Retirement

When To Begin Taking Social Security Benefits

December 7, 2019 By Doug Carey Leave a Comment

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.

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

November 12, 2019 By Amanda Blankenship Leave a Comment

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?

What You Can Learn From The GE Pension Plans Crisis

October 7, 2019 By Amanda Blankenship Leave a Comment

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

Using A Bucket Strategy In Retirement

October 7, 2019 By Doug Carey Leave a Comment

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.

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.

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?

September 16, 2019 By Susan Paige Leave a Comment

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?

August 8, 2019 By Tamila McDonald Leave a Comment

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.