I’m 64. Is it true that you can’t draw Social Security if you make over $14,000 a year?
It’s not true that you can’t take Social Security benefits if you earn over $14,000 a year, but it is true that working (and in particular, earning an income from that work) can reduce your benefit amount if you haven’t reached full retirement age.
Here’s how that works: Once you hit full retirement age — find out what yours is here — you can earn as much income as you want without compromising your benefits. But if you want to take benefits prior to that and continue to work, you may temporarily give up a portion of your monthly benefit.
Why do I say temporarily? Because this isn’t money lost forever. If your benefit is reduced because of work income, it will be increased once you hit full retirement age to account for the amount that was withheld. So as the end result, you’ll break even, but you’ll have to wait longer to receive some of your benefits.
As for how much you’ll lose, that changes every year. But in 2013, if you are younger than full retirement age and take benefits, Social Security will deduct $1 from your benefits for every $2 you earn above $15,120. And if you turn full retirement age during 2013? This doesn’t apply to you because you’re 64, but if it did, the deduction is less severe: Social Security will deduct $1 for every $3 you earn above $40,080 until the month you reach full retirement age.
To read more about this, and see a few examples, visit this Social Security Administration publication.
This week we welcome Dennis Miller, the author of Reboot Retirement and a RetireMentor at MarketWatch. He’s here to share a few solutions to a growing problem: As we start to have kids at a later age, our ability to save for retirement is pushed off and diminished. How do you bounce back? Read on below.
A major generational shift has taken place, and it’s having a huge impact on when and how we save and plan for retirement. Most older baby boomers had children in their 20s and empty nests by age 50. Between the ages of 50 or so and 65, we made a big retirement savings push.
I don’t need expensive research to confirm what I see with my own eyes: Couples are marrying and having children later in life. My oldest son just turned 50, and his two children are 14 and 12. He’s right in line with his peer group.
So let’s imagine a couple whose nest is finally empty at age 62. After that, it takes them three years to become debt-free, leaving just three years to stockpile money for retirement, if they retire at 68. This couple could save 100% of their salaries and still fall short.
So what can younger baby boomers do?
Start immediately. Younger boomers have to run a different race, but they still need to start now, regardless of other drains on their resources.
Make wealth accumulation a top priority. Every time you get a raise, most of it should go to paying off debt or to your 401(k) or IRA. If you’re not contributing the maximum amount to tax-preferred retirement accounts, start now.
Avoid the McMansion trap. Up until 2008, folks were buying the biggest house they could afford, because real estate was an “investment.” Houses weren’t just homes, they were moneymakers—or so we thought.
My son and his wife just bought a new house. They really liked another model that cost $25,000 more, but it would have been too big for them in 10 years or so. They made the right decision. They saved the $25,000 as well as the interest on a higher mortgage, since they had already made the maximum down payment they could afford.
Exercise common sense. I’ve made this mistake more than once: I’d get serious about diet and exercise and go way overboard, cutting my caloric intake in half and exercising to exhaustion. By the third day, my commitment would vanish. Had I paced myself, I would have been a lot more successful.
The same principle holds true for paying off debt and saving. For most folks, the best way to start is by withholding incremental amounts from their paychecks. Tackle debt the same way: cut up your credit cards and start paying a little extra on your regular payments.
Learn about investing now. It is easy to think, “Why do I need to learn about investing when I don’t have any money to invest?” I found that the more I read about investing, the more motivated I became to have money to invest. The thought of my money working for me instead of the other way around sounded quite appealing. After all, isn’t the goal to accumulate enough money and invest it wisely so we don’t need to work at all?
About Dennis: Dennis Miller is the author of Retirement Reboot, Senior Editor of Money Forever at www.millersmoney.com and a popular MarketWatch columnist. Miller’s Money is a research service with the goal of helping people reach their goal of a comfortable retirement.
How can I calculate how much I can draw from my retirement savings, to ensure that I have enough for both myself and my wife? Are there any calculators you can recommend?
