Ask Liz Weston

Get smart with your money

Retirement

Q&A: They paid off the mortgage rather than save for retirement. Now what?

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Dear Liz: My wife and I aggressively paid down our mortgage and now have it paid off, but we don’t have much saved for retirement. I make about $90,000 a year and will receive a teacher’s pension that will replace between 30% and 60% of that (depending on what option we choose) when I retire in about 10 years. It probably won’t be enough to live on. We will receive no Social Security benefits. We have no other debts, and we would like to make up for lost time as best we can on retirement preparation. What is your best advice for people like us who have diligently paid off their mortgage but have not diligently put money away for retirement?

Answer: The older you get, the harder it is to make up for lost time with retirement savings. You probably can’t do it if retirement is just a few years away.

This is not to make you feel bad, but to serve as a warning for others tempted to prioritize paying off a mortgage over saving for retirement.

If you’re in your 50s, you’d typically need to save nearly half your income to equal what you could have accumulated had you put aside just 10% of your pay starting in your 20s. The miracle of compounding means even small contributions have decades to grow into considerable sums. Without the benefit of time, your contributions can’t grow as much so you have to put aside more.

But you can certainly save aggressively and consider a few alternatives for your later years.

Once you hit 50, you can benefit from the ability to make “catch up” contributions. For example, if you have a workplace retirement plan such as a 403(b), you can contribute as much as $26,000 — the $19,500 regular limit plus a $6,500 additional contribution for those 50 and older.

You and your spouse also can contribute as much as $7,000 each to an IRA; whether those contributions are deductible depends on your income and whether you’re covered by a workplace plan. If you’re covered, your ability to deduct your contribution phases out with a modified adjusted gross income of $105,000 to $125,000 for married couples filing jointly. If your spouse isn’t covered by a workplace plan but you are, her ability to deduct her contribution phases out with a modified adjusted gross income of $198,000 to $208,000. (All figures are for 2021.)

If you can’t deduct the contribution, consider putting the money into a Roth IRA instead because withdrawals from a Roth are tax free in retirement. The ability to contribute to a Roth IRA phases out with modified adjusted gross incomes between $198,000 and $208,000 for married couples filing jointly.

If possible, a part-time job in retirement could be extremely helpful in making ends meet. So could downsizing or tapping your home equity with a reverse mortgage. A fee-only financial planner could help you sort through your options, as well as help you figure out the best way to take your pension when the time comes.

Q&A: Retirement saving after layoff

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Dear Liz: My husband and I are both in our early 50s and have been contributing the full amount to each of our 401(k) plans, plus the catch-up amounts since we turned 50. I was laid off in February 2020 and had only contributed $3,000. I had assumed I’d get a new job quickly, but as of now, I still have not. Fortunately, my husband still has a good job and has been able to make his full contribution plus the catch-up. Is there any way we can increase my contribution to retirement savings at this point? Can I fund an IRA if I already contributed to a 401(k)? We don’t want to lose any more ground.

Answer: The fact that you were both contributing the maximum amount — $26,000 each, or $52,000 total — is impressive. That, plus the fact that you’re still able to contribute given your unemployment, indicates your household income could affect your ability to deduct your IRA contributions.

You can still make the contributions, however. Anyone with earned income can contribute as much as $6,000 to an IRA (or $7,000 if you’re 50 or older) even if they’re covered by a workplace plan such as a 401(k). There used to be an age limit for IRA contributions, but that’s been eliminated. You have to earn at least as much as you contribute in the form of wages, salary or self-employment income. If you only earned $4,000 in 2020, for example, that’s the maximum you could contribute to an IRA.

Unemployment insurance doesn’t count as compensation, so you can’t use that — or interest, dividends, pension payments and other such nonwage income — to determine your contributions.

If you were covered by a workplace plan at any point in 2020, the ability to deduct your contribution phases out for modified adjusted gross incomes between $104,000 and $124,000 for married couples filing jointly for 2020. (The phaseout range rises to $105,000 to $125,000 for 2021.)

If you can’t deduct your contribution, consider putting the money instead into a Roth IRA if possible. You don’t get an upfront tax deduction, but withdrawals are tax-free in retirement. The ability to contribute to a Roth IRA starts to phase out with a modified gross income of $196,000 in 2020 (and $198,000 in 2021).

If your income is too high and you don’t already have a large IRA, you could use the “back door Roth” maneuver by contributing to a regular IRA and then converting it to a Roth, since there are no income limits on conversions. (You have to pay taxes on any pretax money that’s converted this way, which is why this might not be an ideal approach for those with big IRAs.)

You also can open up a taxable brokerage account and invest an unlimited amount of money. Again, there’s no upfront deduction, but investments held for at least a year can qualify for favorable capital gains tax rates.

Investing in accounts with different tax treatments is a good idea in general, since it can help you better control your tax bill in retirement.

