Ask Liz Weston

Get smart with your money

Retirement

How to extend your (working) life

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Many people plan to work past normal retirement age, by choice or necessity. But most aren’t taking the steps that could increase the odds they’ll be able to do so.

When asked what they’re doing to ensure they can continue working past 65, fewer than half of employees polled in the 2019 Transamerica Retirement Survey of Workers say they’re trying to stay healthy. Similar numbers cited performing well in their current positions (43%) or keeping their job skills up to date (40%). More than 1 in 4 say they aren’t doing anything to ensure they remain employed longer. In my latest for the Associated Press, why the workers of the world need to wake up.

Q&A: How to make retirement saving a priority

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Dear Liz: One thing I like about saving for retirement with an IRA is that I can wait until April 15 of the following year and then just contribute a lump sum for whatever I can afford to put in that year. Is there anything similar with 401(k)? Or do I have to have the contributions come out piecemeal with payroll deductions? I keep revising the percentages, but then there is a lag time between when I revise and when that money is taken out. It is a hassle. It would be much easier to just make a lump sum contribution at the end of the year to my 401(k).

Answer: Many people have unpredictable incomes and variable expenses that make planning tough. If you have a steady paycheck, though, you’d be smart to pay yourself first by making your retirement contributions a priority.

It’s generally smart to contribute at least enough to get the full company match, even if that means cutting back elsewhere. Matches are free money that you shouldn’t pass up. If you can contribute more, even better. For many people, retirement plan contributions are one of the few available ways they can still reduce their taxable income.

If you discover after the end of the year that you could have put in more, you can still make a lump sum contribution to an IRA. Since you have a plan at work, your contribution would be fully deductible if your modified adjusted gross income is less than $64,000 for singles or $103,000 for married couples filing jointly. The ability to deduct the contribution phases out so that there’s no deduction once income is above $74,000 for singles and $123,000 for couples.

Thursday’s need-to-know money news

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Today’s top story: Getting real about health costs in retirement. Also in the news: Watch your credit card rewards pile up with these 5 tips, learning the different types of mutual funds, and how hackers can steal your data at airports.

Let’s Get Real About Health Costs in Retirement
Making costs easier to predict.

Watch your credit card rewards pile up with these 5 tips

What Are the Different Types of Mutual Funds?
Learn the basics.

How Hackers Can Steal Your Data at Airports
Protecting more than just your luggage.

Tuesday’s need-to-know money news

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Today’s top story: Why your financial aid may plummet after freshman year. Also in the news: 3 tricks to help you shop less, how FICA tax and other withholding taxes work on your paycheck, and why you should plan to retire even if you don’t plan on retiring.

Why Your Financial Aid May Plummet After Freshman Year
Preparing yourself.

These 3 Tricks Can Help You Shop Less
Curbing an expensive habit.

How FICA Tax and Other Withholding Taxes Work on Your Paycheck
What they are and how you can change them.

Plan to Retire Even If You Don’t Plan to Retire
Plans have a way of changing.

Let’s get real about health costs in retirement

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You won’t pay for health care in retirement with one lump sum. That’s the way these expenses are often presented, though, and the amounts are terrifying.

Fidelity Investments, for example, says a couple retiring in 2019 at age 65 will need $285,000 for health expenses, not including nursing home or other long-term care. The Employee Benefits Research Institute says some couples could need up to $400,000 — again, not including long-term care. The Center for Retirement Research at Boston College hasn’t updated its figures recently, but back in 2010 estimated a typical couple could spend $260,000 for medical and long-term care, with a 5% risk that costs will exceed $570,000.

No wonder 45% of people in their 50s and early 60s have little or no confidence that they’ll be able to afford their health care costs once they retire, according to a survey by the University of Michigan.

In my latest for the Associated Press, a health care cost reality check.

Q&A: Here’s a case where taking retirement funds early might make sense

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Dear Liz: My wife and I are both retired and receiving annuity payments. In addition, we have about $1.3 million in traditional IRAs and $350,000 in another annuity that will pay us each about $1,000 per month. We are moving from Texas to Arkansas sometime in the next year. Texas has no state income tax and pretty high property taxes, while Arkansas has lower property taxes but about 6% income tax. We plan to put down about $200,000 on a new home and obtain a mortgage for about $350,000 at about 4% interest.

Does it make sense to withdraw money from the IRA to pay down the amount we need to borrow for the mortgage? I can withdraw about $90,000 without putting us into the next higher federal tax bracket, if that makes any difference, and end up saving $5,400 in Arkansas income tax at the same time.

By my calculations, the return on the $90,000 would be almost $8,000 every year in reduced mortgage payments if we took out a 15-year mortgage. If we did the 30-year loan, that savings would be over $5,000. I don’t think we’ll achieve the same returns on $90,000 leaving those funds invested as they are in bonds or cash.

Answer: It usually doesn’t make sense to tap retirement funds to pay down a mortgage, but your case may be one of the exceptions. You have enough saved that the withdrawal won’t claim a big chunk of your available funds and leave you cash-poor.

We’ll assume you’re over 59½ and won’t face penalties for early withdrawal. If that’s the case, then you’ll also be facing required minimum distributions within a few years. These mandatory withdrawals, which must start after you turn 70½, would subject at least some of this money to taxation. The question is whether you want to pay those taxes now or later, and you’re making a pretty good case for now.

Before you withdraw any money from a retirement fund, however, you should consult with a tax pro or a fee-only financial planner, or both. Mistakes made in early retirement often have irreversible consequences, so you want an objective second opinion before you proceed.