David, this is a great question. Everyone should be doing these calculations, yet many people aren’t — I know that because of anecdotal evidence from surveying participants during Money School, but there is also a great deal of formal research on the subject: According to EBRI’s 2013 Retirement Confidence Survey, only 46% of workers have tried to calculate how much they need to save to live comfortably in retirement.
I recommend that everyone do two things: First, calculate how much you need to save for retirement. There are many calculators out there, including one on this very website. That’s a good thing, because I think you should use several and compare the results. I like the Ballpark E$timate from ChoosetoSave.org, and many brokerage firms have calculators on their own websites.
Once you have a good handle on how much you need to be putting away, you can look into how much you can pull out during retirement, and for that, I like the Retirement Income Calculator from T. Rowe Price (again, there are many in this space and you should play around with several). BlackRock’s CoRI calculator has been getting a lot of good press lately as well, and you can give that a test run here. These calculators will tell you, based on what you already have saved, what you plan to save in the future, and what you expect from Social Security and any other sources of income in retirement, how long your savings might last and how much you can afford to spend each month.
Finally, if you’d like to dig deeper — and making the transition to retirement is a time when you probably should — you might want to talk to a financial advisor for really specific, tailored advice and planning.
When Dan Otter from 403bwise.com reached out about contributing a guest post to the site, we were thrilled — as he mentions below, 403(b) plans aren’t as widely known — or understood — as 401(k) or IRA plans, and even those who have them may lack a clear understanding of how they work. Dan was able to break down some complicated information in a way we can all understand, and bring to light a warning about fees that is important for all investors. Read on for more.
Imagine you are at a retirement plan party. Not a retirement party — there are no gold watches being given out here. But a party attended by the various retirement plans. There’s the famous 401(k) and it’s quirky but increasingly popular sibling the Roth 401(k). There’s the modest IRA, with some of its cousins: the Roth IRA, the SEP IRA, and the Rollover IRA. Even the granddaddy of them all, Social Security, is in attendance. Then there’s this other plan. It’s kind of off by itself. You can’t quite place its name. Is it called the 401b? Or, wait, isn’t it called a tax sheltered something?
Close. The plan is actually called the 403(b). But it is commonly, and erroneously, referred to as a TSA or Tax Sheltered Annuity. Created in 1958, it predates the more famous 401(k) by twenty years, yet it remains a bit of a mystery. Why? Probably because the 403(b) covers a smaller subset of employees working in generally less glamorous positions: K-12 employees, college and university employees, pubic health care workers, and not-for-profit workers. Plus, public school teachers and administrators typically have pension plans, so for them the 403(b) is a supplemental plan.
Here’s what you need to know to make small talk with and about the 403(b):
The 403(b) works much like a 401(k):
- Contributions are pre-tax
- For 2013, participants may contribute up to $17,500 in regular contributions
- Those who are age 50 at anytime during 2013 may contribute an additional $5,500
- Able to invest directly into mutual funds
- Participants cannot invest directly in individual stocks
- Most plans offer annuity products (fixed and variable)
- Not all plans offer direct investment in mutual fund products (instead they must be purchased as part of a variable annuity)
- Most plans have multiple vendors which can lead to higher costs (vendors often employ a commission-based sales force in an effort to stand out from competition — can you imagine sales people from different financial companies pitching products in the lunchroom of Apple or GE?
- Many of the variable products sold have onerous surrender charges, some lasting as long as 15 years
Why so similar yet so different? Two reasons:
- When the 403(b) began in 1958, participants could only invest in annuity products. This is why the plan is often referred to as a TSA, or Tax Sheltered Annuity. This is a misnomer, of course, and gives the false impression that participants can only invest in annuity products. The mutual fund option was added way back in 1974.
