Archives for March 7, 2020

When you plan for retirement, you need to consider all potential sources of income. Unfortunately, many pre-retirees make the mistake of considering a source of money they aren’t likely to have: funds from working a job.

According to research from Transamerica Center for Retirement Studies, 55% of workers plan to continue working in retirement. Though most of these pre-retirees expect they’ll work only part-time, 14% say they intend to work in a full-time position. For some, the motivation is to stay active and healthy. For most people, concern about having sufficient savings drives the desire to stay in the workforce in some capacity during retirement.

This could be a big problem.

Many people who want to work in retirement find they can’t do so because of limited job opportunities. The unemployment rate for seniors is higher than for the general population, and though age discrimination is illegal, many older people find it difficult to find work.

Employment opportunities could be limited by your physical health. If you develop medical problems, this could further reduce the pool of jobs you can do and make it even more difficult to maintain part-time or full-time employment. 

What should you do if you planned to work but you can’t?

If you planned to work in retirement but you discover there are no jobs you can do, you need to make some swift changes to your lifestyle. 

Start by assessing the amount of income available to you from Social Security, retirement savings and any pension money you have. Make sure you calculate income from savings based on a safe withdrawal rate. This should be no more than 4% of your account balance, though some experts suggest it should be even less.

Compare the income available to you with your budget to see if there’s a shortfall. If you’ll have too little income without a paycheck and you can’t find work, you need to make some budget cuts quickly. This could mean downsizing to a smaller home, which could help you boost your savings account balance if you cash out home equity. You might need to give up a car or move to an area that has a lower cost of living.

The key is to make sure you don’t draw down your retirement account balance in an effort to maintain a lifestyle you can’t afford without the paycheck you planned on having. Paragraph

Avoid setting retirement goals based on the idea you’ll work as a retiree
Though you may want to work as a senior, chances are very good you won’t be able to. To make sure you aren’t left with too little money when holding a job isn’t possible, always set your retirement planning goals without the expectation of a paycheck. If working is doable, you can use the extra income to enjoy your life a little bit more.

Women around the world are being highlighted and celebrated in March as part of women’s history month — their retirement plans need some of that attention, too.

The path to retirement is often not a simple one for women, who face numerous challenges as they save and prepare for their old age. The consequences of those challenges can be devastating.

About 45% of women were not confident they could retire comfortably, according to a 2019 Transamerica Center for Retirement Studies report, compared to 29% of men. Men were almost twice as likely as women to have accumulated $250,000 or more for retirement.

Here’s what that means for retirement: women potentially falling into or near poverty. Women are 80% more likely to wind up in poverty when they’re 65 or older, according to a 2016 report from the National Institute on Retirement Security. About 9% of women age 65 or older lived at or below the federal poverty level at that time, compared to 5% of men.

There are a handful of barriers to saving enough for retirement, but there are also solutions women should consider. Here are a few:

Caregiving

One of the greatest challenges women face when saving for retirement is also one of the greatest gifts they can give to others: caregiving. Women tend to be the family caregivers, either for children or ill, older loved ones. But leaving the workforce to tend to their family members has its consequences, including losing out on a salary and access to an employer-sponsored retirement plan, as well as years that would go toward accumulating credits to Social Security benefits.

“Because women often are the primary caregiver for children and relatives, and therefore tend to take time away from full-time employment, they often suffer from lower wages, lower Social Security benefits and smaller retirement savings account balances,” said Adam Finch, co-founder of RFC Financial Planners in Ann Arbor, Mich.

One solution: Attempt to save at a higher rate in the years you’re working, said Sandra Adams, a partner at the Center for Financial Planning in Southfield, Mich. “If you are a caregiver, try to find ways to get paid for your caregiving.”

Some family members may want to draft a personal care agreement, which is usually made up among relatives. The purpose of the contract is to ensure the loved ones who are caring for ill family members are being paid for their services, which can alleviate some of the financial stresses they face if they leave the workforce. Caring, a senior care referral service, has a website called “Paying for Senior Care,” which offers a template for the contract. In it, relatives can set hours and responsibilities for the caregiver, as well as compensation.

