.
One way to ensure you’re saving is to set up automatic contributions to your retirement account. That way you’ll consistently contribute every month, and when you get a raise or a bonus, you can make extra or increased contributions.
Begin envisioning your retirement
While the prospect of sleeping in, not working, and having endless days off may seem blissful right now, in reality, many retirees quickly find retirement boring—and their retirement savings may not fund a revised plan that includes travel, shopping, or other expenses.
To make sure that your retirement savings match your retirement plans, think through now how you might spend your time in retirement. Do you want to travel the world? Spend part of the year visiting family and friends? Buy a cabin in the mountains? Take classes at your local community college?
Once you get an idea of what you’d like to do in retirement, you can put together a budget reflecting how much it might cost and check whether your savings are on track to match it. If not, you may want to increase your monthly allocation. Or, you can think of a more affordable way to spend retirement that still will make you happy. Either way, planning your retirement now will guarantee a more fulfilling retirement.
Invest your retirement savings well
Your investment strategies for your retirement fund should change as you age. You might consider investing less aggressively as the years go on, as there won’t be time to recover any losses if the market sinks close to the time you plan to begin withdrawals.
For example, if a lot of your money is tied up in stocks, you may want to move a larger portion of it to bonds. As a general rule to follow, about half of your stock portfolio should be invested in stocks at age 60.
Increase your accounts
While one retirement savings plan is good, more can be even better. If you plan to max out your contribution to your 401(k) plan in 2020, consider opening a Roth IRA account with your tax refund or 2019 bonus. Roth IRA contributions are made post-tax.
However, if you are in a higher tax bracket, a traditional IRA may be a better choice. This option allows you to fund the account before your income is taxed; instead, you’ll pay taxes on withdrawals, when you’ll likely be in a lower tax bracket. This option allows you to postpone—and potentially pay less—in taxes.
To avoid another government shutdown, Congress passed a bipartisan spending bill in December. Tacked to it was a bill called the Setting Every Community Up for Retirement Enhancement (SECURE) Act that Barron’s describes as “the biggest retirement legislation in a decade.”
Many financial experts were surprised that the SECURE Act, which was backed by the insurance industry and lobbyists, was included in the bill. Earlier in 2019, the House passed it with a 417-3 vote, but several Republican senators put a hold on the bill and discussion on it reached a stalemate. While some lawmakers have raised questions about the SECURE Act and offered amendments, it generally has enjoyed bipartisan support.
With President Trump’s signature on the bill on Friday, December 20, the SECURE Act was signed into law. The legislation will reform the way that Americans save for retirement. Here are five key changes you need to know about.
Minimum age raised for RMD
Currently, people who own IRAs must begin taking required minimum distributions, or RMDs, when they become age 70 ½. The SECURE Act raises that age to 72. That means people who turn age 70 ½ in 2019 will have to take out their first RMD by April 1, 2020. Those who turn 70 ½ in 2020 or after can wait two years to withdraw their RMD.
Some analysts believe this change will significantly benefit retirees. Postponing RMD allows an IRA balance more time to grow through compounded interest and through additional contributions.
Age cap removed for IRA contributions
The SECURE Act will change a rule that restricted people from contributing to an IRA after they turned age 70 ½ (this restriction did not apply to Roth IRAs). Under the SECURE Act, there are no age limitations for contributing.
This change could help people who work into their 70s or beyond, allowing them to continue to make contributions to their IRA as long as they work. Under the SECURE Act, people will have more time to increase or catch up on their retirement savings. Coupled with the new rule increasing the age for RMD, people could significantly increase their retirement savings in those additional work years. According to research from experts at Stanford University, Cornerstone Research, George Mason University, and Financial Engine, putting off retirement for one year will benefit you 3.5 times more financially than saving 1% of your income over 30 years.
Benefits expanded to include part-time workers and more
With this change, the SECURE Act will respond to a changing economy with an increasing number of people working “gig” and freelance jobs. The act will allow many more employees who work part-time to save for retirement through their employer.
The SECURE Act also will allow people to withdraw as much as $10,000 from their 529 plan to pay back student loans. This move helps graduates because they will pay less interest as they repay their debt quickly and make them more financially secure as they enter the working world and begin families. As the nation’s student debt burden has surpassed $1.5 trillion, employers are looking for ways to help their workers manage this debt.
Parents of newborns, either through birth or adoption, will also get help through the SECURE Act. The act makes new parents eligible to withdraw $5,000 from their IRA, without penalty, to help pay the cost of delivery or adoption.
The end of “stretch” IRAs
Stretch IRA rules have allowed families to pass IRAs through generations tax-free. Under these rules, inherited IRAs kept their tax-deferred status when passed to non-spouse beneficiaries (typically children and grandchildren), allowing the IRA to grow without paying taxes. Stretch IRA rules, which applied to any type of IRA, meant that when a young beneficiary inherited an IRA, taxes and required distributions could be put off for decades.
The SECURE Act gets rid of these rules, and now non-spouse beneficiaries of an IRA must disperse its balance within 10 years. There are exceptions for surviving spouses, minor beneficiaries, beneficiaries who are disabled, beneficiaries who are chronically ill, and beneficiaries who are within 10 years in age of the account owner.
The primary beneficiary of this rule change? The U.S. government. Called a “tax acceleration,” eliminating stretch IRAs is estimated to generate about $15 billion in tax revenue in the next 10 years. It also can significantly change estate planning, as it eliminates a shelter for inherited income.
More annuities in 401(k) plans
While investors have always had the option of including annuities in their 401(k) plans, right now employers are responsible for making sure they are a good choice for their employees’ plans. Under the SECURE Act, insurance companies will become the decision-makers on annuities. Critics say this is a boon for the insurance industry, which sells annuities and lobbied for the passage of the SECURE Act.
Supporters of this rule change argue that annuities can be a sound investment choice because they provide a guaranteed income over the life of the retiree. However, because annuities are complicated investment products, investing in the wrong ones could mean large financial penalties and fees.
The calendar year is almost over, and if you’re saving for retirement with an IRA, there are several smart moves you can make before the end of 2019.
Contribute the maximum amount
For the first time since 2013, the cap on the annual contribution to a traditional IRA has been increased $500 to a maximum of $6,000 for contributors younger than 50. Those age 50 and older are allowed to contribute an additional $1,000 as a “catch up,” bringing their total allowable IRA contribution to $7,000.
To contribute to an IRA, you must have earned income from work, and you cannot contribute more to an IRA than you earned. IRA contributions in 2019 are tax-deductible, and if you or your spouse do not have a 401(k) or other work retirement account, you can deduct your entire 2019 IRA contribution on your tax return. Make your 2019 contribution before the next tax filing deadline passes on April 15, 2020.
If required, take your minimum distribution
If you are age 70 ½ or older, you typically are required to take a minimum distribution, or RMD, from your IRA. Figuring out the amount of your RMD, however, can be difficult, and it’s best to go over your retirement account with a financial expert before taking any distributions (errors can be expensive). The amount of your distribution depends on your life expectancy and how much your IRA is worth – the IRS calculates it by dividing your IRA balance on the last day of 2018 by your life expectancy or the applicable distribution period.
