Despite a permanently reduced monthly benefit, here’s why more workers could opt to take their payout as early as age 62.
Whether you realize it or not, you’re probably going to be reliant on Social Security for a portion of your retirement income. According to data from the Social Security Administration (SSA), 62% of current retirees lean on the program for at least half of their income, with just over a third reliant on Social Security for virtually all (90%-plus) of their income.
This more or less corroborates surveys conducted by Gallup of retired and non-retired individuals. Of the retirees, just 1 in 10 aren’t reliant on their Social Security income in any way. Meanwhile, more than 4 out of 5 non-retirees expect to lean on their retirement benefit as a major (30%) or minor (54%) income source.
All of this data leads to one conclusion: Your claiming age is extremely important.
Your claiming age can have a huge impact on your monthly benefit check
As a refresher, there are four factors that have a high bearing on what you’ll be paid by Social Security during retirement, assuming you’ve earned the required 40 lifetime work credits to receive a benefit. The first two factors are intertwined: your work history and earnings history.
When calculating your retirement benefit, the SSA will take into account your 35 highest-earning, inflation-adjusted years. If you have any hope of maximizing what you’ll receive from the program, you’ll want to work at least 35 years to avoid any zeros being averaged in for each year you didn’t work.
The third factor, which we have absolutely no control over, is your birth year. The year you’re born determines your full retirement age, or the age at which you become eligible to receive 100% of your retirement benefit. Put simply, claiming benefits prior to your full retirement age will result in a permanent reduction to your monthly benefit of as much as 30%, whereas claiming after your full retirement age can boost your payout by as much as 32%, all depending on your birth year.
The final factor is your claiming age. Retirement benefits can be claimed as early as age 62, but the SSA gives people incentives to wait by increasing their payouts by 8% per year, up until age 70. Assuming you were looking at two identical individuals (i.e., same work history, earnings history, and birth year), the one claiming at age 70 could receive a monthly payout that’s up to 76% per month higher than the individual claiming as early as possible at age 62.
So, everyone obviously waits then, right? Well, not exactly.
Expect a claiming-age trend reversal next decade
Historically, a majority of Americans claim benefits prior to reaching their full retirement ages. Whether that’s because they need the money or simply don’t understand their options isn’t clear. What is clear is the data, which showed that 60% of retired workers in 2013 took their benefits between ages 62 and 64, with another 30% claiming at ages 65 or 66 (age 66 was the full retirement age in 2013). Comparatively, just 1 in 10 retirees took their benefits after their full retirement age.
However, there has been a modest reversal of this trend in recent years. Data from the SSA finds that more people are waiting to take Social Security, albeit very few are still waiting until after their full retirement age. At last check, 57% were claiming prior to their full retirement age, with 34.3% signing up at age 62. Of course, this data also includes those folks receiving a disability payout and is therefore not an apples-to-apples comparison to the 2013 data.
This push to a later claiming age is certainly preferable, especially with the average American living longer than their parents or grandparents and potentially needing more income for a longer period of time. But as time passes, my suspicion is we’ll again see this trend reverse, with more retirees choosing to claim earlier rather than waiting.
The reason? A forecasted cut to Social Security benefits, as highlighted in the 2018 Trustees report.
Benefit cuts could be coming, and retirees will want to stay ahead of the curve
According to the Trustees report, Social Security will face an inflection point this year. In other words, it’ll expend more than it collects in revenue for the first time since 1982. This might not seem like a big deal, but this net cash outflow is expected to rapidly grow in size beginning in 2020 and beyond.
By the time 2034 rolls around, the program’s $2.89 trillion in asset reserves is expected to be completely gone. Should this happen and Congress fails to generate additional revenue and/or institute expenditure cuts, a projected across-the-board cut to benefits of 21% would be needed to sustain payouts through 2092.
There are two considerations to make here. First, there are a lot of Americans who incorrectly believe that Social Security running out of its excess cash means the program is insolvent. In fact, more than half of all millennials surveyed by Pew Research Center in 2014 believed they wouldn’t receive a red cent from Social Security by the time they retire. This fear of Social Security going bankrupt (which actually can’t happen) is probably one driving force for early claimants.
The other consideration here is the notion that benefits could be slashed by more than a fifth come 2034. Workers who come of claiming age in the next five to 15 years are probably going to give serious consideration to taking their benefits sooner rather than later and reaping the rewards of a check that isn’t reduced by up to 21% (even if claiming early will itself result in a permanent monthly reduction).
Is this the right move?
But is it the right move? The honest answer is, no one knows. Congress could allay these concerns by passing a bipartisan fix to the program that doesn’t result in a huge benefit cut in less than two decades’ time, which would make early claimants none-too-pleased.
We also (thankfully) don’t know our expiration date, which means that we can never be certain that we’re making the best possible claiming decision. And by “best possible,” I mean the decision that results in the highest amount of lifetime benefits being received.
What I do believe is that the longer Congress waits to act and the larger Social Security’s cash shortfall becomes, the more likely it is that we’ll see aged beneficiaries making earlier claims.
The $16,728 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
7 Social Security Blunders that can Ruin Your Retirement
Even a minor Social Security misstep can rob your nest egg of tens of thousands of dollars in retirement benefits.
So, it pays to understand how the system works and how to maximize your Social Security checks.
The following are some of the biggest and most costly mistakes you could make when navigating Social Security — and how to avoid making them.
1. Taking Social Security early
It’s tempting to start taking Social Security before you reach what the federal government calls your “full retirement age.” But you’ll wind up with a smaller check each month.
