Study: Retirees Lose by Taking Social Security at Wrong Time.

A new study finds that only 4% of retirees start claiming their Social Security benefits at the most financially optimal time. And current retirees collectively will lose $3.4 trillion in potential income to fund their retirement because they started drawing benefits at a less than ideal time. That's roughly $111,000 per household, according to the research from United Income, an online investment management and financial planning firm.

Americans typically can start claiming their Social Security benefits as early as age 62 and most adults do so by the time they turn 63. But the size of the monthly benefit grows for each year they wait, maxing out at age 70.

It's not just a financial equation though. Deciding when to draw benefits depends on a myriad of personal factors such as age, health, other savings, marital status and plans for retirement. But the report's authors say people aren't spending enough time sorting through this process and policymakers could do more to encourage it.

Those conversations are important because Americans are increasingly in charge of their own retirement planning and Social Security is a major component. It accounts for about one-third of all income annually received by U.S. retirees. And many Americans are underprepared to supplement their retirement with their own savings. For about one-third of retirees, Social Security is their primary source of income. 

The researchers also estimate that elderly poverty could be cut by 50% if all retirees claimed Social Security at the optimal time. They suggest policymakers make changes to encourage people to claim at a more financially advantageous age, such as improved education for those eligible for Social Security or changing the terminology to indicate that benefits may increase with time. For example, researchers suggest that instead of calling 62 the "early eligibility age" it could be labeled the "minimum benefit age."

While there is no one optimal age, the researchers found that 92 percent of retirees would be better off waiting to claim Social Security until at least their 65th birthday. The exact timing is tough to pinpoint, even varying within households depending on age and who earned more.

 

That being said, there are people who are better off taking the benefits as soon as they can, such as those in poor health who have less time to enjoy their benefits. For others, waiting for the ideal time to claim would mean losing wealth in their 60s as it would require them to live off savings or investment account withdrawals instead of Social Security benefits.

 Courtesy: SARAH SKIDMORE SELL 

3 Costly Retirement Mistakes to Avoid.

Many workers look forward to retirement, and understandably so. After all, your golden years are a great time to kick back and enjoy the fruits of your lifelong labor. But retirement can also be a precarious financial period of life. Going from a steady paycheck to a fixed income can be a stressful prospect, and if you're not smart about the way you manage your money and expenses, you could really end up struggling financially. With that in mind, here are three retirement mistakes that could end up making your senior years miserable.

1. Filing for Social Security too soon

Your Social Security benefits are calculated based on your highest 35 years of earnings. The age at which you file for those benefits, however, could cause them to change, and not necessarily for the better. If you wait until you reach full retirement age, or FRA, to claim benefits, you'll get the full monthly payments your earnings record entitles you to. That age is either 66, 67, or somewhere in between, depending on the year you were born.

That said, you're allowed to file for benefits starting at age 62. Doing so gives you early access to that money, but it also means you'll reduce your benefits by a certain percentage depending on how far ahead of FRA you file. What this means is that if you retire before reaching FRA, it might pay to wait on Social Security until you've reached FRA or beyond, as you can delay benefits up until age 70 and grow them by 8% a year in the process. This way, you won't slash what could ultimately end up being a major income source for you in retirement.

Imagine you retire at 65 and have some savings to live on, at least on a short-term basis. If your FRA is 67, at which point you're entitled to $1,500 a month from Social Security, and you can get by without benefits, waiting those two years could save you a nice chunk of money -- specifically, $2,400 a year. Therefore, don't rush to claim Social Security if you retire before your FRA, because you could end up cutting your benefits for life.

2. Not signing up for Medicare on time

Medicare eligibility begins at age 65, and signing up on time can help you not only secure the coverage you need but also help you avoid expensive penalties that make your health benefits more expensive. Your initial Medicare enrollment period begins three months before the month in which you turn 65 and ends three months after the month in which you turn 65. If you don't sign up for Medicare during that period, you can sign up during the general enrollment period of Jan. 1 through March 31 of each year. But you might end up paying more for Medicare if you hold off too long.
Most Medicare enrollees don't pay a premium for Part A, which covers hospital visits. They do, however, pay a premium for Part B, which covers preventative care and diagnostics. If you don't sign up for Medicare during your initial enrollment period, you'll face a 10% increase in your Part B premiums for every 12-month period you were eligible for coverage but didn't enroll. And when you're on a fixed income, that added cost could really hurt you.

