Retirement Archives - Page 14 of 34

May 29, 2017 By Liz Weston

Q&A: Money in the bank isn’t safe from inflation

Dear Liz: I am 68 and not in very good health due to heart disease. I’m not sure what do with my savings of over $1 million, which sits in online bank accounts, earning 1.25% to 1.35% in 18-month certificates of deposit. (No account contains more than $250,000 to remain under the FDIC insurance limits.) The money will eventually go to my daughter, though I could use it for my retirement. I don’t have the appetite for market swings. What should I do with my money?

Answer: Your money currently is safe from just about everything except inflation. If you want to keep your nest egg away from market swings, you’ll have to accept that its buying power will shrink. There is no investment that can keep your principal safe while still offering inflation-beating growth.

If you do want a shot at some growth, you could keep most of your savings in cash but also invest a portion in stocks — preferably using low-cost index mutual funds or ultra-low-cost exchange-traded funds.

Before you know how to invest, though, you’ll need to think about your goals for this money. A fee-only financial planner could help you discuss the possibilities and come up with a plan. You can find fee-only planners who charge by the hour through the Garrett Planning Network, www.garrettplanningnetwork.com.

Filed Under: Financial Advisors, Investing, Q&A, Retirement Tagged With: investment, q&a, Retirement, Savings

May 22, 2017 By Liz Weston

Q&A: Health savings accounts can supercharge retirement funds, but not for this guy

Dear Liz: Prior to retiring in 2015, I contributed to a health savings account. At the time my spouse and I were enrolled in my employer-provided high deductible health insurance plan. After I retired, I enrolled in an HMO plan my employer provided, which is not high deductible, and my wife enrolled in a Medicare supplemental plan. Can I make a one-time IRA rollover of $8,750 into the HSA? If not the $8,750, can I make any one-time contribution to the account while I am enrolled in the Kaiser health insurance plan? I have only $53 in the HSA. Are there any reasons to keep the account open or should I close it?

Answer: You did have the option, while you were enrolled in the high-deductible plan, to make a one-time rollover from your IRA to your HSA. The amount you could roll over is capped to the HSA contribution limit. The limit in 2015 would have been $7,650 ($6,650 for a family, plus a catch-up contribution of $1,000 for those 55 and over). You would have had to subtract from the rollover any amounts already contributed to the account that year.

Since you no longer have the high-deductible plan, though, rollovers and new contributions aren’t allowed. There’s no reason to keep open a plan with just $53 in it because most HSA providers charge monthly fees that will quickly eat up such a small balance. (Your employer may have paid these fees while you were working and covered by the high-deductible plan.)

That’s too bad, because a properly funded HSA can be an excellent way to save for medical expenses in retirement. HSAs offer a rare triple tax break: Contributions are pre-tax, the money can grow tax deferred and withdrawals are tax free when used for qualifying medical expenses. HSAs are meant to cover the considerable out-of-pocket expenses that come with high-deductible health insurance plans, but the money in the account can be rolled over from year to year and even invested so it can grow.

Filed Under: Insurance, Q&A, Retirement Tagged With: health insurance, health savings account, q&a, Retirement

May 1, 2017 By Liz Weston

Q&A: The confusing balancing act between government pensions and Social Security benefits

Dear Liz: I am a public school teacher and plan to retire with 25 years of service. I had previously worked and paid into Social Security for about 20 years. My spouse has paid into Social Security for over 30 years. Will I be penalized because I have not paid Social Security taxes while I’ve been teaching? Should my wife die before me, will I get survivor benefits, or will the windfall elimination act take that away? It’s so confusing!

Answer: It is confusing, but you should understand that the rules about windfall elimination (along with a related provision, the government pension offset) are not designed to take away from you a benefit that others get. Rather, the rules are set up so that people who get government pensions — which are typically more generous than Social Security — don’t wind up with significantly more money from Social Security than those who paid into the system their entire working lives.

Here’s how that can happen. Social Security benefits are progressive, which means they’re designed to replace a higher percentage of a lower-earner’s income than that of a higher earner. If you don’t pay into the system for many years — because you’re in a job that provides a government pension instead — your annual earnings for Social Security would be reported as zeros in those years. Social Security is based on your 35 highest-earning years, so all those zeros would make it look like you earned a lower (often much lower) lifetime income than you actually did. Without any adjustments, you would wind up with a bigger check from Social Security than someone who earned the same income in the private sector and paid much more in Social Security taxes. It was that inequity that caused Congress to create the windfall elimination provision several decades ago.

People who earn government pensions also could wind up with significantly more money when a spouse dies. If a couple receives two Social Security checks, the survivor gets the larger of the two when a spouse dies. The household doesn’t continue to receive both checks. Without the government pension offset, someone like you would get both a pension and a full survivor’s check. Again, that could leave you significantly better off than someone who had paid more into the system.

Filed Under: Q&A, Retirement, Social Security Tagged With: Pension, q&a, Retirement, Social Security

April 24, 2017 By Liz Weston

Q&A: Social Security survivor benefits

Dear Liz: I have been with my significant other for over 30 years. We have an adult son. My significant other has a much larger Social Security benefit than I will have when it’s time for me to retire. I understand that if we were to marry and something happened to him, I would receive his benefit. But the law on Social Security is confusing. It says you have to be married several years to collect your spouse’s benefit unless you have a child. If we were married soon, would I be eligible for his benefits if something happened to him or would we have to be married for many years?

Answer: Social Security benefits can be confusing, but you don’t have to be married for many years to receive benefits.

