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AARP Article

The Relocation Decision

A change of scene can be good for your well-being

To move or not to move, when you retire — that’s a big question. If moving seems sensible, then where? And what will it cost?

The vast majority of new retirees plan to stay in their own homes. But circumstances change. You might be widowed, your spouse might get sick or you simply might get tired of having to find someone to clean the gutters and make repairs. Over 12 years (1992-2004), 30 percent of the home-owning cohort born between 1931 and 1941 pulled up stakes at least once, according to a 2009 study for the Center for Retirement Research at Boston College.

They didn’t go far. The vast majority found a new home within 20 miles of where they lived before. These kinds of moves are a form of aging in place because you don’t leave your community and friends.

One surprising finding — to me, at least — is that moving tends to improve your psychological well-being. That seems right for people who planned a move to new housing or a new part of the country. But even those who are shocked into moving — say, by widowhood or divorce — do better than people in similar situations who stay put, the study found. There’s something about a change of scene that helps pick up your spirits.

Older people who move do it primarily for family reasons rather than reasons of health or finances, according to U.S. Census data. Downsizing occurs less often than you might think. About the same number of retirees want a larger house as want a smaller one, the Census reports. There’s a slight preference for moving from the Frost Belt to the Sun Belt, but not much.

For services and opportunities, the Frost Belt actually looks like a better choice. I learned this from the Milken Institute, an economic think tank in Santa Monica, Calif. Every other year, it puts out a study called “Best Cities for Successful Aging.” Its researchers rank the 100 largest metro areas and 252 smaller ones based on a wide variety of criteria, such as types of housing available, access to transportation, employment opportunities for older people, opportunities for active lifestyles, and educational and cultural activities. It also considers the abundance of health services, as well as the basics, such as taxes and cost of living. The top big cities in its 2014 report? Madison, Wis., and the Omaha, Neb.-Council Bluffs, Iowa area — not exactly towns for year-round golf. The top smaller metros: Iowa City, Iowa, and Sioux Falls, S.D. You can look up the report and check the relative livability of your own city, at milkeninstitute.org.

If you are weighing a move, make careful comparisons. If you stay put, your current house might need major repairs. You might have to add a first-floor bedroom or widen the halls to allow for a wheelchair. By contrast, if you move there will be fix-up costs on your old house and moving expenses. If the move takes you from a house to an apartment, your rent payments will gradually go up. But remember: Had you kept your old house or bought a new one, taxes, insurance and upkeep costs would have risen, too. Downsizing or renting should leave you more money in the bank. In any town, make housing decisions that you think you can afford for life.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Plan Ahead for Long-Term Care

Policies have become prohibitively expensive for many in recent years

As our age group … well … ages, the chance of needing help with our day-to-day lives goes up. More of us will be seeking home health aides and, yes, even places to live where we can get the care we need. But how will we pay for long-term care?

Median costs run $6,844 a month in nursing homes, $3,628 in assisted living facilities and $3,861 for full-time professional services at home, Genworth Financial reports.

The majority of Americans don’t have anything close to that kind of money. When their savings run out, they rely on their children, Medicaid (the government program for people with limited income) or both.

People with higher incomes appear to be doing the same. Sales of traditional long-term care (LTC) policies fell 60 percent over the past 10 years, the American Association for Long-Term Care Insurance reports, as average premiums rose 44.5 percent. A typical married couple who are now 60 might pay anywhere from $2,600 to $5,600 a year, depending on the insurance company and benefit they choose. The affluent are putting large lump sums into combination LTC insurance and life insurance or annuity products. Those with fewer assets are going without. Here’s a guide to your own decision on traditional LTC insurance.

Who should consider buying LTC insurance?

Primarily, married couples with substantial retirement incomes and significant assets. If one of you enters a nursing home or needs costly home care, the payouts from the insurance will help maintain the healthy spouse’s standard of living. For single people, LTC coverage matters less. All your savings can go toward your personal care. (And by the way, single women are charged about 50 percent more than men for LTC insurance!)

How do you hold down costs?

