Category Archives: retirement security

When Should I Take Social Security?

Posted on March 23, 2012 by admin

Since its inception during the Great Depression, Social Security has grown to become a primary source of income for retirees in America. After 40 quarters of contributions, those who stop working are eligible to receive retirement and/or disability income and also a small death benefit. However, the question of when to begin drawing this income is not always easy to answer. There are several factors that must be taken into account for this issue, and the right answer will vary from one person to another depending upon their circumstances. Determining Variables The central issue that must be considered when trying to decide whether to begin drawing Social Security is whether one will come out the furthest ahead by drawing benefits early, at full retirement age or later. And several further variables must be considered when trying to answer this question, such as the worker’s level of earnings from age 60 to 70 and their life expectancy. A worker with serious health problems may be wise to begin drawing benefits at age 62, so that they will have received something back from their years of contributions in the event that they die early. Conversely, those with longer life expectancies may want to hold off on starting their payout as long as possible in an effort to receive the maximum possible payout. Workers who have reached their earnings peak just before retirement can also boost their retirement income by working a little longer and waiting to take their benefits. The Investment Option Those who are investment savvy may come out the furthest ahead by taking benefits at age 62 and investing them prudently. Of course, the wisdom of this choice will boil down to the rate of return earned on this principal. For example, if Social Security benefits for an investing worker taken at normal retirement age are $2,000 per month, then early benefits would be $1,500 per month, as these are generally 75% of the normal amount. Therefore a worker who invests this benefit in a Roth IRA for 4 years and receives a 5% average annual return would have approximately $79,000 by age 66, the current normal age for OASDI retirement benefits. If the money in the Roth continues to grow at 5%, then $1,000 could be drawn as a tax-free distribution from the account each month to supplement the $1,500 benefit already being paid. This additional payout would last for 8 years, resulting in a total of $312,000 of retirement benefits and distributions from earnings on benefits over a 12-year period from age 62 to 74, compared to just $192,000 of full Social Security benefits paid out from age 66 to 74. Obviously, failure to achieve the rate of growth in the example shown could negate the benefit of this strategy. The Bottom Line Deciding when to take Social Security is one of the most important decisions that workers must make when they retire. Those who fail to plan adequately in this area may find themselves in serious financial trouble later in retirement. For more information on when you should begin taking Social Security benefits, visit the Social Security website at www.ssa.gov or consult your financial advisor. Continue reading →

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Will I Pay Taxes During Retirement?

Posted on March 19, 2012 by admin

Paying taxes during retirement, on your earnings and other sources of income, can drastically reduce your nest egg if you aren’t careful.  But those who plan wisely can often pay little to no income tax during retirement, depending upon their circumstances and living expenses. Even those whose income levels will not drop substantially in retirement will receive some tax breaks that can allow their dollars to go further. Much of this issue depends upon the type of income that you draw in retirement and how it is received. Taxation of Retirement Income Knowing how all of your retirement income is taxed can save you a bundle in some situations. But distributions from any type of Roth IRA or retirement plan are always tax-free as long as you are at least age 59 ½ and have had some sort of Roth plan or account open for at least 5 years. Having access to Roth assets can drastically lower the amount of tax that you pay in some instances, such as when you have to take a large lump-sum distribution. For this reason, it may be wise to draw a regular, lower stream of income from your taxable retirement accounts and let your Roth assets grow. Then, when you need to take out a large distribution, you can take it from the Roth account without substantially disrupting the rest of your finances. And taxpayers who live on modest means may owe little to nothing after their deductions and credits have been subtracted from their gross incomes, especially if their incomes are low enough that their Social Security is not taxable. For example, a married couple that receives $30,000 of Social Security income and $20,000 of taxable retirement plan distributions may have a tax bill of zero, especially if they itemize deductions. (Of course, there are many factors that will ultimately determine the amount of tax that they will pay.) Timing is Everything If you have substantial assets that you need to liquidate during retirement, such as stock that you have held for years outside of your retirement funds, then you should check with your income tax advisor to see if you might pay less tax by waiting until next year to do so. Of course, you may not always be able to wait that long, but there can be times when you could end up paying unnecessary taxes on your gains or retirement plan distributions because you realized substantial income in a single year. Caution should therefore also be used when converting traditional IRAs and retirement plans to Roth IRAs, because the taxable income generated from this transaction can also inadvertently land you in a higher tax bracket. For more information on retirement plan income, visit the IRS website at www.irs.gov or consult your financial adviser. Continue reading →

