Archives for September 28, 2019

Saving for retirement is complicated and confusing, and there are dozens of factors to consider when creating your retirement plan. How much should you save? What age do you plan to retire? How much will healthcare costs affect your budget?

One factor in particular that can have a major impact on your retirement is Social Security, and yet most workers don’t fully understand how the program works. In fact, a whopping 77% of workers incorrectly believe Social Security benefits won’t be available to them once they retire, according to a report from the Transamerica Center for Retirement Studies.

While it’s true that the Social Security program is facing some cash shortage issues, the problem isn’t as bad as you may think. And not understanding what you can expect from Social Security can make it much harder to plan your retirement.

The future of Social Security

There are plenty of startling headlines about the future collapse of Social Security, but it’s not quite as grim as it seems. The program itself isn’t going anywhere, because as long as people continue paying their taxes, there will always be at least some money to pay out in benefits. However, there is a chance that benefits could be cut in the next couple of decades.

Right now, as baby boomers retire in droves and life expectancies continue to climb, there’s more money being paid out in benefits than is coming in from taxes. To bridge the gap, the Social Security Administration has dipped into its trust fund reserves to continue paying out benefits in full. Those trust funds are expected to run dry by 2035, though, at which point the only money that will be available to pay out in benefits is what comes in from taxpayers. Currently, the Social Security Administration predicts that tax money will only be enough to cover around three-quarters of expected benefits after 2035.

Of course, this is assuming Congress doesn’t come up with a solution to fix the problem before then, most likely in the form of tax bumps or increasing the retirement age. While most workers won’t like either of these solutions, if the government doesn’t do anything, retirees may only receive around 75% of their expected benefits.

So what does this mean for you? In short, it means you should probably start preparing for a potential reduction in Social Security benefits. The government may figure out a solution before you retire, but if not, you could be in for a rude awakening if you’re planning to rely on your benefits for a significant chunk of your retirement income.

Because the future of Social Security is in the government’s hands, there’s little the average worker can control. That said, there are a couple of things you can do to maximize your benefits and protect your retirement income.

Maximizing your Social Security benefits

One way to increase the amount you receive each month from Social Security is to delay claiming until after your full retirement age (FRA). Your FRA is either age 66, 66 and a few months, or 67, depending on the year you were born, and claiming at that age will ensure you receive the full amount you’re entitled to. If you claim before that age (as early as age 62), your benefits will be reduced by up to 30%.

If the SSA is forced to cut benefits in the future, your checks could be reduced significantly if you claim before your FRA. But by waiting to claim until after your FRA (up to age 70), you’ll receive extra money each month on top of your full amount. If your FRA is age 67, you’ll receive a 24% boost each month by waiting until age 70 to claim, which can take the sting out of any potential benefit reductions.

Another way to increase your benefits is to work a few more years. Your basic benefit amount (or the amount you’ll receive if you claim at your FRA) is based on an average of the 35 highest-earning years of your career. If you haven’t worked a full 35 years, you’ll have zeros in the equation for the years you haven’t worked, lowering your average. Even if you have worked at least 35 years, you might choose to work longer so that some of your more current, higher-earning years can replace your lower-earning years from earlier in your career.

Keep in mind that although it’s a good idea to maximize your benefits the best you can, at the end of the day, your monthly checks aren’t designed to cover the majority of your retirement expenses. Your benefits are only intended to replace roughly 40% of your pre-retirement income, so you’ll need a significant amount in personal savings as well to cover all your retirement costs.

Social Security is not on the brink of collapse, but there may be some changes in the coming years. Regardless of whether benefits are reduced or not, it’s important to have a plan in place just in case you don’t receive as much as you anticipate. The more you understand about how the future of Social Security affects your retirement plan, the more prepared you’ll be.

If you want to know where the wealthy prefer to put their money, you might be surprised to find out it’s in cash.

A Capgemini report found that cash surpassed equities for high-net-worth individuals as their No. 1 asset class in the first quarter of 2019. The reason: market uncertainty.

In North America, those wealthy investors had 27.1% of their assets in cash while 26.3% was in equities.

Today, a cash management platform company named MaxMyInterest is launching a new checking account to help both individual investors and financial advisors make the most of the interest earned on that money.

