Ask Liz Weston

Get smart with your money

Retirement

Q&A: Volunteering can fill a void for unhappy retirees

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Dear Liz: I was very disappointed in your response to the reader who was unable to cope with unplanned retirement. The reader has sufficient assets but was unable to manage the loss of purpose. This is common, and maintaining purpose is one of the most important components of a healthy retirement.

You did not mention volunteer work as an option, and that is a shame. There are hundreds of organizations that need volunteers of all skill levels, and they come in every shape and size you can imagine.

There are social services, cultural, civic, social justice, child development, healthcare and senior organizations that exist only because of their volunteers. You can volunteer long term or short term, or even on occasion.

I have just spent the last five months running a series of events connecting retirees to organizations who need volunteers. My own retirement will be completely focused on doing all of the volunteer work I did not have time for while working.

Retirement is an excellent time to make your contribution to the community that helped you along the way.

Answer: Several people wrote in to suggest volunteering was the answer to the reader’s unhappiness with an involuntary retirement. Volunteering may indeed fill her time, but her point was that she found fulfillment in paid work. She rightly warned others that they need to think through what they might lose by retiring too early.

People may get more than paychecks for their labor. They can get recognition, respect, a feeling of achievement and a sense of mission. What they do may be a significant part of who they are — perhaps far more than they realize.

If they give that up without sufficient thought and planning, they may feel as if they’ve gone from a “somebody” to a “nobody” overnight. That can be a terribly hard adjustment that volunteering may not alleviate. Here’s another perspective:

Dear Liz: Your recent writing about considering when to retire and the dangers of a too-early retirement rings a big bell.

I am a psychotherapist who has worked with a number of people who were either considering retirement or who took early retirement. For those who took early retirement, the emotional problems associated with the large amount of both time and space in their lives after retirement, which they never fully considered, have been very surprising and upsetting for them.

To those working every day at jobs they don’t love, retirement seems like a great thing. But the reality of an open, unstructured life can present an array of problems — financial, relational and emotional — for the newly retired.

People should think about this decision carefully because it is hard to re-create a steady job. Or, even better, have a long hard conversation about it with someone close to you or a specialist like me.

Answer: Excellent advice. In addition to traditional therapists, there is a growing field of professionals who combine financial advice with psychological counseling. People can get referrals from the Financial Therapy Assn. at www.financialtherapyassociation.org.

Q&A: How to figure out the right time for retirement

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Dear Liz: I hear so much talk about waiting to collect Social Security. What are good reasons to start collecting Social Security at age 62? I recently retired from the military with a monthly retirement of $4,400. I plan to work a civilian job until I’m 62 (eight more years).

I’m in fairly good health now, but decades of military service and multiple deployments overseas put a lot of miles on my chassis. I truly hope I do, but I don’t know if I will live until I’m 80 or 90 years old.

Answer: None of us knows how much more time we have on this Earth. The primary reason for delaying Social Security is to decrease the odds of running short of money if we (or our spouses) happen to live a long time.

Think of it as a kind of longevity insurance because the longer you live, the more likely you are to use up your savings and to rely on your Social Security check for most, if not all, of your income. The wealthier you are — in savings and in pensions — the less important it may be to delay Social Security.

Your military pension provides a substantial monthly check and (presumably) survivor benefits for your spouse. These benefits will rise with inflation. You also have retiree health insurance at reasonable rates. You’re better off than most people approaching early retirement.

Still, your pension may not cover all your expenses and it’s not clear how much you have in other savings. Also, consider that your survivor would get about half (or less) of your pension check if you die first. So you may still want to hedge your bets by waiting at least until your full retirement age of 67 to start Social Security.

In addition to increasing your benefit, delaying to that age means you won’t be subject to the earnings test that can reduce your check by $1 for every $2 you earn over a certain limit (currently $17,040). You may think now that you’ll be ready to stop working at 62, but many early retirees find they miss the stimulation and social contact work provides.

Q&A: When considering retirement, money isn’t the only factor

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Dear Liz: You answer many questions about whether people are ready to retire. But there’s one other thing to consider besides money, and this is more important.

Folks need to seriously ask themselves whether they can handle being retired. I know I can’t stand it.

I have more than enough assets, plus a pension, plus healthcare, plus no debts or bills. I’m young and healthy. But I find happiness in work.

Unfortunately, I had to leave my job owing to conditions outside of my control. I now live in a beautiful house at the beach, with all my money and all the things I like to do — and I’m miserable. I’m looking for a part-time job. I live in a small community and there aren’t many jobs, but I’m hopeful to find one.

Tell your readers that it’s not only the advice of a financial planner, but also some good soul-searching that they’ll need, especially if someone is a manager or a highly educated professional. You can’t just give that up and go from full time to no time. At least work part time before retiring to make sure it’s what you want.

Answer: That’s excellent advice. Not everyone derives meaning and purpose from work, but many do, and an abrupt adjustment can be painful. Good luck in your search for a job that gives you a reason to get up in the morning.

Q&A: Don’t jump into early retirement without considering these things

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Dear Liz: I am almost 59½. Can I retire at 60½?

