Monthly Archives: September 2011

10 Things Social Security Won’t Tell You

Hello,

A lot of workers are walking in the streets with the confidence that the contributions they make to the Social Security is enough to cater for their retirement. I’m not suggesting that income from Social Security is not enough to cater for your needs, but as you come to realize that there are expenses you either underestimated when calculating the funds you would require in your retirement, which leads to a deficit in your calculations. As much as Social Security caters for retirement, this should be viewed as a supplementary income. Apart from the insufficient contributions to the total income of a retiree, there are a number of other issues that affect Social Security income, and as Jonnelle Marte explains in the following article, there are 10 things Social Security won’t tell you.

1. “Long-term deficit? We can hardly afford our bills today.”

Worried about the future of Social Security? You’re far from alone. The Social Security Administration itself has said that unless something is done to reform the system, it will burn through its funds within the next few decades. Less talked about, perhaps, is the concern about the present: the program is having a hard time paying its bills. In 2010, the Social Security Administration collected less revenue in taxes than it needed to cover its benefit payments — the first time expenditures have exceeded income since 1983. As a result, the program had to tap its $2.5 trillion trust fund, sooner than some had expected. The same is expected to happen this year. “The depth of the recession has slowed down revenues to the system,” say Eugene Steuerle, an economist with the Urban Institute, a non-partisan think tank in Washington, D.C.

A Social Security spokeswoman points out that interest income from the Treasury bonds held in the trust fund will allow it to keep growing until 2022 — even if the agency has to siphon off some money to offset any shortages in tax revenue — and won’t be exhausted until 2036, when the first Gen Xers begin retiring. But that’s already one year earlier than previous projections. After that, the agency says tax income under the current system will only cover about 75% of benefit payments through 2085.

2. “The more you make, the less you get back.”

It’s common to think of Social Security as an individual account of sorts — what you pay in, you get back, more or less. That’s far from accurate. By design, the Social Security Administration says, the system is tilted in favor of lower-income workers who have fewer resources to save for retirement. In practice, that means that the more money you make, the less you get back, at least as a percentage of your salary. For example, a single, 66-year-old man who earned $50,000 per year on average and retired in 2011 would get an annual benefit payment of about $22,800, or about 45% of his annual salary. If he had earned $150,000 per year, he would get annual benefits of about $30,670 — just 20% of his annual salary. “People act like the percentage of benefits of your salary you get is the same for everyone and it really isn’t,” says Jo Anne Barnhart, former Social Security Commissioner.

That’s particularly true for the highest earners. Benefits are calculated on a maximum average salary of $106,800, which means anyone who made that much or more — whether by a few dollars or by a few hundred thousand dollars — gets the same annual Social Security payment. To be fair, earnings over that threshold aren’t taxed, either, and the agency spokeswoman says benefits are meant as supplemental retirement income, not full freight.

3. “This used to be a much better deal.”

Today’s workers — boomers, Gens X and Y — like to carp about Social Security, but it’s not all sour grapes or skepticism about paying into a system with an uncertain future. Employees today pay more in Social Security taxes than previous generations did. They’re also likely to get smaller benefits when it’s their turn to retire.

Over the years, as the Social Security Administration has come to grips with the cost of its benefit program — and the ranks of eligible beneficiaries has swollen — taxes to fund the program have gone up and up, a trend that experts say is likely to continue over the coming years. As a result, workers now pay 6.2% in payroll taxes (reduced to 4.2% in 2011) — nearly double the 3.6% tax rate workers paid in 1965. Over the same time period, the maximum earnings eligible for taxation have also increased from $4,800 (equivalent to about $34,500 in 2011 dollars) to $106,800.

For example, a single man who retired in 1980 at age 65 after earning an average wage of $43,500 would have paid about $96,000 in Social Security taxes, and probably received $203,000 in lifetime benefits, according to a study by the Urban Institute, a non-partisan policy think tank in Washington D.C. By contrast, a single man making the same average wage today and retiring in 2030 will likely pay $398,000 in lifetime taxes but receive just $336,000 in lifetime benefits — about 16% less than he paid in. “People who were first in the system got a great rate of return,” says Alan Gustman, chair of the economics department at Dartmouth College. “It’s the younger generation that is going to be in the most difficult position.”

The agency spokeswoman says the imbalance is partly due to the fact that the earliest beneficiaries only paid taxes in the later stages of their careers.

4. “Want a bigger check? Go back to work.”

Most people within ten years of age 62 have already started doing the Social Security math problem: How much do I get if I wait one year to take payments? How much if I wait two years? To get the biggest bump in benefits, workers have to delay their benefits beyond full retirement age — around 66 for people born before 1957, closer to 67 for people born after. (To find your exact date, see Social Security Online http://www.socialsecurity.gov/retire2/agereduction.htm.) For every additional year you wait, you’ll get an 8% increase in payments until you hit age 70. Someone who earned, on average, $50,000 per year over their working life would get $1,900 per month at 66, but $2,505 if he waited until age 70 — a 32% boost. “You’ll get a bigger benefit amount for the rest of your life,” says Dennis Marvin, a financial planner in Cleveland.

If you’ve already started collecting benefits and you’re under full retirement age, it’s not too late to get a raise. One strategy: Go back to work. If you earn more than $14,160, the Social Security Administration will dock $1 in benefits for every $2 you earn. But once you reach full retirement age, your benefits will be recalculated to account for the money you didn’t get while working. So, for example, someone who took their benefits at 62 — at a 25% reduction compared to full benefits — but went back to work from ages 63 to 66 and earned enough to zero out his entire Social Security check could end up collecting close to full benefits at age 66.

5. “Good luck qualifying for disability.”

More than 8 million people receive Social Security Disability Insurance, which is awarded to people who are unable to work because of a long-term physical or mental disability. But qualifying is no easy task, says John Roberts, manager of Myler Disability, an advocacy group. Only 30% who applied in 2009 were awarded benefits, down from 44% in 1999, according to agency data.

