Monthly Archives: August 2012

8 Bad Money Habits to Drop by Retirement

Good Day,

We all look forward to retirement, because this is a time when the only thing that will be occupying your mind is what you wanna do with all the time you have in the world. But getting to that point in your life will require a lot of sacrifice, because the retirement life of your dreams won’t come cheap. As you endeavor over the years on how to achieve your retirement dream, there are habits that will have to be dropped since they will be contrary to your future goals. These are money habits that we unknowingly undertake on a daily basis that prevent one from enjoying their retirement to the fullest. Ok, I know dropping a bad habit is easier said than done, but if it is not beneficial to your future life, why not sacrifice for a better tomorrow. According to the following article by Jill Krasny, there are 8 bad money habits that every would-be retiree should drop before hitting retirement.

Baby boomers have borne the brunt of the recession burden and blame, but their bad money habits may be the root of the problem.

As many of these boomers near retirement, they face a dire financial situation spurred by years of financial mistakes. Luckily, these mistakes are correctable. MainStreet has tapped some financial experts to explain the most common money sins boomers commit so they can break the bad habit before retirement. Don’t say we didn’t warn you …

Not Saving for Retirement

MainStreet recently reported that one in six older Americans lives below the poverty line. This means millions, or 16% of seniors, lack the financial resources they need to get by and are being forced to take extreme measures such as cashing in assets, moving, returning to work or tapping the government for help.

Even if you’re not poor, don’t let a lack of planning hinder your financial future.

“These boomers think that it’s ‘after right now’ that it’s time to start saving,” says Stuart L. Ritter, a certified financial planner with T. Rowe Price, “but that’s a way to not have to make any changes.” Start saving now to spare yourself the heartache later.

Obsessing About Taxes

Ritter says one of the top misconceptions boomers have about individual retirement accounts is that taxes account for everything. And while they do matter to an extent, “a lot of people say that they want to pay less in taxes, when I’d personally like to pay significantly more. Hey, I want my boss to give me a massive salary increase so that I would pay more in taxes!” Ritter says.

Unfortunately, using taxes as the sole criterion for whether you use a Roth IRA or a traditional IRA can also mean higher long-term costs down the road, Ritter notes.

“Often, an upfront tax loss [with a Roth IRA] will give you more to spend in retirement,” but many will opt for the traditional IRA because it looks better on paper.

The ‘I’ll Just Work Longer’ Mentality

“I’ll start my diet tomorrow” is a common excuse heard long after New Year’s Eve, but are you taking the same approach to your savings by saying you’ll push-off retirement to work longer?

If so, you’re only procrastinating, and that’s not an effective savings strategy, Ritter says. By planning your finances ahead of time, you won’t need to pseudo-commit yourself to work, which may or may not be an option, depending on your health (and the economy).

Betting on Your Inheritance

The nation’s largest-ever intergenerational transfer of wealth is under way, and a nest egg of $11.6 trillion will be handed over to boomers from their elderly parents.

But you might not be one of these lucky inheritors, says Gabrielle Clemens, a certified divorce financial planner, and you’ll need to manage your assets on your own. “Many of these people, especially divorcees, are banking on their inheritance,” Clemens told MainStreet. But when tragedy strikes, Americans turn to three bad options: credit cards, the generosity of living family members and even bankruptcy. Keep your dignity intact and you won’t have to go down those rabbit holes.

Skipping Long-Term Care

“Having a plan for long-term care, whether that’s insurance, is something probably every boomer should consider,” Ritter says. Yet few boomers aged 46 to 64 actually do, according to a recent New York Life Insurance survey. While many boomers value long-term care and the role it played in their own parents’ lives, only 9% of 1,073 online respondents actually bought coverage for themselves because many (47%) felt they won’t ever need it or assume the government will foot the bill.

Still, as America’s health care costs ramp up and obesity and morbidity grow alongside it, older Americans face a decreased quality of life and need to be prepared.

Forgoing Employee Benefits

Are you working for one of those post-recession employers that still shows employees it cares? Wise up and sign on for the benefits being offered.

As TheStreet recently reported, “with the worst of the recession in the in the rearview mirror, benefits are getting a second look,” and some employers are finding cheap but effective ways to make employees feel special. That might mean adding a couple more days of paid vacation (not to mention holiday, sick and personal time) or throwing in retirement perks, from pensions to 401(k) plans. Sounds good to us — it should to you, too.

Not Using Your FSA

Too many boomers fall into the trap of thinking that if you don’t use it, you’ll lose it, Ritter says. While this is true with flexible spending accounts (FSAs, in which pretax income is set aside to pay for health or dependent care expenses), the tax benefit can outweigh the use-it-or-lose-it provision. “That’s all they’ll focus on and they’ll give up huge benefits that FSAs provides.”

Think about it this way: Without an FSA, $100 of salary taxed at 30% to 40% means you’ll lose $30 to $40. “But here’s the counterintuitive thing,” Ritter adds, “if at the end of the year you didn’t use the $100, you’ve still got $30 and loose change and you’ll come out ahead.”

