Retirement Mistakes: Ranked

This episode of MPB's Money Talks originally aired July 10, 2018 and will be available online at http://www.mpbonline.org/moneytalks/

I have a few usual comments to make before we dive into this. I have said this before and will say it again, 90% of the personal finance information that you find on the internet is wrong or harmful, the other 10% was not tailored for you. I hope this blog falls in the 10% which is fine advice but not personalized to you. You can read excellent advice on the internet, but if you don't apply it well to your situation, it won't be good advice for you.

This article is originally from Kiplinger, which has its fair share personal finance advice in the 90% category. This article, which we used as inspiration on the radio, had some useful tips. The article is Fourteen Retirement Mistakes You Will Regret Forever. While the title is pretty forbidding, the actual mistakes can fall into a few broad categories:

• Failure to plan.
• Calculation mistakes.
• Getting scammed or spending too much.

On the radio, we tried to talk about what the most important things to avoid were, so I will give a rough ranking of:

1. Important for everyone!
2. Varies with your situation.
3. Doesn't matter so much.

Lets have a look at what Kiplinger thinks you will regret forever...

Relocating on a Whim 

The lure of warmer climates has long been the siren call of many who are approaching retirement. So you're cooking up a plan to head south to Florida or one of the many other great places to retire if you hate the cold.  

Our advice: Test the waters before you make a permanent move.

I would rank this a 1. The important thing here is that you need to plan ahead for this sort of thing. Moving is expensive and hard to reverse (well, expensive at least). People often think about moving or downsizing when they retire but the numbers may not work out unless the savings are significant or the change in atmosphere is perfect. The recommendation here to test the waters, say, by taking an extended vacation or checking out a location in more than one season makes a lot of sense. Of course, check the numbers to make sure they work too.

Falling for Too-Good-To-Be-True Offers    

1! This is important! Nobody should fall for scams! The article gives some general pointers about reporting scams as well.

If you fall victim to a scam, it is important that you report it. It may be very embarrassing, but the information that you possess can save others from falling victim and possibly even lead to the capture of the perpetrators.

Planning to Work Indefinitely 

Many baby boomers like me have every intention of staying on the job beyond age 65, either because we want to, we have to, or we desire to maximize our Social Security checks. But that plan could backfire. 

Consider this: 53% of workers expect to work beyond age 65 to make ends meet, according to the Transamerica Center for Retirement Studies. Yet, you can't count on being able to bring in a paycheck if you need it. While more than half of today's workers plan to continue working in retirement, just 1 in 5 Americans age 65 and over are actually employed, according to U.S. Department of Labor statistics.

This one may seem surprising. After all, working and making money should be a good thing in retirement, no? I give this a 2, it will depend on your situation more than others. The important consideration here is that you have a good plan. They want to emphasize that if you plan on working forever, you are running the risk of being fired or no longer able to work for any number of reasons (including because you have to take care of someone else!). This can be mitigated, of course. If you do plan on working forever, just have a plan in place if you cannot continue working.

Putting Off Saving for Retirement

This is the most important thing. Number 1! Don't forget to save for retirement. This is the number one problem. Of course the amount you need to save varies with your income, but it is never too early to start. If you feel you have waited too long, just start.

Borrowing From Your 401(k) 

Taking a loan from your 401(k) retirement-savings account can be tempting. After all, it's your money. As long as your plan sponsor permits borrowing, you'll usually have five years to pay it back with interest.

Before borrowing from a 401(k), explore other loan options. College tuition, for instance, can be covered with student loans and PLUS loans for parents. Major home repairs can be financed with a home equity line of credit.

I'd rate this a 2. It comes down to the calculation. Firstly, only borrow from your 401(k) if you really need to. But if you really need to, it might be one of your best options. The rates are generally lower than credit card, medical or personal loans, and the interest gets paid back to you. Its not exactly the worst thing ever. They are often limited to small amounts so you can't wreck a financial plan doing this. Borrowing from is vastly cheaper than withdrawing from a 401(k) when you consider the cost of taxes.

I wouldn't totally disregard this, but do check the numbers to make sure it makes sense. Also, the article does note that there are other borrowing options which may be more appropriate depending on what you need the money for.

