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Dear Liz: I’m in my late 60s and plan to retire in about two years. I have a pension that will pay close to my current take-home income. I also have about $500,000 in annuities and IRAs. These plus Social Security make retirement look good. But right now finances are tight. Should I continue to put $1,300 a month into my retirement plan or use that money for expenses and travel now — while we’re still relatively young?

Answer: You appear to be in the fortunate position of being able to try a “practice retirement.”

The term was created by mutual fund company T. Rowe Price after it discovered that people who have saved substantial amounts for retirement by age 60 may not have to save much more to have a comfortable retirement. Just putting off the day when they take Social Security and tap their retirement funds may be enough. That’s because Social Security benefits grow about 7% to 8% a year, plus inflation adjustments, for each year you delay starting your checks. Not starting retirement plan distributions also allows your nest egg to grow, and the delay shortens the length of retirement you’ll need to cover.

T. Rowe Price found that people who have saved four to eight times their annual income by their early 60s may be able to crank back on their retirement contributions. Instead, they could use the money to “practice retirement” by taking some trips and doing some of the other things they had planned for golden years while continuing to work.

The company recommends practice retirees continue to contribute enough to employer retirement plans to get any available match (it’s free money, after all), while delaying the start of Social Security to age 70 if possible.

T. Rowe Price researchers assumed that its practice retirees would live only on their savings and Social Security. The fact that you have such a generous pension means you may not need as much saved as they recommend. In any case, if this idea appeals to you, run it past a fee-only financial planner who can review your situation and ensure the plan is viable for you.

Categories : Q&A, Retirement
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Divorced spousal benefits cause confusion

Oct 15, 2013 | | Comments Comments Off

Dear Liz: You’ve been writing about Social Security and how people can qualify for benefits based on a spouse’s or ex-spouse’s earnings record. Please add that given the parameters you already cite, a divorced spouse may remarry after the age of 60 and collect Social Security from the ex. However, if a person is collecting a public pension, any Social Security, whether one’s own or that of the former spouse, will be offset, possibly to the extent that one cannot collect anything from that former spouse. It is important to have all of the information.

Answer: It is indeed — but you’re incorrect about the availability of divorced spouse benefits after remarriage.

Only spouses or ex-spouses who are receiving survivors’ benefits may remarry after 60 without worrying about losing their checks. If the primary earner is still alive, the rules are different. Here’s what Social Security has to say on its website: “Generally, we cannot pay benefits if the divorced spouse remarries someone other than the former spouse, unless the latter marriage ends (whether by death, divorce or annulment), or the marriage is to a person entitled to certain types of Social Security auxiliary or survivor’s benefits.”

People who are eligible for pensions from the government or from a job not covered by Social Security should learn about the offsets that affect their benefit. The Social Security website has information about these offsets at http://www.ssa.gov/gpo-wep/. Information also is available by calling 1-800-772-1213.

Categories : Q&A, Retirement
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Dragging debt? You’re not ready to retire

Oct 07, 2013 | | Comments Comments Off

Dear Liz: I just turned 65 and had planned to wait until 70 to retire. I love the actual work I do but my boss is very challenging. I’m starting to question whether working here another five years is really how I want to spend my days at this point in my life. I have about $175,000 in my 401(k), about $35,000 in an IRA and $1,500 in a single stock that’s not in a retirement account. I have two years left on my primary mortgage and a $17,000 balance on my second mortgage, plus I owe $3,500 on a line of credit and $2,000 on credit cards. I was starting to take money out of my IRA to pay down my mortgage early but the taxes at the end of the year were so much that I stopped that distribution. (I still owe $500 to the state tax agency.) I have also had trouble keeping up with my property taxes and owe about $3,500. I live in a 900-square-foot home which I love and live a fairly simple life. I’m wondering about cashing in the stock and some of my IRA to pay down my debt, then using my 401(k) for living expenses until I actually draw from Social Security. As I’m typing this out I’m thinking, “Are you crazy?” I’d love your thoughts.

Answer: One definition of insanity is doing the same thing over and over again, expecting different results.

Tapping your IRA incurred a big tax bill that you’ve yet to fully repay. You also lost all the future tax-deferred gains that money could have earned. Why would you consider doing that again?

You may long for retirement, but it’s pretty clear you aren’t ready. You don’t have a lot of savings, given how long retirement can last, and you’re dragging a lot of debt. The type of debt you have — second mortgages, credit lines, credit cards — is an indicator you’re regularly spending beyond your means. If you can’t live within your income now, you’ll have a terrible time when it drops in retirement.

So instead of bailing on work, take retirement for a test drive instead. Figure out how much you’d get from Social Security at your full retirement age next year (you can get an estimate at http://www.ssa.gov.) Add $700 a month to that figure, since that’s what you could withdraw from your current retirement account balances without too great a risk of running out of money. Once you figure out how to live on that amount, you can put the rest of your income toward paying off debt (starting with your overdue taxes), building up your retirement accounts and creating an emergency fund. It’s OK to cash out the stock to pay off debt, since it’s not in a retirement account, but make sure you set aside enough of the proceeds to cover the resulting tax bill.

