Al-Huda
Foundation, NJ U. S. A
the Message Continues ... 11/182
Newsletter for January 2017
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Things to Know About Money Before You’re 60
You still have time for changes
that can make a difference.
You’ve been
hearing and reading about this
thing called retirement
for a lot of years. Well, it’s
finally on your doorstep. All of
your financial planning has
brought you to this point, and
while you still have time for
changes that can make a
difference, for the most part it
is time to start contemplating a
retirement lifestyle based on
what you have not on what you
hope to have. Certainly,
you may choose
to work another 10 or 12 years,
if you are healthy, enjoy what
you do, and have kept up your
job skills. But, ready or not,
most folks retire in their 60s
even if what they retire to
includes some kind of a
paycheck.
Now is the time to take a
thorough accounting of your
assets, and estimate your
expenses going forward. Don’t
overlook health considerations;
they may prevent you from
working as long as you like.
Nothing needs to be set in stone
right now. Working longer or
part time should remain an
option right up to the moment
you call it quits. But there are
many important factors to
consider. Here are 10 things you
should know about money before
turning 60:
1) How much longer you expect to
work
Ok, this is the big one. No
other single decision will have
more impact on your retirement
security than choosing the date
you will quit work, give up your
income and begin to draw down
your savings. Most current
retirees called it quits before
turning 65, Gallup found.
But the average age of
retirement has been ticking
higher, and today 37% of workers
say they expect to work past age
65 up from just 14% saying that
in 1995.
Those closest to age 65 are most
likely to project working past
that age, Gallup found. This
probably reflects a sober
assessment of the costs of
retirement and the benefits of
staying on the job among those
closest to the big moment.
Working longer allows you to
build more savings and delay the
moment you start spending down
what you have put aside,
ultimately shortening the period
that you will be drawing down
assets. T. Rowe Price estimates
that a typical 60-year-old
couple that stays on the job to
70, rather than retires at 62,
would nearly double their
monthly income in retirement.
Working longer also keeps up
your connections, which is good
for your health. In a Bank of
America Merrill Lynch survey,
pre-retirees were asked what
they thought they would miss
most in retirement, and their
top response was a paycheck. But
those already in retirement said
what they most missed was the
social connection of a
workplace. That may help explain
why 72% of pre-retirees say
their ideal retirement includes
some work so long as they have
flexible hours or can launch a
new business or whole new
career, according to the Merrill
Lynch survey.
2) The best time to take Social
Security
Millions of retirees make poor
decisions about when to trigger
this important benefit.
Individuals leave an average
$100,000 of lifetime Social
Security benefits on the table
and a typical married couple
misses out on $250,000,
according to Financial Engines,
a benefits manager. Next to
choosing a retirement date,
choosing when to take Social
Security benefits may be the
most important financial
decisions still in front of you.
Social Security remains a
staple of most peoples’
retirement income. Despite
constant talk of its demise, the
trust fund is not scheduled to
run out of money until 2034 and
even then the program would be
able to pay 79% of scheduled
benefits for another 55 years.
Social Security lifts 15 million
seniors out of poverty and is
the sole source of income for
nearly one in four recipients.
Changes almost certainly are in
store but this bedrock
retirement benefit is not going
away.
Without a traditional pension to
fall back on, Social Security
may be your only source of
income that will never run out.
So it is critical to get the
most you can. In general, you
will do that by waiting as long
as possible until age 70 before
claiming. Why? Your monthly
benefit rises 6% to 8% every
year you delay between age 62,
when you become eligible for
early benefits, and age 70, when
you must begin collecting.
But not everyone should wait
that long. If you are in poor
health or have few other
resources you may be better off
claiming the benefit as soon as
possible. But try to wait at
least until your full retirement
age (66 or 67, depending on when
you were born). That leaves you
with the most claiming options,
like filing and
suspending and start-stop-start.
Unfortunately, even the Social
Security customer reps don’t
always make the best
recommendations about such
options or always know the
rules. So for help choosing the
best strategy for you, try the
tools
atsocialsecuritysolutions.com, T.
Rowe Price, maximize
my social security.com
and social security choices.com.
