Retirement Advice | RetirementAdvice.com

How to Stay Busy During Retirement

walter — Fri, 25 May 2012 15:24:24 +0000

Entering retirement means different things to different people. For some, simply finding enough activities to keep themselves busy turns out to be a bit of a challenge. Certainly many retirees enjoy traveling and visiting family, but these activities usually do not provide enough to completely fill their days.

Sometimes the shift into retirement turns out to be bigger than expected. Without the structure of a full-time job, or children to take care of, some retirees can feel a bit lost in terms of how to keep themselves active.

If you’re finding this to be the case as you move into retirement, here are some suggestions on how to stay busy during retirement.

Keep Working. Just because you’re “retired” it doesn’t mean you can’t still work. Many times the working environment for a retiree won’t be as stressful as demanding as it was for them pre-retirement, but that doesn’t mean it can’t be challenging or stimulating.

Start a New Career. Of course, keeping yourself active in the workforce doesn’t have to mean doing so on a reduced schedule. In fact, some retirees use their time (as well as their sometimes significant retirement nest eggs) to start a completely new career – perhaps something they wish they had pursued earlier in life.

Volunteer. Many retirees find great personal satisfaction in volunteering within their communities. With shrinking educational budgets, many schools and school districts are welcoming retirees who wish to volunteer as teachers’ assistants, library aides or even crossing school guards.

Learn. You might be surprised that many institutions of higher learning offer free or reduced price classes to senior citizens. Many retirees use their free time as an opportunity to learn more about a subject that they might not have had the chance to study when they were working full time.

Take Up a New Hobby (Or Dust Off an Old One). A lack of mental stimulation is often one of the most common complaints among retirees. Fortunately, the greater amount of free time permits you to take up a new hobby. Think of something you’ve always wanted to do or try, or perhaps a new sport that you’ve never really had time to focus on before. Golf is always popular, of course, but as more retirees enter their golden years in better health, an increasing number are choosing to take up tennis, bicycling, swimming and fitness walking.

Focus on Your Health and Well-Being. After decades of putting the health of your kids before your own, and perhaps even sacrificing a bit of your own health in order to work long hours to support your family, retirement can be a time to focus on your own health and well-being. Now you have more time to spend on exercise and cooking healthy foods for yourself.

Don’t commit to doing something just because other retirees are doing so. Start any new pursuit gradually, and see what works best for you.

It is Never to Early to Start Planning for Retirement

walter — Tue, 15 May 2012 15:42:18 +0000

Saving for retirement is one of those things that most people know is important, but many people find reasons not to do. Competing expenses and other financial obligations (both real and perceived) are common reasons why people are not saving enough for retirement.

Another reason that some people have for not saving enough is that since retirement is so far away, they don’t need to worry about it now because there will be plenty of time to save later. Unfortunately, the only surefire way to make sure you have enough for retirement is to start the process early. In fact, it’s never too early to start planning for your retirement.

Here’s some retirement advice on important steps you should take to start savings for your retirement immediately.

Starting Now Helps Develop Habits. Perhaps the most important aspect of retirement planning is to develop the habit of saving. If you have to think about whether you want to save for retirement in the coming year, or whether you can afford it, then you’re already facing an uphill battle. Making a commitment to add to your retirement savings with every paycheck will ensure that you do the right thing, rather than having to convince yourself that you should be saving. In some respects, the habit of saving is at least as important as the amount you save.

Starting Now Helps Build the Nest Egg. Of course, the more you can start saving now, the better. In a tax-advantaged account like a traditional IRA or a 401(k) (or even in a Roth IRA, where any investment earnings and games will be completely tax-free – even upon withdrawal), the longer those funds can work, the better. Individuals who make regular contributions throughout their 20s can expect to end up with a significantly larger nest egg than individuals who wait until their 30s (or later) to get serious about retirement.

Help Set Up an Account for Your Young Children. Any individual who has earned income can contribute to an IRA. If your children have any kind of part-time or summer job (or if you can hire them to do work for your home or family owned business), then they can contribute that money to a retirement account. Even just a one-time $2,000 contribution to an account at age 15 will grow to over $35,000 by age 65 (assuming a modest 6% return). As noted above, the more an individual can save earlier in life, the better.

