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Retirees’ Tax Puzzle: Pay Now or Later?

The majority of retirees pay no federal taxes. But taxes should be a concern for retirees who have retirement savings. That’s because the money they take out of their retirement accounts for living expenses will be treated as federal taxable income. It’s difficult enough to figure out how much money to withdraw – and when. Taxes are a separate but related issue.  

In this blog, we interviewed Michael Kitces, a well-known financial adviser and partner with a Maryland financial firm, who writes the “Nerd’s Eye View” blog. He discusses the basics of navigating the tax code. The challenge facing retirees is to make tax decisions today that will minimize taxes now and in the future.

Question: Do you find that new retirees are surprised by their retirement tax situation?  

Kitces: It’s usually not even on their radar screen. Pre-tax and post-tax income, different tax buckets – I don’t think most people even think about it once they’re in retirement. That’s why we’re still seeing people who are “surprised” when they turn 70½ and the required minimum distributions (RMDs) begin, and their tax bill gets a whole lot higher. They say, “Why didn’t we plan for this?” We say, “We’ve been recommending you plan for this for years!” …Learn More

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Caring for Her Elderly Parents 24/7

Vivian Gibson

Taking care of her elderly parents is Vivian Gibson’s full-time job.

The last two weeks in October weren’t so unusual.  She tended to her 86-year-old father for several days in the hospital – another episode in his unending battle with ankle sores stemming from service in the Korean War. Gibson also helped her mother, age 81, get through a medical procedure and chauffeured both parents to more than a dozen doctor’s appointments and to their dentist. Her mother has been dealing with a pulled tooth, along with abnormal cells in her bladder and an abnormal EKG.

In addition to their medical needs, Gibson helps them with everything else, from cleaning and dressing her father’s wound daily to buying their groceries and cleaning up the yard.  Her parents live in Bartow in central Florida, about 20 minutes from Gibson’s home in the country, and she’s always on call in case her father falls again.

Yet she remains surprisingly upbeat, unfazed by a non-existent social life and a caregiving burden made heavier by the fact she is an only child. “There is never any respite,” she said. “I have to work my doctor’s appointments in around theirs. My mother keeps telling me, ‘Don’t get sick. You can’t get sick!’ ”

To help her parents, Gibson retired from a local hospital just shy of her 59th birthday.  She’s now 61 and premature retirement has strained, though not broken her financially.  She drained most of her $17,000 emergency fund to meet regular expenses and reluctantly dipped into her IRAs and past employers’ retirement savings plans. Her combined balance is down to $300,000 – or about $12,000 lighter than when she retired, despite a rising stock market. Her lifeline has been a $24,000 pension from her work in state government.

“I wanted to travel,” she said – Australia, New Zealand, Canada – “but I don’t have the money – or the time – for that.” …Learn More

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Happy Thanksgiving!

The staff at Squared Away  hope our readers enjoy their time with family and friends during the holiday weekend.
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Video: Overtime Rule to Benefit 4 Million

Just hours after the following blog went live on Tuesday, major media reported that a Texas judge blocked implementation of the new overtime regulation in response to challenges by a group that included 21 states and businesses. The future of this regulation is now in question.

On Dec. 1, an additional 4.2 million U.S. workers will potentially be eligible for overtime pay when the annual earnings cap doubles to $47,476 under the new federal overtime rule.

Retail workers bracing for the holiday onslaught will be among those receiving overtime if they work more than 40 hours per week but earn less than $47,476.   The previous cap, $23,660, was set in 2004.

Under the new rule, employers must pay overtime to any eligible full-time or part-time worker, according to the U.S. Department of Labor (DOL), which produced the above video explaining who will benefit from its recent rule change.

This will mean bigger paychecks for low-wage workers but permanent raises for others earning slightly more. That’s because one option for employers seeking to avoid overtime pay is to increase annual pay for, say, middle managers to just over the $47,476, exempting them from the rule.

Inevitably, some employers will try to ignore the rule. It’s important that workers know their rights under the law – so watch the video and read this.  The overtime rule is enforced by the DOL’s wage and hour division offices in 50 states. …Learn More

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Early Social Security Filers Afraid to Lose

Retirement experts and financial advisers maintain there is a right way and a wrong way to approach Social Security.

For most people, the right way is to view waiting until your late 60s to sign up for benefits as the route to boosting your retirement income and protecting against out-living your savings.  People who delay will have a larger Social Security check to pay the bills that come due every single month for as long as they live.

