11/26/13

Improving Your Finances – 401(k), IRA others… What’s the Best Account Type for You?

I am frequently asked these questions:

  • What is the difference between a 401(k) or IRA?
  • If my employer offers a Roth 401(k) should I use it?
  • What are the rules surrounding a Roth IRA vs. Regular IRA?

So when I found this summary of pros and cons with each type of account, published by Morningstar Online, I knew this would be a very valuable weekly newsletter update.

If you have any questions as you review these options, please feel free to call or email me.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

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11/19/13

Short Video Explains How a Couple can Maximize Collecting Social Security – Don’t Miss This Info!

Mary Beth Franklin is one of the nation’s leading financial experts on the topic of maximizing social security benefits.  In this message is a link to a short video she was featured in.  In very clear terms, she explains the complicated concept of how a couple can maximize Social Security benefits.

In addition, I have some additional links below to previous newsletter articles I sent out on the topic of maximizing social security.  If you have any questions, please let me know.

Link to the Video – http://link.brightcove.com/services/player/bcpid1079049310?bctid=2581409450001

Take a look at previous newsletter articles:

8/26

9/3

9/10

 

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

11/13/13

Unplanned Early Retirement? Spending Time in These 3 Areas Will Pay Off

Morningstar Magazine, By  Christine Benz| 10-31-13 

Google the words “early retirement,” and you’ll find blogs, books, and chat boards dedicated to hanging it up early so you can spend time bumming around Europe or pursue a second career as a winemaker.

But for many older workers, early retirement isn’t about hopping on the Eurostar or tending to a hobby vineyard. Instead, they’ve had to stop working before they were actually ready to–because of downsizing, because of their own health problems or those of a family member, or because they took a buyout package.

For such individuals, early retirement isn’t exhilarating; it can be terrifying, especially from a financial standpoint. Tapping an investment portfolio prematurely can, of course, put undue strain on a nest egg–there’s a big difference in a portfolio’s longevity when you extend the withdrawal time horizon from 30 to 35 or 40 years or more. Health-care costs can also weigh heavily on the finances of individuals who aren’t covered by an employer plan and aren’t yet Medicare-eligible. Although the Affordable Care Act is a new safety net, enrolling in such a plan or COBRA is apt to result in extra out-of-pocket costs that weren’t there when an individual was working.

Even older workers who intend to find another job may have difficulty doing so. At the end of September 2013, the rate of joblessness among people age 55 and older was 5.3%, the lowest rate of any age group. Yet it takes displaced older workers a longer time to find a new job than it does their younger counterparts, according to Bureau of Labor Statistics research.

Workers over 55 should tackle many of the same tasks that any other unemployed workers should take: line up health insurance coverage, strip any nonessential expenditures from their household budgets, and, if they plan to continue working, network and polish their resumes. In addition, older workers should also take the following steps to ensure that premature unemployment doesn’t derail their financial plans.

Here are three guidelines I recommend for anyone in such a situation.

1) Be strategic about where to go for cash.
If you’re no longer earning a paycheck and forced to tap your assets or look elsewhere for living expenses, the name of the game is to first exhaust your most liquid assets. Only as a last resort should you tap assets where you’ll face taxes, rack up early-withdrawal penalties, or incur borrowing costs.

The proverbial “emergency fund”–cash held in a taxable account–is obviously your best source of cash. From there, longer-term taxable assets or Roth IRA contributions, the latter of which can be withdrawn without taxes or penalty at any age, are the next-most desirable.

Withdrawals from traditional IRAs and 401(k)s, would be next in the queue, though you’ll pay an early-withdrawal penalty unless you’re over the age thresholds, generally 59 1/2 and 55, respectively. (You can also avoid the early-withdrawal penalty by taking so-called 72(t) distributions, the details of which are outlined here.) Tapping traditional IRA and 401(k) accounts will trigger ordinary income tax on those distributions, so plan accordingly. But one silver lining of not earning a paycheck is that your tax rate likely will be lower than it was when you were employed. (More on this in my second point.)

Tapping home equity–via a home equity line of credit or a reverse mortgage–should be further down in the queue, especially as long as you have investment assets, because the interest payments to service your debt may well negate any investment earnings. Credit cards, needless to say, are a last resort.

2) Manage your taxable income to qualify for health-care subsidies.
Early retirees who aren’t yet eligible for Medicare and are shopping for health-care plans available under the Affordable Care Act have a new incentive to keep their taxable income down. The lower their income levels, the more likely they are to qualify for subsidies for their health-care plans; taxpayers whose income levels are 400% of the federal poverty level or lower can qualify for subsidies.

Mike Piper, author of several books about retirement planning and the founder of the website obliviousinvestor.com, notes “there are essentially huge marginal tax-rate spikes at the 150%, 200%, 250%, and 400% of federal poverty-level thresholds because at those points, one additional dollar of income can cause you to lose, in some cases, thousands of dollars worth of subsidies.”

Piper advises, “It’s super important to pay attention to those four thresholds and how your income compares with them. Many people will find that by making small changes (for example, spending more from taxable or Roth accounts and less from tax-deferred accounts), they can get their income just below one of those thresholds and thereby qualify for some very significant subsidies.”

But he also warns that a form of modified adjusted gross income affects one’s eligibility for the subsidies; increasing itemized deductions won’t affect this number. (You can see Piper’s full post on the topic here.)

