What are Retirement Biggest Blunders Folks make after 50?

It’s time to reassess and make sure that your retirement financial plan is in order. If you wait until later, you may make serious mistakes that will threaten your future financial security. AARP’s recent article entitled “10 Retirement Planning Mistakes People Make at 50” gives us 10 errors that 50-year-olds make that may have serious consequences in the future:

  1. Expecting to work past retirement age. Data from the Employee Benefits Research Institute (EBRI) show that 48% of people retire sooner than planned, often due to layoffs, health issues or family matters. If you lose your job in your 60s, it may be incredibly tough to find a new one, especially with the same pay and benefits. Plan for an earlier retirement date, and if you work well into your 60s, it should be because you want to, and not because you must.
  2. Taking too much or too little risk. Some people realize that time is running out, and they may do one of two things: take in too much risk, frequently in the form of speculative investments or they sell everything and move into cash, CDs, or fixed annuities, which can deprive them of decades of growth. Too much risk might mean huge losses, when they can least afford them. Instead, create an investment strategy based on your goals, aspirations and concerns.
  3. Missing the 50-plus catch-up provisions. As a 50-year-old, you can catch up in your savings. For 2021, the IRS is allowing individuals to contribute an additional $1,000 to an IRA in addition to the standard $6,000 limit. Self-employed people 50 and older with a SIMPLE IRA can add $3,000 to the $13,500 limit. If you have an employer-sponsored 401(k), you can max out your contributions by adding $6,500 over the $19,500 limit. While you are still employed, you can start a Roth IRA with a 2021 contribution limit of $7,000 for those 50-plus.
  4. Too much credit card debt. Paying down debt is critical, and you should work toward having no debt, except your mortgage. Once other debts are paid off, and you are funding your retirement, then attack your mortgage.
  5. Adding college debt. Parents take on too much debt to fund their kids’ schooling because they did not save enough in their 529 plans. Some take out home equity loans or other debts that they may be unable to pay off before retirement. These put a tremendous drag on monthly cash flow, especially for those on a fixed budget. Instead, make your children take loans in their names and help them with payments as much as you can or wish to. Do not jeopardize your own financial security.
  6. Overlooking health maintenance. Spending time, energy and money in your health now will help to reduce health-related expenses later. You will also enjoy the journey more because you feel better. Watch your weight, exercise and eat a healthy diet.
  7. Neglecting life insurance. Many healthy 50-year-olds may not think much about insurance, but at 60, buying a long-term care policy may be difficult. Health can worsen from 50 to 60, making a policy harder and more expensive to obtain. Life insurance is also important because you do not want your family to experience emotional and financial stress in the event of your untimely and premature death.
  8. Living the same lifestyle after a divorce. Divorce is the number one risk to retirement. Dividing assets and assuming individual expenses can be financially devastating. Envision your financial plan as a single person and look at the way in which divorce will impact your long-term goals. Keeping your past lifestyle and budget is a common mistake. If you need to downsize post-divorce, do it sooner rather than later.
  9. Failing to update important documents. If you have an estate plan, make certain it is current. If you do not, see an experienced estate planning attorney and get one. Life changes, so review your will, trusts, health care proxies, living wills, powers of attorney and beneficiary designations.
  10. Letting the market frighten you. Do not make the mistake of trying to time the market. You should have amassed substantial assets, so do not be distraught if the market plunges. Filter out the noise and stick with your strategy.

Reference: AARP (May 11, 2021) “10 Retirement Planning Mistakes People Make at 50”

 

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Should I Include an Annuity in Estate Planning?
Retirement

Should I Include an Annuity in Estate Planning?

Annuity  – Kiplinger’s recent article entitled “Annuities: 10 Things You Must Know” explains that, as traditional sources of guaranteed retirement income (like pensions) are no more, many retirees are wondering where to look. An annuity may be an option. However, not all annuities are alike, and some may not be appropriate for everyone’s situation.

Immediate Annuities vs. Deferred Annuities. There are two types of annuities: immediate annuities and deferred annuities. Immediate annuities are best for retirees who want to receive payouts immediately. If you invest money in an immediate annuity, an insurance company guarantees that you will receive a fixed payment every month for as long as you live (or as long as you or a beneficiary are alive). However, usually your money is locked up after you give it to the insurance company. Some insurance companies, however, permit a one-time withdrawal for emergencies. In light of this, you may not want to tie up all of your savings in an annuity.

