Category Archives: Social Security

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Learning from the Mistakes of Others

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How does that old saying go, “Those who cannot remember the past are condemned to repeat it”? I believe it applies to the challenges of living successfully in retirement. What does “successfully” mean? I live by Earl Nightingale’s definition of success which is, “the day to day realization of a worthy goal”.

I think it’s safe to say that retiring on our own terms is a worthy goal. So, what can we learn from history? I recently read a post from the blog Retired and Relaxed. There was an interesting discussion on what we can learn form others’ retirement “mistakes”. Here is a sample of the things “I would have done knowing what I know now”:

  • Stay healthy as I grow old
  • Have started saving and investing sooner
  • Make sure I don’t outlive my savings
  • Know the right time to retire
  • Not worry about medical insurance

These are just a few of the revelations in the blog post. The thing that struck me was that many of these things can be accomplished through education. Of course, a lot of “staying healthy” is out of our control yet there is much we can control by learning more about nutrition and exercise, for example. I agree that learning about savings and investing earlier in life can save a lot of financial heartache later in life.

However, it is never too late to learn. Understanding Medicare and Social Security are two learning opportunities that are timeless. By working with a financial advisor, you can develop a strategy to live within your means and not outlive your money. Again, it’s all about learning.

Checkout my blog post titled, It’s Time to Leave “Someday Isle” and Start Planning Your Retirement Journey for more on the “woulda, shoulda, coulda” mentality. Another of my favorite sayings is, “the best time to plant a tree was 20 years ago. The next best time is right now. We can’t undo past mistakes. We can embrace an attitude of learning and start today where we are and make the best of the time before us. Don’t go it alone. There are people like me ready and willing to help you avoid repeating the past and retire on your own terms.

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What Does the DOL Fiduciary Rule Mean for Retirement Planning?

What You Need to Know as a Retirement Investor

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You have probably seen, heard or read about something called the DOL Fiduciary Standard in recent months. You might have thought, “What does that have to do with the price of tea in China?” or, “What is the DOL and/or what is a fiduciary?” All logical responses because unless you are in the financial planning or investment business you probably haven’t given it a second thought. Here is a brief synopsis of how it will affect you.

First, the DOL is the Department of Labor. They are responsible for enforcing employment law in our country and, in essence, looking after the rights and welfare of employees. A fiduciary is someone who is obligated to act in your best interests, such as a financial advisor. You might ask, “Well, aren’t financial advisors supposed to act in the best interests of their clients?” The answer is, “yes”. However, prior to the passing of the DOL rule financial advisors were only obligated to recommend solutions that were “suitable”. In other words, the product had to be a fit with your investment time horizon, experience and risk tolerance.

That left the notion of “your best interest” up for interpretation. From the government’s perspective that vagueness led to a few “bad apples” taking advantage of retirement investors by putting their hard-earned retirement savings into investments vehicles that were overly expensive, among other things. These overpriced investments may have been “suitable” from the standpoint of fitting the consumer’s risk tolerance and investment time horizon but they were not in the “best interest of the client from a fiduciary perspective.

The outrageous fees diminished the yield on the retirement funds and lessened the chance the investor would reach their retirement goal any time soon. For example, an investment that boasted a yield of 7% after paying 4% in annual fees the yield is 3%. That’s a big “haircut”!

Financial Advisors who operate on a “fee basis” don’t charge commissions. They will typically invest your money and charge a smaller annual “management fee”. These fees typically range from .75% to 2.0%. By pricing the investment in this manner it effectively puts the advisor and the client “on the same side of the table” since the advisor gets paid for an increase in the portfolio and also suffers, just like the client, when the investment value decreases.

One-time commissions can be as high as 8%. All of which raises the question, “If an advisor has two options, one that pays him/her 8% or one that pays 1-2% per year, which one is in the best interest of the client and which is in the best interest of the financial advisor?”

The goal of the DOL is to eliminate that conflict of interest and require that a financial advisor act in a fiduciary capacity when dealing with a client’s retirement assets. This means that the fee-based option is almost always going to be in the best interest of the client. If the advisor wants to recommend a commission-based product, the client and the advisor have to sign a “BIC” agreement (Best Interest Contract). This is a contract that states that the client acknowledges that they are buying a product that has a commission. All fees are disclosed and it lists steps the advisor will take to mitigate any potential conflicts of interest.

While the DOL has the best interest of the public in mind with this regulation, it does “punish” those advisors who are already operating in a transparent manner and are, in essence, acting in an otherwise “fiduciary” capacity. The benefit for the consumer is that it will force more of the “bad apples” out of the industry and force the financial product manufacturers to develop products that are fairly priced and easier to understand.

As with any major financial decision, do your homework. Check out the financial advisor that you are thinking of working with. Ask them if they offer fee-based options. Look for advisors who have the CFP® (CERTIFIED FINANCIAL PLANNER) designation. Always make sure the advisor offers more than one option to your financial need.