Besides, with an FSA there are deals to be had. “Every optometrist has a sign saying ‘use your FSA at end of the year,'” Ritter notes.

Taking Social Security Too Soon

Remember the phrase “Good things come to those who wait?” According to Ritter, “taking your Social Security too early isn’t part of a solid financial plan either.” That’s because for every year you stave off the temptation to take those funds, you’ll get a 7% to 8% payout increase guaranteed and adjusted for inflation up to age 70. Many boomers do it because they can, but they’re really only hurting themselves in the long run.

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How to Protect Your Retirement Investments from Scams

Good Day,

People are losing their hard-earned cash in all manner of ways these days, and one of those ways is through scams that have been coined by well researched individuals purporting to be investment experts. As I mentioned in my previous blog on this subject, the target for these con artists are retirees, since most of them lost a considerable amount of money during the financial meltdown, and at the moment are in a vulnerable position as they try to recover their losses. With no more income coming in, a lot of retirees fall for whatever ”investment” that promises high returns at low management fees, but the next time the retiree goes to check on their investment, the con artist usually comes up with a story of how things did not go as they had predicted, and losses were inevitable. Thousands of retirees have lost their cash in this sort of scam, and many more may be victims if nothing is done to inform the public of the dangers that is awaiting them out there. So the next time you go shopping for an investment that will give good returns be sure to protect yourself and your money from con artist that are waiting for unsuspecting investors, as David Francis explains in the following article.

The Great Recession hammered investments across the board. But perhaps no one was more devastated by the economic downturn than retirees or those on the verge of retirement. People who already retired were no longer working, so they had no chance to earn back the money lost. People close to retirement were left scrambling to regain losses quickly or delay retirement altogether.

It’s no coincidence that around this time, a new kind of scam emerged that targeted financially stressed retirees. These scams take many forms, but perhaps the most common is what is known as a “free lunch” scam. Here’s how it works: An advertisement is placed in a newspaper or online promising a high-reward, low-risk investment that directly benefits retirees. It also promises a free lunch at a local restaurant, where a more expansive sales pitch can be made.

At the lunch, a polished broker promises market-beating returns. All the retiree has to do is roll over his or her 401(k) account into an account run by the broker’s firm. There’s some talk about risk and fees but with high returns, those fees would be nominal. Desperate to make up the money lost in the bear market, the retiree agrees.

Once that money is under the broker’s control, it disappears. The retirees are told that unforeseen market fluctuations caused steep losses in their account. According to the broker, there’s little to nothing left. The retirees are left broke; the broker most likely walks off with the money.

These scams have become so common that the American Association of Retired People (AARP) started a No Free Lunch campaign to increase awareness.

“We have people who are concerned about lack of credentials, high-pressured pitches, promises of high returns, and virtually no risk,” says Sally Hurme, a lawyer and project manager with AARP education and outreach. “We want them to report their concerns back to us in an easy reporting form available at this site.”

Wide range of scams.

Free lunch scams are hardly the only ones that target seniors. In “mystery shopper” scams, people receive a large check from what appears to be a government agency with instructions to deposit the check into a checking account. There are also instructions to spend a portion of the money at a particular store, keep a bit in the account, and wire the rest overseas.

Sounds like easy money. But the check is bogus and the money being transferred out of the account belongs to the victim.

Then there’s medical fraud, in which seniors are targeted for unneeded tests, and a relative-in-distress fraud, in which a person calls claiming to be a long-lost relative in need of money. There are also Ponzi schemes, made famous by Bernie Madoff. Money raised from new investors is used to pay old investors. Sooner or later, the scheme collapses and everyone loses their cash. Other fraudsters sell unregistered securities, like promissory notes or sales in microstocks.

According to Katherine Hutt, director of communications at the Council of Better Business Bureaus, these are just a sampling of the scams aimed at seniors. “During retirement specifically, there are so many different scams that targets seniors,” she says. “There are a lot of scam artists that fly under the radar.”

Fraud warning signs.

Gerri Walsh, vice president of investor education at the Financial Industry Regulatory Authority (FINRA), says a scammer’s primary way of targeting a victim is through persuasion. To gain trust through persuasion, he or she uses five primary methods:

  1. Promises of phantom riches. “They dangle something that you want but can’t have–guaranteed returns and promises of untold riches,” Walsh says.
  2. Source credibility. “This is the idea that we all want to work with the person who is the expert. We seek out the person who is knowledgeable,” according to Walsh. “A con man looks the part of the authoritative figure, but authority can be faked. Diplomas you claim to have, accolades you have gained–it can all be made up.”
  3. Social consensus. “Everybody is doing it, and you don’t want to be the one that’s left off the bus. You want to be with the ‘in’ crowd,” she says.
  4. Reciprocity.“The idea behind this is the concept of ‘I do something nice for you, you do something nice for me,'” Walsh says. “There’s been a lot of research that’s been done that shows when you give someone something, that person is more likely to give back to you.”
  5. Scarcity. “It’s used to create a false sense of urgency–something is time-limited. They might say it’s quantity-limited. They also might claim something is exclusive,” Walsh says. “This is the idea that this opportunity is only available to a select group of investors, and you are one of them.”