3) How much guaranteed income
you have
If you are fortunate, Social
Security is only one of your
sources of guaranteed lifetime
income. Many workers approaching
age 60 today still have a
traditional pension or even two,
if they have worked long stints
at different large employers.
Get a handle on your total
household monthly income from
these sources.
To learn about your Social
Security benefit at age 62, at
full retirement age, and at age
70, register with the Social
Security Administration here.
Ask the human resources
department at your employer and
former employers for a statement
of pension benefits. Ideally,
guaranteed lifetime income the
kind that can never run out and
is not subject to market swings
would cover all your fixed
expenses in retirement. If it
does not, consider working
longer, scaling back your
lifestyle, or finding more
guaranteed income.
An increasingly popular option
for additional income is a
fixed-income annuity, which is
an insurance contract where you
pay a large up-front premium and
get monthly income for life, or
for some shorter designated
period. For an estimate of how
much income you can purchase, go
toimmediateannuities.com. You
will see many choices, including
options for an annual inflation
adjustment and annuities with
survivor benefits.
Fixed-income annuities are very
different from, say, a
government bond, which provides
secure income but at a very low
interest rate and which carries
the risk of your principle
getting whacked if interest
rates rise quickly. Dividend
stocks pose problems too. At
this age, you want to be
decreasing the amount of your
wealth that’s invested in the
stock market. (A decent rule of
thumb is to have 110% minus your
age in stocks.) Rental income
can be an attractive source of
income but comes with many
potential headaches, including
repairs and deadbeat tenants.
These issues are partly why
Fidelity Investments recommends
putting up to 30% of your
savings in fixed-income
annuities. They pay month in and
month out no matter what.
4) Your safe withdrawal rate
Not everyone can secure
sufficient guaranteed lifetime
income. This is especially
difficult without a traditional
pension. If you fall into this
category, you will have to take
charge and make the money in
your 401(k) last. Increasingly,
employers are building low-cost
guaranteed lifetime income
options into their plans. So
look for that option and
consider converting a portion of
your nest egg.
But if you must manage savings
on your own, or you have 401(k)
assets beyond what’s needed for
fixed expenses, the trick is
drawing down the account at a
pace that gives you good odds of
not outliving your money your
so-called safe withdrawal rate.
One common strategy is
withdrawing 4% of your 401(k)
balance each year, and adjust
for inflation annually. This
gives you a good chance of not
running out of money for 30
years. But there are no
guarantees; a long period of low
returns might exhaust your nest
egg early. T. Rowe Price looked
at the 4% rule for anyone
retiring Jan. 1, 2000 and found
the Internet bust and financial
crisis would have laid waste to
their finances. The following 10
years, a portfolio of 55% stocks
and 45% bonds drawn down by 4% a
year plus inflation would have
fallen by a third and you would
have had only a 29% chance of
your money lasting 30 years.
To play it safe, financial
planners today recommend
dropping the withdrawal rate to
3% or less. But even that is not
certain to last. Another
strategy is dividing your nest
egg by your remaining years of
life expectancy and withdrawing
that amount each year. You can
find your life expectancy at 65
and beyond here.
5) When to accelerate debt
repayment
One lingering effect of the
financial crisis is that more
workers are entering retirement
with more debt. Some of this is
a result of the mortgage
refinance boom of the early
2000s, when boomers took
advantage of low rates but wound
up taking out cash or extending
the length of their mortgage.
Others bought new or second
homes somewhat late in life and
financed it with a 30-year
mortgage.
The percentage of homeowners age
65 and older carrying mortgage
debt increased from 22% in 2001
to 30% in 2011, according to the
Consumer Financial Protection
Bureau. Among those age 75 and
older, the rate more than
doubled, from 8.4% to 21.2%.
Seniors are also carrying more
credit card debt, according to
the National Center for Policy
Analysis, and even student debt,
according to the Federal Reserve
Bank of New York.
Debt is one of the key things
keeping many from retiring as
they had planned. So targeting
your debts should become a focus
in your pre-retirement years.
Now is the time to create a
pay-down schedule. This is never
easy because it almost always
requires that you cut spending.
