7 Retirement Sins You Don’t Want to Commit

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

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.

Turning 66? Here’s How You Can Boost Your Income…

This post Turning 66? Here’s How You Can Boost Your Income… appeared first on Daily Reckoning.

For couples to receive the largest monthly Social Security check possible, experts generally recommend that the higher wage earner holds off until age 70 to begin collecting retirement benefits.

But often people cannot afford that delay if they retire before then, which explains why about 50% of them file early.

Some though, have discovered a perfectly legal way to increase their Social Security benefits by tens of thousands of dollars without waiting those extra years…

When you file for Social Security, you are automatically applying for your own retirement benefit and for any spousal benefit that is available. You’ll receive the higher one. You can’t choose which benefit to take; Washington does that for you. And that decision can never be changed.

On top of that, your benefit may be reduced for the rest of your life if you are not yet 70, which could also affect survivor benefits.

But a restricted application allows the husband or wife to file for spousal benefits only.

You could do this at your full retirement age — 66 — or later.

The Payoff

You received 50% of your spouse’s full retirement age benefit for up to four years while your delayed benefit grows. To use this strategy, your spouse must have already filed for benefits.

In 2015, Washington killed that loophole as part of the Bipartisan Budget Act.

The reasoning according to the Social Security Administration:

“Historically, spousal benefits were designed to be paid only to the extent they exceeded any benefit the spouse earned based on his or her own work record. This change in the law preserves the fairness of the incentives to delay, but it means that you cannot receive one type of benefit while at the same time earning a bonus for delaying the other benefit.”

In other words … the change is meant to prevent you from collecting only spousal benefits while your retirement benefit earns delayed credits.

The opportunity to file a restricted application for spousal benefits ended on April 30, 2016.

However, there are exceptions for an estimated 13 million boomers, but they expire the end of this year.

To Qualify to be Paid Now and Even More Later …

You must:

  • Have been born between 1950 and 1953
  • Be married or divorced
  • Have not yet have filed for Social Security benefits

And your spouse or ex-spouse must have filed for retirement benefits.

Here’s an example of how a restricted application could work:

Harry and Sally are married; both are 66. Harry qualifies for a $2,300 monthly Social Security benefit, while Sally can get $1,200.

Harry could file a restricted application for a $600 monthly spousal benefit.

This accomplishes four things:

  • Harry will receive half of Sally’s benefit, or $600 per month, without filing for his own benefits. Over four years that’s an extra $28,800 of spousal benefits (plus cost of living increases). Their combined monthly Social Security income will be $1,800.
  • Since Harry is not receiving benefits based on his earnings record, he earns an 8% delayed credit each year for four years until he turns 70 when he switches to his own benefit.

That’s a whopping 32% in additional benefits ($736 more) at age 70 for a monthly benefit of $3,036. Their combined benefit will then be $4,236 plus any cost of living adjustments.

  • When Harry files for his own benefits, Sally could qualify for additional spousal benefits based on his record.
  • If Harry predeceases Sally, she switches to survivor benefits based Harry’s higher retirement benefit at the time of his death.

Divorcées and Divorcés

If you are divorced, the exception rules vary a little:

  • You must have been married at least 10 years
  • If you were divorced within the last two years, your ex must have filed for benefits
  • If you divorced more than two years ago, your ex must be at least age 62 and entitled to Social Security
  • You are unmarried

Widows and Widowers

Widows and widowers don’t have to worry about the Jan. 1, 2020 deadline; they’re not affected by the new law. The only criteria are that you must have been married for at least nine months and be age 60-70 when using this strategy.

So you could file a restricted application for survivor benefits then switch to your own retirement benefit, assuming it’s larger, as late as age 70.

Bottom Line

Take your time to understand your options when filing for Social Security. After all, there’s no point leaving a boatload of money on the table.

And if you qualify, filing a restricted application is a great way to maximize the higher earner’s benefit, coordinate benefits between you and your spouse, and maximize survivor benefits.

But time is running out. So look closely at the “be paid now and even more later” strategy before it vanishes.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Turning 66? Here’s How You Can Boost Your Income… appeared first on Daily Reckoning.

7 Ways THIS Is Not What It Used to Be

This post 7 Ways THIS Is Not What It Used to Be appeared first on Daily Reckoning.

The days of the 40-year career with the same company are gone. The gold watch is gone. And in most cases, the company pension is gone too, or it’s been replaced by a self-managed IRA or 401(k) plan.