According to Walsh, the best scammers will use these tactics on a mark without the mark realizing that he or she is being targeted.

How to fight back.

Walsh says the best weapon against cons is simple: Ask a lot of questions.

“The process is designed to weigh you down so that you’re in an ether and not making a rational decision–you’re making an emotional one,” she says. “The best way to avoid this situation is to ask questions. If you make the con’s work difficult, they’ll back away.”

“You’ve got to do your own independent research,” adds AARP’s Hurme. “You have to verify the info and not let the glitter and glamour of a brochure that is not a regular prospectus get in the way of prudent caution.”


Changes Tough, but Social Security is Fixable

Good Day,

We have heard that Social Security is going broke enough times, but on very few occasions have I heard someone talk about how to get ourselves out of this quagmire we are in at the moment. The blatant truth is that Social Security is in deep trouble, and thus will require very tough decisions to be made. This being an election year, don’t expect anything drastic to happen , and for that matter, I don’t see any action being taken because what has to be done on Social Security requires, sorry for my language, but somebody with real balls, because it requires proposals that will not go down with lawmakers and the American people in general. But just like the economy is going through some tough times and will mean tough decisions, Social Security needs the same treatment. It is not too late to make the necessary changes that are required to ensure that Social Security does not go broke in 2033, as it predicted. And as Stephen Ohlemacher points out in the following article, although the changes are tough, Social Security is still fixable.

Despite Social Security’s long-term problems, the massive retirement and disability program could be preserved for generations to come with modest, but politically difficult changes to benefits or taxes, or a combination of both.

Some options could affect people quickly, such as increasing payroll taxes or reducing annual cost-of-living adjustments for those who already get benefits. Others options, such as gradually raising the retirement age, wouldn’t be felt for years but would affect millions of younger workers.

All of the options carry political risks because they have the potential to affect nearly every U.S. family while raising the ire of powerful interest groups. But the sooner changes are made, the more subtle they can be because they can be phased in slowly. Each year lawmakers wait, Social Security’s financial problems loom larger and the need for bigger changes becomes greater, according to an analysis by The Associated Press.

“Certainly, in the current environment, it would be very difficult to get changes made,” Social Security’s commissioner, Michael J. Astrue, said in an interview. “It doesn’t mean that we shouldn’t try. And sometimes when you try hard things, surprising things happen.”

Social Security is ensnared in the same debate over taxes and spending that has gripped Washington for years. Liberal advocates and some Democrats say benefit cuts should be off the table. Conservative activists and some Republicans say tax increases are out of the question.

Others, including a deficit commission created by President Barack Obama in 2010, have called for a combination of tax increases and cuts to future benefits, including raising the retirement age again.

Janice Durflinger of Lincoln, Neb., is still working at age 76, running computer software programs for a bank. Still, she worries that a higher retirement age would be tough on people with more physically demanding jobs.

“No matter how much you exercise, age takes its toll,” Durflinger said.

But at 20, Jared Macher of Manalapan, N.J., worries that Social Security won’t be around for his generation without major changes.

“My generation sees Social Security as a tax, not an investment,” Macher said.

Social Security’s finances are being hit by a wave of demographics as millions of baby boomers reach retirement, leaving relatively fewer workers behind to pay into the system. About 56 million people get benefits today; that is projected to grow to 91 million in 2035.

For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children.

But Social Security trustees project that the surplus, now valued at $2.7 trillion, will be gone in 2033. At that point, Social Security would only collect enough tax revenue each year to pay about 75 percent of benefits, unless Congress acts.

After the surplus is spent, the gap between scheduled benefits and projected tax revenue is big.

Social Security uses a 75-year window to forecast its finances, so the projections cover the life expectancy of every worker paying into the system. Once Social Security’s surplus is gone, the program is scheduled to pay out $134 trillion more in benefits than it will collect in taxes over the next 75 years, according to data from the agency. Adjusted for inflation, that’s $30.5 trillion in 2012 dollars.

The options for closing the gap fall into two broad categories: cutting benefits or raising taxes. There are, however, many options within each category.

The AP used data from the Social Security Administration to calculate how much of the shortfall would be eliminated by various options. To illustrate how Social Security’s long-term finances have become worse in the past two years, the AP also calculated the share of the shortfall that would have been eliminated, if the options had been adopted in 2010.

Taxes

Social Security is financed by a 12.4 percent tax on wages. Workers pay half and their employers pay the other half. The tax is applied to the first $110,100 of a worker’s wages, a level that increases each year with inflation. For 2011 and 2012, the tax rate for employees was reduced to 4.2 percent, but is scheduled to return to 6.2 percent in January.