Technically, you should receive the same total amount of benefits over the span of your retirement no matter the age at which you claimed benefits. The Social Security system is designed to be neutral in this regard.
Still, claiming early can be risky because once you claim benefits, you will be stuck with the same size check for life. The amount of a person’s monthly benefit typically will never increase except for inflation adjustments.
If you’re the main breadwinner in your family, you may want to think twice about starting your Social Security benefit early since your spouse may receive that smaller benefit amount one day.
Jeffrey A. Drayton of Jeffrey A. Drayton Financial Planning and Wealth Management in Maple Grove, Minnesota, tells Money Talks News:
“When one of you dies, the surviving spouse will get to keep whichever benefit is larger. If yours is the larger benefit, do you really want to reduce it? Doing so means that you might be reducing this lifelong annuity that gets adjusted for inflation permanently not just for yourself but also your spouse.”
2. Claiming benefits and continuing to work
If you claim Social Security before reaching full retirement age and continue working, you might have to pay penalties against your Social Security benefit. It depends on how much money you earn, as we detail in “The Danger of Working While Collecting Social Security.”
One solution is to wait until full retirement age to claim Social Security. There is no penalty for working while taking benefits after your full retirement age, regardless of how much income you earn.
3. Not checking your earnings record
The amount of your retirement benefit is based on your top 35 years of earnings. So, if there’s an error in your Social Security earnings record, the amount of your monthly check could suffer for it.
For example, if an employer fails to correctly report your earnings for even one year, your monthly benefit upon retiring could be around $100 less, according to the Social Security Administration (SSA). That amounts to a loss of tens of thousands of dollars over the course of your retirement.
While employers are responsible for reporting your earnings, you are responsible for checking your earnings record, as only you can confirm the information is accurate.
To review your earnings record, log into your mySocialSecurity account, or first create an account if you have yet to do so.
You’ll want to check each year. The SSA explains:
“Sooner is definitely better when it comes to identifying and reporting problems with your earnings record. As time passes, you may no longer have past tax documents and some employers may no longer be in business or able to provide past payroll information.”
4. Making an isolated decision
A Social Security decision is just one piece of a retirement income puzzle, says Charlie Bolognino, a certified financial planner at Side-by-Side Financial Planning in Plymouth, Minnesota.
It can impact how you draw down other retirement income sources — such as a pension, 401(k) or cash savings. It can also impact the amount of retirement income you lose to federal or state taxes.
Failing to consider these other retirement funding factors when making Social Security decisions — as well as rushing to those decisions — can therefore cost you a big chunk of your nest egg.
“This is a big decision with potentially thousands of dollars at stake, so don’t short-cut it,” Bolognino tells Money Talks News. “Find a reputable benefit option comparison tool or work with a financial planner who can help you evaluate options in the context of your broader financial picture.”
5. Failing to understand what qualifies you for Social Security
Social Security retirement benefits are not a guarantee. You must qualify for them by paying Social Security taxes during your working years, or be married to someone who qualifies for benefits, Drayton says.
“The qualification rules are complicated. The short answer most people give is that you need to work for at least 10 years. However, it is based on a system of credits and quarters, and there are different types of qualifications for different types of benefits.”
The bottom line? Know your qualification status and, if you’re ineligible, how to qualify for benefits.
To find out whether you’re eligible for retirement benefits or any other benefits administered by SSA, check out the SSA’s Benefit Eligibility Screening Tool (BEST). You can also use the tool to find out how to qualify and apply for benefits.
6. Not knowing the Social Security rules regarding divorce
You may be eligible to claim a spousal benefit based on your ex-spouse’s earnings record after a divorce. So, failing to realize this can cost you a lot.
Generally, the person entitled to the smaller benefit amount may be eligible for this type of spousal benefit — provided they were married for at least 10 years, haven’t remarried and meet a few other requirements.
7. Not accounting for dependent benefits
If you still have dependent children when you claim Social Security retirement benefits, they may be eligible to receive benefits, too. An eligible child can receive up to 50 percent of your full retirement benefit amount each month, according to the SSA.
Your family would receive that amount on top of your own benefit amount. Payments to your dependents would not decrease your benefit. So, understanding the benefits that your dependents might be eligible for can help you maximize your family’s collective benefit amount.
Re-posted from MSN.COM
The crushing weight of student debt and the Great Recession have shaped millennials’ relationship with money, for better or worse. In some, it has created enough anxiety about financial security that they save as much as they can and avoid any type of credit agreement that could cause them to take on more debt. Others become so preoccupied with their present expenses that they fail to save for the future.
Unfortunately, both approaches have their drawbacks. Here are a few of the most common money mistakes millennials are making — and what you can do to fix them.
1. Not preparing for the unexpected
About 46% of millennials don’t have any money set aside in an emergency fund, according to a 2017 survey by GOBankingRates. This can pose a problem when an unexpected event like a home repair, a costly medical bill, or a sudden job loss puts an extra strain on your budget. Without any savings to cover these financial emergencies, you may have no choice but to take on debt or fall behind on your rent or mortgage payment and other bills, which can have a serious impact on your creditworthiness.
Most experts recommend keeping at least three to six months’ worth of expenses in a savings account to help cover unexpected expenses. Look at your monthly bills and calculate how much you would need to cover them. Then multiply that number by three (or six if you want to be extra safe) and create a weekly savings goal to help you reach it.
2. Avoiding credit
Only 1 in 3 millennials owns a credit card, according to a recent study by Bankrate. While it’s wise not to overuse credit, avoiding it entirely can pose problems, especially when you go to buy a home or finance another big purchase.