The first thing you need to know about retirement today is it’s entirely your responsibility.

Here are seven ways retirement has changed in the last 25 years and what you can do about it.

1. Inheritance

If you were banking on an inheritance from mom and dad to fund your retirement, think again.

According to an HSBC Bank survey of 16,000 people in 15 countries (1,000 from the U.S.), 23% of pre-retirees would like to spend their last dollar with their last breath, and let the kids figure it out on their own. Only 9% of the pre-retirees found it important to leave a legacy for their kids.

In the U.S., about one in 10 retirees support a child over the age of 16 and almost 60% of working-age Americans expect to leave something to heirs.

The days of a hefty inheritance will soon be forgotten, so instead I suggest you start saving more now.

2. Mortgage Payoff

Should you pay off the mortgage? For most people, it generally makes sense after taxes to keep the mortgage, but 25 years ago most people would rather not have to make that payment every month.

Given how low interest rates are today, many retirees are choosing to keep the mortgage, or obtain one if they are buying a retirement home. A recent study by Merrill Lynch and Age Wave, a research firm, found that 64% of retirees expect to move at least once and 37% have already done so.

What’s more, 27% are seriously thinking about it. And not all of this is downsizing, 30% of those who have already moved upsized to a larger home primarily to make room for visitors and family.

3. Retirement Age

It used to be that 65 was the age you retired. This was the norm for a long time. Then a handful of baby boomers made retiring at 55 cool but this was still considered early retirement.

A recent survey by the Employee Benefit Research Institute, found that 50% of retirees quit working earlier than they expected. Health issues were the culprit in 60% of those situations, while 27% cited changes at the company, and surprisingly, 22% stopped to care for a family member.

In addition, a New York Life survey found that 51% of retirees wished they had stopped working sooner so they could have enjoyed retirement while they were younger and healthier. On average, they wanted to retire four years earlier than they did.

There’s no set or recommended retirement age anymore. Retirement comes to each person at different times in life. For some people, retirement is when your work becomes optional. While others are forced into it due to unforeseen circumstances.

The point is you need to be prepared when your time comes to retire. Build a plan anticipating the most likely outcome and stick to that plan until you retire or your circumstances change.

4. Reliance on Social Security

In the mid ‘80s through to the early ‘90s, retirees relied on Social Security for around 65% of their income. Today, Social Security accounts for just 27% of a person’s retirement income.

It used to be that a lot people had pensions that could fill the gap left by Social Security. In the early ‘90s, 43% of all private-sector workers were covered by a pension plan. Today, only 19% of companies offer pension plans. Again, you’re going to have to rely heavily on savings to bridge the gap between Social Security and your cost of living, so keep saving and earning.

5. Living Longer

The average life expectancy for a 65-year-old is 19 years, but a lot of people will live another 25 even 30 years. This presents several challenges with respect to planning how much you’ll need saved up.

The longer you live, the more likely you are to encounter health problems which can quickly eat away at your nest egg. The good news is with living longer you have more opportunities and time to pursue items on your bucket list. Just make sure you budget for all the things you want to do.

6. Medicare: Part D

Speaking of health. The Part D prescription-drug plan is probably one of the biggest changes to Medicare in the last 25 years. 

When Part D launched, there was a huge gap in coverage. The tradeoff was drug prices were lower. Since 2006, drug prices have rapidly climbed. Now the gap is a lot smaller, but drug prices are higher.

Add in Medicare Advantage plans, where you have new benefits and they don’t have to be uniform across plans, and your head starts to spin. Most people only focus on premiums, rather than looking at the out-of-pocket costs coming from actual expenses. Moving forward, it’s going to be even more difficult for the average American to choose the right plan.

7. Retirement Solutions

Around the mid nineties, we were dealing with a bull market. Everyone loved 401(k) plans. You could invest in just about anything and be doing well. Then, at the beginning of the 2000s, Enron crashed.

All these massive companies had 401(k) plans filled with company stock, and when the company failed, so did your 401(k). This was a big red flag and it became even worse when the economy crashed in 2008.

Today, we’ve moved away from defined benefit plans into 401(k) plans.

But I see more changes to come, possibly even an entire system overhaul.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 7 Ways THIS Is Not What It Used to Be 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.

7 Ways Retirement Has Changed

This post 7 Ways Retirement Has Changed appeared first on Daily Reckoning.

