Can I Retire?

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Can I retire? I get that question… A LOT! And the answer more often than not is YES YOU CAN!

Unfortunately we’ve been trained to believe we need millions, MILLIONS I tell you!, in order to retire.

I don’t get it. Well, actually I do get it. Is it possible the folks saying we need MILLIONS would actually benefit from us saving more? Just throwing it out there as a possibility.

In this episode which I’ve divided into two videos, I share with again the Motley Fool article about what the average retiree actually needs in retirement for income.

The good folks at The Fool use actual, empirical evidence from the Bureau of Labor Statistics (BLS) to show that the number is much lower than most people realize.

I also break out Ty Bernicke’s classic article from the Journal of Financial Planning in June 2005 called Reality Retirement Spending which also uses BLS numbers via the Consumer Expenditure Survey (CES) to show that retirees actually spend LESS as they age.

Crazy right???

So taken together the picture begins to be painted that maybe, after all, one could retire sooner, or with less assets than was previously considered.

In fact, in this video I show you how $100,000 can do it for you. Should you retire with $100k based on my video alone?

No. Do your own research. But I bet when you do you will be pleasantly surprised and for once can see the light at the end of the tunnel.

How to Pay No Tax on Dividends and Capital Gains

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If you are married filing jointly with taxable income of $77,400 or less, you are in the 12% tax bracket. However, add $1 more and you are in the 22% bracket. See how that works? $77,400 = 12% bracket. $77,401 = 22% bracket.

This is how marginal rates work: the more income you receive the higher the tax rate on that additional income will be. The tax you paid on your previous income doesn’t change though. You only pay higher taxes on the amount that puts you into the next bracket.

How Qualified Dividends and Long-Term Gains Are Taxed

Now, let’s say you have total income of $70,000 which consists of $60,000 of work income and $10,000 in the form of Qualified Dividend Income (QDI) and Long Term Capital Gains (LTCG). But you need $80,000 to maintain your lifestyle. So you take a $10,000 distribution from your IRA. That puts you in the 22% tax bracket.

The following April you go visit your tax guy to file your taxes. Your tax guy gives you what you initially thought to be a pleasant surprise. He says that you only have to pay 15% on the $10,000 you received as dividends and capital gains even though you are in the 22% tax bracket. This is good news, right?

Unfortunately, the reason you’re in the 22% bracket to begin with is the IRA distribution put you there. Now, you owe over $3,000 in taxes. This is bad.

You wise up and use a different strategy for the following year. You still need $80,000 to get by. You’re still only making $70,000 from work and dividends. To make up the difference this year you take a distribution from your Roth IRA, not your Traditional.

Now, when you go back to your tax guy you really do get a pleasant surprise: you pay $3,000 less in taxes! “Wait a second. How can this be?” You ask.

Your tax guy explains. “Your IRA distribution last year not only increased your marginal tax rate to 22% but it also made your dividends and capital gains taxable as well. That $10,000 IRA distribution cost you $1,500 in income tax plus $1,500 in taxes on your dividends and capital gains. A double-whammy if ever there was one!

“Because your Roth distribution is tax free you remain in the 12% bracket. Taxpayers who are in the 10% or 12% brackets do not pay tax on their qualified dividends or long term capital gains. So, not only do you not pay taxes on your Roth, you don’t pay taxes on your other investment income either!”

Isn’t the Roth beautiful?

 

 

The PERFECT Retirement Plan

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With a Roth you determine when you want to pay the taxes for what you put into the account. This is a benefit of the Roth that way too often gets overlooked.

Remember, anything contributed to a Roth is with after-tax money. If you choose the Roth, you pay tax now. If you choose the Traditional you pay tax later. It’s up to you when you want to pay the tax.

Let’s play out a scenario to see how this may work for you. Sarah and Dan just retired. Sarah is 62 and Dan 66. They are not taking Social Security yet just living off the savings they were able to squirrel away.

They have no mortgage and they figure they spend about $50,000 a year total, on everything, vacations, bills, helping the kids out occasionally, etc.

They have accumulated $300k in their 401ks and rolled those accounts to IRAs. They also have $150k in savings accounts. They wonder if they should start taking Social Security.

NO! Absolutely not!

Given they have no income other than minimal interest they’re making on their bank account they are paying NO TAX. They will continue to pay NO TAX until they reach 70.5 when RMDs kick in. They should take advantage of their $0 tax and start moving money over to a Roth, now! Any income they receive up to $25,300 is TAX FREE! ($12,000 is the Standard Deduction in 2018 for Sarah and $13,300 for Dan).