Just about everyone will apply for a loan at some point in their lives. When you do, your lender will pull your credit reports to assess how responsible you’ve been with your money in the past. Your credit reports contain information on all active credit accounts in your name, but if you don’t have any, you’re not giving lenders anything to go on. This can make them hesitant to work with you, and they may deny your loan application or charge you a higher interest rate than someone with a well-established credit history. If you’d like to become a homeowner someday, then a nonexistent credit history will be a major obstacle.
You don’t have to use credit cards, but it is important to build up your credit history in some way. Paying off student loans can help, and if you take out an auto loan or personal loan, these will appear on your credit report as well. But for many, credit cards are the ideal credit-building tool because you can use them regularly, and as long as you pay the balance in full each month, you won’t have to pay any interest at all.
3. Not saving for retirement
For many millennials, paying off student loans is a much more pressing concern than saving for retirement. After all, they have 30 to 40 years left to work, so what’s the big deal if they put off retirement savings for a few years?
The trouble is that your most valuable retirement contributions are the ones you make while you’re young. The sooner you put funds in a retirement account, the more compound interest can make them grow. When you get a late start, your money has less time to gain interest before you need to start using it.
Say you put $10,000 in a retirement account when you’re 25 years old. Assuming your investments earn 8% per year, that $10,000 will have grown to $253,000 by the time you’re ready to retire at age 67. If you waited until age 35 to put that money in, it would only grow to $117,000. And if you waited until 45, you’d end up with only $54,000.
Waiting to start saving for retirement may not seem like a big deal, but it can mean a difference of hundreds of thousands of dollars. If you have any extra money left over after you’ve paid your bills each month, put it into your 401(k). If your employer doesn’t offer one, then open an IRA.
4. Spending frivolously
Millennials are more likely to indulge their immediate wants than baby boomers and Gen X-ers are today. In a survey by Schwab, 60% of millennials admit to spending more than $4 on their coffee (though it doesn’t specify how often), and they’re more likely to eat out and spend money on clothing and electronics they don’t need. While it’s healthy to indulge these wants occasionally, doing it frequently can take a large chunk out of your budget, leaving you less money to put toward retirement and your emergency fund.
Take a good look at how much you’re spending on the non-essentials each month and look for areas where you may be able to cut back. Making your coffee at home, rather than purchasing it at your favorite chain, will save you over $1,300 a year on average. This assumes that an average cup of Joe from a cafe is $4, while the cost of making a cup at home is $0.17, and you are drinking one cup per day. Dining in and curbing your shopping could free up even more money.
For millennials, it’s all about maintaining a balance between what you need now and what you’ll need later. By remaining mindful of how your present decisions are impacting your future finances, you’ll be able to make smart choices that will serve you well today and in all of your tomorrows.
Re-posted from Are you Making these 4 Major 401K Mistakes?
If you’re lucky enough to have access to an employer-sponsored 401(k), you should know that you have a great opportunity to accumulate a bundle in time for retirement. That’s because 401(k)s allow you to contribute much more on an annual basis than IRAs. The current yearly limits are $18,500 for workers under 50 and $24,500 for those 50 and over. By comparison, IRAs max out at $5,500 and $6,500 a year, respectively.
Still, having a 401(k) will only get you so far if you don’t manage it wisely. With that in mind, here are a few major mistakes you should make every effort to avoid.
1. Not contributing enough to snag your employer’s match
One benefit of having a 401(k) is the opportunity to build wealth not just with your own money but your employer’s as well. In fact, 92% of companies that offer a 401(k) also match worker contributions to some degree. But to get that money, you’ll need to contribute money of your own. Unfortunately, an estimated 25% of workers don’t put in enough to capitalize fully on their employers’ matching dollars, and are thus leaving a collective $24 billion on the table each year.
If you’re not getting your employer match, you’re kissing free money goodbye — so don’t let that continue. Figure out how much you need to put into your 401(k) to get that match, and cut corners in your budget to make up for a slightly smaller paycheck. Otherwise, you’ll miss out on not just your company match itself, but the potential to invest it and grow it into a larger sum over time.
2. Not increasing your contributions year after year
Many workers get a raise year after year. If you’re one of them, then you’re doing yourself a major disservice by not sticking that extra money into your 401(k) before it shows up in your paychecks.
Think about it: Unless your expenses go up drastically from year to year, you can probably get by without that additional money. So, if you arrange to have it land in your 401(k) from the start, you won’t come to miss it.
3. Sticking with your plan’s default investment
When you first sign up for a 401(k), you’ll be automatically invested in your plan’s default option until you select your own investments. That default option is usually a target date fund, and while that may be a good choice for some workers, it’s not necessarily the best choice for you.
Target date funds are designed to grow increasingly conservative as their associated milestones near. For example, if you invest in a target date fund for retirement over a 30-year period, you’ll generally start out with a more aggressive investment mix and will shift toward safer assets as that period winds down.
The problem with target date funds is that they don’t necessarily provide the best returns on investment, nor is your 401(k)’s default target date fund designed to align with your specific strategy or tolerance for risk. A better bet, therefore, is to review your plan’s investment options and choose those that are more likely to help you meet your goals. Keep in mind that you may, after reviewing your choices, decide to stick with that default fund, and that’s fine. Just don’t make the mistake of not exploring alternatives first.
