Monthly Archives: November 2012

8 Bad Money Habits to Drop by Retirement

Good Day,

Has it ever occurred to you that sometimes it’s not the system that is unfair, but rather you as an individual where you, subconsciously put yourself in harm’s way and blame the system later. As human beings, many people will generally never admit that they have an issue, and it becomes a problem when the same issue is the one that brings us down. Take an example of the various habits we have in regards to money, some of us are spenders, others are savers while others happen to fall in the middle. Spending money is not a bad habit, as long as you have your priorities right. As Jill Krasny explains in the following article, there are 8 bad money habits that you should drop before reaching 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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7 things you must know about the ‘new retirement’

Good Day,

I think we’re all in agreement when I say that a lot has changed in the last 25 years or so, truth be told, a lot has changed in the last 5 years, to be exact, since the financial meltdown, and retirement planning is no exception. Things that were considered basic when it came to retirement are no longer working, for example, the 4% withdrawal rule that was once a ‘policy’ for any retirement account, nowadays depends on the financial circumstance the retiree may be facing. Basically, we have a new retirement ball game, and you need to keep in touch with the changes, so as not to be caught unawares. The following article by Dana Dratch gives seven things that every person planning on saving for retirement and those who are already retired, must know about the ‘new retirement.’

This isn’t your daddy’s retirement. And it’s not for the faint of heart.

Do-it-yourself 401(k)s, IRAs and multiple-choice Medicare supplement plans have taken the place of the company pension plan, retiree health benefits and a gold watch.

And working into retirement — in the form of a second (or third) career or part-time job — is becoming the norm.

“It’s a changing landscape,” says Sara Rix, a senior strategic policy adviser with AARP.

But this evolution hasn’t happened overnight, she says. “Some of the changes we’re seeing began 20 to 25 years ago.”

One major adjustment: People are working longer. In 1985, there was fewer than 1 in 5 65- to 69-year-olds in the workforce, Rix says. Today, it’s almost 1 in 3 — a 74 percent increase.

Some would-be retirees need the money, says Rix. Others enjoy their jobs and want to keep at it. And, for some, it can be a combination of the two.

Whether you’re 25 or 75, you should know these seven things about retirement in the new millennium.

You’re on your own

It’s like one of those high school math brain-twisters: The amount you save times your compounded earnings, minus any investment losses and factoring for inflation, equals what standard of living at some (movable) future date?

“People have to be much more proactive,” says Tony Webb, research economist with the Center for Retirement Research at Boston College.

A study by the center using the Federal Reserve’s 2007 Survey of Consumer Finances showed that half the people on the cusp of retirement (ages 55 to 64) had a retirement account balance of less than $100,000. At a typical drawdown rate of about 4 percent per year, that equals about $4,000 annually, or about $333 a month in retirement income, Webb says.

One big problem with everything financial is that you pick up skills as you move along — and make plenty of mistakes along the way, says Webb.

And, unlike a lot of situations, the people retiring now can’t look to past generations as a model because the game has changed, he adds.

Start planning early

It doesn’t take a rocket scientist to calculate that saving for 50 years will yield more than saving for 20 years.

But what 20-year-old wants to forgo critical funds for a day that’s so far off into the future?

That’s why a recent Stanford University study has gotten so much attention, says Ruth Hayden, financial consultant and author of “Start Where You Are: Retirement Planning in a Changing World.”

Researchers found out that when they showed young workers digitally aged photos of themselves at retirement age, workers were more willing to put money aside for their future selves.

“It changes their perception,” Hayden says. And when it comes to planning for retirement, “that intellectual and emotional ownership is critical.”

One big rule for the new retirement: Financial literacy needs to be a lifelong pursuit, says Rix.

Do it right, and money planning will be downright boring, Hayden says. “Plain-vanilla” strategies — such as regular contributions, slow-and-steady growth and diversification — are often most effective over the long haul, she says. It’s also important to get advice from trusted, neutral advisers when you can afford it, she says.

Two of the biggest mistakes employees make is cashing out the 401(k) after a job change and leaving an employer’s matching dollars on the table, says Hayden.

Money can be accessible

It used to be that when you put away money for retirement, you couldn’t touch it until retirement — except in some very limited circumstances.

That’s not always true anymore.

With a Roth IRA, you can withdraw any money you contribute at any time without taxes or penalties, says Ed Slott, CPA and author of “The Retirement Savings Time Bomb … and How to Defuse It.”

The idea that retirement savings is locked up for a far-flung future date is a mental block for a lot of potential savers, says Slott. “That is one of the things that turned me off from (traditional) IRAs years ago,” he says. “But now that’s not the case with a Roth.”

The nice thing about a Roth is those earnings won’t be taxed during retirement. The trade-off with a Roth is that you don’t get a tax deduction now when you make a contribution.

But continuous access to your money and the ability to grow it tax-free more than make up for forfeiting a one-time tax deduction, says Slott.

“When you make a $5,000 contribution to a Roth IRA, you have immediate access to that money,” says Slott. “So if you need it, it’s there.”

You can contribute to an IRA

You contribute to a 401(k) through work. Or you’re a stay-at-home spouse with no income.

In either case, you can still probably use an IRA to save for your retirement, says Slott.

Workers already contributing to a 401(k) can most likely still make contributions to an IRA if they want, he says. “A lot of times they think if they’re in a company plan, they’re not allowed,” he says. “But that’s not true.”

Earn above a set income, though, and you may not get the full tax deduction for your traditional IRA contributions, says Slott. But that income ceiling won’t affect most wage-earners, he says. IRS Publication 590 provides details about IRAs.

With a Roth IRA, there is no tax deduction, “but there are some high-income limits for who can contribute,” he says.

Not working outside the home? As long as your spouse is earning enough to cover the contribution, you can fund your own spousal IRA in your own name, he says.

With an IRA, you can bank up to $5,000 annually per person, if you’re 49 or younger. Fifty or older? You can salt away up to $6,000 this year.

Consider health care

One area many people don’t consider in their retirement planning is medical costs.

Often, younger workers assume that Medicare covers everything, but it doesn’t.

After the age of 65, the average couple will spend about $260,000 out-of-pocket on health care, including insurance premiums and nursing home care, according to a 2010 study by the Center for Retirement Research at Boston College.

“The problem is most households don’t have $260,000 in the first place,” says Webb. “What it means is that in practical terms, a lot of households face the risk of impoverishment or ending up on Medicaid.”

Prepare to work longer

Many of today’s “retirees” are staying in or rejoining the work force.

For some, it’s a financial necessity. For others, it’s a chance to pursue interests or careers they put off in their younger years. And for many, it can be a combination of both.

“And maybe the nature of retirement is changing,” says Webb. “It’s less of a clean break.”

Postponing Social Security payments or retirement account withdrawals often means you’ll get more when you do tap those sources.

For those retiring over the next few years, delaying collecting Social Security from 62 to 70 can mean a 76 percent increase in benefits, says Webb.

Two factors may force workers to retire earlier than expected: late-in-life job loss and health problems, he says.

Seniors face a greater risk of having to leave the working world because of health, and also of “being prematurely ejected from the workforce,” says Webb.

Think beyond the money

When you’re planning and saving for your golden years, don’t hesitate to think beyond the money.

Throughout your working life, “Keep your eye on the next job, and prepare so that (your) skills are what employers are seeking,” says Rix.

It also doesn’t hurt to be a little entrepreneurial, says Martin Yate, author of “Knock ‘Em Dead: Secrets and Strategies for Success in an Uncertain World.”