There are other ways to be paid as a family caregiver, in the case of elderly or sick loved ones, such as through Medicaid or Veteran’s Health Administration, according to AARP.

And when living in a one-salary household, women should consider saving in an individual retirement account, which they can do even if their spouse is working and they are not, said Lindsey Cannata, a financial adviser at J.P. Cannata & Associates in Roselle, Ill. “It is critical that from a young age, women start saving for retirement,” she said.

Lower pay

Women aren’t always paid as much as men in the same fields and positions. Women with a bachelor’s degree earned 74 cents for every dollar their male counterparts made, according to a U.S. Census Bureau report released last year. For women without a bachelor’s degree, they earned 78 cents on the dollar. Other reports have shown women with a bachelor’s degree earn about the same as men with an associate’s degree.

Part of the solution is knowing what you’re worth — and charging for it, said Catherine Valega, a financial adviser at Green Bee Advisory in Waltham, Mass. “We tend to under-negotiate,” Valega said. “I have four daughters of my own and am a huge believer in girl power — and getting paid what you’re worth.”

To do so, women need to research what the market is for their specific skills or business ventures, which they can do by networking. They can do so by checking career sites that share pay information, such as Glassdoor.com, said Brenna Baucum, a financial adviser at The H Group in Salem, Ore. “See if your pay aligns with your experience,” she said. “If it doesn’t, ask for that raise. If you don’t get it, move on.”

There are other resources available to help women earn more money. “Ladies Get Paid” is an organization that hosts webinars and in-person meet-up groups to discuss topics such as asking for a raise, negotiating a higher starting salary and climbing the corporate ladder.

Longer life expectancy

Although a longer life can be a blessing, it comes with its own challenges. Americans are living longer than ever before, but they need to afford those extra years of life. There are 5.7 million more women than men at age 65, and one out of two women in their mid-50s today will live until age 90, said Linda Stone, a fellow at the Society of Actuaries, during a Senate hearing on aging last year. Women’s savings need to stretch over that timespan, which can be difficult if they do not have as much money as their male counterparts.

A fix: Invest in a portfolio that’s allocated appropriately for the long-term. Think about longevity, the goals you’d like to accomplish in old age, and how much money it will take to make that happen. “Work with an adviser to make smart financial decisions related to potential income sources and investments, have an updated estate and insurance plan and plan early for long-term care,” Adams said.

Part of the financial plan must include paying for health care, which is a hefty expense later in life. An average couple who retired at 65 in 2019 can expect to spend more than $285,000 in retirement for health care costs alone — and that figure continues to rise each year, according to Fidelity Investments. A single woman retiree would need $150,000 alone, according to the estimate. “Senior living expenses and nursing home care costs can add up rather quickly making it even more important that women thoroughly plan for their retirement years with their spouse and alone,” Cannata said.

Lack of interest in family finances

Not all women actively participate in their household’s financial planning, which becomes a problem later in life if they find themselves single, alone and on a budget. “Women need to understand that the sooner they learn and develop financial savvy habits, the better off they’ll be,” said Tracy Sherwood, president and financial adviser at Sherwood Financial Management in Williamsville, N.Y. “They need to be involved in their finances and if it isn’t a strength, work with an adviser.”

And women should always be involved in conversations about finances, whether that’s at the financial adviser’s office or at the dining room table at home. Not everyone feels comfortable doing so, but it is imperative. Keeping up to date on family budgets, financial plans and important estate documents will deter them from suffering a disaster during an emotionally-taxing time, including during a loved one’s death or a divorce. Some 80% of men die married but 80% of women die single, according to the Women’s Institute for a Secure Retirement, which means women need to be the managers of their own finances later in life.

Being conservative investors

They may also struggle with investing — some women are more conservative investors than men, Valega said. “It is necessary to be aggressive,” she said. If their portfolios are heavily invested in bonds, they should consider changing that asset allocation (with the help of a financial adviser), or at the least switching to a target-date fund, which will create a portfolio based on their age and target retirement date.

