Category Archives: Costly Retirement Planning Mistakes

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Do You Need a Financial Coach?

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Sally and Roger have been married for over 30 years. Roger is 60 and Sally is 58. They have never saved much of their paychecks, so Roger has a small amount, about $100,000 in his 401k. Like Roger, Sally had good intentions to set money aside for retirement, yet it seems something else always took precedence such as needing a new car, loaning money to the kids, or fixing something at the house.

The concept of retirement has always felt like it was “out there” on the horizon. Now, reality is hitting them like the proverbial “ton of bricks”. Sally wants to stop working and devote more time to the grandkids. Roger knows that the only way that can even be a remote reality is if he just keeps working. His health is ok so he and Sally decide that will be their retirement plan. Roger will keep working until he just can’t physically do it any longer. They have a $500,000 life insurance policy on Roger so that will help Sally should anything happen to Roger.

This scenario may sound far-fetched or it may resonate with many of you. It’s called the “Work Until I Die” retirement plan. Many Americans have embraced this plan because they don’t think they have an alternative. Most don’t think they are qualified to meet with a financial advisor because those people only deal with people who have “real money”, whatever that is. As a result, millions of Americans drift into the “retirement years” unaware that help is out there. Help can take the form of a traditional financial advisor or it can be a Financial Coach.

What is a financial coach? A financial coach works on your financial life instead of investing your money and/or selling you financial products. Some people work with both. Not all financial advisors are equipped to be financial coaches. For example, a financial coach can help you put a personal budget together, teach you about Medicare and Social Security and educate you about other financial topics that will impact your financial life.

A financial coach will help you develop good money habits that will last a lifetime. You don’t have to have a lot of money. In fact, many people come to a financial coach in debt to get help building good spending and budgeting habits.

Sally and Roger can benefit from a Financial Coach. They are at a point where they don’t know what they don’t know. Knowledge is power and they need to be educated about how they can retire on their own terms. They may find that Roger won’t have to work until he dies. With some belt tightening with their budget and a few other changes they will be surprised at how their retirement looks after working with a financial coach.

Financial Coaches like financial advisors are not miracle workers. They are trusted advisors who are vested in your financial health. Like a coach in sports, they can get you into shape financially and then help you stay there into your retirement years, whatever you envision those years to be.

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Do These Three Things Today If You are Turning 60

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Turning 60 can be a landmark for many of us. You might be getting ready to retire or think about your next employment gig. Even if you plan to continue working in some capacity there are still things that you need to be aware of and, in some cases, act to avoid surprises down the road. If you are 60 or getting there soon, you still have time to get your finances in order if you do plan to retire in the next few years. Here are three things that I recommend you do right now.

  1. Get Social Security Benefit Information. Remember those update we used to get from the Social Security Administration every year. Yeah, they don’t do that anymore. But you can still find out about your retirement benefit by using the Social Security Retirement Estimator. It shows what your estimated retirement benefit from Social Security will be at different ages.

    This is an important step as most people have no idea how much they will receive from Social Security upon retirement. So, if you do this when you are 60 you still have time to make any necessary adjustments. When you take your Social Security benefit will impact your monthly check in a significant way. If you were born in 1960 or later, your Full Retirement Age (FRA) is 67. If you choose to receive benefits before you reach that age, your benefit will be reduced by 6% per year. Let’s say your FRA benefit is $2,000 per month. If you decide to take your benefit at age 62 the amount you receive will be $1,400!

    Luckily the opposite is true as well. IF you delay receiving your benefit until age 70 your benefit will increase by 8% for every year beyond your FRA. Let’s use that same $2,000 FRA example. If you delay receiving your benefit until age 70 you will receive $2,480, a 24% increase (8% x 3 years).

    Hopefully you can see why some advance planning can have a big impact on the benefit that you receive!

  2. Compute the Income You Expect from Retirement Plans. Just as we did with Social Security, we need to figure out what we will receive in income form our retirement plans whether that is a pension, 401k or other defined contribution plan or both. So how do you figure this? Common practice today is to use what is known as a safe withdrawal rate. The common rate used today is 4%. The idea is that if you withdraw 4% of your retirement savings each year it will last your lifetime. The idea is based on the premise that if you have a portfolio of 50% stocks and 50% bonds it should yield around 6%. Keep in mind that the S&P 500 index averaged 10% from 1926 to 2018. So, if you withdraw 4% per year that leaves 2% to cover inflation.

    Let’s use the example of a retirement plan balance of $500,000. If we apply the 4% safe withdrawal rate you would receive $20,000 per year. If you have a million dollars you would receive $40,000 per year.

  3. Increase Retirement Plan Contributions. If after looking at your Social Security benefit and income from your retirement plans you don’t think you will have enough income in retirement, then now is the time to increase your contribution. Before you begin let’s look at some calculations you need to do.

    First, you need to estimate how much income you need in retirement. Then you need to figure out what you expect from Social Security and your retirement plans. As an example, you have determined that you need $100,000 per year to live comfortably in retirement. Your expected sources of income are:

  • Social Security for you and your spouse – $40,000 per year
  • Your pension will provide $15,000 per year
  • Your spouse has a 40ik with $750,000 that will produce $30,000 per year
  • Total income will be $85,000 per year

With that you have a shortfall of $15,000 per year. As we learned earlier you may be able to delay Social Security to get a little more. You can also start increasing your contribution to your 401k or other defined contribution plans. This year you can contribute $19,000 plus a catch-up provision of $6,000 since you are over age 50. You may also be able to contribute to an IRA account depending on your adjusted gross income.