If you find something that gives you joy, stick with it, he says. Figure that in time, “I will learn how to make a buck,” Yate says. “And in my 50s and 60s, I will either have a little business on the side or be prepared to launch one.”

And if your needs and interests change or get refined as the decades go by, that’s OK, says Yate.

Whatever your entrepreneurial dreams, you’ll be using and sharpening many of the same transferable skills you use in your “day job,” he says. “It will help you be successful.”


The Cost of Living Longer

Good Day,

The advancement in medicine and other health areas has lead to the increase in the lifespan of many people, and this has meant that the costs of caring for the aged is increasing on a yearly basis. Thus, medicare costs are becoming an important area when thinking of saving for retirement, since they tend to consume a big chunk of most retirees’ pension income. Gone are the days when someone was old and needed some help, they was always the family to count on, but in these modern times, where everybody is running around chasing the green, nobody is bothered with the elderly and nowadays there are places that have been set up to cater for their special needs, Unfortunately, this special treatment requires a lot of money, and as Kelly Greene explains in the following article, it is always important o know what kind of services a person requires first, as it may save you a lot of money.

Andee St. John is searching for an assisted-living facility near Columbia, S.C., for her 69-year-old mother, who was hospitalized recently after several falls. But finding the place with the right combination of price, amenities and services has been difficult.

So far, Ms. St. John has consulted with a financial adviser, a geriatric social worker and an elder-law attorney as part of her research.

“It’s been very eye-opening,” Ms. St. John says. “You don’t just pay one fee a month for assisted living. There are all these different add-ons.”

A growing number of families are wrestling with the same dilemma: rising costs for long-term care and a mind-boggling array of options.

Nationwide, long-term-care costs in a number of categories have risen faster than inflation over the past year, according to research to be released Tuesday by insurer MetLife’s Mature Market Institute. At the same time, care providers are changing the types of services available or bundling services in new and at times confusing ways.

But there are strategies that can help. People who identify the specific services their loved ones need, haggle aggressively on price and explore alternative-care options can save money—or at least get more care for the money they do spend, experts say.

The broad category of “long-term care” includes a variety of health and daily-living services, either in facilities or in people’s homes, for people with chronic illnesses or disabilities.

Costs are rising for most kinds of care, according to the MetLife study, which surveyed nearly 6,700 long-term-care providers and is the first to analyze the ways providers have started bundling together various add-on services, such as transportation or extra meals, in their fee structures.

The average rent at assisted-living facilities, which provide help with day-to-day activities but not necessarily round-the-clock skilled-nursing care, shot up 17% to $3,486 over the past five years, according to the study. That is based on facilities offering six to nine services.

The price of a private room at a nursing home, meanwhile, rose 4% over the past year to $248 a day. And while prices for home-health aides and adult-day services didn’t rise, on average, the brief respite comes after increases in recent years. Home-health-care spending by Medicare beneficiaries, for example, climbed 129% to $19 billion from 2000 to 2010, according to a March report to Congress by the Medicare Payment Advisory Commission.

With fees rising and the menu of services changing, here are some strategies families are using to stretch their long-term-care dollars further.

Paying for Care

Before exploring which kind of long-term care a family member needs, you should be clear about how you are paying for it. Some consumers have long-term-care insurance, which covers an array of expenses. But the policies often have been money losers for insurers, and in recent years several have exited the business. The ones that remain have raised premiums, cut back on coverage for new policies or both—meaning consumers will have to pick up more of the tab themselves.

Most people simply reach for their checkbooks. But there are a couple of ways to ease the sting.

Married couples with some savings might want to consider buying an immediate annuity that pays benefits for a set number of years, to preserve savings for the “well” spouse while the other spouse receives care, says Gary Cotter, a certified financial planner in Sun City Center, Fla.

The benefit: Such an annuity wouldn’t count against them in qualifying for assistance from Medicaid, the state and federal program that pays for health and long-term care for the poor. The catch: The well spouse has to live through the entire period the annuity is making payments. If not, the state has the first claim on any remaining payments, Mr. Cotter says.

One often-overlooked benefit is available to millions of families of wartime veterans. The Department of Veterans Affairs’ aid-and-attendance benefit pays up to $2,020 a month to married veterans who qualify. Single veterans and surviving spouses might qualify for smaller payments. For help applying, go to http://www.va.gov, click on “Locations,” then on “State Veterans Affairs offices,” “Veterans Service Organizations” or “Regional Benefits Offices.”

Choosing the Right Care

Once the financing is settled, it is time to choose the kind of care you need. That should start, experts say, by cataloging the various daily living tasks you and your loved one can and can’t perform. That will give you a sense of whether a few hours a day of personal assistance can do the job, or whether it is time to make a costlier move.

Genworth, one of the country’s largest long-term-care insurers, uses five levels, ranging from independent (level one) to completely dependent on skilled-nursing care (level five).

At the second level, the older adult suffers from disease symptoms or early dementia and typically needs help shopping and paying bills, tasks a family member often can perform at no cost. At level three, people need four to five hours a day of help with activities that take place at predictable times. People at level four need considerable assistance from someone who is constantly on call.

Experts say most families wait until there is an immediate need for more care before they research and shop for it. A better approach: asking your loved one’s doctors for help anticipating what you might need next. That way, you have more leverage. You can figure out in advance which assisted-living facility has vacancies and might waive a move-in fee or other charges, for example, and which one has a waiting list.

Some families turn to geriatric-care managers, typically social workers or registered nurses who charge an hourly fee. The managers can help you figure out what kind of care you need and review contracts before you sign to make sure there are no hidden charges, such as move-out fees. (There is a directory at www.caremanager.org.)

Assisted Living

Of all of the various long-term-care options, assisted-living facilities are becoming the trickiest to figure out, experts say.

That’s because, in the past five years, a growing number of facilities have started packaging more services together, rather than charging for them a la carte. This year, for example, 65% are providing six to nine services in their base rate, up from 59% five years ago, and 31% include 10 or more services.

The problem: People who need added services often must choose plans with a higher base rate that lumps more services together—and end up paying for some services they don’t need. The “personal-care” category—which may or may not include dressing, bathing or other tasks—costs an average of $504 a month, according to MetLife.

But many services have wiggle room for discounts, experts say. A good starting point, they say: move-in fees and monthly “wellness fees” that sometimes include only blood-pressure checks, which many residents can do on their own with a $30 cuff from a drugstore.

Kathleen Dempsey, a geriatric-care manager in Minneapolis, often recommends that clients buy a medication-monitoring system rather than pay for a nurse to do so, a service that costs $347 a month on average, according to MetLife. The website e-pill.com offers several different choices.

Jalaa McNeal, a 71-year-old retired physical-education teacher, moved to an assisted-living facility in Cedar Rapids, Iowa, this summer after she was diagnosed with water on the brain and had a shunt implanted. When she moved in, she needed to have her medicine administered a few times a day. But after months of therapy, she was tested by a neuropsychologist who said she can manage her medicine on her own. She canceled, saving $500 a month.

Independent Living

Some families are delaying or avoiding costly assisted-living care by moving to so-called independent-living apartments. Traditionally, most of these communities were little more than age-restricted apartment complexes. But in recent years, many have added nonmedical services such as transportation, meals and concierge desks. Families can hire their own home care separately if they need it.

One big advantage: Unlike fancier continuing-care retirement communities, independent-living facilities typically don’t require lump-sum payments, says Mr. Cotter, the Florida planner.

