by Joe Hearn | May 8, 2012 | Estate Planning, Insurance, Investing, Retirement
The odds are extremely good that my wife will outlive me. Whatever the reason—genetics, a healthier diet, the fact that she uses our treadmill as something other than a clothes rack—there will likely come a day when she bids me adieu.
Most people know that women have a longer life expectancy than men, living about 81 years compared to 76 for the average male. But what they may not have considered is what this statistic means in reality: namely that the overwhelming majority of people in retirement are women.
In the U.S., women make up nearly 60 percent of the population over age 65 and nearly 70 percent of the population of those over age 85*. How should that reality affect the retirement planning of the fairer sex?
Investments
At a minimum, a longer retirement means the need for more income. All else being equal, funding a 20-year retirement will be more expensive than funding a 10-year retirement. That means more money will need to be set aside leading up to retirement and withdrawal rates will need to be sustainable (around 4 percent) during retirement in order to keep from running out of money.
Also, asset allocation will be more important than ever. The portfolio will need to be invested aggressively enough to overcome the ravaging effects of inflation that are sure to happen over a longer period, but not so aggressively that investment losses wipe out principal. Maintaining the proper balance is a key ingredient to making the money last.
Pension plans
A pension plan for a married couple can be an important source of retirement income, but what happens to that income when one of the spouses dies? If the husband dies and it was his pension, does that income go away? It depends. If the pension benefit was based on his life only, then payments will likely end when he dies. To avoid the negative financial impact that this would likely cause, couples should arrange with the pension provider to base the benefits on both of their lives. “Joint Life” benefits will likely be smaller than those based on a single life, but they will also minimize the financial impact on the surviving spouse.
Social Security
Women are more likely than men to leave the workforce at some point in their careers in order to raise children or care for aging parents. Some choose not to work outside the home at all. This, along with the fact that women still tend to earn less than their male counterparts, can impact their eligibility for Social Security benefits. Because of that, the Social Security Administration has special rules that apply to people who are widowed, divorced or still married, but with little in the way of earned benefits.
For starters, spousal benefits entitle everyone to either their own benefit or half of their spouse’s benefit, whichever is greater. In addition, those widowed or divorced are able to collect benefits on their former spouse’s Social Security record if:
- The former spouse is collecting benefits or is deceased
- You were married for at least 10 years
- You are 62 or older (60 or older if your spouse is deceased)
Getting remarried could affect your eligibility for benefits under certain conditions, so be sure to check with the Social Security Administration before heading back to the altar. For more information visit www.ssa.gov and download the brochure “What Every Woman Should Know.”
Life Insurance
The primary purpose of life insurance is to replace a person’s income in the event of his or her death (Note: It can also be an effective estate planning tool, but that is a discussion for another article). Because of that, many people keep adequate insurance coverage during their working years to protect their spouse and children, but then get rid of it when they retire. This could be a big mistake if a significant portion of a couple’s retirement income is attributable to just one of the spouses, say in the form of pension or Social Security benefits.
How do you know if you need life insurance during retirement? Ask yourself this question: “Would my death create a significant financial hardship for my spouse?” If not, then you probably don’t need life insurance. However, if the death of either you or your spouse would result in significant loss of income for the other, then life insurance can be a good way to protect against that loss.
Long-term care insurance
Long-term care insurance can help cover a variety of costs including home health care, respite care, adult day care, care in an assisted living facility, or nursing home care. This type of insurance can make sense for women for a variety of reasons, but two stand out. First, if a woman is predeceased by her husband, there is a good chance that there will be some large medical bills related to his final illness and care. These bills can take a big chunk out a couple’s nest egg and impair its ability to provide income to the surviving spouse. Long-term care insurance can help preserve those assets by covering expenses not usually covered by health insurance, Medicare or Medicaid.
Second, if a woman lives 5, 10 or even 20 years longer than her husband, there is a good chance that she will need some type of long-term care services during her life as well. And because her husband died first, she will have fewer options if she becomes sick or disabled and needs someone to help. A long-term care policy can provide peace of mind, minimize burden on friends or family, and help her get into her choice of facilities or be cared for at home as long as possible.
Estate Planning
Married couples typically create their estate plan (e.g. wills, powers of attorney, etc.) together, but it is the wife who tends to see that plan in action. Because women live longer, it is the wife who will likely be the one to use the powers of attorney for finance and health care if her husband becomes disabled or incapacitated due to illness. She will also need to handle his estate when he dies. When that occurs she will need to update her own planning and make sure that it passes her property to the correct people and names the people she wants to handle her affairs in the event that she is no longer able. Because of that, women should pay particular attention to their family’s estate planning and make sure that it is up to date and accurately reflects their wishes.
