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10 Retirement Options To Help Your Money Last Longer

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retirement options

For many, the idea of running out of money during retirement is terrifying. After all, a person’s golden years can be surprisingly expensive, and people are living longer today than they did in many generations before. Couple that with concerns about another recession, the rising cost of healthcare, inflation, and coming up financially short could easily become one of a person’s biggest fears. Luckily, there are retirement options that can help your money last as long as possible. Here are ten.

1. Maximize Social Security

While the idea of receiving Social Security benefits at age 62 might be appealing, waiting can pay off. If you start too early, your benefit is much smaller than if you delay a few years. Waiting until you reach full retirement age should be considered essential. That way, you don’t get a reduced benefit.

Your full retirement age depends on the year you were born. Here is an overview based on a person’s year of birth:

Year of Birth Full Retirement Age
1950 or before Already at full retirement age
1951-1954 66 (all will be at full retirement by the end of 2020)
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

However, if you can wait until age 70, that’s even better. You’ll earn delayed retirement credits that boost your Social Security payment. For every year between your full retirement age and 70, your payment rises by 8 percent. That means, if 67 is your full retirement age, by waiting until age 70, your payment is 24 percent higher than it would be if you didn’t wait.

2. Consider a Lifetime Annuity

Depending on your financial situation, a lifetime annuity might be a smart addition to your retirement planning. In exchange for a lump sum, you’ll receive a set amount every month for the remainder of your life, regardless of how long it is.

It’s important to take care when exploring annuity options. Some come with incredibly high fees, degrading the value of the product. However, if you are using one as a supplement and not a primary source of retirement income, annuities can be worth exploring.

3. Work Part-Time or Freelance

One of the easiest ways to make your retirement money last is to keep working, at least in some capacity. This could include a part-time job that provides you with some extra cash, using freelance work to bolster your bank account, starting a blog that generates income, or any other approach that works for you.

Retirement can actually be a great time to take on a job that you enjoy without having to consider the impact on your career or long-term earning potential. Plus, it can help you stay active and engaged in your community, and that is a great benefit.

4. Shift Your Savings to a High Yield Account

The average savings account interest rate, according to the FDIC, is a measly 0.09 percent. Some banks offer even less, coming in at just 0.01 percent interest.

If your money is sitting in an account like that, you are missing out on an earning opportunity. Just by moving your cash to a high-yield online savings account, you can earn more in interest with zero effort.

For example, $5,000 sitting in an account that earns only the average 0.09 percent brings in $4.50 in interest every year, suggesting the account compounds monthly. In comparison, with an interest rate of 1.5 percent, that money earns $75.52 in interest instead. That’s a difference of $71.02 every year. And it happens even without having to deposit any additional money.

Look for an option with an interest rate of 1 to 2 percent or more. That way, if you have money in savings for emergencies, it’s making you as much as possible.

5. Reexamine Your Portfolio

As you get closer to retirement, it’s normal to skew your portfolio toward the conservative end. That way, your odds of preserving your money go up, but you still have a chance of experiencing some decent gains.

However, if your portfolio has been adjusting automatically or without your direct input, you might want to see if the allocations are appropriate. It’s possible that your portfolio is more conservative than you’d like, particularly if you decide to retire later in life than you did when you first set up your allocations.

Similarly, many people could potentially live decades after retiring. That means you could have 20, 30, or 40 more years to live. That means you have some time to ride out a degree of market volatility, so keeping at least a portion of your retirement account in stocks could be a wiser choice.

If you are delaying your retirement by a few years or could potentially have a lengthy retirement, explore whether being more aggressive makes sense for you. It may let you earn more before you retire, so it is worth considering.

6. Factor in the Value of Downsizing in the Future

If you will pay off your house before you retire and are in a family-sized home, then you can factor in the value of your property when planning for your retirement. Once it’s paid off, if you choose to downsize, any excess value above the cost of your new housing arrangement could be an income boost.

Even if you wouldn’t plan on shifting to a smaller home, it’s wise to examine the value difference. That way, your property could function as a safety net, giving you a source of cash should your other retirement accounts dwindle down faster than you expected.

However, if you downsize when you retire, you are creating a way to stretch your retirement income. A smaller property is usually less expensive to maintain, operate, and insure. As a result, your monthly expenses could go down, allowing you to stretch your dollars further.