The days of the 40-year career with the same company are gone. The gold watch is gone. And in most cases, the company pension is gone too, or it’s been replaced by a self-managed IRA or 401(k) plan.

The first thing you need to know about retirement today is it’s entirely your responsibility.

Here are seven ways retirement has changed in the last 25 years and what you can do about it.

1. Inheritance

If you were banking on an inheritance from mom and dad to fund your retirement, think again.

According to an HSBC Bank survey of 16,000 people in 15 countries (1,000 from the U.S.), 23% of pre-retirees would like to spend their last dollar with their last breath, and let the kids figure it out on their own. Only 9% of the pre-retirees found it important to leave a legacy for their kids.

In the U.S., about one in 10 retirees support a child over the age of 16 and almost 60% of working-age Americans expect to leave something to heirs. The days of a hefty inheritance will soon be forgotten, so instead I suggest you start saving more now.

2. Mortgage Payoff

Should you pay off the mortgage? For most people, it generally makes sense after taxes to keep the mortgage, but 25 years ago most people would rather not have to make that payment every month.

Given how low interest rates are today, many retirees are choosing to keep the mortgage, or obtain one if they are buying a retirement home. A recent study by Merrill Lynch and Age Wave, a research firm, found that 64% of retirees expect to move at least once and 37% have already done so.

What’s more, 27% are seriously thinking about it. And not all of this is downsizing, 30% of those who have already moved upsized to a larger home primarily to make room for visitors and family.

3. Retirement Age

It used to be that 65 was the age you retired. This was the norm for a long time. Then a handful of baby boomers made retiring at 55 cool but this was still considered early retirement.

A recent survey by the Employee Benefit Research Institute, found that 50% of retirees quit working earlier than they expected. Health issues were the culprit in 60% of those situations, while 27% cited changes at the company, and surprisingly, 22% stopped to care for a family member.

In addition, a New York Life survey found that 51% of retirees wished they had stopped working sooner so they could have enjoyed retirement while they were younger and healthier. On average, they wanted to retire four years earlier than they did.

There’s no set or recommended retirement age anymore. Retirement comes to each person at different times in life. For some people, retirement is when your work becomes optional. While others are forced into it due to unforeseen circumstances.

The point is you need to be prepared when your time comes to retire. Build a plan anticipating the most likely outcome and stick to that plan until you retire or your circumstances change.

4. Reliance on Social Security

In the mid ‘80s through to the early ‘90s, retirees relied on Social Security for around 65% of their income. Today, Social Security accounts for just 27% of a person’s retirement income.

It used to be that a lot people had pensions that could fill the gap left by Social Security. In the early ‘90s, 43% of all private-sector workers were covered by a pension plan. Today, only 19% of companies offer pension plans. Again, you’re going to have to rely heavily on savings to bridge the gap between Social Security and your cost of living, so keep saving and earning.

5. Living Longer

The average life expectancy for a 65-year-old is 19 years, but a lot of people will live another 25 even 30 years. This presents several challenges with respect to planning how much you’ll need saved up.

The longer you live, the more likely you are to encounter health problems which can quickly eat away at your nest egg. The good news is with living longer you have more opportunities and time to pursue items on your bucket list. Just make sure you budget for all the things you want to do.

6. Medicare: Part D

Speaking of health. The Part D prescription-drug plan is probably one of the biggest changes to Medicare in the last 25 years. 

When Part D launched, there was a huge gap in coverage. The tradeoff was drug prices were lower. Since 2006, drug prices have rapidly climbed. Now the gap is a lot smaller, but drug prices are higher.

Add in Medicare Advantage plans, where you have new benefits and they don’t have to be uniform across plans, and your head starts to spin. Most people only focus on premiums, rather than looking at the out-of-pocket costs coming from actual expenses. Moving forward, it’s going to be even more difficult for the average American to choose the right plan.

7. Retirement Solutions

Around the mid nineties, we were dealing with a bull market. Everyone loved 401(k) plans. You could invest in just about anything and be doing well. Then, at the beginning of the 2000s, Enron crashed.

All these massive companies had 401(k) plans filled with company stock, and when the company failed, so did your 401(k). This was a big red flag and it became even worse when the economy crashed in 2008.

Today, we’ve moved away from defined benefit plans into 401(k) plans.

