In this issue:
5 Retirement Blunders To Avoid
Relaxing in the sun, having time for new hobbies and old friends, a bit of travel—everybody dreams of a comfortable retirement. What far too few of us do is plan for it, and many stumble into common blunders that can make their retirement years stressful, or even force them to keep working longer than they wanted to. Below, we’ll discuss five errors many investors make in their planning—and how to avoid them.
Underestimating Health Care Costs
There’s nothing so precious as good health in old age—quite literally, these days. A recent study by Fidelity found that a couple retiring in 2019 could expect to spend $285,000 on health care costs in retirement.
While enrolling in Medicare as soon as you’re eligible can certainly help cover hospital care and other expensive needs, many retirees are surprised by the wide array of health care costs Medicare doesn’t cover, including most dental care, hearing aids or glasses and contacts. Moreover, Medicare itself isn’t free: Monthly Medicare Part B premiums can be as high as $460.50 for high-income earners, and many retirees purchase additional Medicare Advantage or Medigap plans.
Most health care cost calculators also don’t include long-term care costs, which can run between $4,000 to $8,000 a month. Purchasing long-term care insurance can help—click here to learn more about how it works.
Not Changing Your Investment Approach
Early on in one’s career, taking on a bit more riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. in order to achieve superior long-term returns can make sense. The closer you get to retirement, however, defending the nest egg you’ve built takes on greater importance. But too many investors use the set-it-and-forget-it methodology when it comes to investing, sticking with portfolio allocations that may have suited their risk toleranceThe amount of loss an investor is willing to absorb in their investment portfolio. years ago, but which may now put their retirement plans in jeopardy in the event of a bear marketA period in which stock prices decline significantly from recent highs and remain below previous high marks for weeks or months. Generally, a decline of at least 20% in stock prices is considered the threshold marking the start of a bear market. or crash (such as the sharp decline in the U.S. stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market as the COVID-19 pandemic spread through Europe and the U.S. this March).
While we’re no fans of the one-size-fits-all approach used by target date funds, we do think it’s crucial to review your portfolio with a trusted adviser as you near retirement, both to make sure you’re on track to meet your goals and that you’re invested in funds that suit your needs once you’ve retired.
Cracking the Piggy Bank Too Early
After saving for decades, carefully socking away money in tax-deferred accounts, finally retiring and being able to withdraw those funds without penalty can be a little dizzying.
Many are tempted to use a lump sum from their retirement savings to fulfill long-deferred desires once retirement arrives. But don’t book that world cruise or buy that boat just yet.
Dipping deeply into your savings early can cause problems down the road. Many individuals underestimate how long they’ll need their retirement savings to last. The average 65-year-old in the U.S. can expect to live until their mid-80s—for healthy, active individuals, often more. That means that you may need 20 to 30 years’ worth of income, and that your savings will need to continue to grow while you’re in retirement. Coming up with a spending plan for your retirement income that won’t leave you short should be a key part of your strategy.
Not Having a Social Security Strategy
For our parents or grandparents, retirement planning might have been as simple as waiting until their 65th birthday and signing up for Social Security—these days, there’s a lot more to consider. For one thing, 65 is no longer the age at which you can expect to receive your full Social Security payment amount. Instead, most retirees have to wait until they’re 66 or 67.
If you opt to begin taking Social Security before then, you’ll be giving yourself a pay cut. Early filers (those who sign up for social security after age 62 but before their full retirement age) have their benefits reduced by 25% a month (30% if they’re drawing spousal benefits).
In contrast, if you can afford to wait to begin drawing on Social Security, you’ll be entitled to delayed retirement credits. Holding off until age 70 will garner the maximum credit. The difference can mean thousands of dollars of extra income each year.
Married couples in particular may be in a position to strategically maximize their benefits, for example by having the spouse with higher lifetime earnings delay taking Social Security. Spousal benefits can be complex—for more information on how to maximize your Social Security income in retirement, check out our recent three-part podcast series covering a wide range of the program’s aspects along with common questions and strategies.
Retiring With Debt
According to a recent survey by BankersLife, more than half of Baby Boomers say they intend to enter retirement debt-free, but only one-quarter of retired Boomers actually are debt-free. Eight in 10 middle-income Boomers have some debt, with nearly three in 10 devoting more than 40% of their monthly income to debt and a quarter have a mortgage with more than 20 years remaining on it.
Having to service debt while in retirement can substantially increase the chances you’ll run out of money. And tapping retirement accounts to pay off big debts like a mortgage may not be the best solution: Taking lump-sum withdrawals from retirement funds could push you into a higher tax bracket and increase your Medicare premiums.
Of course, the best tactic to use to avoid these and other blunders is simple: Make sure you have a solid plan for your retirement. Going through your finances with a professional will help you maximize the benefits available to you, protect your assets and put you on track to retire when you want, how you want—and enjoy it. If you have questions about retiring or creating a financial plan, please contact us. We’re happy to help.
New RMDA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). Relief From the IRS
There’s good news this week for retirees left out in the cold by one of the Congressional coronavirus relief package’s major provisions: Now all are able to roll over their required minimum distributionsA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). (RMDs) in 2020, reducing their income taxes for the year.
Congress had included the opportunity for those of retirement age to roll over their RMDs when it initially passed the bill, also known as the CARES Act, in late March. However, under standard IRS rules, individuals are only eligible to roll funds over once every 12 months, and they must do it within 60 days of receiving the funds. This meant that many people who had taken RMDs in January weren’t able to take advantage of the provision. Those who take their RMDs in several installments could roll over only one.
The IRS announced this week that those restrictions around rolloversThe process of transferring funds from one retirement account to another, typically without incurring a tax. have been relaxed, and anybody who took an RMD earlier this year now has until August 31 to put the money back into the account and reduce their tax burden. Moreover, the new IRS rules also allow beneficiaries of an inherited IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. account to roll over funds as well for 2020—inherited accounts had previously been ineligible for rollovers of any kind.
We’ll have more to come on these and other recent tax changes due to the pandemic, so stay tuned. But in the meantime, be sure to contact your accountant or your portfolio team to learn if this new RMD ruling can benefit you.
Podcast: Is This Normal? StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market Performance During Recessions
You couldn’t miss it, but it’s official—we’re in a recession. The National Bureau of Economic Research, the trusted authority in making these calls, announced on June 8 that the U.S. entered a recession in the first quarter due to pandemic-related economic slumps. Yet, the stock market is up nearly 40% from its March 23 low and the NASDAQ Composite index has touched record territory.
In this episode of The Adviser You Can Talk To Podcast, Director of Research Jeff DeMaso and Portfolio Manager Charlie Toole analyze the history of dislocations between the market and the economy, and why using recessions to “time” the market is usually a losing strategy.
In this engaging conversation, Jeff and Charlie discuss:
- Stocks’ returns during the past 11 recessions
- Why the market is not the economy
- Media hype that bored day traders are juicing stock prices via smartphone
- The impact of government safety nets on Wall Street’s thinking
- RisksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. at home and abroad that threaten recent gains
- … and much more!
The logic of an economy in dire straits with a surging stock market is tough to square—and Jeff and Charlie have you covered. Click here to listen now!
Adviser Investments’ Market Takeaways
Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’re providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us.
Recently, EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin provided a look at how companies are raising cash to help them get through the pandemic, while Vice President Steve Johnson had comments on the V-shaped recovery debate.