I have $570,000 in a 401(k) and $180,000 in an IRA. I owe $253,000 on a condo that would sell for $600,000. I plan to buy a home next year for $400,000 and pay off the mortgage with the proceeds of the condo. Then I would be left with no bills. I will start collecting Social Security at 62 for approximately $1,850 a month.

I had a wonderful job for 23 years but something changed at work and now just going to work is hard on me. Let me know if you think this is doable.

Answer: That depends. How much do you need and want to spend?

Financial planners typically consider a 3% to 5% withdrawal rate as “sustainable.” The rate depends on how long you’re expected to live and your asset allocation, among other factors, but you should err on the conservative side if you expect to retire early.

A 3% initial withdrawal rate would give you $1,875 a month. A higher withdrawal rate could dramatically increase your chances of running short of money later in retirement.

While you might not have a mortgage, you would certainly have other bills, including the cost of healthcare insurance. If your employer is subsidizing your coverage, as many do, you could end up paying a lot more.

And if Congress dismantles or alters the Affordable Care Act, your health insurance could get even more expensive or perhaps hard to find. Your healthcare costs may go down once you qualify for Medicare at age 65, but they certainly won’t go away.

Also consider that taking Social Security retirement early means a smaller check for the rest of your life. If you do run short of money, that check may be your only source of income, and you may curse yourself for locking in the smaller amount.

You certainly shouldn’t bail on your job before you’ve had a fee-only financial planner look at your situation and see if your plans are realistic.

Q&A: Help your son by helping yourself

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Dear Liz: I’m a new mom and want to start saving for my son’s college/car/other life expenses while also planning a secure future for him. If I only had, for example, $300 a month to put toward this goal, what would you recommend I spend it on? Life insurance? Savings accounts for him? Savings accounts for my household? A 401(k)? Stashing away money under the mattress? Something else I haven’t thought of yet? I just want to make sure I’m doing the very best for my son and our future.

Answer: Congratulations and welcome to the wonderful adventure that is parenthood.

This adventure won’t be cheap. The U.S. Department of Agriculture estimates the cost of raising a child to age 18 is now $233,610 for a middle-income married couple with two kids. Your mileage will vary, of course, but there’s no denying that your income will have to stretch to cover a lot more now that you’re providing for a child.

Your impulse will be to put your son first. To best care for him, though, your own financial house needs to be in order.

Begin by creating a “starter” emergency fund of $500 or so. Many people live paycheck to paycheck, which means any small expense can send them into a tailspin. Eventually you’ll want a bigger rainy-day fund, but it could take several years to build up the recommended three months’ worth of expenses, and you don’t want to put other crucial goals on hold for that long.

Once your starter fund is in place, you should contribute enough to your 401(k) to at least get the full company match. Matches are free money that you shouldn’t pass up.

You probably need life insurance as well, but don’t get talked into an expensive policy that doesn’t give you enough coverage. Young parents typically need up to 10 times their incomes, and term policies are the most affordable way to get that much coverage.

After life insurance is in place, you can boost both your retirement and emergency savings until those accounts are on track. If you still have money left over to devote to your son’s future, then consider contributing to a 529 college savings account. These accounts allow you to invest money that can be used tax free to pay for qualifying education expenses anywhere in the country (and many colleges abroad, as well).

Keep in mind that post-secondary education really isn’t optional anymore, particularly if you want your kid to remain (or get into) the middle class. Some kind of vocational or college degree is all but essential, and the money spent can have a huge payoff in terms of his future earnings.

Q&A: Saving for retirement can’t wait

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Dear Liz: I have a family member who at 57 has no savings, a house whose value is 58% mortgaged and debt from a family member of $180,000.

This person is just starting a new job that will cover expenses with about $1,000 left over each month. The job offers a 401(k) but doesn’t allow contributions until employees have been with the company for eight months.

This person has paid into Social Security so that will be there (hopefully!) at retirement. What would be the best way for this person to start saving toward retirement?

Answer: Your relative shouldn’t wait to be eligible for the 401(k). People 50 and older can contribute up to $6,500 annually to a traditional IRA or a Roth IRA, which is $1,000 more than the usual limit.

If your relative didn’t have a previous job that offered a workplace plan in 2017, then this year’s contributions to a traditional IRA should be deductible.

Next year, when your relative is eligible for the 401(k), the deductibility of contributions will depend on that person’s income. In 2018, deductibility begins to phase out when modified adjusted gross income reaches $63,000 for singles. If IRA contributions aren’t deductible, after-tax Roth contributions typically are a better deal, but the ability to contribute to a Roth begins to phase out for singles at $120,000 in 2018.

Encourage your relative to save and to delay starting Social Security for as long as possible. When Social Security makes up the majority of one’s income in retirement — as it will for your relative — it’s important to maximize that check.

It’s not clear why your relative has been saddled with a family member’s debt, but any retirement plan needs to include options for paying off, settling or even erasing (through bankruptcy) such a substantial amount. Your relative should talk to a credit counselor and a bankruptcy attorney to better understand the options.