But I see more changes to come, possibly even an entire system overhaul.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 7 Ways Retirement Has Changed appeared first on Daily Reckoning.

Retire on Time Even if You’re 40 with Nothing Saved

This post Retire on Time Even if You’re 40 with Nothing Saved appeared first on Daily Reckoning.

Turning the big 4-0 with nothing in the bank for retirement isn’t ideal but it’s reality for a lot of Americans today.

The Employee Benefits Research Institute reports that 37% of all employees age 35–44 and 34% of employees age 45–54 have less than $1,000 saved for retirement.

If you fall into this camp, take comfort in knowing you’re not alone. But realize you have a big hill to climb if you want to build a decent-size retirement nest egg.

You missed the opportunity to let time perform its compounding magic on your investments and now you’re faced with a simple math problem: The compounding approach won’t work for you if you start this late in the game.

It’s tough to accept, but it’s true. There are a variety of reasons why you left retirement planning until your forties. Dealing with too many debt commitments, juggling other priorities, having too little time, or simply not realizing that your 60s are closer than you think.

Regardless of your why, it’s not too late to take a hard look at your finances, create a plan, and get some money in the bank. Here’s a step-by-step guide on how to save for retirement in your forties without having to take on crazy amounts of risk. 

Step 1: Outline a Basic Retirement Plan

You’ll need four key numbers to start building your basic retirement plan:

  • the age you want to retire
  • the number of years you’ll depend on retirement savings
  • an annual estimate of living expenses in retirement
  • your current savings

Here’s how to find these numbers: While a lot of people see 65 as the “normal” retirement age, it’s by no means definitive. Take into account your age, salary, expenses and how long you’re likely to live, and you can figure out what age is a realistic retirement target.

Also consider all possible retirement income streams you might have. Will you have a pension, or will you depend on Social Security? To calculate your Social Security payments, enter your birthdate and current salary into this Social Security calculator from the U.S. Department of Labor.

You’ll see how retiring a year or two earlier or later will affect your monthly payments. For example, a 40-year-old earning $50,000 a year can expect benefits of $1,566 per month if he retires at age 65, or $1,824 if he waits until age 67.

After you figure out what age you plan on retiring, run your numbers through AARP’s Retirement Calculator. Enter your age, salary and lifestyle details, and the calculator will build a graph that shows your estimated retirement income and projected living expenses, as well as any gap between the two.

Adjusting your planned retirement age helps show you how working an additional year or two could affect your savings. What you might find is even delaying retirement until age 67 or 70, doesn’t close the gap entirely. This is where you need to rely on savings. So, how much money should you be saving?

To get a quick answer, use this Retirement Savings Calculator. Add your age, salary and current savings and the calculator will spit out how much of your annual income you should be saving for retirement.

This will be like a splash of cold water to your face. A 40-year-old earning $60,000 should aim to save 17 percent of his annual income — and that’s assuming he already has $10,000 in the bank. If you’re not sure where this money is going to come from, move on to step two.

Step 2: Trim Living Expenses

In your 40s, you should be earning substantially more than you did in the earlier stages of your career.

The downside is you probably feel comfortable taking on bigger expenses now. If you want to bridge the gap between your estimated retirement income and living expenses, you need to start slashing your living costs to free up cash.

Build a budget and see where the bulk of your money is going each month. Figure out which major expenses you need to cut.

Scaling back your cable package might add another $50 a month to your savings, and so might packing a lunch two or three times a week. But if you have virtually nothing saved in your 40s, it’s going to take more than $50 a month to make up for two decades of neglecting your nest egg.

Start thinking bigger.

Decide that instead of holding onto two vehicles, you and your partner will share one. Or, consider downsizing to a smaller home or condo which will lower almost all your housing costs in one shot.

Step 3: Get a Side Job

Working harder after you’ve spent the last 20 years or so paying your dues is not appealing, I know.

However, if you’re willing to take on a second, part-time job, you could reach your retirement savings goals a lot faster or without having to take such drastic measures as mentioned above.

For instance, if you can make an extra $400 a month on top of your regular paycheck, you might not need to become a one-car family. Better yet, if you’re able to reduce some major expenses and work a side job, you’ll accelerate your savings and not only hit retirement on time but have a sizeable nest egg to boot.

Step 4: Test Your New Plan

After you’ve made all the necessary calculations, trimmed some major expenses, and found a few new opportunities to earn some extra cash on top of your regular paycheck, run the numbers again.