3. Not going in with a savings withdrawal strategy

Ideally, you'll enter retirement with a substantial nest egg. But if you don't establish a withdrawal strategy, you'll risk depleting your savings prematurely and running out of money later in life.
For years, financial experts have been promoting the 4% rule, which states that if you begin by withdrawing 4% of your nest egg's value during your first year of retirement, and then adjust subsequent withdrawals for inflation, your savings should, in theory, last 30 years. Though it's not a perfect rule, it's certainly a decent starting point to work with. That said, if you're retiring earlier than the average American (say, in your 50s), it's best to adopt a more conservative withdrawal strategy -- say, 2% or 3% a year -- since your savings will need to last longer. And on the flipside, you might get away with taking higher withdrawals, percentage-wise, if you don't retire until your 70s.

Along these lines, plan to be flexible during years when the market takes a downturn and your portfolio value drops. If you cut back on expenses when your investments are worth less and therefore withdraw less, your nest egg will take less of a hit. But if you take withdrawals blindly without adopting a strategy or understanding the consequences involved, it could cause you to lose money unnecessarily and, as previously mentioned, deplete your nest egg at a time when you're still very much alive and kicking.

Retirement can be a financially stressful period of life, but it doesn't have to be. Avoid these mistakes, and you'll be more likely to enjoy your golden years without the financial worries so many seniors face.
By Maurie Backman, The Motley Fool.

The fear of running out of money in retirement is overblown.

One of my biggest concerns about early retirement was running out of money. What if there was another massive correction in the stock market? What if my rental properties went vacant for an extended period of time? What if Financial Samurai died? What if I accrued unexpected medical expenses? What if I underestimated how much I needed to be happy? Such worrisome thoughts can paralyze even the best of us.

Whether you decide to retire in your 60s or in your 30s, I’m here to say the fear of running out of money in retirement is overblown. Journalists and government officials, most of whom have never retired, have fear mongered the general population long enough! Through firsthand experience, let me explain why your retirement life will probably be just fine.

1) You will need less than you think: I’ve been out of the workforce since early 2012, and my biggest surprise has been how much less I need to live a comfortable retirement life. Like any good retiree, we plan for multiple scenarios over an extended period of time before making a decision. I spoke with at least two dozen retirees about retirement spending and they all said they are spending much less than they anticipated. For myself, on average I’m spending 30% less than projected. 

It costs nothing to play tennis at a public park. There are plenty of cheaper food alternatives once you no longer have to work in an expensive downturn area. You can read all the latest magazines at your local library, surf the web, and enrich your mind with classic literature for free. In fact if you look, you’ll find a plethora of free activities.

2) You don’t need to save for retirement once you are retired: What many retirees “forget” is that once they reach retirement, they no longer need to save for retirement. It’s not so much forgetting, but being so accustomed to saving that you just can’t stop! If you’ve spent a lifetime maxing out your 401k, you’ve suddenly got $18,000 a year more in gross disposable income.

For the life of me, I cannot stop trying to save at least 50% of my after-tax income, while also contributing as much as possible to my Solo 401k even though I’m supposed to live it up more in retirement. I tried blowing money on mid-life crisis cars this year, but both my low-ball offers were rejected. I tried spending more while I was in Europe for three weeks, but couldn’t stomach paying more than $250/night after taxes and fees for a hotel. I still can’t convince my dad to get cable. Old habits die hard! 

3) You will adapt to different income levels: For the first two years after I left my job, my annual income decreased by 70% – 80%. Yet looking back, there were minimal lifestyle changes. I still lived in the same house that I had been living in for seven years prior. Refinancing my mortgage before leaving helped. I still stayed in the same house in Hawaii for the past 30 years every time I visited my parents. I also drove the same paid off car named Moose for a couple years until I bought a snazzier car in late 2014. 

Yes, I had to cut back on eating prime rib for a couple years. But I replaced $50 dry-aged steaks with $2.5 In N’ Out cheeseburgers. Yum! $12 toro sashimi was replaced with regular old $4 salmon sashimi. Still quite tasty. 

Just like the lifestyle of a one "percenter" is not much different from the lifestyle of a middle income person, as long as you have the basics covered, the lifestyle of a lower income person isn’t much different from a middle income person either. The lower income person has a harder time saving for retirement, which ironically gels well with a retiree who doesn’t need to save for retirement.

As long as I have food, shelter, clothing, dental floss, companionship, and internet access, I’m 85% of the way there. For most of you, it’s going to be the same thing. The joy of doing anything you want, whenever you want more than makes up for a lower income. 

 

4) You will be in a lower income tax bracket: The great thing about making less money is that you’ll be in a lower income tax bracket. Therefore, you’ll have a relatively higher amount of disposable income for each dollar earned. It felt wonderful going from a 39.6%, 35%, or 33% marginal income tax bracket (depending on my deductions and bonus) to a more reasonable 25% tax rate for a couple years. Just imagine killing yourself at work for 70 hours a week to give over 50% of some of your income to a fiscally irresponsible government. No thank you. 

