Financial Mistakes to Avoid as You Approach Retirement

Jane Young, CFP, EA

Jane Young, CFP, EA

As you enter your 50s it becomes increasingly important to incorporate retirement planning into the management of your finances.  Your 50s and 60s will probably be your highest earning years at a time when expenses associated with raising children and home ownership may be tapering off.  It’s crucial to take advantage of the opportunities during this time to shore up your retirement nest egg.

One significant retirement mistake is the failure to assess your current financial situation and understand how much is needed to meet your retirement goals.  Many underestimate the amount of money required to cover retirement expenses which may result in delaying retirement.   Consider hiring an advisor to do some retirement planning and help you understand your options, how much money is needed, and what trade-offs may be required to meet your goals.

Another common mistake is to move all of your retirement funds into extremely conservative options, as you approach retirement.  With the potential of spending 30 to 40 years in retirement, it’s advisable to keep a long term perspective.  Consider keeping your short term money in more conservative options and investing your long term money in a well-diversified portfolio that can continue to grow and stay ahead of inflation.  As you approach retirement, it’s also important to avoid making emotional decisions in response to short term swings in the stock market.   Emotional reactions frequently result in selling low and buying high which can be harmful to your portfolio.

Many in their 50s and 60s have more disposable income than at any other stage of life.  Avoid temptation and be very intentional about your spending.   Avoid increasing your cost of living with fancy cars and toys or an expensive new house as you approach retirement.  Instead, consider using your disposable income to pay down your mortgage or pay off consumer debt to reduce your retirement expenses.

Another common pitfall is spending too much on adult children including your child’s college education.  The desire to help your children is natural and admirable but you need to understand what you can afford and how it will impact your long term financial situation.  Place a cap on how much you are willing to contribute for college and encourage your kids to consider less expensive options like attending a community college or living at home during their first few years of college.   They have a lifetime to pay-off reasonable student loans but you have limited time to replenish your retirement funds.

Finally, a failure to care for your health can be financially devastating.  If you are healthy you will probably be more productive and energetic.   This can result in improved job performance with more opportunities and higher income.  If you are in poor health, you may be forced to retire early, before you are financially ready.   You also may face significant medical expenses that could erode your retirement funds.

Working Part Time in Retirement Becoming the Norm

Jane Young, CFP, EA

Jane Young, CFP, EA

With the possibility of living another 20 to 30 years in retirement, many baby boomers are considering part time work in retirement.  According to a report by the Transamerica Center for Retirement studies, 82% of people in their 60’s either expect to work past 65, already are doing so or don’t plan to retire.   Likewise, a 2013 Gallop poll found that 61% of people currently employed said they plan to work part time in retirement.  While many seek part time work for financial reasons, working in retirement can also provide tremendous psychological and health benefits.

With the loss of traditional pension benefits many retirees need an extra cushion to cover retirement expenses.   Working part time can provide many financial benefits including the reduction of distributions from your retirement account.  Part time work can also help you avoid drawing from your portfolio when the market is down and the additional income can make you more comfortable increasing the risk in your portfolio, with the potential for higher returns.   Another benefit of working part time is the opportunity to delay Social Security benefits till age 70, when you can earn a larger benefit.  Additionally, part time earnings can be used to improve your future cash flow by paying off your mortgage, credit card debt, vehicle loans, and proactively address household maintenance and repairs.

Aside from the financial benefits, numerous studies have found that people who work in retirement are happier and healthier.  Part time work can give you a sense of purpose, identity and relevance.   It can also replace the social interaction that is lost when you retire.  A 2009 study in the Journal of occupational Health Psychology found that those who worked in retirement experienced better health.   Additionally, a study reported by the American Psychological Association in 2014 found that working in retirement can delay cognitive deterioration.

If you are considering part time work during retirement, start developing a plan before leaving your current position.  Leverage and expand your existing network while you are still working.   Your current employer may be interested in retaining you on a part time basis or may be aware of other opportunities for you.

Think of creative ways to utilize your skills, experience and passion to find or create a job that you will enjoy.  You may want to start your own business doing free-lance work or consulting.  Consider turning your hobbies or interests into a business such as tutoring, handyman services, party planning, programming or working for a golf course.  If you have management experience you may be able to fill a gap as a temporary executive while an organization is going through a transition.

Keep an open mind, be flexible and stay connected with your network.  Here are a few sites that can be helpful in finding part time work; Retirementjobs.com, Flexjobs.com and Coolworks.com.  Please use extreme caution when using internet job sites; many are scams that look legitimate.

Things to Consider Before Filing for Social Security

Jane Young, CFP, EA

Jane Young, CFP, EA

Social Security seems straight forward but it can be quite complex, there are many opportunities and pitfalls to watch out for.  Before filing for Social Security, research your options to maximize your benefit, minimize taxes and avoid errors in your benefit calculation.  It’s important to meet with a Social Security Representative prior to filing but don’t solely rely on this information.   Due to the complexity of various options, they may overlook something that could impact your situation

You can file for Social Security benefits as early as 62 but you will receive a reduced benefit.  Most healthy individuals should hold off on taking Social Security as long as possible.  If possible, delay taking Social Security until age 70.  Your benefit will increase 8% a year from your full retirement age to age 70.  The full retirement age for individuals born before 1954 is 66 gradually increasing to age 67 for anyone born in 1960 or later.