Decluttering to the Extreme 

My parents are in their mid-80s and have been living in the same house for decades. In recent years they have started getting rid of all the bric-a-brac they've accumulated. Their goal is either to sell and move into a retirement community or, at the least, make it easier for my brother and I down the road when we inherit the home. 

Be careful about what you throw out in haste. Sentimental value aside, certain professionals including doctors, dentists, lawyers and accountants can be required by law to retain records for years after retirement. As for tax records, the IRS generally has three years to initiate an audit, but you might want to hold on to certain records including your actual returns indefinitely.

I wouldn't worry to much about this. This is a 3 - low priority. Yes, I agree that you shouldn't be throwing away things that you are legally required to hang on to, but make a digital copy of important records and dump the rest is not a bad policy. They note that an important reason to declutter is to make things easier on your children when you pass. Not only will your children not want most of your stuff (probably) they might also have no clue where or what things are! Get rid of what you don't need. It can ease things a lot down the road.

Putting Your Kids First 

Sure, you want your children to have the best — best education, best wedding, best everything. And if you can afford it, by all means open your wallet. But footing the bill for private tuition and lavish nuptials at the expense of your own retirement savings could come back to haunt all of you.   

This is important! Number 1 priority! If you thought that raising a child was expensive, wait until you are still supporting your adult children. Spending a large lump sum on your children college or wedding or home or car or life can put a big dent in your accounts and continuing to support them after they have grown to some sort of independence can drain your paycheck of any possible savings.  This is a classic "spending too much" mistake.

Buying into a Time-Share

Time-shares are scammy. See "too good to be true" above. These can be expensive mistakes. While there are legitimate time shares that work well for peoples lifestyles, there are more nightmare stories than you can count.

Avoiding the Stock Market 

"Conventional wisdom may indicate the stock market is 'risky' and therefore should be avoided if your goal is to keep your money safe," says Elizabeth Muldowney, a financial adviser with Savant Capital Management in Rockford, Ill. "However, this comes at the expense of low returns and, in fact, you have not eliminated your risk by avoiding the stock market, but rather shifted your risk to the possibility of your money not keeping up with inflation."

This is important! 1! The above paragraph sums it up well. People often fear the risk of the stock market but instead take on the real long term risk of not being able to meet their financial goals.

Ignoring Long-Term Care 

When the day arrives that you or a loved one does require long-term care, be prepared for sticker shock. A 2017 Genworth survey found that the national median cost of assisted living is $45,000 a year; a private room in a nursing home, $97,455 a year. Even a sizable retirement nest egg can be wiped out in a hurry. And remember, Medicare doesn't cover most of the costs associated with long-term care. 

There are options for funding long-term care, but they're pricey. If you can afford the high premiums, consider long-term care insurance, which covers some but not necessarily all nursing home costs. A typical policy for a 55-year-old male might start at $2,000 a year, according to Genworth. The annual premium jumps to $3,000 if the man waits until 65 to buy a policy. You can also look into purchasing a qualified longevity annuity contract, known as a QLAC. In exchange for investing a hefty lump sum up front when you're younger, the QLAC will pay out a steady stream of income for the rest of your life once you hit a certain age, typically 85.

This is a number 2 priority and it really depends on your situation. Some people will fall onto the support of medicaid when they need it and some people will be self insured. Think of long-term care as consuming your last dollars, and how many it will consume. Long term care insurance protects the assets you do have from being spent in your final days. If you have plenty to cover the expense anyway, you may not need the insurance. If you don't have much at all, you may lean on medicaid for your last years. In between those? Long term care can protect your assets and provide for your comfort.

Neglecting Estate Planning 

Estate planning isn't just for the wealthy. Even if your assets are modest — perhaps just a car, a home and a bank account — you want to have a valid will to specify who gets what and who will be in charge of dispersing your money and possessions (a.k.a. the executor). 

Estate planning is a HUGE topic. It is also VERY important for pretty much everyone. This is a number 1 priority. Estate planning is more than just instructions. It is untangling complex ownership structures, relationships and assets. Don't leave this task to someone else when you die, make it clear what you want to happen before then.

Borrowing Against Your Home 

Rather than borrow against the value of your home, explore ways to lower your housing costs. Start with downsizing. Sell your current home, buy a smaller place in the same area, and put your profits toward living expenses. For the ultimate in downsizing, consider a tiny home for retirement — seriously. Tiny homes are inexpensive, upkeep is easy, and utility bills are low. If you're willing to relocate, sell and move to a cheaper city that's well-suited for retirees. Or, stay put and find a roommate. The rental income will supplement your Social Security and savings. 