Look at the Big Picture. When doing your retirement planning, make sure to look at the “big picture.” Retirement planning means more than just building up your IRA and 401(k) balances (although doing those things is certainly important). For example, some individuals will be close to retirement age just as one or more of their children are getting ready to go to college. In order to properly prepare, coming up with a plan to fund an educational (Coverdell) IRA (or other education savings vehicle) may be appropriate.

There are very few downsides or risks associated with starting your retirement planning and saving early in life. Because there is such an upside to doing so, it’s a course of action that everyone should pursue.

Watch Out for 401(k) Fees

walter — Tue, 01 May 2012 18:03:44 +0000

As a well-informed investor, you are probably already taking steps to make sure that you’re not paying too much in fees within your investment brokerage accounts. You may already invest in no-load mutual funds that have low annual expenses, and if you trade stocks then you probably make sure that your commissions are not too high. Too many fees (or fees that are too high) can significantly hamper investment performance.

But are you also looking out for fees that would affect the returns within your retirement accounts? In particular, you should also be paying attention to the various types of fees that you may be getting charged for inside your 401(k) account.

Here’s some retirement advice on how to evaluate and deal with rising 401(k) fees.

A 401(k) is Less Transparent Than an IRA. While the 401(k) is one of the best opportunities for most to save for retirement, and is in many ways superior to the IRA (the 401(k) has the potential for an employer match and the annual contributions limits are higher), there is one way that many 401(k) plans are less desirable – transparency. Because you can open an IRA at virtually any bank, brokerage or investment advisor, those entities compete for your business. Most IRA custodians work to make their fees low and easy to understand. In contrast, when a company signs up with a custodian to administer a 401(k) program, the company’s employees are essentially given a “take it or leave it” proposition. If they want to have a 401(k) account, they must do so with that particular entity. The 401(k) custodian therefore does not have nearly the same level of incentive to keep its fees low to the program participants.

Smaller Company Employees Often at Risk. Workers participating 401(k) plans offered through smaller companies are often particularly vulnerable to above market fees. This is the case because while smaller companies are anxious to offer 401(k) plans to their employees, they are unwilling or unable to pay the administrative fees. In those cases, the costs are shifted to the participating employees.

401(k) Fees to Note. Some 401(k) plan administrators charge fees for a number of different items, including recordkeeping and account administration, as well as fees for brokerage, management and investment advisory services. Even if each of these fees are relatively small, they can add up to make a significant difference in how much a 401(k) participant can accumulate over a long period of time.

New 401(k) Disclosures are Coming. Beginning in 2012, the Department of Labor will require that 401(k) plan custodians provide certain types of disclosures to the participants in their plans. Under these new rules, 401(k) participants are to receive annual and quarterly disclosures that will spell out how much in fees the participant is paying per $1,000 invested in a plan mutual fund, as well as stated as a percentage of assets.

As with many other aspects of personal finance, it’s important to take control of your future. Make sure you understand how much you’re being charged within your 401(k) account so that you can make informed decisions about your retirement planning.

The Danger of Over Diversifying Retirement Savings

walter — Tue, 17 Apr 2012 14:08:00 +0000

For years we’ve heard the traditional financial advice that diversifying our investment portfolios is a good idea. The thinking was that if we have a number of different investment types and risk exposures, then a downturn in any particular market segment or asset type would only affect a portion of our portfolio.

But over the past few years we’ve seen that the relative degree of “safety” that can be gained from broad diversification may not be as much as we thought. In fact, according to some financial commentators, over diversification might actually be a negative in that it prevents us from focusing on the strongest performing market segments. These issues also apply to our retirement savings.

Here’s some retirement advice to help you recognize when you might be at risk of over diversification.

Over Diversification Can Distract You. Your retirement savings is likely different from your non-retirement investment accounts in a number of ways. Depending on how close you are to retirement (or if you’ve already retired), you’ll want to have a certain type of asset allocation to meet your retirement needs. In broad terms, the allocation will be amongst stocks (or other growth-oriented investments) and bonds (or other relatively stable value income-generating investments). The more money you have in your retirement account, and the closer you are to retirement, the more this allocation is likely to be weighted towards bonds. Over diversifying could potentially take you away from your optimal account balance. Focus on that allocation before you worry about diversification.

