Retirement

Q&A: Planning for retirement in a volatile market

April 7, 2025 By Liz Weston

Dear Liz: I have a retirement account at work and a stock portfolio. Both are down significantly this year and I’m tired of losing money. What are the safest options now?

Answer: Before the “what” you need to think about the “why” and the “when.” Why are you investing in the first place? And when will you need this money?

If you’re investing for retirement, you may not need the money for years or decades. Even when you’re retired, you’ll likely need to keep a portion of your money in stocks if you want to keep ahead of inflation. The price for that inflation-beating power is suffering through occasional downturns.

You won’t suffer those downturns in “safer” investments such as U.S. Treasuries or FDIC-insured savings accounts, but you also won’t achieve the growth you likely need to meet your retirement goals. In fact, you may be losing money after inflation and taxes are factored in.

Also keep in mind that if you sell during downturns, you’ve locked in your losses. Any money that’s not invested won’t be able to participate in the inevitable rebounds after downturns. Plus, you may be generating a tax bill, since a stock that’s down for the year may still be worth more than when you bought it. (You don’t have to worry about taxes with most retirement accounts until you withdraw the money, but selling stocks in other accounts can generate capital gains.)

The exception to all this is if you have money in stocks that you’re likely to need within five years. If that’s the case, the money should be moved to investments that preserve principal so the cash will be there when you need it.

Q&A: You can’t spend it when you’re gone, but delaying Social Security payments makes sense

October 14, 2024 By Liz Weston

Dear Liz: I’m a single person with no children. I worked for one private employer for 36 years, retired from there at 54 and am now 57. My home is paid off. I receive a pension of $2,400. I’ve been working a nearly full-time job averaging $3,800 a month with 8% going into a 401(k) and 4% being matched. I have observed many fellow workers wait till 65 to collect Social Security and then die a few years later. I also volunteer at my local VFW and listen to people complain about the lack of money they have, especially the women, who unfortunately relied on their dead husbands. So would it be bad for me to start collecting my Social Security at 63?

I am a very healthy person and longevity is in the family.

Answer: Some people do die shortly after retiring. Most, though, live well past the “break-even” age, when the smaller checks they give up by delaying Social Security are more than made up for by the larger checks they receive by waiting.

And the ones who die early … well, they’re dead. They no longer care about Social Security checks. The ones who care intensely about how much they’re getting are those who survive and run through their savings. Perhaps some of the women at the VFW had husbands who started their retirement benefits early, thus stunting the survivors’ checks their wives are getting. A few years’ delay could have made a huge difference to these women, who may have to live for years or even decades on a too-small benefit.

That’s why it’s so important for the higher earner in a couple to delay starting Social Security as long as possible, preferably to age 70, when their benefit maxes out. That’s also good advice for single folks who haven’t been previously married and don’t have another person’s benefit to supplement their own.

Plus, starting Social Security before your full retirement age of 67 means you’re subject to the earnings test. That test reduces your check by $1 for every $2 you make over a certain amount, which in 2024 is $22,320.

Your good health and family longevity don’t guarantee a long life, but they certainly make it more likely. Maximizing your Social Security benefit is a powerful way to ensure you don’t run short of money in your old age.

Q&A: Trust in the flexibility of living trusts

September 30, 2024 By Liz Weston

Dear Liz: Is naming a beneficiary for a nonretirement, “payable on death” account as effective as putting the account in a living trust? It seems easier than doing all the paperwork each time I open an account, but is it a good idea?

Answer: Both living trusts and payable on death accounts avoid probate, the court process that otherwise typically follows death. But living trusts offer more flexibility and control.

Let’s say you want to benefit two relatives equally, and are leaving a savings account to one and a brokerage account to the other. The balances of the two accounts may be roughly equal today, but could be dramatically different by the time you die. A trust allows you to divvy up your assets regardless of where the money is kept.

Trusts also allow you to put restrictions on how money is spent, which can be important if your heir is a minor child, a spendthrift or someone reliant on public benefits. Payable on death accounts don’t allow restrictions.

Should you become incapacitated, the successor trustee of your living trust could access trust assets to pay for your care. Beneficiaries of payable-on-death accounts can’t get to the funds until you die, so a court procedure may be necessary to provide for you.

After you die, the person settling your estate probably will need money to cover your burial and funeral expenses, pay your bills and final taxes and perhaps get your house ready for sale. If the needed funds have already been distributed to beneficiaries of payable on death accounts, this person might be faced with asking for funds to be returned or paying out of their own pocket, says Jennifer Sawday, an estate planning attorney in Long Beach.

There’s also the piecemeal nature of payable on death accounts. Keeping track of and updating beneficiaries can be a chore. If a beneficiary dies before you, that can create administrative problems as well.

Payable on death accounts can be a low-cost solution for people who don’t have much money and who can’t afford to pay for a trust. If you already have a trust, though, it makes sense to use it.

You typically don’t have to update your living trust every time you open a new account, by the way. Discuss the issue with your estate planning attorney, but typically all that’s needed is to add the account to the schedule of assets that’s usually at the end of your trust document.

Q&A: A retirement catch-22 and health savings accounts

September 23, 2024 By Liz Weston

Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?

Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.

As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.

The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.

Q&A: Health savings accounts offer big tax benefits. The trick is knowing when to use the funds

September 16, 2024 By Liz Weston

Dear Liz: My retirement account covers all my expenses, including medical. I also have $60,000 in a health savings account that is invested in a mutual fund. I’m struggling with how to use that. I could use it for all current medical costs, or just for unexpected big ones. Or I could keep the HSA as backup in hopes of leaving it to my heirs. All options seem to have advantages, and I’m stuck. Your thoughts?

Answer: HSAs offer a rare triple tax benefit: Contributions are deductible, the money grows tax deferred and withdrawals can be tax free if there are qualifying medical expenses.

If anyone other than your spouse inherits the HSA, however, it basically stops being an HSA. The account becomes taxable to the beneficiary in the year you die, which means the HSA loses one of its three tax breaks.

Inheriting an account that’s taxable is probably better than no inheritance at all. But generally it’s better to use the HSA yourself or leave it to a spouse and designate other money for heirs.

Trying to figure out the optimum rate of spending this money is obviously tricky. The longer you leave it alone, the more it can grow. But the longer you live without spending it, the greater the risk you’ll die without taking advantage of those tax-free withdrawals.

If you’re reluctant to tap the HSA, give yourself the option of “deathbed drawdown.” By keeping good records, you may be able to empty the account at the last minute and avoid taxes.

As you may know, you don’t have to incur a qualified medical expense in the same year you take an HSA withdrawal for the distribution to be tax free. As long as the expense is incurred after the HSA is established and before you die, it can justify a tax-free withdrawal, as long as the expense wasn’t reimbursed — paid by insurance or used for a previous HSA withdrawal. So keep careful records of all the medical expenses that you pay out of pocket. If you get a bad diagnosis or your health starts to deteriorate, you can use those receipts to justify a tax-free withdrawal.