4. Not paying attention to investment fees
Of the various investments you’ll get to choose from in your 401(k), some are bound to be more expensive than others. But if you don’t pay attention to fees, you could end up losing thousands upon thousands of dollars in your lifetime without being any the wiser. The funds in your 401(k) are required to disclose their associated fees, so take a look at those numbers and aim to keep them as low as possible without compromising on returns. You can generally pull this off by sticking mostly to index funds, which are passively managed and don’t have the same costs as actively managed mutual funds.
Participating in a 401(k) plan is a great way to set yourself up for a comfortable retirement. Avoiding these mistakes will help you make the most of that plan, leaving you with a higher ending balance by the time your golden years eventually roll around.
SPONSORED: The $16,728 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more … each year. Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.
Re-posted from CBS News.Com
After preparing your 2017 tax return and finding out that you still owe Uncle Sam, it’s natural to feel some regret over things you could have done before the end of 2017 that could have lowered your tax bill. For example, if you contributed less than $18,000 to your employer’s 401(k) retirement plan last year, you can’t go back and make that contribution now.
But in certain situations, taxpayers can still do some things now to reduce their gross income on their 2017 tax return.
For instance, workers can make tax-deductible contributions for last year to several types of retirement savings accounts, even though the contributions are made this year. Here’s the list of these accounts, how much you can contribute and the deadline for doing it.
Traditional and Roth IRAs
You’re still allowed to make a 2017 contribution to these accounts if you do so by the due date for filing your 2017 tax return, which is April 18 this year. But this deadline doesn’t get extended when you file for an extension until Oct. 15. This deadline also applies to opening a new IRA.
The maximum contribution you can make to an IRA for 2017 is $5,500. You can add an additional $1,000 if you were over age 50 on any day in 2017. Whether you can claim a deduction for an IRA contribution depends on your adjusted gross income. If you’re single and your AGI is over $62,000, you’re allowed a partial deduction. But if your income exceeds $72,000, the IRA deduction is completely phased out. The AGI limits for marrieds is $99,000 and $119,000.
Health savings accounts
For a growing number of workers, a health savings account, or HSA, is a much.
An HSA is a special account that allows you to save money that can later be withdrawn tax-free to reimburse yourself for medical expenses. Best of all, money you contribute to an HSA is tax-free on the way in, grows tax-free and is tax-free when you take it out to pay for qualified medical expenses. No other long-term savings account allows this.
HSAs are so valuable that I advise clients that after they take advantage of the matching contribution in their employers 401(k) plan, they should make the maximum contributions to an HSA before saving money in another account or plan.
You can still make a 2017 contribution to an HSA if you do it by the April 18 filing deadline. Again, this deadline doesn’t get extended when you file an extension. Contributions for 2017 are also allowed even if you didn’t open the HSA in 2017. You can open one now, make the 2017 contribution and take a deduction for it on your 2017 tax return.
To contribute to an HSA, an individual must have been covered last year under a health insurance plan with an annual deductible of at least $1,300, or $2,600 for a family plan. The maximum annual HSA contribution in 2017 is $3,400 for individuals, $6,750 for a family. Those age 55 and older can contribute an additional $1,000.
This retirement plan allows the self-employed to make generous contributions both as an employer and as an employee. You can make two types of contributions to this plan. As an employer, you can contribute a percentage of net profit. As an employee, you can contribute a fixed-dollar amount up to the employee 401(k) contribution limit ($18,000, or $24,000 for those over age 50 in 2017).
This plan works best for a sole-proprietor with no employees. That’s because if you have any employees age 21 or older and who work at least 1,000 hours per year, you’ll have to also open accounts and make similar contributions for them. Finally, you will need to establish the SE 401(k) account before year-end, but you can make the deductible contributions by your tax filing deadline, including valid extensions.
SEP IRA or SIMPLE IRA plan
If you’re self-employed, a business owner or sole proprietor, you can establish and contribute to either of these retirement plans. For a SEP IRA, as the employer you must contribute a uniform percentage of pay for each employee, who can’t make their own contributions. The allowed contribution amount is up to 20 percent of your self-employed income (or 25 percent of an employee’s compensation), up to $54,000.
An alternative is the SIMPLE IRA. It allows employees to contribute a percentage of their pay to an IRA and requires an employer to either match employee contributions (dollar-for-dollar) up to 3 percent of compensation or make a fixed contribution of 2 percent for all eligible employees, even if they choose not to contribute.
A SIMPLE IRA plan is allowed for employers with 100 or fewer employees. The limit for employee contributions is $12,500 for 2017. The catch-up contribution for those over age 50 is $3,000.
Contributions to these accounts can be made by the employer’s tax filing deadline, including valid extensions, for the employer to be able to deduct contributions for the 2017 tax year.
Re-posted from marketwatch.com
The $1.2 trillion tax overhaul that was signed into law by President Trump on Friday will affect your retirement in a number of ways.
The tax plan no longer includes lowering contribution limits on retirement accounts or nixing traditional individual retirement accounts in lieu of Roth individual retirement accounts (which would have shifted when retirement savers pay taxes on their savings), but it does address individual retirement accounts and increases the standard deduction (by almost double), which could affect the way people itemize their charitable donations. These changes would be for next year’s taxes, to be filed in 2019 — 2017 tax returns are due on April 17.
Here are five ways retirees will be affected:
Retirees will have to be more strategic about their IRA conversions
The new tax bill would stop what’s called “recharacterizations” of IRAs. Recharacterizations allow a person to undo their decision to rollover or convert accounts to Roth IRAs. Therefore, retirement savers who have already made these conversions this year should consider before the new year if they want to reverse them.