“A lot of people prefer independent-living apartments because they can contract with a home-health provider themselves,” he says. “It puts them in control of the whole thing.”

Kevin Skipper, a financial adviser in Columbia, S.C., paid $2,000 a month for his mother’s independent-living apartment, which included rent plus three meals a day. When he added companion care, the total cost was $2,900 a month, allowing him to delay moving her to a nearby assisted-living facility, which was charging $4,500.

A quick Web search can turn up options in your city or state.

Home Health Care

Many people prefer to remain at home rather than move to a facility. It can be costly, but there are ways to save.

People who don’t need 24-hour care can sign up for hourly services. Rates average about $20 an hour for basic services such as housekeeping and meal preparation, and $21 an hour for hands-on assistance with bathing, dressing and other activities, according to MetLife.

Families using home care on a consistent schedule, or for several hours or more every day, might be able to cut the rate by a few dollars an hour, experts say. A good starting point is Medicare’s Home Healthcare Compare tool (medicare.gov/homehealthcompare), which allows you to search for local agencies and see their quality of patient care.

To get a better deal, consider hiring caregivers on your own, rather than through an agency, which usually runs about 25% more, experts say.

You might get lucky and find a caregiver through word-of-mouth from a friend also caring for elderly loved ones. Otherwise, you probably will need to place ads online or in newspapers.

Alternative Options

Other types of care often are overlooked, but can relieve family burdens and financial stress.

“Adult-day services,” for example, provide health, social and therapeutic activities in a group setting for people with functional and cognitive problems. Some are free-standing; others are housed within nursing homes, assisted-living facilities or hospitals. Some offer a high level of medical care, and charge an average daily rate of $79. The services work well for patients who can sleep through the night at home, experts say.

Another option: Many assisted-living facilities offer “respite-care” programs, through which older adults who are cared for at home can check in for a weekend or longer when a family caregiver needs to leave town. It is an option that can help a family delay having to use a more expensive assisted-living facility, says Rona Loshak, a long-term-care insurance broker in Roslyn, N.Y.

Many families also can tap hospice care, generally meant for patients in the last stages of a serious illness, earlier than they might realize, and often with Medicare’s backing.

Linda Fodrini-Johnson, a geriatric-care manager near San Francisco, recently moved her mother, who qualified for Medicare-backed hospice care, from a skilled-nursing facility costing more than $10,000 a month to a small residential-care facility with six private rooms—at about half the price.


Seven questions to ask before refinancing

Good Day,

In this day of Foreclosure and Refinancing being the order of the day, refinancing has all of a sudden become a huge topic to all those homeowners struggling with their monthly mortgage repayment. With the current low interest environment being experienced in the market making homeowners run  to the nearest financial organization asking for refinance, as they perceive the savings in terms of interest costs that they will make as a result of the low interest rates, its time to sit back and take a second look to the issue of refinancing your home. A lot has to be taken into consideration besides the new interest rate that will be charged on your new loan once your case is approved. Many home owners have fallen into the trap, once they see the low interest rates and sign on the dotted loan. There are other areas you should look into when thinking of refinancing your mortgage loan, the low interest rate currently in the market in one of them, and in the following article, Jennifer Berry elaborates seven questions that every homeowner should ask themselves before refinancing their mortgage loan.

Wondering if refinancing makes sense for you? Before you sign on the dotted line, you may want to ask yourself these seven questions. Wondering if refinancing your mortgage is something you should look into? That answer depends on what you want to get out of it.

Refinancing, or paying off your existing mortgage with a new one, could be worth it when it saves you money. And with interest rates near historic lows – around 3.5 percent as of mid-September, according to the Mortgage Bankers Association – it very well could help you save.

However, just because rates are low, doesn’t mean that refinancing is the right option for everyone. In fact, refinancing costs and rates vary on a case-by-case basis.

“The approval process is much more restrictive than it used to be and there may be more of an expense up-front [for some people],” warns Joe Gross, a national mortgage expert and the author of the book “The Greed of Wall Street.”

Looking for a little guidance on whether or not you should refinance? We’ve put together a list of questions you can ask yourself to help you make a decision…

Question #1 – Will I get a lower interest rate if I refinance?

It only makes sense to refinance if the new mortgage is going to be better for you financially, right? Then, the first place to look is the interest rate, which is a good indicator of how much you could be saving.

Just consider this example: If you have a $100,000, 30-year fixed-rate mortgage with a 6 percent interest rate, your monthly payment will be $600. Refinancing your mortgage and dropping your interest rate to 3.5 percent (the current historic low) could lower your monthly payment to $450 – saving you $150 a month. Sounds pretty nice, doesn’t it?

Talk to your mortgage broker to find out if – and by how much – you might be able to lower your interest rate by refinancing. But keep in mind, the interest rate is just one piece of the puzzle. Sometimes a low interest rate might come with high fees.

”While interest rates are low now,”Gross says, “You still need to run your numbers. Ask yourself what the new loan will cost you, how much will you save on a monthly payment, and how much on the life of the loan.”

Question #2 – How good is my credit score?

Why should you care about your credit score when it comes to refinancing your mortgage?

Here’s one reason: Lenders may use it to decide whether or not you are a good risk for a home mortgage, and how much interest to charge you if you get the loan, according to the California Department of Consumer Affairs.

So what’s a good score? Well, FICO credit scores – developed by Fair, Isaac and Company, Inc., and today’s most frequently used scoring structure – can range from 300 to 850.

And the higher the score, the better.

In fact, “If your credit is below 580 or 620, you’ll have a harder time getting a mortgage these days,” Gross says. “Work on raising your credit score before you apply for a mortgage, then walk into the local bank or call a broker to see what they offer. Look at all your options and see what’s the best way to go.”

If your credit score isn’t up to par, don’t worry. There are a few things you can do to help improve your score, like paying your bills on time and paying down your credit card balance.

Question #3 – Can I afford the refinancing costs?

If you’re paying six percent interest on your mortgage right now, it might feel like a no-brainer to try and refinance to a 3.5 percent interest loan. But before you sign off on that new loan, you need to know how much refinancing will cost you.

To give you an idea, the Federal Reserve’s “Consumer’s Guide to Mortgage Refinancing” notes that “it is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees.”

The Federal Reserve, which is the central banking system of the United States, adds that refinancing fees could include the following:

  • Application fee
  • Loan origination fee
  • Appraisal fee
  • Home inspection fee
  • Home insurance
  • Attorney review/closing fee
  • And more

“A lot of the refinance cost is incorporated into the loan so you might not feel it,” Gross says. But you’re still paying it – sometimes as much as $15,000 or more, according to Gross. “Find out what the refinance will cost and take that into consideration. Sometimes the cost doesn’t outweigh the savings.”

Question #4 – How long do I plan on staying in this home?

This is one of the more important questions to ask yourself, because if you are planning to move within one or two years, refinancing might not be worthwhile for you.

For example, if you save $100 a month with your refinanced loan – but the loan costs you $2,400, you’ll need to live in your home for 24 months before you’ll start saving money.

To determine if refinancing aligns well with your future plans, Gross encourages you to look at your family goals.

For example, you might want to ask yourself:

  • Are you buying a smaller house with the intention of moving to a bigger one down the road?
  • Are you thinking of moving out-of-state in a few years when you retire?

If the answers to these questions indicate that you’ll be moving out of your house in the near future, then refinancing isn’t the best idea.