Let’s say I am able to convince them to convert $50,000 this year. That $50,000 will be taxable as ordinary income. But with their $25,300 of standard deductions kicking in and the fact they have no other income their taxable income will be all of $24,700. They’ll pay only $2,583 in taxes this year.

$2,583 in tax today is a tiny price to pay for all the benefits of the Roth IRA. Heck, I’d even advocate they convert a full $100,000.

If they convert $100,000 in year 1, $100,000 in year 2 and the rest in year 3, they’ll have moved all their money from their to-be-taxed accounts to never-taxed-again accounts.

In year 4, when they have exhausted their cash savings, then they both take Social Security. Dan will get his as a 69-year-old, meaning he’ll have nearly maximized his Delayed Earnings Credits (DEC) and will enjoy a significant bump in his benefit.

Say Dan averaged $75,000 a year over his career. His Averaged Indexed Monthly Earnings (AIME) will be $6,250. This means his Primary Insurance Amount (PIA) will be $2,519 at his Full Retirement Age (FRA). If he waits to file for Social Security at 69 his Social Security benefit will be $3,173 a month because of the three years of Delayed Earnings Credits.

If Sarah made the maximum under the Social Security rules at her FRA her benefit would be around $2800 a month. But because she is going to file at 65, a year before her FRA, her benefit will be reduced to $2,600 a month.

Following this strategy, Dan and Sarah will receive nearly $70,000 a year in Social Security benefits, which will meet all their income needs and it will be TAX FREE.

If they need to dip into their Roth IRAs to augment their Social Security income they can do so and will still pay no tax. It’s a beautiful thing to behold. Their primary source of income is Social Security which will be tax free augmented by tax-free Roth IRA distributions.

Dan and Sarah have another 20-25 years ahead of them and they will NEVER pay income tax again. Let that sink in. Can that work for you too? Absolutely!

Roth IRA + Social Security = An Amazing Benefit of the Tax Code

The beauty of this retirement cannot be overstated. Yet, very few people take advantage. Why? They’ve been taught, incorrectly, to defer taxes as long as possible. I take issue with this philosophy. If you can pay a small amount of tax today to avoid huge taxes in the future, you absolutely should.

Big Social Security COLA Coming For 2019???

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Well this could be good news.

The folks over at the fool.com are giving us reasons to think that the Social Security Cost of Living Adjustment for 2019 could be the largest since 2012.

Given what I posted two days ago on how inflation is destroying Social Security beneficiaries purchasing power, a 3% or more COLA is long coming.

We’ll see if it comes to fruition. But, as the fool points out, it looks pretty set.

The problem with Social Security adjustments is that it’s based on the CPI-W which is more an analysis of cost increases for working people, not retirees. So, things a retiree may be affected by may be counted less in the CPI numbers than what affects a worker.

Energy, for instance, represents less than 5% of the CPI-W. Does the average retiree have a larger energy expense? How about health care? etc.

Until the COLA adjustment is made more geared towards retirees there is nothing we can do other than be happy when a larger COLA comes down the pike, like seems will happen next year.  We shall see.

https://www.fool.com/retirement/2018/…

Annuity For 83 Year Old

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This is just wrong…on so many fronts.

Talked to a wonderful lady who I haven’t spoken to in years today.  She and her husband are long time friends of the family and just the best people you could possibly know.

Her mom is even better.  The sweetest lady one could possibly be. Tough as nails too. 93 years old now. And sadly can’t hardly remember her own children’s names as disease has spread through her brain.

She is in a nursing home. Was costing $10k a month until they moved her to a ‘cheaper’ one for the low, low price of $6k a month.

As you know, at least if you’ve been following me at all, Medicare does NOT cover long term care stays. Your Social Security statement could not be any clearer than on page 4 where it says this explicitly.

In this case, Mom is on the hook, for that $6k a month.  Thankfully, she has a bit of money to pay for it. Not much mind you but enough to see her through a few years.

However, in talking with my friend today, it turns out that Mom was sold an annuity 10 years or so ago when she was in her early to mid 80s.  Said annuity has a large surrender charge meaning if she were to take money out of the contract she would lose THOUSANDS of dollars!

I find this to be insane in so many ways.  What was an insurance agent doing selling an annuity, with a huge surrender charge schedule, to a widow in a remote part of the US? Why did the annuity company, or companies actually, allow this to happen?  Did the agent not think that there could be a time when Mom, again at the time of sale an 83 year old widow in a rural place, might need to move to a home to be provided for?  How would she pay that?

I can’t fathom this. I can visualize this sweet ever-so-trusting lady, sitting on her front porch in the mountains, while a nice talking insurance agent has her sign the contracts for these annuities. It disgusts me.