Deferred annuities are better for people who are still saving for a future retirement because that money they invest grows tax-deferred, until it is withdrawn later. A deferred annuity, also known as a longevity annuity, needs a smaller cash outlay. You get guaranteed payments when you reach a certain age, and you’ll receive the highest payout with an annuity that stops paying when you die.

Annuity Payouts: Single Life vs. Joint Life. If you buy an immediate annuity, you’ll get the highest annual payout if you buy a single-life version. The payouts cease when you die, even if your spouse is still alive. However, if your spouse needs that income, you may want to take a lower payout that will also continue for his or her lifetime.

Fees for Cashing Out Your Annuity. Although deferred annuities let you cash out at any time, you may not see all your money returned. A surrender charge is usually imposed that’s about 7% to 10% of the account balance in the first year. It gradually decreases every year, until it disappears after seven to 10 years. If you withdraw money before age 59½, you generally have to pay an early-withdrawal penalty of 10%.

Deferred Annuities: Fixed vs. Variable. Most deferred annuities allow you to invest your money in mutual-fund-like subaccounts. These products are known as deferred variable annuities. They let you add (for a fee), guarantees that you won’t lose money, even if the underlying investments decline in value. If the market drops, you can still withdraw about 5% of the guaranteed balance each year. You can also withdraw the actual account value at any time (after the surrender period expires) if your investments increase in value.

Reference: Kiplinger (May 21, 2021) “Annuities: 10 Things You Must Know”

 

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Should I Name a Living Trust Beneficiary of a Roth IRA?

The simple answer is yes, a living trust can be the beneficiary of a Roth IRA. However, without knowing more about an individual’s specific circumstances, it’s hard to know if this is a wise move.

A November 2018 article from NJ Money Help entitled, “Be careful when choosing a beneficiary,” explains that there are several things you need to know when considering a living trust as the beneficiary of a Roth IRA.

By designating a living trust as your beneficiary, the distributions from the Roth IRA at your death will become mandatory based on the life expectancy of the oldest beneficiary named in the trust.

This is an important point if you’re currently married. That’s because you’ll forfeit the ability for a spousal rollover, by naming the trust as your beneficiary.

Current law permits IRAs to be passed to a spouse as a beneficiary, and the spousal beneficiary can treat the account as if it was their own IRA.

In the case of a Roth IRA, this means the surviving spouse can continue to defer distributions tax-free for their lifetime.

By naming the living trust as beneficiary, this benefit is lost no matter if your spouse is one of the living trust beneficiaries.

Why?

Distributions are required to begin immediately, if the beneficiary is anyone other than a spouse.

Thus, you would forgo the ability to allow the funds to continue to grow tax-free for a longer period of time.

You should talk about this with an experienced estate planning attorney. He or she will be able to look at your entire financial situation before you determine if this is a wise move for you.

Reference: NJ Money Help (Nov. 2018) “Be careful when choosing a beneficiary”

 

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The Stretch IRA Is Diminished but Not Completely Gone

Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes ( Stretch IRA ) . This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week.

A quick refresher: the SECURE ActSetting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).

However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.

However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:

  • Surviving Spouses.
  • Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the Strech IRA within ten years. The only exception is for full-time students, which ends at age 26.
  • Disabled individuals. There is a high bar to qualify. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
  • Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
  • Those who are not more than ten years younger than the deceased account owner. That means any beneficiary, not just someone who was related to the account owner.

What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? Yes, this was a major tax grab for the federal coffers.

Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”

 

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Elder Financial Abuse Increases with Social Isolation

Social isolation , whether because of a pandemic or because an elderly person is alone, is a leading factor contributing to the financial exploitation of seniors. The necessity of quarantining for older adults because of COVID has increased the number of people vulnerable to elder financial abuse, reports the article “Social Isolation and the Risk of Investment Fraud” from NASDAQ.com.

Financial abuse can take place at any time during a person’s life. However, scammers typically strike during times when seniors are more susceptible. It is usually during a health crisis, after the death of a loved one, or when younger family members live far away.

Scammers get information about their prospective victims by reading the obituaries and social media. They also become involved with senior social and support groups to ingratiate themselves into seniors’ lives.

Combine social isolation with lessening cognitive capacity and the situation is ripe for a scam. Senior investors are often flattered when their new-found friends praise their superior understanding of investment opportunities. Decreased judgment paired with a lifetime of savings is a welcome mat for thieves, especially when friends and family members are not able to visit and detect changes indicating that something bad is occurring.