Upon reaching full retirement you may be eligible to take 50% of your spouse’s benefit or 100% of your own benefit if you are currently married, were born before 1954 and your spouse has started taking benefits.  While taking spousal benefits, your benefit can continue growing until you reach age 70 at which time you can switch to 100% of your own benefit if it’s higher.  There is no advantage to delaying benefits beyond age 70.

If you have been divorced for two years or more, were married for at least 10 years and are currently unmarried, you are eligible to receive 50% of your ex-spouses benefit or 100% of your own benefit.  If you were born before 1954, at full retirement you have the option to start taking 50% of your ex-spouses benefit and switch to your own retirement benefit at a later date. If you are a widow and you were married for at least 10 years you are eligible to take the highest of 100% of your deceased spouses benefit or your own.

If you take benefits before your full retirement age you are limited on how much you can earn before your benefit is reduced. In 2016, your benefits would be reduced by $1 for every $2 earned over $15,720.  Benefits lost due to work will result in a higher benefit later.  There is no income limit if you wait to take benefits at full retirement. If you take Social Security while working a larger portion of your benefit will be taxable, so you may want to consider delaying Social Security until you stop working or reach age 70.

If you held jobs where you paid into Social Security and you receive a pension from working in a job where you did not pay Social Security, your Social Security benefit may be reduced.  Be sure to notify the Social Security Administration of your pension.

More information on your Social Security benefits is available at www.ssa.gov.

Get Serious About Planning for Retirement in Your 50’s

Jane Young, CFP, EA

Jane Young, CFP, EA

In our 50’s we still have time to plan and save for retirement and it’s close enough that we can envision ourselves in retirement.  Below are some things to address as you plan for retirement.

  • Set some goals and make plans, what does your retirement look like? Consider your path to retirement and your timeframe – you can gradually transition by working fewer hours in your current job, work part time in a new career field or completely stop working.  Think about how you will spend your time in retirement.   Work usually provides us with mental stimulation, a sense of purpose and accomplishment, social interaction and a sense of identity.  How will you meet these needs in retirement?
  • Evaluate your current situation. Take a thorough look at current expenses and assets.  Analyze your spending habits and compare this to your earnings.   Look for opportunities to save money to invest and prepare for retirement.
  • Ramp up savings and maximize your retirement contributions – try to save at least 10% to 15% of your annual income. Increase contributions to your 401k and IRA to take advantage of catch-up provisions.  These are your highest earning years where you can really benefit from investing in tax deferred retirement plans.
  • Invest in a diversified portfolio that will grow and keep up with inflation. Your retirement savings is long term money that will need to last another 30 – 40 years.   A reasonable portion of this money should be invested in stock mutual funds to provide you the growth needed to carry you through retirement.
  • Take steps to reduce your retirement expenses – pay off high interest debt, credit cards and vehicle loans. Make extra payments on your mortgage to pay it off around the time you retire.
  • Think about where and how you want to live. Do you want to move to a lower cost area or downsize to a smaller home? Put plans in place to meet your goals.  Complete major remodeling, repairs and upgrades on appliances before you go into retirement.
  • Develop a retirement budget. Consider the impact of inflation and taxes on your monthly outflow.  Many retirees are more active and spend more early in retirement.   Include expenses for health care and long term care in your budget.
  • Evaluate your Social Security options. Delay taking Social Security benefits as long as possible, up to age 70.
  • Calculate how much you need to pull from your retirement savings by subtracting your monthly expenses from your Social Security and pension benefits. As a rule of thumb, avoid spending more than about 4% of your retirement savings per year.  This will vary with the amount of risk you are comfortable taking in your portfolio.  To get a more precise projection on when you can retire, how much you can spend and how much you should save, periodically work with a financial planner on some formal retirement planning.

Avoid These Common Retirement Mistakes

Jane Young, CFP, EA

Jane Young, CFP, EA

When it comes to retirement there are many preconceived notions and myths on how you should handle your finances.  Avoid falling into the trap of what retirees are “supposed to do”.  Instead, logically evaluate your situation and make decisions accordingly.   Below are some common financial mistakes to avoid with regard to your retirement.