- Public sector 403(b) plans (like those for public school teachers) fall outside the rules of ERISA (Employee Retirement Income Security Act), meaning there is much less employer oversight. Furthermore, unlike the ERISA-based 401(k), there are no fee disclosure rules for public 403(b) plans. This can leave participants in the dark about fees.
Retirement plan researcher The Spectrem Group reports that of the approximately $882 billion in 403(b) plans, the majority of the money sits in annuity products (approximately 46% in fixed annuities; 31% in variable annuities; and just 23% in mutual funds). Why should this matter? Most fixed and variable annuities are sold through commission-based sales agents. While variable annuities do offer access to mutual funds, they average about 2.25% in fees. This contrasts with index mutual funds, which can cost as little as 0.10%. This stark fee disparity can have a huge impact on return. Consider the fate of three hypothetical investors. Each contributes $250 a month over 35 years. Each realizes an 8% average annual return. However, each contributes to a different product. The result?
- The hypothetical Variable Annuity investor pays 2.25% in fees and accumulates $336,320 in savings.
- The hypothetical Mutual Fund investor pays 1.40% in fees and accumulates $409,585 in savings.
- The hypothetical Index Mutual Fund investor pays 0.18% in fees and accumulates $548,750 in savings.
It doesn’t take a math teacher to realize it is better to accumulate more savings.
If you find yourself stuck in a bad 403(b) plan, lobby your employer. Show them this and other fee impact information. Point out that employers are also participants. Point out that it is in their interest to have the best possible plan. Rally co-workers to your side. It may take time, but change can happen. Now, if you find yourself stuck at a party with retirement plans, you need to get a new group of friends.
About Dan: Dan Otter is a writer and teacher who operates the 403(b) education and advocacy website 403bwise.com. In 2012 Money Magazine named him a Money Hero for his efforts to improve the financial well being of others.
This is my second marriage. My husband is financially secure and retired. I am not and must keep working. He wants me to retire, but how do we rectify the financial differences? Should he set aside an amount of money for me or should I keep working?
Lynn, my first question for you has nothing to do with money: Do you want to keep working? A lot of people continue to work past what might be considered a “traditional” retirement age for reasons beyond the financial: They enjoy their jobs, they like having somewhere to be everyday, they want to keep their skills and their minds sharp.
If you’re one of those people, I think you need to sit down with your husband and explain that, money aside, you’re just not ready to pull back. You could compromise, by lightening your work load or talking to your employer about working part-time or giving up one day a week so you can spend more time with your husband.
On the other hand, if it’s strictly about the money, I assume your husband is aware of your financial situation and he’s planning to offer support if you retire before you’re financially ready. I think that’s very generous. But I also think you have to consider the worst-case scenario: In other words, if you pulled out of the workforce at the request of your husband, and then your marriage fell apart and you were left with no job and little retirement savings of your own (assuming you don’t live in a community property state). I think it’s important to be financially independent, especially if that independence helps you sleep at night. At the same time, many married couples plan their retirement jointly, based on shared assets, and there isn’t anything wrong with that approach.
If you don’t see a risk here, and he’s financially secure enough to foot the bill for both of your retirements, and you’re ready to retire, you probably have your decision. But I still might encourage you to ease into this, by taking my suggestion of scaling back first. You can always jump out of the workforce with both feet later.
Today’s post is by Joy Loverde, author of The Complete Eldercare Planner. According to the Family Caregiver Alliance, as many as 42% of employed Americans have provided eldercare in the last five years; 17% are currently doing so. This is an issue that is likely to affect all of us, and for today’s post, we asked Joy to pull together a list of her favorite resources, with explanations about how they can help. The list below will help both caregivers and those who need care.
Eldercare. This time it’s different. In addition to taking on the myriad responsibilities associated with parent-care, we can now expect to add aging spouses and life partners to the equation. At the same time, we have entered the era of “Unmarried America.” One in three baby Boomers is unmarried.