Some of that change can be attributed to more people applying for benefits — 2.8 million in 2009 compared to 1.5 million a decade earlier. That’s common when the economy is tough, says Gustman: The number of applications rises, along with an increase in claims that fall short of the agency’s standards. Even for people with true and serious disabilities, it can be difficult to qualify. The process can take years and often requires legal help. Most people have to wait for a hearing, says Roberts: “Best case, it is 18 months before you get approved.” In some cases, the battle goes to federal court.

To improve your chances, Roberts recommends applying for benefits as soon as you become disabled. Waiting too long could leave you in a situation where you haven’t worked long enough to qualify for disability benefits. You must generally have worked at least three to ten years before you became disabled, depending on your age. The spokeswoman for the Social Security Administration says it does not pay benefits for partial or short-term disability and taxpayers must be able to show that they cannot do work they did before or adjust to other work because of their medical condition.

6. “You can be unemployed and retired.”

A growing number of people in their 60s are collecting unemployment and Social Security benefits at the same time. Since 2002, seventeen states have changed the rules to allow people to qualify for more unemployment benefits while they receive Social Security, according to the National Employment Law Project, which has advocated on behalf of allowing seniors to claim both. It’s perfectly legal; you just have to report the income to both agencies.

There is no clear data on how many people are drawing both. About 10% percent of people who collected unemployment benefits in 2010 were 60 or older, according to the Department of Labor; the minimum age to collect Social Security retirement benefits is age 62. For those who qualify, the option has obvious appeal for older Americans struggling to find work in today’s weak job market. “We are generally talking about older workers who lose their jobs involuntarily, who are trying to survive,” says George Wentworth, an attorney with the National Employment Law Project.

Receiving unemployment benefits doesn’t affect your Social Security payments, but the reverse is not always true: In some states, collecting Social Security can reduce your unemployment checks. In Illinois, Louisiana, South Dakota, Utah and Colorado, your unemployment benefits can be reduced by half of your monthly Social Security benefit.

7. “Your Social Security number is no state secret.”

Don’t carry your social security card in your wallet. Don’t give your number over the phone. Don’t use it as a password. For all the precautions workers are told to take to protect that nine-digit number, a Social Security number is still surprisingly vulnerable. So far this year, more than 13 million names and Social Security numbers have been exposed to potential theft as a result of more than 270 data breaches at state governmental agencies, according to the Identity Theft Resource Center, a nonprofit that helps victims of identity theft.

But a social security number need not even be stolen to be compromised. A 2009 study from Carnegie Mellon University finds that it’s possible — and not too difficult — to guess a Social Security number using details easily gleaned from a Facebook profile, such as date of birth and home town. Researchers were able to accurately guess the first five digits of 44% of Social Security numbers issued after 1988 on the first try, just by using the date and the state the number was issued in; they were able to guess the complete numbers almost 9% of the time. The authors used a list of known Social Security numbers from the Social Security Death Master Files to find patterns on how the last four digits are assigned — the first five digits are based on the state the number was issued in — and they found that they are largely assigned in order, based on when the number was issued.

A spokeswoman for the agency says it implemented a new system starting in June that randomly assigns numbers, making more nine digit combinations available in every state. Anyone with a number issued before then might want to guard their birth date and place of birth as carefully as they do their Social Security number — or at least tighten their Facebook privacy settings.

8. “We think you’re dead.”

The distinction between dead — cold, no pulse — and alive — just went for a jog! — seems pretty obvious. But the Social Security Administration commonly records living people in its Death Master File — a public database that includes Social Security numbers, dates of birth and addresses — an error that can have grave financial consequences. Of the 2.8 million deaths the Social Security Administration reports each year, about 14,000 people added to the Death Master File are very much alive, according to agency statistics.

People who are incorrectly reported dead can rack up bank fees for bounced checks after Social Security payments stop without warning, and will have to follow-up with credit bureaus and other institutions once they get their names off the death file, says Gabriela Beltran, a spokeswoman for the Identity Theft Resource Center. Some people don’t find out until they’re applying for a loan and they’re denied because records show them as decease, she says.

A spokeswoman for the Social Security Administration says it takes “immediate action to correct and reinstate benefits” once it notices an error. Getting off of the list and resuming Social Security payments requires beneficiaries to bring identification to a Social Security office where they can have a face-to-face interview, the administration says.

9. “If you make too much, we’ll tax your benefits.”

Your Social Security benefits come from paying taxes while you were working, so surely they can’t be taxed, right? Wrong. You may in fact be taxed on your Social Security benefits if you have substantial income from other sources, such as dividends, self employment, investment interest and other sources. And studies find many Americans aren’t aware of the fact: Some 42% of pre-retirees surveyed by the Financial Literacy Center did not know that benefits could be taxed if their income in retirement exceeded a certain amount.

The rule is that if your combined income — a measure that includes other sources of income and half of your Social Security benefits — exceeds $25,000 for an individual or $32,000 for a married couple filing a joint return, you may be taxed on up to 85% of your benefits. People who find themselves in this group can make quarterly estimated payments or choose to have federal taxes withheld from their benefits. The Social Security Administration says the provision to tax benefits became law in 1983 and was “intended to restore the financial soundness” of the Social Security program and Medicare.

10. “Your cost-of-living adjustments come up short.”

Every year, Social Security recipients get a cost-of-living adjustment, a little bump based on the current rate of inflation and designed to cover the rising cost of everything from toothpaste to airline tickets. But some critics say the current measurement of inflation doesn’t reflect the higher costs that seniors truly face. For example, many older people spend a large share of their budgets on health care, where prices have risen about twice as fast as overall prices, according to a 2010 paper published by the Congressional Research Service. “In many parts of the country a monthly Social Security benefit is not enough to cover basic living expenses,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies.