  • Don’t underestimate your life expectancy and how many years you will spend in retirement. It is reasonable to spend 20 to 30 years in retirement.  Most retiree’s should plan to cover expenses well into their 90’s.
  • Avoid overestimating your ability and opportunity to work during retirement. Be cautious about including too much income for work during retirement in your cash flow projections.  You may lose your job or have trouble finding a good paying position.  Additionally, your ability and desire to work during retirement may be hindered by health issues or the need to care for a spouse.
  • Many retirees invest too conservatively and fail to consider the impact of inflation on their nest egg. Maintain a diversified portfolio that supports the time frame in which you will need money.  Money needed in the short term should be in safer, fixed income investments.  Alternatively, long term money can be invested in stock mutual funds where you have a better chance to earning returns that will outpace inflation.
  • Resist the temptation to take Social Security early. Most people should wait and take Social Security at their full retirement age or later, full retirement is between 66 and 67 for most individuals.  Taking Social Security early results in a reduced benefit. If you can delay taking Social Security you can earn a higher benefit that increases 8% per year up to age 70.  This can provide nice longevity insurance if you live beyond the normal life expectancy.  You also want to avoid taking Social Security early if you are still working.  In 2016 you will lose $1 for every $2 earned over $15,720, prior to reaching your full Social Security retirement age.
  • Avoid spending too much on your adult children. The desire to help your children is natural but many retirees need this money to cover their own expenses.   You may be on a fixed income and no longer able to earn a living, your children should have the ability to continue working for many years.

One of the biggest retirement mistakes is the failure to do any retirement planning.  Crunch some numbers to determine how much you need to put away, when you can retire, and what kind of budget you will need to follow.  Without proper planning many retirees pull too much from their investments early on leaving them strapped later in life.  It’s advisable to have your own customized retirement plan done to determine how much you can annually pull from your investments.  As a general rule, annual distributions should not exceed 3-4% of your retirement portfolio.

Taking Social Security Early Not the Best Option

Jane Young, CFP, EA

Jane Young, CFP, EA

The best time to take Social Security is a personal decision based on your financial situation, health, lifestyle, family longevity and when you stop working.  Social Security will provide you with the same total amount, if you live to the average life expectancy, regardless of when you take it.   The full retirement age for most people is between 66 and 67.  You can begin taking reduced benefits as early as 62 or you can wait and take an increased benefit as late as age 70.  If you begin at 62 your benefit is reduced by about 30%, if you take Social Security after your full retirement date your benefit will increase 8% per year until age 70.

You will probably benefit from taking Social Security at full retirement or later.  Unless you have a serious medical condition, there is a good chance you will live longer than the Social Security average life expectancy.  Social Security life expectancy tables are based on 2010 data and lag what can be reasonably expected.  They indicate a 65 year old male will live to around 84.3 and a 65 year old female will live to around 86.6.  Taking Social Security later is like buying longevity insurance.  It can provide you with more money later in life which can help put your mind at ease, if you are worried about out living your money.

If you are still working it can be especially detrimental to take Social Security before your full retirement age.  In 2015 you will lose $1 for every $2 earned over $15,720.   Once you reach full retirement age there is no limit to how much you can earn.   However, taxation of your Social Security benefit is based on your overall earnings.  If you take Social Security after you stop working a smaller portion of your benefit is likely to be taxable.  Additionally, if you continue to work and delay Social Security you may be able to increase your total Social Security benefit. The Social Security Administration annually recalculates benefits for recipients who are still working.

The decision on when to take Social Security is significantly impacted by your marital status and your spouses expected benefit.  If you have been married for at least ten years you have the option to take the greater of 50% of your spouse’s benefit or your full benefit. If you wait until your full retirement age you can start taking 50% of your spouse’s benefit, let your benefit grow, and switch back to your full benefit at age 70.   If you take the spousal benefit prior to your full retirement age you cannot switch back to your own benefit at a later date.  If you have been married for at least 10 years, and your spouse dies, you are eligible for the greater of your benefit or 100% of your spouse’s benefit.

More information about your Social Security benefit is available at www.ssa.gov.

Gradual Retirement Can Ease Stress and Cash Flow

Jane Young, CFP, EA

Jane Young, CFP, EA

As the average life expectancy increases retirement is starting to look very different.   We may be less likely to completely stop working on a fixed, predetermined date.  As the traditional retirement age of 65 approaches many are considering a more gradual transition into retirement.

One advantage of easing into retirement includes the ability to supplement your cash flow and reduce the amount needed to be withdrawn from your retirement savings.  If you continue working after 65 you may be able to earn enough to delay taking Social Security until 70.  This will provide additional financial security because your Social Security benefit increases 8% per year from your normal retirement age to age 70.  The normal Social Security retirement age is between 66 and 67.

Abruptly going into retirement can be very traumatic because careers provide us with a sense of purpose, a feeling of accomplishment and self-esteem.   Your social structure can also be closely tied to work.  By working part time before completely retiring, you can gradually transition into the new phase of your life.   As you approach retirement age the grind of working 40 to 50 hours per week can become very trying.   Working part time allows you to stay engaged with your career while taking some time to relax and pursue other interests.

According to a 2012 study by the Bureau of Labor Statistics, more people are working beyond age 65.  In 2012 about 18.5% of Americans over 65 were still working vs. only 10.8% in 1985.  A study reported by the Journal of Occupational Health and Psychology stated there are health benefits from working part time during retirement.  This may be attributed to less stress and a more balanced life while experiencing the mental stimulation gained from continued engagement at work.