Question #5 – Does my current mortgage have a pre-payment penalty?

While Gross says they’re not as common these days, pre-payment penalties – which are fees you have to pay the bank for ending a mortgage early – do exist. So, before you decide to refinance, you should check to see if your current mortgage has one.

If your current loan does have a pre-payment penalty attached to it, start by finding out how much it will cost you. If you run the numbers and find that the pre-payment penalties are just too expensive, then refinancing may not be the best idea.

However, Gross says you can always call your bank to see if there’s anything they can do for you.

“Sometimes you can try to negotiate with your bank not to charge the penalty,” Gross says. “That’s not to say the bank will give it up, but it never hurts to ask.”

The Federal Reserve offers similar a recommendation. “If you are refinancing with the same lender, ask whether the pre-payment penalty can be waived. You should carefully consider the costs of any prepayment penalty against the savings you expect to gain from refinancing.”

Question #6 – How stable is my job?

One of the things banks and mortgage brokers look at when determining whether or not they’ll approve you for a loan is the stability of your employment.

Does that mean you won’t qualify for a loan if you’ve hopped around jobs?

Not necessarily, “but you do need continuous employment,” Gross says. “Banks want to make sure you’ll have a job two months from now, so they want to see a good history of employment in your past.”

Gross adds that “if you’re in the middle of a refinance, don’t switch jobs before you finish the transaction.” Why? Because you don’t want to give banks any reason to doubt your ability to pay the mortgage going forward.

Does the same apply for people who are self-employed? Things might be a bit trickier, but that doesn’t mean you won’t qualify for a refinance.

According to Gross, “Self-employed people are seen as more of a risk for banks, who tend to be a bit more cautious when lending to them.” To help, Gross says “you have to have a few years of history of self-employment.”

Question #7 – Do I need to make any big purchases in the near future?

If you’re considering refinancing, ask yourself if you can put other big-ticket items on hold for a while. If you can’t, Gross says refinancing may not be in your best interest.

“Don’t take out new debt at the same time you’re trying to get a refinance,” Gross says. “Some people think that ‘the bank will see I just got a new car, so of course they’ll give me money’ – but in truth the bank worries if you have a new car (and new car payments) how will you pay the mortgage?”

And while it’s okay to have some debt – like student loans or car payments – it’s important to make sure that you can manage all of your payments comfortably, including refinancing costs and monthly payments.

As a final bit of advice, Gross says, “Even if you’ve already applied for a refinance, don’t take on new debt until the deal has closed.”


Living in Retirement

Good Day,

As I had promised on my last blog, that I would give a heads up on healthcare costs that you are bound to come across in your retirement, the following article is a conclusion of the topic I had started, Living in retirement from the editors of Money Magazine.

How do I afford health care in retirement?

Save up a big fat pile of money before you retire. Sadly, we’re not joking.

Sure, once you hit 65 you will be eligible for Medicare. That will take care of a lot of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn’t. Fidelity Investments ran the numbers and estimated that a 65-year old couple who retired in 2009 will need $240,000 of their own savings to handle 20 years of out-of-pocket retirement health costs.

And be careful about relying on your employer’s promise to provide health care benefits once you retire. Even those that pledge such care may find it hard to live up to their promise when you hit retirement. More and more big companies in a financial pinch are reducing or rescinding health insurance benefits once promised to their retirees.

What is Medicare?

Medicare is the federal insurance program for Americans age 65 and over (it also covers the disabled). You are automatically enrolled at age 65. Medicare includes a mind-numbing maze of coverage, rules and regulations. Basic Medicare comes in two parts: A and B.

Medicare Part A provides coverage if you’re hospitalized.

Medicare Part B provides coverage for doctor visits and other “outpatient” costs such as physical therapy, plus some preventive costs such as diabetes testing.

But wait, there’s more.

Medicare Part C, known as Medicare Advantage, is a private plan run through Medicare that provides an alternative to Parts A and B. If you want it, you have to buy it.

Medicare Part D provides prescription drug coverage. It is a separate policy you buy from a private insurer if you want it.

What is Medigap insurance?

Medicare provides a whole lot of coverage, but it doesn’t cover everything. So some people choose to buy a separate policy to provide coverage for the areas Medicare falls short on. This is known as Medigap insurance. You buy Medigap from a private insurance company.

You can also use your Medigap policy to cover expenses you have under Medicare, such as annual co-pays and deductibles.

Important note: If you opt for a Medicare Advantage Plan (Medicare Part C), any Medigap policy you have won’t pay out. So if you decide to move into a Medicare Advantage Plan and you already have a Medigap policy, drop the Medigap.

Which Medigap policy should I buy?

There are 12 standard Medigap policies to choose from, with the eye-popping names of A through L. Medigap A is the most basic “core” policy. As you move through the alphabet, the plans add more coverage. For example, Medigap E will offer something that is not included in Medigap D, but will lack a coverage provided in Medicare F.

There is no difference in plans offered by different insurers; plan details are all set by the government. (Important caveat: If you live in Massachusetts, Minnesota or Wisconsin, check with your state insurance company or a private insurer who operates in your state. Medigap policies in these states offer coverage different than the plans followed by the 47 other states.)

If you and your spouse want Medigap coverage, you’ll need to buy separate policies; spouses aren’t covered together.

What is Medicaid?

Medicaid is a health insurance program for certain low-income individuals and their families. The program is run jointly by the federal government and your state. People 65 years of age or older who meet the income and asset limits for their state are eligible for Medicaid. Your state is in charge of setting the income and asset eligibility tests for its residents.

What does Medicaid cover?

Medicaid provides a broad level of health insurance coverage, including doctor visits, hospital expenses, nursing home care, home health care and the like. Medicaid also covers long-term care costs, both in a nursing home and at-home care. Medicare does not provide this coverage.

Prescription drugs are not covered by Medicaid. But if you’re eligible for Medicaid, the program may pay the premium for Medicare Part D, the Medicare prescription drug plan.

Should I get long-term care insurance?

A long-term care (LTC) policy doles out money to help cover the costs of nursing home care, an assisted living facility or at-home assistance if you are no longer able to take care of yourself. Once you hit 60 or so, you may no longer qualify for coverage. Get answers to more questions on long-term care insurance.

How can I tell if a nursing home is a good one?

Show up unannounced and ask to walk around. You want to see how the facility works when no one is expecting you. There’s nothing better than using your own eyes to get a feel for the professionalism of the staff.

The Medicare Web site also maintains a searchable database of Medicare-approved nursing care facilities with basic data on the operations of each facility.

Will my health coverage be affected if my spouse dies?

Medicare is not affected at all; each Medicare recipient has individual coverage through the program. The same is true with private Medigap policies.

However, if you received health care benefits as part of your spouse’s retirement package from a former employer, your coverage may be affected. It is up to the plan to set guidelines for coverage of surviving spouses. Check with the plan administrator for details.

Can I tap my home equity to support myself in retirement?

Yes. Two of the most common options are:

  • taking out a reverse mortgage
  • selling your current home and moving to a smaller one.

But use caution. Make sure to explore the risks of taking out a reverse mortgage, and the added costs of downsizing your home before making a move.

What’s a reverse mortgage?

It’s a way of tapping what’s probably one of your biggest assets: The equity in your house. Understandably, reverse mortgages seem pretty alluring to lots of retirees.

Here’s how they work. So long as you’re 62 or older, you get to draw down your home equity without repaying it as long as you stay in your house. You get the money up front, but the interest is deferred until you move out (in most cases, when you move to a nursing home or die).