A policy might be available through a company group plan, if you’re still working. If not, buy leaner benefits—say, by waiting six months before payments kick in instead of three months. If you’re in your 50s or early 60s, however, don’t skip the automatic inflation adjustment, even though it’s pricey.

What if you already have LTC insurance and your premiums are shooting up?

Do everything possible to keep the policy. Reducing benefits is better than giving them up. Of those who used care between 2006 and 2012, 23 percent had let a long-term policy lapse in the previous four years, according to the Center for Retirement Research at Boston College.

What about the new short-term care insurance?

You pay less and get less. Our 60-year-old couple might be charged $1,235 annually for 360 days of coverage at a fixed $150 a day. Policies vary in how they pay—by the day, by the service or by the location (at home or in a nursing facility). So know what you’re buying, and know that you’re not covered for a true medical catastrophe.

Bottom line?

For almost all of us, family and Medicaid remain the safety net.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Navigate the Medicare and Social Security Maze

Here’s how to unravel the complicated programs

When you think about retiring, where will you get health insurance? “Simple,” you might reply, “I’ll go on Medicare.”

Ha! Welcome to an intricate decision, especially if you (or your spouse) keep working past the usual retirement age.

Medicare is for people 65 and up and comes in four parts. Part A, for hospital bills, is “free” and supported by the payroll tax, but also has copays and deductibles. Part B, which covers doctor bills, and Part D, which covers prescription drugs, charge monthly premiums. You might also buy private medigap insurance to pick up some costs that Medicare doesn’t cover. Medicare Advantage plans (known as Part C) cover all these health services in their benefit packages. Which should you choose?

To save money, browse your local Part C plans on medicare.gov. They often cost less because you’re generally required to use only the doctors and hospitals in the plan’s network. For more choice of providers, select Parts A, B and D.

If you (or your spouse) are still working at 65 or beyond and are covered by an employer health plan, consider signing up for free Medicare Part A. It can cover the portions of the hospital bills that your employer plan doesn’t pay once you’ve met the Medicare deductibles.

If you reach your full Social Security retirement age, say 66, and are still working, you have another option. You can augment your salary by filing for your full Social Security retirement benefit (at that age, payments are not reduced for people with earnings). When you file, you’ll be signed up, automatically, for Medicare Parts A and B. Keep the free Part A. But if you’re still covered by an employer plan, call Social Security and decline Part B. There’s no point paying extra premiums.

You have two choices if you’re under 65, you’re on your spouse’s health plan, and your spouse retires and goes on Medicare. Those close to 65 might go for the company’s COBRA plan that can extend employee coverage for up to 36 months. Alternatively, buy coverage on the health-plan exchanges or from an insurance agent.

There’s a catch-22 if your employer health plan comes with a health savings account. HSAs let you save money, tax free, to use to pay out-of-pocket medical expenses. You (and your employer) can make contributions. But you can’t have Medicare and make HSA contributions, too. If you claim Social Security, which comes with Medicare Part A, you can still pay bills with the HSA savings that you already have, but tax-free contributions stop.

Here’s advice on how to play your HSA, from Stephen Neeleman, M.D., founder of HealthEquity, which manages these plans for employers:

  • Consider deferring Social Security until age 70 if your employer makes the maximum HSA contribution ($3,350 for singles, $6,750 for a family).
  • If you have a family plan and your spouse goes on Medicare, you or your employer can still make the maximum family contribution.
  • You can’t contribute to an HSA if your working spouse covers you under a traditional employee plan. So decide which plan is best.
  • Stop making HSA contributions in the few months before you retire. Medicare Part A can be backdated for up to six months. Any HSA contributions you made during those months will count as taxable income.

Health insurance — not so easy after all.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Stop Saving, Start Spending?

In retirement, some die-hard savers stay thrifty for too long

Everyone praises the habit of thrift. Habitual savers spend less than they earn, providing themselves with emergency funds and a comfortable cushion for the future.

But a funny thing happens when they retire and it’s time to start spending the money they’ve saved, says Michael Finke, a professor of personal financial planning at Texas Tech University in Lubbock. They can’t do it. They’re so used to thinking of savings as sacred that they don’t touch the money, even if it crimps their retirement style of life.