Gradually transitioning into retirement may be more practical for someone who is self-employed.  However, the concept of phased retirement is a hot topic among human relations firms and departments.  Phased retirement programs usually involve working about 20 hours a week with some element of mentoring less experienced workers.  Formal phased retirement programs are still rare but they are gaining popularity.  A 2010 study by AARP and the Society for Human Resources Management found that about 20% of the organizations polled had a phased retirement program or were planning to start a one.  In fact, the federal government just launched a phased retirement program.

Before signing up for a phased retirement plan, take steps to fully understand the impact it may have on your benefits.  If you are under 65 there may be restrictions on your health insurance.   Additionally, some pension calculations are based on your final years of salary, working fewer hours at this time could negatively impact your benefit.  Also avoid situations where you are only paid for 20 hours a week but still work 30 or 40 hours to get your job done.

Save Money in Retirement

Jane Young, CFP, EA

Jane Young, CFP, EA

There are many ways to stretch your retirement dollars without dramatically impacting your lifestyle.  Start by evaluating what is of great importance to you.  Create a plan that encourages you to spend on things and experiences that are important to you and helps you reduce expenses in low priority areas.

Depending on your priorities, a decrease in housing expenses may provide tremendous cost savings.   If you live in a city with a high cost of living, consider relocating to a lower cost city – ideally one closer to family.  According to Forbes, some of the most affordable cities in 2014 include Knoxville, Birmingham, Tampa, Virginia Beach and Oklahoma City. 

Downsizing is another great way to reduce expenses.  Now that you’re retired, your housing needs have probably changed.  Downsizing can help you reduce expenses on mortgage, insurance, taxes, utilities and maintenance.  In addition to saving money, you may be ready for a different lifestyle, a new floor plan (living on one level) and a new neighborhood that better meets your needs throughout retirement.

In retirement there are opportunities to save on vehicle expenses.  Assuming you are no longer commuting to work every day, you should be able to save on gas and maintenance for your vehicle.   Additionally, many retired couples don’t need two vehicles, selling a second car can save on car payments, insurance, taxes and maintenance. 

Vehicles are a depreciating asset where you can lose thousands of dollars by simply driving a car off the lot. Save money by resisting the temptation to buy a new car.  Internet sites such as Edmunds.com and Kelley Bluebook (kbb.com) make it easy to research prices to negotiate a good deal on a used vehicle.   Additionally, where possible, buy your vehicles with cash and avoid high interest car loans.

In retirement, you have more time to focus on saving money. Use this time to shop and compare, watch for specials and utilize coupons.  Evaluate your home, auto and health insurance and compare prices and features provided by different companies.  Save on cell phones, internet and television by comparing service offerings and negotiating prices.  Consider doing chores around the house that you previously hired someone else to do and cook more to save on eating out.

Having more time can also result in saving on travel expenses.  A more flexible schedule, allows you to avoid peak season and get reduced rates on airfare, lodging and restaurants.  May and September are great months to travel and get some good deals.  You can also save by flying during the week.   Travel sites such as Tripadvisor.com, Cheaptickets.com, RickSteves.com and Vacation Rental by Owner (VRBO.com) can also help maximize your travel dollar.

Finally, avoid the temptation to over spend on children and grandchildren.  You will probably need most of your money to cover retirement spending needs.  Give your family the gift of your love and time rather than your money.

Retirement Tips for All Ages

Jane Young, CFP, EA

Jane Young, CFP, EA

It’s always a challenge to balance between current obligations and saving for retirement.  A good start toward meeting your retirement goals is to get your financial house in order.  Create a spending plan that helps you live below your means.  Maintain an emergency fund of at least four months of expenses and pay off high interest consumer debt.    Establish a habit of saving at least 10% of your income.  If you are getting a late start, you may need to save 15-20% of your income.

Develop a retirement plan to determine how much you need to save on a monthly basis and how large a nest egg you will need to comfortably retire.  There are many on-line calculators available to help you run retirement numbers.  However, they are only as accurate as the data that you input and the assumptions that the model uses.  You may want to hire a fee-only financial planner to run some figures for you.

Work toward maximizing contributions to your employer’s retirement plan; take advantage of any employer match that may be provided.  Once you have contributed up to the level of your employer’s match, consider contributing to a Roth IRA.  A painless way to steadily increase your contribution percentage is to increase your contribution whenever you get a raise.  If you are self-employed, or your employer doesn’t offer a retirement plan, contribute to a SEP, Simple or an IRA.  If you are maxed out, increase your contributions as the maximum contribution limits increase or you become eligible for a catch-up contribution at age 50.

Invest your retirement funds in a diversified portfolio made up of a combination of stock and bond funds that invest in companies of different sizes, in different industries and in different geographies.  Generally, your retirement savings is long term money, so avoid emotional reactions to make sudden changes based on short term market fluctuations.  Develop an investment plan that meets your timeframe and investment risk tolerance and stick to it. 

Don’t use your retirement funds as a savings account for other financial objectives.  Unless you are in a dire emergency, don’t take distributions or borrow against your retirement funds.  When you change jobs, don’t cash out your retirement plans.  Roll your funds over to an IRA or a new employer’s plan.    Avoid sacrificing your retirement savings to fund college education for your children.

