Archives for February 4, 2019

During retirement, you’ll have a lot more freedom. You won’t have to answer to a boss anymore, or meet important work deadlines.

But just because your hours are your own doesn’t mean you don’t have to live by some rules. In fact, there are five key rules you need to follow as a retiree so you don’t end up in dire financial straits. Here are those five rules, which apply no matter who you are or how much money you have set aside for your retirement:

1. Have an emergency fund

Emergencies don’t stop just because you no longer have a job. Appliances and cars still break, roofs still leak, and unexpected doctor visits still happen. And if you don’t have the money for them, this could be a big problem.

The last thing you want is to get deeply into debt during retirement, or to be forced to sell investments before you’re ready because you need to cover a financial shortfall. You should have several months of living expenses saved up so when a big issue arises, you won’t put yourself at risk of going broke by decimating your retirement accounts.

Ideally, you’ll have three to six months of living expenses in cash set aside before you leave the workforce. If you do, and you need to spend money from your emergency fund, cut your spending and save to replenish your fund as quickly as possible. If you’re already retired and don’t have an emergency fund, make this your top financial goal.

2. Know the RMD rules

When you have a 401(k) or an IRA, you’re going to have to start making withdrawals at some point, even if you don’t actually need the money. That’s because the law says you can’t just leave your cash to grow in these tax-free accounts forever. There are rules for required minimum distributions (RMDs) that mandate you begin withdrawing money when you hit 70 1/2 years old.

The specific amount you need to withdraw should be calculated using the IRS required minimum distribution worksheet. Be sure to understand what’s expected of you and make the withdrawals in a timely manner. Otherwise you could be forced to pay a penalty equaling half the amount you failed to withdraw on time.

3. Don’t withdraw too much money too fast

While you must withdraw some of your retirement nest egg starting after your 70th birthday, that doesn’t mean you should be making big withdrawals. In fact, you should limit your withdrawals to a reasonable amount because when you take money out, it’s no longer there to help your wealth grow.

If you draw down your accounts too fast, this significantly increases the chances you’ll end up broke with no investments late in your retirement — when you’re more likely to have the most expensive health issues and when working is impossible. You need to leave enough principal invested so your account can earn reasonable returns and you’ll have a nest egg that lasts for the long term.

There are lots of ways to figure out the appropriate amount of money to withdraw. Traditionally, experts recommended a 4% rule wherein you’d withdraw 4% of your principal balance in the first year of retirement and then increase your withdrawal amount by the rate of inflation each year thereafter. But there are concerns you could run out of money with this approach, so you may want to adopt a 3% rule instead — or use RMD tables from the IRS to determine an appropriate withdrawal amount.

4. Take steps to stay healthy

Healthcare is one of the single biggest expenses seniors face, and the costs often come as a major shock to retirees. Unfortunately, when you need health services, you have no choice but to pay for them — and there are lots of services Medicare doesn’t cover that you’ll need to pay for out of pocket.

Putting money into a dedicated account, such as a health savings account, is a good way to save money for care as a senior. But the best way to save a fortune is to do everything you can to stay healthy and avoid costly medical issues. Sometimes, it’s not possible to prevent an illness through lifestyle change. But evidence has shown that regular exercise, eating right, and getting preventive care can reduce the chances of costly illnesses or make some illnesses easier to treat.

You have nothing to lose by trying to stay healthy, and if doing so saves you a little money (or a lot) in the long run, that’s all the better.

5. Don’t accept financial obligations you can’t fulfill

When you’re retired, requests for your financial help often don’t retire with you. In fact, you may have younger relatives — especially children — who still rely on you. It can be hard to say no to your loved ones, but you don’t do them any favors by impoverishing yourself and jeopardizing your retirement by giving them money you can’t afford to lose.

Giving money to adult kids is just one financial obligation you may not be able to afford to take on. You may want a vacation house or a sailboat to enjoy in your golden years, or your spouse may be dreaming of a big RV. But unless you’re 100% confident you can take on a financial obligation without the payments putting your retirement at risk, just say no. There’s nothing that you could buy that’s worth running out of money in your late 80s.

Following these rules will help you be more secure in retirement

It may not be fun to say no to family members, to hit the gym as a senior, or to limit your withdrawal rate. But when you make smart choices and follow these simple rules, you can maximize the chances your money will last and you’ll stay comfortable during retirement. That’s definitely worth the effort.

Tax scams abound year-round, but people over 65 are targeted even more frequently during tax season.

Why? A certain amount of money is in play at this time as taxpayers are figuring out what they owe Uncle Sam and scammers take advantage of the fact that money is being exchanged between the U.S. citizenry and its government. On April 15 we effectively settle the bill. People who owe more than they paid during the last year will receive a tax refund. Others who paid less in tax than they actually owe will be sending money to the government.