Options:

Apply the Social Security tax to all wages, including those above $110,100. Workers making $200,000 in wages would get a tax increase of $5,574, an amount their employers would have to match. Their future benefits would increase, too. This option would eliminate 72 percent of the shortfall. Two years ago, it would have wiped out 99 percent.

Increase the payroll tax by 0.1 percentage point a year, until it reaches 14.4 percent in 20 years. At that point, workers making $50,000 a year would get a tax increase of $500 and employers would have to match it. This option would eliminate 53 percent of the shortfall. Two years ago, it would have wiped out 73 percent.

Retirement age

Workers qualify for full retirement benefits at age 66, a threshold that gradually rises to 67 for people born in 1960 or later. Workers are eligible for early retirement at 62, though monthly benefits are reduced by about 25 percent. The reductions shrink the longer you wait to apply.

Options:

Gradually raise the full retirement age to 68 in 2033. This option would eliminate 15 percent of the shortfall. Two years ago, it would have eliminated a little more than 20 percent.

Gradually raise the full retirement age to 69 in 2039 and 70 in 2063. This option would eliminate 37 percent of the shortfall. Two years ago, it would have eliminated about half.

Cost-of-living adjustments

Each year, if consumer prices increase, Social Security benefits go up as well. By law, the increases are pegged to an inflation index. This year, benefits went up by 3.6 percent, the first increase since 2009.

Option: Adopt a new inflation index called the Chained CPI, which assumes that people change their buying habits when prices increase to reduce the impact on their pocketbooks. The new index would reduce the annual COLA by 0.3 percentage point, on average. This option would eliminate 19 percent of the shortfall. Two years ago, it would have eliminated 26 percent.

Benefits

Initial Social Security benefits are determined by lifetime wages, meaning the more you make, the higher your benefit, to a point. Initial benefits are typically calculated using up to 35 years of wages. Earnings from earlier years, when workers were young, are adjusted to reflect the change in general wage levels that occurred during their years of employment.

Tinkering with the benefit formula can save big money, but cuts to initial benefits mean lower monthly payments for the rest of a retiree’s life. The average monthly benefit for a new retiree is $1,264.

Option: Change the calculation for initial benefits, but only for people with lifetime wages above the national average, which is about $42,000 a year. Workers with higher incomes would still get a bigger monthly benefit than lower paid workers but not as big as under current law. It’s a cut they would feel throughout their entire retirement. This option would eliminate 34 percent of the shortfall. Two years ago, it would have eliminated almost half.


5 Costly Retirement Surprises

Good Day,

Retirement is a phase in your life that you cannot escape, unless of course you never make it that far for other reasons. But since majority of us will make it, why do most of us get caught off guard because of simple things that you should have done when setting up your retirement fund. For example, many retirees tend to blow their budget during the early years of their retirement, maybe it’s because of the excitement of having so much freedom, and wanting to do all those things that you’ve always wanted to do once you retire, that not many people pay any close attention to how much expenses their accumulate along the way. The following article by Kiplinger gives 5 retirement surprises that prove to be costly for many retirees.

Most people dream of retirement long before they get there. Perhaps you imagine hours spent on the golf course, taking a class on a subject that has always intrigued you or volunteering for your favorite cause. Of course, that’s the idealized version of retirement. And then there’s reality.

Kiplinger’s asked financial planners from the National Association of Personal Financial Advisors what retirement surprises their clients most often encounter, and queried our Facebook community as well, to come up with this list of five top financial surprises. Pre-retirees, you are forewarned.

Health Care Costs

The cost of health care came up most often as a top retirement challenge among retirees on our Facebook page. According to Fidelity Investments, the average 65-year-old couple will spend about $400,000 out-of-pocket throughout retirement until age 92, not including long-term-care costs.

Those new to Medicare may find it’s more costly than they bargained for, too. While Part A of traditional Medicare, which covers hospital benefits, is free, you’ll pay a premium for Part B to get coverage for outpatient services and a premium for Part D to get prescription-drug coverage. Add in the premium for a private Medigap policy, which helps cover the costs that Medicare doesn’t cover, and a couple can end up paying $6,500 a year in Medicare premiums alone.

High-income beneficiaries get an extra shock — they are subject to a premium surcharge. Even if your income isn’t always high, you can land yourself in surcharge territory if you spike your income in one year with a Roth conversion, for example, or exercised stock options. The surcharge starts to kick in if your annual adjusted gross income (plus tax-exempt interest income) tops $85,000 if you are single or $170,000 if you are married filing jointly.

Keep in mind that Medicare does not cover long-term-care costs – an additional expense you must plan for.

Higher Spending

You no longer have to budget for work clothes or commuting. But you may have to start paying for some things that you used to receive as perks through work, such as a company car, meals, travel or computers. “Small business owners and professionals who retire are often surprised how many of their expenses were picked up by their company,” says Bert Whitehead, president of Cambridge Connection, in Franklin, Mich. “It is a jolt when they discover how much it adds up to.”