The pricing pressure means some retirees could find themselves struggling to cover essentials like gas, medicine and groceries, says Collinson, meaning they will have to cut spending in other areas. For pre-retirees, it means ramping up your savings today so that you can struggle less in your golden years, she adds. The Social Security Administration says it has been using the Consumer Price Index since legislation instituting automatic cost-of-living increases was enacted in 1972, and changing the benchmark would take an act of Congress.

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Gen Y’s $2 Million Retirement Price Tag

Hello,

A good percentage of baby boomers are having a rough time with their retirement, after the financial crisis wiped away a considerable chunk of their retirement portfolio. For a person to have the kind of retirement they have always dreamed of, there must take into consideration the type of expenses they hope to be incurring during retirement. Coming up with the magic number can be a daunting task for many, and would require the help financial planners to assist in calculating the number. With the rise in prices of almost all goods and services, a lot of young people are wondering how much they will need to put aside to live a decent life, and as Emily Brandon explains in the following article, the generation aged between 18 to 45 need a retirement plan of $2 Million to live a decent life when they retire.

Twentysomethings will need to save much more than their parents did for retirement

Retirement won’t be impossible for Generations X and Y, but they will need to save considerably more than the baby boomers to make up for less employer and government help. Fewer young people have access to generous retirement benefits, including traditional pensions and retiree health insurance. And anyone born in 1960 or later must wait an extra year, until age 67, to claim the full amount of Social Security they are entitled to. Those who claim at the same age their parents did will get less. Here are some ways 20- and 30-somethings can get on track to retire comfortably.

Set a worthy goal.

In a 2010 survey of 226 registered investment advisors commissioned by Scottrade Advisor Services, more than three-quarters (77 percent) suggested a retirement savings goal of at least $2 million for members of Generation Y, defined by the study to include those ages 18 to 26. Sixty-eight percent of the investment advisers said members of Generation X should also aim to save more than $2 million. “For a generation Y person who thinks she wants to retire at around age 70 who is going to have slightly above-average annual expenses, $2 million is probably the right number,” says Michael Farr, president of the Washington, D.C., investment firm Farr, Miller, & Washington and author of A Million Is Not Enough: How to Retire With the Money You’ll Need. But he cautions, “Most people who have high incomes and the ability to set aside $2 million will likely have more expensive lifestyles.”

However, other studies have found that young people may be able to get by on less in retirement. Human resources consulting firm Aon Hewitt calculated that Generation Y workers, who it defines as people ages 18 to 30, will need 18.7 times their final pay for retirement, including Social Security, traditional pension plans, and personal savings, to maintain their current standard of living after retirement at age 65. For someone whose final salary is $75,000, that’s just over $1.4 million, and Social Security will provide part of that. For Generation Xers ages 31 to 45, Aon Hewitt estimates they will need 16.1 times their final salary to pay for retirement. “A higher earner will probably continue to spend more in retirement,” says Janet Tyler Johnson, a certified financial planner and president of JATAJ Wealth Management in Fitchburg, Wis. “It’s really dependent on how much you need in retirement.”

Take advantage of employer help.

Getting to $2 million will take some effort, even if you start saving early. A 25-year-old will need to save about $7,405 annually, or $142 per week, to get there over 40 years, assuming an 8 percent annual return. Retirement account contributions from your employer will make it much easier to hit your retirement savings goal. If your employer matches your 401(k) contributions with $2,000 per year, you’ll only need to save $104 per week to have $2 million by age 65, again assuming an 8 percent annual return.

Control costs.

Minimizing investment fees and expenses will help you to grow your nest egg faster. That’s because high expense ratios on mutual funds can have serious drag on your long-term returns. Getting a 7 percent annual return instead of 8 percent over a 40-year career (because you are paying 1 percent in yearly fees) means you will need to save $2,255 more per year to still hit $2 million by age 65. Index funds generally charge much less in annual fees than actively managed mutual funds. “If I didn’t manage my own money, I would buy a S&P 500 index fund because it is low-cost,” says Farr.

Get a Roth IRA or 401(k).

Roth 401(k)s and IRAs allow young people, who are likely to be in a low tax bracket, to pre-pay taxes on their retirement savings. “Young folks are in a lower tax bracket now than they will be in the future, including when they begin to tap into their retirement savings,” says Joe Alfonso, a certified financial planner for Aegis Financial Advisory in Lake Oswego, Ore. “You’re giving up the current tax deduction, but you are basically getting tax-free retirement income that would otherwise be taxable in the future.” Once your contribution is made with after-tax dollars, that money can continue to grow for the rest of your life without the drag of taxes. If you wait until age 59½ to withdraw the money, you won’t have to pay taxes on any of the growth.

Maximize Social Security.

Social Security provides a base level of income that your retirement savings should build upon. Take steps to maximize the amount you get by making sure you have at least 35 years of earnings under your belt before you sign up for payments, so that zeros won’t be factored into your calculation. And carefully consider the age at which you begin to claim benefits. Payouts increase for each year of delayed claiming between ages 62 and 70.

Don’t plan on retiring at 65.

A male born in 1946 can expect to live 18 years after retirement at age 66, according to Social Security Administration projections. Men born in 1980 should plan for at least a 19.3 year retirement, after the higher retirement age of 67. For women, the average projected length of retirement jumps from 20 years for those born in 1946 to 21.2 years for those born in 1980. And these are just the averages. “Generation Y’s life expectancy is going to be a lot longer,” says Farr. “They have to fund more years of retirement than the old financial planning models built-in.”

Of course, you don’t have to retire at age 65, or at what the Social Security Administration defines as the full retirement age, which is 66 for most baby boomers and 67 for younger people. Working a few extra years gives you more time to save, allows your investments a longer time to compound, and reduces the number of retirement years your savings must finance. If you’re 25 now and willing to work until age 70, you could reach $2 million by saving just $95 per week, assuming an 8 percent annual return and not even counting the 401(k) match.

Don’t get hung up on the number.

