12/28/15

Turning a Saver into a Spender in Retirement

Try these strategies to avoid spending your retirement savings too quickly. It can be difficult to watch your life savings decline each year in retirement.

You spend your entire career saving so that you can stop working. Once you retire, you may be surprised to realize it’s hard to change your pre-retirement mindset about the need to save money. A lifetime of saving is a positive habit, and there are emotional and psychological forces that make it feel awkward to change course. Consider these tips and tools to help you navigate the transition from saving to spending.

Finalize your roadmap. You spent years developing a savings plan that helped you reach financial independence. But building up money is only half the journey. Retirement and financial independence is a long-term stage of life. You also need to develop a plan for what retirement and the spending of those assets looks like. No goal is too big or small.

You will need a complete understanding of what your annual living expenses are in retirement. Make sure you include your charitable goals, vacations and lifestyle hobbies like playing golf or eating out. You also need to consider big, one-time expenses that occur more infrequently, such as taking the entire family with the grandkids on a cruise, buying a new car or a trip to New Zealand.

Once you have a plan developed that takes into account fully funding all your goals, you can feel liberated and comfortable that you are covered. Eliminating worries allows happiness and fulfillment to occupy more of your daily routine.

Decide what matters most. Far too often, individuals spend a lifetime accumulating wealth only to realize that all they did was accumulate wealth. Money and wealth building should always be viewed as a tool to help you focus on the things in life that truly matter.

The definition of what “truly matters” varies from person to person. It might mean security, travel, providing for loved ones, charitable inclinations, community involvement or starting a business. Whatever your values, it’s always important to keep in mind that money is a tool to help you achieve those goals. It’s not the goal in and of itself. You should have a nice balance of building for the future (or deferring spending if you are in retirement) and enjoying the present.

Plan for children and grandchildren. Almost anyone who works and saves consistently throughout his or her life has the potential to become a millionaire. But if you do that, it’s not guaranteed that your children and grandchildren will have the same work ethic. In many cases, second and third generations of wealthy families don’t have any trouble burning through the assets of the first generation. Considering this, it might make sense to begin using your resources to provide opportunities that might otherwise be squandered if you were not in control of the financial decision making.

For example, you could fund family trips or pay for the education of family members. You could also provide opportunities to teach younger generations how to replicate your sound financial management, such as offering a start-up loan or beginning an annual gifting strategy. You have spent a lifetime building and accumulating these assets, so it might be nice to actually get to see your children and grandchildren reap the fruits of your labor while you are still alive.

Set up systems. Moving from saver to spender is a process. As with most major lifestyle changes, it makes sense to ease into it to avoid setting yourself up for failure. Setting up the right systems can help.

An easy system to put into place in retirement, especially if you are living off of retirement assets, is a “retirement paycheck.” Just like you determined your spending budget based off the monthly or bi-weekly paycheck you received for the bulk of your working career, the same holds true in retirement. If you have a $1 million portfolio that needs to last you for 30 or 40 years of retirement, think of it as a monthly paycheck of about $3,300 (assuming a 4 percent withdrawal rate before taxes) rather than a million-dollar account you can draw off of as needed.

If you find yourself in a situation where you have more than enough retirement income flowing in from Social Security, pensions and other resources, it may make sense to continue saving on a systematic basis just like you did while you were working. This is especially helpful if there are tangible goals you know you would like to fund, and it gives you some motivation to prepare for specific events and reward yourself once you hit that goal. Financial goals might include replacing your car, taking a trip or buying a new watch.

Moving from your working years to your retirement years can be a very emotional and unsettling time. Having a strategy can eliminate some of the stress and burdens of living off your savings in retirement.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

12/21/15

Retirement Money Myths Debunked

By Russ Wiles, November 20, 2015 USA Today

For those not there yet, retirement is a time of life veiled in excitement but with perhaps a tinge of fear and uncertainty thrown in. Will I make an easy transition from the workplace? How will I spend my time? What can I afford to do?

Several myths and misconceptions have arisen over retirement, particularly over the financial aspects. Here are some common assumptions that don’t always stand up to scrutiny.

Myth #1: People who continue to work later in life do so because they’re forced to.

Actually, results from a survey by Fidelity Investments released last month found that people still employed later in life often do so voluntarily. Some 61% of older workers indicated that they like their work, and 48% said a job makes them feel valued, according to the poll, which elicited responses from more than 12,000 people.

That  said, the survey also found that a solid majority of people, once retired, said they’re generally satisfied with their situation. Some 85% of respondents said retirement is the most rewarding time of their lives, and nearly the same percentage indicated that they retired at the right time and have found that it’s easier than they thought to live comfortably.

