Important Age Milestones when Retiring

The Money column at USNews has identified several critical ages on the road to retirement. Personally I'd love to retire early but it will be many years before I can touch my 401-K without penalty and private health insurance is terribly expensive.

• 59½. Earliest age for withdrawals from tax-deferred retirement accounts like 401(k)s, 403(b)s, and IRAs without a penalty.
• 62. Earliest age to collect Social Security benefits. But you may want to wait. If you collect at 62 you'll only get 75% of what the government will pay if you wait until 66 or 67 (for people born after 1943).
• 65. Eligible for Medicare benefits. If you don't have employer insurance then pay attention to the seven-month window (three months before 65 up to four months after your birthday) to sign up. If you miss this window, you may wind up paying higher Medicare premiums for the rest of your life.
• 66. Your full retirement age (FRA) for Social Security benefits if born between 1943 and 1954, 67. Your Full Retirement Age if born in 1960 or later.
• 70. The oldest age at which your Social Security benefits increase if you defer collecting. After your FRA benefits rise by about 8% a year each year until you turn 70.
• 70½. If retired, you MUST begin taking money from your tax-deferred retirement accounts.
• 85. This one was new to me. It's a standard age of payments of "longevity annuities" purchased 20 or even 30 years earlier. Insurance companies sell these for for people who are worried about running out of money in their final years. If you die before the payoff age or 80 or 85, then you and your heirs get nothing. If you live to the payoff age, you get a monthly check for the rest of your life.

Bottom Line

Keep these age dates in mind. They are very important to a successful retirement.

401(k) Withdrawal Mistakes

“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.”
-George F. Burns (who lived to 100)

If you are contributing money to a 401(k), congratulations! This is a great way to save money for retirement and reduce the taxes paid. But putting the money into a 401(k) is just half the battle. You must be extra careful when taking money out of the 401(k) to avoid tax penalties.

Check out the U.S. News article on 401(k) Withdrawal Mistakes to Avoid.

1. Leaving before you are vested.
My company supports profit sharing but I don't get to keep my full share until employed for five years. Your company may have similar restrictions on matching contributions to your 401(k).

2. Not doing a direct rollover.
When I joined my current company, the new investment advisor was eager to manage the rollover of my 401(k) from my prior employer. This is not something you should try to do on your own. If you close out your old account you have 60 to deposit then money in a new IRA or 401(k). Otherwise the government considers it an early withdrawal and hits you with heavy penalties of 20-30% or more.

"As a general rule of thumb, don't ever have the check made payable to yourself."

3. Rolling over into higher-cost investments.
You are not required to rollover your 401(k) when you change jobs. It's definitely a good idea if you fear your old company might go out of business or default on pensions. Otherwise compare the management fees on the old plan and the new and go with the lower fees.
In my case the mutual funds were quite different in old and new 401(k). I liked the old funds and decided not to rollover my 401(k).

4. Two required minimum distributions in the same year.
Very tricky. You must take out money EVERY year after age 70½. You can delay your first withdrawal to April 1 of the year after you reach age 70½ but only counts for the prior year and you'll still need to make a second withdrawal for the current year. This double withdrawal could push you into a higher tax bracket.

5. Withdrawals before retirement.
401(k) withdrawals before age 55 will usually require you to pay income tax and a 10 percent early withdrawal penalty. Don't do it! Consider this alternative instead,

"If you roll the money over to an IRA, there are several government-approved ways to spend your nest egg that don't incur the early withdrawal penalty, including unreimbursed medical expenses that exceed 7.5 percent of your income, health insurance after a job loss, college costs, and a first home purchase up to $10,000."

Bottom Line

Be careful with your retirement nest egg. Know the rules about the right ways to take money out of it.

401k

‘Never invest in a business you cannot understand.’
-Warren Buffett

If your company offers a 401k, use it. This is a great tax deferred investment tool made even better if your company matches your investment. Still there are things to watch out for says money.msn.com.

1. How much is the employer really matching?
Some companies require a vesting period of 3-5 years and won't match a penny until you've worked for them that long. They may show matching dollars in the quarterly statements but they reserve the right to take it back if you leave the company too soon. Also find out if there is a maximum your company will match or if the matching ratio is not 1-1.