If you must tap your home equity, tread carefully. If you still have a mortgage, look into a cashout refi. Just try to keep the length of the refinanced mortgage to a minimum to avoid making repayments deep into retirement. Otherwise, investigate a home equity loan or home equity line of credit (HELOC). However, be forewarned that under the new tax law you won't be able to deduct the interest on these loans unless the money is used to substantially improve your home, such as replacing the roof. In the past the interest could be deducted even if you spent the money on, say, a vacation or a new car. Yet another option for retirees is a reverse mortgage. You'll receive a lump sum of money or access to a line of credit that in most cases doesn't need to be repaid until you or your heirs sell the home.

This is tricky and comes down to calculations. If you need to borrow money, it is a matter of figuring out the best way to get the money. If you need to reduce your living expenses, raising your borrowing is probably the wrong way to go. The article mentions downsizing and even tiny homes as part of the solution. If you have been paying attention, I have already cautioned that might not be the best course of action. You need to look at those numbers carefully. If you move to a tiny nome, you better be prepared for living in a tiny home - that is a major lifestyle change for most people. Beware of reverse mortgages too.

Failing to Plan How You'll Fill Your Free Time

This shouldn't be too high of a priority, but I guess it was fun for the authors to throw in. Of course you need to figure out what to do in retirement, but you won't regret it forever if you just have to make it up as you go along.

 

Importance of your Credit with the National Foundation for Credit Counseling

This episode of MPB's Money Talks will be available online at http://www.mpbonline.org/moneytalks/

Today on the radio our guest was Bruce McClary, VP of communications from the National Foundation for Credit Counseling. The NFCC covers a lot of ground but what we focused on was the services offered by credit counselors nationwide. Most people probably think of Credit Counselors only when they are in trouble with debt, or even in court ordered bankruptcy, but they also serve a great role keeping people out of trouble in the first place. Credit counselors offer educational resources to help people budget, guide credit cessions and prepare for homeownership.

As with any financial expert, I wanted to know how credit counselors got paid. The NFCC itself is a non-profit and gets revenue from banks and lenders. They also get grants and local or regional funding for specific missions. For instance, if a state or regional institution wants to promote homeownership, they may give NFCC money with the condition that it be used to fund education outreach on the topic of homeownership in a certain area or demographic. Banks and lenders want their customers to be responsible with money, and also want to introduce more people to their services. Supporting the NFCC gives financial institutions a fairly good way to make sure they have a well prepared customer base.

Beyond the non-profit grants and institutional sources of funding, credit counselors make money from some paid services, including debt counseling for those in bankruptcy.

Here we need the usual disclosure - never take on more debt than you can handle. A financial advisor or credit counselor can help you determine what you can afford and show you what your financial life will look like when you take on debt. If you use a credit card, only spend what you can afford to pay off in full every month.

We had some excellent callers - people always want to know more about their credit score! Importantly, your credit score determines the price at which you can borrow money. It can even be used in other situations like rental applications and insurance rates!

Our first caller was aiming for a credit score of 800! Keep in mind that 850 is the highest FICO score, and last week, a mortgage lender told us that anything over 750 was golden, and getting higher would not likely make a big difference. But our caller wanted the best! She had paid off all of her cards and knew to keep cards open, it appeared that the main thing she could do was wait. Bruce gave some breakpoints where you can expect changes in how lenders view you:

• 300-500 you are rock bottom of the subprime. anything you are offered will be with a sky high interest rate. you probably won't even qualify for a mortgage.
• 500-600 is subprime territory. mortgages here can still be in the double digits (even today, when a prime mortgage can be had in the 4% range)
• (note that you may be able to get an FHA mortgage at 580)
• 600-700 is getting into prime lending for unsecured credit. you may be able to get a mortgage with some higher fees and interest.
• at 750 you are in the best of the best range for mortgage rates, and likely most other lender rates as well.

A caller asked about the statute of limitations on an old debt that he cannot pay. It is different for different states so check with a local legal services clinic. Your state Legal Bar may have more information as well. Bruce emphasized that you should not run from this problem or try to hide from a debt collector. He advised speaking with a counselor and potentially negotiating down an old debt.

