"Some will win. Some will lose.
Some were born to sing the blues.
Oh, the movie never ends It goes on and on and on and on."
- Journey, "Don't Stop Believin"
By JULIA ANDERSON
If I had to do it over again, I would do a few things differently as I transitioned from full-time work into semi-retirement and part-time work. Turns out that many people like me have regrets. Some steps are difficult to undo.
Two areas of confusion:
How and when to take Social Security benefits as part of your long-term retirement plan? And how to protect as much of your retirement income from hefty federal income taxes over the first 20 years of retirement?
Like most people, I didn't really think much about retirement other than to know that I needed to save a bunch of money in my 401(k). I also built up savings in a separate traditional Individual Retirement Account. But every time I thought about converting that IRA to a tax-free Roth IRA, I hesitated. Converting it meant paying taxes as part of the conversion. I didn't want to do that. So the conversion never happened.
Now (Mistake No. 1), I wish I had a Roth IRA. Any money coming out of my 401(k), which is now a Rollover IRA as regular income. I did not realize that when I reach age 70 and a half, the IRS tells me how much must be withdrawn from this nest egg account. The rate of withdrawal is about 4 percent. That's more than I want to withdraw but I have no choice. I'm freaking out about making my money last until I die. Money withdrawn from Roth IRA is tax-free since you've already paid taxes on the money inside the Roth. (Roth IRA vs. traditional IRA, click here.)
Mistake No. 2 I claimed Social Security benefits at age 64 on my own account. If I'd been smart, I would have filed on my ex-husband's account, not my own. While I would have received a smaller amount in monthly benefits this strategy would have allowed my own Social Security account to keep growing (8 percent a year in increased benefits until age 70). (For more, click here.)
Or instead of taking Social Security at all, I should have considered withdrawals from my Rollover IRA. I did not do the math on the trade offs. If I had done the math, I'd might have made a different decision. I would have had less money in my Rollover IRA but I would have made up for that in bigger Social Security benefits later. At the time I signed up for Social Security, you could still pay your account back and restart benefits at a higher level. Social Security changed that rule just as I was making the decision.
If I had to do this all again, I would have sought the advice of a tax-savvy Certified Public Accountant or seasoned investment counselor who could have provided more tax-related and income options. This would have been a fee-only hour of expert advice. I did not want to get a sales pitch about buying an annuity. I did not want someone to say they would put together a plan and manage all my money. I felt confident enough to do that myself, thank you very much. But some expert information would have helped.
An ongoing process
Independent adviser, Rob Pool, sees retirement as an ongoing process that evolves as markets go up and down, personal circumstances change and “things happen.”
“The key to getting off to a good start in retirement is building in flexibility,” he said. “If you set up a (household) budget and you’ve had a good year in the market, then take that trip to Europe. If it’s a bad year, defer the trip.”
I remember that it wasn't always that way. In the old days... say 20 years ago... brokerage firms put together multi-page leather-bound plans with lots of charts and graphs. The binders then were handed across a desk to the clients with the message, “Go and be retired.”
Most advisers now counsel against locking in fixed (possibly unrealistic) automatic withdrawals from retirement nest eggs. Most say managing your expenses, your money and nest egg investments is part of the job of being retired. The good news is that there is plenty of expert advice on how to avoid mistakes.
Steps to Social Security
Linda Haines, a broker (now retired) with Morgan Stanley, said a good first step is deciding how and when to take those Social Security benefits that I was talking about. Often people sign-up as early as possible at age 62. But there's more to it than that.
“Couples need to decide whether one or both of them will take Social Security payments at full retirement or file and suspend one or something else,” Haines said. “This decision can make a big difference in your retirement funds.”
Social Security can be so complicated that some may need professional help to determine what’s best. The optimum strategy is hardly as simple as just waiting another year, or waiting until 70, particularly when it comes to couples, writes Janet Novack for Forbes magazine.
Factors such as differing ages, earnings and health; spousal and survivor benefits; the concept of joint life expectancy; and Social Security rules that allow a couple to maximize their combined take with various “file and suspend” strategies, all may play a role in the decision, Novack writes.
But even before deciding the Social Security issue, Haines says couples should talk candidly about their retirement expectations. If you're on your own...talk it out with a trusted friend or adviser.
“Make sure you talk to your spouse about what your ultimate dream of retirement is,” she said. “You may be surprised with the answers. You may assume your spouse wants to do exactly what you do and it ends up they have something completely different in mind. In this time of life, communication is key,” she said. To start, the basics must be in place, she said.
“People need to make sure they have defined their goals, evaluated their current financial situation to make sure they have enough to achieve those goals, and have created a financial plan. They then need to implement that plan and review it regularly,” she said.
Health care costs, down the road
Both Haines and Pool encourage those moving into retirement to take into account future health care costs including long-term care not covered by Medicare.
“Healthcare costs are one of the most important costs that people tend to under-plan for,” Haines said. “That can be devastating to a portfolio, if not protected adequately.”
For her, it’s all about creating a plan that lasts as long as you do by not underestimating how long you might live.
A worst case scenario might be a husband stricken with Alzheimer’s disease who requires nursing care that may cost $10,000 a month. By the time he dies, the nest egg is gone and the wife is left on her own in poverty.
