Getting Ready for Retirement - What to do in your 50s (Marketwatch.com)

7 to-dos between 55 and 65 for a better retirement

By Dana Anspach

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Retirement will be here before you know it. Are you ready?

It was Roy Disney who said, "When your values are clear, your decisions are easy."

Many retirement decisions aren't only tied to your values, they are also irrevocable decisions. This isn't the time to play it by ear. By planning ahead, and starting with your values, retirement decisions do get easier.

Work your way through these seven action items, and you'll be facing your own retirement planning with ease:

1. Prioritize values

Time and money are often interchangeable. You may be able to retire earlier, giving you more free time, but the trade-off might entail living on less. For some of you this is an acceptable trade-off. For others, it isn't.

Now is the perfect time to dig deep, and think about what matters the most to you. There are no right or wrong answers. This is a personal choice. When you are clear about your values, it makes money decisions far easier. It even makes spending decisions easier. If you have a clear goal in mind and a target monthly or annual savings number to hit, then it becomes easier to say no to less important items that may hinder you from reaching your goal as quickly.

Once you have clear goals, find pictures and written statements that inspire you. Put them somewhere where you see them every day. Who cares if your family or co-workers think you're a bit wacky. They’re your goals, not theirs.

2. Know your net worth

Have you ever had to watch yourself on video? It's an uncomfortable feeling. Anyone who is in the entertainment field has to overcome this discomfort and learn to watch themselves over and over. This is how they improve.

This same discipline works for your finances. It can be uncomfortable to take an objective look at how much you have, how much you save, and how much you spend. If you want to improve this is a necessity. I started this practice years ago when I embarked on an effort to get out of debt. I tracked remaining credit card balances every single month. It was a powerful motivator to watch them go down.

For retirement, tracking starts with a net worth statement. This a list of what you own, minus what you owe. You'll want to update it each and every year. As an adviser, it is fun for me to go back 10 years and show my client's their net worth statements then versus now. People are often surprised by how much progress they’ve made. You won't know unless you track it.

3. Estimate your benefits

Social Security offers financial features that cannot be purchased on the open market. Take advantage of this. The earliest age you can claim is 62, but you get a powerful boost if you wait and claim later. And if you're married, by planning together you and your spouse can take advantage of spousal benefits and survivor benefits. Survivor benefits function as a great form of life insurance, as the highest monthly benefit amount between the two of you is the amount that continues on for a surviving spouse, regardless of who passes first. By delaying the start date of the highest earner's benefit, you can be sure the survivor benefit is as large as possible,

 And if you are divorced, but have a prior marriage that lasted at least 10 years, don't forget that you have access to spousal benefits too.

4. Get a handle on health care

Too many people think Medicare will cover most of their health care costs once they reach age 65. Wrong. On average Medicare covers about 50% of your health care costs. The 50% that you pay will include Medicare Part B premiums (which are means tested — meaning the more income you have the more you pay), a supplemental policy, long-term care, and then there's dental care, eye care, hearing, copays, deductibles, etc.

When I run retirement expense projections I typically estimate about $10,000 a year per person for health care. This number can trend lower for those with retirement incomes under $75,000 and higher for those with incomes over $150,000. Of course you are already paying a portion of this now, as most people are paying at least a couple thousand a year in of out-of-pocket health care costs while working, so the incremental difference may not be as high as $10,000 a year. Your personal costs will also depend on things like where you live and how healthy you are.

5. Make an income timeline

In school I wasn't much of a history buff. I didn't like timelines as I couldn't see how memorizing the exact date of a bunch of historical events was going to have much relevance to my life. But future timelines are different. I love them.

A future timeline can be organized by month or by year. For retirement projections yearly is best. For budgeting purposes monthly works. You can use Excel or graph paper to lay out a timeline. Each column represents a year, and put in your expected income and expenses for that year and calculate the difference. This is a useful tool for laying out the varied start dates of sources of income, like Social Security and pensions, which may start midyear. You can also use it to account for periodic expenses, like a new car purchase, which may occur every few years, or only once a decade.

I use a monthly timeline for budgeting purposes so I know when to expect annual invoices for insurance premiums, home warranties, Christmas spending, and car repairs. I use a year-by-year timeline for retirement planning projections.

6. Outline options

There may be retirement possibilities you haven't thought of yet. Perhaps substituting a lower paying, lower stress job for a few years would work. In many cases this works if you stop contributing to savings during your lower earning years but don't start withdrawing yet. A transition to part-time work often works in the same way.

For some, a move to a different state can make a world of difference. This works if you live in a state with high taxes and high property values, and can move to a retirement tax-friendly state where you may be able to buy an equivalent home for less, freeing up home equity.

There are also options that involve reverse mortgages or annuities. These are viable strategies that, contrary to what many believe, can allow some to retire earlier, and often on more money.