7. Take Advantage of an HSA

If you aren’t enrolled in Medicare yet and are eligible to open a Health Savings Account (HSA), consider doing it as part of your retirement planning. While you can’t contribute once you enroll in Medicare, you can add to the HSA until that day comes.

With an HSA, contributions are tax-deductible. Plus, it grows tax-deferred and, as long as you use the funds for qualifying healthcare expenses, you can withdraw it tax-free.

Even if you are no longer eligible to make contributions, you can keep using the saved money until it is gone. Since healthcare costs tend to rise as a person ages, this can be a great way to plan for managing retirement expenses. Then, your other retirement account funds don’t have to go to medical costs.

8. Readjust Your Life Insurance

While it might seem like adjusting your life insurance as you get closer to retirement isn’t a great idea, it might be. If your children no longer live at home and don’t depend on you financially, you might not need as much insurance as you did when they were younger.

If you haven’t examined your policy recently and your household’s situation looks different than it did when you signed up, see if reducing the size makes sense. In some cases, it may, allowing you to cut a monthly expense and still have a suitable amount of protection.

9. Make a Tax-Smart Withdrawal Plan

If you have more than one type of retirement account, then making a tax-smart withdrawal plan is a good idea. Certain kinds of accounts – like traditional IRAs and 401(k)s – have taxable withdrawals while others – like Roth IRAs – don’t. Aside from any mandatory withdrawals, make sure you consider the tax implications when you access the money. That way, you can choose an approach that may minimize your obligation, allowing you to keep more of your money.

10. Move to a State with Lower Taxes or Cost of Living

Some states have higher tax rates than others. Income, property, and sales tax rates can vary dramatically, so moving to one that has better options than where you live now can help you stretch your money.

Similarly, the cost of living isn’t the same in every state or city. Some are much more affordable than others, so you might be able to make your money last by opting for a change of scenery.

If you don’t have a reason to stay in your current area, compare how much you could save by heading elsewhere. Just make sure to factor in taxes and the cost of living. That way, you can genuinely find the most affordable option for you.

 

Do you know of any other retirement options that can help make the money last longer? Share your thoughts in the comments below.

 

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New Parents Can Take a Penalty-Free Early Withdrawal From Retirement Savings

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Penalty-free early withdrawal

It is the beginning of the year and many people have already started preparing their taxes for April. If you took money out of your 401(k) or other retirement savings, you likely have some penalties to pay on the amount you withdrew. However, new parents can take a penalty-free early withdrawal from retirement savings, but it will increase your taxable income.

Why New Parents Get This Break

Being a new parent can be extremely overwhelming and expensive. New parents get a small break if they need to withdraw funds from their retirement savings with the Secure Act, which was passed in December. If you are struggling for money, this can be a good source of emergency cash.

It is important to note that the penalty-free early withdrawal only applies to individuals with new children. There is also an exception for medical expenses, but you need to make sure that the year you withdraw the funds is also the year you needed medical assistance. You won’t be able to withdraw funds from your retirement savings in the event of financial hardship or any other reason without paying the 10 percent withdrawal fees.

While having that extra cash to fall back on is great, there are definitely a few things to be wary of. Even if you need the money for your child or a medical expense, it may not be the best financial decision.

Should You Consider a Penalty-Free Early Withdrawal?

The Secure Act will allow parents with a new child to deduct up to $5,000 from their retirement savings or individual retirement account (IRA) without having to pay the 10% penalty. The $5,000 limit applies to each parent, meaning the family can deduct up to $10,000 in total as long as they have separate retirement accounts.

Even though they won’t have to pay the 10% penalty, parents will still have to pay taxes on this money. Not to mention, you’ll be removing money from retirement savings that likely took years to accumulate and could take years to re-establish. Additionally, you are creating a habit of borrowing, which is never beneficial to your long-term finances.

Ed Slott, CPA and founder of Ed Slott and Co. said, “Retirement funds are for retirement. If you use them well before retirement, what are you going to have in retirement?” All in all, it is probably not the best idea to withdraw from your retirement savings early. Instead, look for other ways to fund your needs and focus on saving more so you don’t have to resort to deducting money from your 401(k) or IRA.

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When To Begin Taking Social Security Benefits

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When is the best time to take your Social Security benefits?

As with so many tricky decisions, the short answer is, “it depends.” According to the Center for Retirement Research at Boston College, far too many people are taking benefits too early. Those taking their benefits beginning at 70 or later are in the single digits, percentage-wise.