Now, don’t blame this episode on the “evils” of annuities.  Annuities are neither good nor evil.  They are inanimate.  They carry no morality.  Just like firearms, actually.  However, like firearms, BAD people can use them in nefarious ways.  As is the case here, in my opinion.

Try as I might, I can not see a reason whatsoever why someone would put an 80 year old lady into a product with significant surrender charges.  It’s crazy to me.

So, moral of the story, be careful out there, as they used to say on Hill Street Blues. Remember that show?
If something sounds too good to be true, it is.

Lastly, if you can’t have access to your money without waiting at least 10 years, please, for the love of all that is good, think long and hard before you sign the bottom line.

In the meantime, I’m going to look over the contract that Mom signed and see if there is an escape hatch of some sort because I just can’t believe ANY insurance company would allow this to happen.

Why You Should NOT Rely Solely On Financial Planning Software

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Time For A Social Security Quiz…

Fun right? But read on, this is going to be incredibly important for you. 


When I was running an analysis on cash flow in retirement for a client, we’ll call them Bob and Jane, I noticed something horrific.  See below if you can identify what is wrong. 
Here’s a hint. Bob is the higher earner and in this scenario we have him dying at the age of 80. 

Anything jump out at you?

Well if you notice in the year after Bob dies, Jane’s Social Security is only $20,173.   Of course, if you’ve been following my emails and/or blogs you’ll know that Jane will actually receive the greater of her own benefit or what Bob was receiving at his death.

In this case Bob was receiving around $46,000 in Social Security benefits.  Yet, the software has Jane only retaining her own benefit.  This is a $26k mistake, made annually.  And as much as I wish it so, this is NOT user error.  This is a programming error.  The developers simply do not understand how Social Security works well enough to program the correct information.

This program also has Bob and Jane paying tax in GA even though they certainly will not given their total income.

Unfortunately, in the 20+ years I’ve been a professional financial planner, this is not an exception to the rule.  It is the rule. Just last night, I was looking at a different program because I’m very familiar with the  retirement planning professional this software group retained on their staff. Their Social Security models have issues too.

I’ve seen another software program run retirement scenarios where the retiree has a 100% success rate even though the retiree doesn’t have enough money to pay off his debts.  How can this be? Well if the investment return assumptions are 6.5% for a conservative portfolio we can make a lot of retirements look great, on a computer.

I’ve had other programs say a retiree needs $4 million to retire. When in fact, they probably need all of $800k or so.

At the end of the day, software is, and will forever be, junk in, junk out.

So, what does this mean for you? Well, you need to be careful with your software-generated retirement plan.  Make sure the numbers are legit.  Ask questions.  Make sure your planner knows what the heck he or she is talking about.  If they are just saying “Look Ms. Smith, you’re going to be okay because the computer says so.”  That does not inspire confidence.   The HUGE firms are more guilty of this than the smaller firms in my opinion.  The HUGE firms offer boilerplate financial planning with an off-the-shelf program that a lot of times was designed specifically for them.  Again, not confidence inspiring.

I use the software as a tool to help present a plan to a client. It certainly is not the end-all solution because the program is only as good as the developers behind it.  Who are those people? Do they know what they’re doing? Do you really want to trust your retirement to them?

Do a double and triple take with ANY financial planning document that is presented to you.

Lastly, if someone says your financial planning is good to go because they did a “Monte Carlo” analysis and you’re at at 95% success rate, the first thing you should say is… “That’s great! Is that before or after taxes and fees?”

Here’s a podcast episode and accompanying blog I did on this topic. Again things aren’t always what they seem and YOUR financial planning is too important not to know everything that went into making your financial plan.

As always, contact me with any thoughts, questions or concerns.

True Health Care Costs In Retirement

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A long time ago I came across a study in the Journal for Financial Planning which showed the VAST majority of retirees spend little money in out of pocket health care costs. In fact, something like only 5% of all people who needed assisted care spent over $100,000. I can’t remember the exact numbers but it was significantly less than anything I was expecting.

For some reason though, this article never made any headway into the retirement planning community. The silence around this study was similar to how Ty Bernicke’s work on retiree spending was neglected for a long time too. I wrote about this previously. I emailed previously on this as well which you can find here.

Fidelity Study On Health Care Costs

In fact, the noise has all been in other direction. Every year, Fidelity will publish a report on the costs a newly retired couple needs to fund health care expenses. “A Couple Retiring in 2018 Would Need an Estimated $280,000 to Cover Health Care Costs” screams the headline to the study you can find here. Oh, by the way, this does NOT include nursing home costs either.