Over Diversification Can Keep You From the Big Winners. It’s a simple matter of math – the more investment holdings you have, the less you can have invested in a particular stock or fund. This means you might miss out on the big market “winners.” In 2011, for example, the Dow Jones Industrial Average gained about 5.5%. But 40% of the stocks that comprise the Dow actually declined over the year. By diversifying into the Dow Index, the gains of the stocks that comprise the top one-third of the Dow (which gained anywhere from 12% to 30% on the year) were significantly diluted. Over diversification occurs when the protection you gained from adding another investment to the mix is outweighed by the risk that you’re missing out by taking those funds away from a potential winning investment.

Over Diversification Can Cost Too Much. If you over diversify in your retirement account (or any investment account, for that matter) then you are at risk of overpaying – in terms of fees as well as the time it takes you to manage your many different holdings. You should focus on the goals of your retirement savings account (which might include current income, preservation of capital as well as growth – in varying amounts depending on your needs), and let that drive your diversification strategy.

As with any investment strategy, there is no “one size fits all” answer. Diversification can protect your retirement savings to some extent, but over diversification has its risks as well.

Retirement Advice on the Tax Advantages of an Annuity

walter — Thu, 05 Apr 2012 16:41:14 +0000

Many people have likely heard of annuities when they’ve done research about their retirement planning. But there’s a good chance that not everyone fully understands what annuities are and how they can play a significant role in an individual’s retirement planning.

In essence, an annuity is a financial contract between you and an insurance company. In exchange for a single payment or a pre-determined series of payments, the insurance company agrees to provide you with certain benefits once you reach retirement. There are some choices you must make regarding how you want your annuity to be paid out once you enter retirement. Whether an annuity is right for you depends on your particular financial situation, but it’s worth noting that annuities do have some tax benefits worth considering.

Here is some retirement information and advice on the tax advantages of an annuity.

Invested Amounts Grow on a Tax-Deferred Basis. Unlike retirement savings vehicles such as 401(k)s and traditional IRAs, deposits into an annuity are not tax deductible. Instead, the power of an annuity comes from the fact that all investment and interest income builds up within the annuity account on a tax-deferred basis. This means that the account holder won’t have to pay any taxes on any gains until they start withdrawing those funds.

Deposits are Not Taxed Upon Withdrawal. Because your contributions into an annuity are not tax-deductible, those dollars are not taxed again when you withdraw them from your account. This means that some of the payments you receive back from your annuity will not be taxed.

No Contribution Limits. Unlike 401(k)s and IRAs, there are no eligibility requirements or contribution limits for annuities. This means that even if you’ve maxed out your contributions on all of those other types of retirement accounts, you’re still free to invest as much as you like in annuities.

Different Payout Options. Most annuities allow you to choose what type of payout to receive when it comes time to access your savings. The basic options are to take a single lump-sum payment, or to take guaranteed periodic payments either for a specific period of time or for the rest of your life. By selecting a payment stream (either for a fixed period of time or your lifetime), you further delay paying taxes on your investment gains from the annuity.

Indirect Tax Advantages. Retirees who have an annuity as part of their retirement portfolio can strategically differ accessing their other retirement accounts. For example, a retiree may elect to take a lump sum payment or a short periodic payment schedule from their annuity so that they can continue letting their tax-advantaged accounts continue to grow (including accounts such as a Roth IRA, where eventual withdrawals will be completely tax free). By using an annuity in this way, a retiree can also delay taking Social Security until age 70 (and therefore maximize their Social Security benefits).

Annuities are not as common as IRAs and 401(k)s in most retirement strategies. While annuities don’t have quite the same tax advantage as those other types of accounts, they do have a place in some individual’s retirement portfolios.

Advice on Rethinking Retirement in Difficult Financial Times

walter — Tue, 27 Mar 2012 14:05:39 +0000

In difficult financial times, individuals are often forced to reevaluate and rethink many of the plans they’ve made for themselves. Vacations and major purchases can be delayed, downsized or perhaps even eliminated altogether.