Widowed or divorced seniors are more likely to be victimized. People who suffer from isolation, more and more often turn to the internet as a social outlet. Research shows that people are contacted by scammers through social media or pop-up messages on websites. Those who are dependent and engage more frequently in online life are more likely to engage with a scammer and lose more money than those who are targeted by phone or scamming emails.

How to protect yourself or your aging parents from fraud during quarantine

Scammers isolate their victims. Talk with family, friends, your estate planning attorney, or financial advisor for advice before making any decisions.

Do your homework first. If you don’t know how to do an internet search to see if the website or the person is a scammer, talk with a family member or professional advisor who can. Don’t invest money, unless you fully understand the risks and can verify the legitimacy of the offer and the company involved.

Educate yourself about finances and investments. This is a good project for people with too much time on their own. There are many worthwhile websites where you can learn about investments and finances. Look for well-known financial publishing companies. Don’t bother with marginal websites—that’s where fraudsters lurk.

Don’t be embarrassed to file a complaint. If you think you have been defrauded, you can file a complaint with the SEC, FINRA, and your state securities regulator. Your estate planning attorney will also know what resources you can tap to defend yourself.

Warning Signs of Elder Financial Abuse:

  • A new “friend” who suddenly appears and tries to keep family and friends away.
  • Someone who presses you to provide financial information and passwords to accounts.
  • Fear or anxiety when a certain person calls or sends a text.
  • Sudden and unexplained changes in estate planning documents or beneficiary designations.
  • Anyone who asks for passwords to financial accounts.

Generally speaking, anyone who promises a high return with no risk is not telling the truth. The same goes for anyone who tells you that you need to act fast.

Seniors who are socially distant can stay in touch with family and friends through phone calls and if they can manage the devices, by video chat. Regular contact goes a long way in preventing strangers with bad intentions from insinuating themselves into your life or your parent’s lives.

Reference: NASDAQ.com (Feb. 11, 2021) “Social Isolation and the Risk of Investment Fraud”

 

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Should I Pass a Certificate of Deposit in My Will?

Certificate of Deposit – There are three categories of property, and only one requires probate, so it can be accessed when the owner passes away, says njmoneyhelp.com’s recent article entitled “How can we avoid probate for this account?”

First, it’s important to understand that property that passes by operation of law is any asset that’s owned jointly with right of survivorship. These accounts are sometimes labeled as “JTWROS.”

When one co-owner dies, the property passes by law to the surviving co-owner. Probate isn’t needed here.

Married couples typically have most of the accounts held in this manner.

A second category is contract property, which includes life insurance, retirement accounts and any non-retirement accounts that have beneficiaries designated upon death.

These designations supersede or “override” a will and also pass outside of probate directly to the named beneficiary.

These are frequently designated as “POD” (payable on death) or “TOD” (transfer on death).

The third category is everything else. This includes accounts that are owned solely by the person who died with no POD or TOD designation.

A certificate of deposit is a time deposit. It’s a financial product commonly available from banks, thrift institutions and credit unions. Certificates of deposit are different from savings accounts because a CD has a specific, fixed term and usually, a fixed interest rate.

To avoid the probate process to access a CD or any other account owned by a spouse’s name, you can either make the account jointly owned by husband and wife with right of survivorship.

Another option is to designate your spouse designate you as a beneficiary upon death.

Either option will avoid the need to probate the will to access that particular account, like a certificate of deposit.

Contact an experienced estate planning attorney with questions about CDs and probate.

Reference: njmoneyhelp.com (June 6, 2019) “How can we avoid probate for this account?”

 

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Should You Gift Stocks as Part of Your Estate Plan?

There are a number of ways to gift stock to family members, during your lifetime or after you die, according to a recent article from Think Advisor titled “Gifting Stock to Family Members: What You Need to Know.” The idea is simple, but how the gifting is done and what taxes may or may not need to be paid (and by whom) requires a closer look.

Transfer of stock today is made through an electronic transfer from your account to the investment account of the recipient of the shares. The rules for gifting shares of stocks also apply to ETFs and mutual funds.

Lifetime gifts. Stock gifts can be made in place of giving cash. The annual limit of $15,000 per person or $30,000 for a joint gift with your spouse, applies, and the value of the stock on the day of the transfer constitutes the amount of the gift.

If you gift in excess of the annual limits, this takes a bite out of your lifetime gift and tax exemption, which as of this writing is $11.7 million per person for federal estate taxes. That’s something to keep in mind when deciding on your gifting strategy.

