Some specifics about the “second act.”
Does your vision of retirement align with the facts? Here are some noteworthy financial and lifestyle facts about life after 50 that might surprise you.
Up to 85% of a retiree’s Social Security income can be taxed. Some retirees are taken aback when they discover this. In addition to the Internal Revenue Service, 13 states levy taxes on some or all Social Security retirement benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. (It is worth mentioning that the I.R.S. offers free tax advice to people 60 and older through its Tax Counseling for the Elderly program.)
Retirees get a slightly larger standard deduction on their federal taxes. Actually, this is true for all taxpayers aged 65 and older, whether they are retired or not. Right now, the standard deduction for an individual taxpayer in this age bracket is $13,500, compared to $12,200 for those 64 or younger.
Retirees can still use IRAs to save for retirement. There is no age limit for contributing to a Roth IRA, just an inflation-adjusted income limit. So, a retiree can keep directing money into a Roth IRA for life, provided they are not earning too much. In fact, a senior can potentially contribute to a traditional IRA until the year they turn 70½.
A significant percentage of retirees are carrying education and mortgage debt. The Consumer Finance Protection Bureau says that throughout the U.S., the population of borrowers aged 60 and older who have outstanding student loans grew by at least 20% in every state between 2012 and 2017. In more than half of the 50 states, the increase was 45% or greater. Generations ago, seniors who lived in a home often owned it, free and clear; in this decade, that has not always been so. The Federal Reserve’s recent Survey of Consumer Finance found that more than a third of those aged 65-74 have outstanding home loans; nearly a quarter of Americans who are 75 and older are in the same situation.
As retirement continues, seniors become less credit dependent. GoBankingRates says that only slightly more than a quarter of Americans over age 75 have any credit card debt, compared to 42% of those aged 65-74.
About one in three seniors who live independently also live alone. In fact, the Institute on Aging notes that nearly half of women older than age 75 are on their own. Compared to male seniors, female seniors are nearly twice as likely to live without a spouse, partner, family member, or roommate.
Around 64% of women say that they have no “Plan B” if forced to retire early. That is, they would have to completely readjust and reassess their vision of retirement and also redetermine their sources of retirement income. The Transamerica Center for Retirement Studies learned this from its latest survey of more than 6,300 U.S. workers.
Few older Americans budget for travel expenses. While retirees certainly love to travel, Merrill Lynch found that roughly two-thirds of people aged 50 and older admitted that they had never earmarked funds for their trips, and only 10% said that they had planned their vacations extensively.
What financial facts should you consider as you retire? What monetary realities might you need to acknowledge as your retirement progresses from one phase to the next? The reality of retirement may surprise you. If you have not met with a financial professional about your retirement savings and income needs, you may wish to do so. When it comes to retirement, the more information you have, the better.
When to start? Should I continue to work? How can I maximize my benefit?
Social Security will be a critical component of your financial strategy in retirement, so before you begin taking it, you should consider three important questions. The answers may affect whether you make the most of this retirement income source.
When to Start? The Social Security Administration gives citizens a choice on when they decide to start to receive their Social Security benefit. You can:
* Start benefits at age 62.
* Claim them at your full retirement age.
* Delay payments until age 70.
If you claim early, you can expect to receive a monthly benefit that will be lower than what you would have earned at full retirement. If you wait until age 70, you can expect to receive an even higher monthly benefit than you would have received if you had begun taking payments at your full retirement age.
When researching what timing is best for you, It’s important to remember that many of the calculations the Social Security Administration uses are based on average life expectancy. If you live to the average life expectancy, you’ll eventually receive your full lifetime benefits. In actual practice, it’s not quite that straightforward. If you happen to live beyond the average life expectancy, and you delay taking benefits, you could end up receiving more money. The decision of when to begin taking benefits may hinge on whether you need the income now or if you can wait, and additionally, whether you think your lifespan will be shorter or longer than the average American.
Should I Continue to Work? Besides providing you with income and personal satisfaction, spending a few more years in the workforce may help you to increase your retirement benefits. How? Social Security calculates your benefits using a formula based on your 35 highest-earning years. As your highest-earning years may come later in life, spending a few more years at the apex of your career might be a plus in the calculation. If you begin taking benefits prior to your full retirement age and continue to work, however, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit ($17,640 in 2018). If you work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit ($45,360 in 2018) until the month you reach full retirement age. After you attain your full retirement age, earned income no longer reduces benefit payments.