But the sooner your debts are
gone the more freedom you will
have to retire when and how you
want.
If your main debt is credit
cards, start by paying off the
one with highest interest rate
and then moving to the next,
being certain to use all savings
from the retired debt to
accelerate payoff of the next
card. Some planners prefer the
momentum method, where you pay
off the card with the smallest
balance and then move to the
next smallest balance, using
this momentum to stay focused.
The momentum method may be best
applied to multiple forms of
debt say credit cards, medical
debt, a car loan, student debt,
and a mortgage. You may be able
to work your way to nothing but
mortgage debt fairly quickly.
With a mortgage, consider making
two extra payments a year or
arrange for automatic monthly
payments higher than what is
owed.
6) Whether to let your term life
insurance lapse
Young families tend to choose
term life insurance over whole
life policies for good reasons:
They’re less expensive and, if
you shop wisely, your term
policy will expire around the
time you no longer need it. But
life happens. Your calculations
may have been off. Approaching
age 60 is a great time to look
at your policy and decide if you
should lengthen it, let it go,
keep paying to expiration, or
replace it with another policy.
After years of paying for this
insurance it may seem
frightening to let it go. But
term life is different than
whole life insurance. There is
no cash value. You have not been
building value in this policy
over the years merely paying for
a large benefit should you pass
away early. There is nothing
there to hang on for if you no
longer need the coverage. So in
thinking about term life in your
late 50s, think about why you
bought the coverage in the first
place. You may no longer need
the coverage if:
·
Your kids are grown and self
sufficient;
·
You have paid off your mortgage;
or
·
You have saved enough to stop
working.
These are the main areas that
families seek to protect. In
general, you want enough term
life so that your spouse would
be able to retire all debts
immediately, pay for the kids
through college, and generate
enough income to live the same
lifestyle. It may be a waste of
money to keep paying once those
are accounted for. Of course,
you may have new reasons to keep
a term policy, including the
education or welfare of
grandchildren or some other
large debt. In that case you
will need to do a little math.
Find out exactly when your term
policy expires. On that date,
you can still maintain coverage
but the premium will skyrocket.
If you need coverage for more
than another year or two you
almost certainly will be better
off with a new policy, assuming
good health. You may be able to
convert your term policy to a
whole life policy without
evidence of good health.
Finally, if you still have a few
years left on your policy but
feel the coverage is now
excessive and the premiums are
too expensive, ask for a
modification. Many companies
will allow a one-time decrease
in face value to your policy,
which will reduce your premiums.
This is also a wise strategy if
you are healthy and buying a new
policy. Odds are at this age you
don’t need as much coverage as
you once did. So buy less face
value and you may be able to
hold your premiums steady.
7) Your future out-of-pocket
healthcare costs
A quarter century ago two-thirds
of large companies offered
retiree health benefits; today
that figure is just one-third,
reports Allianz Life Insurance.
With routine healthcare costs
rising 4% to 5% a year, just one
in nine pre-retirees are
confident they will be able to
foot the bill. Little wonder
that health problems top the
list of worries for those
planning to retire.
Many retirees fail to take these
out-of-pocket expenses into full
account and wind up shocked and
ill prepared. They assume that
Medicare and Medicaid will take
care of them. But even those
programs have considerable
lifetime costs for co-pays and
deductibles. Total out of pocket
healthcare expenses for a
healthy 65-year-old couple will
run $266,589 (not counting
dental and vision), reports
Health View Services. That
figure jumps to $463,849 for a
55-year-old couple retiring in
10 years. Other estimates are
somewhat lower. Fidelity puts
the 65-year-old
couples’ costs at $245,000. But
let’s not quibble. It’s a lot of
money.
To better prepare for these
expenses, consider buying
insurance to supplement
Medicare, such as Medigap and
Medicare Advantage. You might
also dedicate the income stream
from a pension or Social
Security to cover this cost. And
you stand a good chance of
cutting this bill substantially
if you eat right and stay fit.