7. Determine your level of engagement

Are you going to do your own planning and investment management, or hire someone to do it for you? Either way, you need to gain a basic understanding of how things change when you near retirement and what new risks you face. At a minimum, you need to know enough to recognize good advice from bad advice. I'd suggest you subscribe to publications particular to those near retirement. 

Books are also a great resource. Many of my fellow RetireMentors are experts in their subject matter and have written outstanding books that you can learn from. You are also welcome to a free download of the first chapter of my book, Control Your Retirement Destiny .

If married, you also need to consider your spouse's level of engagement. You may be the money person, but how will your spouse fare when you are gone? It is cruel to leave an unsophisticated spouse to figure it out on their own. At a minimum do your research so you can tell them what kind of assistance they will need when you are gone, and how they can go about finding the appropriate resources.

Some of these steps may sound boring, and to be honest with you, sometimes they are. But the results they deliver — in terms of less stress and greater peace of mind — are anything but boring.

Why Are CDs, Money Market Rates So Low? (NY Times)

December 26, 2009
At Tiny Rates, Saving Money Costs Investors
By STEPHANIE STROM
Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.

The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

“Open a Savings Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)

“They’re advertising it in the papers as if they’re actually proud of that,” said Steven Weisman, a title insurance consultant in New York. “It’s a joke.”

The advertised rate for the Savings Plus account has expired, according to the bank’s Web site; as of Friday, the account paid an interest rate of 0.5 percent. The bank’s highest-yield savings account, the Ultimate, was paying 1.01 percent.

The best deal Mr. Weisman has found is 2 percent on a one-year certificate of deposit offered by ING Direct, an online bank that has become a bit of a darling among the fixed-income crowd.

Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent, as of Monday. Bank of America offers 0.35 percent on a standard money market account with $10,000 to $25,000, and Wells Fargo will pay 0.05 percent on a basic savings account.

Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.

“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”

Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”
Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

Many think the Federal Reserve is fueling a stock market bubble by keeping rates so low that investors decide to bet on stocks instead. Mr. Parks of Better Investing moved more money into the stock market early this year, when C.D.’s he held began maturing and he could not nearly recover the income they had generated by rolling them over.

He began investing some of the money in blue chip stocks with a dividend yield of at least 3 percent and even managed to find an oil-and-gas limited partnership that offered 8 percent.

Mr. Parks said, however, that he would not pursue that strategy as more of his C.D.’s matured. “What worked in the first quarter of this year isn’t as relevant, because the market has come up so much,” he said.

No one is advising a venture into higher-risk investments. Katie Nixon, chief investment officer for the northeast region at Northern Trust, said that, in general, “no one should be taking risks with their pillow money.”

“What people are paying for is safety and security,” she said, “and that’s probably just right.”

People who rely on income from such investments for support, however, are being forced to consider new options.

Eileen Lurie, 75, is taking out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates. Reverse mortgages have a checkered reputation, but Ms. Lurie said her bank was going out of its way to explain the product to her.

“These banks don’t want to be held responsible for thousands of seniors standing in bread lines,” she said.

Such mortgages allow people who are 62 and older to convert equity in their homes into cash tax-free and without any impact on Social Security or Medicare payments. The loans are repaid after death.

“If your assets aren’t appreciating and aren’t producing any income, you’re getting eaten up in this interest rate environment,” said Peter Strauss, a lawyer who advises the elderly. “A reverse mortgage is one way of making a very large asset produce income.”

Eve Wilmore, 93, has watched returns on her C.D.’s drop to between 1 percent and 2 percent from about 5 percent a year or so ago. Yet the Social Security Administration recently raised her Medicare Part B premium based on those higher rates she had been earning. “I’m being hit from both sides,” Mrs. Wilmore said. “There’s some way I can apply for a reconsideration, and I’m going to fight it. I have to.”

She said she was reluctant to redeploy her money into higher-risk investments. “I don’t know what my medical bills will be from here on in, and so I want to keep the money where I can get to it easily if I need it,” she said.

Peter Gomori, who taught a course on money and investing for Dorot, a nonprofit that offers services for the elderly, did not advise his students on investment strategies but said that if he had, he would probably have told them to sit tight.

“I know interest rates are very low for Treasury securities and bank products, but that isn’t going to be forever,” he said.

But investment professionals doubt rates will rise any time soon — or to any level close to those before the crash.

“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”

from Marketwatch - Think Twice About Compromising Your Nest Egg

ROBERT POWELL
Better think twice
Don't make these critical mistakes with your nest egg, even if times are tough
By Robert Powell, MarketWatch
Last update: 7:31 p.m. EDT July 2, 2008BOSTON (MarketWatch) -- Recession or not, these are fast becoming hard times, and hard times can lead to bad decisions.
Recently, the Financial Industry Regulatory Authority warned investors to think twice before taking steps that might compromise their nest eggs, such as taking out a reverse mortgage, getting a 401(k) debit card, or cashing in life insurance policies to weather tough financial times.
"Each of these should be considered strategies of last resort," Mary Schapiro, chief executive of the Financial Industry Regulatory Authority said last week in a speech.
"They may raise cash quickly, but each also carries long-term consequences that can undermine financial security in retirement and pose the potential for losing a significant, and sometimes irreplaceable, asset," Schapiro said. FINRA is a nongovernmental organization that oversees U.S. security firms.