As you near retirement age, there are several ways to stretch your retirement dollars.  Retirement doesn’t have to be all or nothing.  Consider a gradual step down where you work a few days a week or on a project basis.   Try to time the payoff of your mortgage with your date of retirement.  Consider downsizing to a smaller home or moving to a more economical area.  Establish a retirement spending plan that provides funds for things you value and helps you avoid frivolous spending on things that don’t really matter.

Sure Fire Ways to Ruin Your Retirement Plan

 

 

Jane Young, CFP, EA

Jane Young, CFP, EA

Managing your finances is a balancing act between spending for today and saving for the future.   It’s important to plan and save for retirement but the demands of everyday life frequently get in the way.  Here are some common pitfalls to avoid when planning for your retirement.

 

Living Beyond Your Means – Spending more than you earn, failing to save and going into debt can be huge threats to your financial security and retirement plans.  Develop a spending plan that allows for an emergency fund and annual savings of 10-15% of your gross income.  Make a conscious decision to spend less money, buy a less expensive house and buy less expensive cars to keep your expenses below your income.  This can help you save for the future with a buffer for financial emergencies.

 

Failure to Participate – Participate in tax advantaged retirement plans for which you may be eligible.  Contribute to your employers 401k or 403b to take advantage of any employer match and deduct the contributions from your current income.  Additionally, if you are eligible, consider contributing to a Roth IRA.  Generally, an after tax Roth IRA contribution can grow tax free, with no tax due upon distribution.

 

Failure to Diversify – Maximize the potential for growing your retirement nest egg by maintaining a well-diversified portfolio designed to meet your unique risk tolerance and investment timeframe.  A common pitfall is the failure to monitor and rebalance your portfolio on an annual basis.   A portfolio that is too conservative can be as detrimental to your retirement plan as an overly aggressive portfolio.  Upon retirement, investors frequently make the mistake of changing their portfolio allocation to be extremely conservative, when they may live for another 30 to 40 years.

 

Market Timing and Trading on Emotion – Moving in and out of the stock market based on short term market fluctuations generally results in lower long term returns.   There is a natural inclination to buy when the economy is booming and sell when the economy is in the doldrums.   This usually results in buying high and selling low, which can be very detrimental to your portfolio.  To maximize your retirement portfolio avoid the emotional temptation to react to short term events and fluctuations in the market.

 

Funding College and Living Expenses for Grown Children at the Expense of Retirement – Avoid the pitfall of sacrificing your retirement to fund college education for your children or to make significant contributions toward an adult child’s living expenses.  Students have many options to finance or minimize college expenses but you can’t take out a loan to finance your retirement.

Cashing Out or Taking an Early Withdrawal – When you change jobs, transfer the money from your employer’s plan to another tax deferred plan such as a Rollover IRA.  This allows you to avoid paying significant income tax and a 10% early distribution penalty, if you are under 59 ½.

The Difference Between an Roth IRA and a Traditional IRA

Jane Young, CFP, EA

Jane Young, CFP, EA


One of the biggest decisions associated with saving for retirement is choosing between a Roth IRA and a Traditional IRA. The primary difference between the two IRAs is when you pay income tax. A traditional IRA is usually funded with pre-tax dollars providing you with a current tax deduction. Your money grows tax deferred, but you have to pay regular income tax upon distribution. A Roth IRA is funded with after tax dollars, and does not provide a current tax deduction. Generally, a Roth IRA grows tax free and you don’t have to pay taxes on distributions. In 2013 you can contribute up to a total of $5,500 per year plus a $1,000 catch-up contribution if you are over 50. You can make a contribution into a combination of a Roth and a Traditional IRA as long as you don’t exceed the limit. You also have until your filing date, usually April 15th, to make a contribution for the previous year. New contributions must come from earned income.
There are some income restrictions on IRA contributions. In 2013, your eligibility to contribute to a Roth IRA begins to phase-out at a modified adjusted gross income of $112,000 if you file single and $178,000 if you file married filing jointly. With a traditional IRA, there are no limits on contributions based on income. However, if you are eligible for a retirement plan through your employer, there are restrictions on the amount you can earn and still be eligible for a tax deductible IRA. In 2013 your eligibility for a deductible IRA begins to phase out at $59,000 if you are single and at $95,000 if you file married filing jointly.
Generally, you cannot take distributions from a traditional IRA before age 59 ½ without a 10% penalty. Contributions to a Roth IRA can be withdrawn anytime, tax free. Earnings may be withdrawn tax free after you reach age 59 ½ and your money has been invested for at least five years. There are some exceptions to the early withdrawal penalties. You must start taking required minimum distributions on Traditional IRAs upon reaching 70 ½. Roth IRAs are not subject to required minimum distributions.
The decision on the type of IRA is based largely on your current tax rate, your anticipated tax rate in retirement, your investment timeframe, and your investment goals. A Roth IRA may be your best choice if you are currently in a low income tax bracket and anticipate being in a higher bracket in retirement. A Roth IRA may also be a good option if you already have a lot of money in a traditional IRA or 401k, and you are looking for some tax diversification. A Roth IRA can be a good option if you are not eligible for a deductible IRA but your income is low enough to qualify for a Roth IRA.