Go back to AARP’s Retirement Calculator and see if you’ve closed the gap between your estimated retirement income and projected living expenses. If there’s still a gap, go through steps 2-4 again and figure out how you can move the needle in the right direction.

At the end of the day, you’ll have to work with what you have. You might realize that given your skillset or current time commitments, working a second job is not feasible. Or, you’ve cut your expenses to the bare bones and the numbers still don’t add up.

Once you’ve reached this point, then it’s time to consider higher risk investments to give your money a shot at growing. Treat high-risk portfolios as a last resort.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Retire on Time Even if You’re 40 with Nothing Saved appeared first on Daily Reckoning.

6 Social Security Mistakes to Avoid

This post 6 Social Security Mistakes to Avoid appeared first on Daily Reckoning.

One of the biggest Social Security mistakes I see people make is claim their benefits too early. 

According to the Centers for Retirement Research at Boston College, 60% of seniors are applying for social security benefits before full retirement age. 

If you turned 62 last year, your full retirement age will be 66 years and six months. Full retirement age will continue to increase in two-month increments each year until it reaches 67. 

Even though you’re eligible to start claim benefits at 62, it’s ill-advised. Monthly payments are reduced by 25-30% if you claim at 62, depending on your birth year. 

In theory, claiming Social Security benefits should be straightforward — after working several decades, fill out an application and get a monthly benefit check for the rest of your life. 

But, you and I know it’s not that easy. There are strategies to consider if you want to maximize your benefits, and there are several mistakes that could cost you thousands of dollars over the course of your retirement if you’re not careful. 

Here are just a few mistakes I see people make that could easily be avoided. 

Mistake #1 – Claiming Benefits Too Early

I already explained why this is not advised for most retirees. But if you already chose to claim benefits early and now are second-guessing your decision, there are some recourse steps you can take.

Specifically, you are allowed to withdraw your Social Security application and re-claim benefits at a later date, but two conditions apply. 

First, you must withdraw your application within the first 12 months of receiving benefits. And second, you have to pay back every cent of benefits you’ve already received. Which can be a lot of money if you weren’t planning on withdrawing. 

This is why you should be certain. There are some perfectly good reasons for claiming benefits before your full retirement age, but it’s important to weigh all your options before you make moves.

Mistake #2 – Not Understanding the “Earnings Test”

If you’re still working and haven’t yet reached full retirement age, your benefits can be withheld based on your earnings. 

Here are the two “earnings test” rules for 2019:

  1. If you will reach full retirement age after 2019, $1 of your benefits will be withheld for every $2 you earn in excess of $17,640.
  1. If you will reach full retirement age during 2019, $1 of your benefits will be withheld for every $3 you earn in excess of $45,920. This is prorated monthly, and only the months before your birthday month are counted.

To be clear, benefits withheld under the earnings test aren’t necessarily lost. They can be returned in the form of increased benefits once you reach full retirement age. 

People who think they can be fully employed and collect their Social Security benefits are often caught off guard when the Social Security office tells them they made too much money and have to repay some of the benefits. 

Once you reach full retirement age, you can earn as much as you’d like with no reduction in benefits.

Mistake #3 – Assuming Social Security Is All the Retirement Income You Need

23% of married couples age 65 and older and 43% of unmarried seniors rely on Social Security for 90% or more of their income. Not only is this unsustainable, it’s not how Social Security was designed. The original intent was that Social Security would account for about half of your retirement income. 

In reality, the average American can expect Social Security to replace about 40% of their income. The rest needs to come from other sources, like pensions and retirement savings. 

Typically you’ll need 70% to 80% of your pre-retirement income to maintain your quality of life after retiring. 

Mistake #4 – Not Checking Your Social Security Earnings Record

Do you check your Social Security statement each year? If not, now is a good time to create an account at www.ssa.gov and check it out. 

Your Social Security statement has lots of valuable information, including your estimated retirement benefits, disability benefit eligibility, Medicare eligibility and benefits for your potential survivors. 

But maybe the most important reason to check your statement every year is to ensure it’s correct. Recently, the SSA said there was about $71 billion in Social Security-taxed wages that couldn’t be matched to any earnings records, and only half of this was eventually resolved. 

Because your future benefits are based on your earnings record, it’s important to make sure you keep tabs on this number.