Myth #2: Social Security recipients will lose benefits if they continue to earn money on the job.

This issue is an occasional source of confusion. Yes, some Social Security recipients might lose benefits, but others won’t. And even in cases where benefits are withheld, they usually aren’t truly lost.

Social Security recipients do face an annual limit on work-related earnings, which for 2015 is $1,310 per month or $15,720 for the year. That amount gradually will rise in subsequent years. If you collect Social Security retirement benefits before full retirement age, your benefits are reduced $1 for every $2 you earn over the limit. In the year you reach full retirement age,  $1 gets deducted for every $3 above a higher limit. Full retirement age is between 66 and 67 for most people currently in the workplace.

As noted, if you’re above full retirement age, there’s no need to worry. ”Starting with the month you reach full retirement age, we will not reduce your benefits no matter how much you earn,” states the Social Security Administration.

Even if below full retirement age, you don’t really lose out, as you will get back those withheld benefits later. ”The amount that your benefits are reduced … isn’t truly lost,” states the Social Security Administration. “Your benefit will be increased at your full retirement age to account for benefits withheld due to earlier earnings.”

Myth #3: Medicare pays for nearly all health care costs in retirement.

Medicare pays most health-related expenses, but retirees should have some money on the side to handle other costs.

The Employee Benefit Research Institute, in a recent update, offers savings guidelines based on probabilities. The group suggests that a 65-year-old man should plan on accumulating $68,000 to meet health costs through retirement. That amount would give him a 50-50 chance of covering all his expenses. A 65-year-old woman would need $89,000, due largely to longer expected longevity. For a  90% chance of meeting all costs, a male would need  $124,000 and a female $140,000.

In reality, those savings targets might be understated because the estimates above don’t include long-term care. “Medicare was never meant to cover all health care costs in retirement,” the EBRI explained. Beneficiaries pay a share of their health expenses out-of-pocket because of program deductibles and other cost-sharing rules. In 2012, the most recent year analyzed, Medicare covered 60% of health expenses for people 65 and up. Personal spending and private insurance covered most of the rest.

Myth #4: A retirement portfolio will last decades if investors limit their withdrawals to 4% annually.

The 4% rule provides a good starting point and, in the right circumstances, might allow a portfolio to last almost indefinitely. But it never was intended as a foolproof measure. Various factors can drag down your assets considerably. These include your expected longevity, expected personal costs (for health care and taxes, for example) and the allocation, or mix, of your investments.

With bond yields now near historic lows, for example, you can’t count on the fixed-income portion of your portfolio to provide much income. But even more critical is your allocation to stocks and stock funds. These investments, over time, likely will generate the growth needed to sustain your portfolio and allow for yearly withdrawals of 4% or more. But if the stock market drops sharply, especially in the early years, a portfolio could be depleted much faster, even if you limit annual withdrawals to just 4%.

Researchers at WealthVest, in a recent study appearing in Financial Advisor magazine, said a withdrawal rate closer to 2% is a more realistic bet for people counting on their portfolios to last for decades, after factoring in low bond yields, high stock prices, investment-management fees and other variables.

Whether 2% is more realistic than 4%, one key lesson is this: Big withdrawals in the early years of retirement can be devastating if they coincide with sharp downturns in asset prices, especially stock-market values.

Myth #5: Social Security isn’t the dominant source of retirement income for Americans.

Many Americans have plenty of investments to draw on in retirement, including company pensions, 401(k) retirement plans, other personal assets, housing equity and more. Yet Social Security still plays a central role for most Americans as they age.

In a survey by AARP and the Financial Planning Association, only 39% of adults who aren’t yet retired said they expect Social Security will make up at least half of their retirement income. Yet, in fact, Social Security represents a pillar of many individuals’ incomes, especially as they get older. After 80, for example, it accounts for at least half of income for six in 10 retirees, according to AARP.

The same survey (which elicited responses from more than 1,200 people ages 45 to 64 who aren’t yet claiming Social Security benefits and a roughly equal number of certified financial planners) showed ample confusion over various Social Security program features. Notable here was confusion over the impact, in terms of higher monthly payments, of waiting until full retirement age to claim benefits.

Only 9% of Americans view themselves as very knowledgeable about how Social Security retirement benefits are determined — and that might be overstated, based on responses from the financial planners.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

12/14/15

The 4 Biggest Financial Benefits of Marriage

MotleyFool.com, 11-22-2015

Most people think focusing too much on the financial benefits of marriage is unromantic. Yet no matter why you tie the knot, the financial impact of getting married can be substantial, and for many, it’s unequivocally positive. Let’s look at four of the biggest financial benefits that getting married can bring.