The Widow’s Guide to Social Security Benefits

The Widow’s Guide to Social Security Benefits (via Credit.com)

As a Certified Financial Planner™, I work with a lot of widows trying to navigate the tricky world of Social Security benefits after their spouse passes away. Social Security provides you, as a widow, with a choice between your own Social Security benefit based on your work history, and a survivor…

Stock Can Be a Good Option in Retirement

 

 

 

 

 

 

Jane M. Young

As we approach retirement, there is a common misconception that we need to abruptly transition our portfolios completely out of the stock market to be fully invested in fixed income investments.   One reason to avoid a sudden shift to fixed income is that retirement is fluid; it is not a permanent decision. Most people will and should gradually transition into retirement.  Traditional retirement is becoming less common because life expectancies are increasing and fewer people are receiving pensions. Most people will go in and out of retirement several times.  After many years we may leave a traditional career field for some well-deserved rest and relaxation.  However, after a few years of leisure we may miss the sense of purpose, accomplishment, and identity gained from working.  As a result, we may return to work in a new career field, do some consulting in an area where we had past experience or work part-time in a coffee shop.

Another problem with a drastic shift to fixed income is that we don’t need our entire retirement nest egg on the day we reach retirement.   The typical retirement age is around 65, based on current Social Security data, the average retiree will live for another twenty years. A small portion of our portfolio may be needed upon reaching retirement but a large percentage won’t be needed for many years.   It is important to keep long term money in a diversified portfolio, including stock mutual funds, to provide growth and inflation protection.   A reasonable rate of growth in our portfolio is usually needed to meet our goals. Inflation can take a huge bite out of the purchasing power of our portfolios over twenty years or more.   Historically, fixed income investments have just barely kept up with inflation while stock market investments have provided a nice hedge against inflation.

We need to think in terms of segregating our portfolios into imaginary buckets based on the timeframes in which money will be needed.  Money that is needed in the next few years should be safe and readily available.  Money that isn’t needed for many years can stay in a diversified portfolio based on personal risk tolerance.  Portfolios should be rebalanced on an annual basis to be sure there is easy access to money needed in the short term.

A final myth with regard to investing in retirement is that money needed to cover your retirement expenses must come from interest earning investments.  Sure, money needed in the short term needs to be kept in safe, fixed income investments to avoid selling stock when the market is down.  However, this doesn’t mean that we have to cover all of our retirement income needs with interest earning investments.  There may be several good reasons to cover retirement expenses by selling stock.   When the stock market is up it may be wise to harvest some gains or do some rebalancing.  At other times there may be tax benefits to selling stock.

 

Mutual Funds May be Your Best Option

 

 

 

 

 

 

Jane M. Young

Generally the typical investor is better off investing in stock mutual funds than in individual stocks. A mutual fund is an investment vehicle where money from a large number of investors is pooled together and invested by a professional manager or management team.  Mutual fund managers invest this pool of money in accordance with a predefined set of goals and guidelines.

One of the primary benefits of investing in stock mutual funds is the ability to diversify across a large number of different stocks.  With mutual funds, you don’t need a fortune to invest in a broad spectrum of stocks issued by large and small companies from a variety of different industries and geographies.  Diversification with mutual funds reduces risk by providing a buffer against extreme swings in the prices of individual stocks.   You are less likely to lose a lot of money if an individual stock plummets. Unfortunately, you are also less likely to experience a huge gain if an individual stock skyrockets.

Another benefit of stock mutual funds over individual stocks is that less time and knowledge is required to create and monitor a portfolio.  Most individual investors do not have the time, expertise, or resources to select and monitor individual stocks.  Mutual funds hire hundreds of analysts to research and monitor companies, industries and market trends.   It is very difficult for an individual to achieve this level of knowledge and understanding across a broad spectrum of companies.  Mutual fund managers have the resources to easily move in and out of companies and industries as investment factors change.

Most individual investors appreciate the convenience of selecting and monitoring a diversified portfolio of mutual funds over the arduous task of selecting a large number of individual stocks.   Stock mutual funds are a good option for your serious money.  However, if you really want to play the market and invest in individual stocks, use money that you can afford to lose.

For diehard stock investors, there are some advantages to investing in individual stocks.  Many stock mutual funds charge an annual management fee of between .50% and 1% (.25% for index funds).  With individual stocks, there is a cost to buy and sell the stock but there is no annual management fee associated with holding stock.

Another advantage of individual stocks is greater control over when capital gains are recognized within a non- retirement account.  When you own an individual stock, capital gains are not recognized until the stock is sold.   In a high income year, you can delay selling your stock, and recognizing the gain, to a year when it would be more tax efficient.   On the other hand, when you invest in a stock mutual fund you have no control over capital gains on stock sold within the fund.  Capital gains must be paid on sales within the mutual fund, before you actually sell the fund.  Mutual funds are not taxable entities, therefore all gains flow through to the end investor.

