The Critical Money Considerations You Should Make in Your 60s

finances-in-your-60's

The average retirement age in the United States is 63, according to U.S. Census Bureau data. If you are part of that trend, get ready to have your financial world turned upside down in your 60s.

As you trade in your office keys and a steady paycheck for a pension (if you’re lucky), investment income and Social Security, you shift from an accumulation phase to a distribution phase. Once you do, many of the engrained investment lessons you learned no longer apply. While the most important retirement-based IRS rules come into play during your 50s and 70s, in your 60s you must learn about (and try to understand) government programs, such as Social Security and Medicare.

As you shift from accumulation to distribution, volatility becomes trouble. While market turmoil is tough to stomach whether you’re in your working years or retired, those wild swings can actually be beneficial for employees. If you participate in an employer-based retirement plan, you have a forced discipline to buy securities even when the market is down. You are practicing dollar-cost averaging, which, over long periods of time, can help you buy at a lower cost per share. The day you turn on that “income” switch, that volatility exposes you to sequence-of-return risk. In other words, the average return of your investments is not the only factor anymore. When you are living off your investments, the timing of returns is also critical. The earlier in retirement you take a big hit, the worse off you’ll be.

Financing Life After Retirement 

Now that we know we want to reduce volatility as well as sequence-of-return risk, we must think about solutions. Not to sound like a broken record, but the first step is to diversify. Imagine retiring in 2000 with large tech holdings or 2008 with large amounts of real estate. To spread the risk, cut your pie into many pieces.

Once you have a diversified, retirement-appropriate portfolio, you must decide which pieces and how much to sell in order to make your money last. Here are two out-of-date strategies that I wouldn’t fully depend on.

1. Living Off Dividends

Living completely off your dividends is probably unrealistic and irresponsible, unless you are very wealthy. In today’s low-yield environment, you are likely to get a dividend around 2%. If you’re invested 100% in stocks (also irresponsible for many), that means you’ll need a $5 million portfolio to draw $100,000 a year before taxes are taken out. The other risk is that if you are properly diversified, you are drawing only from the stock side, which means the bonds will become too heavily weighted. A better strategy is to sell by rebalancing. Every year decide how much money you will need and sell from the portion of the portfolio that has gone up. This will bring your portfolio back into balance and help you avoid selling at a loss.

2. Using the 4% Rule of Thumb

The 4% rule — often used to determine how much money you withdraw from a retirement account each year — was created for much less healthy people in a much healthier market. The amount you can safely pull out of your portfolio depends on the return you are earning and your life expectancy, which should make you skeptical of any one-size-fits-all strategy.

When to Take Government Retirement Benefits

Now that we have handled the complexities of investing as a retiree, we can dip a toe into the murky, complex waters of government programs. Regardless of your birth year, you can claim Social Security retirement benefits early at age 62. However, you will be permanently penalized for doing so. If your full retirement age is 66 (if you were born in 1943-1954), you will receive 25% less in benefits every month if you claim at 62. The opposite is true if you wait. You will get delayed retirement credits (income increases) of 8% per year until age 70.

The first step to figuring out Social Security is to learn the language (PIA, AIME, DRC, FICA, etc.). Next, find an advocate. Whether they’re a financial planner or not, you need someone sitting on the same side of the table as you when you make the very important decision about when to claim. Lastly, if you’re married, you must plan as a couple. Survivor benefits can be permanently reduced or increased depending on when your spouse claims benefits. Social Security should be simple — in fact, it’s anything but.

It used to be that Social Security’s full retirement age and Medicare eligibility aligned at age 65 and you could knock out both benefit applications at once. However, now you’re eligible to apply for Medicare up to 3 months before you turn 65, and that enrollment period is open for 7 months. You should apply ASAP, at least for Part A, in order for your coverage to begin the first day of the month of your 65th birthday. If you are still working, you’ll need to decide whether it’s worth picking up parts B and D or whether you have adequate, affordable coverage through your employer. Once you retire, you’ll have 8 months to get full Medicare coverage before your premiums are increased by penalties.

While traditional Medicare will likely cover the expenses of many of your medical needs in retirement, it will not cover long-term care expenses, except for short stays in a skilled nursing facility. According to the U.S. Department of Health and Human Services, 70% of those turning 65 will need some type of long-term care (LTC) services during their lifetime. Therefore, it’s a good idea to stress-test your financial plan to help ensure that you can afford a LTC service if needed. If you choose to buy long-term care insurance, you must factor that into your monthly or annual expenses to see if you can afford what are likely to be increasing premiums. If you decide to roll the dice, you want to be sure you have enough in assets and/or income to cover the cost.