3) Do your homework on Social Security strategies.
For individuals prematurely ejected from the workforce, turning on a stream of income by claiming Social Security benefits soon may look like the ideal stopgap–and a way to delay invading their portfolios prematurely. Not surprisingly, early claiming of Social Security increased during the financial crisis, reversing a trend from the previous decade.  Of course, that uptick was very likely driven by necessity in many cases, and other retirees may have claimed benefits early to avoid tapping their nest eggs while at a low ebb.

But following a five-year rally in stocks, tapping a portfolio early–perhaps by rebalancing out of enlarged equity holdings–looks like a better bet than claiming Social Security benefits before full retirement age (66 for people born between 1938 and 1957 and 67 for people born after 1959). (This interview further details the advantages of delaying Social Security in favor of portfolio withdrawals.) Filing early carries the heavy cost of permanently reduced benefits–as much as a 30% reduction for those who file for benefits at age 62. By contrast, those who wait until age 70 to file will receive delayed credits that amount to an 8% annualized return in the period between their full retirement ages and age 70.

Mark Miller, a Morningstar contributor and the author of The Hard Times Guide to Retirement Security, says “Where else can you get an 8% return–risk free?” He advises that it’s particularly important for the higher-earning spouse in a household to delay filing. “That may well allow the lower earner to get a higher survivor benefit later than he would get if the higher-earner had filed early,” he said.

Delaying receipt of Social Security benefits until full retirement age can also allow couples to employ the so-called file-and-suspend strategy. Under this strategy, outlined here, Miller says “the result can be much higher combined lifetime benefits for the couple.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

11/5/13

65? 70? 80? What’s the Real Retirement Age These Days?

EBRI, UBS and Swiss Re reports may disagree on the number, but they all agree that the age at which workers expect to retire is rising

So what’s the real retirement age these days? Is it 65? 70? Just how many 80-year-olds are actually working?

“Americans are starting to recognize that living longer will require a shift in retirement planning. For many Americans surveyed, 70 is the new 65,” Swiss Re’s North American head of longevity, George Graziani, said in a statement on Monday, which marked the start of National Save for Retirement Week.

For those familiar with Americans’ lack of retirement preparedness (the average 401(k) balance is somewhere around $80,000, according to Fidelity Investments), Graziani’s statement sounds perfectly plausible. Yet UBS just released a new report saying that 80 is the new 60, while the Employee Benefit Research Institute (EBRI) warns that while the age at which workers expect to retire is slowly rising, the reality is that they may not be able to due to health problems or job loss.  The takeaway seems to be that age is just a number and a moving target because traditional views of retirement are changing.

$80,000,  according to Fidelity Investments), Graziani’s statement sounds perfectly plausible. Yet UBS just released a new report saying that 80 is the new 60, while the Employee Benefit Research Institute (EBRI) warns that while the age at which workers expect to retire is slowly rising, the reality is that they may not be able to due to health problems or job loss.  The takeaway seems to be that age is just a number and a moving target because traditional views of retirement are changing.

The Swiss Re risk perception survey shows that the majority of Americans believe they’ll be working well into the years that have traditionally been viewed as retirement years. The survey shows that 57% of American workers expect to work beyond age 65 or never retire.  And 19% of U.S. respondents, more than in any other nation surveyed, said they would be working at least until 70, while 12% believe they never will be in a position to retire. The remainder, 21%, didn’t know or couldn’t answer when they believe that their working lives will end.

Compare those numbers to respondents in other nations surveyed, where 38% of workers globally think they’ll retire by age 64 compared with just 22% of Americans. In China, Hong Kong and Brazil, survey respondents were most optimistic about their financial prospects for their retirement years, with 78%, 45% and 42% of respondents, respectively, saying they will retire before 64.

Conducted in partnership with global polling firm The Gallup Organization Europe, the survey canvassed nearly 22,000 citizens 15 and older across 19 markets in April and May.

The UBS Investor Watch report, meanwhile, revealed that most wealthy investors today say they don’t expect to feel “old” until they reach age 80 — a vast change from their parents’ generation, which viewed age 60 as old.

Even the concept of retirement has undergone a transformation, with the UBS report finding that only 16% consider retirement as a sign of being old. More importantly, Americans define old as the loss of individual independence, marked by no longer living in one’s own home, at 71%, and by losing the ability to drive one’s own car, at 67%.

“People do not see retirement as a sign of being old, as it was for their parents,” said Emily Pachuta, head of investor insights, UBS Wealth Management Americas, in a statement. “What we’re hearing from people is that age is nothing more than a number and the age when people feel old has gone way up.”

On Sept. 12, EBRI also released a report on the expected retirement age, saying that the age at which workers expect to retire is slowly rising. “In 1991, just 11% of workers expected to retire after age 65. Twenty-one years later, in 2012, 37% of workers report they expect to wait until after age 65 to retire. At the same time, the percentage of workers expecting to retire before age 65 has decreased from 50% in 1991 to 24%,” EBRI reported.  But here’s the rub: expectations don’t always match reality. EBRI goes on to report that “a sizable proportion of retirees report each year that they retired sooner than they had planned,” with fully 50% doing just that in 2012. “Those who retire early often do so for negative reasons, such as a health problem or disability (51%) or company downsizing or closure (21%).”

And here’s another reality check: In 2010, the participation rate of those 65 and older in the labor force stood at 16.1%, a 4 percentage-point change from 1990, according to the U.S. Census Bureau. Further, a Gallup poll last May found that the average retirement age is 61.

“Whereas the average current retiree stopped working at age 61, those still working expect to work well beyond that age,” Gallup reported. “The average nonretired American currently expects to retire at age 66, up from 60 in 1995.”

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®