Mistake #5 – Remarrying without Understanding the Consequences

If you’re collecting an ex-spousal Social Security benefit and you remarry, that benefit goes away. And if you remarry someone who is 10 or 20 years younger than you, you might not qualify for spousal Social Security benefits for awhile.

So make sure you understand how remarrying will impact your benefits. Also consider, if your ex-spouse passes away, you will step up to their full benefit amount — not the most pleasant thing to think about but important to consider. 

Mistake #6 – Assuming Social Security is Tax Free

A surprising number of people I’ve talked to don’t realize they may have to pay income tax on their Social Security benefits. It depends on how much retirement income you have. But you don’t have to be considered “high income” to be taxed. 

If your combined income is greater than $25,000 for single filers or $32,000 for married couples filing jointly, as much as 50% of your benefits could be taxable. If your combined income is greater than $34,000 (single) or $44,000 (joint), as much as 85% of your benefits could be subject to federal income tax.

It really depends on how significant a source Social Security will be for your retirement income. If you have a pension and significant 401(k) income, likely a portion of your Social Security benefits will be taxed. 

If Social Security is your prime source of retirement income, you’re unlikely to be taxed. Consider this when estimating how much income you’ll need in retirement.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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8 Key Factors to be a Great Investor

This post 8 Key Factors to be a Great Investor appeared first on Daily Reckoning.

Rich dad used to say, “When it comes to money, many people are financial hypochondriacs.”

Their thinking comes from the lower mind which blurs their vision of the future. These are the people who often drive their car by looking into the rearview mirror. Their fear of losing causes them to not take action when once-in-a-lifetime opportunities are placed right in front of their eyes.

Later as they drive down the highway of life, you hear them saying, “I would have, I should have, I could have.” As many wise people have said, “Hindsight is 20/20.” Rich dad said, “If you want to be rich, it is best to be farsighted.” And if you’re thinking it’s too late for you, there’s good news: I can show you how to get new streams of passive income every single week.

When I caution people about the coming stock-market crash, I am not pessimistic about the future. I am very optimistic about the future. Warning people about the coming stock-market crash is the same as warning a friend about a road up ahead that is washed out. If the person will take another route, they can still get to their destination safe, sound, and on time.

As captain of your own ark, one essential skill is to develop your vision. Rich dad’s definition of vision is “seeing with your mind rather than with your eyes.” In order to develop this vision, it is important to first train your middle mind and then go out in the real world and allow your higher mind to develop its natural wisdom, often called intuition or instinct.

Things are changing far too quickly to attempt to see the future through your rearview mirror. Regardless of how old you are, stop for a moment and think of all the changes that have happened in the last few years.

Thinking back upon my own life, I remember when a golf club called a wood really was made out of wood. Today, the new woods are made out of new composite materials I have never heard of. In other words, the game remains the same, but the tools used to play the game have changed dramatically. That is true in many areas of life. Today when someone says, “Let’s stay in touch,” it could be via foot, car, bus, plane, telephone, fax, regular mail, or email.

If you go further back in time, you will see that just a hundred years ago, not even kings, queens, or the richest people in the world were flying on planes because there weren’t any. Almost anyone can afford to fly today.

A hundred years ago, only the rich had cars. Today, cars are everywhere. A hundred years ago, you needed to know Morse code to communicate over the telegraph.

Today, people all over the world carry cell phones. I do not know too many people today who know Morse code. In 1990, the world did not know what the World Wide Web was. Today, the Internet is changing the future of the world faster than any other invention in history.

How to Improve Your Vision to See the Future

One way for you to see the future is by watching things getting too big. Then watch for something small or invisible to replace it.

For example, soon after the attack on the World Trade Center, Chevron and Texaco, two giant companies, announced that they were merging to become a giant of an oil company. On the same page of the business section, a smaller company announced a breakthrough in fuel-cell technology, a new technology that has the potential of taking a lot of business away from big oil companies.

Bill Gates and Steve Jobs became very rich young men by seeing what big companies could not see. Bill Gates got the software contract for IBM’s PCs because IBM did not see the spread of powerful and smaller computers. Steve Jobs became a rich man by using a technology that Xerox did not know how to market, a technology that helped create the Macintosh computer.

The Invisible Economy Is Strong and Growing

Dr. Fuller predicted that we would soon witness the death of the Industrial Age. He also predicted that it might be difficult for people to see the dawn of the Information Age simply because the changes would be invisible. Dr. Fuller died in 1983 and did not live to see many of his predictions come true, but they did.