The wrong way is to make a decision based on fear – the fear of losing money if you don’t sign up soon after turning 62, the earliest age allowed under the program.  While you might feel that delaying means losing out, delay can, in fact, protect you and your spouse from a more consequential loss in the future: inadequate monthly income when you are very old.

A study on this issue used a new technique to identify which individuals possess this fear of loss.  In six different online surveys, the researchers asked some 7,000 working-age adults to choose between numerous pairs of gambles showing the probabilities of scoring a financial gain (45 percent), losing money (45 percent), or breaking even (10 percent).  In each pair, one gamble had a smaller potential dollar loss than a second gamble in which they could lose more money – but also win more.

Loss aversion was prevalent. They found that about 70 percent of adults showed some degree of loss aversion, meaning that they preferred the gamble that risked a smaller dollar loss.

Next, the researchers analyzed whether the people who were most loss averse also plan to claim their Social Security benefits at younger ages.  In all six surveys, the most loss-averse workers were significantly more likely to claim their benefits earlier.

The researchers hope their new technique and findings improve the ability to identify who is loss averse, so that experts can design better ways to help people make smart decisions about their Social Security, the bedrock of most Americans’ retirement security. Learn More

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The Needs of Working Folks

“The economy” was the top priority for the vast majority of American people in one poll last summer. Surely, what they were talking about was quality jobs and economic and financial security for themselves and their children.

Or as my brother, a father of three and service manager at an auto dealership outside Chicago, put it in a recent text message, “No one can afford anything anymore.”

This simple idea seemed to resound throughout the primaries and long presidential campaign. With the election over, I compiled the following wish list for working people based on what the polls and research studies reveal about what they are hoping for.

Good jobs. The disruption created by the transition from an industrial to a service economy has hollowed out the middle over three decades. Despite a remarkably low unemployment rate of 4.9 percent, middle-skill workers face a dilemma: there are a lot of jobs, but most aren’t the right jobs for them.

Consider this detail in the October jobs report. Retail employment increased by a total of 38,000 in August, September, and October. These jobs pay, on average, $553 per week. Meanwhile, 12,000 goods-producing jobs were lost during the same three months, meaning that fewer people are earning industry’s average weekly wage of $1,100. The urgent question is, what are the potential jobs that will bolster the middle class?  Healthcare and telecommunications technicians for the New Economy?  A related question is, what are the vocational and policy paths to securing better-paying jobs?

Cash on hand. Working Americans are severely strapped for cash. One in three surveyed by the FINRA Investor Education Foundation said they probably could not come up with $2,000 to cover an unexpected expense in the next month, and nearly half said they can’t pay off their full credit card balances every month. While working people are benefiting from the stronger economy, Finra concluded, “large segments of society continue to face financial difficulties, particularly minority populations and those without a college education.” …Learn More

Wyoming Retirement Education on Point

Wyoming government has brought some 535 employees of the state’s executive, legislative and judicial branches into its retirement savings plan since July 2015 under a new policy of automatically enrolling each new hire.

They are free to withdraw from the plan at any time, but only 15 of the 535 have done so – “and not a complaint from anybody,” said Polly Scott, who manages the savings plan and heads employee retirement education.

This technique, borrowed from behavioral economics, addresses the inertia that prevents many people from ever signing up to save in their employer’s plan.  So why wait for them to join? Instead, Wyoming uses inertia to benefit state workers: when people are automatically enrolled, research shows, they tend to stay put and save.

This is one piece of a larger effort to educate government workers about what’s required to properly prepare for retirement – and nudge them to do it.  The 457 retirement savings plan is crucial. Wyoming’s retired state workers receive Social Security, but the inflation adjustment in their traditional defined benefit pension has virtually been eliminated for the near future.  The 457 plan “is voluntary, but it’s not optional if you want a secure retirement,” Scott said.

The heart of the state’s education efforts is a website titled “Your Whole Story” that is on point and explains in clear language likely to benefit employees. Employees are encouraged to increase how much they’re already saving, resist the temptation to withdraw their savings prematurely, and prepare themselves for a long time in retirement in an era of increasing life expectancy.

This initiative is based on a campaign sponsored by the National Association of Government Defined Contribution Administrators (NAGDA) – Scott was NAGDA’s president last year – and designed by the National Association of Retirement Plan Participants.  Other states use some version of “Your Whole Story,” including the Missouri State Employees’ Retirement System and Montana Public Employee Retirement Administration.

One problem Wyoming is tackling is young adults who hurt their retirement prospects by withdrawing money from their 457 plans when they leave their state jobs, which “means they’re spending it,” Scott said. Another issue is that more older workers are rolling 457 savings over to private IRAs, which can have higher fees. …Learn More

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