You’ll be penalized 50 percent if you miss your RMD, a significant penalty for a retirement account. If you don’t need the money from an RMD but have to take it, you can donate the disbursement to a charitable cause through a qualified charitable distribution (QCD). In this case, the donation will go straight from your IRA to a qualified charity of your choice, and it will not be counted as personal income. QCDs are limited to $100,000 each year.
Review your assets
December is a great time for a year-end review of your investment policy statement (IPS). This document lays out how much of your money should be in cash, bonds, and stock, and when each category will rebalance. At the end of the year, you can evaluate whether your investments match the allocations on your IPS. If they don’t, which is likely, you may want to rebalance your account.
Financial experts recommend creating an IPS before the end of the year if you don’t have one. While it’s ideal to create your IPS in a calm market, if that’s not possible, make one right away, no matter the market conditions.
Avoid taxes on distributions
One significant downside of a traditional IRA is that distributions can be taxed and converting to a Roth account can eliminate some of these potential losses. Also, investors who donate their RMD to a qualifying charity or use the disbursement to buy a qualifying longevity annuity contract also can avoid disbursement taxes.
Converting to a Roth IRA may be an especially wise choice in years when your taxable income is low. The taxes you pay in a slow year will set a baseline for you to make good choices when your taxes could be higher. Investors between ages 59 ½ and 70 ½ likely won’t benefit from a Roth IRA conversion, however, as they aren’t required to take RMDs.
If you inherited a traditional IRA in 2019, you must take the RMD by the end of 2019 and pay the taxes on it – even if you are younger than 70 ½.
Don’t overdo it
While saving for retirement is generally encouraged, can you contribute too much to an IRA? Yes, and there are consequences. For example, if your income is better than usual for one year, and you make a large contribution to your IRA, you may have to pay a 6 percent penalty on your extra contributions until you fix the error. If you have over-contributed, there are remedies:
- Withdraw the excess contributions before April 15, 2020.
- If your tax return already is on its way to the IRS, you can remove the extra contribution and send in an amended tax return by the deadline in October.
- If you apply the extra contribution amount to 2020, you will still have to pay the 6 percent penalty on it for 2019, but you’ll get a “head start” on next year’s contribution.
While these are fixes, the best approach is to not make excess contributions at all.
Looking forward, IRA contribution rules will not change in 2020 – the maximums will remain at $6,000 and $7,000, depending on your age, for combined contributions to Roth and traditional IRAs. The window for 2020 contributions begins Jan. 1 and ends April 15, 2021.
The family office has served as an integral part of wealth management since ancient times, although the modern form of the family office was born in the late 19th century with the Rockefellers. In 1882, John D. Rockefeller created an office to organize his many lines of business and oversee his family’s investments; this office managed the Rockefeller wealth as an investment portfolio, rather than individual businesses. Though this setup was never described as a “family office,” it’s similar to the concept today. In essence, a family office is an organization, typically made up of financial professionals, who help wealthy clients and their families manage their money and make sound decisions about their investments and financial futures.
In 2020, according to a recent Forbes report, the idea of the family office will continue to evolve and grow in response to cultural, economic, and financial trends. This structure still will help individuals and families build and preserve legacies, amass inheritances, and protect family businesses. However, many family office providers will need to rethink think their structures and purposes in response to a changing world, according to Forbes.
Here are six trends that will affect the family office in 2020.
Family offices already are preparing for a recession, according to Forbes. A UBS Campden Wealth Family Office Report published this year notes that more than 50 percent of family offices are prioritizing increasing their cash reserves, mitigating risk, and taking advantage of opportunistic events. Almost half of the family offices surveyed are also increasing their contributions to direct private equity investments, while 42 percent are prioritizing private equity funds and 34 percent are investing more in real estate.
Transitioning family businesses
Many families now are selling their established businesses or buying other family businesses, while others are moving from managing companies to managing large wealth portfolios. This trend is increasing the need for family offices, as families seek to preserve their wealth and legacies for future generations, according to Forbes. Family offices are providing support and structure for wealthy families transitioning into new stages of wealth management.
Advances in technology and changes in global economic patterns have created a new phase in globalization that some experts are calling “Globalization 4.0.” Trade in the global south is growing quickly, and the developing world is playing a greater role in international trade flows. In addition, automation, artificial intelligence, Big Data, the Internet of Things, and other paradigm-shifting technologies are impacting markets and trade, giving rise to a trend that’s seeing more products made locally, close to their consumer markets. For family offices, this shift can force rethinking about where individuals and families want their holdings located and how they will structure their governance.
New family office structures
Wealth is shifting as the number of billionaires worldwide declined by around 5% amid market changes and slowing economies. However, more family offices are being created, according to Forbes, as businesspeople who started companies in the 1990s sell and tech entrepreneurs are preparing to put their companies on the market. Much of this influx of wealth will be invested, and for individuals and families, a family office can be an excellent structure to manage assets and chart a financial future.
How will this impact family offices? This influx of investors looks different from previous generations. Instead of a single or multi-family office, investors are looking for new structures, such as virtual and private multi-family offices or on-demand resources. The sharing economy has also made its way to the family office, as some investors now are interested in pooling their resources with other families to open more investment opportunities.
Prioritizing other risks
Family offices now are increasingly factoring in non-financial risks when making decisions about their investments. Climate risk, for example, is now part of the World Bank’s risk management strategy. Since the publication of the Panama Papers, which exposed the innerworkings of some family offices’ investments, the threats to an individual’s or family’s reputation is more frequently considered when assessing risk. Another important factor is the risk surrounding succession, which fails two-thirds of the time. According to Forbes, half of family offices do not have a succession plan. This is clearly a risk that more family offices will need to prioritize.
The role of banks and financial advisors has diminished as digitization has given family office holders more access to systems and information. Often, family office members can manage their own investments and transactions, which can give them complete control over how their portfolio grows.
Digitization also is affecting wealth management services that work with family offices. Families are demonstrating growing concerns about the security of their information and are asking for greater access to their transactions and portfolios. To meet these demands, wealth management services must increasingly utilize software and other digital tools to store data in a centralized, accessible location. They must also provide regular, open communication with clients, as well as more tailored, customized solutions.
Long-term care insurance, which covers the cost of nursing homes, in-home care, and assisted living, can help tremendously if such a need arises when you retire. According to the AARP, out-of-pocket costs for long-term care average $140,000 (and these types of expenses typically aren’t covered by Medicaid), and by the time you reach the age of 65, there is about a 50-50 chance that you’ll have to pay for long-term care at some point. The U.S. Department of Health and Human Services has stated that 70 percent of people who are turning 65 will need long-term care.
Why, then, do so few people not plan for their long-term health care needs? Only about 7.2 million Americans have long-term care insurance, according to the AARP, and for many people, it’s a problem that they aren’t prepared to handle. Long-term care insurance policies can be costly, and the premiums typically become more expensive as you grow older. When you’re still relatively young and healthy, the need seems less pressing. As a result, long-term care insurance can be an easy expense to postpone. Here’s why you need, at minimum, a plan for financially managing long-term care issues, even if you’re perfectly healthy right now.
Assess Your Situation
First, it’s helpful to look at your life circumstances. Do dementia or other debilitating diseases run in your family? If that’s the case, you may need assisted care later in life. Consider how you’d pay for this care. Will your savings cover it? Would your children be able to help? Could you use your home equity? In some situations, financial advisors say that you could comfortably do without long-term care insurance, such as if you are using less than 4 percent of your savings for annual living expenses. If you have few assets, then you may qualify for Medicaid.