Research shows that eight out of 10 couples will have one of them requiring long-term care. Long-term care insurance may be the answer, but it’s expensive and requires careful planning. Again deciding whether to invest in insurance requires doing your homework, comparing plans and reading the fine print, not just taking what someone tells you for granted.
Strategies for second marriages
Advisers are seeing more baby boomers in second and third marriages. Each may have grown children, some who may need money. Advisers caution against co-signing on loans for children or co-signing on student loans for grandchildren. It’s important for these couples to plan for who gets what when one of them dies.
Obviously, there can be conflict between providing for a surviving spouse and providing for children from the first marriage. Again, it’s all about taking time to do the planning.
Pool recommends that his clients create a “legacy” drawer” where family or a surviving spouse can easily find wills, trust account information, insurance records, investment accounts and passwords. “It makes the transition easier in times of stress,” he said.
A friend of mine just tipped me this week to a smart phone app called My Health Care Wishes that allows you to store your own advance directive or family members' on your phone.
According to a New York Times article by Paula Span. "If and when you need them, the app lets you present such documents as well as other health information and contacts."
According to the report, May Health Care Wishes comes in two versions..free or $3.99, if you want unlimited storage for any number of people. The reality is that few of us have bothered to actually create these documents in the first place. Yes, I've got one but it's in a folder at my desk.
And while most people understand the basics of retirement planning, they may not be aware of retirement tax strategies that can make a big difference in their long-term financial well being.
“It’s important to plan for a less expensive tax situation,” Pool said. “Money coming out of a 401(k) or traditional Rollover IRA is taxed as ordinary income,” he noted. “Alternatives are to either put money in a Roth IRA or convert retirement savings into a Roth IRA, if the stars are aligned,” Withdrawals from a Roth IRA are tax-free.
Even if you're "retired" you may still be able to start a Roth IRA. That's if you are still working part-time. Only "earned" income can be considered for a Roth.
Taking draw downs
For many experts, the easiest avoidable retirement mistake is failing to “rebalance” your investment portfolio with the ups and downs of markets or to adjust your withdrawal rate to accommodate changes in markets and the economy.
Charles Sizemore writing for Forbes magazine says, “An absolute nightmare scenario for any retiree is to build a retirement plan based on the assumption of say 4 percent annual draw downs, then have a major bear market put your entire standard of living at risk.”
Draw downs of 4 percent, he said, "are no problem at all in a bull market that sees the market rise 10 percent to 20 percent per year. But if you go through a prolonged bear market, taking regular draw downs can dig deeply into the capital that you need to last for the next 20 years.”
An old rule of thumb has been to put 30 percent of your nest egg in stocks and 70 percent in bonds. But with today’s near non-existent bond interest rates that ratio no longer makes sense.
“Just because you’re retired doesn’t mean you have to have everything in bonds and cash,” Pool said. “With our long life expectancy, you’ve got to have a fair amount in equities…that will grow over time.” But they've got to be managed by you or someone else. (Warning: Avoid exceptionally high yields. It's a red flag).
Pool counsels a withdrawal rate based on a percentage of the portfolio value each year rather than locking in a fixed withdrawal rate no matter the value of the nest egg.
“Using the percentage of the total lowers the risk of running out of money,” he said.
Talking about retirement
For Haines, the technical questions surrounding a transition to retirement can be managed but communication about expectations in retirement may turn out to be a bigger challenge.
“You may assume your spouse wants to do exactly what you do and it ends up they have something completely different in mind in retirement,” Haines said. "Either or both spouses may have worked and were apart most of the day or one spouse works and one at home during the day. Both of you suddenly always at home or together can be a little overwhelming,” she said.
She said retirees tell her that it's good for each of you to have time to do something on your own, go to lunch with a friend, take an exercise class or go golfing with your friends.
“It makes the time when you get together more interesting and fun,” she said.
Both Haines and Pool agree that retirement planning is not a one-time slam dunk.
“Retirement is a living breathing process that evolves as markets change, personal circumstances change,” Pool said. For Haines, it's about making the adjustment, staying busy and having a plan.
“Some people do fine, others need to work a little harder at finding what is interesting to them to keep them busy,” she said. “Some end up going back to work on a consulting or part-time basis to bridge into full retirement. The journey and who you include in this new part of your life are what is important.”
Am I losing sleep over my retirement mistakes? No. --- Julia
Editor's note: Before taking any steps to retirement, consult with a good tax attorney or CPA. Their expert advice may put you exactly on track.
Over the next 20 years, 10,000 baby boomers will turn 65 every day.
Today, only 23 percent of Americans plan to retire before age 65.
Forty percent of Americans plan to work until “they drop.”
Though they may be “retired,” 74 percent of Americans expect to be working.
TIPS FOR NEW RETIREES:
- Don’t start Social Security benefits too soon. Seek advice.
- Discuss your dreams for retirement with your spouse. You may be surprised.
- Don’t under plan for health care costs.
- Put together a “legacy” drawer of your accounts and passwords.
- If you’re in a second or third marriage, plan for who gets what, when one of you dies.
- Set up a flexible budget and withdrawal plan to adjust to market changes.
- Take advantage of tax strategies. Seek advice.
- Don’t give money to your kids that you will need or co-sign on their loans.
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I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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