How much you need to save for retirement largely depends on your expenses. If you’re willing to pay off your mortgage before retirement, move to a smaller house or low-cost area of the country, and live a modest lifestyle, you may find a way to get by on less. Conversely, those who want a lavish retirement will need to save more. “If you’ve got a goal based upon assumptions about inflation and rates of return, it’s actually counterproductive, because those numbers can be pretty big, especially for young folks,” says Alfonso. “It’s more important to focus on the things that you can control, such as the percent of your gross income that you save and to really focus on your career and moving up the salary chain.”


5 Questions Every Worker Should Ask Before Retirement

Hello,

If there is a day people look forward to, is the last day of your working life, people visualize all kinds of crazy ideas on how they are going to spend the remaining years of their life in paradise. Life is good the first few years, until reality checks in and a lot of retirees have to undergo a major readjustment of their lifestyle to ensure that their retirement portfolio can sustain them for as long as they live. Retirement planning is not as easy as many people portray it to be, and a lot of things have to be taken in consideration before making the big decision. Before making any drastic moves, ask yourself 5 simple questions as explained by Kayleigh Kulp  in the following article.

Wall Street’s recent turmoil has many investors questioning whether they will have enough to retire the way they’ve always dreamed, or to retire at all, for that matter.

Whether your post-work life is just around the corner or far away in the distance, there’s never a bad time to reevaluate your definition of retirement: what it means ideologically and financially.

“How you answer that question has very important implications about where you’re going to be and what you’re going to spend,” says author and certified financial planner Eleanor Blayney. “There’s so many demands on the dollars we thought we’d be using in our 60s or 70s. Retirement used to be a going away from the workplace. Now it has to be thought of as ‘what am I going toward?'”

When it comes to retirement planning, it is important to evaluate the big picture: desired lifestyle, trips and activities to pursue and of course, financial security and retirement.

“You have to be much more active in [retirement], you’re also at the point of life where you’re at the maximum complexity of financial issues,” Blayney says.

Deciding how much resources retirees will need and when to pull them, is tricky and people generally do a poor job of it, according to experts. Research from the Society of Actuaries shows that 49% of retirees and near-retirees plan for 10 years or less of retirement.

A certified financial planner or money manager can help investors understand complicated tax, estate and retirement demands, but before going it’s important to have a plan.

Here are five questions every investor needs to ask regarding planning for retirement:

How am I going to spend my time and how will I make it count?

It’s important to visualize your day-to-day retirement life in order to properly plan for it, Blayney advises.

“Where will I be and who will I be with?” she says. “Boredom can cost you. You pick up expensive hobbies. Sometimes our only job is how to spend our money and how to make it last.”

Practicing retirement is a good start. Before leaving the workforce entirely, Blayney suggests knocking your work schedule down gradually and observe how you spend your money and extra free time. Take the time to try out new hobbies and pursue passions.

Do I have enough to have live comfortably and have fun?

Review your retirement goals regularly. Social Security can be drawn without penalty between ages 65 and 67, depending on birth year. But Social Security can not fully fund you retirement and will require some sort of supplement either through Individual Retirement Accounts (IRAs), which can be withdrawn at age 55, pensions or 401(k) plans.

“The age at which each person can retire varies; the longer you work, the more you’ll benefit from your investments and Social Security,” says Anna Rappaport, an actuary and retirement expert. “Researchers at Boston College have estimated that many people have a shortfall in what they need for retirement but working two to four years longer will close the gap for a lot of them.”

Be sure to evaluate your income and budget for necessities, incidentals and fun money.

“Many retirees and financial advisors assume the cost of living decreases in retirement, pointing to costs to commute, meals and wardrobe,” says Mark Gianno, president of Gianno & Freda, Inc., a Boston accounting firm. “Retirees spend at least as much and often more than they did while in the workforce. Retirees have more time on their hands to pursue interests such as travel, home improvement, entertainment and hobbies.”

Should I downsize?

Housing accounts for about one-third of expenses for people aged 65 and older, according to the Mature Market Institute. Next on the list is transportation, taking up nearly 20% of total expenses. A lot of retirees want to keep their big place for a family to come home to for the holidays, but Blayney says moving to a smaller home in a more affordable city is a good way to stretch your nest egg.

If downsizing isn’t an option, or you’d like to stay in your home forever, pay off your mortgage before retirement or consider a reverse mortgage as a way to gain extra monthly income.

Also consider downsizing big, gas-guzzling vehicles or opt to keep cars longer to avoid recurring payments.

What if something happens to me or my spouse?

Consider how unfortunate circumstances could affect your lifestyle and plan for them while you’re healthy: Will you want to be near your children in the event that you get sick? Live in an assisted-living facility? Will you have enough money to take care of yourself?

Plan adequately for widowhood, Rappaport says.

“I estimate that an individual needs about 75% as much to live as a couple,” she says. “Most people think the survivor will be about as well off as before the death of his or her spouse, yet many widows have a decline in economic status after the death of their spouses. About 4 in 10 older women alone have virtually no money other than Social Security.”

What about health care?

Medicare is available to most people 65 and older, but even with government or employer-subsidized insurance, unreimbursed health-care costs associated with aging could cost as much as $200,000 over the course of retirement, according to Blayney.

Nursing homes alone can exceed $70,000 annually, Rappaport says.

Medicare covers a very large portion of acute health-care costs for those over age 65, but very little long-term care expenses. And individual insurance premiums go up with age, and insurability may be lost if the purchase is delayed. Prepare for medical expenses and coverage in advance to prevent financial ruin,” Rappaport says.

Gianno suggests transferring assets away from your control long before they may be forcibly spent for your care.