I remember when I was a relatively new broker just starting out in 2004. I used to use this exact study in seminars to show people how they weren’t prepared. But back then the costs for a newly retired couple was only $184,000. What was the answer to folks deficiencies? Well, to work with me of course! In fact, Fidelity offers you their help as well: “Fidelity has also published an age-based set of retirement savings guidelines that include health care expenses and are designed to help individuals understand how much they should have save by specific age milestones.”

 

How Much Does A Retiring Couple Need For Housing?

Now, at the risk of sounding TOO cynical, why have I never seen a study that states: “A Couple Retiring in 2018 Would Need an Estimated $280,000 to Cover Food Costs” or “A Couple Retiring in 2018 Would Need an Estimated $280,000 to Cover Housing Costs”?

Yet, aren’t food and housing just as important as health care for retirees?

Weird huh?

Employee Benefits Research Institute Study

Okay, so this leads me to what I want to talk about with you today. This study from the Employee Benefits Research Institute. If there was ever a research piece you NEED to read, it’s this. I was blown away. And you will be too. Why? Because of this finding:

For the majority of surveyed people, out-of-pocket health care expenses are not as high as commonly believed. For those who die at age 95 or later, the median cumulative out-of-pocket expense after age 70 until death is slightly above $27,000.

This study was conducted using REAL PEOPLE, 8300 of them to be precise, from 1993-2014. Actual numbers that this cohort spent on out of pocket health costs were reported. Over 6000 of the participants had died by the end of the study but even then analysts were able to extract data from heirs.

My Videos And Podcasts

Now I won’t get into the data on this email. I did TWO videos on this which you can find here.
If you’re more of an audio learner you can listen to the podcasts here and here.

It’s an amazing piece of work my friends. One of those that comes along every few years to punch you in the face and force you to wonder “has everything we’ve been told been wrong???”

And here is the ultimate kicker for me. How many people have retired in fear, fear they’re going to run out of money and thus they neglect to enjoy those few years they have in good health with their loved ones? They neglect to take that tour of Europe they always wanted to do because they’re so doggone concerned they’ll run out of money.

Don’t Neglect Your Enjoyment in Retirement

They neglect to spend that vacation with their grandkids at the beach they dreamed about for fear that they might not have enough resources to pay for huge health care costs.

Then, one day, they wake up at 83 years old, hub has recently passed and they realize they have more money in their accounts then they could possibly spend. A deep feeling of remorse overcomes them because they did NOT enjoy those few years they had together for fear of being without.

How many people stay in crappy old jobs, they HATE, having been convinced they’ll never have enough money to retire and thus if they could just stay on at work for 2 more years, they’ll be okay. Yet, they are miserable and they are making their loved ones around them miserable too. Each day they go back to that hated job they lose a little bit more of joy in their lives and for many people, men in particularly, it won’t be found again.

They finally do retire but quickly find out playing golf as much as they wanted is not very fulfilling. They get bitter and even resentful. They look for happiness in other things and people. Forgetting that only YOU can make YOURSELF happy. No one else, or nothing else, can bring you happiness. It’s all on you. And when those things don’t make them happy, the resentment builds even more.

 

Only YOU Can Make YOU Happy

Having been a financial planner for so long now, I’ve seen these incidents over and over. It breaks my heart in so many ways.More than that, it makes me mad.

I KNOW why the industry focuses so much on health care costs. Because people have a fear of the unknown. No one knows if THEY will be that one person in hundred fifty that spends $10,000 a month at a nursing home. So the industry plays on that, “don’t you think you should stay at your crappy old job to squirrel more money away just in case? You don’t want to rely on your kids to take care of you do you??? Well, do you???? Oh, and by the way, we’re here to help you with that money you squirrel away too.”

Is the Financial Industry Playing Off Fear?

Yup, I am cynical. But it comes with experience.

Okay, so what can YOU take from this?

First and foremost, if you are a woman with longevity in your genes you do need a plan to protect yourself from potentially exorbitant out of pocket health costs. There are sooooo many ways to do this nowadays without breaking the bank. Just do SOMETHING, to plan as soon as you can, because the older you get the harder it is to make a plan work. Does this mean a Long Term Care insurance policy? Maybe. Does this mean a side account that you put $150 a month into and don’t touch for anything because it’s designated as your out of pocket health account? Maybe. Does this mean you have a plan of action to look at life care options at a local Continuing Care Retirement Community? Maybe that too.

Plan – NOW!

All options should be on the table. But YOU are the person most at risk for a high cost health event. However, even while that risk to you is higher than the general population, the risk is still quite low. So, don’t get overly cautious or worried. Just plan!!!

For everyone else, there is a simple solution to the low likelihood but high cost potential event happening to you… Are you ready for it??? You sure???

