7 Retirement Sins You Don’t Want to Commit

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In general, Americans are pretty fearful about retirement and it’s easy to see why.

So today I want to talk about seven different things that can totally derail anyone trying to work toward more financial stability in their golden years.

Retirement Planning Sin #1: Counting on Social Security, Pensions, and Other Traditional Plans

At this point, I’ve probably written a million words on the problems with our traditional retirement systems and you’re free to read my thoughts in past articles and interviews I’ve done over the years.

But just to recap:

  • Social Security is now taking in less than it pays out and is projected to do so every year going forward…
  • Without changes, the program’s trust fund will be exhausted in 15 years and only 75% of promised benefits will be paid out…
  • Many pension plans – both governmental and private – have been suffering from similar shortfalls and systemic problems…
  • A number of pension plans are already trying to go back on the promises they’ve made to retirees…
  • And while near-term retirees will probably be the least affected group, I wouldn’t treat any guarantee as sacred.

Now, it needs to be said: These are not just abstract concepts. I’m not saying these things for shock value.  These are real issues that impact a lot of people in my own life.

For example, my father has two different state retirement plans after working in various mental health facilities for four decades.

My mother-in-law receives her retirement income from a pension provided by Dupont, her life-long employer.

And even I have a small pension from more than a half decade working at Standard & Poor’s.

I hope all of our payments keep coming as they should. But I’m telling my father, my mother-in-law, and everyone else not to just blindly depend on it!

Instead, you should always be saving and investing somewhere else on the side… just as a fall-back plan. 

Retirement Planning Sin #2: Failing to Have a Budget

For about 15 years, I urged my mom to keep track of her spending so she would have a good understanding of what her cash flows looked like.

In response, she gave me all kinds of excuses. She didn’t have time. She already had a basic idea of what she was spending. That there was no possible way to even keep track between her credit cards, her check payments, and all the various cash transactions she was making.

Then she turned 66 and got serious about retiring.

Sure, she knew what all the big numbers looked like – property taxes, car payments, etc. But did she have any idea how much was being spent eating out with her friends? Or going overboard buying Christmas gifts for my daughter?

Not really. Without that knowledge it was going to be impossible for her to design a sustainable life on a very fixed income.

Now she’s actually retired and keeps better track of the money coming in and going out because she has to. But she could have been even better prepared… and probably saved a lot more money ahead of time… if she had started sooner.

So please, if you don’t currently have a budget… one that accounts for ALL your expenses… please get one up and running.

I do this in an excel spreadsheet for my own family and we meet at the end of every year to revisit things.

But the process can be as simple as a $1 notebook from the drug store. And all you have to do is write down how much you spent and on what – no matter what payment form you use.

Then, after a few months, add up the numbers and put them into basic categories. I think you’ll be surprised at the patterns you see… and where you might have room for additional savings.

One other thing – if you share your finances with anyone else, it’s absolutely crucial that you include them in this process and that you have open and honest discussions about how the money is getting spent.

Speaking of which, there’s one major expense you might NOT be factoring in. And that’s why the third deadly sin is

Retirement Planning Sin #3: Ignoring Inflation, Especially in Health Care Costs

I’m sure you understand the general concept of inflation and you already have a sense that today’s budget might look different ten years from now simply because of rising prices.

But perhaps no single expense is rising faster – or impacting more retirees – than soaring healthcare costs.

Every year, Fidelity takes a look at how much a typical 65-year-old couple will spend on out-of-pocket healthcare costs during retirement.

This year the number was an eye-popping $280,000.

Five years ago, the number was $220,000.

That’s a 27% surge in just half a decade!

What’s more, this is assuming you have traditional Medicare coverage. Plus it doesn’t include costs associated with nursing-home care.

And that’s where things get really scary.

Unless you’re essentially destitute and qualify for Medicaid – or you’ve already purchased long-term care insurance – medical treatment outside a hospital is going to be your cost to bear.

The total outlay depends on a number of factors, including your local area. But according to Senior Living, the national average for a semi-private nursing home runs $82,128 a year!