Living a long, healthy life definitely has its benefits. It means more time with friends and family. More time doing the things you love. More time enjoying life and experiencing all that it has to offer. Unfortunately, it can also mean outliving those you love. By planning ahead, you can create security and peace of mind for yourself and your family and keep your retirement on track.
Photo by Mark Brooks. Used under Creative Commons License. I originally published this article at www.fpanet.org.
by Joe Hearn | Mar 13, 2012 | Investing, Retirement
Update: Before jumping into today’s article I wanted to give you an update on the learning post from last week. It must have struck a chord with the IR community (who, like those from Lake Wobegon are good looking and above average), because it was the most read and forwarded article on the site to date. If you enjoy learning new things, follow along with the challenges as we go and you’ll have plenty of things to talk about at the next cocktail party.
With the current challenge I’ve memorized the Americas, Europe and Africa. A good start, but there are a lot of countries in Asia and Oceania that will be challenging. With that update, let’s move on to today’s post, which is an article that I wrote for the Financial Planning Association. With tax time upon us, I thought many of you would find it helpful.
As April 17 (you have two extra days this year) rapidly approaches, people all across the fruited plain are sharpening their pencils, firing up their calculators, and figuring out what, if anything, they owe Uncle Sam. For all the ink spilled lamenting the complexity of the tax code, doing your taxes during your working years is a pretty straightforward task for most people. Just add up what you made, subtract any allowable credits or deductions, and then grab your checkbook.
The process is similar during retirement, with the exception that you have greater control over your income, which means greater control over your tax bill. That control means you can stretch your nest egg further by making good distribution decisions. With that in mind, here are five ways to minimize your tax bite during retirement.
Know which accounts to access first
The money you’ve saved for retirement is likely held in different types of accounts that are taxed differently. Some accounts are fully taxable, while others, like traditional IRAs, defer taxes until you withdraw the money. Still other accounts, like Roth IRAs, may be free from federal taxes altogether.
Which accounts should you tap first? A good rule of thumb is to take money from your taxable accounts first. This will allow the money in your tax deferred accounts to continue compounding. Access tax-free accounts last.
One exception to the rule of thumb might be if you are in a lower tax bracket now and anticipate that you will be in a much higher tax bracket in the future. In that case, you may want to begin taking distributions from your tax-deferred accounts earlier. In any event, work closely with your tax and financial advisers each year to make distributions decisions that make the most sense for your specific situation.
Minimize taxes on Social Security
If Social Security is your only source of income, chances are that you will not need to pay taxes on those benefits. If you have other income sources, however, you may need to pay taxes on a portion of your benefits if your modified adjusted gross income (MAGI) plus one-half of your Social Security benefits exceeds what the IRS calls the base amount for your filing status.
For example, if your MAGI plus one half of your Social Security benefits is between $32,000 and $44,000 (for those married filing jointly) in 2012, you may need to pay taxes on 50 percent of your Social Security benefits. If your income exceeds $44,000, you will likely need to pay taxes on 85 percent of your Social Security benefits. Armed with this knowledge, it’s easy to see how a poorly timed IRA distribution or acceptance of some part-time work during retirement can impact your tax bill in a given year.
Relocate to a tax-friendly state
Different states tax things differently. Consequently, where you decide to live during retirement is no small decision when you think about the various types of taxes that you pay (e.g. income taxes, Social Security and Medicare taxes, capital gains taxes, dividend taxes, property taxes, sales taxes, estate taxes and inheritance taxes). If a particular state is willing to cut you a break in one or more of these areas, it is worth factoring that into your decision making.
For example, do you plan on working at least part time during retirement? There are seven states that do not impose personal income taxes. Will most of your income be from Social Security? Thirty-six states don’t tax Social Security benefits. Do you anticipate a free-spending retirement? There are five states with no sales taxes. Do you have a pension? Ten states don’t tax federal, state and local pension income. Before deciding where to live, inventory your income streams and decide which state will allow you to keep more of what you make.
Consider tax-free bonds
Municipal bonds are issued by states or municipalities and are usually exempt from federal taxes. They may also be exempt from state and local taxes if you live in the state that is issuing the bond. This preferred tax treatment along with their historically low default rate make municipal bonds a staple in many peoples’ retirement accounts.