 

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4 Keys to Financing Your Retirement if You Plan to Work Longer Than Expected

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A recent survey by Charles Schwab found that 95% of baby boomers say they won’t be willing to spend less in retirement. According to the Schwab survey people are coming to the realization that they want to have a good lifestyle in retirement even if it means they have to save more and work longer. Some of the frugality of the post 2008 meltdown appears to be wearing off. Some other survey figures show that 47% of workers age 65 and over are prepared to work in retirement.

Against the backdrop of those survey results it makes sense to look at some ways that boomers can maximize their income when they plan to work longer than perhaps they originally planned.

  1. Take Advantage of Your Salary Benefits. As long as you are making a salary you can continue to contribute to a retirement plan i.e. 401(k) or IRA. It’s a good idea to max out your contributions if possible. That way your accounts can continue to grow and take advantage of time and compounding before you start drawing on them for income once you retire. On the debt side you can also start using your salary to pay down debt before retirement. This will help lower your expenses once you retire.
  2. Higher Social Security benefits. As a general rule waiting to take Social Security benefits makes sense. Applying for Social Security benefits at normal retirement age produces a 25% higher benefit than applying for early benefits at age 62. If you wait until age 70 you will more than double the benefit compared to taking benefits at age 62. Keep in mind that Social Security is based on your highest 35 years of earnings. So if you work longer at your peak earnings you can replace some of those zero earning years early in your working life. You can get more details on Social Security in my FREE Guide to Social Security.
  3. Higher pension benefits. If you are fortunate to have a pension then your ongoing employment will likely boost your retirement payout since most pension payout formulas account for earnings and years of service. If your company has a 401(k) with a match you can continue to earn that match the longer you work. Again, put time and the compounding effect to work for you.
  4. Save on health insurance premiums. Always a big concern. Prior to Obamacare delaying retirement to ensure continued company-paid health care was an important consideration. Even with Obamacare affording pre-65 healthcare coverage can still be a concern. The chances are your company-provided plan is less expensive than an Obamacare plan.

Not everyone will be able to work longer to help finance retirement. The number one reason people are forced to retire early is health issues. Still, many boomers will decide to work in retirement by choice as well as by necessity. In either case it makes sense to take advantage of the benefits of earning a salary pre and post retirement. Plan well. Live better and enjoy retirement on your terms by taking advantage of the time you have now to finance it.


Time Out! How do you feel about working longer to finance your retirement? You can leave a comment here.

 

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5 Myths About Social Security

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I speak frequently about Social Security. As many of the roughly 76 million Boomers approach retirement age the interest in this important part of the retirement income picture increases. Naturally many of the questions I get are the result of misinformation and rumor. Here are 5 of the most common myths that I hear.

  1. Social security won’t be around when I retire – In my opinion it will be; it just may look different than it does today. It will need a makeover in the next few decades in order to sustain payments to retirees in the future so it may just not look like it does today. The reason? The next generation will see the largest drop in worker-to-beneficiary ratios in history. To compound the situation we are living longer so the benefits have to last longer; things cost more and the birth rate is declining. When Social Security was established there were 15 workers for every 1 person receiving benefits. Today its closer to 3 workers for every worker and it will probably decrease further in the next few decades. The bottom line is this; plan on receiving benefits just be prepared for the rules to change.
  2. If I work in retirement I will lose my Social Security benefits. – The short answer is, “no, you won’t lose your benefits. Depending on how much you earn your benefits may be temporarily reduced. Over 30% of the workforce today is between the ages of 65 and 69 so the “new retirement” includes working to some degree for many Boomers either by choice or necessity.

    So just how does Social Security work when you work in their traditional retirement years? If you work after reaching age 62 Social Security will deduct $1 for every $2 that you earn over the 2013 limit of $15,120. In the year that you reach your “Full Retirement Age” (FRA) the rules change. You will have a deduction of $1 for every $3 that you earn over $40,080. Then…when you actually reach your FRA and thereafter there is no deduction.

    So, what happens to the money Social Security withheld? You will get it back. For every year that you work they will recalculate you benefit and pay you a hire benefit for life once you actually stop working.

  3. Once I die, my spouse won’t be able to receive any of my benefits. Actually the surviving spouse will receive 100% of the Social Security the deceased spouse was receiving. Spousal benefits work differently. In the case of spousal benefits, the lower wage earner or no wage earner can receive spousal benefits once he/she reaches their Full Retirement Age.
  4. It’s always better to take Social Security benefits sooner rather than later. There is no one-size-fits-all answer. If you absolutely need the income right away then many times it does make sense to start your benefit at age 62. Keep in mind, once you start then your benefits is set for life (with the exception of cost of living adjustments). There are strategies to increase your benefit. They are explained in the FREE Guide to Social Security. Social Security is designed to have you delay taking benefits. The longer you wait the more time the fund has to grow. Generally speaking the longer you wait to receive benefits the more you will receive; again, it’s a lifetime decision so plan carefully.
  5. I should take Social Security as soon as possible and invest it. I am often asked if this strategy makes sense. People often make the decision on when to take benefits based on what will create the largest lifetime income. I can provide you with a projection of your lifetime benefits when you use the Social Security Estimate Form and return it to me.