1. Social Security benefits

Social Security offers substantial benefits for spouses. If you’re married, you’re entitled to receive spousal benefits both after your spouse retires as well as if your spouse becomes disabled. In addition, survivors benefits can give you payments for the rest of your life after your spouse dies.

Spousal benefits are available regardless of whether you worked or not, as long as your spouse accumulated a long-enough work history to qualify for disability or retirement benefits. Typically, you’d be entitled to receive up to 50% of whatever amount your spouse received. Survivors benefits are even larger, with the potential to receive as much as 100% of your spouse’s benefit at full retirement age.

In order to collect Social Security benefits based on your living spouse’s work history, you need to have been married for at least one year. The required length of marriage is nine months to be eligible to get survivors benefits after your spouse’s death.

2. Income tax advantages

Much has been made of the so-called marriage penalty, which can result in higher-income singles paying more in income taxes if they get married. For many people, though, a marriage bonus results from getting hitched.

For low- and middle-income taxpayers, tax brackets are generally set up so that any potential marriage penalty is eliminated, leaving married couples in a no-lose situation. In particular, one-earner families can reap a huge marriage bonus due to the fact that earnings enjoy lower tax brackets for greater amounts of income. Even two-income families can reap a big bonus if disparities in pay are fairly sizable.

3. No estate tax on inheritances

If you have enough wealth to have to pay estate tax, then trying to leave a bequest can come with a hefty price tag. Estate tax rates are currently 40%, meaning that for every $60 that goes to your chosen heirs, $40 could go to the IRS.

If you’re married, however, you’re entitled to get an unlimited marital deduction for money you leave to your spouse. Moreover, even in the states that still have an inheritance tax, most offer spouses either a full exemption from paying the tax, or much lower tax rates than for non-spouses. Moreover, being married can effectively double the amount of money a couple can leave to future generations, which is especially helpful if one spouse was responsible for building up that wealth.

4. Retirement account strategies

Spouses also get a better deal when it comes to handling retirement accounts. When someone leaves their IRA or other retirement account to a non-spouse, the options that the heir has to start making withdrawals are more limited and generally result in tax getting paid faster.

By contrast, spouses are allowed to roll inherited retirement accounts into their own personal IRAs if they choose. Depending on relative ages and other circumstances, this can dramatically lengthen the time you enjoy tax-deferred or tax-free growth, and that in turn can make it easier to minimize the tax burden of retirement withdrawals.

Getting married for money is generally frowned upon, but there are still many financial benefits of marriage that are worth exploring. Even if you marry for love rather than money, it still pays to know how you can have healthier finances down the road.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

12/8/15

Creature Comforts Keep Gen X, Boomers From Saving for Retirement

By Lee Barney, November 20, 2015 PlanAdvisor.com, Lee Barney| November 20, 2015

Gen X’s second-biggest obstacle is saving for their children’s education.

The number one reason keeping Generation X and Baby Boomers from saving more for retirement is an unwillingness to sacrifice their current quality of life, cited by 34% of Gen X and 29% of Boomers, Charles Schwab found in a survey of 1,000 investors.

For Gen X, other reasons they are not saving more, in order of importance are: saving for their children’s education (cited by 32%), needing money to pay basic monthly bills (28%) and still  having to pay down student loans (14%). Boomers’ additional obstacles include: basic monthly bills (20%), a child’s education (10%) and student loans (6%).

Only 58% of Gen Xers know how much they will need for a comfortable retirement, and just 53% think they are saving enough to be able to retire when they want to. This group is also the most likely to have taken a loan from their 401(k), with 31% having done so, compared with 13% of Millennials and 29% of Boomers.

“Borrowing from a 401(k) is like stealing from your future self,” says Catherine Golladay, vice president of participant services and administration at Schwab Retirement Plan Services. “A 401(k) loan can severely derail your savings plan and comes with steep tax penalties if you leave your job and can’t repay the loan, so it should be viewed as a last resort for everyone, regardless of age.”

Among Boomers, only 63% think they are saving enough to retire when they want to, 65% think they will be comfortably retired in 15 years, and 22% think they will retire at a lower standard of living than what they would like. They are also more concerned about being healthy enough to enjoy retirement (61%) than having enough money to enjoy it (39%). However, on the bright side, 40% of Boomers are getting investment advice, compared to 7% of Millennials and 10% of Gen Xers.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®