And contribute to charity twice every two years
Retirees likely won’t be itemizing since they don’t have many deductions, except for charitable contributions, property taxes and perhaps state income taxes, said Andrew Houte, director of retirement planning at Next Level Planning and Wealth Management in Brookfield, Wis. Some retirees may want to take advantage of Qualified Charitable Distributions, which allow them to donate directly to charity from their individual retirement accounts without having to itemize those donations (after 70 ½ years old). Because of the increase in the standard deduction, retirees may benefit from making more charitable donations, but less frequently — for example, donate twice as much, but every other year — which would help taxpayers by having more to write off than the standard deduction limit, said Scott Bishop, executive vice president of financial planning at advisory firm STA Wealth in Houston, Texas. More people may also invest in donor-advised funds instead of donating cash, he said.
Personal income tax rates are changing, but still important
Personal income taxes would be lowered for most households — to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Retirees will have to watch their income to avoid ending up in a higher tax bracket, Bishop said. Income includes withdrawals from retirement accounts, required minimum distributions and ordinary income. For example, people with large balances might want to begin distributions before turning 70 ½ years old, when they’ll be required to take distributions in some accounts — that way, when they get there, they won’t be forced into a higher tax bracket. It takes a little calculating, and predicting what income will look like in the future versus now, but it could save retirees money down the road.
Also see: The four worst things about the tax bill
Small businesses may not offer retirement accounts
Most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become even less advantageous for small businesses to host these accounts, said Trevor Gerszt, chief executive officer of CoinIRA, a company that allows savers to convert assets into digital currency, such as bitcoin. The bill reduces the income tax rate for small businesses but does not address offering or contributing to retirement plans, which are incentives to establish these accounts, according to the American Retirement Association.
Some retirees may want to move
Deductions for mortgage interest rates were left untouched, and $10,000 in local property taxes will be deductible on a federal level. That means income tax-free states will be best for retirees, according to Brett Anderson, a financial adviser and president of St. Croix Advisors in Hudson, Wis. Retirees are more easily able to move from state to state because they have no job tying them down, he said, which also means they can be more sensitive to the various income tax rates in various states. There are a few states that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.
The new bill also reduces the maximum amount of mortgage debt a person can acquire for their first or second residence, to $750,000 for married couples filing joint tax returns (or $375,000) for those married filing separately, down from $1 million. This won’t affect home purchases before Dec. 16, 2017 so long as the home closed before April 1, 2018.
Re-posted from MSN Money
Being able to contribute consistently enough to your retirement savings accounts is the most important aspect of any retirement plan, but it’s also by far the most challenging. So finding a way to make regular, adequate contributions easier is really the key to a successful retirement. And the best way to accomplish this is by having a written financial plan.
Why does a written plan help?
Self-help gurus uniformly urge their clients to write down their goals, plans, and dreams for a reason. Writing something down has a significant psychological impact on the writer: It makes that written declaration more “real” to us and gives us accountability. Once it’s in writing, we feel more compelled to follow through on it. For a task like saving for retirement, that feeling of accountability can make all the difference in sticking to a contribution plan versus having a plan but only contributing “when it’s convenient.” A written plan also motivates us by reminding us what we stand to gain tomorrow by sacrificing today.
The power of written financial plans
A recent study by Charles Schwab highlighted the impact that written financial plans have on retirement savings. The study compared various financial attributes of Americans with a written financial plan to those who did not have one. For many important financial tasks, the difference between the two groups was startlingly high.
For example, 27% of savers with written financial plans maxed out their contributions to their retirement savings accounts, compared to 11% of savers without plans. Thirty-four percent of savers with written financial plans had investments in addition to their retirement investments, versus only 16% of those without written plans. And 49% of savers with written financial plans felt very confident in their ability to reach their financial goals, as opposed to just 13% of those without written plans.
Starting your financial plan
Financial plans come in many forms — debt payment plans, down payment savings plans, investing plans, and so on. And while the idea of creating a financial plan may sound daunting, in reality such a plan can be extremely simple, as you’ll see shortly. We’ll focus on a retirement savings plan, but the principles are similar for creating any type of financial plan.
First, your plan needs a goal. For a retirement savings plan, the goal will typically be to save enough during your working years so that when you reach your planned retirement date, you will have enough money to live comfortably for the rest of your life. Because different savers have very different ideas of what “living comfortably” entails during retirement, the exact number you end up with as a savings goal will depend largely on your own preferences and situation.
In order to know how much money you’ll need to save for retirement, you first need to figure out how much you’ll be spending during that time. Ideally, you’ll write up a list of the expenses that you expect to carry during retirement and add them up. If that sounds like too much work, you can get a pretty fair estimate based on your current income.
If you anticipate a fairly sedate retirement without a lot of fancy, expensive activities, you can assume for planning purposes that 80% to 90% of your current income will suffice as annual income during retirement. Aim for the low end of this range if you’re sure you’ll be debt free by the time you retire (that includes owning a home that’s completely paid off). Otherwise, aim for at least 90% of your current income. On the other hand, if you dream of an adventurous retirement touring the capitals of the world, aim for at least 100% of your current income (or possibly even more, if you have really expensive plans).
Making it official
Once you have a goal for your retirement income, you can plug that number into a retirement calculator to find out how much you need to save in order to hit your target by your planned retirement date. Let’s say that your goal is to save $1 million by age 65 and the retirement calculator tells you that in order to reach your goal, you need to save $1,000 per month. Write this down in a form that will inspire you to follow through. For example, you might write “Millionaire by age 65: $1,000 every month into the 401(k).” Then post a copy of this document somewhere you’ll see it on a regular basis, such as next to your bathroom mirror, on the front of the refrigerator, or attached to the side of your computermonitor.