To qualify for survivor benefits, you typically must have been married for at least nine months. To qualify for spousal benefits, you generally have to be married a year. If you have a natural child together and that child is a minor, the one-year requirement for spousal benefits is waived.

Survivor benefits are what you get when a higher-earning spouse dies. The benefit is 100% of what the deceased spouse received (or earned, if he hasn’t started benefits), but the amount is reduced if you as the surviving spouse begin benefits before your own full retirement age. The current full retirement age is 66 and will rise to 67 for people born in 1960 and later.

Spousal benefits are what you can receive while a spouse is still alive. This benefit is typically equal to half that spouse’s benefit and is reduced to reflect early starts.

You’ll need a longer marriage to get benefits should you divorce. The marriage must have lasted 10 years, and you must not be currently remarried to receive divorced spousal benefits based on your ex’s work record. For divorced survivor benefits, the marriage also must have lasted 10 years but you’re allowed to remarry at age 60 or later.

Filed Under: Q&A, Retirement, Social Security Tagged With: q&a, Retirement, social security spousal benefits

April 3, 2017 By Liz Weston

4 tax hacks you might not know

You know to contribute enough to your 401(k) to get the full company match. Maybe you’ve even adjusted your withholding so you’re not giving Uncle Sam an interest-free loan.

Yet you may feel the need to do even more, especially if you’re making the last big push toward retirement. These hacks allow you to shelter more money from taxes now and when you retire. In my latest for the Associated Press, the 4 crucial tax hacks you might not know.

Filed Under: Liz's Blog, Retirement, Taxes Tagged With: Retirement, tax, tax hacks, Taxes

March 13, 2017 By Liz Weston

Q&A: Investing during retirement

Dear Liz: I’ll be retiring shortly. After 30 years of public service, I’m fortunate to have a generous pension. I’ll be paying off all my debts upon retirement, including my mortgage. I have a deferred compensation account that I will leave untouched until I’m required to take disbursements at 70 1/2 (15 years from now). Until then I will have disposable income but no significant tax deductions. Short of investing on my own in a brokerage account (and perhaps incurring capital gains taxes), are there any other investment vehicles that perhaps would be tax friendlier?

Answer: A variable annuity could provide tax deferral, but any gains you take out would be subject to income tax rates, which are typically higher than capital gains rates. (Annuities held within IRAs are subject to required minimum distributions starting after age 70 1/2. Those held outside of retirement funds will be annuitized, or paid out, starting at the date specified in the annuity contract.) Also, annuities often have high fees, so you’d need to shop carefully and understand how the surrender charges work.

Many advisors would recommend investing on your own instead and holding those investments at least a year to qualify for lower capital gains rates. This approach is particularly good for any funds you may want to leave your heirs, since assets in a brokerage account would get a “step up” in tax basis that could eliminate capital gains taxes for those heirs. Annuities don’t receive that step-up in basis.

You also shouldn’t assume that waiting to take required minimum distributions is the most tax-effective strategy. The typical advice is to put off tapping retirement funds as long as possible, but some retirees find their required minimum distributions push them into higher tax brackets. You may be better off taking distributions earlier — just enough to “fill out” your current tax bracket, rather than pushing you into a higher one.

Filed Under: Investing, Q&A, Retirement Tagged With: Investing, q&a, Retirement

February 6, 2017 By Liz Weston

Q&A: Options for a pension payout

Dear Liz: I am a single, 52-year-old female. I just received some information about my pension from a previous employer that gives me the option to take a lump sum of $18,701 that I can roll it into an eligible retirement plan. Or I could also take it now and be subject to penalty and taxes. Or I could defer taking payment until I’m 65, when I would start getting a monthly estimated check worth $218.68. The time is limited to make my decision. I don’t need income now, so I am interested in taking the rollover and severing ties with them. But I could wait until I am 65 and take the monthly payments. Which deal is better financially?

Answer: Theoretically you can do better with the lump sum — assuming you roll it over into an IRA or other retirement plan, invest at least half of it in stocks for long-term growth and keep your hands off the money until you’re ready to retire. If you would be tempted to do something stupid like cash out, then you’re better off with the annuity. The annuity check also is for life, while the fate of the lump sum depends on market returns.

Filed Under: Retirement Tagged With: payout, Pension, q&a

December 19, 2016 By Liz Weston

Q&A: How much risk is too much in retirement?

Dear Liz: If you have all your required obligations covered during retirement, is having 70% of your portfolio in equities too risky?

Answer: Probably not, but a lot depends on your stomach.

Retirees typically need a hefty dollop of stocks to preserve their purchasing power over a long retirement, with many planners recommending a 40% to 60% allocation in early retirement. A heftier allocation isn’t unreasonable if all of your basic expenses are covered by guaranteed income, such as Social Security, pensions and annuities. Ideally, those pensions and annuities would have cost-of-living adjustments, especially if they’re meant to pay expenses that rise with inflation.

Historically, retirees have been told they need to reduce their equity exposure as they age, but there’s some evidence that the opposite is true. Research by financial planners Wade Pfau and Michael Kitces found that increasing your stock holdings in retirement, where the allocation starts out more conservative and gets more aggressive, may reduce the chances of running short of money. Their paper, “Reducing Retirement Risk with a Rising Equity Glide-Path,” was published in the Journal for Financial Planning and is available online for free.

That said, you don’t want your investments to give you ulcers. If you couldn’t withstand a big downturn — one that cuts your portfolio in half, say — then you may want to cushion your retirement funds with less risky alternatives.

Filed Under: Investing, Q&A, Retirement Tagged With: Investing, q&a, Retirement

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