PAY OFF YOUR MORTGAGE!

No debt = financial freedom. This is one area I agree with Dave Ramsey on. Completely. Get. Out. Of. Debt. And enjoy your life. It’s the only one you have.

 

Health Care Costs In Retirement

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Health care costs in retirement are a HUGE concern for soon-to-be retirees and current retirees alike.

You can’t blame folks, actually, as so much ink has been spilled about the costs retirees face for health care.

Fidelity Health Costs In Retirement Study

Fidelity does a study each year that purportedly shows retirees need $260,000 to fund their health care costs.  “Oh no, honey, we don’t have that kind of money!!! What are we going to do???” (Give Fidelity more money to invest of course!)

Why doesn’t Fidelity also how much retirees need for food, housing, auto insurance etc…? If we use the same logic, we’d say retirees need to have $500,000 or more for housing costs in retirement and another $500,000 or so for food because both of these are higher on the list of retirement expenses for the average American.

Preying on fears of bankruptcy?

No one says that though. Why? Because it wouldn’t scare the way saying people will go bankrupt due to health costs does. For some reason, that fear has taken over for many retirees. And unfortunately, that fear has also kept those same retirees from actually enjoying their retirement out of fear of running out of money.

These retirees, and I’ve spoke to many of them in my career, see their future selves as paupers, eating Ramen noodles, having to move in with their kids.  So, to try to avoid that fate, they take minimum out of their accounts and live much more frugally than is required.

Missed Opportunity To Enjoy Retirement

This saddens me greatly because I can’t tell you how many widows, mainly, I’ve spoken to that have more money than they know what to do with but no one to share it with. Their husband has since passed, and now they’re in their mid 80s and not as sprite as they once were.

Their regret is not have doing more when they were younger and the hub was alive. That bothers me. It bothers me even more when the tax man comes knocking to claim an even bigger share of THEIR money because as you know widows pay MUCH more in tax than married couples.

EBRI Health Costs In Retirement Study

So along comes this study from the Employee Benefits Research Institute. This study shows the ACTUAL out of pocket expenses retirees have from a conducting interviews of over 8,000 participants every two years since 1993.

Lo and behold, what we find is the majority of these people had little to no out of pocket expenses. In fact, other than a tiny percentage of retirees most have very little expenses.

Hmmm… Could There Be A Reason To Frighten People?

Why this study hasn’t received more attention is beyond me, well I am a natural cynic, so I think I know. The investment firms, and the insurance industry, doesn’t want you to breathe easy when it comes to your retirement money. Fear is a great motivator to get you to buy the stuff they sell.

Before you part with your hard-earned money though please look a bit at your situation. Are you a woman with longevity in your bloodline? That is the person most at risk for major out of pocket expenses.

Consider All Your Options

You may want to consider some options to protect against those risks.

However, for all others, men and women alike, think twice before buying something expensive that offers protection against a risk that is not likely to matriculate and maybe consider ways to actually enjoy your retirement instead of constant worry.

 

Continuing Care Retirement Community – CCRC Guide Review

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Continuing Care Retirement Communities are gaining market share as more baby boomers age.

In this episode I go over a guide from the CA Advocates For Nursing Home Reform. While the guide is nearly 10 years old and I’m not familiar with this specific organization, it is definitely worth your time to read, especially if you are looking at a CCRC.

CCRCs Similar to Long Term Care Insurance

CCRC’s act like a long term care insurance policy. They take away your concern of wondering how you’ll get care if something happens to you or your spouse.

Entrance Fee

The entrance fee is generally based on the local community average housing costs. So, keep that in mind. If you are in Alabama and looking to sell your house to go to a CCRC in Los Angeles, you’re probably going to need to come up with cash even after selling your home.

Monthly Fee

The monthly fees can increase, and most likely will, each year. You’ve got to make sure you have the ability to pay for the increases. Your Cost of Living Adjustments from Social Security won’t cover those increases in the least.

Lifestyle Adjustment

One thing I thought was interesting in this article was it focused on the lifestyle adjustments one needs to make. Think about it, your whole life you lived in a neighborhood of varying people; Retirees, young families, single couples etc.

Now you go into a CCRC and you’re going to be with people your age exclusively. That may be quite an adjustment especially if you’re in an apartment. Just something to think about.

CCRCs mainly are non-profits

Most CCRC’s are non-profit. Don’t think that means they’re any more “righteous” than for-profit organizations. You just have to look deeper. Some sponsoring organizations offer their name only, but don’t do anything on the day to day management.

Lots of interesting information in this guide for sure. Link is below.

http://www.canhr.org/publications/PDF…