Why do they hesitate? Among other reasons, they see their savings as their defense against future inflation and scary medical expenses toward the end of life. These fears might be overblown.

Studies by David Blanchett, head of retirement research for Morningstar Investment Management, found that, on average, retirees reduce their real, inflation-adjusted spending as they age through their retirement. That includes people with comfortable savings as well as people without.

For example, most IRA money isn’t touched until withdrawals become mandatory at 70 1/2, by which time the total dollar amount is generally up because of investment returns. When normal medical costs begin to rise, these retirees have effectively prepared for it by cutting their spending — and growing their savings — in advance.

There are natural ways that retirement spending declines. You’re no longer paying Social Security or Medicare taxes, or contributing to a retirement plan. Workaday expenses go away — commuting, clothing, meals out because you didn’t have time to cook. Younger retirees might pick up the slack by spending more on entertainment and travel. But on average, even those who increase their spending do so at a rate that’s lower than inflation, Blanchett says. Put another way, their real spending falls.

Finke thinks that good savers shouldn’t be afraid to live a little higher on the hog. Depending on their current expenses, relative to savings, people with moderate nest eggs might safely spend something around 8 percent more per year than they’re doing now, he says. For those with high savings, it could be as much as 50 percent more. At the very least, consider spending all of your income instead of adding part of it to savings, as thrifty retirees often do. After all, retirement is what you created that income for.

The averages, of course, gloss over the very personal situation of every household. Some retirees have to cut spending because they retired with a mini nest egg or none at all. Some lost their jobs or had to cut spending when their spouses died. Some but not others will have their savings drained by medical expenses. You might have no choice but to live on less.

If you have a choice, however, and won’t touch your capital, you’re part of what researchers call the “retirement consumption puzzle.” Maybe you limit spending out of deep-seated fear — that you’ll live too long, run out of money, or make an irremediable financial mistake. When you lack confidence in your spending rate, your attitude shifts to preservation, just in case. A few hours with a fee-only financial adviser might give you great comfort, by showing you what you can actually afford.

Maybe, of course, you’re perfectly happy living on less and leaving more for your kids. Still, you might shake yourself up a bit. Spending a little more money can add variety to a retirement life.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

The Second-Marriage Dilemma

Estate planning can be tricky for couples who have former spouses

Inheritance questions tend to be easy when you’ve been married only once. If you die first, your assets—whatever they are—usually go to your spouse. If you have children, you divide the money among them equally. Unequal inheritance sometimes makes sense. For example, you’d leave more to a child who’s disabled. But for the sake of future family harmony, equal amounts work best.

If you enter into a second marriage, however, the choices get harder—especially if you remarry later in life. How much, if anything, do you want to leave to your new spouse? If you own the house, does he or she stay in residence if you die first? In long second marriages, do you leave anything to stepchildren?

If you avoid making these kinds of decisions, state and federal laws decide where your money goes. Your second spouse typically will be able to claim one-third to one-half of the assets covered by your will, even if it says something else. Joint bank or brokerage accounts held with a child will go to that child. Your IRA will go to whomever you’ve named on the IRA’s beneficiary form, leaving your new spouse out.

If you want some other arrangement, you and your spouse must have a written prenuptial (or postnuptial) agreement that meets your state’s inheritance laws. You’ll also need to change those beneficiary forms.

Overwhelmingly, the spouse with more assets wants to make sure that the second spouse is provided for, says attorney Shirley Whitenack of Schenck, Price, Smith & King in Florham Park, N.J. That might mean leaving him or her with money that otherwise would have gone to your kids.

Where assets are roughly equal, however, or in a late-life marriage, spouses might choose to put their own kids first and leave little or nothing to their new mate.

Complications arise when you own a house. You might leave it to your kids but give your spouse the right to occupy it for life. In some states, the spouse’s right is guaranteed, even if he or she remarries, says attorney Molly Abshire of Wright Abshire in Houston. Before the house can be sold, your new spouse and kids will have to come to some kind of agreement (usually financial).

A risk that might not occur to you is the potential cost of long-term care. In many states, married people have a legal duty to support each other. If your second spouse eventually needs long-term care, his or her assets and yours might be tapped to pay the bills. In Texas, that even includes your own income and IRA, Abshire says. You’ll be spending your kids’ inheritance on your second spouse’s medical expenses.