However, the amount of equity you can pull out is far less than with a traditional mortgage. For example, an 80-year-old Chicagoan with a house worth $400,000 would probably be able to borrow only about $195,000. And the younger you are, the less you can borrow because it will be longer until the loan is paid back. So a 65-year-old in the same situation would get perhaps $160,000.

Should I get a reverse mortgage?

Reverse mortgages can definitely help cash-strapped retirees generate extra money for living expenses. But there can be an expensive downside: They carry stiff fees, nearly three times as much as those on a traditional mortgage. Upfront fees can exceed 10% of the loan in some cases.

So while a reverse mortgage can generate cash, it’s not necessarily the best or only way to do that. Because of the high upfront costs, a reverse mortgage is usually not a great option if you’re borrowing a small amount or you plan to move in a few years. You might pay far less by taking out a home-equity line of credit. Or you may be able to generate more income by selling and moving to a less expensive place.

Bottom line: Make sure there aren’t cheaper ways to get the money you need.

What’s the downside of a reverse mortgage?

Loan-origination fees (part of the upfront costs you pay to take out such a mortgage) can top $7,000 on a $500,000 home. Those sums are attracting aggressive salespeople intent on getting you to take out a reverse mortgage whether you need one or not. Some may try to persuade you to invest the proceeds in high-priced financial products, such as annuities, boosting their commissions even more.

No one can say how widespread such tactics are. But several lawsuits have been filed, and the Senate Special Committee on Aging was concerned enough to hold a hearing in December 2007, while FINRA (the Financial Industry Regulatory Authority) issued an investor alert in March of 2008.

Annuities are frequently pitched to seniors along with a reverse mortgage. However, you’re unlikely to earn more with an annuity than you are being charged in interest and fees on the reverse mortgage. Worse, you might have to pay surrender charges that are upwards of 20% to take money out in the first few years.

Should I use a reverse mortgage to buy an annuity?

What’s more, lots of salespeople pitch reverse mortgages to pay for long-term care insurance. Whether that’s a bad deal is tougher to evaluate since it depends on your assets and resources, the cost of the policy and the odds you’ll end up in a nursing home for an extended period. But Donald Redfoot of AARP’s Public Policy Institute notes that if you’ve got to take out a loan to be able to pay for a long-term-care policy – and a reverse mortgage is a loan – then you’re probably not a good candidate for one.

Where can I get objective advice about reverse mortgages?

While the federal government requires you to meet with a counselor before taking out a reverse mortgage, the quality of the counseling is uneven. (The U.S. Department of Housing and Urban Development is working on new standards for counseling that will require a discussion of the implications of using loan proceeds to buy annuities.)

If you want a rigorous analysis of whether you’re better off with a reverse mortgage or a less expensive home, consult a fee-only financial planner. Because fee-only planners don’t make commissions from investments they sell you (instead, they charge by the hour), you can be confident that they won’t be peddling annuities just to score high fees for themselves. To find one near you, go to napfa.org

What are the best places to live in retirement?

The goal is to find a balance between a region that allows you to maintain your financial security and one that doesn’t compromise your quality of life.

As all too many retirees have learned, relocating to save money can be a jolting experience if it takes them far from family and friends. Factor in the cost of traveling to see loved ones if you move to a different part of the country. You don’t want to be so far away that it becomes cost prohibitive to maintain your most important relationships.

Don’t pick up and move without giving a new town a trial run. Rent a place for a few months to make sure you get a true sense of what the community is like. If you have your eye on an area that’s very popular in the winter, spend some time there in summer. Maybe you will love the quiet – or maybe you’ll find it depressing when the high-season action packs up and goes home.

While change and new adventures can be invigorating, make sure wherever you move lets you continue to pursue your favorite hobbies or pastimes. If you are a big opera and symphony fan, moving to the boonies might not be a good fit.

Make sure you’ll have close access to good health care – especially in specialties of particular concern to older people, such as cancer, heart disease and general geriatric care.

Also carefully consider the financial pros and cons of the region you’re considering. Look for a well-diversified economy – that means the area is more likely to be able to weather setbacks to a particular industry. In a one-company or one-industry town, your home’s value can take a big hit if that company or industry hits a hard patch or decides to relocate. A protracted downslide in a region (or state) can eventually lead to cutbacks in basic public services, from a reduction in bus routes to a smaller police force.

You get the idea. New can be great. Just make sure that what’s new is also what you love to do, or have nearby. Money’s list of best places to retire can help you weigh the plusses and minuses of various cities.

Should I move to the city?

This is an increasingly popular move for retirees. One potential cost saving comes with getting rid of one (or more) cars. The insurance and maintenance savings on one care can easily be more than $1,000 a year, and you eliminate wallet-emptying trips to the gas station.

However, if you plan on taking your cars with you, budget in higher costs for parking and insurance. And if you go completely carless, factor in the new cost of taxis and public transportation to get around town.

Should I retire to a state that charges no income tax?

Retiring to a state (and county) that doesn’t tax retiree income – or taxes it only lightly – might seem like a no-brainer. It’s not. That’s because those places may compensate for low-income taxes with high property taxes or sales taxes. So make sure to factor in those other taxes too.

When you do the math on relocating to a different state or region, find out if you’ll be in line for any “senior” tax discounts. Some states and localities offer reductions or exemptions on property tax for senior citizens.

Should I retire to another country?

Maybe, if you’re worried that you’ll outlive your money. The cost of living in many foreign countries is much lower than that in the U.S. That means your retirement kitty can last longer. But there are many factors to consider. Some include:

Taxes. Many countries have tax treaties with the U.S. that help to reduce the chances you’ll be taxed twice. (Google expat sites for a given country and you’ll find the info you need.) But even if you’re living abroad full-time, you’ll still have to file a U.S. tax return.

If you work in retirement while you’re living overseas, you can claim the Foreign Earned Income Tax Credit. In 2010, this allows you to exclude the first $91,400 you earn in the foreign country from U.S. taxes. Earn more than that amount and Uncle Sam is going to take his cut of your earnings. Pension income from U.S. sources is also going to be taxed, no matter where in the world you happen to be living.

Health care. It’s a big issue – and potentially a big problem. Despite all the drawbacks with the health-care system in the U.S., the quality of care there is among the highest in the world, while some other countries are below par. Unfortunately, it’s those countries with the lowest cost of living that frequently have the worst medical care.

Another huge issue for expat retirees is that Medicare coverage does not extend beyond U.S. borders. You’ll either have to return to the U.S. for any care or budget to pay for care or insurance in your new home away from home. Either way, it can be more expensive than you bargained for.

Exchange rates. You’ll be subject to currency risk. If your retirement income is in U.S. dollars, you could suffer if the country you live in sees its currency’s value rise against the dollar.

Bill paying. Depending on the country, you may find it nearly impossible to open a local bank account – and once you do, it may not be set up to handle deposits (such as Social Security checks) in U.S. dollars. Many expats deal with this problem by maintaining a U.S. bank account and then paying for a wire transfer (and transfer to local currency) a few times a year.

And if you plan to just rely on your U.S. bank, you’ll ring up some sizable ATM fees anytime you want to get local currency by tapping your U.S. account. It can often cost you more than $5 per transaction, and many countries limit the amount foreigners can withdraw on a daily basis. As a result, you’ll be stuck paying the nuisance fee on smaller withdrawals.