For other ideas, please check out my Guide to Getting Started When You are Starting Late.

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Five Rollover Blunders That Could Cost You a Fortune

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One of the most important decisions boomers will make when it comes to their retirement is how to handle that 401(k), pension or other qualified retirement plan when they leave their job for good. Not that you necessarily have to roll that 401(k) immediately. In fact about 40% of boomers don’t take action within the first year of leaving their employer. Eventually you will have to rollover those funds.

One of the main advantages of rolling over your retirement account to an IRA is that it gives you many more investment options than those dozen or so mutual funds that you had in the company 401(k). Along with that opportunity come a set of red flags that you need to be aware of so you don’t end of paying unnecessary taxes and penalties. Here are five of the most common blunders pre-retirees make.

  1. Missing the 60-Day Rollover Deadline – You have a window of 60 days to move your retirement plan to an IRA tax-free. The clock starts ticking as soon as your money leaves your 401(k) account. Don’t let time slip by while you are on vacation or when the check gets lost in the mail. Keep track of the time or have your financial advisor assist you. The easiest way to avoid this potential problem is to request a direct transfer of your assets to the IRA account that you will set up ahead of time.
  2. Naming the Wrong Beneficiary – Sometimes if your finances are complex your attorney or other advisor recommends a specific vesting that the financial institution holding your IRA cannot accommodate. Another problem occurs when spouses get divorced and fail to update their beneficiary designation. The halls of attorneys’ offices are littered with ex-spouses who inherited money unintentionally because their ex forgot to change the beneficiary. Sign a beneficiary designation form when you set up your account and get up to date with your life events i.e. death, divorce, marriage and update your beneficiaries as they occur.
  3. Not Paying Off Loans Before Rolling Over – Any loans outstanding when you roll over your retirement account will be considered a distribution – taxable and subject to penalties. Before rolling your funds your plan administrator will deduct the amount of the loan. The IRS considers the difference a distribution. Pay off your loans before you rollover the funds.
  4. Cashing Out Your Retirement Account – Yes, it can be tempting to spend some of that hard earned retirement money. The problem is you can be subjected to taxes, penalties and loss of the growth that you enjoyed while your money was invested. Any cash you take out to pay off loans or to buy something will be considered a distribution and therefore taxable. If you don’t replace it within that 60-day window discussed in #1 above it will be taxable.
  5. Failing to Consider a Roth IRA Rollover – We love the benefits of tax deferral. We can keep Uncle Sam’s mitts off of our money only for so long. We know that eventually we will have to pay taxes on our retirement money. If you rollover your funds to a Roth IRA you will pay taxes in the year you roll the funds but…future earnings will be tax free. Wouldn’t it be great to get the taxes out of the way up front and not have to worry about paying taxes on those Required Minimum Distributions down the road? Does it make sense for you? Talk to your Financial Advisor and ask for a Roth analysis.

Of course there are more blunders that you need to avoid. These are 5 of the most important that come to mind. You have worked hard to accumulate your retirement nest egg. Don’t blow it by making one of these mistakes. There is no “Oops Button”; some of these blunders can be fixed. It can be costly and time consuming. I recommend that you don’t go it alone. Work with an expert who can keep an eye on things while you are getting ready for your retirement journey. Good luck and congratulations!

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Should I Pay Off Debt Using Money From My IRA?

"Avoid These Costly Retirement Planning Mistakes" Series #1

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So, you have been struggling to save for retirement.  You qualify to have an IRA account and you have been faithfully putting money into it each year. Great job! Life happens, as they say, and you find yourself with a credit card debt that just won’t go away. You figure that you have enough in your IRA to get rid of the debt. Then, you reason, you will have more to put in your IRA since you won’t have to make a credit card payment. Think long and hard before you make that withdrawal.

First, if you withdraw your funds from your IRA before you are 59 ½ you will get hit with a 10% tax penalty (there are a few exceptions). Don’t forget, you still must pay regular taxes on the money as well. If that regular tax puts you in a higher tax bracket that just compounds the problem.

You have a Roth IRA, you say? Yes, the Feds allow you to withdraw those funds without penalty or taxes. Just make sure you are nit withdrawing earnings on those Roth contributions or you will pay a penalty and taxes.

Another often overlooked downside to withdrawing money from an IRA early is that the funds cannot be replaced. That’s right, there is no catch-up provision. Remember you are restricted to a specific amount that you can contribute each year. So even if you withdraw a small amount, you will forego the benefit of compounded interest for those years until retirement. While it may seem like a small amount, it can have a significant impact on your retirement years.

So, what to do instead of withdrawing from your IRA? There are several choices depending on how dire your situation is. First, you are wise to be motivated to eliminate debt as you approach your retirement. The most difficult yet practical way is to pay down as much as you can each month. By this I mean more than your minimum payment. The first step is to know what you spend each month. My Budget Tracker can help you get started. Once you know how much you are spending then you can find where you can cut back on those expenses.

Once you have figured out where you can cut back i.e. dining out, entertainment, buying coffee out, eating lunch out instead of packing a lunch, etc., then you can use those funds to add to your existing credit card payment. You will be surprised at how quickly you can find $50 or $100 extra each month to pay down your debt quicker.

It’s always best to try to manage your debt “organically” i.e. from your current income and expenses, before you consider taking on debt such as with a home equity loan or borrowing against your 401(k).

Good luck! Please let me know in the comments or email me at mark@myrp.me if you have any questions or want to share your own experiences.