Out of Work, Out of Options and Over the Hill

Hello,

I always talk about retirement and how to go about it, but one area that is overlooked is those individuals who are out of a job and need cash to meet their daily expenses. When the financial crisis started, many people were laid off by their employers, both young and old, and as we all know, it is easier for a young person to find employment than a person who was about to retire. As a result, there are a lot unemployed seniors in the US, with no source of income apart from the savings they made during their employment years. This will develop into a crisis later on, when a person has exhausted all their retirement savings. As Emily Glazer explains in the following article, there are a number of ways a senior can minimize costs while at the same time protecting their retirement savings from total erosion.

After 20 months without a job, 55-year-old Henry Dietz has nearly drained his 401(k) retirement plan.

He already has used up his personal savings, borrowed extensively, switched to a catastrophic health plan, which only covers medical emergencies, and even skipped family funerals because of travel expenses.

If he doesn’t find a job soon, he may not be able to make his mortgage payments and the family may have to “move back with Mama,” says the married father of three from Raleigh, N.C., who was laid off from an advertising agency.

Mr. Dietz’s situation may be extreme, but many people are facing a similar dilemma: over 50, unemployed and running out of options.

With no job prospects long before they can afford to retire — and Social Security benefits still years away — many unemployed workers in their 50s and early 60s are struggling to pay the bills, the mortgage, health-care expenses and college tuition. It’s a scenario that was unimaginable to many just a few years ago.

Of the 14.9 million unemployed, more than 2.2 million are 55 or older, according to the U.S. Labor Department. And almost half of those have been unemployed six months or longer. The unemployment rate in that age group is a record high 7.3%.

So what’s an unwitting early retiree to do? Here are some tips to help stretch your finances.

1. Retirement Accounts

If, like Mr. Dietz, you have no choice but to dig into your retirement account, there are ways to minimize the tax hit and penalties.

Withdraw money from an individual retirement account or 401(k) before age 59 1/2 and you’ll pay federal income taxes on the withdrawals and will get hit with a 10% penalty.

But the tax code has a provision, 72(t), that allows someone younger than 59 1/2 to withdraw a set amount of money at least five times until age 59 1/2 or for five years, whichever is longer. You won’t pay a penalty, but the money is still taxed.

The caveat: Once you start taking out the money, you’re locked into making withdrawals, says Jerod Wurm, a certified financial planner in Sacramento.

Jonathan Pond, a financial adviser for AARP, says that if you were laid off this year, you might want to delay tapping your retirement money until next year, when you might be in a lower tax bracket.

If you need a chunk of money for a short period of time, consider the 60-day rollover requirement. This rule allows you to take money out of a qualifying retirement account, tax- and penalty-free, once a year, regardless of your age — but the full amount must be deposited back into the account within 60 days.

2. Health Insurance

“It really is penny wise and pound foolish to go without health coverage,” says Mr. Pond, especially at an age when health-care expenses can start to rise.

Maintaining coverage is easier said than done when the pennies are hard to come by. But your lower-income may qualify you for options you may not have considered if your Cobra coverage is coming to an end or you didn’t have employer-provided insurance to begin with. (Cobra allows terminated workers to continue under a former employer’s group plan.)

Most states have programs that offer low-cost coverage, typically if one earns less than $30,000 a year. The MassHealth program in Massachusetts, for example, covers adults and children under age 19 if they live with the parents.

Short-term insurance policies, which typically cover unexpected illnesses and accidents, can run as low as $30 per person for a month. Catastrophic insurance typically starts as low as $30 a month depending on a person’s age and health.

Have you been denied coverage or been quoted an exorbitant rate because of a pre-existing condition? You can enroll in the federal Pre-existing Condition Insurance Plan, a part of the new health-care law. (The provision banning insurers from denying coverage based on pre-existing conditions doesn’t take full effect until 2014.)

Premiums range from $320 to $570 a month per person depending on the state. But with private insurance, premiums for people with “pre-existing conditions…could easily run into the four figures,” says Henry Aaron, a senior fellow at the Brookings Institution.

You also may be able to use out-of-pocket health-care costs to your advantage come tax time. You can deduct medical expenses exceeding 7.5% of your adjusted gross income. While that may have been too high of a threshold in the past, you may qualify now because of your lack of income. (See Topic 502 at http://www.irs.gov.)

3. Real Estate

The typical advice is to downsize to a cheaper home in a cheaper locale. But today’s real-estate market is anything but typical. And for people who are hunting for work or have a spouse with a much-needed job, moving to a state with a lower cost of living may not be feasible.

So use your home to make some extra cash. If you live near a college or university, for instance, rent an extra room to a student or recent graduate. You can easily get a few hundred dollars a month. Contact a school’s student-housing department or put up fliers on campus.

For homeowners who are 62 and over and still have equity, another option is a reverse mortgage, which allows older homeowners to tap their home’s equity while they remain in the house. The loan typically doesn’t come due until the homeowner sells the house or dies. And upfront fees have come down some recently.

4. College Expenses

Still on the hook for college tuition for your kids or yourself? Try renegotiating loan and aid terms.

Jerome Chester, a 51-year-old from Bethesda, Md., who has been unemployed since June, went to student-loan provider Sallie Mae to renegotiate his tuition loan. He was able to defer payments, about $1,000 a month, for six months.

And a school’s aid package isn’t always set in stone. Go back to the school and ask for more aid given your financial troubles. Results will vary by school and a family’s financial status.


All Changing Jobs

Hello,

It’s a known fact that more and more senior citizens are delaying retirement and working a full-time job. This is mainly due to financial considerations and other issues that may warrant an extension of a person’s work life. During this period, a lot of the older workers are faced with numerous challenges that are related to work. The bottom line is that you should have a specific goal in mind or a specific objective that you would like to achieve in a certain period of time. Working an eight to five job when every bone in your body is begging for rest in is no easy task, and as Rachel Louise Ensign illustrates in the following article, this could also be a time of wonderful opportunities to achieve your goals and also time to face incredible challenges.

When Angela Gregor’s mother became ill and needed long-term care in the 1990s, Ms. Gregor tapped her individual retirement account for funds and stopped making contributions. Then came the tumultuous stock-market ups and downs of the past decade, dealing the IRA another blow.