Bruce encouraged people to monitor their own credit. You can get a copy of your credit report free once every 12 months from each of the major credit bureaus. The there bureaus are Equifax, Experian and Transunion. Annual Credit Report (dot) com is the website to get your credit report. You can do this online, or fill out a paper request and mail it in. Monitoring your credit is important to catch mistakes, and watch for fraud! If you spot a mistake, the earlier you catch it is better. We've written a lot more about credit here. We encourage people to monitor their credit and are happy to help you learn more about that.

A few points that came up about choosing a credit card were very useful. For your first card, do research! Sites like NerdWallet can help you narrow down cards that are available for your credit score range. Sticking with something simple, with just a cash back reward and nothing too fancy may make sense for your first card. Always look at the fees that are in the fine print, because there should be not reason that you have to pay regular fees on a card, unless you opt for one with an annual fee to get the benefits you want. A good tip that Bruce brought up was to check other sites for customer reviews, and even the CFPB complaint database (while it is still up!).

We could have talked for hours more. The important thing to remember is that if you have financial questions, there are great resources out there. The trouble is just finding trustworthy resources! Before you just rely on what you heard on the street, check with a professional financial advisor or the NFCC to get reliable information on your financial questions. Remember, if you are just looking at general advice on the internet (like this blog!) it is NOT tailored to your situation and may not make sense (or dollars!) for you.

This episode of MPB's Money Talks will be available online at http://www.mpbonline.org/moneytalks/

2018: Year of the Roth IRA

I've declared 2018 the year of the Roth IRA. All Roth all the time. If you aren't contributing to a Roth IRA in some way, you might be missing out in a big way!

What is a Roth IRA?

As long time readers know, I am a Roth IRA evangelist. Even in my fervor, I do recognize that the Roth IRA might not always be the best idea for everyone. I often settle for it being the best idea for most people. However, in the year of our lord 2018, the Roth IRA is an even better deal for more people than it has been before.

To understand this, lets look at how a Roth IRA works compared to other investment accounts.

A Roth IRA is a tax free account. While you pay taxes on your income, once you put money into the Roth, it grows tax free and can be withdrawn (subject to a few rules) completely tax free. This is a really good deal for investors who hope to grow their accounts massively over a long period of time.

Another type of account is tax deferred, such as a Traditional IRA or many 401(k) style accounts. With accounts like this, you get a tax break just for putting money in, the account grows tax free, but you pay income tax on the withdrawals. These are great if you are in a high tax bracket now, as you get the tax break immediately, and defer your tax burden into the future.

The last type of account is what I call a Taxable account. There are no special tax rules around it. You can put as much money in and take as much money out as you like. The only taxes you pay are on the growth of the investments that you make. There are some tax advantages here as investment gains typically have favorable tax rates compared to income, but there are no breaks or tax reductions with this type of account.

Why Now?

Roth IRA deposits effectively come from your income. You pay taxes on your income. Once you have money in the Roth IRA, you can invest it however you like, generally in some combination of stocks, bonds or cash.

The idea with an account like this is to let it grow for a long time so that you can have money to support yourself in retirement. If you put in $1,000 and invested it such that it grew at 6% for 40 years, you would have nearly $10,000. If you set said $1,000 each year and earned an average 6% growth, you would have about $80,000 at the end of only 30 years! The compounding of higher growth rates is real.

In general, you pay a little tax on a little money, and a lot of tax on a lot of money. Also, the more money you pay tax on, the higher the rate. Putting all of this together, you can see the that the Roth IRA is very beneficial if you expect 1) your account to grow and 2) you might be in a similar or higher tax rate later. This is why I generally recommend a Roth IRA for young folks and people who have a long time to let their money grow.

Back to your burning question, why now? Well, thanks to the modest tax cut that everyone is receiving, everyone is suddenly in a lower tax bracket. Additionally, since the tax cut is only temporary, we KNOW that we will be in a higher tax bracket later (for the same income level)! So, while we are in this lower tax rate world for the next year (or so? unclear) it is time to take advantage of the Roth IRA!

How can I contribute?

There are three ways that you can contribute to a Roth IRA. Each one makes sense for different people.