Q&A: Survivor vs. retirement benefits

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Dear Liz: I was 21 and my husband was 69 when we got married. He died in 1992 after 13 years of marriage. Our young son and I received survivor benefits for years. I got remarried in 2000 and divorced in 2008. When I reach my full retirement age of 66 years and 8 months, could I still claim survivor benefits from my first husband?

Answer: Yes, although you may want to start them sooner.

If your second marriage had lasted, you wouldn’t have been eligible for survivor benefits based on your first husband’s earnings record. Widows and widowers who remarry before age 60 aren’t eligible for survivor benefits.

Since that marriage ended, though, you were eligible to begin benefits at age 60. You are also free to remarry at 60 or later without losing those benefits.

Starting before your full retirement age for survivor benefits, however, means your check would be reduced and also subject to the earnings test, which reduces your benefit by $1 for every $2 you earn over a certain amount ($18,960 in 2021).

As mentioned in a previous column, your full retirement age for survivor benefits is different from your full retirement age for retirement benefits. Since you were born in 1958, your full retirement age for survivor benefits is four months earlier, or 66 years and 4 months.

In most cases, starting a Social Security benefit early locks you into a smaller check permanently. With survivor benefits, though, you also have the option of switching to your own retirement benefit later, if it’s larger. The ability to switch benefits is severely limited with Social Security, but survivor benefits remain the exception.

Being eligible for survivor benefits complicates claiming decisions, so consider using a more sophisticated claiming calculator such as Maximize My Social Security or Social Security Solutions to determine how best to file.

Q&A: Retirees and mobile home parks

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Dear Liz: I’ve been following the discussion of the reader who was 70 and trying to decide between renting in a senior living facility versus buying a second-floor condo with no elevator. There is a third choice for people who are older and cannot stay in their present residence. We moved to a senior citizen manufactured-home park. It has a clubhouse, and before the COVID epidemic the park had all kinds of activities. It is a great place for seniors.

Answer: That’s a good suggestion and actually just one of many choices people have to age safely. Many mobile home parks are “naturally occurring retirement communities,” a term for areas that weren’t necessarily created for seniors but that nonetheless have a high concentration of older folks. At their best, these organic retirement communities provide services and activities that benefit seniors, including opportunities for socializing and the sense that their neighbors are looking out for them.

Q&A: What to consider when deciding whether to buy or rent a home

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Dear Liz: I’m just turning 70 and am on my own for the first time in my life. In the last three years I took care of both my 100-year-old mother and my husband as their health failed. My daughter and son-in-law live in Colorado and are going to have a baby, and I plan on moving there in the near future.

I had originally planned to move into a senior living apartment complex. Then my children said I should buy a condo for the freedom, privacy and potential investment. They found a condo building under construction with units I could afford, plus a mortgage company willing to take me on and help with the down payment.

I’m torn about what to do. Because of both bad luck and bad decisions, currently I have only about $18,000 in savings. Between my pension and Social Security I make about $47,000 a year.

Do I invest in the condo and use up a good chunk of my savings? It’s on the second floor (the steps aren’t very steep, fortunately) and I’m strong and in good shape, but I’m also 70 and things can go south quickly. But, as the kids have said, I could live there for 10 years and make a good profit from the sale.

Or do I move into the senior living apartment and keep my savings but face regular increases in rent (thus “throwing my money away”)? The senior complex has amenities and activities and elevators but lots of people around all the time (thus sacrificing some privacy). Having a place of my own would be so wonderful, but I need to be smart about this decision.

Answer: Younger people often don’t understand about stairs. No, they’re not a big deal now, but even a few steps can become a huge barrier if you have mobility issues — and those issues become more likely the older you get. Having an elevator or a unit on the ground floor, preferably with a zero-step entry, is a good insurance policy against the vicissitudes of aging.

Besides, you aren’t necessarily throwing money away when you rent. You’re buying freedom. You don’t have to worry about paying for repairs and other unpredictable costs, and you can move more easily if your circumstances change. People are often advised to rent first when they move to a new area, just so they can get a better idea of the advantages and disadvantages of various neighborhoods before they commit. Renting also could give you a chance to build up your reserves so that if you do decide to buy, you won’t be quite so
house poor.

Having more people around isn’t necessarily a bad thing, either. You’re newly widowed, and moving to an area where you presumably don’t know many people. The senior complex could make it a lot easier to make friends. A good social network is essential to staying mentally and physically healthy as we age.

Q&A: Managing retirement savings

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Dear Liz: I’m considering converting an old 401(k) to a Roth IRA. Will the gains from the 401(k) account be treated as capital gains? And can you only convert 401(k) plans you no longer participate in, or can you convert both current and former 401(k) plans?

Answer: You’ll pay income taxes on the conversion. Retirement plans, including 401(k)s and IRAs, don’t qualify for capital gains tax rates. You may be able to convert your current 401(k) as well. Ask your plan administrator if “in plan Roth conversions” are allowed.