2. You may borrow against your 401k BUT...
If you quit, are laid off or fired, you may be required to pay back the 401k immediately. Not what you want to hear when unemployed.
And if you can not pay it back? Then the IRS counts the loan as an early withdrawal with taxes and 10% penalty.

3. If you 401k is less then $5000 when you leave the company...
the company has the option to cash out the plan instead of holding on to it or rolling it over to a new 401k for you. If cashed out you have 60 days to find a new 401k or IRA or the IRS will impose tax penalties for early withdrawal.

4. Your 401k funds might charge a load
If your company is small, the investment house managing the 401 might charge a front-end load, often 4%, for every investment.  This is not acceptable - especially since the same company will also be charging administrative fees to your account. I try never to buy a load fund. Lobby your employer to move to Fidelity or Vanguard or similar 401k provider which do not charge loads.

5. Avoid tax-advantaged investments in a 401k
A 401k is already tax deferred. There's no reason to use it to buy a fund whose goal is to minimize taxes. The goal should be to make the most money you can in the 401k and pay the taxes on it at a lower tax bracket when you've retired.

Bottom Line

Watch out for the hidden fees and gotchas when investing. Read and understand what you're buying.

Roth IRA's in 2010

"If stock market experts were so expert, they would be buying stock, not selling advice."-Norman R. Augustine

In 2010 the law for Roth IRA's changed (for the better). But you ask, what the heck is a Roth IRA?

With a normal IRA you put in "tax-free" money now and pay taxes when you cash it in during retirement. You get a credit on current taxes for the money deposited and will pay taxes on the money invested and all the interest earned at time of withdrawl. Hopefully you'll pay from a lower tax bracket in retirement.

With a Roth IRA you invest money and get no up-front tax credit. You're investing after-tax dollars. But once invested, there are no further taxes (provided you follow the rules and wait until age 59 1/2, have a disability, or are a 1st time home buyer). You can withdraw the money and interest tax free!

This may sound like 6 one day, half-a-dozen the other, but Roth has some clear advantages.

1. You can withdraw the principal (but not the interest) early if you're strapped for cash.

2. You can invest in Roth and have a company 401k at the same time

3. With a normal IRA you must withdrawl by age 70 1/2 or face a 50% penalty. With Roth there is no age limit for required withdrawls.

Bottom Line

So what is the good news for 2010? In prior years there were restrictions on Roth IRA's for anyone earning more than $100,000. Now those restrictions are lifted and anyone can convert a normal IRA to a Roth (by paying the taxes now).

Why convert now? If you're unemployed part of the year, you'll be in a lower tax bracket and will pay less tax during conversion. If the stock market collaspe took a big bite out of your IRA, there will be less money to convert and tax.

Clever Ideas for Saving Money

“A penny saved is a penny earned”
- Ben Franklin in Poor Richard’s Almanac

According to the The 2009 MetLife Study of the American Dream, “A disturbing 50% of Americans say they are only one month — or only two paychecks — or less away from not being able to meet their financial obligations if they were to lose their job, and more than half of these, a startling 28% of the total respondents, couldn’t survive financially for more than two weeks.” [MetLife] And yet, with the current recession, “Three quarters of Americans have already been touched by unemployment in some way as a result of the financial crisis, with nearly two in ten reporting that they have recently lost a job and an additional 55% having a friend, relative or neighbor who lost their job.”

When I was laid off last year, it took me six months to find a new job close in pay to my old job. We still had to pay bills, especially the COBRA insurance payments, buy food, etc, using only a modest severance payoff, a pittance from unemployment insurance and our cash savings.

Everyone needs an emergency savings account. Otherwise you can be forced into some very bad choices. For example, if you stop paying for health insurance, you create a “gap”. When you do get employed and resume insurance, the new insurer may refuse to cover any “prior conditions”, that is ANYTHING you’ve seen a doctor for in the past.