The double benefit of no longer having to work and paying less taxes made me much happier. Paying less taxes will make you much happier too. 

5) You will find many ways to make money: If you retire with only part of your living expenses covered, logically you’ll need to come up with a solution to cover the “income gap” required by your desired lifestyle. Throughout our entire careers, we are always asking for more. Thus, in retirement it’s often hard to accept less. But once we learn to control our egos, a bevy of new income earning opportunities materialize.

Since retiring, I’ve done consulting with four financial technology companies at an hourly rate 60% – 80% less than what I used to earn at my full-time job. Initially, it felt odd making so much less. But I soon got over it because the experience was fun and I was learning something new. I even let some people who had no idea what they were doing, tell me what to do! The experience was insightful because it allowed me to write the post, How To Get A Job You Do Not Deserve.

Then, I really squashed my ego and spent time driving for Uber for $25 – $35 net an hour. One time I picked up an ex-client at his place in Pacific Heights. Perfect. I wanted to see if making a living driving was possible. It’s hard, but doable. The experience was good and driving added about $5,000 more gravy to my plate in 2015. From there, I wrote some articles about my experience and added another $5,000 through driver referral income. I still pick up passengers when going long distances to make gas money.

If you don’t have a car, not to worry. Recently, I hired some “Taskers” from TaskRabbit to help transport some furniture from a buddy’s place to my house this past weekend. After paying a 35% (!) commission to TaskRabbit, the Taskers still made $54 an hour. Further, they had a couple other “tasks” lined up that day. And if you aren’t strong enough to be a mover, you can do a hundred other tasks that don’t require muscle, like cat sitting.

If you’re allergic to all animals, don’t worry. You can always sign up to be a greeter at Walmart or flip burgers at McDonald’s while also eating free food. You’re not too proud to work a minimum wage job are you?

If you are willing to swallow your pride and make much less than you once did, you’ll have no problem making up the income gap between your covered expenses and your desired lifestyle.

6) You have more to offer than you think: When I left finance, I thought I‘d be done for good because I didn’t think I had any transferable skills like a software engineer or electrician. When you’re used to doing one thing for a large portion of your life, you begin to doubt your versatility. Every colleague I spoke to felt the same way, which is why so few ever leave.

Having transferable skills is overrated. All you really need is to be: 1) likable, 2) trustworthy, and 3) consistent. To make life easier, build a high EQ. Anything technical can be learned on the job. Think about how much you remember from high school and college. Not much! The CEOs earning $25 million a year aren’t coding or rewiring your house. All they’re doing is managing people, building business relationships, and making decisions.

Given you’re close to or already retired, what you’ve got more than most is experience. Experience cannot be taught or bought. Acquiring it takes time. Your experience is extremely valuable. I never anticipated companies approaching me for online marketing consulting work. But at least eight firms have done so because over the last seven years with little budgeted, I’ve organically built my own platform into something significant. For any startup that wants to build its brand online, this is valuable experience.

7) Your existing assets have upside: You might have a business that invites couples into your home to learn how to cook. Why not expand and shoot videos of the cooking sessions to sell online?

You might have rental property that hasn’t been spruced up in a while. Perhaps if you did some minor remodeling, you could get a much higher rent.

Your investments might not be properly allocated based on the current state of the economy. Perhaps instead of having 50% of your assets in a Treasury bond yielding 1.5% in a bull market, you could double your money by allocating more to blue chip dividend stocks that pay more than a 2% yield and provide stronger capital appreciation. Or perhaps instead of having 100% of your net worth in public equities, you should be more diversified in order to not get pummeled during the next downturn.

It’s rare that all of our assets are fully optimized. Only car manufacturers are able to trick us into changing the oil every 3,000 – 5,000 miles. The reality is, if you didn’t change the oil and spark plugs for 10,000 miles, your car would probably still work just fine!

If necessary, we can probably all do some fine-tuning to make our existing assets generate more income. It’s just a matter of taking the time and expending the energy to make it happen. Don’t let a steady paycheck make you comfortably numb!

8) You can always tap your pre-tax retirement accounts early: If you so happen to retire before the age of 59.5, you can follow Rule 72(t) and withdraw money from your pre-tax retirement accounts penalty free provided that the holder take at least five “substantially equal periodic payments” (SEPPs).