In other states, however, your personal income and IRA might not be forfeited for a spouse’s nursing home expenses. So get good legal advice. You might decide to skip the “I do’s” and publicly become partners instead.

These decisions can be tough to make, especially if you and your new beloved find that you don’t agree. It’s even harder to tell the kids that their inheritance might change. “Often, people freeze and do nothing,” Whitenack says. Or they make their plans secretly, figuring “I’ll be dead and won’t have to worry about it.” That’s the worst outcome. Be brave. Fess up. 

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Beware the ‘Tax Torpedo,’ Spousal Benefits and Mortgage Deductions

Q: My wife and I were shocked to discover that when we start taking the required distribution from our individual retirement accounts at age 701/2, our Social Security taxes will jump and we will be in a higher tax bracket. We’re 69. What can we do?

A: It feels natural not to tap an IRA early because those investments accumulate tax deferred. But as you’ve learned, a “tax torpedo” awaits. If your IRA is large, it’s often smarter to live on it for a few years after you retire while putting off filing for Social Security. You’ll shrink the IRA and hence the size of your required withdrawal at 701/2. Meanwhile, your Social Security account will grow by a guaranteed 8 percent for every year after 66 that you wait to collect, up to age 70. Social Security income is taxed less than IRA income, so this strategy often brings you out ahead. At this point, unfortunately, there’s nothing you can do. But I hope that your question will help others!

Q: You wrote that a divorced wife can collect spousal benefits on her ex’s account when she’s 62. Social Security says I can’t get half of his benefit until I’m 66.

A: We’re both right. If you were married at least 10 years, you get half of his benefit if you claim at 66, but less if you file at a younger age. If he dies, you can get survivor’s benefits as early as 60 (50 if you qualify as disabled). But again, claiming early means that your check will be reduced.

Q: I have a small mortgage on an investment condo. I can pay it off but I’d lose the tax deduction. What do you think?

A: The “value” of the interest deduction is a scam foisted on us by the mortgage industry. A deduction is not a gift! OK, in the 25 percent bracket, you write off $25 for every $100 paid in interest, but it costs you $75 out of pocket. How is that good? You’re always ahead when you have no debt.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

The Smart Way to Help Grandkids With College

4 tips for helping offset tuition bills

Are you planning financially to help a grandchild  — or niece or nephew — go to college? A common question is whether your gift will hurt the student’s chance at financial aid. The answer: sometimes yes, sometimes no. It all depends on the type of aid the child is apt to get.

If the family earns a substantial income, aid based on financial need is off the table. Instead, the school might offer a merit scholarship. This form of aid goes to students a school particularly wants, typically supersmart kids or those with a special gift. Grandparent money has no effect on merit scholarships, says Dean Skarlis, founder of the College Advisor of New York, which counsels families on educational choice. So feel free to give any amount of aid in any form you want.

It’s another story, however, if the family qualifies for aid based on financial need. In that case, your gift will indeed reduce the amount the student receives. But so what? The money you give will almost certainly exceed any potential loss in need-based aid. What’s more, that “aid” might have come in the form of student loans. Your contribution will help your grandchild graduate with a smaller burden of debt.

Here’s how to help the student while still getting the most out of need-based aid.

1. Give the money to the parent rather than the student and let the parent pay the bills. Students are expected to contribute 20 percent of their assets toward college; the contribution expected from parental assets is limited to 5.6 percent. By routing your gift through the parent instead of through the child, the child will qualify for more aid.

2. If the parents have a 529 plan for college savings, see if you can contribute to that one rather than setting up a 529 of your own. Money paid to the school from a grandparent’s plan won’t affect need-based aid in the student’s first year but counts as student income in future years. As a result, aid could drop sharply. Payments from parents aren’t considered student income. (Quick note: 529 investment plans grow tax-free when the money is used for higher education. They’re offered through brokers and — at lower cost — directly from the states.)