“A lot of us are focused on the security money brings us,” said Tess Zigo, a financial adviser at Waddell and Reed in Lisle, Ill. “Money is emotional.”

One driving force behind your retirement relocation decision may be taxes. The wrong choice can eat up a whopping 40% of your cash flow, especially with property, income, excise, gasoline, fuel, sales and luxury taxes. Not to mention the estate tax and probate costs that form a merger between death and taxes.

Don’t make the mistake of judging states (or foreign countries) by income tax alone. Some states with low income or property taxes will have higher sales taxes, for example, and vice versa. Striking a balance is necessary.

For example, one of the least taxing states is New Hampshire. It has no sales tax whatsoever and the second-lowest income tax of those states that have an income tax (only about $18 on every $10,000 in income). What’s more, it does not tax retirement income.

But New Hampshire taxes food purchases, and while there is no income tax on W-2 reported earnings or pensions distributions, you will be taxed on dividend income and other investment income. And it imposes a comparatively large property tax.

Compared to its bordering neighbors, Maine and Massachusetts, however, and its almost bordering neighbors, Rhode Island, Connecticut and New York, New Hampshire is genuinely the tax haven next door. You can move there, shop there, and educate your children there, or semi-retire there on tax-exempt earned income.

Take the reverse case of Pennsylvania, which does have a high-income tax. It, however, exempts Social Security benefits and withdrawals from public and private pensions. But, because of high property taxes, it comes in near the end of a nationwide survey by Kiplinger.

Arizona, Florida, Nevada, and Wyoming are top tax choices according to the Kiplinger report: State-by-State Guide to Taxes on Retirees 2019. New York, New Jersey, Illinois, and Vermont come in at the bottom.

Tailoring ‘Best Places’ List to You

Nevertheless, despite credible sources like Kiplinger, advice must be tailored to you.

For example, in 12 states, a car tax could make the state a high tax venue if you drive a lot. That’s something you won’t care about if you plan to live in a big city and rent a car only occasionally.

New York City does well tax-wise, so long as property taxes aren’t in your life.

If you’ve always thought Alaska was a tax haven, you might be right — or wrong, depending on who you are. Alaska imposes a severance tax on companies for taking raw materials, principally oil, from the land. This gives it enough revenue to dispense with a sales tax or income tax. And every year, each man, woman and child receives a check for their share of the excess of the severance tax over the state’s expenses.

But the housing costs and property taxes are high in Alaska.

Florida is just the opposite. They pay you to die there, or almost.

Florida has no estate tax. That is, it does not impose a burden on your assets when you die. You still must pay the federal estate tax.

There is no income tax in Florida, either. But there is a hefty sales tax, and a tax on intangible assets like stocks, bonds and mutual funds. Annuities, insurance and qualified retirement assets and IRAs are exempt from taxes.

Why Domicile Matters

The key to your tax picture is your domicile or your intended permanent residence.

Domicile means more than just living there. You can have many homes, but only one domicile.

Domicile is determined by the nexus between the elements of your life and the venue. This includes where you vote, register your car, keep your investments, establish bank accounts, file your taxes, spend most of your time, affiliate with clubs and religious institutions and even how you buy things on the web or subscribe to e-mail.

The government or courts can challenge what you call your choice of domicile. They look at the facts.

Of course, it all starts out with you. You select where you intend to make your main home. Only if a taxing entity disagrees will you have to prove your domicile.

Your Tax Checklist

When comparing locations, use this checklist of taxes, prioritizing them from one to eight to see where your tax haven lies:

_______ Property tax per $1,000

_______ Excise tax

_______ Food and transient occupancy tax (when friends and family come to visit and stay in a hotel)

_______ Luxury tax

_______ Income tax per $1,000 yearly income

_______ Sales tax

_______ Car, gasoline, cigarette, or other special taxes

_______ Tax on assets (intangible tax)