Using a trust . Instead of giving cash to a family member, you could use a trust and transfer your shares into the trust, with the family member as a beneficiary of the trust. The treatment of tax and cost basis issues will depend upon the type of trust used. Your estate planning attorney will be able to help you determine what type of trust to use.

Transfer on death. You can also gift stocks to others through your will, through a transfer on death designation in a brokerage account, through a beneficiary designation in a trust if the securities are held there, or through an inherited IRA. Taxes and cost basis will vary, depending upon your circumstances.

Taxes and gifting stock. There are no taxes and no tax implications at the time stocks are gifted to someone, but there are some issues to know before making the gift.

When stocks are given to a relative, there is no tax impact for the donor or the person receiving the stock, and as long as the value of the stock is within the annual gifting limits, the donor does not have to do anything. If the gift value exceeds the limit, the person has to file a gift tax return.

The recipient of the stock shares doesn’t owe capital gains taxes, until the stocks are sold. At that time, the cost basis and holding period of the person who gifted the shares will need to be known in order to determine the tax liability.

If the stock is transferred at a price below the donor’s cost basis and sold at a loss, the recipient’s cost basis and holding period is determined by the fair market value of the stock on the date of the gift. However, if the price of the shares increases above the donor’s original cost basis, their cost basis and holding period need to be known to calculate the recipient’s capital gain.

Gifting to children or grandchildren. Gifting shares of appreciated stock to children and grandchildren can make sense for the donors, since they are taking the value of the stock out of their estate and transferring it to a child or grandchild in a lower tax bracket. The recipient or their parents could sell the shares and pay a lower capital gains rate, or even no capital gains taxes. However, if the recipient is a current or future college student, or the student’s parent, the gift could reduce eligibility for need-based financial aid. The stock may need to be reported as an asset belonging to the student or the parent, increasing their income when they are received and/or when they are sold.

Speak with your estate planning attorney before gifting stock or cash to family members. There will be sensible ways to be generous without creating any issues for recipients.

Reference: Think Advisor (Jan. 25, 2021) “Gifting Stock to Family Members: What You Need to Know”

 

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What are the Biggest Mistakes Women make with their Social Security Benefit?
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What are the Biggest Mistakes Women make with their Social Security Benefit?

Retirement planning is an important part of long-term financial wellness, and for women, who typically make less money and live longer than men, it can mean lower Social Security benefit payments and other problems.

Money Talk News’s article from January entitled “3 Costly Social Security Mistakes That Women Make” looks at some of the costliest Social Security mistakes that women can make.

  1. Taking your Social Security benefits too early. Deciding to take Social Security benefits too soon can be especially costly for single women and women in same-sex relationships or marriages. Women usually have a tougher time than men saving for retirement because they have lower lifetime earnings and a longer lifespan than men, on average. For single women, these challenges are compounded by the absence of a significant other bringing in additional Social Security income — or any other type of retirement income. It may be prudent for single women and women in same-sex relationships to delay claiming Social Security benefits as long as possible, so the amount of their monthly benefit is higher when they do start getting it.
  2. Forgetting about your ex-spouse. If you were married and then divorced, and your marriage lasted at least 10 years, you might be eligible for benefits through your ex-spouse. You should check to see if you’d get a better monthly payment by claiming through an ex’s earnings record, instead of your own. If you’re currently unmarried and at least 62, and your ex-spouse is at least 62, you can claim spousal benefits. Your own retirement benefits at full retirement age must be less than half of your ex’s benefits. (When you claim ex-spousal benefits, it will trigger a claim for your own benefits, unless you were born before 1954.) Even if your ex hasn’t applied for benefits yet, you can file a claim on his or her account, provided you and the ex are both at least 62. However, remarriage will mean the loss of ex-spousal benefits. However, if your later marriage also ends, you again become eligible for the ex-spousal benefits.
  3. Allowing your spouse to make a unilateral claiming decision. A 2018 study from the Center for Retirement Research found that a husband can increase his wife’s survivor benefits by 7.3% each year by waiting to claim his benefits. However, the study says that many husbands don’t think about the effect that their age at claiming benefits can have on their survivor and her benefits. Rather, many husbands will look at more immediate issues and decide to claim Social Security earlier. Despite being educated about the possible effect on their wives in the future, many husbands said they wouldn’t change their claiming age.

Talk to your spouse about how to best manage when each of you should file a claim for benefits and coordinate your retirement and your Social Security claims.

Reference: Money Talk News (Jan. 6, 2020) “3 Costly Social Security Mistakes That Women Make”

 

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Survivor Benefits – When a Husband Dies, Does the Wife Get His Social Security?

