Ask Liz Weston

Get smart with your money

Retirement

Q&A: The thought of ending up old and alone can be terrifying. It doesn’t have to be that way

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Dear Liz: My wife and I have no children to take care of us in our old age, and I am scared to death regarding what will happen to the surviving spouse when one of us dies or we become incapacitated. We are 69 and 67 respectively and I think a lot of “boomers” are facing this issue. Any thoughts?

Answer: Consider getting a copy of the book “Essential Retirement Planning for Solo Agers: A Retirement and Aging Roadmap for Single and Childless Adults” by certified retirement coach Sara Zeff Geber. The NextAvenue site also has a wealth of information on how to prepare for aging and incapacity if you don’t have kids or don’t have ones you can rely on.

Geber provides far too much valuable information to summarize here, but one important strategy is to create a strong social network. Not only can this combat social isolation and loneliness — which are as dangerous to your health as smoking — but these folks can help look out for you and vice versa.

If your social circle is small or you’re out of the habit of making new friends, consider activities that put you in contact with others such as volunteering, taking classes or joining exercise groups. Also check out the Village to Village Network, a nonprofit that helps people age in place by encouraging groups of neighbors to help one another with rides, services and activities.

Living in close proximity to others and in areas with robust social services also can make a huge difference for solo agers. Another option, if you have the means, is to consider a continuing care retirement community that allows independent living to start, with assisted living and sometimes nursing home care as needed.

Every adult needs an advance healthcare directive, such as the free ones at Prepare for Your Care. These documents allow someone you trust to make health decisions if you should become incapacitated. It’s OK to name your spouse, but you also should have at least one and preferably two or more backups. Filling one out can help you think deeply about the people currently in your life you can trust with this task, and may encourage you to deepen those ranks if they’ve gotten a little thin.

Q&A: How to get started managing your retirement assets

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Dear Liz: I’m 72 and still employed with a salary of $80,000. My wife and I have a home with about $1.6 million in equity. We have almost $4 million in real estate investments, $200,000 in stocks, IRAs worth about $250,000 and about $175,000 in cash. Although it may seem like we have a lot, I really have no clue what to do at this time. I worry about the need for long-term care in future for me or my wife, or what would happen if I stopped working and lost that income. I don’t know how to manage the stocks and cash I do have or how to plan for the future. I tried contacting quite a few fee-only financial planners and they all told me they wouldn’t work with me unless I had $500,000 to give them to invest. Any suggestions on where I can get some real advice without giving someone complete control of money that I don’t have anyway?

Answer: You’re describing the “assets under management” model, in which advisors charge a percentage of the assets they manage for clients and often require the clients to have a minimum level of investable assets such as stocks, bonds and cash. This model evolved in part because many people balked at paying directly for comprehensive financial planning, which is time- and labor-intensive.

But this model often isn’t a great fit for people who are just starting out, who don’t want asset management or who, like you, have most of their money in less liquid investments.

Fortunately there are other ways fee-only planners get paid. Some, including those represented by the Garrett Planning Network, charge by the hour. Others, represented by the XY Planning Network and the Alliance of Comprehensive Planners, use the retainer model, in which clients pay monthly or quarterly fees. Interview a few planners from these organizations to find a good fit.

Q&A: What a bear market really means for your 401(k)

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Dear Liz: With the stock market tanking and no rebound likely in the near future, should I decrease the amount I am contributing toward my retirement? I earn a high-five-figure salary and currently contribute 25% of my pay to my company’s 401(k). The current balance is $450,000 with about two-thirds held in a 2030 target date fund and the remainder in a 2035 target date fund. I hope to retire at the end of 2030 at age 64. I have no other retirement accounts, but I am married and my husband collects Social Security and a pension.

It’s hard putting hundreds of dollars into my 401(k) every two weeks only to watch it seemingly disappear. Would it be smart to decrease the percentage I contribute by 5% to 7% and then use that extra money to pay down a $40,000 home equity line of credit? Or should I just stay the course, keep my percentage the same and ride out this bear market?

Answer: Since you’re within 10 years of retirement, it’s time to hire a fee-only financial planner to get specific, individualized advice about your situation. The decisions you make in the years immediately before and after retirement can have a huge impact on how long your money lasts. Mistakes made in this time frame can be difficult if not impossible to reverse.

Take, for example, this impulse to reduce your contribution rate. Your money isn’t disappearing; it’s being used to buy stocks at a discount. When the market rebounds, as it inevitably will, those shares you bought on sale will benefit from the growth.