To make ends meet, Ms. Gregor went back to work part-time last September, as a data-entry clerk at a senior center near Chicago. The 67-year-old hopes to retire by age 70, but says she’ll have a hard time doing so if she can’t sell her home.

“Everything is more expensive. I cannot retire, I wish I could,” says Ms. Gregor. “Like most older people, my money is in my home. … I’m caught between a rock and a hard place.”

Many older people are finding themselves in a position they never expected to be in at retirement age: still working or in need of a job.

And the laundry list of reasons just keeps growing. Already battered nest eggs took another beating this month with the market’s wild swings. With interest rates essentially at zero since 2008, income from Treasurys and certificates of deposit is pretty paltry. And the Federal Reserve recently said it would likely keep rates “exceptionally low” through mid-2013. On top of that, housing prices are still in the doldrums, leaving homeowners with much less equity to tap.

More than three in five U.S. workers in their 50s and 60s plan on working past 65 — and 47% of that group say they’ll do so because they’ll need the money or health benefits, according to a 2011 study from the nonprofit Transamerica Center for Retirement Studies.

But in this tight labor market, working into your golden years isn’t easy. And you’ll have to make your age and years on the job come across as assets, not liabilities. In addition, with the current market upheaval, you’ll need a financial plan that puts your savings on the fast track and takes into account how Social Security and Medicare benefits could be affected.

Staying the Course

For many older workers, the easiest option may be to continue with their current employer. But that will entail making themselves essential.

Workers should take on new projects when possible. And it’s crucial to stay on top of the latest technology being used; you don’t want to be perceived as the old guy who doesn’t know what’s going on.

Older employees also can put their experience to use — and on display — by volunteering to mentor younger workers either formally or informally.

Dave Bowe, 70, says he has kept his position at Stacy Adams Shoe Co. since 1977 because he has continued to be one of the men’s footwear company’s top-selling sales representatives. He says working has helped him pay for expenses related to his wife’s disability and keep insurance that covers her medical expenses, though he also enjoys the job.

Mr. Bowe says he stays close with longtime customers, answering their calls at night or on the weekend. When he had to cut back on overnight travel when his wife became disabled, he made up for lost business by aggressively pursuing new clients closer to home.

“I have to produce or the company wouldn’t let me work out here,” says Mr. Bowe.

Of course, some workers may have to take illness or physical limitations into account. If you feel like you can no longer manage physical labor, late hours or travel, talk to your manager about moving to a different position, says Beverly Harvey, a career coach in Pierson, Fla. Suggest the position you’d like to move to and show how you’re qualified for it, she says. If your boss is the one initiating such a conversation, chances are your standing at the company has already suffered.

Another option is phased retirement programs that let workers gradually reduce their hours, says Cornelia Gamlem, president of human-resources consulting firm GEMS Group. There also are job-sharing arrangements, she says. For instance, if you and a co-worker are both thinking of paring your work hours, approach management with a plan detailing how you could divide your time and responsibilities.

Just keep in mind that a change to your full-time status could affect your eligibility for benefits such as health insurance or a 401(k) match.

Starting Over

Finding employment outside your company will present more of a challenge since you essentially have to prove yourself from scratch.

Ideally, you want to seek work within the same industry to take advantage of your network and work experience. If you look in a different field, figure out what skills you can translate into a new role.

When Ms. Gregor interviewed for her position at the senior center, she highlighted the computer and accounting skills she’d honed in decades of office work, even though she had most recently worked as a home health aide.

Some employers are known to hire senior citizens. AARP (aarp.org) has a directory. Search for “National Employer Team.” Some temporary-employment agencies, including Kelly Services and Adecco, specialize in placing seniors.

Keep Saving

While you may need a steady paycheck to pay the bills, you’ll still need to save for when you eventually do stop working.

Workers age 50 and older typically can contribute an additional $5,500 to a 401(k) annually and an extra $1,000 to an IRA. You also can get a tax credit of up to $2,000 annually if you contribute to a retirement plan and make $55,500 or less (for joint filers) or $27,750 (for single filers).

You generally don’t have to take required distributions from your 401(k) as long as you keep working for the employer offering the plan — regardless of your age. But at age 70 1/2, you’ll need to start taking annual distributions from a regular IRA. So make a plan to set aside or reinvest as much of those distributions as you can afford.

Hold off on taking Social Security benefits as long as possible since the longer you wait, the higher your monthly benefit will be. If you keep working, benefits are likely to be subject to federal income tax and may be further reduced if you take them before full retirement age. Finally, if you’re using Medicare, keep in mind that your premiums are determined by your income.


5 Retirement Mistakes Boomers Should Avoid

Hello,

I can’t count the number of times I have read in the papers of people who have been saving for retirement all their life, only for your portfolio to be wiped out by only one simple ‘mistake.’  For example, on the area of investment, a lot retirees still continue with the old practice of risk taking, not that it’s wrong, but what percentage of your retirement portfolio is invested in stocks. While stocks may have great returns in the long run, they should not be used as source of income for short-term purposes. Anyone who only depends on their investments and Social Security as their only source of income, should be extra careful to avoid some of the mistakes people make, and as Kathryn Tuggle explains in the following article, there are 5 retirement mistakes baby boomers should avoid.

For many baby boomers retirement is just around the corner, but they may also be headed for some big mistakes when it comes to investing for the long haul. Managing your money is never easy, but when you’re ready to quit the workforce, a mistake can turn your golden years to brass.

We checked in with financial planning experts to find the five mistakes baby boomers fall victim of when planning for retirement, and how to avoid them.

DON’T: Think that owning different mutual funds means you’re “diversified”

“Some people think that because they own mutual funds through different money managers, they are diversified, but really they are only in one corner of the market,” says Ken Kamen, president of Mercadien Asset Management.