No matter what your lifestyle situation may be currently, well-being in later life depends on gathering resources and making better choices now. To help you get started in the planning process, check out my recommended list of resources below:
Next Avenue. Geared for people 50 and over, sign up for their weekly newsletter to receive articles, blogs, and videos that address a wide range of financial, caregiving, health, and lifestyle topics.
Aging in Place Technology. Provides thought leadership, analysis, and guidance about technologies and services that enable older adults to remain in their home of choice for longer.
Elderweb. This award-winning research site offers professionals and family members information on aging, eldercare, and long-term care including legal, financial, medical, and housing issues.
Benefits Checkup. Enroll in public and private benefits programs. You will also have access to an online application for Medicare’s Extra Help.
Eldercare Locator. A public service of the U.S. Administration on Aging, this site connects you to services for older adults and their families. You can also reach them at (800) 677-1116.
Golden Reviews. Make better care decisions by taking a look at eldercare from the inside out. By bringing transparency and accountability to senior care, this resource creates a platform of open dialogue between care providers, their residents, and families. Browse through a directory of hundreds of thousands of care providers.
Support Groups Clearinghouse. This resource brings people together around life’s challenges by providing concise, up-to-date-information and meeting places for individuals, their friends and families, as well as professionals who offer pathways to help.
National Association of Senior Move Managers. A professional association of organizations that assists older adults and their families with downsizing, relocating, medical transporting, and home modifications.
Alzheimer’s Reading Room. This one-stop shop offers extensive information on dementia, mental health, memory loss, and treatment. The goal of this resource is to educate and empower.
Well Spouse Association. This national nonprofit membership organization gives extensive support to wives, husbands, and partners of the chronically ill and/or disabled.
EldercareABC Blog. A visit to this website provides access to thousands of insightful and informative blog posts; a library of articles and resources; tele-classes around the most pressing caregiving issues; interviews with experts and authors; special community events; group chat sessions, and products reviews.
Restart Retirement. This interactive online resource incorporates knowledge on wellness, travel, finance, and the passions and pastimes of mature adults.
The Wright Stuff. Established by knowledgeable and extremely helpful health care professionals, customer services is what separates this online store from the rest.
National Academy of Elder law Attorneys. Membership is comprised of attorneys, judges, professors of law, and students dedicated to improving the quality of legal services to seniors and people with special needs. The website also features a “Find an Attorney” option.
About Joy: Joy Loverde’s best-selling book, The Complete Eldercare Planner (Random House, 2009) reflects the depth of her understanding for the needs of older Americans. “The book is the best we saw…” says the American Medical Association. Joy’s media credits include the Today Show, CBS Early Show, CNN, and National Public Radio among others. Joy also serves as a consultant and spokesperson for corporations, professional advisors, associations, healthcare organizations, senior housing, manufacturers, and other members of the fast-growing mature-market industry. Find Joy on her website: www.elderindustry.com.
My 54-year-old husband has a 401(k) account with his previous company with approximately $300,000. It has been doing well, so should he leave it there or transfer it? For tax purposes, should we buy Roth IRAs in each of our names?
Hi Joanne, your husband probably wants to roll that 401(k) over to an IRA, which will give him more control over the money and possibly better — or at least more — investment options. He could roll it into a Roth IRA, but keep in mind you’ll have to pay taxes on any pre-tax assets you roll over, which is likely that entire $300,000 balance. I’d advise that you only do that if you have the money to pay the taxes out-of-pocket — in other words, don’t use funds from the 401(k) to cover the taxes. Once converted, you can pull that money out in retirement tax free, which is a nice perk.
The other option? You could roll the 401(k) into an IRA, then each open a Roth and make contributions there. If you don’t have income of your own, you can contribute as a spouse with your husband’s income. The 2013 contribution limits are $5,500 per person, but you can contribute an extra $1,000 if you are over age 50. That means collectively you could put $13,000 a year into Roth accounts, assuming you are both over age 50. It won’t give you any tax savings now — a Roth’s contributions are made with after tax dollars, so you don’t get a tax deduction — but again, you can pull the funds out in retirement tax free, which can be even better.