How Can I Maximize My Benefit? The easiest way to maximize your monthly Social Security is to simply wait until you turn age 70 before claiming your benefits.
What should you focus on as the transition approaches?
You can prepare for your retirement transition years before it occurs. In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.
How much monthly income will you need? Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.
Should you downsize or relocate? Moving into a smaller home may reduce your monthly expenses. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so.
How should your portfolio be constructed? In planning for retirement, the top priority is to build investments; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time, risk tolerance, and goals: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.
How will you live? There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.
How will you take care of yourself? What kind of health insurance do you have right now? If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.
Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Extended care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?
Give your retirement strategy a second look as the transition approaches. Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.
Breaking down the basics & what each part covers.
Whether your 65th birthday is on the horizon or decades away, you should understand the parts of Medicare – what they cover and where they come from.
Parts A & B: Original Medicare. There are two components. Part A is hospital insurance. It provides coverage for inpatient stays at medical facilities. It can also help cover the costs of hospice care, home health care, and nursing home care – but not for long and only under certain parameters.
Seniors are frequently warned that Medicare will only pay for a maximum of 100 days of nursing home care (provided certain conditions are met). Part A is the part that does so. Under current rules, you pay $0 for days 1-20 of skilled nursing facility (SNF) care under Part A. During days 21-100, a $170.50 daily coinsurance payment may be required of you.
Part B is medical insurance and can help pick up some of the tab for physical therapy, physician services, expenses for durable medical equipment (hospital beds, wheelchairs), and other medical services, such as lab tests and a variety of health screenings.
Part B isn’t free. You pay monthly premiums to get it and a yearly deductible (plus 20% of costs). The premiums vary according to the Medicare recipient’s income level. The standard monthly premium amount is $135.50 this year. The current yearly deductible is $185. (Some people automatically receive Part B coverage, but others must sign up for it.)
Part C: Medicare Advantage plans. Insurance companies offer these Medicare-approved plans. To keep up your Part C coverage, you must keep up your payment of Part B premiums as well as your Part C premiums. To say not all Part C plans are alike is an understatement. Provider networks, premiums, copays, coinsurance, and out-of-pocket spending limits can all vary widely, so shopping around is wise. During Medicare’s annual Open Enrollment Period (October 15 - December 7), seniors can choose to switch out of Original Medicare to a Medicare Advantage plan or vice versa; although, any such move is much wiser with a Medigap policy already in place.
How does a Medigap plan differ from a Part C plan? Medigap plans (also called Medicare Supplement plans) emerged to address the gaps in Part A and Part B coverage. If you have Part A and Part B already in place, a Medigap policy can pick up some copayments, coinsurance, and deductibles for you. You pay Part B premiums in addition to Medigap plan premiums to keep a Medigap policy in effect. These plans no longer offer prescription drug coverage.
Part D: prescription drug plans. While Part C plans commonly offer prescription drug coverage, insurers also sell Part D plans as a standalone product to those with Original Medicare. As per Medigap and Part C coverage, you need to keep paying Part B premiums in addition to premiums for the drug plan to keep Part D coverage going.
Every Part D plan has a formulary, a list of medications covered under the plan. Most Part D plans rank approved drugs into tiers by cost. The good news is that Medicare’s website will determine the best Part D plan for you. Go to medicare.gov/find-a-plan to start your search; enter your medications and the website will do the legwork for you.
Seniors will see their retirement benefits increase by an average of 2.8% in 2019.
Social Security will soon give seniors their largest “raise” since 2012. In view of inflation, the Social Security Administration has authorized a 2.8% increase for retirement benefits in 2019.
This is especially welcome, as annual Social Security cost-of-living adjustments, or COLAs, have been irregular in recent years. There were no COLAs at all in 2010, 2011, and 2016, and the 2017 COLA was 0.3%. This marks the second year in a row in which the COLA has been at least 2%.
Not every retiree will see their benefits grow 2.8% in 2019. While affluent seniors will probably get the full COLA, more than 5 million comparatively poorer seniors may not, according to the Senior Citizens League, a lobbying group active in the nation’s capital.
Why, exactly? It has to do with Medicare’s “hold harmless” provision, which held down the cost of Part B premiums for select Medicare recipients earlier in this decade. That rule prevents Medicare Part B premiums, which are automatically deducted from monthly Social Security benefits, from increasing more than a Social Security COLA in a given year. (Without this provision in place, some retirees might see their Social Security benefits effectively shrink from one year to the next.)