Just look at the Internet and you will see that the world of the invisible is here. This invisible economy presents a growing problem for governments because governments are by-products of the Industrial Age. The government is trying to collect taxes and define borders

for the invisible economy of the Information Age. This problem for governments will grow if the invisible economy becomes too big, and government cannot collect taxes or define borders. If this happens, the currency of the country will eventually weaken, simply because the power of a country’s currency is linked to its ability to collect taxes.

So have governments gotten too big too? Will there still be government, as we know it, in the Information Age? Can government become invisible?

Dr. Fuller believed governments were obsolete. He believed that humanity was about to evolve or disappear because of government’s diminishing powers. Fuller believed that humans had to choose between the two Utopian worlds of greater personal integrity or bigger government. Otherwise, humanity, as we know it, would disappear. In other words, we as individual human beings need to solve more problems rather than turn those problems over to the government.

For centuries, captains of ships have always posted a lookout on the bow of the ship as well as in the crow’s nest. As captain of your own ark, you too will need to post lookouts on your bow and in the crow’s nest. Metaphorically that means you will need to do the following:

1. Keep Your Word

Dr. Fuller said that we were entering the age of integrity. Integrity simply means “whole or complete.” That means that your thoughts, your words, and your actions need to be the same. If you will do that, the future is yours.

2. Keep an Open Mind and Your Ears Tuned for Change

Since changes are now invisible, you will have to see more with your mind than with your eyes.

3. Learn to Read Financial Statements

Regardless if you invest in companies, stocks, real estate, government securities, or yourself, a financial statement allows the mind to see the true financial condition of the investment, government, or person in question.

Always remember that a banker wants to see neat and complete financial statements. Many times a banker decides to lend or to not lend you money in the first three minutes.

If you do not have neat and complete financial statements and are not articulate in explaining your financial position, then chances are that the only kind of debt you will be granted is poor debt at high interest rates.

4. Use Technology

Computer programs now allow the individual to see what before only the rich or powerful could see. I have friends who trade stocks or options. They now have charts and software that give them the same power to search for investments that giant investment firms have.

The individual investors have the same power as the big firms because of these new tools of the trade. Similar advances in technology are available for businesses and real estate. As stated earlier, the game of golf remains the same, but the tools have changed.

5. Watch for Bigness

There is a saying in the investment world that when someone becomes famous enough for the front cover of national magazines, their career is over. Not long ago, in the Industrial Age, a blue-chip company may have been a leading company for 60 years or more.

Today, with advances in technology, the life expectancy of a company is much shorter. In other words, the moment something or someone becomes too big, they are about to decline and be replaced by something or someone new.

That same observation tends to be true for mutual fund companies, real estate, and careers. There is always something or someone new coming along to take the place of the leader. Your job is to be aware of people or things becoming too big and then watch for the replacement.

6. Watch for Changes in the Laws

Rich dad was forever watching for changes in the laws and the effect the laws had upon our future. ERISA and its subsequent amendments are an example.

The law that created Social Security has created a problem that will have to be solved one way or the other. I suggest you watch how government ultimately decides to handle this massive mess. As rich dad said, “Changes in the law change our future.”

7. Watch Out for Inflation

Just as markets go up and down, so does inflation. Right after September 11, 2001, the Federal Reserve Bank flooded the world with U.S. dollars to provide economic stability and liquidity.

The long- term effect of all this printed money may lead to inflation, which means the U.S. dollar will go down in value. If inflation sets in, anything of questionable value will lose value, while things of value—assets such as real estate, gold, silver, and utility stocks—may greatly increase in value.

8. Pay Close Attention to Government’s Handling of Its Social Programs

It is not news that Social Security, Medicare, Medicaid, and other government programs are in trouble and the problem is getting worse. As stated earlier, government is not solving these problems. It is just pushing these problems forward onto future generations.

Sometime around 2016, all this pushing the string forward is about to come to a head. Pay close attention to how the growing problem is handled. If governments begin raising taxes excessively, be prepared for anything, and be prepared to act quickly.

Today, money can literally move at the speed of light. The problem is becoming more and more serious. Medicaid is the leading reason for overspending.

The problem is only going to get worse as more and more people grow old and require medical care they cannot afford. We all need to watch how the handling of this growing problem unfolds.

The future will be different. It is more important than ever to see what others cannot or do not want to see.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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