According to the IRS, the maximum you can borrow from your pre-tax retirement account such as a 401k is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less. For example, if a participant has an account balance of $40,000, the maximum amount that he or she can borrow from the account is $20,000.

Finally, you could simply pay a 10% early withdrawal penalty if you were absolutely desperate. Luckily, if you incur unreimbursed medical expenses that are greater than 10% of your adjusted gross income in that year, you are able to pay for them out of an IRA without incurring a penalty.

9) You can create your own destiny: Let’s say nobody at McDonald’s is willing to hire you. Why not be your own boss? Startup costs are extremely low nowadays. All you’ve got to do is throw up a site for less than 5 bucks a month and you’re literally in business.

   After retiring, I wanted to take Financial Samurai more seriously. So I committed to writing at least three posts a week by spending 2-4 hours each morning before tennis. I didn’t know exactly how I was going to build the business, but I knew that if I kept on writing, opportunities would arise. After a full year of sticking to my plan and publishing my freedom book, the traffic on this site grew as did its income.

    My story is a classic case of “do what you love to do, and the money will follow.” To maximize profits, I should spend more time optimizing this site. But why bother when this site’s income is already a bonus? I’m having too much fun to go back to a stressful work mindset.

    The key is to just start your own site/business endeavor. You don’t need to have all the variables pre-mapped because as you tinker, your variables will change. Overanalyzing a situation will make you do nothing.

    YOU’RE STRONGER THAN YOU THINK: If you’ve been able to entertain legitimately the idea of retiring early, then you probably also have the intelligence, courage, and game plan to adapt to any unexpected changes that happen after retirement.

    Change is scary. But the fear in your head is almost always greater than the reality. Just make sure you have something you enjoy doing once you pull the "ripchord". You might have so much time you won’t know what to do with yourself!

 

Sam Dogen of the Financial Samurai.

Four Actions to Take If You're Retiring in 2017.

But before you start planning your retirement party, make sure you do these four things if you're retiring in 2017.

1. Don't Leave Money on the Table: As part of your employment, you may be entitled to "matching" and/or "profit-sharing" contributions from your employer to your 401(k) or other retirement plan. Since you typically need to be actively employed on the date the payment occurs to receive these funds, make sure you understand these terms prior to setting your final work date. You don't want to miss out on "free" money!

For personal contributions, you may want to increase your contribution percentage to help you reach your annual maximum. Many employers cap the amount you can contribute to your plan from each paycheck. Since you may not be able to increase your contribution rate to 100% for your last couple of paychecks, you may need to instead increase your contribution percentage long before you retire to max out. 

Your pension benefits are calculated based upon your earnings history. Consequently, you will want to align your retirement date with the timing of your annual compensation adjustment, because retiring before that date could cause you to miss out on including another year of higher compensation in your pension calculation. 

On a similar note, it's important to understand the timing and eligibility requirements for any bonus payments you may receive. Most people are required to be gainfully employed at the time the bonus is paid in order to receive it. If you do happen to leave before this date, you may be able to negotiate benefits as part of your retirement agreement. 

Unused vacation days are typically paid out as part of your final paycheck. This can be a problem when you have an exceptionally large amount of time off, as the large lump sum could push you into a higher tax bracket. If you are planning to retire near the end of the year, take vacation time when you planned to retire, which may enable you to push a hunk of your remaining "vacation wages" into the next year and help minimize the ripple effect from a large, one-time payment.

2. Refresh Your Risk Profile: Retirement is a major turning point in your life. It's not just the transition from full-time work to either part-time or no work at all. It's also the transition from saver to spender, where you face the reality of spending down your retirement nest egg.

Given the run-up in the markets since 2009, your asset allocation may be more heavily weighted in stocks than you initially intended. Rebalancing your investments is a good idea during your working years, but it's even more critical to keep things in balance once you retire. Since you'll be drawing down your savings to finance your retirement, having too much of your portfolio in riskier assets like stocks leaves you vulnerable to a potential market downturn. 

Before you rebalance, keep in mind that you may incur tax liabilities and/or transaction costs, and rebalancing does not assure a profit or protect against a loss. 

3. Avoid Underpaying Your Taxes: When you're working, your employer automatically withholds taxes from your paycheck unless you opt out to reduce (or increase) this amount. In retirement, the opposite is true. By default, taxes are not withheld on your retirement income. Instead, you must opt in to have taxes withheld from your Social Security benefits, pension benefits and IRA/401(k) distributions. If you don't have taxes withheld, estimated tax payments (federal and state) will likely become a necessary part of your life. 

