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Retirement

Retirement Contribution Limits Are Increasing in 2020

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Retirement Contribution Limits

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.

Is It Ever Too Late to Get Long Term Care Insurance?

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three clocks

Certain long-term or chronic conditions require a substantial amount of care, and they can be incredibly expensive. For example, on average, assisted living facilities cost $4,000 per month ($48,000 a year). Private rooms in a nursing home run over $100,000 annually.

In many cases, standard health care coverage (including Medicare) contribute very little toward long-term care costs. As a result, long-term care insurance might be necessary to make it financially manageable. However, waiting until a critical health event occurs might make long-term care insurance impossible to obtain. If you are wondering if it can ever be too late to get long-term care insurance. Here’s what you need to know.

When It’s Too Late to Get Long-Term Care Insurance

There are instances where a person might not be eligible for long-term care insurance. Usually, this is based on the covered person’s current health, and certain conditions make them ineligible.

For example, individuals with AIDS (or AIDS-related complex), Alzheimer’s disease, dementia, metastatic cancer, multiple sclerosis, or Parkinson’s disease will almost always be denied access to long-term care coverage. Similarly, anyone with a progressive neurological condition or who has had multiple strokes typically aren’t eligible.

Additionally, most insurers have a maximum age cutoff for new policies. Usually, anyone over 80 years old will be denied, though some companies may have stricter policies regarding age and others may allow those who are 80+ to get a policy, though might charge a high premium to provide the coverage.

Diagnosed With a Chronic Illness or Condition

Usually, the only time when it is definitively too late is when a person has been diagnosed with a chronic or degenerative illness or condition that is practically guaranteed to result in long-term care needs. In the eyes of insurers, that would be like giving a homeowners insurance policy to a house that was actively on fire. They just won’t do it.

Age-related denial can be a factor as well, especially for those who are 80 and older. Similarly, individuals who don’t have any of the health conditions above but are in poor health might struggle to find coverage. Most insurers require medical screenings and review applicant’s medical records. If they believe a person is too risky to cover, they simply won’t.

The Best Time to Get Long-Term Care Insurance

In many cases, long-term care insurance is easier to obtain if you are younger and in good health. Plus, your premium will be substantially lower, which can make your policy more affordable. This means that planning ahead pays off. It also ensures that you’ll have coverage in case you are diagnosed with a chronic or degenerative condition at any point in the future, as long as you pay your premiums.

However, if you are a younger adult and don’t want to commit right away, you should strongly consider it once you reach your 40s or 50s, depending on your health and financial state at that time. At times, making the decision to get insured even younger might be a smart move, particularly if your family has a history of health issues that you may experience as you age and could make it hard for you to get coverage.

 

Do you have long-term care insurance? Tell us what prompted you to get it or why you chose not to in the comments below.

 

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Would You Retire On A Cruise Ship?

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Would You Retire On A Cruise Ship

Currently, about 10,000 people are turning 65 each and every day. For those who choose to leave the workforce, retirement signals a major life transition. They might not be tied to the current home once they stop working. As a result, they can significantly alter their lifestyle. For some, that means spending their golden years on a cruise ship.

How Retiring on a Cruise Ship Works

Retiring on a cruise ship isn’t all that different than booking a cruise ship vacation. The main difference involves the duration, as retirees who want to remain aboard long-term aren’t going to book for one-week intervals.

In some cases, retirees decide to buy a cabin. This makes them a permanent resident, and several cruise lines allow people to essentially purchase the cabin as a condo. After buying, the owner still has access to various cruise ship amenities.

How Much Retiring on a Cruise Ship Costs

It is difficult to determine exactly how much it costs to retire on a cruise ship. One estimate shows that the average passenger spends about $213 per day to be on the ship. For an entire year, that comes out to $77,745.

With an average length of retirement at 18 years, a retiree could feasibly spend nearly $1.4 million if they retire on a cruise ship for that period. In comparison, people aged 65 to 74 usually only spend just under $49,000 per year. For the same 18-year timeframe, that totals to $882,000.

However, the cost of living on a cruise ship is impacted by the average cruise ship duration, which usually comes in near 8 days. Since retirees living on a cruise ship are there for extended stays, their daily rate may be different based on the longer durations without leaving. It may be possible to negotiate a discount, which could make it more affordable.

Additionally, if a retiree decides to buy a cabin, the financial side is different. How much a cabin can cost varies dramatically. Some smaller units on select ships may be under $400,000. However, large units in luxury vessels can be several million.

For example, Storylines has 172 square foot cabins for $352,235. There are also annual assessments of $70 per person for access to all-inclusive amenities at that tier.

On the higher end, Storylines’ 1259 to 1690 square foot cabins start at about $3.3 million. And that doesn’t include the all-inclusive assessment of $230 per day.

Additionally, practically none of the cruise ship arrangements cover any spending when you leave the ship. If you decide to explore a port city, that is more money you’ll have to spend. While all-inclusive arrangements lesson the need by covering costs like food and internet, you might want the option to experience local cultures, and that comes with a price tag.

You also have to contend with handling land-based expenses. If you keep your home or want to store your personal belongings and vehicles, that increases your overall spending.

Healthcare Considerations

If you retire on a cruise ship that travels internationally, your healthcare situation becomes a bit more complex. Medicare won’t always cover you outside of the US, so you might need a private health insurance supplement to handle your medical needs while traveling.

Cruise ships generally have very limited medical services available. Typically, they are equipped to handle various acute situations, like a mild injury or illness. Beyond that, you may have to leave the ship, and that can be hard to arrange if you are in the middle of the ocean.