8) Whether you need long-term
care insurance
Now for the bad news: The
lifetime healthcare costs
mentioned above do not include
the potentially crushing
end-of-life care needs that you
and your spouse may require. The
average 65-year-old is projected
to need three years of long-term
care about two years of in-home
care and one year in a facility,
according to the Department of
Health and Human Resources. For
an idea of what that costs,
consider that the average cost
of a nursing home is $77,380,
according to the Genworth 2014
Cost of Care Survey. Even
assisted living, where you get
just some one-on-one help and
basic medical care, averages
$42,000 a year.
Deciding whether to buy
long-term care insurance to
guard against these costs is
a difficult and personal
decision. Only one in three
policyholders ever make a claim.
At age 65, a man with long-term
care coverage stands a 32%
chance of tiring of the payments
or otherwise letting the
policy lapse, and a woman stands
a 38% chance, according to the
Center for Retirement Research
at Boston College. Many don’t
spend enough time in a facility
for their policies to kick in.
Still, for some couples
long-term care costs run to
$700,000 or more, possibly much
more, and Medicaid picks up the
tab only after you are all but
broke. One rule of thumb: If
your net worth is less than
$200,000 you do not have enough
assets to protect; if your net
worth is more than $2 million
you can probably cover these
costs put of pocket so why spend
up to $5,000 a year as a couple
for 20 or 30 years?
Yet that leaves a lot of people
in between who would benefit
most from the coverage. If you
decide you want it, generally
the most cost effective time to
purchase is before age 60 or
possibly within a few more
years. By age 65 the premiums
are rising steeply. So now would
be the time to pull the trigger.
9) Where you will live in
retirement
For a lot of retirees,
downsizing is at least part of
the solution to making ends
meet. A smaller home in a
cheaper location is one of
AARP’s top suggestions for
strapped seniors. You can find
just about everything you want
in dozens of cool, fun,
culturally rich, and relatively
inexpensive communities. Start
with Money’s annual list of best
places to retire, which takes
into account such concerns as
access to healthcare, property
taxes, public safety and
senior-friendly activities.
If you are going to uproot,
first spend plenty of time
scouting a new area and living
there for a test period first.
Sometimes a place just doesn’t
feel right once you are there no
matter how attractive it seemed
when you visited the first time.
Moving isn’t for everyone, of
course. It may take you away
from family and friends and
familiar surroundings. Nine in
10 pre-retirees say they prefer
to remain in their home after
quitting work, according to
AARP. Yet that poses certain
problems. Fewer than 25% of
homeowners age 55 or older have
a bedroom and full bathroom on
the first floor, a way to get
into the house without steps,
and no steps between rooms,
according to the Joint Center
for Housing Studies at Harvard
University.
In other words, your home may
not be age friendly. Some
important features can be
retrofitted into a home for a
few thousand dollars, including
the installation of railings and
grab bars. Basic modifications
to a one-story home run about
$10,000, according to a 2010
report from the MetLife Mature
Market Institute. That is
peanuts next to the cost of
assisted living.
“Your lifestyle is diminished if
your house isn’t working for
you,” says Louis Tenenbaum, a
Rockville, Md., contractor and
founder of the Aging in Place
Institute. The National
Association of Home Builders
estimates that consumers will
spend $25 billion this year on
universal design no steps inside
or out, no-slip surfaces,
no-curb showers, lots of natural
light, easy to reach storage and
low lighting for nighttime
mobility.
10) What you are retiring to not
from
When you aren’t working there is
a vast world of hobbies that
give your life purpose and
possibly a paycheck. There is
also an exploding array of
volunteer opportunities near
home or in far off lands. Some
4.5 million retirees are now in
“encore” pursuits where passion,
purpose, and a paycheck come
together, says Marc Freedman,
founder of Encore.org.
Plan for this transition. Don’t
leave a job start a new chapter.
Increasingly, boomers are
thinking like young people that
are just getting started in
life. Organizations including
Teach for America and the Peace
Corp have seen a dramatic rise
in interest from retirees. You
may have to take a class, accept
an unpaid internship, or
volunteer for a while all of
which result in a financial
sacrifice. But it is worth the
price if you find a pursuit that
gives your later years meaning. |
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