Most retirees who live overseas keep their credit cards based in the U.S. and make online bill payments. That’s generally a good way to keep costs down.

Should I move to a smaller home?

If your goal is to reduce your housing costs, you need to do the math carefully before you move. For starters, smaller doesn’t always mean cheaper. If you can believe it, the national median price for condos – which typically are smaller than stand-alone homes – is now higher than the median price for single-family houses.

Think long and hard before you downsize into a new place that requires you take on a big new mortgage. Even if it is affordable today, you need to consider whether you can pay that mortgage well into your 70s and 80s – bearing in mind what might happen to your finances when either you or your spouse dies.

One way to gauge affordability is to check out what the payments would be on a 15-year mortgage. If you can handle the higher payments on a loan that would be paid off before you retire, or early on in retirement, that can be a manageable debt load. But if the monthly mortgage cost on a 15-year scares you, that’s a pretty good tipoff that you might want to look at less expensive homes. Don’t let yourself off the hook by financing with a 30-year mortgage unless you are absolutely sure you have the savings to keep up with those payments well into your retirement years.

If you do decide to take the plunge, sell your current place before you buy the new one. Tempting as a pristine new condo can be in comparison to your drafty old five-bedroom Victorian, don’t just plop down earnest money right away. Make sure that you have a buyer with solid financing. Otherwise, you could get stuck with two mortgages, two sets of property taxes, and – well, you get the idea.

At the very least, have your lawyer include a contingency clause in the sales agreement that obligates you to close on the new place only if you manage to sell your existing home by an agreed-upon date. In the sales frenzy of yesteryear, when sellers could make bidders do somersaults, they had no incentive to agree to such a clause. But in a market where homes are sitting on the market, sellers may show some mercy.

What costs will I cut by moving to a smaller place?

When you downsize, you can probably save on certain costs, including:

Utility bills – Especially if you currently live in a big old drafty house. Runzheimer International, a management consulting firm, estimates a $1,300 annual savings in utility costs by downsizing from 2,800 to 1,800 square feet. (On the flip side, if you plan to move somewhere much warmer, your air conditioning bill could zoom.)

Maintenance costs – If you are moving from a large (and older) home on a big chunk of land to a more modest footprint in a townhouse or condo, you’ll cut down drastically on yard work and snow removal, for example.

Property taxes – check to make sure. If you are in retirement mode and considering a move to a new county or state, ask if there is a property tax exemption or deductions for senior citizens.

What costs will I add by moving?

Yep, you may have some of those. If you are moving to a condo or townhouse, or a house that is part of a homeowner’s association, be sure to investigate maintenance costs and assessments. While you’re at it, ask for a record of the past five years of rate hikes. You want to have a sense of whether you are going to face much higher assessments going forward.

If your new place is appreciably smaller, make room in your budget for inevitable new purchases, such as replacing an oversized sectional or king size bed that won’t fit in a cozier place.

And don’t forget that when you sell, you’ll have the 6% or so sales commission (assuming you own your current home), plus the cost of the moving van and all the other fees associated with schlepping your possessions to a new place.

Bottom line: Running the numbers is key. Tot up the annual cost you currently pay for ongoing expenses; as you start shopping for a smaller home, get estimates for what those costs would be at the new place.


Living in Retirement

Good Day,

Ok, you are a few months to starting retirement and you’ve determined that you made the necessary financial arrangement to cater for your living expenses. Living in retirement has so many things you’ll need to consider once you retire, for example, whether or not, and when to start withdrawing for your retirement fund, working while retired, your social security contributions etc. For you to have a fulfilling retirement, you need to look at all aspects of retirement that are bound to affect you life, and the following article by editors of the Money Magazine, look into the different areas that normally affect retirement.

On my next blog, I will dwell into one area that really does some serious financial damage to your retirement funds, Healthcare.

Can I afford to retire?

To step off the corporate treadmill in your 50s or early 60s and maintain anything close to your standard of living, you need a seriously big retirement kitty.

How serious? You’ll likely need assets worth 10 to 16 times your salary by the time you leave your job. A 45-year-old making $120,000 who hopes to retire at age 60, say, should already have nearly $700,000 set aside. (See the Retire Early calculator.)

You can get by with less if you’ll have other sources of income. If that same 45-year-old has a typical old-fashioned check-a-month pension, for example, he might need only $432,000 in savings to be on track. If you expect to hold down a scaled-back job for your first decade of retirement, you can also get by with less.

If the combination of Social Security, pensions and prudent draws from your savings is enough to cover the expenses on your retirement budget, then you’re pretty much home free. Let your retirement adventures begin!

I’m retired. Now what?

Congratulations! Hopefully you’ve done enough planning in your working years, and by this point you’ve got it all figured out. But if not, you’ve got quite a few decisions to make.

Start by figuring out what type of lifestyle you want in retirement, and how much money you think it might cost you. Create a retirement budget that includes everything from essentials like food, utilities and housing costs to the nonessentials that make life more enjoyable, such as travel and entertainment. And don’t forget that you’ll undoubtedly run into unexpected expenses – medical bills that aren’t covered by Medicare, a roof that needs fixing or a car that’s got to be replaced – and that your living costs are likely to rise along with inflation over the years.

From here, you’ll need to figure out how much money you should be withdrawing, and which accounts to tap first. You’ll also want to look into collecting social security payments. You’ve also got some decisions to make about your home. Do you plan to relocate? Downsize to a smaller home?

If you don’t think you’ll have enough to sustain the lifestyle you want, you may have to consider other options like scaling back your retirement plans, taping your home equity for income, working in retirement, or even delaying your retirement

When can I start withdrawing my money?

Now that you’re not working, you’ll probably want to start tapping your retirement money. But you can make the most of your nest egg by withdrawing from taxable accounts first, and leaving any money you have in tax-sheltered retirement accounts for last. For more see When should I start withdrawing from retirement accounts? and Working in retirement

When can I start collecting Social Security?

Assuming you qualify for Social Security, you can begin collecting “early retirement” payments at age 62. (Widows, widowers and disabled persons can sometimes collect sooner.)

But you will receive a much larger benefit if you can afford to delay until you reach “full retirement age” (somewhere between 65 and 67, depending on when you were born) or later – and working in retirement might allow you to do just that. For more, see What’s the best age to start getting Social Security payouts?

Where do I get my health insurance?

Once you turn 65 you are automatically eligible for Medicare coverage. That provides a base level of health insurance that will take care of a lot of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn’t.

Should I delay my retirement?

Maybe. Lots of people should seriously consider it. Hanging on at work for even one more year can be a great boost to your long-term security, especially if you are about to retire when the markets are inconveniently in a swoon.

Say you have $1 million in a tax-deferred account, split evenly between stocks and bonds, when you retire at age 65. If you withdraw 4% plus an inflation adjustment every year, in 30 years you will likely still have $636,200 left after taxes. But if the market happens to tank early in that withdrawal period, the outlook gets riskier – there’s a one-in-four chance that you’ll run out of money before year 30.

If you work just one year longer, though, the projections are far better. And by working three years longer you’d typically end up with $1.2 million after 30 years – and have just a 1-in-20 chance of running out of money.

Every year that you are able to earn enough money to live on allows you to leave your retirement egg untouched for another year – leaving you more money when you finally do stop working.

When can I start withdrawing from retirement accounts?

Well, clearly you need to start tapping those accounts when you need the money to live on. But let’s say you have some of your retirement stash in tax-sheltered accounts like 401(k)s and IRAs, and some of it in regular investment accounts.