3. Grandparent gifts become a nonissue in January of the student’s junior year. By then, the student will already have filed an aid application for his or her senior year. Any future grandparent contributions won’t show up in the record, so they’ll take nothing from a financial-need award, says Joe Hurley, founder of savingforcollege.com, an expert site for information on 529s. You might let the student and family pay for the first 21/2 years of school and then start making your own contributions after that.

4. A student with financial need might also receive a merit scholarship, says Karen McCarthy, senior policy analyst for the National Association of Student Financial Aid Administrators. A grandparent gift may affect the size of the need-based award but, in most cases, should have no bearing on the merit award.

Before you start writing checks for college (or promise to), be sure that your own retirement is assured. Helping grandchildren to an education is a splendid act — as long as you won’t have to ask for the money back in your older age!

(Originally published in The AARP Monthly Bulletin.)

AARP Article

How to Make Your Money Last

Take advantage of Uncle Sam’s help to save at every age and stage

(The following article is taken from the 2016 edition of How to Make Your Money Last: The Indispensable Retirement Guide. The book was updated in 2020.)

“Saved more money.”

That’s the number one response retirees and people nearing retirement give when asked, “Financially speaking, what do you wish you’d done differently?” This realization, of course, usually hits most of us after we’ve blown through Plan A (the retirement fairy who’ll magically take care of everything) and Plan B (work till I drop). But since we can’t count on our health or our jobs to see us through, those of us who are lucky enough to still be employed should proceed directly to Plan C: Squeeze that paycheck like a sponge to fund our retirement accounts.

Fortunately, the government has bestowed a great gift on all retirement savers, even those nearing the end of their working lives: the tax-favored retirement plan. The contributions to these plans, as well as their earnings, are tax-deferred and even, in some cases, tax-free.

Many people close to retirement see little point in funding these accounts. “Why put money in a retirement plan now?” they ask. “I’ll be taking it out in a few years.” Two crucial reasons. First, these could well be your highest-earning years, making the tax benefits especially valuable. Second, you’ll be withdrawing the funds incrementally, not all at once. You may live another three decades — ample time for your preretirement contributions to grow tax-deferred. So be smart and get those tax breaks while you can.

Gimme (tax) shelter

Tax-favored retirement savings plans come in two types: traditional and Roths. The vast majority are traditional IRAs, 401(k)s and similar plans. The income taxes on your contributions, up to an annual limit ($18,000 in 2016, plus $6,000 for taxpayers 50 or older), are deferred, and the earnings grow tax-deferred as well. When you start withdrawing the money (which you cannot do before age 59 1/2 and must do by 70 1/2, unless you’re still on a company payroll), it is taxed as ordinary income. That’s the deal: No taxes now but definitely taxes later, when — the assumption goes — you’ll likely be in a lower tax bracket.

Roths, on the other hand, are funded with after-tax dollars. But all the earnings grow tax-free, so when you take out the money, it doesn’t count as current income and hence is totally tax-free. If you don’t need the money, you never have to take it out; a Roth can grow tax-free for the rest of your life and be left tax-free to your heirs. (Another upside: If you do need the money, you can withdraw your own contributions at any age without penalty.)

But the contribution limits for IRAs, whether Roth or traditional, are fairly low: The 2016 maximum is $5,500, or $6,500 if you’re 50 or older. There are also income limits, albeit generous ones: You can contribute the maximum if your adjusted gross income in 2016 does not exceed $117,000 or, for married couples filing jointly, $184,000.

Which plan is which?

The type of tax-favored plan you participate in is determined by your employment situation, so there’s not much angst around that choice. What is absolutely vital is that you participate in whatever plan you qualify for and sock away as much as you can afford. The money you invest now will be your nest egg later. Here’s a quick rundown.

  • If you work for a company with a tax-deferred plan, a percentage of every paycheck can be deducted automatically from your pretax salary and invested in the plan. It’s typically deposited in mutual funds provided by investment firms, brokerages, banks and insurance companies. Many employers match a percentage of your contribution, a freebie no employee should pass up.

    In general, for-profit businesses offer 401(k)s; public schools, universities and other nonprofit institutions offer 403(b)s; and certain state and local governments provide 457s. (The names correspond to sections of the tax code.)