Many tax season scammers call you up and pretend to be from the Internal Revenue Service (IRS). Some insist that you owe taxes and even threaten you with arrest. Others attempt to obtain your personal information, such as your bank account numbers or Social Security number, even promising the information will be used to deposit a hefty tax refund in your account.

Older people have relatively higher net worth, on average, than younger folks. In fact, households headed by people between 65 and 74 have a much higher net worth than younger households, according to the U.S. Federal Reserve’s triannual Survey of Consumer Finances. Households headed by people 75 and older have the highest net worth in the country, more than double that of households whose heads are 45 to 54 years old.

Older people are especially vulnerable to scams. Senior citizens living on a fixed income might be frightened by people demanding money from them. Seniors are also more likely to be home during the day and answer the phone when it rings.

Not all senior citizens are conversant with technology, either. Con artists use sophisticated technology that can spoof Caller ID and area codes to trick you into thinking the call is from the IRS. Some use email addresses that appear to be from the IRS until you hover your cursor over it. Older people may not realize that fraudsters can manipulate technology to make it look official.

But scams can be averted if you’re knowledgeable about how the IRS actually operates and how tax scammers operate and then understand the difference. How can senior citizens protect themselves from tax scams? By being alert to these three signs that a fraud is afoot.

1. They contact you via phone, email, text, or social media.

Make no mistake. The IRS never contacts anyone initially by phone, email, text, or social media. Official notifications from the IRS that you owe taxes will arrive via U.S. mail. If you have an ongoing issue with the IRS, an IRS representative may call you to discuss your case, but an out-of-the-blue phone call, email, text, or social media messages to say you owe taxes is not from the IRS.

Never respond to any communication via phone, email, text, or social media that says you owe taxes or threatens legal action. Scammers can record your voice when you speak on the phone and use it to authorize payments. The best response is to hang up.

Emails and other messages purporting to be from the IRS or related government agencies may be phishing scams. Don’t open any email or text attachments, either, which can be used to gain access to your data or harm your computer.

2. They demand immediate payment, sometimes in unusual ways.

Another feature of tax fraudsters? They demand immediate payment. The IRS will never do this. One of the reasons the IRS uses U.S. mail, is because you have the right to examine the documents indicating what you owe and to appeal if you don’t agree. If you do legitimately owe the IRS, payment schedules can usually be negotiated.

To ensure they cna grab your cash and run, scammers often ask for credit card or bank account numbers. Never give these out over the phone or send them using email, text messaging, or social media.

Don’t fall for an ingenious twist, in which scammers tell you about a tax windfall you’re owed. You’re blinded by the promise of unexpected money! In this scheme, they ask you to verify your bank account number or Social Security number. This may seem convincing, as fraudsters sometimes know part of these numbers. But guess what: Once you “verify” a number, they have it and they can try to drain your bank accounts or collect your Social Security benefits.

A new scamming innovation is to demand immediate payment from senior citizens via prepaid cards. That’s right, scammers may ask you to fork over Apple iTunes or Google Play cards. Other common requests — common enough for the government to have issued an alert about them — are for Green Dot Prepaid Cards, MoneyPak Prepaid Cards, and Reloadit Prepaid Debit Cards.

Many fraudsters are involved in larger schemes in which their associates convert these untraceable prepaid cards into cash.

3. They threaten you with legal action.

The third dead giveaway of a tax scam is that it threatens recipients with immediate legal action. It could be jail or a fine, but in either case, senior citizens are threatened with a scenario in which they must pay immediately or law enforcement will become involved.

The real IRS never threatens immediate legal action if taxes aren’t paid right away. Yes, it has the power to arrest folks for tax evasion and the power to garnish paychecks and place liens on property for payment of back taxes. But any such action is the end of a lengthy legal process in which the taxpayer has multiple opportunities to pay back taxes and fines in other ways. It does not happen suddenly and out of the blue. Plus, the prospect of any such action is announced in letters delivered to you through the U.S. mail.

If you are contacted by a fraudster purporting to be from the IRS, let the IRS know. Emails purporting to be from the IRS or the U.S. Treasury should be forwarded to phishing@irs.gov. Delete the email from your own computer. Stay safe out there this tax season!

Even steady customers probably don’t know the manager of their local Target or Walmart. They may not even have a real connection with any employee in the store, and they most certainly don’t have a relationship with either company’s CEO.

That’s an inherent pitfall of any big business that small business owners and managers can exploit. It’s not practical or even possible for big-box retailers to build personal relationships with most of their customers. However, if you have a small business, you certainly can and should make personalized service — and actually knowing your customers — a major part of your appeal.

Small businesses can get to know their customers in ways larger companies can’t.