Don’t Forget About Taxes

You’ve heard the saying that in life only two things are certain: death and taxes. While we don’t know when the former will come, we know that the tax man comes every year. That’s true even in retirement. The common assumption — and sometimes misconception — is that you will pay less in taxes once you have retired. That is another belief that depends totally on you, where you live and fiscal policy at the time. Your Federal Insurance Contributions Act (FICA) taxes will likely disappear in retirement, but so will many of your work-related deductions, including your 401K, health savings accounts, etc. My advice: Plan conservatively. You don’t want a tax hike in retirement to change your lifestyle.

There are many things to think about as you transition from your working years to your fun retirement years. Planning is advised; rolling the dice is not.

Remember, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Image: kupicoo

The post The Critical Money Considerations You Should Make in Your 60s appeared first on Credit.com.

How to Delay Taking Social Security Benefits Until You Absolutely Have To

early_retirement

I recently heard about a man who was retired longer than he worked, retiring at 52 and living well into his 90’s. There’s a life worth living.

And it’s not that far-fetched. Life expectancies continue to inch upward, particularly for those who make it to retirement. For those who reach age 65, life expectancy stretches to 82 for men and 85 for women. For married couples who reach 65 together, the news is even better. Odds are 45% that at least one of the partners will live to 90, giving them a full 25 years of traditional “retirement” time.

How Will They Pay for That?

Reminder: This is a good problem to have — far better than the alternative. It’s important to have a long-lasting plan for the golden years so you can enjoy them as long as possible.

Like everything else that has to do with money, time can be your friend or your enemy. It’s critical to start thinking about life in your 70s, 80s and 90s as soon as possible. Yes, that means doing so in your 50s and 60s, and perhaps even earlier. You likely don’t want to get to your golden years and rack up a lot of credit card debt to pay for the essentials.

Factoring in Social Security

For many, the most crucial variable in this equation revolves around when to start collecting Social Security benefits. The simple answer is to take it as late as possible, which is currently at age 70, though every individual situation is different. The earliest you can make this decision is at age 62, so you can plan accordingly, which begins with giving yourself options by planning years before retirement arrives.

Americans who paid into Social Security can begin receiving benefits as early as age 62 — before the traditional 65-year-old retirement age — but that comes at a price. Younger recipients receive smaller benefits to account for the added years of payout. On the other hand, recipients can chose to postpone benefits until age 70, which results in a “bonus” that lasts the remainder of the person’s life. The difference is dramatic — an extra 8% per year for those who wait past retirement age. An example from the Social Security administration shows that a recipient who takes payments as early as possible and deserves $1,000 per month at retirement would instead receive $750. If that same person waited until 70, they would get a monthly check of $1,320.

If you opt to wait to collect Social Security, you’ll be expected to use your own money, which can come from a combination of private retirement savings and continued income. Because it’s to your benefit to preserve your retirement savings as long as possible, continuing to earn income through your 60’s is an optimal option.

Older Americans in the Workforce

In many ways, things are getting harder for older workers. Studies (like this one) show older workers have a harder time even getting through the door for job interviews as many employers are hiring those from younger generations because they’re less-expensive and have more experience with technology. Plus, when layoffs and buyouts roll around, more expensive (often older employees who have spent many years with the company) are typically targeted.

But there are bright spots in the digital economy that can help older workers keep the money coming in as they work to reach the 70-year-old finish line — particularly in the sharing economy.

Whatever you call it — part-time work, contingent work, gig economy work — some only-in-the-digital age income streams are ideal for older workers who need some income but don’t want to be tied down to a full-time job. Some of these positions are challenging for those who need to support a family, like driving for companies like Uber or selling homemade crafts on sites like Etsy. But these can be ideal roles for folks who are simply looking for supplemental income. For example, Uber announced a partnership with AARP last year, hoping to recruit senior drivers.

What’s more, the sharing economy also creates new ways to earn income from assets you’ve acquired. It’s easier than ever to turn your summer cabin into a part-time vacation rental, for example, thanks to services like Airbnb. One extreme, but potentially lucrative, step is to downsize to a smaller home in a less expensive area while renting out a paid-off home in an pricey neighborhood for a few years. Newer sharing economy services even let people rent out their cars or other personal items.

Many older workers may fail to realize the value of their accumulated knowledge. In the past, some made small consulting agencies and, while that’s still an option, the proliferation of online course tools now make it relatively easy to teach digital classes in everything from cooking to coding that consumers can (and do) pay for. Many folks are learning how to turn their hobbies into small-time entrepreneurial adventures this way. For example, Angela Fehr, a self-taught artist in Vancouver, Canada, offers classes in watercolor painting and they range in price from free to $99.