Many retirees plan to see the world in their first few years of retirement, but the costs of transportation, lodging and entertainment can add up quickly. Retirees’ actual “travel budgets tend to be at least 10% to 20% higher than what had been budgeted,” says certified financial planner Debra Morrison, of Trovena’s Roseland, N.J., office. Even if you stay put, you’ll have free time to fill, and activities, such as golf or fixing up the house, cost money, too. “We tell clients that the ‘common wisdom’ that retirees spend 75% of what working people do is a dangerous thing to believe. We do goal setting to discover how they actually picture their retirement, and then try to place a price tag on it,” says certified financial planner Barry Kaplan, of Cambridge Southern Financial Advisors, in Atlanta.

Those first few years in particular may be expensive as you enjoy your freedom from work, so budget accordingly when drawing up your retirement income plan. “Retirees desire to travel and become more active in the lives of their children and grandchildren,” says certified financial planner Lazetta Rainey Braxton, of Financial Fountains, in Chicago. “It’s hard to plan for activities and ‘unassigned gifting’ when a retiree has never set aside these ‘line items’ in their budget.”

Social Security Taxes

Most people realize that they are paying a tax into the Social Security system during their working years, but did you know that you may also have to pay tax on your benefits once you start receiving them? Up to 85% of Social Security benefits are taxable, and the income thresholds that trigger Social Security income taxation are low — $32,000 for a married couple, for example. “Retirees have a difficult time adjusting to the taxability of Social Security income and the low-income thresholds. Most retirees don’t see Social Security as taxable deferred income since they paid into the government fund using after-taxed dollars during their employment years. In their minds, retirement income shouldn’t be taxed twice,” says certified financial planner Lazetta Rainey Braxton, of Financial Fountains, in Chicago.

You’ll also forfeit some benefits if you continue to work before you hit full retirement age — in 2012, you give up $1 in benefits for every $2 you make over the earnings limit of $14,640. The good news is that once you pass full retirement age, your benefit will be adjusted upward to account for the forfeited benefits.

Taxes on Nest-Egg Withdrawals

Uncle Sam not only wants a piece of your Social Security benefits, but he’s ready for his slice of your pretax retirement savings. When you withdraw money from a traditional IRA or 401(k), those dollars stashed away pretax have a tax bill attached to them when they come out of the account, says certified financial planner Burt Hutchinson, of Fisher & Hutchinson Wealth Advisors, which has offices in Wilmington and Lewes, Delaware. Money you pull from tax-deferred retirement accounts is taxed at your top ordinary-income tax rate, which can be as high as 35%. So if you need $30,000 to buy a new car and you are in the 25% tax bracket, you’ll need to withdraw $40,000 from your IRA to cover the cost of the car and the $10,000 tax bill on the withdrawal.

You can leave the money in tax-deferred retirement accounts until you hit 70 1/2. Starting at that age, seniors are required to take minimum withdrawals from IRAs and 401(k)s. If you have a large amount of money in those accounts, a sizable RMD may push you into a higher tax bracket than you thought you’d end up in upon retirement. To mitigate the tax hit, it could be advantageous to tap those accounts sooner than later. Another smart strategy: Start stashing money in a Roth IRA, which has no RMDs for account owners and can be tapped tax-free

Loss of Income for a Surviving Spouse

Estate planning is critical to make sure your assets are passed down as you wish. But another critical component of estate planning for couples is making sure that the surviving spouse will have enough money to live on. “One thing people don’t plan for is the reduction of income if a spouse or partner dies — without corresponding reduction in expenses,” says certified financial planner Kathy Hankard, of Fiscal Fitness, in Verona, Wis. For example, if both spouses are both receiving Social Security benefits, a significant chunk of that income stream will disappear.

The surviving spouse can switch to a survivor benefit if that is higher than her own, but the survivor benefit will not make up for the lost income of going from two benefits down to one. This is one reason why boosting the potential survivor benefit through delayed retirement credits is a smart strategy for couples. The higher-earning spouse can wait to take his benefit, which can earn up to 8% a year in delayed credits up to age 70, and at that spouse’s death, the survivor can switch to a benefit worth 100% of the deceased spouse’s benefit, including the delayed credits plus cost-of-living adjustments.

The same income reduction can happen if a spouse who receives a pension hasn’t signed up for a joint-and-survivor annuity. If the annuity is only based on his life expectancy, at his death, that income source will dry up with no payments for the surviving wife. Choosing the joint-and-survivor option may result in less money monthly, but it will provide income for the surviving spouse if the pensioner dies first.


7 Threats To Your Retirement

Good Day,

The retirement game changed completely after the financial meltdown of 2008, employers nowadays are looking for ways to reduce the contributions they make to their employees’ retirement funds, and at the same time scrapping post-employment benefits entitled to their former employees. I can understand that employers are also going through tough times, since revenues are decreasing while costs are either increasing or maintaining a constant level. The most worrisome part of all this, is that employees have maintained their usual contributions instead of increasing it. This means that when it comes time to retire, many people will have insufficient funds in their retirement portfolios, and as result, some may be forced to lower their standard of living or postpone their retirement, and continue working for the forseeable future just to accumulate enough wealth that will ensure a better standard of living. But employer contributions is one of the threats to your retirement portfolio. The following article by Kiplinger gives 7 threats that will do harm to your retirement portfolio in this day and age.