You don’t mention if your husband has a 401(k) at his new company, but if he does, he should contribute enough to that account to grab any matching dollars, then contribute to the Roth, then go back to the 401(k) with anything else.
My husband will have a pension and an annuity through his work for retirement, but we also opened a Roth IRA for him about two years ago. I have a Traditional IRA. We currently only have the ability to put $5,000 in a year. Does it make sense to place that $5,000 in just his Roth IRA given the tax ramifications at retirement age or continue to split the $5,000 between the two? We are currently in the 25% tax bracket. My traditional IRA is valued at about $30,000 and his is near $13,000.
Just to recap, here’s the difference: You contribute after-tax dollars to both accounts. With a Traditional IRA, you may receive a tax deduction on your contributions, but you are taxed when you pull them out in retirement. With a Roth, there’s no tax deduction today — but when you tap the account in retirement, you tap it tax-free, meaning your earnings are completely untaxed. There are other differences, aside from taxes, that are important to note, particularly as you near retirement: A Traditional IRA means required minimum distributions at age 70 ½. You may leave the money in a Roth IRA untouched for as long as you like, making it a good way to pass an inheritance if that is your goal.
So the question now is whether you want to pay taxes today, or tomorrow — and whether making a required distribution at age 70 1/2 matters to you. If the required distributions aren’t an issue — you know you’re going to need this money in retirement — then you can look squarely at the tax issue: Do you think your tax rate is lower now than it will be in retirement, or higher? If it’s lower, that argues for paying taxes on the money now, through a Roth. If it’s higher, you may want to defer taxes as long as possible and go with the Traditional IRA. Unless you strongly know differently, the Roth is usually a fantastic deal. And if you don’t think you’ll need the money in retirement because of that pension and annuity, it’s a good idea to choose a vehicle that won’t require distributions.
Should you invest in your 401(k) if your company will match? I asked the same question to Al Roker and Willie Geist this morning on TODAY. Check out the video below to see the right answer, and even more information on making the most of your 401(k).
I work full-time and am married with three children. In 2010, my husband lost his job — we ended up losing our house and were in a crunch to pay off $45,000 in credit card debt, not to mention two cars and PLUS loans. When all this happened, I went to the first credit card company and worked out a payment plan for the next year. However, the other card companies weren’t as easy to deal with. So I went through the National Foundation for Credit Counseling for help in consolidating our credit card debt. Now I am paying for that one credit card and have an account to pay off the others through a credit counselor.
My question: I took a loan out against my 401(k) to pay off those cards and some college expenses that my youngest daughter will have (after her student loans and scholarship, she needed about $9,000 for tuition). The credit card debt now totals $24,000. Did it make sense to take the loan and be done with the debt? I am repaying the loan over three years.
Hi Annette, here’s the deal with 401(k) loans: On the upside, you pay them back, with interest, to yourself, so looking only at the math, they are a better deal than other borrowing scenarios.
The rub is that if you lose your job — as your husband did, so you know this can happen, and often suddenly — you are in many cases required to pay that money back inside of two months. Otherwise, it is treated as a distribution and you are taxed and penalized as such. So it’s risky. You are also taking money out of the market, which could mean selling investments and locking in losses if you do this at the wrong time. And recent research suggests that if you borrow once, you’re more likely to do it again. All of these things make 401(k) loans a last-resort option.
But you already did it, and the good news is you’re paying it back to yourself, not a creditor. It also likely has a lower interest rate than your debt, although I don’t know what interest rate was negotiated by the credit counselor — it may be very good. In any case, just make sure you continue paying it and your credit card debt off and hang on to that job. And note: In general, I don’t recommend borrowing from or shortchanging your retirement to pay for college expenses. There is financial aid available that your children can tap if necessary, but you are not going to find financial aid resources to fund your retirement.