After years of Part B premium inflation being held in check, the “hold harmless” provision is likely fading for the above-mentioned 5+ million Social Security recipients. They may not see much of the 2019 COLA at all.
Even so, the average Social Security beneficiary will see a difference. The increase will take the average individual monthly Social Security payment from $1,422 to $1,461, meaning $468 more in retirement benefits for the year. An average couple receiving Social Security is projected to receive $2,448 per month, which will give them $804 more for 2019 than they would get without the COLA. How about a widower living alone? The average monthly benefit is set to rise $38 per month to $1,386, which implies an improvement of $456 in total benefits for 2019.
Lastly, it should be noted that some disabled workers also receive Social Security benefits. Payments to their households will also grow larger next year. Right now, the average disabled worker enrolled in Social Security gets $1,200 per month in benefits. That will rise to $1,234 per month in 2019. The increase for the year will be $408.
Retirement is undeniably a major life and financial transition. Even so, baby boomers can run the risk of growing nonchalant about some of the financial challenges that retirement poses, for not all are immediately obvious. In looking forward to their “second acts,” boomers may overlook a few matters that a thorough retirement strategy needs to address.
RMDs. The Internal Revenue Service directs seniors to withdraw money from qualified retirement accounts after age 70½. This class of accounts includes traditional IRAs and employer-sponsored retirement plans. These drawdowns are officially termed Required Minimum Distributions (RMDs).
Taxes. Speaking of RMDs, the income from an RMD is fully taxable and cannot be rolled over into a Roth IRA. The income is certainly a plus, but it may also send a retiree into a higher income tax bracket for the year.
Retirement does not necessarily imply reduced taxes. While people may earn less in retirement than they once did, many forms of income are taxable: RMDs; investment income and dividends; most pensions; even a portion of Social Security income depending on a taxpayer’s total income and filing status. Of course, once a mortgage is paid off, a retiree loses the chance to take the significant mortgage interest deduction.
Health care costs. Those who retire in reasonably good health may not be inclined to think about health care crises, but they could occur sooner rather than later – and they could be costly. As Forbes notes, five esteemed economists recently published a white paper called The Lifetime Medical Spending of Retirees; their analysis found that between age 70 and death, the average American senior pays $122,000 for medical care, much of it from personal savings. Five percent of this demographic contends with out-of-pocket medical bills exceeding $300,000. Medicines? The “donut hole” in Medicare still exists, and annually, there are retirees who pay thousands of dollars of their own money for needed drugs.
Eldercare needs. Those who live longer or face health complications will probably need some long-term care. According to a study from the Department of Health and Human Services, the average American who turned 65 in 2015 could end up paying $138,000 in total long-term care costs. Long-term care insurance is expensive, though, and can be difficult to obtain.
One other end-of-life expense many retirees overlook: funeral and burial costs. Pre-planning to address this expense may help surviving spouses and children.
Rising consumer prices. Since 1968, consumer inflation has averaged around 4% a year. Does that sound bearable? At a glance, maybe it does. Over time, however, 4% inflation can really do some damage to purchasing power. In 20 years, continued 4% inflation would make today’s dollar worth $0.46. Retirees would be wise to invest in a way that gives them the potential to keep up with increasing consumer costs.
As part of your preparation for retirement, give these matters some thought. Enjoy the here and now, but recognize the potential for these factors to impact your financial future.
Urban legends, urban myths, and the latest that’s on everyone’s lips–fake news. Whatever you call it, in our age of information, claims of dubious repute can go viral in minutes. Anyone with a computer can start a blog and offer up opinions on just about any subject, whether he or she is an authority or not. Sources? Who needs sources?
Alright, please excuse the sarcasm, but hopefully you know where we're going.
When it comes to retirement, there are plenty of misleading thoughts, opinions and fake news floating around out there. With that in mind, we'd like to clear up some misconceptions that surround the retirement years.
Myth #1: I’ll never see a penny of the money I put into Social Security.
If we had a nickel for every time we've heard someone utter that phrase, we'd have a lot of nickels. Sadly, if a 40-something says he is confident he will receive monthly checks, he sets himself up for ridicule among his contemporaries.