Pitfalls in Taking Early Social Security

Jane M. Young CFP, EA

 

You can begin taking Social Security at age 62 but there are some disadvantages to starting before your normal retirement age.   The decision on when to start taking Social Security is dependent on your unique set of circumstances.  Generally, if you plan to keep working, if you can cover your current expenses and if you are reasonably healthy you will be better off taking Social Security on or after your normal retirement age.  Your normal retirement age can be found on your annual statement or by going to www.socialsecurity.gov and searching for normal retirement age.

Taking Social Security early will result in a reduced benefit.  Your benefits will be reduced based on the number of months you receive Social Security before your normal retirement age.    For example if your normal retirement age is 66, the approximate reduction in benefits at age 62 is 25%, at 63 is 20%, at 64 is 13.3% and at 65 is 6.7%.  If you were born after 1960 and you start taking benefits at age 62 your maximum reduction in benefits will be around 30%.

On the other hand, if you decide to take Social Security after your normal retirement age, you may receive a larger benefit.  Do not wait to take your Social Security beyond age 70 because there is no additional increase in the benefit after 70.  Taking Social Security after your normal retirement age is generally most beneficial for those who expect to live beyond their average life expectancy.  If you plan to keep working, taking Social Security early may be especially tricky.  If you take benefits before your normal retirement age and earn over a certain level, the Social Security Administration withholds part of your benefit.   In 2012 Social Security will withhold $1 in benefits for every $2 of earnings above $14,640 and $1 in benefits for every $3 of earnings above $38,880.  However, all is not lost, after you reach full retirement age your benefit is recalculated to give you credit for the benefits that were withheld as a result of earning above the exempt amount. 

Another potential downfall to taking Social Security early, especially if you are working or have other forms of income, is paying federal income tax on your benefit.  If you wait to take Social Security at your normal retirement age, your income may be lower and a smaller portion of your benefit may be taxable.  If you file a joint return and you have combined income (adjusted gross income, plus ½ of Social Security and tax exempt interest) of between $32,000 and $44,000 you may have to pay income tax on up to 50% of your benefit.  If your combined income is over $44,000 you may have to pay taxes on up to 85% of your benefit. 

The decision on when to take Social Security can be very complicated and these are just a few of the many factors that should be taken into consideration.

 

 

 

Financial Guidance for Widows in Transition

 
A workshop from the heart for women who are widowed

or anticipate becoming a widow in the future . . .

or those with a widowed friend or family member

 Friday, August 3, 2012 from 9:30am – 11:30am 

at Bethany Lutheran Church

4500 E. Hampton Avenue

Cherry Hills Village, 80113

OR 

  Friday, August 3, 2012 from 2:00 – 4:00 PM
 
at First Lutheran Church

1515 N. Cascade Avenue

Colorado Springs, 80907

 There is no charge to attendees, but advance registration is required.
Call 1-800-579-9496 or email Bob.kuehner@lfsrm.org

 Join us for a special presentation by Kathleen M. Rehl, Ph.D., CFP®, award winning author and speaker. She presents practical information in an engaging and entertaining manner, along with issues of the heart. The workshop is open to all . . . although it’s especially designed for women. So, bring your gal friends for an enjoyable morning out together.

   Kathleen’s world changed forever when her husband died. From personal grief experiences, her life purpose evolved-helping widows to feel more secure, enlightened and empowered about their financial matters. She is passionate about assisting her “widowed sisters” take control of their financial future.

 Dr. Rehl is a leading authority on the subject of widows and their financial issues. She is frequently invited to give presentations across the country on this topic.

 She and her book, Moving Forward on Your Own: A Financial Guidebook for Widows, have been featured in The New York Times, Wall Street Journal, Kiplinger’s, AARP Bulletin, U.S. News & World Report, Consumer Reports, Investment News, Bottom Line and many others. The guidebook has received 10 national and international awards.

 To devote more time to writing and speaking, Kathleen closed her practice to new clients some time ago. She was previously named as one of the country’s 100 Great Financial Planners by Mutual Funds Magazine.

 Please be our guest for this educational and enlightening workshop!

 This event is a sponsored gift to the community from
 Jane M. Young, CFP with Pinnacle Financial Concepts, Inc.
   

 (719)260-9800

www.MoneyWiseWidow.com

 
   
 

Advantages and Disadvantages of Variable Annuities

 

Jane M. Young, CFP, EA

 

What is a Variable Annuity?