However, most people will eventually have to face the reality of how to cover long-term care. According to LifePlans, an industry research firm, long-term care insurance premiums cost an average of $2,700 a year. The average stay in a nursing home is about two-and-a-half years, and prices tend to increase each year. Genworth Financial has tracked the price of care for 16 years, and its 2019 data shows that the costs for assisted-living facilities and in-home care have increased, on average, between 1.71 percent and 3.64 percent each year since 2004, an increase that’s often greater than the U.S. inflation rate. For in-home care, that’s an average increase of $892 each year, and for a private room in a nursing home, it’s an increase of about $2,468 annually.
Benefits of Long-Term Care Insurance
Some believe that Medicare will pay for long-term care, but this coverage typically only covers short-term nursing home care or a percentage of at-home care costs. Additionally, patients must be in specific situations in order to qualify for this type of care. Most of the time, families must pay for the care themselves. This is why long-term care can be so valuable, as it covers the cost of residential or in-home care, regardless of the diagnosis. Premiums are based on how much coverage the policy holder would like to have on a daily basis. Policies are typically available from private insurance companies or through employer-sponsored insurance plans. Some companies offer their employees group long-term insurance plans, which are often cheaper. One drawback is that once you no longer have a job, then you lose the insurance plan.
If you do want long-term care insurance, it’s never too early to purchase it. Waiting until you are sick or older may seemingly save you money in terms of the premiums. However, your age and health can work against you if you try to purchase coverage late in life. Conditions such as multiple sclerosis, metastic cancer, dementia, and Parkinson’s disease—all progressive health conditions—are often reasons why applicants are not approved for long-term care insurance. In 2010 (when the most recent data became available, according to the American Association of Long-Term Care Insurance website), 23 percent of people in their 60s who applied for long-term care insurance were rejected, and 14 percent of applicants in their 50s were declined. According to the American Association of Long-Term Care Insurance, the prime time to apply for long-term care insurance is when you are in your mid-50s.
Considerations to Keep in Mind
In addition, there are some considerations to keep in mind if you’re thinking about purchasing long-term care insurance. The number of carriers offering long-term care has shrunk significantly. According to one expert, 10 years ago more than 100 insurance companies offered long-term care policies; now, only about 12 do so. Questions remain about how much longer these policies will be available, even for those who have already purchased them.
If you’re in “The Big Middle,” a term that SCAN Foundation Chief Bruce Chernof coined for those who are not wealthy enough to pay their own long-term care costs and not poor enough to qualify for Medicaid, the choice remains about whether to invest in long-term care insurance.
Financial decisions in our youth can be simple. How much can I afford to pay in rent? Should I budget for two meals out a week or four? What amount of car payment can I afford?
As we get older, however, our finances—and our financial decisions—can become more complex. As we accumulate wealth and begin thinking about the financial side of issues such as retirement, second homes, and leaving an inheritance, most of us could use some guidance. That’s where wealth management comes in.
What is wealth management?
Wealth management is an individualized financial planning service for highly affluent clients. These individuals work with either a single wealth manager or a financial advising team that provides comprehensive services and has expertise in a wide range of financial services and products.
What is a wealth manager?
Serving as personal consultants, wealth managers focus on issues that affect extremely wealthy clients, such as managing estate tax rules. They spend time getting to know their clients, including their financial and life priorities.
Along with answering questions and meeting with their clients, wealth managers often coordinate legal and accounting services for them as well. Wealth managers help clients with all financial planning needs, whether it’s setting up a trust for your grandchildren or working through how tax rules impact your business’s income.
Wealth managers provide across-the-board financial services, working with clients on all aspects of their financial holdings and decisions. Clients looking for a single service, such as help with retirement planning, may find it is more efficient to work with a financial planner who offers a la carte services. Similarly, individuals who are interested in guidance creating an investment strategy may want to consider a portfolio manager, who will offer advice on maximizing returns and minimizing risk but won’t provide additional financial services.
Wealth managers provide many services. These include estate and tax planning; accounting; retirement planning; providing legal guidance on finance-related matters; offering investment management and advice; setting up trusts and foundations; creating a plan for charitable giving; engaging in risk management; and planning for Social Security benefits.
Your initial meetings with a wealth manager may be more conversational as you talk through your personal and financial goals. A wealth manager will need to be familiar with the entirety of your finances as well as your financial history, hopes and plans for your future, and the legacy you want to leave. Using all this information, a wealth manager will craft a financial strategy that will meet all of your goals.
How do I find a wealth manager?
Generally, there are two types of wealth managers. Large firms such as Merrill and Morgan Stanley offer wealth management experts along with banking and other types of financial services. Smaller independent firms, on the other hand, may provide a more personalized experience.
Either way, you’ll want to make sure that the wealth manager you choose is certified. Only one certification specific to wealth management, the certified private wealth advisor (CPWA) is available.
Financial advisors with this certificate are qualified to work with clients whose net worth is at least $5 million. The certified financial planner (CFP) and chartered financial analyst (CFP) certify a professional in general financial planning practices and are valuable certifications for wealth managers.
You can start looking for a local wealth manager through online search. This should provide information about large financial institutions and small private firms in your area. You also could ask around. Word of mouth can be a valuable tool in finding a qualified professional that others— especially peers who have similar levels of wealth and financial situations—recommend.
The cost of wealth management services typically is based on a percentage of the client’s assets that are being managed. That means the more financial assets you have, the higher your fees will be. Firms may also add other charges—Morgan Stanley, for example, charges fixed fees for specific accounts and services. It’s important to talk to your wealth management advisor about their rates and fees before agreeing to work together.
What if I prefer online services?
If you’re more comfortable behind a computer screen, many financial institutions offer wealth management service online—although you’ll lose the personal touch of face-to-face meetings. Meetings can be moved to the phone or a video conference while much of the financial information is provided online.
Some online services offer unlimited access to a human financial provider or team of providers for a flat annual fee that’s determined by the services you need and how complicated your financial needs are. Other services calculate fees based on a percentage of your assets. The downsides for some of these services, especially when they offer a team approach, is that you may not consistently work with the same financial adviser.
Regardless of the criteria you use to select a wealth management service, it’s vital to think through your needs and research your options thoroughly. You have spent a lifetime building up your wealth. Your financial decisions often will impact your family for decades or more to come. This means it is important to work with a qualified wealth manager who takes the time to understand your financial situation and long-term goals.
The two basic types of retirement accounts are the 401(k) and the individual retirement account (IRA). While it is easy to confuse the two, they are actually quite different. While a 401(k) is an employee-sponsored account, anyone can open an IRA. This makes it an important product for people who do not have access to a 401(k) or who have already maxed out contributions to that account.
Unfortunately, the contribution limits for an IRA are significantly less than for a 401(k). However, they remain extremely important vehicles for retirement savings because of their tax advantages. An IRA is a way for the government to incentivize retirement savings outside of the employee-sponsored account.
The Various IRA Options Available Today
To open an IRA, individuals only need income from a job that is claimed for tax purposes, which rules out income from Social Security or an investment. When opening an IRA, individuals need to choose between a traditional and a Roth account. Like a 401(k), an IRA comes with certain tax benefits.
