Archives for April 8, 2019

You may have a retirement date in mind, but your savings will determine whether or not that’s actually feasible. You don’t want to risk outlasting your money, so it’s crucial that you take steps now to keep your retirement plan from going off the rails.

There are several ways to approach this. One of the easiest is to delay your retirement to give you more time to save while simultaneously reducing how much you need to cover your retirement expenses. Approximately 52% of workers expect to delay their retirement, according to a recent MetLife study, but this approach may not appeal to everyone. It may not even be an option for you if a sudden health or family issue forces you to retire early. Fortunately, there are other steps you can take to keep your retirement savings on track. Here are three strategies you can try.

1. Re-evaluate your retirement plan periodically

You can’t just create your retirement plan once and never look at it again. You need to re-evaluate it every year or two to determine whether you need to make any adjustments. Things like an unexpected long-term illness or a divorce can affect how much money you need to save for retirement. Job loss may prevent you from saving anything for retirement for a while, forcing you to increase your future contributions when you get a new job.

By staying on top of these lifestyle changes, you can minimize the toll they take on your retirement plan. Recalculate your retirement living expenses based on your latest estimates, and don’t forget to add 3% per year for inflation. A retirement calculator can help with this. Then, compare your newest estimate to the retirement plan you’ve been following and make any adjustments to your monthly savings if needed.

If you don’t have a retirement plan at all, now’s the time to make one. First, estimate your life expectancy and then subtract the age you plan to retire at to get the estimated length of your retirement. Then, total up your estimated annual living expenses in retirement, including housing costs, utility bills, insurance, groceries, and more. Multiply this by the number of years of your retirement, adding 3% annually for inflation. Then, subtract from the total any money you expect to receive from Social Security, a pension, or an employer 401(k) match. Here’s a comprehensive guide to walk you through all of this.

2. Look for ways to cut costs

You can use this strategy in one of two ways. First, you can look for ways to reduce your expenses today to free up more money for retirement savings. Cancel any subscription services you don’t use, limit discretionary purchases, cook more instead of eating out, and find ways to entertain yourself and your family that don’t involve spending a lot of money. Take the extra money you save and put it toward your retirement. Even if all you can spare is an extra $50 per month, that could add up to nearly $68,000 over 30 years, assuming an 8% rate of return — enough to cover a year or two of living expenses in retirement.

Another option is to find ways to reduce your expenses in retirement. You could plan to downsize your home, move to a more affordable neighborhood, or reconsider your travel plans. It’s difficult to predict how much this will save you because there are a lot of individual factors involved, but anything that you can do to reduce your expenses in retirement will help your existing savings stretch further.

3. Pay attention to investment fees

All retirement accounts charge administrative fees, and you’re probably paying fees every time you buy or sell an asset. Some investment products, like mutual funds, also have expense ratios, which are annual fees charged as a percentage of your assets. All of these costs can eat into your profits over time. A 1.3% 401(k) fee could cost you nearly $100,000 over 42 years, compared to a 0.25% 401(k) fee, according to the Center for American Progress. This could force you to work years longer to hit your target savings goal.

If you’re not sure how much you’re paying in retirement account fees, the first step is to find out. Talk with your retirement plan administrator or your company’s HR department. You can also read your plan summary or the prospectus for your investments. Ideally, you shouldn’t pay more than 1% of your assets in fees each year, and the lower you can keep those fees, the better.

You may not be able to control your plan’s administrative fees, which cover things like recordkeeping and special services like 401(k) rollovers, but you can control what you invest your money in. Consider moving your savings to lower-cost investment products, like index funds. These are passively managed mutual funds that track a market index, and they’re popular because they typically generate substantial returns for a low fee. If your 401(k) plan doesn’t offer any low-cost investment products and your employer refuses to add any, consider moving your money to an IRA where you’ll have more investment choices and lower fees, unless your 401(k) includes an employer match that covers what you pay in fees each year.