    According to Vanguard’s 2014 study “How America Saves,” workers in their mid-50s to mid-60s contribute an average 8.8 percent of their earnings to these plans. At 65 and up, they save 10.1 percent. As an annual goal, that may be too ambitious; still, try raising your current contribution by 2 or 3 percent (an amount that should be relatively painless when deducted automatically from your paycheck). Vanguard reports that women, mindful of their longevity, save a larger percentage of their pay than men at the same income level.

  • If you work for a company and meet certain income requirements, you can fund a personal IRA in addition to a company plan. The full IRA contribution ($5,500, or $6,500 if you’re 50 or older) is tax-deferred if your modified adjusted gross income in 2016 does not exceed $61,000 or, for married couples filing jointly, $98,000. You can earn more than those amounts and still open a personal IRA in addition to a company plan if you have freelance income on the side and use it to fund the IRA.

  • If you have no employee plan, you can open a traditional IRA. The same contribution limits mentioned above make an IRA stingier than the 401(k), but the tax break it offers should not be left on the table. Moreover, if your spouse has no earnings, you can make maximum contributions in both your names — as long as the amounts are covered by your earnings. Tax-favored retirement plans cannot be funded with unearned income (Social Security, pensions, interest, dividends or rent). If your part-time job pays, say, $4,500 per year, that’s where your contribution tops out.

  • If you’re self-employed and earn a substantial income, you can start a SEP-IRA (simplified employee pension, handled like an IRA) with a maximum contribution of $53,000 in 2015. If you work with your spouse, you can each fund a SEP-IRA. However, any employees who’ve worked for you at least three of the past five years must also be included in the plan.

If and when you change jobs, your plan travels with you. Your key objective is to preserve the tax umbrella over it. There are five ways to accomplish this.

1. If your new employer also offers a 401(k), you can transfer your money tax-free into the new employer’s plan. This option has the advantage of consolidating your retirement savings in a single account.

2. You can usually keep the old 401(k) if you like, as long as the balance is at least $5,000. The pros: You’re in a familiar investment; the fees may be lower than elsewhere; and you can usually make withdrawals without penalty if you’re between 55 and 591/2. The cons: There may be limits on how and when you can withdraw the money; the fees may be higher than at a no-load (no sales charge) mutual fund; you could lose track of the old 401(k); and an heir could miss out on tax advantages that might otherwise be available.

3. Most commonly, people transfer the money from the old plan, tax free, into a “rollover IRA.” There’s no limit on the amount you can roll. You can choose the IRA offered by your plan’s current administrator — an attractive option if it’s managed by a no-load mutual fund group such as Vanguard, Fidelity or T. Rowe Price; a discount broker such as Charles Schwab or TD Ameritrade; or a low-cost firm that specializes in retirement plans. Or you can roll your old plan into an IRA administered by a different firm, preferably one of those just mentioned. Definitely switch if your current 401(k) is invested with a firm whose advisers charge sales commissions, even if you don’t use those advisers. The IRAs of such firms often contain high-cost mutual funds. Also switch if you’re in a 403(b) or 457 plan whose only investment option is a fixed or variable annuity. And run away — fast — from the friendly “advisers” who call, email, mail and even visit your office with recommendations for your rollover account.

4. If you have multiple retirement plans, roll them together into a single IRA. Separately, they’re a pain to keep track of and likely add to your costs.

5. If you want to buy individual stocks (an imprudent move), roll your retirement plan into a self-directed IRA with a discount or full-service brokerage firm or financial adviser.

Note: The money you move should go directly from your old plan to your new one without passing through your hands. (Your new plan’s trustee will explain.) If the check goes to you, it’s counted as a taxable withdrawal unless you deposit it into your personal bank account, write a new check, and send it to the new plan within 60 days. Too much can go wrong, so don’t do it.

Should you convert to a Roth IRA? You can roll any amount of money from a traditional IRA, 401(k) or similar plan into a tax-free Roth IRA regardless of how much income you earn. There’s a cost to this transfer, however — perhaps a big one. You pay current income taxes on the money you move even though you don’t withdraw any of the cash.