Called Max Checking, the account offers 1% annual percentage yield. In addition, the feature also provides a debit card with free ATM access internationally. The account, which was created with Radius Bank, also comes with no fees or monthly minimum balance.

The checking feature works with MaxMyInterest’s existing cash management product, which works to help consumers supplement the bank accounts they already have with online savings accounts that will get them a higher yield.

It works to regularly monitor interest and automatically reallocate your cash so that you’re always earning the most interest possible, according to MaxMyInterest CEO Gary Zimmerman. Today, that’s as much as 2.28% APY.

Notably, MaxMyInterest never touches any money because it’s not a custodian or an intermediary. Instead, a customer’s money stays in their bank accounts that they hold in their own name.

“Max sort of functions like an air traffic control tower looking over your bank accounts and monitoring rates and telling your banks when to send money between one another,” Zimmerman said.

The new checking feature is aimed at expanding MaxMyInterest’s reach. Previously, consumers had to have accounts at one of the 20 large financial institutions with which the company was working.

With Max Checking, the company can now link to any combination of checking, savings and brokerage accounts.

In addition to higher rates, the company also offers higher levels of FDIC protection, according to Zimmerman. That can be as high as up to $2 million per individual or $8 million per couple.

FDIC rules typically cover individuals for up to $250,000 per investor, per account type and per bank charter.

Because MaxMyInterest currently supports eight online banks, according to Zimmerman, that gives an individual up to $2 million in coverage. A spouse or significant other would also get their own $2 million in coverage for their accounts.

Plus, because the FDIC considers joint accounts as a separate account type, they could get up to $500,000 in coverage per account over eight banks, for as much as $4 million, Zimmerman said.

The eight banks include Ally Bank, American Express, Barclays, Comenity Direct, Marcus by Goldman Sachs, Radius Bank, Sterling National Bank and UFB Direct.

The company does not sell its customers’ information or cross-sell with other products.

While the checking account has no fee, MaxMyInterest does charge 2 basis points per quarter for its service. For $100,000 of deposits, that amounts to $20.

Those fees are about half as much as what a money market fund charges, Zimmerman said. Unlike money market funds, MaxMyInterest offers same-day liquidity.

“I definitely like the idea of them helping you get the best rate without having to work for it,” said Arielle O’Shea, banking expert at NerdWallet. “On the other hand, as always, you need to be aware that there’s a fee for that service.”

You will want to compare how much you’re earning to the fees you’re being charged to make sure you’re coming out on top, O’Shea said.

MaxMyInterest does not have a direct competitor in the consumer market, O’Shea said. But there are other options for higher rates that individuals may want to consider.

That includes high yield online savings accounts, as well as new cash management accounts that are being offered by robo-advisors such as Betterment, Wealthfront and SoFi, she said.

In a lot of cases, those accounts pay rates that are around 2% and are typically fee-free, though it’s important to dig into the fine print of the account to make sure you’re not paying more than you think you are, O’Shea said.

Instead of using MaxMyInterest, a consumer can instead try to move their money more frequently in pursuit of higher rates. “Administratively, it can be a hassle,” O’Shea said.

At the very least, you should check your accounts every six months to a year. “You should definitely know how much your interest rate is and whether you can do better elsewhere,” O’Shea said.

MaxMyInterest’s customers are currently about evenly divided between individuals and financial advisors. The company is working with 750 wealth management firms, most of which are registered investment advisors.

When planning for retirement, many people like to look for simple rules to follow. There are plenty out there — one of the most common is the 4% withdrawal rule. It states that you can comfortably withdraw 4% of your savings in your first year of retirement and then adjust that amount for inflation for every subsequent year, and thus avoid running out of money for at least 30 years.

It sounds great in theory, and it may even work for some in practice. But if you’re blindly following this formula, you could still end up running out of money prematurely or with a financial surplus at the end of your life that you could have spent on things you enjoy.

The problems with the 4% rule

As with many of these so-called retirement rules of thumb, the 4% rule aims for simplicity but isn’t flexible enough for a wide range of scenarios. It assumes that your investment portfolio contains about 60% stocks and 40% bonds, but your assets may be allocated differently. Investing more in bonds could result in slower investment growth, because bonds typically don’t see the returns that stocks do, and when the 4% rule was developed, bond interest rates were much higher than they are today. Following the 4% rule in this scenario could cause you to withdraw too much too quickly.