Take advantage of Net Unrealized Appreciation (NUA)
If you own highly appreciated company stock in your 401(k) or other employer sponsored plan, you should review your options carefully before rolling that money into an IRA when you retire. That’s because tax law permits you to distribute those shares from your 401(k) and pay income tax on the basis (your original purchase price) of the shares while continuing to defer the taxes on the unrealized gains. Once the stock is eventually sold, you will only pay capital gains taxes on the difference between your basis and the sale price. If, however, you roll all of those shares into your IRA at retirement, you will pay ordinary income taxes on the entire amount when you eventually distribute it from your IRA.
This strategy might be particularly appealing to someone in a high marginal tax bracket who currently pays income taxes at a much higher rate (35 percent) than capital gains taxes (15 percent).
Unfortunately, your tax bill doesn’t retire when you do, but there are actions you can take to minimize what you owe. By working closely with your advisers, you can maximize your income and increase retirement security.
by Joe Hearn | Mar 2, 2012 | Investing, Retirement
The question I’m asked most frequently by clients about their retirement is this:
“Will I have enough?”
If baby boomers are losing sleep over an issue, that’s it. And I don’t blame them. There’s a lot hanging on the answer to that question. Having enough means freedom, opportunity, peace of mind, and independence.
So how can you improve your chances of success? A few years back the mutual fund company Putnam and the data firm Lipper did a study on that very topic. They measured the impact of changes in several key variables like asset allocation, fund performance, and contribution rates.
Rather than bore you with the details, I’ll just share one conclusion. The variable that had the greatest impact by far was how much a person saved. In fact, increasing savings rates from 2 percent to 4 percent had 90 times (90 TIMES!) the impact of being able to perfectly pick the best performing mutual funds.
So if you want to make a small change today that will have a huge impact on your retirement security, get online or call your HR department and increase the percentage that you’re contributing to your 401(k) each month. The change will take five minutes, but will have more impact than anything this side of winning the lottery.
Thanks for reading. Have a great weekend!
Joe
by Joe Hearn | Feb 1, 2012 | Investing, Pursuits, Retirement
There have been quite a few new readers at Intentional Retirement lately and I’m glad to have you all here. Each month, I post a quick summary of the new articles at the site for anyone who may have missed something. January’s articles are below.
We’re one month into the New Year. How are you doing with your plans and goals? No worries if things aren’t perfect, but stick with it. Just like compound interest can produce amazing results with your investments, compound effort can produce amazing results with your life. Don’t hesitate to touch base with me (or the rest of the IR community through the comments section after each post) if I can ever help.
Joe
by Joe Hearn | Jan 31, 2012 | Investing, Retirement
We’ve all heard the expression “Give a man a fish and feed him for a day. Teach a man to fish and feed him for life.” When it comes to our kids and their finances, it’s sometimes tempting to give rather than teach, because we want to help them out and we want them to be happy. We could do them a great service, though, if we took a little time to pass on the lessons we’ve learned (sometimes painfully) about how to save and handle money.
In that spirit, I’ve included an article in today’s post that is focused on helping people in their 20s and early 30s plan for retirement. It is the first installment in a three part series that I am doing for the Omaha World Herald on retirement planning for different life stages.
As you’ll see below, starting early makes a HUGE difference. If you know someone who could benefit from that advice, I’d really appreciate it if you forwarded them the article. You can also share it to twitter or facebook using the buttons below.
Thanks in advance! I’ve heard from several of you this week who needed help with one issue or another. Don’t ever hesitate to touch base if I can lend a hand.
Joe
Note: If any of the charts or other information don’t display correctly in the email version of this post, just click the post title to view it on the web.
Want a nest egg in 40 years or so? Start early. In fact, start now.
Steven Covey once said “Begin with the end in mind.” For people in their 20s, that is about the best retirement advice you will ever get. Why? Imagine your life 40 years from now. If the past is any guide, you will just be getting ready to transition out of work and into retirement.
Assuming all goes well, Future You will have a nice comfortable nest egg set aside and will be on the cusp of an exciting new phase in life. There’s just one thing. In order for Future You to have a shot at that comfortable retirement, Current You has some work to do. Thankfully, you have a lot going for you. What are the key ingredients to getting a healthy start?
Start early
Early in life, your biggest asset is time. Those extra years can make a huge difference when it comes to your investments. The chart below shows a hypothetical example of the benefits of starting early. It compares five people saving for their eventual retirement at age 65. They save identical amounts each month ($500) and earn identical rates of return (8 percent per year, compounded monthly) on their investments. The only difference is when they start. Molly starts at 20. It’s a stretch, but she makes it work. Kelly, on the other hand, spends his extra income on a steady diet of video games and Mojitos and doesn’t get around to saving until he hits 30.