Just having the plan in writing, staring you in the face on a regular basis, can work wonders to improve your follow-through.
SPONSORED: The $16,122 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known Social Security secrets could help ensure a boost in your retirement income. For example, one easy trick could pay you as much as $16,122 more each year. Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
Re-posted from Kiplinger.com
As more and more baby boomers start eyeing the coastline of retirement, thoughts turn from the daily worry over the Monday-through-Friday commute to concerns about how to fund the golden years.
How prepared are you? Do you know the ins and outs of your pension (if you’re lucky enough to have one)? How about your 401(k), IRA and other retirement accounts that make up your nest egg? Do you have a good handle on when to claim Social Security benefits? These are some of the questions you will have to contemplate as the work days wind down. But long before you punch out, make sure you are making the right choices.
To help you out, we’ve compiled a list of retirement decisions some of you may regret forever. Take a look to see if any sound familiar.
Planning to work indefinitely
Many baby boomers like me have every intention of staying on the job until 70, either because we want to, we have to, or we desire tomaximize our Social Security checks. But that plan could backfire. You could be forced to retire early for any number of reasons.
Consider this: One in four U.S. workers expects to work beyond age 70 to make ends meet, according to a recent Willis Towers Watson survey. Yet, you can’t count on being able to bring in a paycheck if you need it. While 51% of workers expect to continue working some in retirement, found a separate 2015 survey from the Transamerica Center for Retirement Studies, only 6% of actual retirees report working in retirement as a source of income.
Whether you work is not always up to you. Three out of five retirees left the workforce earlier than planned, according to Transamerica. Of those, 66% did so because of employment-related issues, including organizational changes at their companies, losing their jobs and taking buyouts. Health-related issues—either their own ill health or that of a loved one—was cited by 37%.
The actionable advice: Assume the worst, and save early and often.
Putting off saving for retirement
The single biggest financial regret of Americans surveyed by Bankrate was waiting too long to start saving for retirement. Not surprisingly, respondents 50 and older expressed this regret at a much higher rate than younger respondents.
“Many people do not start to aggressively save for retirement until they reach their 40s or 50s,’’ says Ajay Kaisth, a certified financial planner with KAI Advisors in Princeton Junction, N.J. “The good news for these investors is that they may still have enough time to change their savings behavior and achieve their goals, but they will need to take action quickly and be extremely disciplined about their savings.”
Morningstar calculated how much you need to sock away monthly to reach the magic number of $1 million saved by age 65. Assuming a 7% annual rate of return, you’d need to save $381 a month if you start at age 25; $820 monthly, starting at 35; $1,920, starting at 45; and $5,778, starting at 55.
Uncle Sam offers incentives to procrastinators. Once you turn 50, you can start making catch-up contributions to your retirement accounts. In 2016, that means older savers can contribute an extra $6,000 to a 401(k) on top of the standard $18,000. The catch-up amount for IRAs is $1,000 on top of the standard $5,500.
Claiming Social Security early
You’re entitled to start taking retirement benefits at 62, but you probably shouldn’t. Most financial planners recommend waiting at least until your full retirement age – currently 66 and gradually rising to 67 for those born after 1959 – before tapping Social Security. Waiting until 70 can be even better.
Let’s say your full retirement age, the point at which you would receive 100% of your benefit amount, is 66. If you claim at 62, your monthly check will be reduced by 25% for the rest of your life. But hold off until age 70 and you’ll get a 32% boost in benefits – 8% a year for four years – thanks to delayed retirement credits. (Claiming strategies can differ for couples, widows and divorced spouses.)
“If you can live off your portfolio for a few years to delay claiming, do so,” says Natalie Colley, a financial analyst at Francis Financial in New York City. “Where else will you get guaranteed returns of 8% from the market?” Alternatively, stay on the job longer, if feasible, or start a side gig to help bridge the financial gap. There are plenty of interesting ways to earn extra cash these days.
Borrowing from your 401(K)
Taking a loan from your 401(k) retirement-savings account can be tempting. After all, it’s your money. As long as your plan sponsor permits borrowing, you’ll usually have five years to pay it back with interest.
But short of an emergency, tapping your 401(k) is a bad idea for many reasons. According to John Sweeney, executive vice president for retirement and investment strategies at Fidelity Investments, you’re likely to reduce or suspend new contributions during the period you’re repaying the loan. That means you’re short-changing your retirement account for months or even years and sacrificing employer matches. You’re also missing out on the investment growth from the missed contributions and the cash that was borrowed.
Keep in mind, too, that you’ll be paying the interest on that 401(k) loan with after-tax dollars — then paying taxes on those funds again when retirement rolls around. And if you leave your job, the loan usually must be paid back within 60 days. Otherwise, it’s considered a distribution and taxed as income.
Before borrowing from a 401(k), explore other loan options. College tuition, for instance, can be covered with student loans and PLUS loans for parents. Major home repairs can be financed with a home-equity line of credit.
Decluttering to the extreme
My parents are in their mid-80s and have been living in the same house for decades. Over the past couple of years they have started getting rid of all the bric-a-brac they’ve accumulated. Their goal is either to sell and move into a retirement community or, at the least, make it easier for my brother and I down the road when we inherit the home.
There hasn’t been much junk among the items they’ve parted with save for the wall clock they gave me and swore it worked (it doesn’t). But there were also items my father wisely ran past his lawyer before dumping: Bookkeeping records from the business he owned for years. He was cleared.