Survivor Benefits – When to take Social Security benefits is a decision that has major consequences for not only the worker but their spouse. There are a few mistakes the people make that end up costing their loved ones, advises the recent article “If You Love Your Spouse, Don’t Make This Social Security Mistake” from NASDAQ. The most common mistake concerns deciding when to start taking Social Security benefits.

By starting to claim survivor benefits at age 62, you’ll get a reduced amount compared to what you would receive at your full retirement age. If you can wait until age 70 to claim Social Security, you and your spouse will benefit from the delayed retirement credits.

Most retirees base their benefit decision on how long they expect to live and their financial needs. People who expect to live a long time will get more money if they can wait until age 70, when their monthly benefits will be larger. People who don’t expect to live very long past retirement, usually take their benefits early.

However, when you decide to take your benefits has an impact on your surviving spouse. When both members have worked and earned their benefits, it’s not as big of an issue. However, for a spouse who does not have a work history of their own or whose earnings are significantly lower, this can have a big financial impact.

The issue is survivor benefits. You are entitled to receive a survivor benefits when your spouse dies, and that benefit is based on their work history. If the surviving spouse claims benefits earlier than full retirement age, there will be a reduction.

However, if the deceased spouse claimed retirement benefits early, the surviving spouse will receive a reduced survivor benefit.

Here’s an example. Let’s say a married person, age 62, would get a retirement benefit of $1,500, if they retired at age 66 and 8 months. The person has a terminal illness and will not live more than a few more months. The spouse is also 62. Some people in this situation would start taking their Social Security benefits immediately. The reduced monthly payment would be $1,075. It’s less than the $1,500, but it’s better than nothing.

The issue is that the surviving spouse would only be eligible to receive $1,075 per month. That payment would only be if the surviving spouse waited until full retirement age. If a claim were made before full retirement age, the monthly benefit would be $884.

If the terminally ill person chose not to claim Social Security at all, the surviving spouse would be entitled to a survivor benefit of $1,500, again if they waited until full retirement age.

That $350 difference may not feel big on paper, but when there is only one income, it adds up. Waiting to take benefits could make all the difference in the quality of life your spouse enjoys for the rest of their life.

Reference: NASDAQ (Nov. 14, 2020) “If You Love Your Spouse, Don’t Make This Social Security Mistake”

 

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When Does It Make Sense to Take Social Security at 62 ?

You’re entitled to your full monthly Social Security benefit based on your earnings history when you hit your full retirement age (“FRA”) or  you can take Social Security at 62.

Your FRA is either 66, 67, or somewhere in between, depending on when you were born. However, you can enroll in Social Security early and take Social Security at 62.

However, for each month you claim benefits ahead of FRA, it reduces the amount for the rest of your life.

Motley Fool’s recent article entitled “3 Reasons to Claim Social Security Benefits Early” says it may pay to enroll early, if one of these situations applies to you.

  1. You need cash ASAP. It’s not uncommon for seniors to lose their jobs and have a hard time securing employment again. Others are forced to stop working due to health issues (either theirs or that of a family member).

If you require money immediately, then you might not have the option of weighing whether claiming Social Security early is a good idea. You’ll just have to go ahead to get by.

It’s better to claim your benefits early at a lower rate, than adding costly debt to survive.

  1. Your health is a concern. Social Security is supposed to pay you the same total lifetime benefit. As a result, filing early will give you less money each month, but more years of benefits. This, in effect, simply means stretching that total payout for a longer time period. If you delay, it will have the opposite effect. You get a bigger monthly benefit but over fewer years.

This formula is designed so you break even, if you live an average lifespan. However, if your health isn’t good, and you don’t expect to live all that long, then filing for benefits early could be the right move. This could ensure that Social Security ultimately pays you the largest amount of money.

  1. You want to have fun in retirement, while you’re younger. Filing for benefits before your FRA may let you really enjoy travel and other experiences, while your health permits. However, if you don’t have a lot of retirement savings, you may need to wait on filing for benefits to avoid financial difficulties later on. However, with a good-size nest egg, it pays to claim your money when it will do you the most good.

Take the time to consider your options for claiming your benefits. This will help you to avoid regretting your choice. Consult with a financial advisor with expertise and experience in retirement planning.

Reference: Motley Fool  (Oct. 6, 2020) “3 Reasons to Claim Social Security Benefits Early”

Suggested Key Terms: Elder Law Attorney, Social Security, Elder Care, Financial Planning

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