The rule also doesn’t account for changing market conditions. In a recession, it’s probably not wise to step up your withdrawal amounts; you may even want to reduce them slightly. But when the markets are doing well, you might be able to withdraw more than 4% comfortably.

A third issue is that it doesn’t account for changes in spending and activity levels throughout your later years. Most retirees are more active in the early part of retirement. They often devote more time to hobbies or travel, and their spending is often higher than when they’re beginning to slow down and spend more time closer to home.

But the 4% rule isn’t dynamic enough to account for these lifestyle changes. It limits you to a pre-set amount, which may be too little in your early years and too much in your later years. As a result, you end your life with a bunch of money left over and you weren’t able to enjoy your early retirement as much as you’d wanted to.

How to figure out how much you can spend annually in retirement

There are other retirement withdrawal strategies that are slightly more dynamic than the 4% rule. The Center for Retirement Research at Boston College proposed a system in which you base your annual retirement withdrawals off the IRS required minimum distributions (RMD) tables. RMDs are the amounts you must begin taking from all retirement accounts except Roth IRAs once you’re 70 1/2, unless you’re still working and own no more than 5% of the company you work for. You divide your account balance by the distribution period next to your age in this table to figure out how much you must withdraw every year. 

The Center for Retirement Research used this as its jumping-off point and calculated annual withdrawal amounts as a percentage of your total account balance beginning at 65 — when it claims you can safely withdraw 3.13% of your retirement savings — until age 100, when you can withdraw 15.67%.

This formula has some of the same flaws as the 4% rule. Changing market conditions may affect what you can safely withdraw, and you’re limited to smaller amounts when you’re younger and may want to spend more. But you could make up for this somewhat by spending any earned interest and dividends in addition to the percentages recommended. 

An even better approach is to ignore the cookie-cutter strategies altogether. Talk to a financial adviser about your plans for retirement and how they will affect your spending habits. An adviser will help you determine how much you need to save and how much you can comfortably spend each year to avoid running out of money too soon. 

Make sure you choose a fee-only financial adviser. Those who earn commissions when you buy certain investments can make recommendations based on their bottom line rather than your best interests. Always ask for a copy of an adviser’s fee schedule so you understand what you’re signing up for.

The 4% rule can be a useful starting point to determine how much to spend annually in retirement, but be aware of its limitations. Your needs and goals in your later years are dynamic, and you need a withdrawal plan that is, too.

If you’ve been racking your brain about where to retire on a budget, it might be time to think outside the U.S.

A report by International Living, which publishes information about living abroad, lists destinations where you can coast on less than $30,000 a year.

To be sure, retiring in a new country will require studying up on the tax implications along with pulling off some other logistical maneuvering.

But for many older Americans, the work will be well worth finding a new, affordable place to spend their golden years.

The average monthly Social Security check is $1,404, and more than 40% of single adults receive more than 90% of their income from that check, according to the government.

Here are the international cities where that check will go far, according to International Living.

1. Puerto Viejo, Costa Rica

A couple can live comfortably in this town for just $2,025 a month, or $24,300 a year, according to International Living.

You’ll find warm weather, beaches, and Italian, Argentine and French restaurants.

2. Lagos, Portugal

Couples can live in this town in southern Portugal for $2,080 a month, or $24,960 a year, according to International Living.

Lagos, with a year-round moderate climate, is great for retirees who want to live near the ocean. Transportation options abound and the city is fairly flat, making it great for walking, too.

3. Akumal, Mexico

Couples can retire in this tropical town for $2,240 a month, or $26,880 a year, according to International Living.

“Famously known for its spectacular clear bay filled with sea turtles, Akumal has matured from a secretive destination for divers to a growing tourist hotspot,” the overseas retirement site says.

4. Volcan, Panama

Volcan will cost couples around $1,500 a month, or $18,000 a year, to live.

The town is in the middle of a farming community in a valley, and has a population around 14,000. You’ll need to speak some Spanish to be able to communicate with locals and do business, according to International Living.

5. Medellin, Colombia

Medellin is Colombia’s second-largest city. A couple could live well here for $2,000a month, or $24,000 a year.

The city is filled with more than 30 universities, as well as art and history museums and restaurants.