With a traditional account, individuals can contribute to the IRA and avoid paying any taxes on those contributions. However, when money is withdrawn from the account, it is taxed at that time. A Roth account involves investment of taxed income. Later, withdrawals can be made without paying any taxes, provided that individuals do not touch the account until they are at least 59.5 years old.
Some forms of specialty IRAs exist. For example, a simplified employee pension (SEP) IRA is geared for small-business owners and self-employed individuals. These accounts operate much like other IRAs except that they have much higher contribution limits.
Small-business owners are required to contribute the same rate to eligible employee accounts and their own. In other words, if the owner saves 10 percent of compensation, 10 percent of an employee’s compensation must also be saved. Employees cannot contribute directly to their own SEP IRA.
Another product is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. This product is designed for companies with 100 or fewer employees. A SIMPLE IRA is easy to set up and allows employees to contribute to their own accounts.
Questions to Think about When Opening an IRA
Individuals can open IRAs through most financial service providers, from banks and credit unions to brokerage firms. Different service providers offer various advantages and disadvantages, so it is important to do some homework before opening an account.
Ideally, the financial institution provides individuals with a wide range of resources, from online education materials to in-person meetings, to help guide choices. These resources can help individuals plan for the future. Also, different providers will charge different types of fees. While some companies charge monthly fees, others have customers pay per trade.
Sometimes, companies will charge both monthly and trading fees, so it is important to understand the full payment scheme. Otherwise, individuals may end up paying a lot more for the service than they originally intend. It is also important to figure out what types of investments can be held in the account.
The point of opening an IRA is to invest money for retirement and have it grow over time. As a result, the exact investment options tend to matter quite a bit—especially for people who like to play an active role in investing decisions. People who prefer a more passive approach to investing should consider the possibility that they may want to get more actively involved in the future.
The Basics of Investing in an IRA
When it comes to investing money through an IRA, people need to consider the tradeoff between risk and return. An IRA should be viewed as a long-term investment. Generally, individuals will use an IRA to invest in stocks, especially if they are more than a decade away from retirement.
The stock market involves more risk, but it also usually yields higher returns than products like a certificate of deposit or a Treasury bond. While it is highly unlikely to lose money with these safe investments, individuals will also not earn much money. Different service providers may have some guidance to offer about how to navigate the creation of an effective portfolio. However, it is important that customers not feel pressured.
Alternately, individuals may want to take a fairly hands-off approach to investing in an IRA. In these cases, they may choose something like a total market index fund, which provides access to the kind of diversity needed to mitigate much of the risk involved in the stock market. These funds choose investments from a range of different geographic locations and across a number of different industries.
Individuals would struggle to obtain such diversification alone, even if investing very large sums of money. This option is for people who are willing to leave their money in accounts for long-term gains without the need to micromanage it. Another option for people who prefer a hands-off approach is a robo-advisor. This service will select investments based on the investor’s preferred cost and risk profile.
For many people, the prospect of saving for the future and planning for retirement is daunting. You may feel like you have no options to increase your savings, or worry that you’ll have to make major sacrifices in retirement. You’re not alone—millions of Americans over the age of 40 lack substantial nest eggs for retirement.
However, don’t despair. There are many strategies to substantially boost your savings, even if you feel behind. People under the age of 40 have even more options to get a jumpstart on retirement savings, considering the power of compounded interest.
Some of the strategies you can use to quickly increase your retirement savings include:
Invest in permanent life insurance.
Most people have heard that they should buy term life insurance and invest the rest of their money, rather than going for the more expensive option of permanent life insurance. This option can work for some people, but many others end up spending the money they would otherwise invest, despite their best intentions. For many retirees, permanent life insurance is a better option.
With permanent life insurance, you’ll pay ongoing premiums, which is a sort of automated savings. Each premium increases the cash value of the policy tax-free, and you can borrow funds against the policy or sometimes withdraw cash from it. In addition, the policy will pay out death benefits, which aren’t subject to income taxes. In other words, permanent life insurance can serve as a way of supplementing your retirement income with non-taxable money. Think of permanent life insurance as a sort of bond or certificate of deposit (CD) that increases in value steadily over time.
Save the raise.
As you advance in you career, you’ll likely receive raises that provide a little extra room in your budget. While a raise can sometimes relieve the pressure on a tight budget, many people can make ends meet without the extra income. Frequently, a raise just leads to a corresponding increase in spending. But what would happen if you saved your raise instead? If you put that extra income into a retirement account rather than buying a nicer car or new home, for example, you’ll set yourself up for a more comfortable retirement where you won’t have to sacrifice much to maintain your standard of living. The best part about this strategy is that you won’t have to make cuts to your budget or feel pinched by the extra savings, since you’ll still enjoy the same monthly income.
Take advantage of Roth savings.
Research has shown that Roth accounts are one of the most underutilized retirement preparation strategies. Many people understand the importance of maxing out a 401(k) and taking advantage of employer matching, but aren’t aware that they can do even more. Roth accounts are funded with after-tax income, but withdrawals during retirement are not subject to taxes. This option is especially good for people who may be in a higher tax bracket in retirement than they currently are. The other value of a Roth account is its potential to diversify your retirement savings. With both tax-deferred and Roth accounts, you can minimize the potential impact of future tax changes.
Purchase a home.
There’s still debate about whether buying or renting makes better financial sense. In some areas, renting a home is certainly cheaper in the short term than a down payment, mortgage, and property taxes. At the same time, research by the Harvard University Joint Center for Housing Studies shows that people who own homes tend to increase their wealth significantly more than renters, even after controlling for socio-economic differences and other factors. This may be because home ownership is a type of forced savings. Every mortgage payment builds equity in your home. You pay down your debt on the home while its value likely increases. Of course, it’s important to think strategically about home ownership and realize it is a long-term investment. If you buy and sell homes frequently, you’ll squander any gains on closing fees and other one-time expenses.
Fund a Health Savings Account.
Not everyone is eligible for a Health Savings Account (HSA), but those who are often fail to use them strategically as they prepare for retirement. Contributions to an HSA are tax-deductible and can be invested to fund qualified healthcare expenses you’ll encounter later in life, including during retirement. Very few people use an HSA for long-term savings, even though the accounts can be rolled over annually. With healthcare costs typically increasing during retirement, it’s important to have money set aside to deal with these expenses. An HSA can help you offset the costs of healthcare without needing to rely on your primary sources of income. Ideally, you would start investing in an HSA early and invest the money so that it grows over time and serves as a sort of insurance.
Ideally, retirement is a time when people relax and enjoy their lives, but following bad financial advice or not planning enough can keep you from fulfilling your retirement dreams. While it is imperative to understand the key financial steps to take in preparation for retirement, it is equally as important to know the errors that many people make. Knowing these common pitfalls can help you to ensure that you stay on the right track as you plan for retirement.
Read on for some of the most common financial mistakes that people make in relation to retirement:
Paying off a mortgage.
People often want to enter retirement with as little debt as possible. Many think that paying off their biggest monthly expenses, such as their mortgage, early is the quickest way to free up more money. However, home loans tend to have very low interest rates—paying off a mortgage now will not save you much in the long run. In fact, it may be best to refinance your home at a low rate and invest the money that you would have otherwise used to pay off the home loan early.