Saving for our retirement becomes more and more challenging each day. Longer life expectancies, fewer traditional pensions, and volatile investment markets are the most obvious challenges. Beyond that, here are seven other threats to your retirement.

  • Even if you have a traditional pension plan, those benefits can change.

Your employer can’t take away benefits you’ve already earned, but benefits going forward can be reduced. Traditional pension plans have experienced losses during the market decline, which will require additional contributions from companies. Companies might reduce benefits for newer employees and/or freeze plan benefits for existing workers. In the latter case, you would cease to accrue any further pension benefits. Keep an eye on your pension plan so you know if your employer makes changes.

  • Switching jobs can affect your retirement benefits.

If you have a traditional pension plan, don’t change jobs without considering the impact on your pension benefits. Many plans have a five-year time frame for vesting into a benefit. The same applies to 401(k) plans with matching employer contributions. You may find staying at your job a while longer will significantly increase your benefits.

  • Don’t forget about pension benefits from previous employers.

Many employees leave a company without realizing they are entitled to pension benefits. Before changing jobs, check with your employer to find out what benefits you are entitled to. Then keep track of the company so you can claim benefits when you retire.

  • Early retirement can significantly reduce your retirement benefits.

Sure, it sounds great to retire before age 65 with company pension benefits. But don’t just look at how much you’ll receive when you retire early. Also consider what you would receive if you wait until normal retirement age. Retiring early can dramatically lower your monthly pension benefit for several reasons: You don’t have as many years of service, salary increases you would have earned aren’t considered, and those extra years of benefits cause a large actuarial deduction in benefit calculations.

  • You may not be able to count on health insurance benefits after retirement.

Due to rapidly increasing costs for health insurance, many companies are either phasing out health insurance benefits for retirees or increasing retirees’ share of the cost. While Medicare is still available once you turn age 65, those benefits don’t cover all medical costs. Whether or not you can count on health insurance benefits is often a significant factor in deciding whether you can retire before age 65.

  • Social Security benefits are changing.

Normal retirement age is gradually increasing from age 65 to age 67, a change affecting anyone born during or later than 1938. You can still receive reduced benefits at age 62, but the permanent reduction in benefits is increasing from 20 percent to 30 percent. These changes are meant to encourage you to retire at a later date.

  • Decide carefully before taking a lump-sum distribution.

Some traditional pension plans allow lump-sum distributions instead of monthly pension benefits. Use that option with care. While the amount of money might seem large, are you sure you can invest it and earn more than the monthly pension option?

Planning for retirement was never easy. Make sure you have a financial plan in place and that you have considered all of your options before deciding when to retire.


7 Money Matters to Consider if Retiring Overseas

Good Day,

You have waited for this financial nightmare to be over, but it looks like it will take forever to do that. So you go for the next best option because, lets face it, the returns from your investments are not enough to cover your monthly expenses, and with that trend in place, you figure that you’ll run out of money in the not-so distant future. More and more Americans are contemplating retiring in a foreign land, just to get the most value from their dollar, as a result of the dismal performance of their retirement portfolio. Although the idea of retiring abroad might appear enticing at the moment, you should take a closer look at certain aspects before you regret later on when its much too late to reverse your decision. As Robert Powell points out in the following article, there are seven money matters every retiree should consider before packing their bags, and heading to their dream destination.

For whatever the reason- politics, taxes, the cost of living, you name it—more Americans on the verge of or in retirement want to love it and leave it. They want to keep their U.S. citizenship and retire abroad.

“More and more people are considering it since their investments have taken a hit the last few years,” said Joseph Hearn, a vice president with Teckmeyer Financial Services. “Rather than delaying retirement they’re looking for a place where their dollar will go further.”

But those who fancy a less expensive or more exotic place to live in their golden years must address a good many financial planning issues, including taxes, insurance, investments and estate plans, before leaving the shores of America.

Here’s the laundry list of things to consider.

1. Expert advice

Step one requires that you seek out experts who can help you with the questions you have as well as the questions you should ask.

“It’s well worth your while to talk with somebody who has expertise in tax and estate planning for expatriates—ahead of your move,” said Jennifer Stevens, executive editor of InternationalLiving.com. “I can just about guarantee that your regular-old accountant isn’t going to cut it.”

Others agree. “Taxes can be complicated so I advise people to meet with a tax adviser who has experience in foreign tax issues,” said Hearn. “This is especially true if the person plans on working part-time and has a potential tax liability both in the U.S. and their new country of residence.”

2. Taxes

If you retire abroad, and assuming you haven’t renounced your U.S. citizenship, there will still be two certainties in your life—death and taxes, said Michael Kitces, publisher of the Kitces Report. “As long as you’re still a U.S. citizen, even though you’re living abroad, you still owe income taxes as a U.S. citizen on all income earned, worldwide,” he said.