It’s no secret that the retirement savings situation in the United States is pretty bad. So it makes sense that a lot of people are going to be counting the days until they’re eligible for that first payment.

By choice or not. If you’re heading into retirement and wondering how to make ends meet, then you probably need the money as soon as possible.

But if there’s any doubt — that is, if you can possibly see a way of making ends meet without those benefits — then you’ll want to run some numbers before deciding what and when to take.

Most people are in this boat. They don’t have the kind of money where it’s a no brainer to wait as long as possible to take the benefits. They do, however, have investment accounts and at least some kind of road map that gets them through retirement without running out of money. It’s these folks who often have the best of intentions but make the wrong move by taking Social Security early instead of drawing down on their investments.

There are various reasons people have for making this choice — one is taxes. Investors go to great lengths to avoid capital gains taxes, which they would surely incur if they have been good about saving the past couple of decades. Another is just the force of habit. People with great savings habits sometimes have a hard time doing a 180 and spending down their investment accounts.

But that’s often exactly the best course of action: Spend some of what you’ve saved, take the tax hit, and wait on Social Security. Read on to learn why.

A Stream Of Cash Flows

You’re probably familiar with annuities. What you may not realize is that you have already bought one.

In case you’re not familiar, annuities essentially work like this. You pay into an annuity, often as a lump sum, and in return receive a guaranteed income stream for a defined period of time. That income might have some bells and whistles attached too, such as a survivor benefit — if the recipient dies, the spouse or partner could get some percentage of the payments going forward for some stretch of time.

We won’t get into the debate about whether annuities are good or bad, but we will say that, for the risk-averse, that guaranteed income stream can provide a lot of peace of mind. There’s always the chance that the company that issued the annuity will go out of business, but that’s really rare. Most states have state guaranty associations that serve as backstops if those companies fail.

With Social Security, the chances of default are even slimmer as it’s backed by the U.S. government. Could benefits be cut one day? Possibly, and it’s worth considering what that would mean to your retirement plan. Social Security, however, can be thought of as an extremely safe annuity contract. It just happens to be a contract that most full-time workers have no choice but to take.

For argument’s sake, though, let’s say you get to near-retirement age without having paid into Social Security and decided you would really like that level of confidence in an income source. So you start annuity shopping.

In short, it’s going to cost you. Let’s say you and your spouse are at age 60 and would like a source of $1,000/month with survival benefit starting when you’re 65. That annuity is going to run you about $200,000, due in one payment. You can run the numbers through some online annuity calculators yourself, but this is just to give you an idea.

If, instead, you draw down that $1,000 per month from your investment accounts for five years, you are only out $60,000. Plus, you are virtually guaranteed an 8 percent annual return on your Social Security “investment,” because benefits rise by 8 percent each year that you wait.

In exchange for paying some taxes, you’re saving yourself a whole lot of money by waiting a few years to take your benefits.

Not Just About The Money (But Mostly)

Some people believe they have a good idea about what their life expectancy will look like. If they are fairly certain that they won’t make it beyond, say, their 70s, they might have reason to take the benefits earlier — even if they don’t really need them.

There are calculators that can help you determine when your “break-even” age will be. This refers to the age at which you make up for taking your benefits early. In other words, if you start taking your benefits early, you’ll have to live to a certain age to get to the point where you get the same amount of benefits as someone who waits. Life expectancy of course factors in here too. If you have a strong belief that you’ll live past the break-even age, it’s normally going to make sense to wait to take the benefits.

 

social security

 

Knowledge Really Is Power

The decision — the very permanent decision — about when to begin taking Social Security benefits is just one piece of the retirement puzzle. The pieces need to fit together to have a successful retirement plan — broadly defined as not running out of money, but probably encompassing a lot more than that. Decisions you make about other aspects of retirement — from working part-time to how much in assets you want to leave to your heirs — are all interconnected. It helps immensely to be able to run your plan through a financial planning application so you have all the data in one place. 

Retirement Contribution Limits Are Increasing in 2020

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Retirement Contribution Limits Are Increasing in 2020

The Internal Revenue Service (IRS) released updates for 2020 earlier this week. Amongst those updates, the agency announced changes to the retirement contribution limits that will take effect during the 2020 tax year.