We wouldn’t disagree with the hypothesis that young people getting started in the workforce will receive a low return on contributions into Social Security, but this is a completely different argument.
Contrary to popular assertions, Social Security is not on the verge of bankruptcy, and we fully believe even those who are many years from retirement will be collecting monthly benefits when it’s their turn.
According to the 2017 annual report from the Social Security and Medicare Board of Trustees, Social Security “has collected roughly $19.9 trillion and paid out $17.1 trillion,” in its storied 82-year history, “leaving asset reserves of more than $2.8 trillion at the end of 2016 in its two trust funds.”
As an ever-larger number of baby boomers continue to retire and collect benefits, the trustees expect the trust funds to be depleted by 2034.
Thereafter, expected-tax-income receipts are projected to be sufficient to pay about three-quarters of scheduled benefits. Put another way, recipients of Social Security would receive about a 25% cut in benefits, if no changes are made to the current structure.
Of course, these are simply projections and much will depend on economic growth, job creation, and wages. Yet, it’s a far cry from, “I won’t see a penny of Social Security.”
We suspect that politicians will eventually settle on some type of compromise that will extend the life of the current system, but it may take a catalyst event that would generate enough political pressure for this to happen.
That said, we recognize that timing and strategies that can be implemented for Social Security may be complex. If you have questions, please give us a call or shoot us an email. We would be happy to discuss your options with you.
Myth #2: The stock market is too risky.
There’s no question about it, the bear markets that followed the dot.com bubble and the 2008 financial crisis were unprecedented in that we saw two steep declines in less than 10 years.
Made fearful by what they see as too much risk, millennials have shied away from stocks, according to a Bankrate survey. There has always been a degree of risk in stocks, even with a fully diversified portfolio. Yet, a well-diversified portfolio is akin to a stake in the U.S. and global economy. Moreover, the U.S. and global economy has been expanding for many decades and history tells us it will likely be bigger in 10 or 20 years.
When it comes to investing in stocks, the only resistance we typically come across is from folks who haven’t seriously entertained the idea before. We listen to their concerns, and answer with an array of factual data that’s not designed to win an argument, but simply to educate. When you have all the facts, then you can make an educated decision about what's best for you.
Myth #3: Medicare will handle all my health care needs in retirement.
If only Medicare did cover everything. But then, the cost to finance it would be much higher.
Medicare doesn’t cover the full cost of skilled nursing or rehabilitative care, according to AARP. Yes, the first 20 days of a stay in a nursing home is covered, but you’ll pay over $160 per day for days 21 through 100. And Medicare doesn’t cover stays past 100 days.
You may be paying out of pocket for personal care assistance, too. The same holds true for miscellaneous hospital costs, routine eye exams, hearing, foot and dental care.
Myth #4: Why save today when you can start tomorrow—there’s plenty of time.
This section is designed for millennials and those who are just beginning their journey in the workforce. There’s no better day to begin saving than today and we can’t stress this enough!
Here's a simple example:
Source: JP Morgan Asset Management
This is a hypothetical example and is not representative of any specific investment. Your results may vary.
In other words, Susan begins 10 years earlier than Bill, saves 20 years less than Bill, and saves $100,000 less than Bill, but winds up with $61,329 more.
For every parent or grandparent reading this, we encourage you to forward this powerful example to your kids and grandkids that are near or have already entered the workforce. It's a teachable opportunity with a simple lesson: The sooner you begin; the better off you may be as you approach retirement.
Take full advantage of your company’s retirement program. If your company doesn’t have a savings plan, there are many simple ways that you can get started. Feel free to reach out to us and we can assist.
Myth #5: Retirement is easy.
Many look forward to the day when they will no longer prepare for Monday mornings at the office. For those who face the work challenges that crop up daily, retirement may seem like a welcome oasis in the distance.
But that oasis sometimes turns out to be a mirage. Often, the transition from decades of working to retirement isn’t so simple.
For a better retirement, set goals, and not simply financial ones. Can you transition to part-time in your job? Consider part-time employment or consulting. It will ease the transition, keep you busy, and extend your savings.
Volunteer with your local church or local community organizations. Look for groups with similar interests. You’ll not only derive an enormous amount of satisfaction from helping others, but you’ll meet like-minded folks and make new friends.
Try something new. Keep up any exercise routines—and it's never too late to start a new one. Check with your doctor, who will be happy to prescribe a fitness plan that’s suited to you.