If you’re living full-time in another country, but haven’t fully renounced your U.S. citizenship, which Kitces said has tax and legal consequences of its own, don’t forget to file your annual tax return, and pay your estimated taxes along the way.

In addition, you’ll likely have to file tax forms in the foreign country in which you reside, according to Eric Lin, a certified financial planner, assistant professor of finance and director of the financial planning program at California State University, Sacramento (a CFP Board registered program).

“Although certain tax treaties and foreign earned-income exclusions and deductions are available, it could be difficult for retirees to fully understand the codes and utilize the exclusion/deductions correctly,” Lin said. (See IRS Publication 54.)

Kitces agreed. “In addition, you’ll likely owe income taxes in your country of residence, too, although the U.S. provides a foreign tax credit to at least partially mitigate the double-taxation burden of paying taxes to a foreign government and the U.S., too,” he said.

Check also whether interest paid on a foreign property is tax-deductible in the U.S. It’s probably not, said John Grable, a certified financial planner and professor at the University of Georgia.

And don’t forget about state taxes. “Even though you retire abroad, you may still owe these,” said Stevens. “But if you’ve established a residence in a no-tax state ahead of your overseas move, you could position yourself to save thousands.”

Even though you might be moving abroad to cut costs, there’s likely to be one cost that’s twice as expensive, Lin said. “Retirees need to consider the expense of professional tax services in both countries,” he said.

3. Health care and insurance

You also need to think about how to pay for your health care.

For instance, Medicare won’t provide coverage for U.S. citizens living abroad, according to Hearn. And most employer-provided retiree health plans don’t have or have very limited overseas coverage, Lin said.

That means you will need to self-insure, buy coverage in your new country, or buy an international policy.

The good news on this front: “In lots of destinations, you can buy health insurance as good as—or better—than what you have now for a fraction of what you currently pay,” Stevens said.

For instance, in many destinations recommended by InternationalLiving.com, Stevens said Americans have access to excellent health care, delivered by physicians trained in the U.S. and Europe.

“This, too, can cost half, or less, than what you pay today,” she said. “In fact, it’s so affordable, many expats choose to simply go without health insurance overseas and pay out-of-pocket for care. In a place such as Ecuador or Panama, for instance, where a doctor’s visit might cost $25 to $50, you can do that.”

For his part, though, Lin warned that quality of care is an issue to consider if you relocate to a less-developed country.

4. Social Security

In most cases, you can get your Social Security forwarded overseas, so that shouldn’t be a problem, Hearn said. But there are some costs.

“Expats are eligible for Social Security benefits which can be directly deposited to an U.S. bank account,” said Lin. “However, retirees may incur certain fees for transferring money to a foreign bank account and converting U.S. dollars to local currency.”

5. Investments

According to Lin, some countries limit or even prohibit ownership by foreign nationals.

“Retirees planning to invest in properties or securities in a foreign country need to consider working with a reputable local attorney and other financial professionals,” Lin said. “Taxation on investments can be complicated in a foreign country as well.”

Keep this in mind if you plan to invest in the country in which you reside: “Most countries do not have strong regulatory agencies such as Financial Industry Regulatory Authority and the Securities & Exchange Commission,” said Allan Katz, a certified financial planner and president of Comprehensive Wealth Management Group.

6. Real estate

One issue that seems to catch many Americans off guard is the different property ownership rules in foreign countries, said Grable.

“Sometimes, and I am not sure exactly why, Americans assume that the right to own property is the same elsewhere as in the U.S.” he said. “That is not true.”

In Central America, for example, what people may think of as real property may be shares in a corporation, said Grable. “In that case, no real property ownership exists, so if the corporation fails, the entire investment may be lost,” he said.

Grable recommends that those who want to retire abroad determine whether it’s easy it is for an American to sell a property overseas.

“Some governments have restrictions on the transfer of cash and other assets from the country,” Grable said. “That is, these governments are happy to have Americans invest, but they are unhappy to allow ‘profits’ to be exported.”

Basically, said Grable, it comes down to knowing the rules, laws, and regulations of the foreign country. “Investing overseas can be an enjoyable experience, but often finding something in the U.S. provides better asset protection, income-tax advantages, and safety.”

7. Estate planning

U.S. courts generally don’t have jurisdiction over the transfer—for example, the passing down to the next generation—of a foreign asset owned by a U.S. citizen, according to Lin.

“Trusts drafted in the U.S. usually cannot contain foreign assets,” he said.

Related items are existing wills, durable powers of attorney and advance health-care directives. “Are they recognized by the foreign government?” asked Lin “Retirees need to consider working with a local estate attorney for the proper transfer of the assets as well as the estate planning documents mentioned.”

Indeed, Kitces recommends updating your wills, especially if you own real estate there, “to provide for the distribution of both any U.S. property, and your foreign property.”