Changes to the Retirement Contribution Limits

And, for once, the IRS is giving people a break. Starting in 2020, the IRS has increased the retirement plan contribution limit to $19,500 (up from $19,000). This includes 401(k), 403(b), and 457 plans. Catch up contributions will also be increased from $6,000 to $6,500.

That’s just the basics though. If you’d like to learn more about the ins-and-outs of the changes recently announced, head over to the IRS website. You can also read a quick summary of the changes taking effect in 2020 in the IRS news bulletin.

The best part of the IRS announcing the increase in limits is contributing more to your retirement accounts will help you build wealth. Not to mention, retirement contributions are not typically taxed. Your money will be put to work in the stock market while you effortlessly get ready to retire.

Readers, what do you think about the latest changes to the retirement contribution limits?

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What You Can Learn From The GE Pension Plans Crisis

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GE pension plans

General Electric is making waves this week after it had been revealed that 20,000 employees would have their GE pension plans frozen. Anyone relying on their pension plan to retire would be in a panic, as they should be. Why are GE pension plans being frozen and what can you do to prepare for something similar?

The Downfall of GE

GE was once known as an industrial icon but has fallen in recent years. Shares in the company lost more than half their value last year after a number of problems. This year, executives seem to have refocused on restructuring their business plan and reducing the company’s overall debt.

In August, GE was called out by a whistleblower of hiding issues within the company by providing fraudulent accounting.  Now, General Electric is trying to fix its issues by altering employees’ benefits to cover deficits.

GE Pensions Plans Are Frozen

Already retired GE employees won’t have any changes made to their current supplementary benefits or pension plans. Around 700 current employees will have their current pensions frozen, however. This applies to anyone who became an executive before 2011.

Individuals with frozen pension funds won’t see any additional benefits or be able to contribute any longer starting January 1, 2021. GE is doing its best to compensate for these changes. The company will begin to contribute 3 percent of the employees’ salaries to a 401(k) plan. GE will provide a 50 percent match up to 8 percent of the employee contributions as well. For 100,000 former employees, GE is also offering a lump-sum payment option for individuals who haven’t begun to receive their benefits yet.

These changes are in an effort to reduce GE’s overall pension deficit. Currently, the company’s deficit sits between $5 billion and $8 billion. After GE pension plans are frozen, this will decrease to between $4 billion and $6 billion. The company plans to use some of the money from the sale of BioPharma, BHGE, and Wabtec to pre-fund around $5 billion of its Employee Retirement Income Security Act pension payments for 2021 and 2022.

In a press release, Kevin Cox, chief human resources officer at GE, stated, “Returning GE to a position of strength has required us to make several difficult decisions, and today’s decision to freeze the pension is no exception. We carefully weighed market trends and our strategic priority to improve our financial position with the impact to our employees. We are committed to helping our employees through this transition.”

How You Can Prepare For Something Similar

If you work for a private company or corporation, like GE, have begun to move away from pension plans over the past few decades. After the introduction of the 401(k), many employers have focused on providing that in place of company-based pension plans. The idea of 401(k) plans is to put the responsibility of retirement saving and planning on the employee instead of the company. Many companies contribute to employees’ 401(k) accounts to a certain degree, but they aren’t solely responsible for it like pension plans.

Anyone finding themselves in the situation of the GE employees should look into the fine print of your benefits plan. See how much you’ve accrued over the time you’ve worked there and take a look at how much you’ll need to retire. Keep in mind, you may have additional retirement income (not just payments from your pension plan). This can include 401(k), any savings, Social Security, and any additional benefits/income from your spouse.

If you’re given the option, discuss taking the lump-sum payment versus monthly payments with a financial professional. It is also a good idea to discuss your other options with a professional as well, such as additional sources of income in retirement and how much money you’ll actually need to maintain your quality of life.

“If the company’s financial situation is somewhat in question, it may make sense to take the money and run,” Nate Wenner, principal and senior financial advisor at Wipfli Financial, said. Folks who take a lump sum, according to Wenner, would probably benefit from dumping it into private retirement accounts, such as an IRA.

Another thing to keep in mind is saving is a necessity when it comes to retirement. If you have a pension plan or a 401(k), that’s great. But you also need savings. You never know if something like what has happened with the GE pension plans may also happen at your place of work. Depending on those funds could sink your financial ship in the future.

Photo: Flickr: Jeff Turner

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Using A Bucket Strategy In Retirement

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In today’s low-interest-rate world, equities have become more important than ever. That’s not just for people in their working years, either. In retirement, it’s true that you’ll probably want to take a more conservative approach than you did for most of the rest of your life. But most successful retirement plans are going to depend on some equity exposure.