You should always think about interest rates in relation to debt and strive to get rid of high-interest debt, such as credit cards, first. When it comes to low-interest debt, paying it off is not always the best decision since your money can be invested with a return higher that the interest on the loan.
Investing in variable annuities.
An annuity is a great investment tool for retirees since it provides monthly payouts, sort of like a pension. The most common type of annuity is deferred, which means there is a set payout upon maturity.
However, many people select variable annuities, which invest in the market. While the return can prove higher with variable annuities, they are also vulnerable to market fluctuations and can fees as high as 3 percent. These fees quickly eat into retirement savings, especially when that loss is compounded over the years. For these reasons, variable annuities can actually detract from retirement savings.
Neglecting emergency funds.
Everyone needs an emergency fund, even retirees. In fact, emergency funds become even more important during retirement, a time when many people live on a fixed income.
Emergency funds also prevent you from dipping into retirement accounts, such as a 401(k), during a financial emergency. Borrowing from retirement comes with massive penalties and fees, and doing it even once can significantly lower your overall savings (as the money that would otherwise compound over the years has been taken out). The makeup of an emergency fund will vary according to household, but a good general rule of thumb is to have enough saved to cover living expenses for at least a few months.
Taking Social Security benefits too early.
Too many retirees fail to understand how the value of Social Security benefits changes depending on when they are taken. Though you can get 100 percent of your Social Security benefit at age 66 or 67 (depending on birth year), it pays to wait even longer if you do not have a great financial need. Benefits continue to increase beyond 100 percent after full retirement age until you turn 70 (at that point, it will not grow anymore). Waiting means a significantly higher monthly benefit, and that amount will remain the same for as long as you remain living. The increase in payout starts to outweigh the cost of delaying for anyone who lives past age 82.
Purchasing a timeshare.
Many retirees imagine themselves using a timeshare frequently enough to make the purchase worth it. Unfortunately, this is rarely the case. In addition to the upfront cost of the timeshare, you will also need to pay annual fees to maintain the property. Even if you do use your timeshare frequently, the fees may not be any cheaper than simply renting a vacation home, an option that provides much more flexibility. Also, timeshares are not very liquid, so getting rid of them can be quite difficult.
In general, retirees should avoid timeshares altogether unless they get them at a significant discount from a third party and are sure they will use them regularly.
Retiring too early.
Too often, people retire before they are ready because they feel some sort of pressure to do so. Taking the time to work a few more years can keep you from getting bored, and it can also help you save more money for retirement. Then, when you do retire, you will have more spending money to engage in fun activities, like traveling. While you may have expectations about when you should retire, it’s important to be realistic about savings and work for a few more years, if you can.
The decision to retire can cause a great deal of anxiety, especially if you aren’t sure if you’re ready. Some people use milestones like career achievement, age, or even savings to assess their readiness for retirement, but there are other factors you should consider as well.
Ideally, you should create a comprehensive plan for your financial well-being in retirement. Such a plan makes it easier to deal with financial setbacks and other bumps along the road. Furthermore, the plan should help protect against as many contingencies as possible, to minimize the odds of being caught off guard. To ensure you’re prepared for retirement, it can be helpful to create a readiness checklist. While this list will look different for everyone, some of the key items to include are:
It’s probably not possible to say exactly how much you’ll spend in retirement, but estimates can help you get a general sense. A detailed budget will give you a better idea of how much you’ll need, both monthly and annually. This estimate should include all expenses: basic costs such as housing, utilities, food, transportation, and healthcare, as well as irregular expenses like travel and vacation. Your expenses may change in retirement, but it’s still a good idea to figure out how much you’re spending now, to create a baseline estimate. Remember that the more detailed your budget is, the better—don’t leave any expenses out.
During retirement, you may receive income from a wide number of sources, including investments, Social Security payments, and more. You may also have an annuity or pension income. Adding up your expected monthly income from these different sources can give you a better sense of what you’ll need to save to close the gap and ensure you can cover your bills. In addition, this tally will help you determine if you’ll need to reduce your spending or increase your income through options like downsizing to a smaller home or getting a part-time job.
The question of how much you need to save for retirement is a complicated one. Ultimately, you should base this number on the retirement budget you created for yourself, and then add plenty of room for cushion. To get a very broad estimate, multiply your estimated annual spending by 25. If you expect to have other sources of income in your retirement besides savings, subtract them from your annual spending, then multiply that number by 25. If your actual savings are less than the calculated estimate, it is time to revisit your budget and see what adjustments you can make.
Prior to retiring, you’ll need to plan how you will draw from your retirement accounts. It’s important to be strategic about how you draw down, especially if you have a variety of different accounts. Typically, tax-advantaged accounts should go untouched for as long as possible. Of course, traditional 401(k) and IRA plans have minimum required distributions once you reach 70.5 years of age, but Roth accounts do not have the same requirements. Roth accounts can continue to grow well into retirement, so try to keep as much money as possible in these accounts, for as long as you can.
Carefully consider your anticipated healthcare costs in retirement and figure out what insurance you’ll need. For most people, healthcare is the most significant cost in retirement. Medicare is a given, but many people find that they need supplemental insurance. You should also have an emergency fund for expenses not covered by insurance plans. Keep in mind that the cost of long-term care can quickly lead to bankruptcy, because traditional insurance does not cover it. If you know you won’t be able to shoulder the cost of long-term care, it’s vital to research insurance for this level of care. Long-term care policies become more expensive as you age and your health declines, so you may want to purchase a policy sooner rather than later.
While you might wait until you’ve actually retired to begin legacy planning, start thinking about what you want to leave behind before leaving the workforce. Your legacy could influence your retirement savings target, the timing of your retirement, and your estimated retirement budget. You should also draw up an estate plan. Be sure to revisit it regularly (at least every five years) to ensure everything remains up to date. During retirement, it’s important to have regular conversations with your spouse and heirs, so that everyone knows what to expect and any transition of assets proceeds smoothly.
No one wants to think about the possibility of losing their spouse. However, if you are married, it’s important to consider how your death or the death of your spouse will affect the survivor’s finances. Failing to plan for this could put one of you in a terrible financial situation during one of the most emotional times in life. Talk to your partner about what the surviving person should do; consider things like whether you should stay in the same home or whether you’d need additional sources of income. Some sources of retirement income are tied to one partner, so their death could mean the loss of a specific income stream. Identifying these potential gaps early will help you and your spouse protect each other and your family.
One of the biggest risks that people face in retirement is the cost of healthcare. People frequently underestimate the cost of healthcare and often do not get adequate insurance to protect themselves.
That said, sometimes it’s impossible to correctly anticipate the coverage you’ll need in retirement. While some people know the health issues they will face in the future, most people must guess. Either way, underestimating healthcare needs can put a significant strain on your finances and make it difficult to make ends meet. Many people believe that Medicare will cover them completely. While Medicare Part A covers some levels of hospitalization, you’ll have to pay premiums for Medicare Part B, and you may need supplemental insurance. Even with this, you’ll still have out-of-pocket expenses.