Depending on the country you live in, Kitces said you may need a foreign will to handle your foreign assets, or simply to adjust your U.S. will to provide for the disposition of your foreign property.

For his part, Hearn recommended that you have powers of attorney checked out by a local attorney, especially “since it will be the local hospital that will be looking at the medical power of attorney if you become incapacitated.”

There are alternatives

For those who want to move somewhere exotic, but not deal with the tax issues or the potential estate-planning problems, Lin recommends a have-your-cake-and-eat-it-too solution.

“Things are less complicated for people who plan to retire outside the U.S. but live in one of the three jurisdictions—Guam, Puerto Rico and the U.S. Virgin Islands,” Lin said.


5 Ways People Sabotage Their Own Retirement

Good Day,

I know everybody right now is blaming the financial crisis that happened for their retirement woes, but there are a number ways one can sabotage their own retirement. For example, a lot of people think that the monthly contributions they make to towards their Social Security will be enough to cater for all their expenses once they retire. The mistake a person makes in this situation is that they are not considering that we are paying more in Social Security than any other time, but the benefits we get in form of a Social Security paycheck is less than the contributions. Also, the number of retirees is increasing every year, and what this means is that more workers will be required to take care of this group of retirees. What this boils down to is that you’ll receive less in benefits than the contributions you’ve made to the system. Consider a recent study that has found that this year, the first bunch of retirees started receiving less in benefits that the actual contributions their made in Social Security. But there are other ways that a person can sabotage their retirement as Kimberly Palmer explains in the following article, but the good news is that the damage can be reversed with adequate planning.

There’s no shortage of reasons why Americans don’t have enough money saved for retirement: The stock market’s volatile performance, the declining popularity of pensions, and high cost of living are all culprits. More than half of Americans report having less than $25,000 in savings and investments, according to the Employee Benefit Research Institute, a nonprofit research organization. The federal government estimates that 12 percent of women and 7 percent of men over age 65 live in poverty.

To avoid becoming part of those depressing statistics, consider steering clear of these five common mistakes:

1. Having children.

Children also provide meaning and value, of course, so we aren’t actually suggesting that you avoid parenthood altogether. But it can help to consider the financial ramifications in advance, and prepare accordingly.

A survey by TD Ameritrade found that parents said having children made it more difficult to save money for retirement. Some 48 percent of female breadwinners and 39 percent of male breadwinners said they have scaled back their own retirement savings to put more money toward their children. Households with only one earner face a particularly high risk for falling behind: One in four single-income households said they are far behind on being financially ready for retirement, compared to 17 percent of dual-income households.

2. Waiting too long.

Financial advisers find that people often delay saving for retirement until their debts are paid off, but that can mean sacrificing many years of compounding. Instead, advisers usually recommend opening a tax-advantaged retirement account as soon as you start working, even if you save just a small amount each pay period. Saving those small amounts–$25 per paycheck, for example–can help get a retirement account going, and employer contributions can help even more.

3. Failing to calculate a retirement number.

Only 1 in 10 people make such a calculation, according to the Transamerica Center for Retirement Studies. That might explain why, on average, Americans are on track to replace 60 percent or less of their income during retirement. Financial advisers generally agree that retirees need to replace 80 percent or more.

That means someone who brings home an $80,000 salary at the peak of his working years should save enough before retirement to generate at least $64,000 a year post-retirement. An investment, such as an annuity, that generates a 3 percent annual return would require savings of at least $2.1 million to throw off that sum annually. (Retirees can also supplement their income by continuing to work, as well as with Social Security payments and pensions.)

4. Investing too conservatively, or too aggressively.

Twenty-somethings shouldn’t have most of their retirement investments in bonds, or other conservative assets that barely keep up with inflation, and conversely, soon-to-be retirees should not have most of their nest egg in the stock market, which can drop unexpectedly at a moment’s notice. Advisers generally recommend shifting into a more conservative portfolio as you age; a 30-year-old might have 30 percent in bonds and 70 percent in stocks while a 70-year-old would have the reverse mix.

5. Failing to anticipate a long life.

With lifespans on the rise, retirees can count on living another 20 or 30 years–or longer–post-retirement age. That means they need even more savings than their parents’ generation. Rising healthcare costs also eat up those funds, so erring on the side of a bigger retirement fund is essential.

If you find all this advice confounding, consider this strategy: Just save 18 percent. That’s the savings rate a medium-earner ($43,084 in 2010) would need if he or she starts saving at age 35 and plans to retire at age 68 (assuming a 4 percent return on investments), according to the Boston College’s Center for Retirement Research.

The Center finds that the two most important factors for creating a retirement nest egg are one’s savings rate and the age of retirement. “If people could work until they’re 70, they would have a much higher chance of having a secure retirement. Social Security is higher if you wait until age 70, and it gives your 401(k) assets a longer chance to grow, and it reduces the number of years you have to support yourself,” says Alicia Munnell, the center’s director. Less important was the rate of return earned on investments.

So don’t despair if your investments are still recovering from the last recession–just start saving now, to make up for any lost time.


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