Depending on how far off you are from your savings goal, you may still have to delay your retirement a little bit. But by employing some of the strategies above, you can reduce the extra time you need to work in order to hit that goal.

No retirement plan is complete without allowing for healthcare. We all hope to remain healthy in our old age, but you can’t be sure. And a single unplanned medical expense could cost thousands of dollars, forcing you to drain your retirement savings faster than anticipated.

Medicare is an integral part of most retirees’ healthcare plans, but many rely upon it too much. According to TD Ameritrade, 44% of people believe it will cover the bulk of their medical expenses in retirement, but this may be overly optimistic. Medicare, like all health insurance, charges premiums and deductibles, and there are some services it doesn’t cover at all. If you don’t have the savings to cover these out-of-pocket costs, you could be in trouble.

How Medicare works

You’re eligible for Medicare as soon as you turn 65. It’s broken down into four parts: A, B, C, and D. Part A is hospital coverage, which covers hospital stays, nursing care, and some home health services. You likely won’t have to pay a premium for this coverage as long as you or your spouse paid Medicare taxes for 40 quarters (10 years) while working. However, there is a $1,364 deductible, and you may have to pay for some coinsurance if you’re in the hospital for more than 60 days.

Medicare Part B covers doctor visits, lab tests, X-rays, outpatient procedures, and more. Most people pay the standard $135.50 monthly Medicare Part B premium, though yours could be higher depending on your income. You’ll also have a $185 deductible for Part B each year, and you must pay 20% of all costs on your own.

Medicare Part C plans are offered by private health insurers. By law, they must cover at least the same services as Medicare Parts A and B, but they may cover other things as well. It’s also up to the insurer to determine premiums, deductibles, and copays. If you choose a Part C plan, also known as a Medicare Advantage plan, you pay for this coverage instead of Parts A and B.

A Medicare Part D plan is also offered by private insurers and covers prescription drugs. It’s optional, but it could save you money, especially if you regularly take prescriptions. You’ll pay a premium and possibly a deductible and copayments, but the exact cost depends on which Part D plan you choose.

What Medicare doesn’t cover

Medicare will cover a lot of your medical expenses in retirement, but as I explained above, it covers few expenses in full. There are also some expenses it doesn’t cover at all, including long-term care, dental work, hearing aids, eye exams, and dentures.

If you require these services, you must pay the full cost on your own, unless you have a supplemental health insurance policy. Medigap plans are available through private insurers and cover many of the services that Medicare Parts A and B don’t cover. Some even cover the Medicare deductibles and coinsurance you’d otherwise pay on your own. However, the Medigap policy will have its own premiums, deductibles, and coinsurance you must pay instead.

Medicare’s role in your retirement healthcare plan

Medicare is a key piece in most retirees’ healthcare plans, but it shouldn’t be all you’ve got. You can purchase a supplemental health insurance policy to help cover what Medicare doesn’t, or you can budget for your out-of-pocket costs on your own. The average 65-year-old couple retiring today will need $280,000 to cover their medical expenses in retirement, according to Fidelity. Use this as your starting point. You may want to add to this if you anticipate high medical costs or if you’re far off from retirement to account for inflation. Medical costs have increased by an average of 3.3% per year since 2013, but they rose by an average of 5.7% per year over the decade before that, so it’s best to figure high.

You can save this money in your 401(k) or IRA. Or if you have a high-deductible health insurance plan — one with a deductible of $1,300 or more for an individual or $2,700 or more for a family — you can save with a health savings account (HSA). Contributions to an HSA reduce your taxable income that year, and if you use the money for a qualified medical expense, you won’t pay any taxes on it. If you use it for a nonmedical expense, though, you must pay income tax, plus a 10% penalty if you’re under 65. In 2019, individuals can contribute up to $3,500 to an HSA, and families can contribute up to $7,000. You can contribute an extra $1,000 if you’re 55 or older but not yet enrolled in Medicare.