The key to this is nurturing hobbies, and the entrepreneurial skills needed to monetize them, before staring at a big income hole in your early 60s. Play around with online course software, ask questions and pay attention to other sharing economy developments.

Taken collectively, I call all these revenue-generating opportunities “21st-Century moonlighting.” It’s not for everyone, of course. Plenty of folks are busy enough trying to hang onto their full-time jobs in competitive environments. But mastering the “gig economy” and supplementing a full-time income may make it easier to postpone reliance on Social Security. And maybe even avoiding any boredom that sometimes comes with retirement, too.

Deciding when to start receiving Social Security is a personal and complex subject, made even more complicated when a partner’s benefits are part of the decision. It should be made carefully, possibly even with the advisement of an expert. To start, you can read this article to see if you are financially ready for retirement or use online tools to get an idea of when it makes sense to start receiving benefits before age 70.

In the meantime, you can see how your money habits are affecting your financial goals, like building a good credit score, by viewing your for credit report card for free each month on Credit.com.

More Money-Saving Reads:

Image: monkeybusinessimages

The post How to Delay Taking Social Security Benefits Until You Absolutely Have To appeared first on Credit.com.

What to Do If Your Social Security Check Just Isn’t Enough

happy_older_couple

The U.S. government recently announced there will be no Cost of Living Adjustment (COLA) for Social Security benefits in 2016. The decision, tied to a flat year over year for the Consumer Price Index, could make budgeting difficult for Americans who rely on Social Security as a major source of income.

Fortunately, the Bureau of Labor Statistics also recently released its Consumer Expenditure Survey, which highlights consumers’ average annual spending habits — and, more pointedly, provides some direction for what to do if your Social Security check isn’t covering your bills. According to the survey, housing, transportation and food constitute most Americans’ major expenses. Cutting back in these areas could help you stretch your Social Security or other pension benefits. Here are some tips on how to do so.

1. How to Limit Your Housing Costs

Housing is, on average, our most expensive expenditure, according to the survey. So how can we limit related expenses? You can start by asking yourself “do my current housing costs cover what I want or what I need?” Homeownership is part of the American dream — and paying off your mortgage is a wonderful goal and accomplishment. But property taxes, homeowners association fees and other fixed costs do not go away when the mortgage is paid off, and generally, the larger the home, the greater the cost.

It may be excruciating to think of downsizing, but the advantages, ease of stress and extra money at the end of the month might possibly make it all worth it. Renting may also be a great way for homeowners to lower their expenses, if you decide your current housing costs are putting too much of a strain on your budget.

Current renters may be able to take advantage of the following:

  • Renting may allow for more freedom to downsize and easier relocation.
  • Relocation options may allow for total expense reduction.
  • Rents for lower incomes may be subsidized in certain cases.
  • Renting in age-restricted areas may provide expense reductions.

If you decide to move, you may want to check your credit before searching for a new place. Good credit scores generally entitle consumers to the best terms and conditions on a mortgage and landlords are in the habit of pulling a version of your credit report when you fill out a lease application. (You can check your credit by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your credit scores for free each month on Credit.com.)

2. Trimming Your Transportation Budget

To potentially cut back on transportation costs, you may want to ask, “Do I really need a car?” With the popularity of mass transit, and even new ride-sharing options, owning a car may not be the necessity it once was. If you do need a car, you still may be able to cut the costs associated with it by…

  • Owning what you need, not necessarily what you want. Expensive cars, just like expensive houses, will likely have greater insurance and operating costs.
  • Carrying a higher deductible in order to lower your monthly insurance costs. (Just be sure to review any new policies carefully to be sure you have the coverage you need.)
  • Driving that car forever. If you buy a new car every couple of years, depreciation is your enemy and most likely hurting your pocketbook.
  • Taking care of your car via regular maintenance. Do this and that car may take care of you, allowing for continued use.

3. Reducing Your Food Expenses

According to the 2014 BLS report, around 41% of our total food costs are incurred away from home. That’s a stunning number. Eating out is fun, but rarely a healthy or a cost effective way to spend your monthly income. Staying at home, planning in advance, eating healthy and spending time at family members’ or friends’ houses may be a great way to lower a bulging food budget. We will all go out once in a while, but limiting the high price associated with those visits (along with the frequency) may really add up by the end of the month.

Now you know the average American’s big three expenses. While you may not be able to directly attack each area, with planning and a little focus, you may be able to save enough to help your Social Security or other pension plan last a little longer.

More Money-Saving Reads:

Image: KatarzynaBialasiewicz

The post What to Do If Your Social Security Check Just Isn’t Enough appeared first on Credit.com.