Kamen calls this phenomenon as “phantom diversification,” where an investor really just has a duplicate set of the same stocks, that doesn’t include small-cap stocks or international exposure. He urges people to get out of one corner of the market.

“Many people buy mutual funds from Vanguard, something from Fidelity, but they don’t realize the top 30 holdings for all these companies are almost all identical,” says Kamen. ” With almost all the popular funds, the top 20 or 30 holdings are exactly the same. They just own the same thing in five different places.”

“Check under the hood,” advises Kamen. Even if you believe you bought different mutual funds, look to make sure they aren’t all invested identically.

DON’T: Be afraid of looking “across the pond” for investments

“It always amazes me that people are comfortable buying consumer products from all over the globe, but have an innate fear of investing globally,” says Kamen. “If you’re buying things made in China and Singapore, why not spend a few of your dollars there with growth potential?”

Kamen says that 20 years ago, stocks in the U.S. offered the best potential for growth, but that’s not the case today. He listed China, India, and Brazil as countries that offer strong growth opportunities.

“It only makes sense. The part of your portfolio you want to have growth needs to be invested in an area of the world where there is growth,” says Kamen. “Look for countries that have posted significantly greater growth rates in the last five years.”

DON’T: Jump on the bandwagon of what’s popular

“Don’t just narrow your portfolio down to what’s making money at the moment,” says Rick Salmeron, an investment adviser in Dallas. “When the investment universe shrinks down and everyone is talking about one thing, it pretty much assures you’ll be the last person to enter that idea before the lights go out.”

Salmeron pointed to the 1999 tech bubble and the recent real estate bubble as reasons why getting into the most popular investments of the day can be dangerous.

While it’s good to look for investments that have promise or growth potential, it should be a warning sign if absolutely everyone is talking about an investment.

“If it’s the hot topic of the moment, that’s the point in time where your alarm bells should be ringing,” warns Salmeron. “You’ve got to step back and conclude, you know what, it’s the worst time to get into this area because of its heightened interest.”

DON’T: Chase returns instead of planning for income

When it comes to investing pre-retirement, the biggest concern by far is longevity risk, says Curt Knotick, a financial planner with Accurate Solutions Group in Butler, Penn. The worst thing that can happen to a retiree is that they outlive their funds because they didn’t plan accordingly, he adds.

“When you’re younger, you are investing for retirement by using your paycheck as contributions to your 401(k) and IRA, and you have room to recover if something happens,” says Knotick. “When you are retired, you won’t have the ability to be as bold as you once were, because the money you were investing, you now need to pay the bills.”

The danger is that a boomer will pull out his or her shares during a bear market to use for income, and once those shares are cashed out, they aren’t there to grow during the good times, Knotick says. He advises investors leave themselves enough cash on hand so that they don’t have to withdraw money from stocks that they will need to mature down the line. While being an aggressive investor is great when you’re still in the work force, it can backfire once you’re living on a fixed income.

“Really, we’re looking at the difference between investing for retirement vs. investing for accumulation,” says Knotick. “You’ve got to position your income in the basement of the house, the most secure place, so it can weather the storm.”

He listed annuities, bonds, and more conservative investments that have some type of guarantee behind them as lower-risk places for baby boomers to put their money.

DON’T: Confuse your CPA with a tax planner

One way to ensure you’ve got more money coming in during retirement is by making sure it’s taxed less, says Knotick. Often times, baby boomers will have a certified public accountant working for them, but CPAs do not specialize in tax planning.

“A tax expert can help reduce a person’s tax liability from 15% down to 7% simply by restructuring their portfolios and using a few strategies they might not have thought of,” says Knotick. “Taxes have nowhere to go but up, and retirees have to be positioned for tax advantaged income in future.”

Baby boomers interested in checking on their current tax structure should go to a financial planner who also advertises for tax planning, Knotick says. Those planners will work in conjunction with your CPA to make sure your 1040 is structured to your advantage. Knotick says boomers may be listing things on their tax return unnecessarily that can put their Social Security benefits at risk for being taxed.

“If you can reduce that tax burden, it’s just more money in your pocket,” says Knotick.


Debt Hobbles Older Americans

Hello,

The economy is in bad shape and one of the reasons many people are not taking the retirement option is because their retirement portfolio has taken a beating since stock prices went south. But there is also another major reason most people are postponing investment, and that is debt. It’s no secret that our debt level is the highest it has been and it keeps on increasing on a daily basis, this means the average household is carrying a heavier debt burden than ever before. The consequence of this is, people have forced to cut costs in all aspects of their life, including contributions to their retirement funds. Once all the math is done, a lot of would-be retirees realize that they will not be able to finance their debt payments, and thus the only option is to keep on working until the debt is cleared. As E.S Browning explains in the following article, the issue of debt is affecting retirees to the extent of postponing retirement.

More Americans are reaching their 60s with so much debt they can’t afford to retire.

Most people used to pay off their debts before retiring. But as wages have barely kept up with rising prices over the past 35 years Americans have pushed debt higher, living beyond their means. Now, people are postponing retirement, cutting living standards or both.

All kinds of debt held by this age group have risen, but the big problem is mortgages. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20% had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights’ MacroMonitor. That was up from just 22% and 12%, respectively, in 1994.

The housing crash has made things worse. A few years ago, homeowners in their 60s with big mortgages could sell their homes for a profit and buy smaller places or rent. But the drop in housing values means that many homeowners have little equity, and some now owe more than their houses are worth.

People have tried to reduce debt since the financial crisis, with limited success. Americans of all ages owed $11.4 trillion at the end of the second quarter, based on data from the Federal Reserve Bank of New York. That’s down about 15% from 2007 but nearly double what they owed in 1999, adjusted for inflation and population.

Older Americans also have struggled to dig out in the past four years. “Relative to the value of their homes, the amount of indebtedness if anything has gone up because house prices have fallen faster than mortgages have been reduced,” says Christopher Herbert, director of research at Harvard’s Joint Center for Housing Studies.