You can never predict how much money you’ll need for retirement healthcare expenses, but you don’t want to gamble and fall short. If your existing retirement plan doesn’t include healthcare costs, reevaluate it. It’s a lot easier to adjust your savings now than it will be to find extra cash in retirement.

You know you need to save for retirement and you know how you need to do it.

But what happens when you get to your retirement years? Do you know how to turn your life savings into a steady, tax-efficient stream of income?

For many individuals, the answer is no.

And you’re not alone. Most pre-retirees — 66 percent — have not calculated how much money they will need to cover their expenses in retirement, according to the Alliance for Lifetime Income.

At the same time, just 38 percent of households can count on pensions or annuities for a steady stream of cash, the Alliance’s October 2018 survey found.

That leaves many confused as to how much they should spend — and from which accounts — to augment their monthly Social Security checks.

Even the 4% rule – whereby you withdraw at that rate during each year of retirement — can leave people confounded.

“If I went to you and said, ‘Hey, take out 4%,’ you’re scratching your head like, ‘OK, where do I withdraw from?’” said Bill Meyer, founder and managing principal of Social Security Solutions and founder and CEO of Income Strategy.

The good news is that technology platforms are emerging to help you answer that question.

Kindur

A new platform called Kindur officially launched a feature last week that aims to help you create a check you can count on in retirement.

Kindur is led by founder and CEO Rhian Horgan, who started the company following a career that included almost two decades in asset management at J.P. Morgan.

Horgan was inspired by her personal experience in helping her father, now 69, decide how to draw down his assets. After spending hours poring over 300-page Social Security books, Horgan came to the conclusion that there had to be a better way.

In her career, she keep seeing technology user-interfaces that presented complex financial information in a simpler way.

“I just fell in love with how easy these companies are making it to access these financial products,” Horgan said.

Kindur’s goal is to take out that complexity for its users looking at retirement.

To sign up, individuals must fill out a short questionnaire. That initial process does not require access to specific accounts. To start, just indicating about how much is in pre-tax versus taxable accounts is enough.

Ultimately, once users have fully onboarded, the platform’s goal is to help automate how much you take and from which accounts. Those checks, which the company sends to you directly, augment the income you receive from Social Security and annuities.

The company has also partnered with American Equity to provide a custom annuity that requires two decisions from users: If they want to buy it and when to start receiving income. Importantly, the company has eliminated the commissions or brokers involved in other annuity sales, Horgan noted.

On the investing side, Kindur also has a portfolio of exchange traded funds it is running itself as a registered investment adviser in collaboration with firms such as Schwab and Fidelity. The platform’s goal is to help you decide how much risk to take on based on the guaranteed income you have.

Kindur charges its users 0.5% per year. While the company typically charges a fixed $149 fee for the advice it provides, right now they are providing some promotions for users to try it out for free.

So far, Kindur’s users have an average age of 59 and average net worth of $1.2 million.

The company, which plans to delve deeper into Medicare and health care going forward, has ample backing from investors. It recently completed a $10-million Series A funding round from investors, including Inspired Capital Partners, which is led by former LearnVest executive Alexa von Tobel; Anthemis; Point72 Ventures and Clocktower.Income Strategy

When Meyer first came to the realization that there needed to be better coordination around retirement income 10 years ago, he first set out to develop a product around Social Security.

He teamed up with Dr. William Reichenstein, investment strategy chair at Baylor University, for what he thought would be a three-month project. Instead, it took years to sort through all of the rules.

The resulting product, SocialSecuritySolutions.com, helps individuals sort through claiming rules.

Now, Meyer is at it again with a new product, IncomeStrategy.com, which aims to help individuals decide from which accounts they should withdraw from when.

It might sound like a simple dilemma, but just one decision can have catastrophic consequences, Meyer said.

For example, one withdrawal from your individual retirement account could impact both your Social Security taxes and what you pay for Medicare.

“Just varying which account you draw down from can find tens of thousands of dollars more for someone,” Meyer said.

On average, managing a withdrawal sequence correctly can make someone’s money last for seven years longer, Meyer said.