Don’t forget to budget for medical expenses, including Medicare premiums and out-of-pocket costs. Fidelity estimates a typical couple retiring in 2013 should have $220,000 to pay out-of-pocket medical expenses that aren’t covered by Medicare. That doesn’t include long-term-care costs. Your costs may be lower, but you’ll want to budget conservatively. Spend some time with the Nolo Press book “Social Security, Medicare & Government Pensions: Get the Most out of Your Retirement & Medical Benefits.”

You’ll be ready to retire when you’re debt-free and able to live on your expected income without leaning on credit.

Categories : Q&A, Retirement
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Dear Liz: All my friends have said I should get a reverse mortgage to be able to live more comfortably and still stay in my house. I would think our greedy banking system would give you only 50% of value and have a high interest rate that would chew up the remaining value. What is your advice on the merits of this option?

Answer: A reverse mortgage program that lets you tap too much of your home equity wouldn’t be in business very long.

Reverse mortgages allow people 62 and older to borrow against the value of their homes without having to make payments on the debt. Instead, the amount they owe typically increases over time because interest is charged on the loan, and that adds up. Lenders get paid back when the owner moves out, sells the house or dies. If the house is worth less than the debt, the lender (or more often the insurer) suffers a loss.

Too-generous lending standards have already caused trouble for previous iterations of the Home Equity Conversion Mortgage, the federally insured option most often used by borrowers. Too many borrowers grabbed big lump sums up front, straining the program’s reserves and leaving the borrowers with few options if they ran into hard times later. Defaults rose as borrowers failed to pay their property taxes and insurance premiums as required.

The Federal Housing Administration, which insures HECMs, has tightened the rules so that borrowers can access less of their equity upfront. Fees also have increased.

How much you can borrow using a HECM depends on your age, the home’s value and current interest rates. Interest rates for lump-sum withdrawals are fixed, while those for lines of credit you can tap over time are variable.

You’ll certainly get a better (or at least less expensive) deal if you borrow 60% or less of your home’s value. The mortgage insurance premium for loans below that level is 0.5% of the home’s appraised worth under the new federal government rules that go into effect Monday. Those borrowing more than 60% face a premium equal to 2.5% of the home’s value. That’s in addition to a 1.25% annual mortgage insurance premium.

There’s no getting around the fact that these are expensive and complex loans. They’re usually not a great choice for people who have other assets to tap. They also can prove a land mine for people who drain their home equity too early and wind up with no resources later in life. On the other hand, they can provide a more comfortable retirement for those who would otherwise be strapped for cash, particularly if the borrowers opt for a steady stream of monthly payments rather than the upfront lump sum.

If you are considering a reverse mortgage, you should talk to a fee-only financial planner who is familiar with the program and who can review your other alternatives.

Categories : Q&A, Real Estate, Retirement
Comments (2)

64 and broke: what now?

Sep 18, 2013 | | Comments Comments Off

Dear Liz: I’m 64 and lost my last full-time job a year ago. I have since exhausted my unemployment benefits and been on and off food stamps. (I’m waiting to get back on them right now because my temporary-to-permanent job didn’t become permanent after all.) Fortunately I almost never need to go to a doctor, or if I do, I don’t know that I do and can’t afford to find out. I have about $3,000 in emergency savings, and my IRA is about $15,000. I was fortunate enough to sell a home in Hawaii 20 years ago, but I managed to run through all the money. My income when I was working full time was only $26,000 a year. I don’t know what to do, and I don’t know why I listen to all these financial programs that seem to target twentysomethings or people with retirement savings and comfortable incomes. They do not speak to my situation. My priority isn’t saving for retirement. It’s paying the bills.

Answer: Financial programs are, at least to some extent, concerned about the entertainment value of their programming. They often focus on people who fit their audience demographics and whose problems have satisfying solutions. That’s why the people featured tend to be younger or to have resources, because those are the ones who typically can recover from past mistakes and get their finances on track.

When people have no income, there’s not much financial advice to give. And when they’re in their 60s and have virtually no retirement savings, there’s no way to “catch up.”

That doesn’t mean your situation is hopeless, but it does mean you’ll have to hustle to stay afloat.

Finding a full-time job at this point is a long shot, so part-time work and Social Security probably will provide your income in the coming years. Social Security might replace as much as 40% of your previous low income (the replacement rate is lower for higher earners), but that still leaves you with a substantial gap to fill.

Ideally, you would hold out until age 66 before applying so you can get your full Social Security benefit. You’re eligible for benefits now, but your checks will be permanently reduced if you start early and your earnings could potentially reduce your check further under the earnings test (which you can learn more about at http://www.ssa.gov/oact/cola/rtea.html). The benefits that are withheld aren’t lost, because at full retirement age your monthly check would be increased to account for the withholdings. You’ll have to balance whether those disadvantages outweigh the upside of starting a guaranteed income now.