Another thing that can require rethinking in a difficult financial environment is retirement. Because retirement is such a significant decision (both in terms of the purely financial aspects as well as the emotional component), some people are reluctant to re-examine retirement plans that they may have had in place for a number of years. But a significant change in one’s financial situation, or in the overall economy as a whole, can make it necessary to rethink retirement.

Here is some retirement advice about how you need to rethink retirement in difficult financial times.

Rethinking the Date of Your Retirement. One of the most common approaches when rethinking retirement is for a person to adjust the date at which they plan to retire. Difficult financial times can negatively affect the timing of retirement on several fronts. Many people find that during bad financial times their retirement savings accounts (IRA, 401(k)s, etc.) suffer poor investment performance. This can come in the form of low investment returns, or even a loss of principal. If the difficult financial times last for a few years, and the investment savings losses are significant, it can be very difficult to stick to the original timing of one’s retirement plan because there simply isn’t enough money saved.

Rethinking the Place of Your Retirement. When a retiree has less retirement savings available than they thought they would, it’s often appropriate to rethink where they’re going to spend their retirement years. Retirees who are able to sell their homes at a reasonable price (or who are currently renting their homes) have the flexibility to move to another part of the state they’re currently living in, or perhaps to another state or even another country. While this type of adjustment will also require balancing other factors (such as being close to friends and family, and having to integrate into a new type of community, for example), in some cases the savings that can be found by moving to a new place for retirement is too much to pass up.

Rethinking Your Retirement Lifestyle. If a person isn’t willing or able to adjust the date on which they retire or the place in which they retire, then there is always the option of rethinking the planned upon retirement lifestyle. Many people picture of their retirement as one of leisure and relaxation. But that type of lifestyle can only be supported with a very significant retirement nest egg. For retirees who might have less saved, or otherwise find themselves in a difficult financial situation, a different retirement lifestyle may be appropriate. This can include a smaller monthly budget for living expenses, continuing to work through retirement (even if it’s just on limited or part-time basis) or both.

Perhaps the most important thing to do when rethinking retirement plans in difficult financial times is to be fully aware of one’s overall financial situation, and to be realistic about one’s retirement plans. Being honest with yourself is the necessary first step to readjusting your retirement expectations.

Advice on Paying Off A Mortgage Before Retirement

walter — Mon, 12 Mar 2012 14:57:53 +0000

There are many different ideas and philosophies on how best to save for retirement. You’ll hear lots of retirement advice about how much of your retirement savings should be invested in stocks, how much in fixed income products like bonds or CDs, and how this balance between equity investments and non-equity investments should change as you get closer to your target retirement age.

But another form of retirement savings – one that doesn’t get the same degree of attention as those traditional investments – is paying off the mortgage on your home before you retire. Paying off your mortgage before you retire can provide you with some unique advantages over traditional retirement investment strategies.

Significantly Reduced Living Expenses. When you own your home outright, your monthly living expenses during your retirement years will be greatly reduced. Chances are your housing expenses are one of the most significant components (if not the single largest component) of your monthly budget. When you no longer have to make a mortgage payment, your budget obligations are significantly reduced. (Just remember that you’ll still be responsible for your local property taxes and your homeowners’ insurance even after you pay off your mortgage.)

Less Savings Required For Retirement. When your overall living expenses are lower, you don’t need the same level of income to maintain the same general lifestyle. For example, if you save $1,000 per month by no longer having to pay a mortgage, you can otherwise maintain the same lifestyle with a monthly income that’s lower by $1,000. Keep in mind that it takes $240,000 of retirement savings, earning income at a rate of 5%, to give you $1,000 of monthly income.

Here are some steps you can take to pay off your mortgage before you retire.

Consider Refinancing to a Shorter Term Mortgage. With interest rates at record lows, now might be a good time for you to refinance to a shorter term mortgage. Depending on your current interest rate, and how much time you have left on your current mortgage, you might be able to save money (and be able to pay off your mortgage more quickly with the extra cash flow) by refinancing your mortgage.

Pay Additional Principal Each Month. Another way to pay off your mortgage before you retire is to pay more than your required payment each month, and request that your bank apply that extra amount to the principal balance of your loan.