Have you ever considered taking a class? How about writing a book or mentoring someone young? Expanding your knowledge or sharing your ideas can be quite fulfilling. We've heard of retirees writing books and personal autobiographies for their kids – talk about a legacy!
The most important thing you can do to make retirement enjoyable is to stay active and keep your mind and body sharp.
This research material has been prepared by Horsesmouth
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Among the complexities of financial planning, the most common conversations we have with clients are in the areas of retirement planning. Goals and dreams will certainly vary, but there is typically one common theme – a desire for financial security. More specifically, many ask the question: How much monthly income will I have during retirement?
Situations will vary from person to person. That is why we never employ a cookie-cutter approach with our clients. Each plan must have an individual element to it. But the plans are guided by principles.
Consider this—a top rated professional quarterback, his team and their coaches tailor a game plan for each opponent they face. However, the plans are guided by the basics—the fundamentals.
In our case, we look to the fundamentals that span the financial planning spectrum.
As you look forward to retirement, let's touch on these various fundamentals and what you may want to consider in approaching them.
1. Am I saving enough in my retirement plan or 401k? Is there a matching provision that your company provides? If there is, don't pass up free money! We can't stress this enough, because too many employees leave cash on the company table. At a minimum, pick up the low-hanging fruit.
2. Do I have enough in stocks? It's a question that is bantered around often by financial professionals. For some who experienced the market declines of 2001 and 2008, there is a nagging fear that we will get battered again. It's a fear that keeps us too close to the financial shoreline and delays or prevents us from reaching our financial goals because we may be too conservative.
These are concerns we certainly understand and why we preach diversification within asset classes (numerous stocks across industries and countries) and diversification among asset classes (stocks/bonds, short-term cash, etc.). Diversification helps to manage risk.
Historically, stocks have outperformed income-producing securities such as bonds or CDs over the long-term. But we also recognize a portfolio that is 100% invested in stocks, even if fully diversified may be too risky for most individuals. It's one reason we'll often "anchor" a portfolio with securities that are not as volatile.
You won't squeeze every last dime out of a bull market—but most don't need to. It's better to have confidence when an inevitable decline in stocks occurs.
So we'll rephrase the question. Is it perhaps time to rebalance your portfolio? Do you have too much in stocks? Given solid gains over the last year, perhaps you're a bit too heavy in stocks. For some, it may be time to take some risk off the table and get you back within your proper parameters. In other words, the percentage of stocks that work towards your personal goals and tolerance for risk.
3. When should I take Social Security? This is a question that comes up often. You can take Social Security when you turn 62. Or, you can delay it until you reach 70.
While many factors will influence the timing, it's usually best to avoid the temptation of dipping into Social Security too early.
Let's look at a simple example Fidelity recently provided. "Colleen is 62 and will reach her full retirement age (FRA) at 66 (note: if you are born 1960 or later, FRA is 67). If she starts taking benefits at 62, she will receive $1,200 per month. If she waits until her FRA to collect, she will receive 33% more, or $1,600 a month in Social Security. If she waits until 70, her benefits will increase another 32%, to $2,112 a month."
That's about 8% compounded annually. Moreover, delaying results in your spouse receiving a higher survivor's benefit.
4. Do you have a pension? How should you take it? Many prefer the peace of mind a monthly check will provide, one that comes on top of your Social Security and savings. Or, you may choose a lump sum payment and roll it into an IRA.
But consider this—if you were to pass away before your spouse, do you know what impact it would have on your pension? Typically, a spouse will continue to receive a monthly check at a reduced rate if you elect a survivors benefit. Or, you may choose a reduced initial payout that continues at that rate if you pass first. If you are being presented with various pension options and aren't sure how to proceed, let's talk.
5. What are you going to do once you've retired? When you wake up each morning and are no longer going to work, what will you do? As enticing as it sounds to enter retirement and have work abruptly end, many retirees find the transition easier by shifting from full-time to part-time work.
When you do end up making the full transition, what will your new venture look like? Your new life won't have the structure it had before. Consider putting together an outline of activities and a daily or weekly plan.
Consider volunteer opportunities, exercise, and if you have grandchildren, time with them is always well spent.
Remember, retirement isn't necessarily a time to slow down. It's a time to refocus and redirect your path and embrace new experiences. Take charge and don't let circumstances dictate your future. It's a key factor to a happy and fruitful retirement.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.