Some of the Issues with Health Insurance Coverage in Retirement
During your working years, your employer will often pick up the majority of healthcare insurance premiums, so it’s understandable that many retirees are caught off guard with the amount they suddenly have to pay. At the very least, you will need to pay Medicare Part B premiums. These premiums depend on income; costs are higher for people who make more money. While the premiums are low, starting around $140 per month, Medicare Part B does not cover all health expenses, which leaves many people needing a Medicare Advantage Plan or a Medigap policy to fill in the cracks. Even still, Medigap policies may not provide dental or vision coverage, both of which could also leave you with costly bills. Medicare Advantage covers dental and vision needs, but it offers fewer hospitalization benefits, so a serious illness could come at a very high expense.
The other issue you’ll need to consider as you approach retirement is long-term care coverage. Long-term care is one of the most expensive healthcare needs for older adults, and Medicare does not cover the majority of the cost. Luckily, long-term care insurance is available, but it’s not always cheap, especially if you wait until retirement to purchase it.
As a general rule, purchasing insurance earlier in life makes the premiums much more affordable. The downside is that you’ll be making monthly payments during a time when you’re less likely to actually need long-term care. At the same time, long-term care can quickly bankrupt you in retirement, so this type of insurance shouldn’t be dismissed lightly. This is especially true if you have a family history of a serious geriatric disease, or if you have a serious chronic health condition.
The Average Healthcare Costs Faced by Today’s Retirees
As you approach retirement, it can be helpful to use an online calculator to help estimate the costs of care you’ll face in the years to come. For the average, 65-year-old male, the typical cost for premiums and out-of-pocket healthcare expenses is about $4,500 per year, which translates to $375 per month. You should try to factor at least this amount into your monthly expenses.
Keep in mind that the cost of healthcare is rising at a rate double that of inflation. In other words, your out-of-pocket healthcare expenses could easily be closer to $675 in another decade. If you have a chronic condition, you may have to pay even more, and couples will need to double that figure. In addition, this amount does not account for long-term care. In other words, the cost of healthcare in retirement can be extraordinarily high.
The Key Strategies for Reducing Healthcare Costs in Retirement
Luckily, retirees aren’t completely helpless when it comes to the extremely high costs of healthcare. One of the most important things that you can do to control your costs is to stay healthy by receiving proper preventative care. Healthcare plans prior to and during retirement will cover preventative visits and services. While routine check-ups and such may seem unnecessary and come across as a hassle, they are all aimed at keeping you healthy and helping you avoid costly treatments and procedures. Skipping out on these visits can cause a small health problem to become more serious and therefore more difficult and expensive to treat. In addition, some cancers are curable only when detected and treated early.
The other side of the strategy for keeping your healthcare costs low involves managing distributions in a strategic way. As mentioned above, the cost for Medicare increases as your income rises, but you can manage your distributions in such a way that your premiums are kept in check.
For example, income from HSA accounts, Roth IRA accounts, and cash value life insurance policies do not factor into the formula that determines monthly Medicare Part B premiums. Income from a reverse mortgage is also not included in this calculation. If you have significant amounts of money in a traditional IRA, you may want to consider transferring some to a Roth account before turning 65 to avoid being forced to take large minimum withdrawals down the line. These minimum withdrawals do not apply to Roth accounts. You can also use deductible healthcare expenses to offset the money withdrawn from a traditional retirement account.
Figuring out the best way to save for retirement can be tricky—everyone’s financial situation is different, which can make it hard to find the right balance between saving for retirement, putting money aside for other goals, and maintaining a comfortable lifestyle.
There is a lot of retirement advice out there, but not all advice is created equal. In fact, most of the advice commonly shared about retirement savings should be altogether ignored. To help you determine which savings plan is right for you, first you have to learn what not to do. Here are five of the most frequently shared—but ultimately ill-advised—retirement advice tips.
Monthly expenses go down in retirement.
If you assume your monthly expenses will go down once you retire, you may end up not saving enough. Many people think that they will save on commuting expenses or they will no longer have a mortgage, but the reality is that the majority of retirees replace their old expanses with new ones. While you may no longer drive to work every day, you will likely still drive to volunteer or recreational activities, not to mention incur the increased costs of travel that often occur during retirement.
Also, when homeowners pay off their mortgage, they may funnel that money into new hobbies or making lifelong dreams come true. Though research has shown that about 20 percent of retirees have lower monthly expenses, another 20 percent spend more. The remaining 60 percent tend to have about equivalent monthly expenses.
People need X amount of money to retire.
Many people will offer an exact figure for how much money you need to save to be able to retire. Unfortunately, these numbers rarely reflect the truth for everyone—though you will need a significant chunk of money to retire, choosing an arbitrary number is not helpful. If you choose an amount that’s too high, you may become discouraged because you feel like you will never hit that amount. Or you may become so focused on saving enough that you forego important opportunities in the present.
In reality, future retirees need to think about how much they will likely spend each month in retirement and use that number to come up with a figure that more accurately reflects their personal goals and lifestyle preferences. Financial advisors and other professionals can help you set more realistic goals.
Social Security will run out in the next few years.
Over the years, many people have talked about how Social Security is going broke. While Social Security has been more robust in the past, it is not in imminent danger of going bankrupt. Most often, retirement professionals hear people bring this fact up when they want to draw on Social Security early (even though this involves a penalty). These people tend to want to get in on the money while they can. However, Social Security is funded through a payroll tax, so as long as people are paying their taxes, there will be benefits for retirees. Taking a permanent reduction in monthly income can cause a lot of issues down the line. While you may be tempted to hedge your bets and plan for retirement without factoring in Social Security, the truth is that this money is not running out anytime soon.
There is always time to catch up with savings.
If you have not been able to save for some reason, do not despair—there are things you can do over time to help you boost savings. However, thinking that there is always time to catch up and using that as an excuse to delay savings is unwise. When you start saving early, you maximize the benefit of compounding returns and also give yourself some leeway when it comes to investing decisions.
Individuals who start down the road put themselves at a serious disadvantage since their money will never grow at the same rate it could have if they had started earlier. Sometimes, extenuating circumstances get in the way, but you should be diligent about saving as much as possible—now.
Only one savings tool is necessary.
One of the biggest traps that people fall into is putting all of their savings into a single type of account. There are many different types of savings accounts, and they all have their unique benefits and drawbacks. You can look into other options, like an IRA, to supplement the money you put into your work-related savings accounts, such as a 401(k).
The problem with having one savings tool is that you may start to feel like you have maxed out your savings. For example, when you have gotten as much matched from your employer as possible, you may stop saving. At this point, you need to look at other options and figure out what will benefit you the most once you have achieved the maximum for an employee-sponsored account. Often, it makes sense to have at least one traditional and one Roth account, giving you options for lowering your taxes in retirement.
Nowadays, the majority of workers do not have a traditional pension that they can depend on for income once they retire. As a result, saving through a 401(k) has become more important than ever. However, maximizing your savings through this vehicle is not always as simple as it seems. You will need to pay close attention to the rules governing deposits into your account, as well as current tax policy. Otherwise, you may end up costing yourself money down the line.
Importantly, rules and policies change every year, so it is imperative that you pay close attention as you continue to save for retirement. However, there are some general tips that you should follow to maximize your savings:
1. Avoid fees
When choosing your 401(k) provider through your work, you should opt for one with the lowest or fewest amount of fees. While fees may not sound like much, they can add up quickly and significantly cut into the account value down the line, especially when accounting for compounding over time. Of course, the plan should also have the right risk tolerance. You should never feel like you have been cornered into a particular plan because of fees. If that happens, it is time to talk to human resources and consider an alternate savings plan, such as an IRA. Taking advantage of employee matches may still make sense, but once that is maxed out, another product may prove to be the best choice.