That’s different from the sequence traditional firms typically use, which go for taxable accounts first, followed by tax-deferred and then Roth accounts.

Income Strategy, based in Leawood, Kansas, also aims to set its IncomeStrategy.com product apart from competitors that are developing similar platforms through the level of detail it considers.

Once a user has inputted all of their accounts, the site aims to make the process of withdrawals easy. A “Get Cash” button on the site allows you to input the amount you want to take out — say $40,000 for the next three months — and you will be presented with a list of what you should sell.

For a subscription fee of $20 per month, you execute those transactions yourself.

For $50 per month, you get access to a higher level of service, where those transactions are executed for you. There are also other perks, such as a mini call center with certified financial professionals available for advice or access to low-cost ETF models.

For $125, individuals can get a one-time advice session, which can be a general overview or just on Social Security claiming.

IncomeStrategy.com officially launched in January, but it has already managed to attract more than $1 billion in assets in nine months, Meyer said.

Part of that growth was helped by the financial advisors who used the engine and provided critical feedback in the year prior to the consumer launch.

IncomeStrategy.com is aimed specifically at consumers, who may be reluctant to pay a professional advisor a 1% fee. Those professionals often do not have the right tools to come up with the best drawdown strategies, Meyer said.

“I want it to be an alternative to advisors,” Meyer said. “Advisors are great, but a lot of people don’t have advisors.”

Social Security serves as a major income source for millions of retired seniors, and unless you’ve really saved a bundle, chances are you’ll end up relying on those benefits in retirement as well. Now you’ll often hear that it’s best to avoid filing for Social Security early, because doing so winds up reducing your benefits. And that’s definitely some solid advice. Whether it actually pertains to you, however, is a different story.

Social Security: Your filing age matters

Your Social Security benefits are calculated based on your 35 highest-paid years of earnings. The age at which you file for them, however, will dictate whether that number goes up, goes down, or stays the same.

That said, you’re allowed to start claiming benefits as early as age 62. And while you can technically file at any age after that, 70 is generally considered the latest age to sign up for benefits, since there’s no financial incentive to wait past that point. Delaying benefits past FRA will boost them by 8% a year up until age 70 is reached, while filing ahead of FRA will reduce them by 6.67% a year for the first three years they’re taken early, and 5% a year after that. That might sound complicated, but it means that if you’re looking at an FRA of 67 and you file at 62 instead, your monthly benefit will be reduced by 30%. And unless you undo your filing within a year and repay the benefits you collected, that reduction will remain in effect for the rest of your life.

As such, seniors are often advised not to sign up for a lifetime of lower benefits. But the reason you might want to do so anyway could come down to one important thing: avoiding boredom early on in retirement.

Keeping your spirits up

Retirees are 40% more likely to suffer from clinical depression than workers, and the reason often boils down to feeling bored and restless. Furthermore, workers don’t always get to retire when they want to; an estimated 60% are forced into early retirement due to reasons such as getting laid off or being physically unable to continue working. As such, it’s not uncommon to land in a situation where you’d rather be working, but can’t, yet don’t have the money in savings to entertain yourself adequately.

Enter Social Security. While claiming those benefits early will reduce them, you might consider doing so an important investment in your mental (and, to an extent, physical) health. And if that’s the case, losing out on a few hundred dollars of income per month might be a reasonable price to pay for the ability to avoid getting depressed early on in retirement.

Of course, this strategy only works if you have a decent amount of money saved for your golden years. If you don’t, then you’ll need every cent you can collect in Social Security to pay your basic living expenses. But if you’ve saved enough to cover the basics, and filing early allows you to enjoy retirement rather than resent it, then going that route might make sense after all.

When it comes to picking an age to claim Social Security, there’s no right or wrong answer. Though waiting until FRA will help you avoid a reduction in benefits, filing early might give you the money you need to make your days more satisfying. And that’s reason enough to consider getting your hands on that cash sooner.