Your best strategy in that case is to tap the regular investment accounts first. That way, your money in the tax-sheltered accounts will keep right on growing without Uncle Sam taking his cut. If you spent the money in your IRA or 401(k) first, you’d keep getting taxed on the amount in your regular investment account, eroding its value.

How much should I withdraw from retirement accounts?

Most people also have to dip into savings to bridge the gap between what Social Security and pensions, if any, provide and what’s needed to cover retirement expenses. At that point, the issue comes down to how much you can reasonably draw from your nest egg each year to close that gap. Generally, to avoid going through your savings too soon you’ll want to limit your initial draw to about 4% of your savings and then increase that dollar amount for inflation each year (although, this 4% rule is a guideline, not a carved-in-stone commandment).

How long can I leave money in my retirement accounts?

It depends on what kind of account you have.

If you have a traditional IRA, when you turn 70 ½ years old you must begin making a required minimum withdrawal from it each year. The amount of the distribution depends on how much you have saved in the account and your life expectancy, according to tables published by the IRS.

With a Roth IRA, you can leave the money in for as long as you want, letting it grow and grow as you get older and older.

The rules are similar for traditional 401(k)s and Roth 401(k)s. After you turn 70 ½, you must make required minimum withdrawals from a traditional 401(k). Not so with Roths.

Should I work in retirement?

If you’re worried about making your money last your lifetime, then continuing to bring in some cash through a job, even if it is part-time, can be a huge help. Let’s say you take on some work that gives you enough income so you’re able to reduce your IRA withdrawals by $15,000 a year for 10 years. (As we mentioned, if you are over 70 ½ years old you must make a required minimum withdrawal each year. But we’re talking about reducing your non-required withdrawals that exceed that minimum.)

Okay, so you delay making that $15,000 IRA withdrawal for 10 years and thus keep the money growing tax deferred at an 8% annualized rate. At the end of that 10-year stretch, your IRA will have nearly $220,000 more in it than it would if you had been withdrawing $15,000 a year instead.

Will working affect my Social Security payments?

It depends on when you retire. The Social Security Administration determines your so-called “full retirement age,” which is somewhere between 65 and 67 depending on when you were born. (Your Social Security annual statement includes your lucky date. Visit the ssa.gov Web site for more details.)

If you take early Social Security benefits (anytime between age 62 and your full retirement age), each dollar of income you earn above $13,560 each year will reduce your Social Security payout by 50 cents.

The rules are more lenient starting in the year in which you reach full retirement age. For example, if you already are drawing Social Security benefits and you hit full retirement age in 2008, you could pocket $36,120 in earnings without any reduction in your Social Security benefit. If you happen to earn more than $36,120 in your big transition year, your benefit will be reduced by $1 for every $3 in earnings above the $36,120 threshold.

Now the good news: Once you have passed full retirement age you can earn as much as you want with no impact on your Social Security payout

What’s the best age to start collecting Social Security?

You will receive a much larger benefit if you can afford to delay until you reach “full retirement age” or later – and working in retirement might allow you to do just that. For example, if you take an early benefit at 62 the payment will be 25% less than if you waited until your full retirement age. Hold off until you are age 70 and your benefit will be 25% to 30% more than the payout you would have received at full retirement age. So the difference between taking early retirement and waiting until you are 70 can be a benefit that is more than 50% higher.

Of course, the tradeoff is that when you take the earlier benefit you have that many more years of receiving a payout. Still, with much longer life expectancies today, delaying the payout as long as possible typically pays, assuming you make it to at least age 77. And according to the official actuary tables, if you are alive at 65 there’s a high probability you will indeed still be around at age 77.

If my spouse dies, do I still get his/her Social Security?

Yes; you will be covered under the Social Security Survivor’s Insurance program. And this being Social Security, there are the usual array of odd rules that determine how big a benefit you will receive.

If you have already reached full retirement age (somewhere between 65 and 67 based on your date of birth; if you aren’t sure, check your latest Social Security annual statement), you’re entitled to 100% of your deceased spouse’s benefit.

If you’re at least 60 but not yet at Social Security’s definition of “full retirement age,” your payout will be somewhere in the range of 71% to 99% of your deceased spouse’s full benefit. Note that a widow or widower of any age with a child under age 16 is entitled to a 75% payout.

If my spouse dies, will I still get his/her pension?

Maybe. It depends on whether your spouse chose a monthly payout based solely on his/her life expectancy, or a monthly payout that continues through your life – that is, the “joint and survivor” benefit option. If you aren’t sure what your spouse chose, get in touch with the company providing the pension.

As you might expect, with the “joint and survivor” option, the size of the monthly payout is smaller because the chances that one of you will live a long time are greater. Additionally, many plans offer different payout options: you may choose a setup that pays 100% to the surviving spouse, 75%, 50%, etc. The higher the promised payout to the surviving spouse, the lower the monthly payment will be.

Once the payout decision is made, it typically can’t be changed. So if your spouse hasn’t retired yet, your best bet is usually to make sure he or she chooses “joint and survivor” – or you may be in serious financial jeopardy if your spouse dies before you do. Alternatively, choose the bigger payment pegged to the retiree’s lifespan, and invest the difference to build a bigger nest egg for you. If your spouse dies shortly after retiring, however, you’re out of luck.


Ultimate guide to retirement

Good Day,

I know I’ve talked about this topic a thousand times, and honestly I’ll never get tired of talking about it. A lot of times, people have this misconception that you can start saving for retirement at an advanced aged, and live the rest of your life-like a king. Ok fine, it is possible, but the price you’ll have to pay to get there, I doubt if most people would survive their second year. The other thing is that there is no ‘one fits all’ ultimate guide to retirement because of the unique circumstances every person is going though, and the following article from the editors of Money Magazine gives the basic steps necessary for retirement.

When should I start saving for retirement

The answer is simple: as soon as you can. Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks. That’s because the sooner you begin saving, the more time your money has to grow. Each year’s gains can generate their own gains the next year – a powerful wealth-building phenomenon known as compounding.

Here’s an example of what a big difference starting young can make. Say you start at age 25, and put aside $3,000 a year in a tax-deferred retirement account for 10 years – and then you stop saving – completely. By the time you reach 65, your $30,000 investment will have grown to more than $472,000, (assuming an 8% annual return), even though you didn’t contribute a dime beyond age 35.

Now let’s say you put off saving until you turn 35, and then save $3,000 a year for 30 years. By the time you reach 65, you will have set aside $90,000 of your own money, but it will grow to only about $367,000, assuming the same 8% annual return. That’s a huge difference.

Where should I save my retirement money?

Tax-favored retirement accounts such as individual retirement accounts (IRAs) and 401(k)s are the best places to save for your retirement. The different types of plans have different features, but most of them allow you to defer taxes on the money you save and the returns you earn within the account.

“Tax deferral” means that the amount you contribute escapes the usual income taxes until you start withdrawing the money years later. As a result, more of your money can earn investment returns over time – an enormous advantage over ordinary taxable accounts.

The plans have other advantages as well. For example, many employers will match part of their workers’ contributions to employer-sponsored retirement plans such as 401(k)s.

How should I invest the money?

To build a nest egg large enough to see you through retirement, which may last 30 years or more, you’ll need the growth that stocks provide.

The stock market returned 9.8% a year on average between 1926 and 2009, versus just 5.4% for bonds, according to research firm Ibbotson Associates. Given stocks’ superior returns over the long haul, most financial advisers recommend that investors whose retirement is more than 20 years away hold at least 3/4 of their portfolios in stocks and stock funds.