Look, I’m not trying to depress you here. But the reality is that 70% of us will need long-term care services at some point in our lives… and sometimes it happens sooner than we think. In fact, 40% of the Americans in long-term care are between the ages of 16 and 64.

So whether you consider long-term care insurance or you simply set aside a big chunk of money and hope for the best, you at least need to consider the huge impact that health care costs will have on your family during retirement.

You’re looking at a quarter of a million bare minimum. And another $100,000 a year if long-term care becomes necessary.

That could be enough to drain even a very well-prepared retiree.

Which is why you should also seriously explore how you can protect your income and assets before they get taken or disqualify you from Medicaid.

The rules vary from state to state, and they’re always changing, but at the bare minimum you want to start thinking about this at least five years before long-term care becomes a real possibility.

For example, if you have a second home or rental real estate, you might consider signing it over to a trustworthy heir before you end up signing it over to a nursing home.

And speaking of protecting your assets…

Retirement Planning Sin #4 Is Not Using Tax Shelters!   

It doesn’t matter if you’re 30 or 60 – you should be using tax-advantaged accounts for the vast majority of your saving and investing.

Obviously, choosing which particular accounts make the most sense is going to vary based on your individual circumstances. But in general I recommend using the following process:

First, contribute enough to any employer-sponsored plan to get the maximum match…

Second, if you’re self-employed – which includes people who merely have side businesses – also consider opening a Solo 401(k) plan…

And third, use IRA accounts – traditional and/or Roth varieties depending on your goals and tax situation – to sock away even more.

This is what I do personally, and the same thing I recommend to everyone else I talk to regardless of age or income.

Retirement Planning Sin #5: Not Having “A Post-Work Plan.”

A lot of people don’t think this really matters – especially if they’re still relatively far away from retirement.

Heck, how could NOT working be hard, right? I mean, most people figure waking up without anything to do is a great problem to have.

However, I know someone who retired – from a job she didn’t even like – and she found the transition to be VERY difficult.

So much so that she had to take a class at her local senior center titled “Every Day Is a Saturday.”

In what amounted to a support group, she witnessed countless other new retirees literally breaking down because they didn’t know how to handle their newfound freedom – including a 70-year-old heart surgeon who cried profusely!

Rather than figuring this out as you go, start thinking about it now… and always keep that budget in the back of your mind, too.

There are countless resources available to retirees – free classes (even college educations in some places!)… special exercise groups… volunteer opportunities… mentoring programs… the sky is literally the limit.

The key is envisioning your future before it arrives.

And on a similar note…

Retirement Planning Sin #6 Is Being Inflexible

We never have any idea how things are going to turn out – in investing or life. So all we can do is plan for the best and prepare for the unforeseen twists and turns.

If you have a very narrow vision of what your future looks like, and you’re unwilling to change course, you’re setting yourself up for potential disappointment.

Just consider the thousands of retirees who are now discovering whole new lives in foreign countries they had never thought of visiting ten years ago!

Am I saying you should have to move to Thailand to get a comfortable retirement? Of course not. I’m simply saying that we should try to find joy no matter what… and embrace the excitement of trying new things no matter our age or circumstances.

That’s the real secret to a long, healthy, and happy life.

Which brings me to our final retirement planning sin… perhaps the biggest of them all…

Retirement Planning Sin #7: Procrastinating!

I started saving in a 401(k) the very first paycheck I got and I have increased the amount I sock away at every possible opportunity ever since then.

Two decades in, I have quite a lot in the bank already. Meanwhile, most of my friends are still treating retirement as some far-off thing.

Sure, there might be another two decades to go for anyone in my age bracket. But time flies!

That’s something to remember no matter how old you are… no matter where you’re at in terms of your goals… and no matter how much money you currently have.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 7 Retirement Sins You Don’t Want to Commit appeared first on Daily Reckoning.

401(k) & SS: Which Is Top Dog?

This post 401(k) & SS: Which Is Top Dog? appeared first on Daily Reckoning.

Your monthly Social Security benefit is determined by your age when you begin taking it and your lifetime earnings. Only annual income up to the maximum taxable earnings is counted, which includes money you put into a 401(k) plan. For 2019, that maximum is $132,900.