You might want to switch to a Roth if: 1) You won’t need the money until your later age, if ever. 2) You plan to leave all or most of your Roth to your heirs and want them to receive it tax free. 3) You expect to be in the same, or higher, tax bracket when you retire, although you can’t know for sure. 4) You’re young enough that future growth in your investments could more than offset the cost of paying current income tax. 5) You can pay the taxes due from outside funds without having to tap your tax-sheltered retirement account.

For the average person, however, the size of the current tax from a Roth conversion might overwhelm any likely benefit he or she would get from future tax-free growth.

When there’s no more paycheck

So you’re officially retired? Congratulations — we think. Your income now will derive from many possible sources, including Social Security, pensions, and taxable savings and investment accounts, as well as the tax-favored plans discussed here. It can be hard to know which funds to tap when. Your goal is to make your collective nest egg last as long as possible. The key? Use it tax-efficiently.

The general rule is to spend taxable savings (money held in regular investments) before dipping into an IRA (our term here for your tax-deferred savings, since you’ve likely consolidated them in a rollover IRA). You should also tap your savings — taxable first, then tax-deferred — if doing so enables you to put off collecting Social Security until age 70, the point at which you will get the highest possible monthly benefit for life.

That said, there are times when you should tap your IRA first:

  • When you’re in a low tax bracket and your heirs are in a high one. The IRA money is worth more if you take it now.
  • When you want to shrink your IRA so that, upon reaching 70 1/2, your required withdrawals need not be large. This strategy could save you from paying higher income taxes on your Social Security benefits when IRA withdrawals start.
  • If you’re in the 15 percent tax bracket. You might want to withdraw money from the stock funds in your IRA, even if you don’t need the cash, and pay income taxes on it now. Then you can reinvest the money in stock funds in your taxable account. That way any further increase in their value will be taxed at the low capital gains rate.
  • If you have both taxable and tax-deferred accounts for long-term investments. Keep stocks in the taxable account. That way, any profits will be subject to the low capital gains rate. Taxable bonds, such as Treasury funds, belong in the tax-deferred account. Interest income is always taxed as ordinary income.
  • If you have both a Roth and a tax-deferred IRA. Normally, spend the latter first. The longer the Roth can grow tax-free, the better. But tap the Roth first if you’re in a high tax bracket and expect it to drop in the future.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Got Money Questions?

Jane Bryant Quinn on personal finance.

Q: My husband and I are wondering when would be the best time to collect our Social Security benefits.

A: I get lots of questions like this. The answer differs for every couple, depending on their ages and the size of their potential benefits. Sometimes one of you should take retirement a year or two early so that the other can claim spousal benefits on that account. Sometimes it’s better to wait. These services can provide the answers you need. SocialSecuritySolutions.com charges $20 for a report showing the best time to claim benefits based on the life expectancy you set; it costs $50 if you want to be able to play with various retirement assumptions and $125 for one-on-one advice. SocialSecurityChoices.com charges $39.99 for a claiming strategy based on three projected lifetimes. The services’ recommendations differ a little bit because of the math involved, but both are sound. AARP’s free Social Security Calculator can also help you determine your best age to claim benefits..

Q: Our disabled son’s inheritance will go into a special-needs trust. Can I use a codicil form from the Internet to change the trustee?

A: Please don’t! If the codicil’s wording — or the way you fill in the names or sign the document — doesn’t conform exactly to your state’s law, a court might not accept it. Your son’s welfare is too important to leave to boilerplate.

Q: How are individual retirement accounts divided among heirs? Can I leave my stocks to one child, my bonds to another and my CDs to a third?

A: Yes, you can divide your children’s inheritance in this way, says IRA expert James Lange of the Lange Financial Group in Pittsburgh. But do you really want to? The person who inherits the stocks might wind up much richer than the person who gets the CDs (or much poorer, if the market collapses). You might leave anger or envy behind. And what if you want to sell some stocks and reinvest in CDs? You’d be favoring one child over another. Instead, leave the total value of the IRA in percentages — say, divided into thirds. The trustee will split the assets according to the percentages you decree.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Are You Ready to Retire Early?

Use this checklist to assess your plans

Are you thinking about retiring early? Back when boomers were young they considered it almost a generational perk. Life’s second half should be merry years of play and rest.