Still, that’s fair warning: Be careful about what you throw out in haste. Sentimental value aside, certain professionals including doctors, dentists, lawyers and accountants can be required by state law to retain records for years after retirement. As for tax records, the IRS generally has three years to initiate an audit, but you might want to hold on to certain records including your actual returns indefinitely. Same goes for records related to the purchase and capital improvement of your home; purchases of stocks and funds in taxable investment accounts; and contributions to retirement accounts (in particular nondeductible IRA contributions reported on IRS Form 8606). All can be used to determine the correct tax basis on assets to avoid paying more in taxes than you owe.
Putting your kids first
“You cannot borrow for your retirement living,’’ says Joe Ready, executive vice president of Wells Fargo Institutional Retirement and Trust. “[But] you may have other avenues beyond [borrowing from] your 401(k) plan to help fund a child’s education.” Instead, Ready says parents and their kids should explore scholarships, grants, student loans and less expensive in-state schools in lieu of raiding the retirement nest egg. Another money-saving recommendation: community college for two years followed by a transfer to a four-year college. (There are many smart ways to save on weddings, too.)
No one plans to go broke in retirement, but it can happen for many reasons. One of the biggest reasons, of course, is not saving enough to begin with. If you’re not prudent now, you might end up being the one moving into your kid’s basement later.
Avoiding the stock market
Shying away from stocks because they seem too risky is one of the biggest mistakes investors make when saving for retirement. True, the market has plenty of ups and downs, but since 1926 stocks have returned an average of about 10% a year. Bonds, CDs, bank accounts and mattresses don’t come close.
“Conventional wisdom may indicate the stock market is ‘risky’ and therefore should be avoided if your goal is to keep your money safe,” says Elizabeth Muldowney Samuelson, a financial adviser with Savant Capital Management in Rockford, Ill. “However, this comes at the expense of low returns and, in fact, you have not eliminated your risk by avoiding the stock market, but rather shifted your risk to the possibility of your money not keeping up with inflation.”
While there are no guarantees when it comes to stocks, you can lessen the likelihood of taking a big hit. Diversification is the key. Keep your money in a mix of large, small, domestic and foreign stocks. We favor low-cost mutual funds and exchange-traded funds because they offer an affordable way to own a piece of hundreds or even thousands of companies without having to buy individual stocks. If you aren’t comfortable picking your own funds, hire a financial adviser to help.
And don’t even think about retiring your stock portfolio once you reach retirement age, says Sweeney, of Fidelity Investments. Nest eggs need to keep growing to finance a retirement that might last 30 years. You do, however, need to ratchet down risk as you age by gradually reducing your exposure to stocks.
Buying into a time-share
It’s easy to see the appeal of a time-share during retirement. Now that you’re free from the 9-to-5 grind, you can visit a favorite vacation spot more frequently. And if you get bored, simply swap for slots at other destinations within the time-share network. Great deal, right? Not always.
Buyers who don’t grasp the full financial implications of a time-share can quickly come to regret the purchase. In addition to thousands paid upfront, maintenance fees average upward of $660 a year, and special assessments can be levied for major renovations. There are also travel costs, which run high to vacation hotspots such as Hawaii, Mexico or the Bahamas.
And good luck if you develop buyer’s remorse. The real estate market is flush with used time-shares, which means you probably won’t get the price you want for yours – if you can sell it at all, says Ron Kelemen, a Salem, Ore.-based financial planner. Even if you do find a potential buyer, beware: The time-share market is rife with scammers.
Experts advise owners first to contact their time-share management company about resale options. If that leads nowhere, list your time-share for sale or rent on established websites such as www.redweek.com and www.tug2.net. Alternatively, hire a reputable broker. The Licensed Timeshare Resale Brokers Association has an online directory of its members. If all else fails look into donating your time-share to charity for the tax write-off.
Falling for too-good-to-be-true offers
Hard work, careful planning and decades’ worth of wealth-building are the foundations for achieving financial security in retirement. There are no short cuts. Yet, in 2015 Americans lost $765 million to get-rich-quick and other scams, according to the FTC. Of the more than 3 million complaints received last year, 37% were filed by victims ages 60 and over.
The South Carolina Attorney General’s office and the FTC offer tips for spotting too-good-to-be-true offers. Tell-tale signs include guarantees of spectacular profits in a short time frame without risk; requests to wire money or pay a fee before you can receive a prize; or unnecessary demands to provide bank account and credit card numbers, Social Security numbers or other sensitive financial information. Also be wary of – in fact, run away from – anyone pressuring you to make an immediate decision or discouraging you from getting advice from an impartial third party.
What do you do if you suspect a scam? The FTC advises running the company or product name, along with “review,” “complaint” or “scam,” through Google or another search engine. You can also check with your local consumer protection office or your state attorney general to see if they’ve fielded any complaints. If they have, add yours to the list. Be sure to file a complaint with the FTC, too.
Relocating on a whim
The lure of warmer climates has long been the siren call of many who are approaching retirement. So you’re cooking up a plan to head south to Florida or one of the many other great places to retire if you hate the cold. Our best advice: Test the waters before you make a permanent move.
Too many folks have trudged off willy-nilly to what they thought was a dream destination only to find that it’s more akin to a nightmare. The pace of life is too slow, everyone is a stranger, and endless rounds of golf and walks on the beach grow tiresome. Well before your retirement date, spend extended vacation time in your anointed destination to get a feel for the people and lifestyle. This is especially true if you’re thinking aboutretiring overseas, where new languages, laws and customs can overwhelm even the hardiest retirees.