Liz Weston at MoneyCentral wrote that, “A reader asked me for help after racking up more than 2,000 in bounced-check fees. Another owed thousands to a payday lender. A third despaired of ever paying down his credit card debt. Every time he started to make some progress, his car would break down or he'd encounter another unexpected expense that wound up charged to the cards.”

Fortunately MSN has an excellent article called An emergency fund out of thin air. The author, Donna Freedman, asked readers for ways to save money and they responded.

• Save part of every paycheck, no matter how small. Just $10/month will add up over time.
• Ideally you should save 10% of your earnings instead of $10. This may not be possible – so set a value that works for you, set it aside, and don’t touch it.
• If possible have your bank automatically direct-deposit your fixed monthly savings from your paycheck to a separate account.
• Save spare change, found coins, and dollar bills and deposit these in your emergency fund
• Sell items on eBay or Craigslist
• Rent out your parking spot or condo for weekends
• Use coupons
• Get a second job (even if it's just temporary or seasonal)
• Shop for better insurance rates online
• Collect cans or metal for recycling cash
• Trim your budget, spend less
• Sacrifice a little, drop cable TV and get films from the library for free or watch them online
• Make your own food. Eat out less and buy fewer prepared meals.

Bottom Line

The secret is to be consistent and most importantly to spend less than you earn. At my last job, 11% was deducted from my paycheck to go into a 401-K. Unfortunately I don’t have that option at my new job so I have to come up with my own plan for setting money aside on a regular basis.

How to Budget

“It's time we reduced the federal budget and left the family budget alone.” - Ronald Reagan

If you’re not a federal government and able to print your money then you must learn to spend less than you make. This is called budgeting. It’s important for every day life so you know your daily spending limits. It’s also vital for special events like how much can we afford on a vacation, new car, or new house? The current so-called mortgage crisis was partly caused by people buying more house than they could afford. Other mortgage disasters resulted from people who spent more than they earned by using the home equity of their house as an open loan that never came due while prices climbed upwards. (For a well-written story of a NYT economic reporter with mortgage problems, see www.nytimes.com/2009/05/17/magazine/17foreclosure-t.html?pagewanted=1&_r=2)

It is easy to spend: Starbucks coffee, cell phones, cable TV package, bar drinks, cigarettes, meals eaten out. These things add up quickly. My wife had to point out to me how much money I was spending on breakfast and lunch in NYC every workday. It was never a lot at one time but it added up to a lot in total. Last weekend we visited some craft fairs and farm markets and afterwards were amazed how quickly we had spent the cash taken from an ATM at the start of our travels.

A documented budget and spending plan can also help with lifestyle changes. When my wife wanted to quit her job, we looked at our spending habits and found ways to cut back so we could live on just my income. Years later when I was laid off, we added up our fixed expenses plus some modest discretionary spending to determine the minimum salary I could earn to support our lifestyle. When calculating earnings don’t forget to include taxes and other items that reduce income. There is a huge difference between salary and your take home pay. Suppose for example that state plus federal taxes are 30% of your income, you give 10% to your church and you give 10% to a 401K or other retirement savings. Then there is a 50% reduction in your net earnings and in order to live on $40,000 per year you would have to earn $80,000.

You also have to be realistic when estimating earnings. Don’t spend assuming this year will have a huge bonus equal to last year. Don’t spend assuming you have a high-salary job that will always be there. Don’t spend assuming you can work lots of overtime to make up the difference. Don't spend assuming you can pay it back "someday" with a lottery winning, inheritance, or other windfall event.

Bottom Line
If you’ve never done a budget before, check out the Consumerist's 9-Step Beginner's Budget plan. It provides a getting started spreadsheet and instructions on how to use it.

www.ncnblog.com/2009/05/11/10-things-to-do-before-creating-your-next-budget/ has some advice on starting a budget.

Here’s an online site for creating a budget which claims it “is private and accessible only to you”, www.tomorrowsmoney.org/section.cfm/387/429/877/881

Kiplinger offers the following as traditional spending levels. Actual results may vary but if they differ by a lot then ask yourself why you’re a high spender in some category:

• 30% Housing
• 10% Utilities and other housing expenditures (including renters insurance)
• 15% Food (at-home and away)
• 10% Transportation (including car loan)
• 10% Debt repayment (student loans and credit cards)
• 10% Saving
• 5% Clothing
• 5% Entertainment
• 5% Car insurance and miscellaneous personal expenses

For a detailed history of one hundred years of government programs to encourage "everyone" to own a home (with disastrous results every time) see Obsessive Housing Disorder.