Shift Your Investment Focus. The closer you are to paying off your mortgage, more of each payment you make goes to reduce your principal and less goes towards interest charges. Depending on your tax situation, and your other retirement assets, you might wish to consider shifting some of your investments towards paying off the remaining principal balance.

Like any other investment decision you make in relation to your retirement, you’ll need to balance the likely pros and cons of each investment choice against what you are giving up by not making other investing choices. Make sure to include paying off your mortgage before you retire as a potential choice in your retirement planning.

Retirement Advice on How to Make Your Money Last Longer During Retirement

walter — Mon, 27 Feb 2012 15:10:26 +0000

Even if you’ve worked hard to save for your retirement, you’re still likely to have some concerns about whether you’re saving enough. Much of the uncertainty comes from the fact that you simply don’t know how long you and your spouse will need to draw upon your retirement savings. It’s therefore important that you have a plan for how you’re going to make your retirement savings last as long as possible.

Running out of money during retirement is something that no one wants to face. Regardless of whether you’ve already retired, or retirement is still a few years away, there are many things you can do to make your money last longer.

Here is some retirement advice you can use to help make sure to get the most out of your savings.

Scale Back Your Lifestyle. While this certainly isn’t what any retiree wants to hear, one of the most effective ways to make your retirement savings last longer is to scale back to a more modest lifestyle once you stop working full-time. There are a number of ways to do this, of course, including moving into a much smaller home (and reducing your housing expenses), moving to a state (or perhaps even overseas) where the cost of living is significantly less or simply taking a hard look at which expenses in your life are truly necessary, and which you can do away with.

Select Income Sources Appropriately. There’s a good chance you have multiple retirement savings accounts in your portfolio. Many new retirees have one or more 401(k) accounts, traditional IRAs, Roth IRAs, Social Security and possibly even a company or government pension. Be strategic in which accounts you access first in order to reduce the hit to your overall portfolio.

Delay Taking Social Security. The decision on when to begin taking Social Security benefits will likely be one of the most significant choices that many individuals will make with respect to their retirement funding. For most new retirees, the age to begin receiving full Social Security benefits is between 66 and 67. But individuals may elect to start receiving benefits as early as age 62, although the downside of doing so is that the Social Security benefit they’ll receive for the rest of their lives will be lower than if they waited until full retirement age. On the other side of the coin, an individual who waits even longer (up to age 70) to begin collecting Social Security will receive an amount that’s greater than they would have received starting at their full retirement age.

Work Part-Time. It’s a common complaint among some retirees that a life of playing golf all day isn’t quite as interesting or enjoyable as they dreamt it would be. Particularly for retired individuals who are living alone, the idea of continuing to work throughout retirement is becoming increasingly popular. From a purely financial perspective, even if the part-time job is only one or two days a week, that extra money (combined with the fact that you aren’t out spending money during the times that you’re working) can help a retiree make ends meet and make their savings last longer.

While there are a number of different strategies for making your retirement savings last for the rest of your life, the most reliable approach is to make sure that you have as much as possible saved up in the first place. Do everything you reasonably can to maximize your tax preferred contributions each year, and make sure you take full advantage of any employer 401(k) matching program.

How Much Should You Take From Your Retirement Account Each Month

walter — Fri, 10 Feb 2012 15:41:02 +0000

There are a lot of online calculators to help you figure out how much you should be saving for retirement. While it’s certainly important to come up with a plan to reach that goal, the total amount you accumulate in your 401(k), IRA and other retirement accounts is only one side of the equation.

In order to make sure that you’re able to live a comfortable and healthy retirement, you also need to determine how much you should be taking out of your retirement accounts each month. Ultimately, you’ll have to balance your living expenses with not depleting your resources too soon.

Here is some information and advice on the key factors to determine how much you should withdraw from your retirement account each month.

Your Desired Standard of Living in Retirement. If you desire a higher standard of living during retirement, you’ll need to withdraw more each month. It used to be a common goal to have a higher standard of living during retirement (since many people would expect that they are children will be living on their own, the mortgage on their primary would be paid off, and they’d have more time to enjoy leisure activities), but that’s generally not the case anymore. Most retirees these days simply desire not to lose too much in their standard of living once they fully retire.