A variable annuity is a contract with an insurance company where you invest money into your choice of a variety of sub-accounts, similar to mutual funds. Non-qualified, variable annuities provide tax deferral on gains until the funds are withdrawn. Upon distribution your gains are taxed at regular income tax rates as opposed to capital gains rates. Variable annuities generally charge fees twice those charged by mutual funds. Additionally, you will be to subject to substantial early withdrawal charges if you purchase an annuity from an advisor who is compensated through commissions. Most variable annuities provide the option to buy a guaranteed death benefit option and/or a Guaranteed Minimum Withdrawal Benefit. These do not come without a cost and can be very complex.  Below are some advantages and disadvantages of Variable Annuities.
Advantages and Disadvantages of Variable Annuities:

Advantages:

  • Tax Deferral of gains, beneficial if you have maximized limits on other retirement vehicles such as 401ks and IRAs.
  • No Required Minimum Distribution at 70 and ½ as with traditional retirement accounts. There is no Required Minimum Distribution on Roth IRAs.
  • Death benefit and Guaranteed Lifetime Withdrawal Benefits (GLWB) riders can be purchased for additional fees. However, the death benefit is rarely instituted due to long term growth in the stock market. GLWBs can be very complex and not without risk.
  • Trades can be made within annuity without tax consequences – this is also true within all retirement accounts.
  • Non-taxable transfers can be made between companies using a 1035 exchange.
  • No annual contribution limit. Traditional retirement plans have annual contribution limits.

Disadvantages:

  • Gains taxed at regular income tax rates as opposed to capital gains rates on taxable mutual funds.
  • Higher expense structure –Mortality and Expense fees substantially higher than mutual funds.
  • Substantial surrender charges for up to 10 years on commission products
  • 10% penalty on withdrawals prior to 59 ½, this is also true with most traditional retirement accounts.
  • Complex insurance product
  • Lack of liquidity due to surrender charges and tax on gains
  • No step-up in basis, taxable mutual funds and stocks have a step-up in basis upon death
  • Loss of tax harvesting opportunities

Planning for Retirement is More Than Picking a Date

Jane M. Young, CFP, EA

Below are some questions you may want to consider when you start planning for retirement.

What does retirement look like?
When do you want to start cutting back on your work hours? Do you want to stop working altogether or try something new?

Do you want to take a break for a few years and return to work part time? What are the opportunities for someone of retirement age in your chosen field?

How will you feel in retirement? How much of your personal identity and self esteem is associated with what you do? How will you feed your need for a sense of accomplishment, friendships, social interaction and status? Are you ready for retirement? Maybe a gradual transition will be more comfortable.

Where and how will you live? Do you plan to move to a less expensive city or country? Are you going to stay in your home or downsize to something with less maintenance?

How will you spend your time and money? Do you plan to travel, write a book or play tennis?

How will your expenses change in retirement? (Downsize or pay-off house, travel, no kids and no 401k contribution)

Where are you today?
What are your current expenses and what are you earning? How will this change in the coming years? Do you need to make some improvements in your career/earning situation?

How much are you saving for retirement? Could you squeeze out just a little more? Most people need to be saving between 10 – 15%. If you are getting started late you should be saving more.

What can you expect from a pension or social security?

Are you maximizing your ability to contribute to retirement plans such as 401ks, 403bs and Roth IRAs? Are you taking advantage of opportunities for matching contributions from your employer?

How much do you have put away for retirement?

Is your portfolio well diversified to meet your retirement needs? Avoid being too conservation or too aggressive.

Watch Out for These Pitfalls with Social Security and IRA Rollovers

8a8_9449-x2-x1001

Jane M. Young, CFP, EA

Here are a couple issues on Social Security and IRA Rollovers that frequently catch people by surprise.

Think twice about taking your Social Security at 62 or before your regular retirement age, if you plan to work during this timeframe. In 2011, if you earn more than $14,160, Social Security will withhold $1 for every $2 earned above this amount. However, all is not lost, when you reach full retirement age Social Security will increase your benefits to make up for the benefits withheld. Once you reach your full retirement age there is no reduction in benefits for earning more than $14,160. However, the amount of tax you pay on your Social Security benefits will increase as your taxable income increases. This may be a good reason to wait until your full retirement age or until you stop working to begin taking Social Security.

If you are thinking about moving your IRA from one custodian to another I strongly encourage you to do this as a direct transfer and not as a rollover. We frequently use these terms synonymously but I assure you the IRS does not! A transfer is when you move your IRA directly from one IRA trustee/custodian to another – nothing is paid to you. A rollover is when a check is issued to you and you write a second check to the new IRA Trustee/Custodian. This must be done within 60 days or the transaction is treated as a taxable distribution. You can do as many transfers as you desire in a given year. However, you can only do one rollover per year, on a given IRA. This is a very stringent rule and there are very few exceptions even when the error is out of your control. Whenever possible be sure to use a direct transfer not a rollover to move your IRA Account.

“What is Modern Retirement and Will You be Ready?” Join us on September 7th for our next Pinnacle Fireside Chat.

Please mark your calendars for our next Pinnacle Financial “Fireside Chat”, to be held on Wednesday, September 7th from 7:30am – 9:00am.

Jane will discuss the characteristics of modern retirement and how to plan for it. She will explore different approaches to retirement and some of the factors to be considered. She will also explain the various plans available to help you save for retirement.

The Fireside Chat sessions are informational only (no sales!) and interactive — a great opportunity to learn new things and ask questions in a relaxed environment. These sessions are open to your family and friends, so please feel free to pass this email along to anyone that you think might be interested in attending.

Please call Judy (719-260-9800) if you would like to attend this session on September 7th, as space is limited.

We hope to see you on September 7th! Coffee and donuts will be served!

1 2