Before You Retire on a Cruise Ship

If you simply can’t resist the idea of retiring on a cruise ship, then you should address certain things before you set sail. Calculate a retirement budget to make sure it’s affordable. Decide how you’ll handle your personal property. Evaluate your various insurance needs, such as medical and travel insurance.

Once that is handled, you should also comparison shop before making any formal plans. There are a surprising number of options out there, so you want to make sure you pick an approach that works best for you and gives you the lifestyle you want.

Finally, you might want to speak with a financial planner. Being on a cruise ship doesn’t make you exempt from federal taxes, so having a professional review your situation and help you plan isn’t a bad idea.

 

Would you retire on a cruise ship? Share your thoughts in the comments below.

 

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If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

 

What Age Should You Start Drawing Social Security?

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social security

Deciding when you should start receiving your Social Security benefits is a critical part of retirement planning. If you choose to draw Social Security before you reach full retirement age, you get a reduced benefit. Opting to wait beyond the age where you cross the threshold comes with higher payments. It may also mean you might need to delay your retirement if you don’t have other sources of retirement income. Regretfully, there is no hard and fast rule when it comes to when you should draw Social Security. However, it is possible to examine the situation and make a decision that is right for you. Here’s how.

Know Your Full Retirement Age

Reaching full retirement age (or “normal retirement age”) is often a factor people examine to decide when to take Social Security benefits. While the full retirement age used to be 65 for everyone. Now the age which that occurs varies depending on the year you were born.

Anyone born in 1950 or earlier is already at full retirement age based on the Social Security Administration’s definition. For individuals born between 1951 and 1954, 66 is the normal retirement age.

Starting in 1955, the full retirement age scales up in 2-month increments. For example, those born in 1955 qualify at age 66 and two months. If you were born in 1958, you have to wait until age 66 and eight months to be eligible for full retirement benefits. Anyone born in 1960 or later reaches full retirement age when they turn 67 years old.

Here’s an overview of when people reach full retirement based on their birth year:

Birth Year Full Retirement Age
1950 or earlier Already at full retirement age
1951-1954 66
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

Choosing to draw Social Security before or after the ages above impacts your benefit. Before you select a different age to start, you need to know how it affects your retirement.

Drawing Social Security Early

You do have the option of drawing Social Security before you reach the full retirement age as long as you are at least 62 years old. However, it results in a reduced benefit.

For individuals with a full retirement age set at 66, your benefits are reduced as follows:

  • 25 percent reduction at age 62
  • 20 percent reduction (approximately) at age 63
  • 3 percent reduction (approximately) at age 64
  • 7 percent reduction (approximately) at age 65

Individuals with a full retirement age of 67 can still draw Social Security early once they are 62.  They must understand that the reduction in the benefit is larger. For anyone born in 1960 or later, the maximum reduction is capped at 30 percent.

It’s important to understand that the reduction is typically permanent. Although you can repay your Social Security benefits and set a new start date resulting in a higher benefit for the remainder of your life, it isn’t a plausible option for many retirees.

Drawing Social Security Late

While receiving Social Security benefits early comes with a benefit, waiting until after your full retirement age passes can also be beneficial. As you wait, you earn delayed retirement credits, which result in a boost to your payments when you decide it’s time to draw Social Security.

For every year you wait beyond your full retirement age, you receive a benefit increase of 8 percent. For example, if your full retirement age is 67, and you wait until you are 70 to claim your benefits, your monthly payment is 24 percent higher.

However, once you reach age 70, there is no additional increase for waiting. While you aren’t required to file for benefits at that time, delaying any further doesn’t give you any more increases, so you are simply missing out on money that could boost your income.

Figuring Out Your Benefits

Since knowing what you could receive from Social Security will play a big role in your retirement decision, you need to examine your account. Every person’s situation is unique, and your financial benefits are based on your past earnings and work credits.

You can receive a personalized estimate from the Social Security Administration through the mySocialSecurity portal. This will give you a clearer picture of where you likely stand before you request any benefits or do any additional planning.

Additionally, your mySocialSecurity account will also show you what your benefits would look like if you retired at age 62 or 70. Although it is based on some assumptions about your earnings going forward, it is a helpful tool.

Making the Decision

Once you have a solid understanding of your potential Social Security benefits. You can start figuring out what age makes sense for you. Usually, you want to examine your other sources of income, such as retirement accounts or work-related earnings, once you reach age 62 as a starting point. You should also reflect on your planned retirement lifestyle, as this may impact how much you need on a monthly or annual basis to live how you’d like.

If you have other retirement accounts that can sustain you or plan to keep working, delaying might be a wise move. It allows you to receive a larger monthly payment for the rest of your life, which may make it easier to live without a traditional income.

However, if the idea of retiring early is appealing (or necessary, such as for a health reason), you might want to file earlier. This may be a viable option for those whose expenses will be far reduced in retirement, might only want to work part-time, or need to leave the workforce and require a reliable source of income.

Just be aware that filing before your full retirement age means your benefit is reduced, so make sure to consider that before going forward. Additionally, if you retire early and continue working, you might have to deal with a benefit reduction. In 2019, if you retire before full retirement age, for every dollar you earn above the annual limit of $17,640, your benefit reduces by $1 for every $2 you make.

Ultimately, choosing when to start receiving Social Security benefits is a personal decision. You need to examine your financial situation and figure out what is best for you today, tomorrow, and well into your retirement years.

Do you already draw Social Security? If so, at what age did you start? If not, at what age do you plan on drawing Social Security? Share your thoughts in the comments below.

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