Investment Return. You probably focus a lot on making sure that your investment returns are as high as possible before you enter retirement. But don’t forget that your account will still be earning even after your retirement begins. Some retirees assume that their investment funds should consist primarily or exclusively of safe fixed income investments. Such an approach can protect against principal loss, but might not provide enough growth to make sure that funds will be available far into retirement.

Other Sources of Income. What other sources of income will you have during retirement? Don’t forget to consider your social security income and any part time work you may still do even after you “retire.” The more money you have coming in from other sources, the less you have to take out from your retirement account each month.

Know the Minimum Distribution Rules. While most retirees are going to want to take out the minimum amount each month that allows them to live as they want, the rules governing most tax-advantaged retirement accounts require that once the account owner reaches age 70½ , he or she must begin taking “Required Minimum Distributions.” This is true even if the account owner continues to work and is not otherwise retired. If the rules on minimum distributions apply to you, make sure to follow them so that you can avoid any penalties.

Ongoing Tax Benefits. There’s a good chance that you’ll have several different retirement accounts, each of which may have different tax benefits. Depending on your income level in a given year, for example, distributions from a Roth IRA may be taxed differently than distributions from a traditional IRA. To the extent you can, make sure your withdrawals do not raise your overall tax burden.

Whatever you decide on how much to take from your retirement account each month, make sure to periodically revisit your calculation in order to verify that none of your underlying assumptions have changed.

Information and Advice on IRA Contribution Limits for 2012

walter — Fri, 20 Jan 2012 15:15:29 +0000

Individual Retirement Accounts (“IRAs”) remain the most popular investment vehicle for many individuals and married couples. 401(k)s are certainly popular, but they’re usually much less flexible than IRAs, and many people don’t like going through the hassle of moving or rolling over their accounts when they change employers.

IRAs are generally subject to lower contribution limits than 401(k)s and other investment vehicles. Furthermore, in order to receive the tax advantages of a traditional IRA, your income (or your joint income if you file a joint tax return) must be below a certain level.

Here is some information and advice about IRA contribution limits for 2012:

Traditional IRA Contributions. For traditional IRAs, the 2012 contribution limits will be $5,000 for savers under the age of 50, and $6,000 for savers aged 50 and older. Whether or not your traditional IRA contributions will tax deductible (and to what extent they’ll be deductible) will depend on your filing status, whether you’re covered by a retirement plan at work (such as a 401(k)), and your Modified Adjusted Gross Income (“MAGI”).

Traditional IRA Deductibility – Single. If you’re filing a single return and are not covered by a retirement plan at work, then your contributions will be fully deductible. If you are covered by an employer retirement plan, then your contributions will be fully tax-deductible if your MAGI is less than $58,000 for singles (with partial deductions available up to a MAGI of $68,000).

Traditional IRA Deductibility – Joint. If you’re filing a joint return and neither you nor your spouse is covered, then the contribution is fully deductible. If you file jointly but your spouse is covered, then the contribution is fully deductible only if your joint MAGI is less than $173,000, and a partial deduction is available if your MAGI is greater than $173,000 but less than $183,000. If you’re filing jointly and you’re covered by a work retirement plan then you’ll get a full deduction with a MAGI up to $92,000, and a partial deduction between $92,000 and $112,000.

Roth IRA. For those eligible to contribute to a Roth IRA, the 2012 contribution limits are the same as with traditional IRAs; $5,000 savers under the age of 50, and $6,000 for savers aged 50 and older. But while contributions to Roth IRAs are not deductible, your MAGI is still important because it determines whether you’re permitted to contribute to a Roth IRA at all. If you’re filing an individual return, you can contribute up to the maximum amount if your MAGI is less than $110,000. If your MAGI is between $110,000 and $125,000 you can make a reduced amount, and if your MAGI is over $125,000 you cannot contribute to a Roth IRA. For taxpayers filing jointly, the joint MAGI must be less than $173,000 to make a full contribution, or between $173,000 and $183,000 to make a partial contribution.

It’s important to understand the upcoming year’s rules and limits on IRA contributions and deductions so that you can make the right decisions for your current taxes, and which will help you reach your retirement goals.