A planner would tell you not to cut retirement contributions simply because stocks had entered a bear market. The logical response to a bear market is to invest more, not less.

That said, variable rate debt is getting more expensive thanks to Federal Reserve Bank rate hikes. Reducing your 401(k) contributions a few percentage points to pay off that debt faster could make sense, especially if you’re not giving up free money in the form of a company match and your reduced savings rate will still allow you to retire on time.

Again, a fee-only financial planner could help you weigh your options and recommend the best path.

Q&A: Consider taxes before retirement

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Dear Liz: I began converting two 401(k)s from previous employers to Roth IRAs. To lessen the huge tax hit, I decided to do the conversions over the course of seven years. Even with that, the tax hit is higher than I realized and too painful. Now that partial conversions have begun annually, am I required to complete the total conversion to 100%? Or can I stop midway and leave the remainder in the original accounts? Also, is there an age limit before which Roth conversions must be completed?

Answer: You don’t have to continue making conversions. (Before 2018, you could have even reversed conversions you already made, but that’s no longer possible.) There’s also no age limit for conversions, but the older you get, the less likely conversions are to make financial sense.

Conversions are a good bet if you expect to be in the same or a higher tax bracket in retirement. If you’re young and in a low tax bracket now, you can reasonably expect that to be the case.

As you approach retirement, though, the opposite may be true. Many people find their tax bracket drops once they retire. Why pay a big tax bill now if you can access the money at a lower tax rate later?

Then again, if you’re a good saver, you may discover you’ve accumulated so much that your tax bill will soar once you’re required to start taking minimum distributions at age 72. If that’s the case, then converting some of your retirement money might save you on taxes overall.

But you’ll want to discuss this with a tax pro or financial planner who can model how the conversions are likely to affect your overall finances, including any Medicare premiums, since those can increase with income.

Q&A: Reducing taxes in retirement

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Dear Liz: It appears required minimum distributions will force me to take an additional $3,500 per month from my retirement funds starting in four years at age 72. This added taxable draw will greatly impact my income tax liabilities as I’m now fully retired. Are there any strategies at this time to reduce the hit? As my current income tax rate is 12% federal and 9% state, perhaps I should convert some of these funds to Roth IRAs?

Answer: Partial Roth conversions when your tax bracket is low can be an excellent way to reduce future mandatory withdrawals and save on taxes in the long run.

Let’s say you’re married filing jointly and have $60,000 in taxable income. The 12% federal tax bracket ends at $83,550, so you could convert more than $23,000 of your retirement funds without increasing your marginal federal tax rate. Conversions can affect other aspects of your taxes and finances, so consult a tax pro before proceeding.

Another way to potentially lower your tax bill may be to temporarily suspend your Social Security payments and take more from your retirement funds. Because of the peculiar way that Social Security is taxed, people often face a sharp rise and then fall in marginal tax rates when they have other income, something known as the “tax torpedo.” A tax pro should be able to determine if delaying or suspending Social Security payments could help you reduce the effects.

Q&A: How to minimize taxes after you retire

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Roth conversionsDear Liz: In preparing my 2021 tax returns, I was dismayed to find out that my first required minimum distributions from my retirement account have pushed me into the highest tax bracket ever in my life and caused 85% of my modest Social Security benefit to become taxable. Since I retired five years ago at full retirement age, I never had to pay taxes on my Social Security as it was the majority of my income. In my remaining years, I wonder if there is anything I can do to avoid paying about $8,000 to $9,000 a year in income taxes!? Even a partial conversion from a 401(k) to a Roth IRA would surely increase my Medicare Part B premium, another financial problem. I am not rich, just average middle class, and my financial goals are to carefully plan my necessary expenses so that I will not run out of funds. I do not need to leave an inheritance to my two adult children.

Answer: You’re probably correct that Roth conversions aren’t the answer now, although they may have been helpful earlier. You also may have been able to reduce the overall taxes you pay by waiting until age 70 to claim Social Security and taking distributions from your 401(k) instead.

You can discuss your situation with a tax pro to see if there are any other opportunities for reducing your taxes. Mostly, though, your situation is a good illustration of why it’s so important to get professional financial planning and tax advice well before you retire. Even if you think you’re well informed, you’re inexperienced — you’ve never retired before, whereas experienced financial planners and tax pros have guided many people through this phase of their lives.

Some of the decisions you make around retirement are irreversible and can have a profound effect on how much money you can spend. Ideally, you’d meet with a fee-only, fiduciary financial planner five to 10 years in advance of your retirement date and have several check-ins to make sure your financial plan is sound before you give notice.