It starts with a hello

Back in my days as general manager of a large independent toy store, I made knowing our customers a key part of my job. Even though I had lots of paperwork, ordering, and managing to do, I worked the floor on our busiest days. On Saturdays and school holidays, I roamed the store greeting customers I knew, introducing myself to ones I didn’t, and helping visitors navigate our massive selection.

The owner took a similar approach. He was not in the store most days, but on weekends and holidays, he was actively connecting with customers — some who didn’t even realize he was the owner.

We reinforced those relationships by treating people right. Sometimes that meant setting a rare find aside for a customer who was sure to want it or being honest when someone asked if they should buy their item at a competitor instead.

Having personal relationships with customers helped in many areas of the business. We had a strong grasp of how much to order of each item when it came to collectible gaming releases or limited editions. We were also able to draw on our customers to help run events and to serve as a mobile marketing army for the store.

The toy store had (and still has) an amazing array of merchandise that you would be hard pressed to find elsewhere. That’s enough to get people in the door for browsing, and then often times, they’ll make a purchase. But, the selection is not enough to make shoppers a returning customer. Developing that relationship can elevate casual visitors to devoted customers without too much effort.

Any business can do this

Our goal at the toy store was to make newcomers feel as welcome as regulars. That was important because our store held events and game play where a newcomer might be intimidated by the camaraderie among the participants who already knew one another. We helped overcome that hurdle by making introductions and even playing alongside the new visitor until they made friends.

Even if you own a service business or a store that doesn’t sell something as fun as toys, it’s still possible to make these sorts of connections. Don’t bury yourself in the back office no matter how important that work seems. Put yourself out there to be the friendly face of your business.

Ask your customers questions. Find out what they like and what you might do better. Most importantly, get to know everyone — regulars and first-timers — so you can better meet their needs each time they come in. You want to build not just a customer base, but a community of people who consider you a friend with whom they like doing business.

A key financial question for retirees is what to do with their hard-earned retirement savings. For example, some investors may find it more fulfilling to provide a college fund for grandchildren rather than purchase a second home for themselves. The opposite can also be true, and that’s okay.

In my experience working with retirees, I’ve found it’s critically important to identify what each person’s goals are for their nest egg. Do they want to spend down their assets pursuing activities that bring them joy or leave an inheritance to loved ones? If you find yourself wrestling with the same question, read on for some considerations that can help determine the right approach for you.

The rationale for spending down your wealth

On one hand, you may enter retirement with the primary goal of living the lifestyle you’ve worked so hard to earn. Pursuing a hobby, traveling, purchasing a vacation home or fulfilling another retirement dream may be exactly what you envisioned your later years to be. If you fall into this category, keep in mind that these plans likely come at a price. Spending often goes up in the first few years of retirement as retirees are enthusiastic about all the activities they want to do.

Yet given the realities of longer life expectancies, it’s crucial for all retirees to be prepared for a retirement that could last for several decades. This means your savings will need to cover routine expenses, which are likely to rise due to inflation, as well as the potential for health and long-term care services. Ensure you allocate enough dollars for these purposes before deciding whether or how much money to spend down or leave behind.

The rationale for leaving a legacy

On the other hand, if your primary retirement goal is to leave a legacy to your loved ones, it’s important to start nailing down the details of inheritance plans early. As you do, keep in mind that your legacy includes what you plan to give as an inheritance upon your death, in addition to what you give and value today.

Perhaps you are eager to give your children and grandchildren a helping hand. Your generosity could make a significant difference in helping them reach key financial milestones, such as achieving a college degree, purchasing a home or paying off a mortgage.

Or, maybe you prefer to contribute funds to a charity, foundation, or alma mater that aligns with your values. Think about donating to causes that are most important to you or have made a significant impact on your life.

Whether you give to your loved ones, philanthropic causes or both, create or update an estate plan to document your wishes. Your plan should include written instructions (e.g. a will or trust) and up-to-date beneficiary designations on all your accounts.

Finding a happy medium

Spending your assets or leaving an inheritance are both great options. Yet many of my clients hope to accomplish both. If this is you too, know it’s possible to find a middle ground. After all, each person’s retirement dream is unique, so your financial plan to accomplish it should be too.

As you weigh your options on how to allocate your savings, it may be important to you to talk with your spouse or partner about what brings each of you the most joy. Once you’re aligned, communicate your intentions with family. Estate planning can be a tough topic to raise with loved ones, no matter how much or little money you plan to pass down. But having the conversation can alleviate tension down the road while giving your children confidence about what to expect.

If you’d like a second opinion on how to achieve your retirement dream, consult a financial advisor and attorney. These professionals can offer advice and encouragement, helping you to find your own happy medium between spending and providing an inheritance with your assets.