If you have earned income (if you are working) then you can make regular contributions to a Roth IRA. You are allowed to contribute up to $5,500 each calendar year (If you didn't earn $5,500 then you can contribute up to your total earnings). This will apply to most people who are working and not earning more than the income limits. The income limits for 2018 are $120,000 if you file taxes as a single person and $189,000 if you file taxes jointly.

So what do you do if you are working but making more than those income limits? There is a trick. The trick is called a backdoor Roth IRA. You make a non-deductible contribution of up to $5,500 to a regular IRA, then convert it over to your Roth IRA. This is not, strictly speaking, tax advice, but this trick exists in a vaguely grey area. This follows all of the rules, but also looks like you are just trying to get around the income limits. Which, you are. Talk with your tax advisor about this before pulling the trigger.

What if you are not working anymore? Can you still contribute? Actually, yes! There is one more way to contribute! If you have tax deferred accounts, you can convert them into Roth accounts! This makes sense if you have built up a large 401(k) or personal IRA and are near retirement. Maybe you are in a lull between your last big paycheck and your first little social security check and you technically have no income. This is an ideal time for you to convert some of your old tax deferred account into a Roth account. A conversion is simply taking money out of one account and putting it in the other, all in one stroke of a pen (or click of a button, if you are using the Internet). Now remember from above, if you take money out of a tax deferred account, you will owe income taxes. You must take that into account with this strategy. You don't want to convert a large chunk of tax deferred money into a Roth if you are in a high tax bracket already - that would maximize your taxes! You want to convert when you are in a low tax bracket. Take advantage of a temporarily lower tax bracket (like, say, the ones this year!) and shift money from an account that is all tax, to one that is NO tax. Ideally, this is done when you have a large tax deferred account and are working with a low tax bracket for a year or so. Pay lower taxes now and never pay taxes again!

So how do I do this?

If you made it through that last paragraph and you are still paying attention, congratulations! I hope that you think everything I said is really great and you are totally on board with my thinking. If not, you should really stop reading and do something else with your time. If you are on board, lets get down to the details!

First you are going to need to open a Roth IRA. You can open a Roth IRA at pretty much any financial institution, but since the benefit is really maximized with good growth from stock investments, look for a discount broker or work with an investment advisor who can help you with the process. We use TD Ameritrade and I also like Charles Schwab for retail investors. Robo-Advisors like Wealthfront and Betterment also have decent offerings. Click around on things that say "open an account!" and that should lead you down the right path.

Second - you will need a way to fund that new account, so have your bank account information handy. You can add money as a lump sum all at once or set up a regular transfer from your bank account to your brand new Roth. The Roth IRA is a personal account, so you probably won't be able to do payroll deferrals. You are all on your own, so make sure that you have everything set up correctly.

Next, when you deposit money into a Roth IRA you will need to designate what tax year it is for. Since you have up until tax time to get money in for a given year, January 1 - April 15ish will give you a choice of either the current calendar year or previous calendar year. If you are trying to maximize your deposits, go ahead and max out last year (in line with the income rules!) and then tackle the present. Keep in mind your annual contribution limits. Most brokerages should have something in place to prevent you from over contributing.

Lastly, if you have a self guided account, you'll need to get that cash invested. Robo-Advisors will do the work for you based on a little questionnaire about your age income and risk tolerance. Schwab generally provides some guidance if you click around enough, but focus on simple, low cost funds that you can set and forget. Both Schwab and TD Ameritrade have a slate of index funds that are free to trade, making it easy to build a well diversified, low cost portfolio.

I can't tell you how to invest your portfolio right now, as I don't know anything about you. Generally speaking, the longer you are from needing the money, the more aggressively you can afford to invest. For an all stock portfolio, split it roughly between US and Foreign stocks. On the US side, your biggest allocation should be to Large Cap stocks as they make 80% of the market (conveniently, defined that way) the rest can be split between small and mid cap funds. On the foreign side, developed foreign funds should be the bulk with the difference made up of emerging market funds.

If you're within 10-20 years of starting withdrawals from the account, it may be prudent to allocate some money to bonds and cash.

It is best to work with a professional to establish and understand the appropriate allocation.

And Again...

The Roth IRA is the best deal going in tax avoidance, and this year is even better than usual. It is definitely worth everyone looking at opening and contributing to one to secure your future. Depending on your income level, you may even be eligible for a tax credit for making the deposit!