Imagine you and your spouse are planning on having $150K in retirement income ($50K of Social Security benefits, $25K of pension benefits and $75K of traditional IRA distributions). For federal taxes, you'll need to pay about $5,500 every quarter ($22K annually) in estimated tax payments. Failing to do so will leave you with approximately $500 in underpayment penalties. 

Opting in to have taxes withheld from your retirement income will help you dodge penalties from late payment on taxes and avoid the uncomfortable feeling of writing large checks to the IRS. 

4. Talk with Your Spouse: It's worthwhile to have a good idea of how you're going to spend your newfound free time in retirement. I've met with many clients who gave me a "deer in the headlights look" when I asked them what an ideal day in retirement looks like both today and a year from now (after the initial retirement buzz disappears). They were unprepared for the prospect of converting 40+ hours "in the office" into 40+ hours of meaningful activity. 

At the same time, they also lacked a plan for spending time with their spouse. After all, one or both of you have regularly worked for the past several decades. Retirement creates a brand new dynamic that removes the element of scheduled separation. Instead, you're going to be stuck (blissfully, I hope) with each other. How will you spend that time? Volunteering? Working around the home? Traveling abroad? 

Creating a plan for staying busy that both you and your spouse agree on will help ensure that your golden years are sweet, not bittersweet. 

The Bottom Line: Taking the plunge into retirement is a monumental milestone. It's important that you're ready for it. Ask yourself and/or your adviser the following questions to help you evaluate your retirement readiness:

Do I have a robust understanding of my employer's benefits plans?

What effective (non-marginal) tax rate should I use when setting up withholding on my retirement income payments? 

Navigating your retirement journey requires that you and/or your adviser have confident answers to these questions. If you lack clarity, I encourage you to seek better guidance that ensures you are on track with your financial plan and the pursuit of your long-term goals. 

Courtesy: Brian Vnak, CFP, CPA.

Five Potentially Devastating Mistakes Pre-Retirees and Retirees Make.



Failing to save enough is an obvious, and all-too-common, disaster in the making, but here are five much trickier danger zones to steer clear of. 

The road to and through retirement is filled with potholes. Some are small, and you may be able to drive right over them, but some can be devastatingly deep. They could send you on a financial tailspin with little chance of recovery. 

Here are five mistakes that could hinder your retirement plans:

1. Focusing on the wrong thing: Retirees spend a lot of time worrying about how much things will cost as they age — health care, long-term care, etc. My advice to retirees is to switch their mental energy to the other side of the ledger — their incomes. If you have enough income, and you’re managing it well, you’ll be prepared to handle those expenses as they come at you.

2. Misunderstanding risk: No one knows for sure which way the market will go. We use different measures to aim to figure it out, but at the end of the day, it’s impossible to predict. So, it’s up to retirees to control the amount of risk they are experiencing. For many people, it’s tough to get past the idea that risk equals reward. In the second half of one’s financial life, however, you cannot afford the same kind of risk you tolerated when you were saving money for retirement.

3. Not knowing what you pay: Many people go forward with their financial adviser’s investment strategies without understanding all the possible costs in both hidden and disclosed fees. When you add up the cost of paying your adviser, along with the trading and product costs for your investments, the fees could be upward of 3%. That means you have to get a 3% return just to break even. Don’t just nod and agree with the plan the adviser sets before you — ask questions and check costs.  

4. Leaving your IRA or equivalent to your surviving spouse without considering alternatives: Most people leave their IRA to their spouse without even thinking about how the surviving spouse’s tax status will change — from how the surviving spouse may file (single vs. married filing jointly) to how much taxable income they now have. We encourage married couples to work with their tax preparer or CPA to draw up a mock return that would reflect any possible changes to tax liability if a spouse would pass away. It’s easier to plan for this significant life event than to have to react at that moment. Other choices for bequeathing an IRA would include younger individuals (although they would be required to take required minimum distributions, the percentages to withdraw would be quite small) and a see-through trust.

5. Accepting low returns: The stock market isn't the only place to get a decent return these days. There are many different investment vehicles designed to create lasting income in retirement, which should be the No. 1 focus of retirees. One of those vehicles is a fixed indexed annuity. By taking a portion of their money and putting it on deposit with an insurance company, retirees are able to take advantage of the upside of the market without taking on any of the downside risk. There are also options for creating assistance with potential long-term care costs — something many retirees fail to protect themselves against due to high premiums.  

How can you avoid these potential problems in your retirement journey? I always encourage a person to find an adviser who specializes in the second half of an individual’s financial life and to be sure and ask how the adviser is managing their funds. Receiving good financial advice is one of the most important things you can do for your future self. 

Courtesy: By Roger Ford, RFC, Investment Adviser | Conservative Financial Solutions