2. Diversify savings
When it comes to investing for the future, diversification is important—but many people do not understand how to do so. Diversification reduces your portfolio’s risk by making it more stable during market volatility or downturns. Financial planners recommend choosing both stocks and bonds to provide some degree of balance, as well as periodically rebalancing the portfolio to target allocations.
For example, individuals may rebalance their portfolio to reduce their investment risk as they get closer to retirement to protect the stability of their overall investment. One piece of advice that all financial planners agree with is that investors should never make impulsive changes to their risk profiles without consultation and great need.
Diversification may also mean investing in more than one 401(k) product. A Roth account can offer several benefits to people who max out their contributions to a traditional account.
3. Get matched
Perhaps the most important aspect of maximizing 401(k) savings is taking advantage of employer matching programs. Most often, employers offer 50 cents on every dollar from the employee, up to 6 percent of total pay (although the policies differ between companies). You should know exactly what your company will match and plan to take full advantage of the program. After all, matching is basically free money in your account. This matching program is an easy way to significantly boost your account and provide a larger base for further compounding in the future.
4. Get vested
Importantly, companies also have different policies on getting vested, which means that employees who leave the company too early may not get their 401(k) contributions matched. At some companies, getting vested takes as long as five or six years of service. While some will not pay out at all until an employee becomes vested, other companies will allow employees to keep a portion of their matched contributions when they leave early.
Often, becoming vested means thousands of dollars directly to the retirement fund, so it makes sense to stay as long as possible. However, you should never let the promise of getting vested drive you to stay in a bad job.
5. Rollover balances
When people do switch jobs, they have the opportunity to cash out their 401(k) plan—this is rarely a good idea. Before the age of 59 1/2, you will face a 10 percent early withdrawal penalty and you will be required to pay income tax on the balance. This can be problematic even if you want to reinvest your money in a different account rather than spend it.
Luckily, there are other options. You can choose to keep the money in the 401(k) and let it grow over the years, but it can be difficult to keep track of your different accounts from each company you have worked at. Another option is asking your former employer to transfer the balance to a new account, which helps to avoid any fees or penalties and keeps all of your retirement money in a more centralized location.
6. Take distributions
Just because you’ve finished adding to the principal of your 401(k) account does not mean that you’re finished managing your account. These accounts have required minimum distributions starting at the age of 70 1/2. At this point, you must make minimum withdrawals on an annual basis or face a hefty penalty: 50 percent of the amount that should have been withdrawn. Since you may draw on multiple accounts during retirement or you may not be retired come this age milestone, making the withdrawal can sometimes fall through the cracks and result in a significant loss. Notably, this rule only applies to a traditional 401(k) account. With a Roth 401(k), there are no mandatory annual distributions.
When people feel like they may not have enough money saved for retirement, they may think about selling their homes to reduce their monthly costs. Even those who have saved may consider downsizing their homes as a way of making the most out of the money they have in retirement. After all, retired couples often do not need the same amount of space that they once did after their children moved out and started their own families. Certainly, downsizing your home or moving to a less expensive area can save you money, but it does not always make sense to take this step during retirement. Ultimately, individuals need to think about the total costs involved with this decision and whether or not they will actually save money as a result.
The Numerous and Sometimes Intangible Costs of Selling a Home
Selling a home is a considerable investment. Often, individuals need to pay for some updates or a facelift to maximize the price that they get. In addition, sellers frequently need to pay Realtors a commission, which can total 6 percent or even more of the total sale price. Another consideration is capital gains taxes, which can take a large chunk out of earnings if individuals make a lot of money during the sale. Beyond these costs, retirees could also potentially face expenses involved in moving to a new space, which could range from purchasing or renting a new home to paying for the cost of movers. Closing costs can consume even more money. Furthermore, people often find themselves needing new, smaller furniture for a smaller living space. Other incidental costs may also arise. Another issue is the fact that people often think that their homes are worth more than they actually are.
Selling a home may also involve some intangible costs. These costs also deserve some consideration before a decision is made. Particularly when people move to a new area, they will have to say good-bye to friends, family members, doctors, community members, and others. These relationships are not easy to rebuild in a new place, which can make individuals feel somewhat lonely once they move and result in some regrets about their decision. Plus, our homes have a lot of sentimental value. People should avoid treating this decision too lightly and find themselves wishing that they had followed a different path. For many people, staying put is worth the extra expense in retirement.
When Moving to a New Home in Retirement Can Make Sense
Some people may put themselves in a better position by moving. Perhaps moving will bring them closer to family members or make it easier for them to run their weekly errands. Another important consideration relates to health. As people grow older, they may begin to experience mobility problems, which could make it appealing to move into a home with greater accessibility, such as one without stairs. Of course, individuals can often make their current homes more accessible, but the costs involved can be high, making it more appealing to find a new one. As health concerns become more serious, individuals may end up needing some assistance, which could also influence their decision to move.
Another point to keep in mind is that many retirees successfully boost their monthly retirement income by opting to downsize. According to a study published by the Boston College Center for Retirement Research, individuals who move from a $250,000 home to one that costs $150,000 can net $6,250 annually from the decision. This gain translates to an additional $520 per month, which is a lot of money for the average retiree. Of course, this number is only theoretical. Before making the decision, retirees should create a budget that takes into account utility costs, commuting expenses, insurance needs, and other monthly expenses related to both homes to figure out how much they could potentially save with the move. This figure will often make it much more clear whether or not the decision is the right one.
Choosing a Middle Path When It Comes to Relocating in Retirement
Retirees may want to consider a third option other than relocating to a new home or keeping their current one. This third option involves renting out their current home and then moving to a smaller one. The rental proceeds can help to put a lot of money in the bank without involving many of the expenses mentioned above. Of course, renting a home can also involve a number of costs, such as hiring a management company to dealing with losses if your home goes unrented for a month. However, these costs are generally much less than those involved with an outright sale, especially if the value of your home is expected to increase in the years to come.
People may choose this third option for a number of different reasons. Some may simply want to test out a smaller place while having the option to move back to their home in case they decide that they made a bad decision. Others may want to keep the home in the family so that they can will it to their heirs. Retirees may also simply not want to go through the hassle of a sale, or they may want to have the freedom to relocate easily with the security of knowing that they already own their home should something happen. As with the decision to sell, it is important to think about the expenses involved and the rent that you can potentially secure to ensure that the deal is worth the hassle.
Many people struggle when it comes to choosing the best retirement account because, in part, choosing the right account involves making predictions about the future. But how can you tell if a traditional or Roth IRA is best for you?
Roth accounts are relatively new, as they were only introduced in 1998. In the most basic sense, Roth IRAs can help you to avoid tax ramifications down the road since any contributions are made after taxes, meaning that withdrawals are not taxed. They also have a number of benefits; for instance, you are able to withdraw prior to retirement without penalty and continue making contributions after turning 70 ½ (traditional IRAs require you to take required minimum distributions starting at this age).