By the way, if you’ve ever been married and the marriage lasted at least 10 years, you may qualify for spousal or survivor benefits (even if the marriage ended in divorce) that could exceed the benefit you’ve earned on your own record. You can discuss your options by calling the Social Security Administration at (800) 772-1213.

You’ll need to look for ways to reduce your expenses so that you can get by on whatever income you receive. If you qualify, the federal Section 8 program could help pay for housing (start at Benefits.gov to see what programs are available). Some of the other ways to reduce housing costs — the biggest expense for most people — include getting a roommate, becoming a live-in caregiver for an older person or a family with kids, or becoming an apartment manager or the caretaker of a property.

At 65, you’ll qualify for Medicare. Although this government health insurance program for older Americans doesn’t cover everything, you will have access to healthcare again.

Categories : Q&A, Retirement
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Spousal vs. survivor benefits: the key differences

Sep 03, 2013 | | Comments Comments Off

Dear Liz: I am 66 years old. When I was 60, my husband of 42 years died. He was a banker with more than 40 years of work history at a good income level. I remarried a year later. When I was 62, I was downsized and took early Social Security benefits based on my first husband’s earnings record. This amounts to about $2,000 a month. It would have been about $2,500 at full retirement age (66) and about $3,000 at age 70. I was not advised about survivor’s benefits at all or about any variance of survivor’s benefits versus Social Security based on my deceased husband’s earnings. Do you think I would have gotten a bigger benefit amount if I had taken survivor’s benefits at age 62?

Answer: No, because survivor’s benefits are what you’re getting.

Both spousal benefits and survivor’s benefits are based on the earnings record of the other person in a couple (whom we’ll call the “primary earner”). The maximum spousal check is 50% of the primary worker’s benefit. As with other Social Security benefits, the amount you get is permanently discounted if you apply before your own full retirement age.

Spousal benefits are available to current and former spouses, although former spouses must have been married for at least 10 years to the primary earner and must be currently single. (In other words, you can’t have remarried, unless that marriage has ended as well.)

Survivor’s benefits, on the other hand, can be up to 100% of the primary worker’s benefit. Survivor’s benefits based on a deceased spouse’s earnings record are not available to those who remarry before age 60, but can be claimed by those who remarry after that point.

Since the biggest Social Security benefit is around $2,500 a month and you’ve remarried, it’s clear that what you’re getting is the survivor’s benefit, discounted because you applied early.

Categories : Q&A, Retirement
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Dear Liz: I inherited my brother’s Roth IRA about three years ago. I find it hard to get any information about non-spousal inherited Roths. Can you tell me more about this type of Roth IRA?

Answer: It may be unfortunate that you didn’t ask sooner.

When a spouse inherits a Roth IRA, he can roll it into his own Roth IRA, and it’s as if he or she was the owner of the inherited funds all along. There’s no minimum distribution requirement, so the money can continue to grow.

If you’re not a spouse, you have the option of transferring it into an account titled as an inherited Roth IRA. You also have the option of taking distributions over your lifetime — which means keeping the bulk of the money growing for you tax-free — but to do that you must begin taking required minimum distributions by Dec. 31 of the year after the year in which the owner died.

If you didn’t start these required distributions on time, you have to withdraw all the assets in the account by Dec. 31 of the fifth year after the year your brother died, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. You won’t have to pay taxes on this withdrawal, but it would have been better to let the money continue to grow tax-free in the account.

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Dear Liz: I am 65 and recently visited our local Social Security office to apply for spousal benefits. (My wife, who is also 65, applied for her own benefit last year.) I wanted to get the spousal benefit, even if the amount is discounted, so I can let my own Social Security benefit grow. The Social Security office manager advised us that I cannot claim spousal benefits until my full retirement age. You said in a recent column that I can. Who is correct?

Answer: You can apply for spousal benefits before your own full retirement age. But doing so means you’re giving up the option of switching later to your own benefit. The office manager gave you correct information, based on your goal. If you want the choice of letting your own benefit grow, you must wait until your full retirement age (66) to apply for spousal benefits.

Categories : Q&A, Retirement
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Dear Liz: My daughter, 63, has been recently amicably divorced and receives a small alimony ($1,000). Her ex-husband of 30 years is a doctor who just retired. Is she entitled to part of his Social Security? Neither has remarried.

Answer: Because they were married for more than 10 years, your daughter should qualify for spousal benefits, which can equal up to half of her ex’s benefit at his full retirement age. That amount would be permanently discounted if she applies before her own full retirement age (which is 66).

The ex’s marital status doesn’t matter, although your daughter’s does. If she remarries, she will lose access to spousal benefits as a divorced spouse. This is just one of the ways that spousal benefits differ from survivor’s benefits, which are based on 100% of the earner’s benefit and which widows and widowers can receive even if they remarry after age 60.

Categories : Q&A, Retirement
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