Of course, a stock-heavy portfolio can give you some hair-raising moments (or years). For example, during the 1973-74 bear market, U.S. stocks lost 43% of their value – and it took the market three-and-a-half years to recoup those losses. The stock market also suffered a 47.6% decline during the bear market at the start of this decade.

If you don’t have the stomach for steep downturns, you might increase your allocation to include more bonds or bond funds. Holding, say, 70% of your portfolio in stocks and 30% in bonds will let you capture most of the long-term growth of stocks while sheltering your investments to a certain extent during market downturns.

How should my strategy change as I get older?

As you approach retirement age, most experts agree you should gradually shift more into bonds to protect the money you’ve accumulated. But retirement can last a few decades, so it generally pays to maintain a healthy dose of stocks well into retirement: possibly between 40% and 50% while you’re in your 70s, and up to 30% when you’re in your 80s.

If you want to put your asset allocation on autopilot, consider “target-date retirement funds,” which are available in many retirement plans. You simply choose a fund that’s labeled with the year you intend to retire, and it will automatically adjust what it invests in (usually a mix of stocks, bonds and cash) to maximize your return and minimize your risk as you get older.

How much money will I need in retirement?

Ah, the key question. One rule of thumb is that you’ll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if you’ve paid off your mortgage and are in excellent health when you kiss the office good-bye. But if you plan to build your dream house, trot around the globe, or get that Ph.D. in philosophy you’ve always wanted, you may need 100% of your annual income – or more.

It’s important to make realistic estimates about what kind of expenses you will have in retirement. Be honest about how you want to live in retirement and how much it will cost. These estimates are important when it comes time to figure out how much you need to save in order to comfortably afford your retirement.

One way to begin estimating your retirement costs is to take a close look at your current expenses in various categories, and then estimate how they will change. For example, your mortgage might be paid off by then – and you won’t have commuting costs. Then again, your health care costs are likely to rise.

Will pensions and Social Security be enough?

Unfortunately, probably not. When you run the numbers, you should definitely factor in other sources of income in retirement, including Social Security and a traditional pension, if you’re lucky enough to have one. But your personal savings will have to generate enough income to cover the shortfall.

You can check your estimated Social Security benefits by using the government’s Social Security Online calculators. Current or former employers can provide estimates of any pension benefits you might receive when you retire.

How much should I save?

“As much as you can” is the standard advice. Many financial planners recommend that you save 10% to 15% of your income for retirement, starting in your 20s.

But that’s just a general guideline. This is your retirement we’re talking about, so it pays to get a little more specific by doing your homework up front. It’s a good idea to establish a savings target – one that tells you roughly how much you should set aside over time to meet your retirement goals.

The best way to determine your savings target is to use an online calculator like this one. It will help you figure out how much you should accumulate and how much you must set aside in the meantime to reach that target. Be sure to update the calculation each year, so that you can see if you’re on track.

As a general rule, you’ll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses. So for example if your projected retirement expenses exceed Social Security and pensions by $20,000 a year, you might need a nest egg of $300,000 to $400,000 to bridge the gap.

What if I can’t save enough?

Try to divert as much of your earnings into savings as you can. If you don’t have a budget, create one. If you do have a budget, revise it to reflect your newly urgent commitment to saving, as well as any changes in your spending since your last outbreak of budget fever. Chip away at wasteful habits – that might mean ditching expensive dinners or unused gym memberships.

If you’re still young and you can’t save enough right now, don’t be discouraged. Your income will probably grow as you progress in your career, allowing you to save more. You might also have other opportunities to boost your savings rate; for example, a bonus or inheritance can make a big difference in your long-term prospects if you invest some of the money in retirement accounts.

How can I reduce the amount I’ll need?

The most obvious way is to rethink your standard of living in retirement. Swapping the around-the-world sailing trip for a Caribbean cruise may help you lower your retirement target to a more attainable goal.

You can also delay your planned retirement date from, say, 62 to 68 or so. Working past the traditional retirement age will let you postpone withdrawals from your retirement accounts. Your savings will have more time to grow, and you’ll reduce the number of years you’ll need to draw on them. Working longer may also let you delay taking Social Security until you reach at least full retirement age (66 if you’re 50 today), potentially increasing the size of your monthly benefit by 30% or more.

The great thing about online retirement savings calculators is that you can play with the numbers to see exactly how much more or less you’ll need to save based on when you plan to stop working, or how much you’ll spend in retirement, or any number of other factors.

Working part-time can help too. But the problem is that you don’t know if you’ll have the interest or energy to work at an advanced age – or if you’ll have health problems that prevent it. You also may have a tough time finding an employer who wants to hire you in your later years for the amount of money you want to earn. So pinning your entire retirement strategy to working in your 70s or beyond isn’t such a great idea.

What if I’m running out of time?

If you find yourself running short on time – say, you’re in your 40s or even your 50s, and you haven’t gotten started yet – there are still a few things you can do. The key is to do them now.

You should first max out your contributions to tax-favored retirement accounts like IRAs and 401(k)s. For 2012, the IRS allows $17,000 for a 401(k) (though your employer may impose lower limits), and $5,000 for traditional and Roth IRAs. If you’re over 50, you can contribute additional catch-up contributions. Even the government understands that this is crunch time, and it has devised a few ways to help you out.

For example, workers age 50 and older can put more money into IRAs and workplace retirement plans than younger savers can. That means you can and should contribute an additional $5,500 to a 401(k) and $1,000 to traditional and Roth IRAs.

If you’re arriving late to retirement planning, a traditional IRA may be a better choice than a Roth.

I’m saving a lot but will still fall short – what now?

Consider other alternatives that can reduce how much you need to save. The most obvious one: Think about delaying retirement by a few years. That strategy will allow you make more contributions to your retirement accounts while postponing withdrawals – which could significantly increase the size of your nest egg even as it reduces the amount you need to accumulate to make it through retirement.

For example, if you retire today at age 65 with $500,000 in retirement savings and withdraw $43,000 a year, your savings likely would last until you reached age 90. But if you delay retirement for another five years and max out your IRA contributions during that period, you would retire at 70 with $772,680 saved. That nest egg would let you withdraw $72,000 a year until age 90. (Calculations assume an 8% annual return on your investments.) So by delaying your retirement just five years, you can increase your retirement income by nearly $30,000 a year.

Getting a part-time job after you retire also can make a big financial difference – and can provide mental, physical and emotional benefits as well. Other options include trading down to a less-expensive home (you can invest the profits toward retirement), reining in your spending or transforming the equity in your home into income by taking out a reverse mortgage – though high costs mean this last option is a good idea for only a small number of retirees.

When can I retire?

Trying to figure out whether you can afford to retire is like putting together pieces of a financial jigsaw puzzle. First, you need to estimate how much you’ll spend in retirement. Then you must consider the income you’ll collect in retirement from pensions and Social Security – as well as the amount you can afford to draw from your personal savings or other sources.

The idea is to assemble the various pieces, and then see whether the picture of retirement life that emerges is acceptable to you.

To help bring the retirement picture into better focus, try plugging all your pertinent financial information – including pensions, Social Security, retirement investment accounts and anticipated retirement expenses – into an online calculator. The calculator can crunch all the numbers and assess your odds of being able to retire on the schedule you envision.

Revisit the calculator and all the different pieces of the puzzle each year, in order to make sure you remain on track.


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