According to FINRA, Americans are faced with the perfect financial storm. Rising costs of fuel and food, declines and volatility in the housing and financial markets, and an ever-tightening credit crunch have gathered to form a storm that could lead some Americans to make poor financial decisions. "But tough financial times don't necessarily justify resorting to risky ways to make ends meet," Schapiro said.
Investors could be risking their most valuable assets when they use reverse mortgages, life settlements and 401(k) debit cards to tap much-needed cash.
Retirement accounts
Don't cut back on or stop contributing your 401(k) and, even more importantly, don't cash in all or part of your 401(k). To be sure, plan providers do allow hardship withdrawals in certain situations -- if you face eviction from or foreclosure on your primary residence, for instance, or some other financial calamity. But if you are under age 59-1/2 and there is no hardship, you'll have to pay ordinary income tax on the withdrawal plus a 10% penalty tax. What's more, many employers will withhold 20% of the amount being withdrawn, so it's possible that a $20,000 withdrawal works out to less than $14,000 when all is said and done.
FINRA also warns that such withdrawals come with another cost - opportunity cost. If you're 40 years old with $40,000 in your 401(k) and it's growing at 6% percent year, excluding additional contributions that money would be worth $107,710 in 17 years. But if that same person withdraws $20,000, that remaining $20,000 would be worth just $53,855 in 17 years. In other words, a withdrawal of $20,000 now costs about $54,000 in future growth.
Worse yet, FINRA warns, creditors have access to any money taken out of a 401(k), be it a loan or hardship withdrawal, in ways they wouldn't if you left the money in a retirement account. Under the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, creditors cannot touch your 401(k) balance or similar retirement savings account -- even if, as a last resort, you file for bankruptcy protection, FINRA said. Of note, balances in IRAs (Roth and traditional) are protected up to a limit of $1 million from creditors.
There are other benefits to maintaining contributions to your 401(k). Contributions reduce taxable income and lower your tax bill. Plus, 401(k) contributions often come with free money: Employers typically match a percentage of your contribution.
That said, if you really need the money from your 401(k), FINRA suggests taking out a loan rather than a withdrawal. You might be able to borrow money at a lower interest rate than a bank would offer. Plus, you won't have to pay taxes on the loan as you would with a withdrawal. Also, if your employer offers one, avoid using a 401(k) debit card, FINRA said.
Life settlements
Don't cash in your life insurance policy using something called a life settlement, FINRA warns. With a life settlement, a third party will buy your life insurance policy from you, typically for more than the cash value but less than the death benefit. According to FINRA, life settlements can be a valuable source of liquidity if you would otherwise surrender your life insurance policy or allow it to lapse, or if your life insurance needs have changed. But life settlements are not for everyone, FINRA said.
For instance, life settlements can have high transaction costs and unintended consequences. You might be unable to buy a new insurance policy, plus you could lose state or federal benefits, such as Medicaid. Also, you will have to pay taxes on the life settlement.
If you really need the money from your life insurance and you still need the coverage, FINRA suggests you borrow against your policy, or check whether you are eligible for accelerated death benefits. If you have a long-term, catastrophic, or terminal illness you might be able get a reduced benefit prior to dying.
Reverse mortgages
If you are over age 62 and have equity in your house, a reverse mortgage might sound intriguing. With a reverse mortgage, you get to convert the equity in your house to cash, plus you get to age in place, in your home. What's more, you don't have to make any interest or principal payments during the life of the loan.
But as with all things that sound too good to be true, especially something that sounds too good to be true for what could be your single largest asset and a future source of retirement income, there's a catch with reverse mortgages. For one thing, the loan costs can be steep. Also, interest is added to the principal, making reverse mortgages "rising debt" loans.
"The bottom line is that reverse mortgages are an expensive option that may prematurely deplete your home equity," FINRA said. "A reverse mortgage is a very serious decision."
Consider, for instance, some of the disadvantages FINRA outlined:
The income or lump sum you receive could impact you or your spouse's eligibility for various state and federal benefits, including Medicaid.
Depending on the laws of your state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply against creditors, or if you have a health emergency and your spouse must liquidate assets to pay for nursing home care.
A reverse mortgage is not the right choice if you want to leave your house to your heirs.
A reverse mortgage may be right for you. But you need to evaluate a number of factors, including your health, your spouse's health, other sources of income, the reason you're tapping your home equity, when to do it, and how wisely you use your loan proceeds - before deciding whether a reverse mortgage is right or not.
What are some alternatives to a reverse mortgage? According to FINRA, you could sell your house and then downsize or rent, or take out a home equity loan, or get help from your children or local government assistance program. Any of those tactics could unlock the equity in your home without the cost of a reverse mortgage.