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Americans Cut Spending in Retirement to Stretch Retirement Savings

Posted on November 28, 2011 by admin

Since the recession began in 2008 Americans have grown increasingly anxious about their long-term financial prospects.  With each passing day, more people are losing their jobs, more doubt grows over the sustainability of Social Security and Medicare, and the costs of goods and services continue to rise.  For retirees, it’s only a matter of time before beginning to wonder if their retirement savings are enough to survive on in these tough economic times. Retirement Affects Everyone, Everywhere The number of people who are facing retirement or have already retired is growing.  For each person who reaches retirement age, they must make a tough financial decision.  Have they saved enough for retirement?  Will they be able to afford to live without regular income from working?  Will they outlive their retirement accounts?  These are the questions that must be asked. You May Be Lacking Retirement Savings Millions of seniors have seen their retirement accounts decline in value, thanks to a significant decline in stock prices.  For these people, confidence in the ability to retire has declined significantly.  The rising costs of senior health care and prescription medications has forced elderly persons back into a work force that is already struggling to provide jobs for younger workers. Concerns about Retirement Increase A recent study of consumer confidence about retirement by Sun Life found that, in September 2011, more people believed, based on their retirement savings, that they would be unable to provide for their basic living needs in retirement than believed that they would have no problem affording retirement.  This is a fundamental shift in the thinking of American workers and retirees.  The growing uncertainty has forced seniors to cut back on their basic living expenses, trying to stretch them to fit their lifespan and any emergencies. What is in Store for the Future? Many people are delaying their retirement entirely.  Some are looking at working until they die, which is a grim statistic in the American labor force.  How many 85-year-olds do you know that are still actively employed, especially in jobs that require grueling, physically demanding tasks?  The fear that Social Security won’t be around when many workers retire in the coming decades has further depressed the confidence of retirees and future retirees.  The one-two punch of a depressed stock market and government program insecurity has led to the largest decline in future retirement confidence and thousands of people are left wondering how they will afford to live should their retirement accounts continue to shrink or even disappear. Continue reading →

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Confidence Drops About Financial Security in Retirement

Posted on November 16, 2011 by admin

The ongoing economic uncertainty continues to erode Americans’ beliefs about their financial security in retirement.  Sun Life Financial recently released the results of its annual Unretirement Index survey, which shows that confidence in stability and financial security in retirement has dropped nearly 20% compared to a year before.  The Index was created based on a survey of 1,499 Americans between the ages of 18 and 66. Loss of Confidence:   In 2010, 42% of Americans felt very confident they could meet basic living expenses in retirement, but in 2011, the number was only 23%, the lowest it has been since the survey started.  One in five Americans believe that they will never retire – primarily because of financial concerns.  The survey measured retirement confidence relative to: personal finance, faith in the economy, health, and government and job-related retirement benefits. The confidence level declined in every area, but the largest drop (-31.7%) occurred in confidence about the benefits needed to retire, including defined benefit plans and employee health benefits. Confidence by Age Group:   Not all age groups experience the same degree of anxiety about their financial security in retirement. The survey grouped respondents into three categories: Boomers (47-66), Gen X’ers (25-46), and Millennials (18-24).  The oldest group, the Boomers, were most concerned with the ability to pay for medical expenses; 47% of Boomers said that they were “not at all confident” they could pay for medical expenses in retirement, compared to 31% for the other two groups. The number of respondents who were “not at all confident” they could live the life they want in retirement was similar across all age groups, ranging from 42% for the Boomers to 48% for the Millennials.  The level of anxiety about the inability to meet basic living expenses was comparable between Boomers (30%) and Gen X-er’s (32%), but only 21% of Millennials voiced a similar lack of confidence. Confidence Index:   Sun Life uses the results of the survey to create their Unretirement Index, which measures the level of confidence in financial security in retirement on a scale of 0 to 100 (with 100 reflecting the highest confidence).  The overall score dropped from 44 in September 2010 to 36 in September 2011, a decline of 18.2%. There was not a huge difference in index scores by age group; however, the survey did reveal that Milennials felt more confidence in employee benefits and the economy, while Boomers were more certain about government retirement benefits.  Confidence in personal finances and employee benefits rises with the level of household income. Continue reading →

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