Once you do make the plunge, consider renting before buying. A couple I know retired and circled Savannah, Ga., for their retirement nest. But wisely, as it turned out, they decided to lease an apartment downtown for a year before building or buying a new home in the suburbs. Turns out the Deep South didn’t suit their Northern Virginia get-it-done-now temperament. They are instead thinking of joining the ranks of “halfback retirees” – people who head south, find they don’t like it, and move halfway back toward their former home up north.
By Claire Boyte-White | Updated June 26, 2017 — 6:00 AM EDT
Reposted from Investopedia
While income you receive from your 401(k) or other qualified retirement plan does not affect the amount of Social Security retirement benefits you receive each month, you may be required to pay taxes on some or all of your benefits if your annual income exceeds a certain threshold.
Why Doesn’t 401(k) Income Affect Social Security?
Your Social Security benefits are determined by the amount of money you earned during your working years for which you paid Social Security taxes. Since contributions to your 401(k) are made with compensation received from employment by a U.S. company, you have already paid Social Security taxes on those dollars.
This holds true even for traditional 401(k) accounts. Contributions to traditional accounts are made with pretax dollars, but this tax shelter only applies to income taxes, not Social Security. While you don’t pay income tax on traditional 401(k) funds until you withdraw them, you still pay Social Security taxes on the full amount of your compensation in the year you earned it.
“Contributions to a 401(k) are subject to Social Security and Medicare taxes, but are not subject to income taxes, unless you are making a Roth (after-tax) contribution,” notes Mark Hebner, founder and president of Index Fund Advisors, Inc., Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”
The Tax Impact of 401(k) Savings
Though the amount of your benefit is not affected by your 401(k) savings, you may have to pay income taxes on some of your benefits if your combined annual income exceeds a certain amount. In fact, about one-third of benefit recipients must pay taxes on a portion of their benefits.
The income thresholds are based on your combined income, which is equal to the sum of your adjusted gross income (AGI) – which includes withdrawals from any retirement savings accounts – any non-taxable interest earned and one-half of your Social Security benefits. If you take large distributions from your 401(k) in any given year that you receive benefits, you are more likely to exceed the income threshold and increase your tax liability for the year.
In 2017, if your total income for the year is less than $25,000 and you file as an individual, you won’t be required to pay taxes on any portion of your Social Security benefits. If you file jointly as a married couple, this limit is raised to $32,000. You may be required to pay taxes on up to 50% of your benefits if you are an individual with income between $25,000 and $34,000, or if you file jointly and have income between $32,000 and $44,000. Up to 85% of your benefits may be taxable if you are single and earn more than $34,000 or if you are married and earn more than $44,000. If you are married but file a separate return, you are likely to be liable to for income tax on the total amount of your benefits, regardless of your income level.
Other Types of Retirement Income
In some cases, other types of retirement income may affect your benefit amount, even if you collect benefits on your spouse’s account. Your benefits may be reduced to account for income you receive from a pension based on earnings from a government job or from another job for which your earnings were not subject to Social Security taxes. This primarily affects people working in state or local government positions, the federal civil service or those who have worked for a foreign company.
If you work in a government position and receive a pension for work not subject to Social Security taxes, your Social Security benefits received as a spouse or widow or widower are reduced by two-thirds of the amount of the pension. This rule is called the government pension offset (GPO). For example, if you are eligible to receive $1,200 in Social Security but also receive $900 per month from a government pension, your Social Security benefits are reduced by $600 to account for your pension income. This means your Social Security benefit amount is reduced to $600, but your total monthly income is still $1,500.
The windfall elimination provision (WEP) reduces the unfair advantage given to those who receive benefits on their own account and receive income from a pension based on earnings for which they did not pay Social Security taxes. In these cases, the WEP simply reduces Social Security benefits by a certain factor, depending on the age and birth date of the applicant.
How Your Is Benefit Determined?
Your Social Security benefit amount is largely determined by how much you earned during your working years, your age when you retire and your expected life span.
The first factor that influences your benefit amount is the average amount that you earned while working. Essentially, the more you earned, the higher your benefits will be, up to the maximum benefit amount of $3,538. The Social Security Administration (SSA) calculates an average monthly benefit amount based on your average income and the number of years you are expected to live.
In addition to these factors, your age when you retire also plays a crucial role in determining your benefit amount. While you can begin receiving Social Security benefits as early as age 62, your benefit amount is reduced for each month that you begin collecting before your full retirement age. Full retirement age varies between 65 and 67, depending on your year of birth. Conversely, your benefit amount may be increased if you continue to work and delay receiving benefits beyond full retirement age. For example, in 2017, the maximum monthly benefit amount for those retiring at full retirement age is $2,687. For those retiring early, at age 62, the maximum drops to $2,153, while those who defer collection until age 70 – the latest age at which collection can commence – can collect a benefit of $3,538 per month.
“Delaying Social Security until age 70 can be beneficial since you will receive an 8% gain every year after reaching your full retirement age,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group, Lake Mary, Fla.
To receive Social Security benefits, you must have accrued 40 credits, which you earn by working and paying into the Social Security system. Each year of work is worth a maximum of four credits, so you must work a minimum of 10 years to be eligible. However, each credit is equivalent to $1,300 of taxable earnings in 2017. Once you’ve earned $5,200 in any given year, you have already earned the maximum four credits. This means you could elect to stop working for the rest of year without endangering your eligibility, though this is not a very sustainable strategy. For one thing, a lower income will mean your benefits will be lower.