How much of a difference do those 10 years make? About $1.5 million. Said another way, Molly saved $60,000 more than Kelly ($6,000 per year for 10 years), on the front end, but that extra money resulted in an extra $1.5 million on the back end. The crazy thing? She could have stopped saving at 30 and never added another dime to her account and she still would have ended up with more than Kelly. Behold, the power of compound interest.
The longer you wait, the more drastic the difference and the more you need to save to catch up. The second part of the chart below shows how much our fictional characters would need to save each month in order to end up with the same amount as Molly. Waiting until 50 to start means that Pat would need to save more than $7,500 each month to catch up. Niel would need to put away the equivalent of a new car each month. As you can see, starting early allows time and compound interest to do most of the heavy lifting.
Make it automatic
Saving for retirement takes discipline. That is especially true if you are in your 20s and won’t see the payoff for decades to come. It’s like making a car payment each month for a car that you won’t be able to drive until 2057.
Rather than relying on willpower, make your saving automatic. Have your employer take money from your paycheck each month to add to your 401(k). Set up a Roth IRA that systematically pulls money from your checking account. You can start with as little as $25 per month. After awhile you will get used to living without the money and you won’t even think about it. I believe it was Newton’s Third Law that said “For every dollar earned, there is an equal and opposite way to spend it.” Or something like that. Make it easy on yourself. Make your saving automatic.
Save enough
One of the most common questions that people have when it comes to setting aside money for retirement is “How much should I be saving?” The answer, of course, depends on your specific situation. Recently, a professor by the name of Wade Pfau has done some interesting research on this topic. He calls it the “safe savings rate.”
At the risk of drastically simplifying his research, this is the question he was trying to answer: How much does a person need to save in order to safely fund retirement even after the ups and downs of the market are taken into account?
His conclusion for someone in their 20s (a.k.a. someone who can save for 40 years)? Using historical market data and assuming an allocation of 60 percent stocks and 40 percent bonds, he found that someone saving for 40 years and then living for 30 years in retirement had a 100 percent chance of replacing half of their pre-retirement income if they saved 8.77 percent per year. Increasing the savings rate to 12.27 percent, resulted in a 70 percent replacement rate.
Of course past performance is no guarantee of the future, but his research is helpful in that it gives you a specific number to shoot for. Saving 10-15 percent of your income might seem like a stretch, but you don’t need to get there overnight. Start with something small, like 1 percent per year, with the goal of increasing it each time you get a raise. Combine that with the employer match on your plan (most employers will match a certain percentage of what you put in) and you’ll be at 10% before you know it.
Allocate Properly
Asset allocation (the breakdown between stocks, bonds and other asset classes) is a critical element to investment success. In fact, research shows that it is responsible for as much as 90 percent of return. The remaining 10 percent is determined by the specific investments you buy and when you buy them.
Work with a trusted adviser or the representative assigned to your plan at work to make sure your allocation is appropriate for your situation. Then review that allocation regularly and make changes as necessary.
Don’t raid the piggy bank
The average person changes jobs 5-10 times over a lifetime. Each time you change, it’s tempting to take the money from your 401(k) rather than rolling it over to an IRA or to your new employer’s plan. This is especially true if you have things like moving expenses or if you lost your job involuntarily and need some resources to make ends meet. Do everything you can to avoid taking these premature distributions. Not only will you pay taxes and a penalty (assuming you’re younger than 59 ½), but it also means that the advantages you gained from starting early go out the window.
The secret
The biggest objection to starting early is that it’s not easy to save at the front-end of your career when your income is limited and you have so many expenses like a new work wardrobe or furnishing your house or apartment. I’ll let you in on a little secret. It doesn’t get any easier. There will always be wants and needs competing for your limited resources. The key is deciding to start, no matter the amount, and then making saving a lifelong habit.
by Joe Hearn | Jan 5, 2012 | Investing, Retirement
Just a quick post to let you know about some changes to contribution limits for the New Year. The amount you can contribute to your 401(k) is increasing by $500 in 2012. The new maximum is $17,000. Those over 50 can make an additional “catch up” contribution of of $5,500 for a total of $22,500.
IRA limits are staying the same: $5,000 plus an additional $1,000 for those over 50. Income limits on both Traditional and Roth IRAs are being increased, however, so more people will be able to take a tax deduction for Traditional IRA contributions or be eligible to make Roth contributions. Touch base with me if you have questions about your specific situation.
Enjoy the day! It’s going to be 60 degrees in Omaha today. Not bad for January.
Joe