The longer you wait to take the benefits and the more you earned, the bigger the monthly payout.

The maximum monthly benefit in 2019 is $2,861 for someone who files at full retirement age (currently 66). Holding off as long as you can, for instance until 70, would boost that benefit to $3,770.

Click here to estimate your benefits.

So the simple answer is: No. Your 401(k) will not directly affect your benefits.

However, withdrawals from your 401(k) could make some of your Social Security benefits taxable, which affects the net amount you end up with.

To Determine If Your Benefits are Taxable…

Take one-half of your benefits plus all other income, including tax-exempt interest and 401(k) withdrawals. If that sum is more than your base amount, part of your benefits will be taxable.

Your base amount is:

  • $25,000 if your are single, head of household, or a qualifying widow(er)
  • $25,000 if you are married filing separately and lived apart from your spouse for all of 2018
  • $32,000 if you are married filing jointly
  • $0 if you are married filing separately and lived with your spouse at any time during 2018
  • How much is taxable is based on your filing status and income …
  • If you file as an individual and your base amount is between $25,000 and $34,000, you may have to pay tax on up to 50% of your benefits. If it’s more than $34,000, up to 85% may be taxable.
  • If you file a joint return and have a base amount between $32,000 and $44,000, you’ll pay tax on up to 50% of your benefits. And if it’s more than $44,000, expect up to 85% of your benefits to be taxable.
  • And if you’re married and file a separate tax return, you’ll probably pay taxes on all of your benefits.

Click here for a worksheet to check if your benefits are taxable.

5 Ways to Ease the Pain

Required Minimum Distributions (RMDs) are part of what makes up your base amount for calculating tax on Social Security benefits. 

However, some planning could help shrink your 401(k), which will make the RMDs smaller and ultimately cut or eliminate the tax on your benefits …

1. Start Taking Distributions While Working

When you turn 59½ you can withdraw money from your 401(k) without paying the 10% early-withdraw penalty.

You’ll have to pay income tax on those dollars. At the same time you’re reducing the amount in your 401(k). And that could mean smaller RMDs down the road.

Make sure though, that the additional income won’t kick you into a higher tax bracket.

2. Use 401(k) to Pay Living Expenses

If you retire say at 65, use 401(k) withdraws to pay your living expenses rather than beginning Social Security benefits. That accomplishes two things:

  • You’ll shrink the size of your 401(k) and ultimately the RMDs
  • By postponing Social Security you could significantly boost the payouts. For every year past your full retirement age that you delay, your benefits go up by about 8% until age 70.    

3. Convert to a Roth IRA

Roth IRAs aren’t subject to RMDs. Moreover, you can take unlimited tax-free distributions from a Roth without worrying about any impact on the taxation of your Social Security benefits.

However when you convert to a Roth, the amount converted is taxable at your ordinary rate. Take note:

A large conversion could push you into a higher tax bracket and make some of your Social Security benefits taxable, although it would only be for the year of conversion.

4. Charitable Contributions

You can’t give RMDs from your 401(k) tax-free to a charity. That only applies to IRAs. But there is an indirect way to make a tax-free transfer.

Simply roll over funds from your 401(k) to an IRA and then donate it to charity. Taxpayers age 70½ or older can transfer up to $100,000 a year to charities. And those donations count towards your RMDs.

Smaller RMDs could keep your income below base amounts in which Social Security benefits become taxable. 

5. Go Back to Work or Keep Working

You must begin taking RMDs from your 401(k) at age 70½. Miss one and you’re looking at a 50% penalty on the amount that should have been withdrawn.

But that doesn’t apply if you’re still working.

So if you’re not quite sure you want to retire or you’re considering going back to work, a position that offers a 401(k) gives you two benefits:

  • The ability to delay RMDs 
  • The potential for additional tax-deferred growth

And if you have a 401(k) from a previous employer, rolling it into your current employer’s plan (assuming the plan allows rollovers) will let you postpone RMDs on that money, too.

Bottom Line

Keep in mind that if you take large distributions from your 401(k) while receiving Social Security benefits, those withdrawals could push you past the base amount and increase your income tax bill for the year.