Many have little choice but to keep working. “I imagine I’ll be working until I’m 70,” says Christine Shiber, a 59-year-old Methodist minister in California’s Bay Area, struggling to pay off her mortgage, credit-card debt and a loan she took against her retirement account.

Debt isn’t the only issue clouding retirement prospects. People aren’t saving enough either. As calculated in a Wall Street Journal article earlier this year, the typical American household nearing retirement with a 401(k) retirement account has less than one-quarter of what it needs in that account to maintain its standard of living in retirement.

Four out of five households with heads in their early 60s and with mortgages had too little savings in 2008 to pay off debts without dipping into retirement accounts, according to Boston College economist Anthony Webb.

Instead of boosting their savings as they approach retirement, a period when people usually make their largest retirement contributions, some older people are stopping contributions in order to service debts. Some who had already retired are going back to work because they can’t make the financial numbers add up.

The combination of easy credit, low interest rates and a consumption-oriented culture helped fuel a spending binge for Americans until the financial crisis. People with problems aren’t just those who took subprime loans or spent foolishly on lavish lifestyles. They are people from all backgrounds, including some with six-figure incomes.

“We have gotten into this ‘debt’s OK’ mentality and it is going to be very hard to get out of it,” says financial planner Greg Heller of Heller Capital Resources in Los Angeles, who says he has wealthy clients in their 50s with problems.

The Rev. Shiber and her husband borrowed to buy a home and for their children’s education, something many Americans have done. They divorced in 2007 and sold the home, repaying debts.

But Ms. Shiber needed a place to live. In 2008, she took out a fresh mortgage to buy a condominium. The down payment, together with her son’s college costs, used a big chunk of her remaining savings.

Soon, Ms. Shiber realized that she wasn’t making ends meet. She had trouble paying credit-card bills and started running a balance. Her 2001 Ford Focus needed a big, unexpected repair. She borrowed against her retirement account.

To her relief, Ms. Shiber negotiated a raise late last year. She then got a letter from her bank saying it had under-calculated her property-tax obligations. It raised her monthly mortgage bill, including property taxes, by an amount slightly more than the raise.

To Ms. Shiber, the debt burden began to seem biblical. “Even with Job, there weren’t these coincidences,” she laments. “I said, ‘Now, God, you are really messing with me!'”

After consulting with a financial adviser, Ms. Shiber cut living expenses. She travels less to visit her mother and daughter in New York and has fewer meals out. To her adviser’s dismay, she also has cut most of her contributions to her retirement plan.

Christine and Mark Nordell, a couple in their 60s, have put off retirement for at least two more years as they struggle to pay down their mortgage and credit-card debt and a daughter’s student loan.

Their plan was to sell their house in a Minneapolis suburb, pay off their debt and retire to a second home near a lake. But the Minneapolis home’s value plunged in the housing collapse and their plans went on hold.

Then Mr. Nordell lost his job when the nonprofit entity he founded to help African immigrants in the U.S. lost its funding. His new job as a part-time minister provides less income. The family lives mainly on Ms. Nordell’s income as a speech pathologist.

Despite efforts to cut spending and pay down debt, their credit-card debt sometimes has crept higher. Their home requires improvements before it can be sold, and they can’t afford them. They refinanced the mortgage and increased the loan balance to reduce high-interest credit-card balances.

They have retirement savings and a pension, which they think will cover retirement needs, but only after they get rid of the debt. Ms. Nordell hopes that the housing market recovers enough so they can sell their Minneapolis home, which would solve some problems.

“We did have some good stock investments, which have really saved us,” she says. “I have gradually had to cash them all in to help us with living expenses.”

Debt levels of older Americans have been rising for more than two decades. Of households with heads aged 62 through 69 and with mortgages, the median amount of mortgage debt hit $71,000 in 2007, five times the 1987 inflation-adjusted median, according to a study by William Apgar, then at Harvard’s Joint Center for Housing Studies.

Most people make their biggest salaries in their 50s and 60s, which should permit them to make their biggest retirement-savings contributions. But partly because of debt payments, many are missing out on the end-of-career push that is supposed to boost retirement savings to where they need to be.

Fidelity Investments, one of the largest managers of 401(k) retirement accounts, says participants aged 55 to 60 contributed a median 8% of salary in the first quarter of this year, down from 10% in the same quarter of 2006. Some cut contributions to zero. Even the 8% level is well below the double-digit contribution rate financial planners recommend for older workers.

In addition, some people, like Ms. Shiber, have borrowed against existing retirement savings. Others have withdrawn savings early. TIAA-CREF, another large retirement-money manager, says that new loans taken out by participants of all ages against retirement accounts rose by 18.8% in 2010 over 2009.

Debt problems are so pervasive that they are affecting retirement expectations even of people far from retirement.

Rob Salvaggio of Glencoe, Ill., won’t turn 50 until later this month, but he already is expecting a financial hit when he retires. Mr. Salvaggio, who works for a real-estate manager, once dreamed of retiring at 55, but his mortgage, auto and credit-card debts are so high that he is aiming now at something more like 65. Because of heavy monthly debt payments, his wife has stopped contributing to her 401(k) and he is making only minimal contributions to his.

“We aren’t going to be able to maintain or increase our standard of living in retirement,” he says. “We are going to go backwards.”

Mr. Salvaggio and his wife, Wendi, make good incomes and their financial adviser has urged them to cut back on their standard of living to reduce their debt. But Mrs. Salvaggio, who works for a multinational technology company, went through a difficult divorce before they married. Now, to provide stability for her son, they are determined to remain in the neighborhood where they live, even though it is expensive. When the landlord took back their rental home, they decided to buy another home, take on a mortgage and cut back on retirement savings.

“We all agreed that it wasn’t the optimal idea,” he says, although he hopes his home’s value will rise, permitting him to sell at a profit when he retires. “We thought it was better for our son to stay here.”


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