While these benefits may make Roth accounts sound attractive, they do not always make sense for everyone. Generally, the decision between Roth or traditional IRAs comes down to how much a person is currently making and how much that person plans to make in the future. Roth accounts make the most sense when people think that they will have a higher income in retirement than they do now, meaning that they would be taxed at a higher rate later than they are now. Individuals who expect to earn less during retirement than now typically should opt for a traditional account since it will allow them to enjoy a lower tax rate in retirement.
The Benefits of Roth Accounts for Young Earners
Typically, a Roth account makes the most sense for young workers who have not yet fully realized their earning potential. Young workers often have an effective tax rate in the low single digits, and it is highly likely that they will be in a higher tax bracket once they retire. Front-loading the tax burden makes sense for them since it will save money down the road. In addition, investments grow tax-free in Roth accounts, an important consideration for young workers as the money will likely accrue compounded interest over the course of decades. When these individuals reach retirement, they will be able to spend all the money they have accrued without worrying about paying any taxes.
However, young workers should also consider that, since their contributions are taxed, they will need to divert more of their monthly income to retirement to make the same impact as non-taxed accounts. In a sense, Roth accounts require that individuals pay both the contribution and the taxes to a retirement fund.
At the same time, if a young worker made maximum contributions to a traditional retirement fund and then invested the tax they saved into a Roth, they would likely end up paying more in taxes than if they used a Roth to begin with, due to the required tax on the investment growth.
The Primary Strategy for Older and Higher Earners
Once individuals start to approach the peak of their careers, a Roth account stops making a lot of sense. Individuals who have high salaries, and who are thus in higher tax brackets, will likely experience a lower tax rate during their retirement years. As such, they may do best to choose a traditional account, which will defer taxes for the future.
For the highest earners, this may actually prove a moot point since there are income restrictions for opening Roth accounts. In 2019, the IRS is prohibiting people from contributing to a Roth account if they earn more than $137,000 annually as a single person or more than $203,000 as a married couple. There are some strategies for getting around this rule, but people generally do not have a compelling reason to do so, especially considering that traditional IRAs do not have income caps for contributions.
Higher earners with traditional accounts can also enjoy a lower adjusted gross income (AGI). Pre-tax contributions are deducted from the AGI, whereas post-tax deposits into a Roth IRA are not. A lower AGI can help maximize the Saver’s Tax Credit for people who make contributions to traditional plans, although this credit mostly applies to individuals with modest incomes or AGIs below $64,000 for joint filers.
The Benefits of Having Both Traditional and Roth Accounts
The people who may have the most difficulty deciding between a Roth or traditional account are those in the middle of their careers. These individuals probably do not have a clear idea about their future tax status. In this case, it can make sense to contribute to both a Roth and a traditional account at the same time. This strategy is akin to hedging their bets, although individuals should note that combined contributions cannot exceed $6,000 annually or $7,000 for people over the age of 50, according to current tax law.
However, there are some other advantages to investing in both. During retirement, people may have low tax years, such as when they have significant long-term care expenses. During these years, it makes sense to take from traditional accounts. These same individuals can also have high tax years, especially with large capital gains. In these years, distributions can come primarily from Roth accounts.
When thinking about retirement, the most important thing is to start saving early. However, it’s also important to realize that saving is not enough on its own. You need to plan strategically for how you will fund your retirement years, which means considering all forms of income and how to maximize them.
When you pay into Social Security, you’ll receive a retirement benefit in an amount that depends on several factors. When you know about these factors early in your working life, you can plan around them and maximize your retirement income. And of course, even if you’re near retirement, it’s also important to understand how Social Security works, so you can pick the right time to start drawing your benefit.
What to Know about Social Security Benefits When You’re Starting Your Career
Your Social Security benefit is primarily determined by your earned income during your working years. In general, the more you earn, the higher your benefit will be. However, there is a maximum Social Security benefit. In 2019, this maximum is $2,861 per month. No one can receive more than that, but many people will end up receiving much less, mainly due to a couple of key factors. One of these key factors is their work history.
The federal government calculates the final benefit you receive based on your lifetime earnings, averaging your salary over the 35 years during which you earned the highest amount. The Average Wage Indexing Series is used to account for inflation in this calculation. However, it is critical to know that if you work fewer than 35 years, your salary is essentially considered “$0” each year that you’re short of 35. This will reduce your average salary calculation and therefore your benefit. It’s true that you only need to work for one decade to qualify for Social Security, but you’ll need to put in at least 35 years to reap the maximum benefit.
The second factor that can bring down your Social Security benefit is when you claim it. You’ll need to work until your full retirement age to get the maximum benefit. The full retirement age depends on when you were born. The government has increased the full retirement age from 65 to 67, although the increase is happening incrementally over a 22-year period that began in 2000. For people born in 1960 and later, the full retirement age is 67. Check the Social Security Administration’s chart to view your full retirement age.
That being said, you can claim your Social Security benefit at 62. However, that benefit will be lower than it would be if you waited until full retirement age. Basically, your benefit will be reduced a certain percentage for each month before your retirement age. If you were born in 1960 or later and your full retirement age is therefore 67, you can claim your benefit at age 62, but that benefit would be reduced by about 30%.
After your full retirement age, the Social Security benefit actually increases incrementally up to 70 years of age. Thus, if you want to maximize your Social Security benefits, don’t claim any until you are 70. Past 70, no further increases occur, so it’s time to cash out.
Understanding these rules early in your career can help you plan for the future effectively. However, it is important to understand that people often need to claim the benefit before reaching age 70—and that’s okay. In an ideal world, you would be able to hold off until 70, but life has a habit of getting in the way.
Similarly, it is important to maximize your earnings for 35 years, but within reason. If you take a year or two off, you may want to plan to work another year or two, so that you don’t have those zero-salary years included in your benefit calculation. The 35-year average also makes it possible to eliminate some low-earning years, such as those right after high school or college.
Your Income and Earnings in the Years Before and After Retirement
Two other important considerations have to do with the years leading up to and following retirement. One concerns penalties: people in early and full retirement have earning limits beyond which their benefit is affected. Currently, early retirees can earn $17,640 in gross wages or net earnings without penalty, but every $2 earned above this amount will result in a $1 reduction from your benefit. In the year leading up to your full retirement age, you can bring in $46,920 before you’re penalized. For every $3 earned above this amount, $1 will be subtracted from your benefit. Once you reach your full retirement age, your earnings will not affect your benefits.
The other important consideration is taxes. Up to 85 percent of your payout can be subject to federal taxes, depending on your filing status and overall income. If your combined income falls between $25,000 and $34,000 for single filers or $32,000 and $44,000 for joint filers, you’ll have to pay taxes on up to 50% of your Social Security income. Above these ranges, you’ll be taxed on 85 percent of your benefit.
Given all this, you may want to think about reducing your overall taxable income in retirement. By distributing funds evenly over the span of a few years without sudden increases, you can decrease your adjusted gross income, but this will require some planning.
How Married Couples Should Strategize for Social Security
Another important consideration is the strategies married couples should use when it comes to claiming Social Security benefits. In general, there are two primary strategies. You can claim your own benefit, or delay this claim and receive half of your spouse’s payout. Your marriage needs to be at least 10 years old to qualify for this strategy. This approach can be especially helpful if one spouse was a particularly high earner.
Generally, one spouse will begin receiving payout earlier, whether at 62 or full retirement age, while the other waits until age 70 to maximize their benefit. Typically, the spouse who earned more delays their claim.