Still, equities can be volatile. And retirees don’t need volatile. Ask anybody who had retired (or was about to retire) heading into the last big bear market a little more than 10 years ago. If they were riding the bull-market wave and decided to keep riding it, they likely crashed hard. If they had been dialing their equity exposure down as they headed for retirement, they probably emerged bruised but not broken.

Using the WealthTrace financial planning application, we ran a series of equity-heavy portfolios through the program’s Bear Market Scenario tool, and in every case, the results were ugly. No surprise there; stocks get hammered in a bear market by definition.

Run Bear Market Scenario

Send In The Bucket Brigade

If you have played your cards right as you approach retirement age, you should have money squirreled away in various investment accounts. You might have a 401(k) account, an IRA, maybe even a Roth IRA or a Health Savings Account (HSA) that has some funds in it. And if you have stuck to low-cost investments and haven’t needlessly traded in and out of them, all while contributing to them and rebalancing them over time, the accounts have likely flourished.

So now you might have a lot of different asset classes (like stocks and bonds) in these various accounts. Where do you begin when it comes to withdrawing these assets so you can live on them?

From a high-level tax perspective, there are some basic rules as to how this should go. Normally, you would draw down from the taxable and tax-advantaged (like a Roth IRA) accounts first, and go for the qualified tax-deferred accounts (like a traditional IRA) later. Within the first group, you might need to tweak your withdrawal strategy a bit so you’re not realizing huge capital gains that you’ll have to pay taxes on.

There is another way of looking at the process besides how taxes come into play. It essentially has to do with asset classes, and it’s called a bucket strategy.

There’s no one correct definition of a bucket strategy. But it refers to the idea that you maintain groups–or buckets–of assets that you’ll be using to cover expenses in retirement. Those buckets, whether actual separate accounts or virtual ones (more on that in a minute), are sorted mainly by when they will be used, and partially by what they’re made up of.

How It Works

A bucket strategy can have as few as two buckets, but we’ll use a three-bucket strategy as an example to help explain it better.

Bucket One: Cold Hard Cash (or its equivalent, like a money market account or a short-term government bond fund). This is the most obvious one in that, for near-term, day-to-day living expenses, you really don’t want to take a chance that an investment–like an ETF with equities in it–could lose its value suddenly. Cash is subject to erosion due to inflation, but that doesn’t normally happen overnight.

Still, you don’t want any more of your investment money in cash than necessary. What’s “necessary” will be up to you, and will depend on your risk tolerance. Does “near term” mean a year, or five years? It’s probably going to be somewhere in between.

Bucket Two: Bonds and Dependable Dividends. This second bucket moves up the risk ladder a bit with some income-generating investments. These might include real estate investment trusts (REITs), master limited partnerships (MLPs), stocks that pay solid and perhaps growing dividends, and bond funds. Funds that are generated here will be moved to bucket one as necessary; excess funds (and we hope there are excess funds!) will be reinvested in this bucket’s investments.

Bucket Three: Growth Stocks. Remember the volatility we were talking about? Hopefully, most of it will be concentrated here. That’s because this bucket will contain the assets we’ll need last. That means greater return potential, but greater risk (as measured by volatility) too. Growth stocks will be the most obvious choice for this bucket. As gains are realized here, they will flow to bucket two.

That’s a basic bucket strategy, and a fairly common one, though with myriad variations.

Virtual vs. Actual

We mentioned “virtual” accounts earlier. What we mean by that is you may not want to actually open new brokerage accounts to create three (or however many) buckets. Doing so might be messy, requiring you to transfer assets from one existing account to another or even realizing gains you don’t want to realize.

Managing the buckets “virtually,” meaning basically in your head, is probably better. For example, say you want two years’ worth of living expenses in cash and equivalents. You could scrape that together from various existing brokerage accounts and deposit it into your savings account so it’s all in one place. Or, you could keep track of where the cash already is, and draw on the various accounts as needed. That’s the virtual version.

Asset Allocation

Variations On a Theme

One could write a book of bucket strategies. No two are exactly alike, because everyone’s needs, risk tolerances, and investments are different. Regardless of how the assets are allocated or how many buckets you’re using, you’ll need diligence, a good understanding of your tolerance for risk, and the right tools to help you keep track of your system.