    Anytime you make a decision to invest in the market you are making certain assumptions about rates of return. If your assumptions pan out it could make sense. According to Andy Landis, author of “Social Security, The Inside Story”, you are better off waiting until your age 70 when you will receive the highest benefit and keep putting money in your 401(k) or another tax deferred vehicle versus investing your age 62 benefit because the odds are against you strategy working out as planned.

Social Security is just one leg of your retirement 3-legged stool (or 4-legged if you have a pension).The other legs are your taxable retirement savings and your retirement accounts like your 401(k). It’s important to be informed about your options because once you decide, you are stuck with your decision for life. Be informed, work with an advisor and choose well!

Question: What have you heard about Social Security that causes you concern? You can leave your comments here.

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10 Reasons to be Financially Thankful

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Before you pitch that tent in the Black Friday shopping line and start updating your Amazon.com Wish list, here are some reasons you should be grateful this Thanksgiving for the control that you have over your personal finances.

  1. It pays to be 50. Yes, there are some benefits to reaching this milestone. If you are 50 this year you get a bonus from Uncle Sam when it comes to your retirement savings. This year you can contribute a total of $29,500 ($6,500 to your IRA and $23,000 to your 401(k))!

     

  2. Technology Can Make it Painless. If using paper and pen and a HP 12C calculator makes your eyes glaze over, there are a number of online resources that can make the task of setting up and maintaining a budget actually bearable if not enjoyable.

     

  3. There’s Help Out There. You don’t have to go it alone. One of the best things you can do is work with a financial planner. Don’t confuse an investment advisor with a planner. They are not the same. You need both but start with a planner. Find someone with a CFP® after their name. Having achieved this designation myself I can attest to the depth and breadth of knowledge you have to have to earn this designation. Click here to find a CFP® in your area.

     

  4. You Can Get Free Money. If your company offers a match with their 401(k) all you have to do is contribute up to the match percentage to qualify. Don’t leave money on the table. Get the match!

     

  5. Social Security Will Be There. Yes, count me among the optimists. You should plan on social security when you do your retirement income planning. Will it look like it does today when you retire? Probably not. You may have to wait longer to receive benefits but I believe it will be there for you and me. Check out what your benefit will be here.

     

  6. Medicare Will Be There Too. Yes, just like Social Security it will get a makeover but this all important benefit will help you and me afford healthcare in retirement so plan on it. Learn more with your copy of Guide to Medicare. Click here for more information.

     

  7. You Can Work As Long As You Want. People talk about the “New Retirement” that includes working well into the traditional retirement years either by choice or necessity. You can still collect Social Security when you work and you will get the potentially reduced benefit back. Check out all you need to know about working in retirement and Social Security here.

     

  8. You’re In Good Company. There were about $76 million births between 1946 and 1964 so there are a lot of us around now, many already retired. What does that mean for you? The law of supply and demand means that technology, the housing industry, financial services and the healthcare industry, to mention a few, will have to evolve to make our lives easier since there are so many of us. Retirement living communities will improve; healthcare will have to improve to respond to the increasing demands on the system. History demonstrates the power in numbers when it comes to the economy. Like it or not, the Affordable Care Act wouldn’t have been passed 20 years ago.

     

  9. You Have New Ways to Catch Up. Much has been written about Baby Boomers not doing a very good job at saving for retirement. In response the financial services industry continues to innovate by creating new products such as annuities with income adjustment features or step up features that guarantee a minimum return to help Boomers earn a respectable retirement income. They’re not for everyone but the point is that even the biggest procrastinators can get in the game and celebrate a financial victory of some degree.

     

  10. You Will Live Longer Than Your Parents Did. Longevity can be viewed as a blessing or a curse. Of course we want to be healthy in our “Golden Years”. Living longer also means we have to have more money saved to live off of in retirement. It also means we can live to see our legacy in action whether it’s helping our kids, a charity or just enjoying living longer. Today we see many people retiring form one career and starting another. My grandfather couldn’t do that and didn’t want to do that. He retired at 65 and died a few years later.

We have a lot to be thankful for in this information-overload society that we live in that tries very hard to make us think otherwise. During this season of overspending let’s pause to give thanks for the control we have over our finances and the resources we have to improve our financial lives. Happy Thanksgiving to you!