Also, watch for any changes to the Social Security base amounts. And include income tax when planning your retirement.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 401(k) & SS: Which Is Top Dog? appeared first on Daily Reckoning.

There are Billions to Be Claimed… Is Any of It Yours?

This post There are Billions to Be Claimed… Is Any of It Yours? appeared first on Daily Reckoning.

State governments are sitting on boatloads of unclaimed dollars. 

Right now Florida alone is holding $1 billion, Washington … $1.3 billion, Illinois … $2.9 billion, California … a whopping $9.3 billion, New York … a jaw dropping $14 billion.  

And the billions keep pouring in. 

According to the National Association of Unclaimed Property Administrators (NAUPA), in FY 2015, $7.763 BILLION was collected.

Where the Money’s Coming From 

When a rightful owner cannot be located after a year or longer, funds are turned over to the government. 

For instance, suppose you had a small savings account and moved to another state. But you forgot to give the bank your new address? Since the bank doesn’t know where to send statements or tax information, it turns the money over to the state. 

The same often happens with life insurance death benefits. The insurance company can’t locate the beneficiaries, so the money eventually goes to the state. 

Other cases when the owner cannot be found include:

  • Trust distributions
  • Tax refunds
  • Contents in safe deposit boxes
  • Tenant security deposits 
  • Annuities
  • Old stocks
  • Uncashed payroll checks  

How to Find Your Share

Of the $7.763 billion cited above, $3.235 billion was returned to the rightful owners. That’s because every U.S. state, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have unclaimed property programs meant to find owners of lost and forgotten assets. 

The unclaimed property law is sometimes referred to as the W.C. Fields Law, named after the legendary comic and actor who died in 1946. Afraid of being robbed while he worked in the vaudeville circuit, Fields opened bank accounts in around 700 places. After his death, his heirs spent years contacting banks around the country to track down his assets.

Most states hold unclaimed financial assets until you are found. Tangibles, such as from a safe deposit box, might eventually be sold at auction and the proceeds held until you claim them. 

The amounts are usually small, $100 or so. However, last year in Arizona someone claimed $2 million. 

You may have received a notice from a company offering to recover money that you didn’t know was yours. 

Many are legitimate businesses that charge a percentage of the amount recovered. Although some are scams expecting you to pay upfront and then don’t deliver on promises. So be cautious before signing a contract. 

But if you’re willing to do some legwork, you can search for unclaimed assets on your own. And in most cases, the state will return them to you at little or no cost. 

Where to Start

The government doesn’t have one central source to look for money that might be owed to you. 

So a good place to begin is with the NAUPA. You can search every state where you have lived on their free search engine.  

Go to the IRS, too. They may be sitting on a refund you didn’t even know about because they have an old address. 

Have you ever had a credit union account? The National Credit Union Administration (NCUA) could be holding funds for you. 

Or are you about to retire and think you might be entitled to a small pension from a company you worked for decades ago? The problem is … you can’t locate them.  

The Pension Benefit Guaranty Corporation has over $300 million for more than 38,000 people who haven’t claimed their pensions. The individual benefits range from 12 cents to almost $1 million. 

Speaking of retirement money …

The Department of Labor (DOL) allows companies who are terminating defined contributions plans, like 401(k)s, to transfer accounts of $1,000 or less to state unclaimed property funds when they can’t locate the owners.

So if you think you may have had small qualified retirement plan that has been terminated, the DOL will help you locate your money.  

To Prevent Losing Your Property…

Property is generally lost because the company or financial institution can’t find you.  

To prevent that: 

  1. Let banks, brokerage firms, insurance companies, and other financial institutions know when you move or have a change in marital status.
  2. Maintain accurate records that include account numbers, institutions’ names and addresses.
  3. Have a qualified attorney prepare a estate plan that has the contact information for all beneficiaries. And review it annually and make changes as needed.  

I hope this helps you find out if any of the unclaimed assets are actually yours.

To a richer life,

Nilus Mattive

Nilus Mattive
Editor, The Rich Life Roadmap

The post There are Billions to Be Claimed… Is Any of It Yours? appeared first on Daily Reckoning.