Once you slide into your 50s, however, the question of early retirement grows complex. You might still need your paycheck. If so, case closed. And you might love your work and hope to pursue it for many more years.

If you’re ready to quit, however, there’s a lot to consider before casting loose. On the plus side, you’ll be able to take your life in any direction you want. On the downside, early retirement carries financial and emotional risks. Before telling your boss to take that job and shove it, run down this checklist to see if your plan is sound:

Do you really have enough money to finance a long retirement?

Don’t underestimate your longevity. At, say, 55, men have an average of 28 more years to live, and women 31 years. Roughly half of you will live longer than that. During your early years of play, you’ll be living primarily on your savings and investments, plus any special sources of income such as rents, royalties or perhaps a small pension. You’ll have to wait until 62 to qualify for Social Security retirement benefits. But by claiming that early, your benefit will be docked by as much as 30 percent, compared with what you would receive if you waited until your full Social Security retirement age (67 for today’s 55-year-olds). You might come to regret that.

Have you made a retirement budget you can live with?

To make it easy, sketch the budget for only your first retirement year. Start by listing the income that you can realistically expect after your paycheck stops. For budget purposes — and to feel fairly sure that your money will last for the next 30 years — assume that you’ll take only 4 percent out of your savings and investments. The total, from savings and other sources, represents your spending limit.

Now add up your expenses.If they’re higher than your spending limit, you’ll have to cut back — maybe sharply. That might not be hard if your largest budget item is your house and you’re happy to downsize. If not, you’re probably not ready, financially, to make the leap.

In fact, you’re not even ready if your budget just barely breaks even. Inevitably, you’ll run into costs that you didn’t expect. If you cover them by digging too deeply into savings, you might run seriously short of money a couple of decades from now. You might be better off staying at work for a few more years, cutting spending and concentrating on saving more.

When budgeting future withdrawals from your savings and investments, follow the classic 4 Percent Rule: Take 4 percent of your financial assets in Year 1. Take the same dollar amount plus an inflation increase in Year 2. In Year 3, take last year’s dollar amount plus another increase to cover inflation, and continue on that track. When you eventually sign up for Social Security (later, not sooner, I hope), that income will be inflation indexed, too.

Are you out of debt?

Giving up a paycheck when you’re carrying credit card debt is nothing short of madness.

Do you have health insurance?

Some corporations provide early retirees with health insurance until they reach 65 and qualify for Medicare. If you’re not that lucky, survey the private marketplace carefully to see what’s available at a price you can afford. Going bare can wreck your finances overnight.

Do you have a sustainable investment plan?

At today’s interest rates, you’d need a two-ton truck full of money to live off the interest paid by high-quality bonds or certificates of deposit. Low-quality bonds yield more but carry market risk. If you switch your savings into dividend-paying stocks, you’re facing market risk plus a lack of diversification. That’s because you’ll have too much money in financials, consumer staples and utility company stocks and not enough in the growth stocks that typically don’t pay dividends.

Financial planners might advise early retirees to hold 60 to 70 percent of their money in an index mutual fund that follows the total stock market (both large and small stocks), for 20- and 30-year growth. The balance would go into intermediate-term Treasury bond funds. They’re a good cushion because their prices usually rise when the stock market falls. Research shows that following this strategy in conjunction with the 4 Percent Rule gives you very high odds of making your money last for 30 years. Put an extra 5 percent into stocks if you need the money to last for 40 years.

If you’re married, how well do you and your spouse get along?

Retirement at any age throws you continually into each other’s company. Doing the 50 states in an RV will become a misery if you’re arguing all the time.

How flexible are you?

If your early retirement doesn’t work out because you’re bored or you’re spending money faster than you expected, be prepared to go back to work — part time, at least. That means keeping up your skills or finding new ways of deploying the natural talents you have. If you’re choosing a new place to live, you might consider its employment opportunities, just in case.

Who succeeds at early retirement?

People who have enough money (with “enough” depending on how high on the hog you want to live), plenty of personal interests and an adventurous disposition. Have a happy second half of your life!

(Originally published in The AARP Monthly Bulletin.)