Student Loans

“It's easy to get a loan unless you need it.” - Norman R. Augustine

On Instapundit.com I learned some things about student loans that I did not know.

“They’re the worst debt you can get — huge, at unattractive interest rates, and non-bankruptable.” – Instapundit.com

The New York Times reports

“Thousands of recent graduates have been unable to find jobs or are earning too little to cover the payments for loans that are sometimes as high as $50,000 … as many borrowers have learned, student loans are among the most ironclad debts, on par with child support, alimony and overdue taxes. They stick with you no matter what … Even death isn’t a good enough excuse for discharging some private loan debts. And the government can wield a heavy hand to collect what it is due: If you fail to repay your federal loans, it can garnish up to 15 percent of your wages or take your tax refund or part of your Social Security benefits.”

About two-thirds of graduating students will have a loan to pay off (typical size is $22,500 but the NYT describes one student who managed to get $150,000 into debt.). Sadly, loans are unavoidable for most students due to outrageous fees. When I was in college tuition rates rose much faster than the rate of inflation and my school still had record enrollment and overcrowded dorm rooms. Families were willing to pay any price for college degrees.

Here are some options to reduce the debt:

• Invest early in a 529 Investment plan – it’s like a 401K for college. With favorable tax incentives, you put away money when your child is young and can only spend it when they reach college age. When college investment plans were first advertised I recall that you were locked into a single college (i.e send money to MIT when your child is born.) But SavingForCollege.com claims that with a 529 plan, “you can be a CA resident, invest in a VT plan and send your student to college in NC.”
  
• Earn a National Merit Scholarship via the PSAT test. Of the 1.5 million entrants, some 50,000 with the highest PSAT/NMSQT® Selection Index scores qualify for recognition in the National Merit Scholarship Program. Whether you get any money is up to the colleges you apply to and their standards. I was offered a 4-year Merit Scholarship from Michigan State University that covered most tuition costs but no merit scholarship for Cornell University. When Cornell called me to ask why I had rejected their acceptance, the answer was simple - I couldn’t afford them.
  
• Apply for the “needs” based Federal Pell Grant. If you can prove to the government that you are poor enough, you might get a Pell Grant.
  
• Check with the Financial Aid department of the colleges you apply to for any unusual funds that you’re eligible for. Alumni may leave scholarship money for American Indian applicants, children of Rotary members, etc. Check also with local organizations and local companies, like Lions Club, for scholarships.
  
• Students should get a summer job. When I graduated, Harris Corporation offered “scholarship” internships to top students from local high schools. I ended up working for Harris for five summers. To maximize the paycheck I worked 2nd and 3rd shifts for the extra pay differential.
  
• Students can work at college. I worked in the dorm cafeteria my freshman year. The following year I returned to campus too late and all cafeteria positions were already assigned. I walked directly to the office of the head of my department (mathematics) and asked for a job. He said yes and that began nearly 10 years of teaching starting as assistant and leading to class instructor and course coordinator. A dorm friend of mine, an engineering student, got a job at college soldering electronics and said the hands on experience was great.
  
• Live cheap - buy used books and avoid spending money on frills. Cheap can also mean choosing a state school were you live to get a lower resident rate, living with your parents, and or going to a community college for your first two years. Yes there are some snobbish jobs that prefer Ivy League graduates but in the long run the name of the school won’t matter so long as the education was good. I’ve looked at resumes of job applicants from Russia, India, Canada, etc. I know nothing about the reputation of the schools they attended so instead I look at past job history and their ability to answer questions during the interview.

Bottom Line

If you have a Student Loan and are unable to make payments, read the complete NYT story, Student Loans. There is detailed advice on steps you can take with different lenders to get a deferment and forbearance.

For more information on 529 plans check out morningstar.com
http://news.morningstar.com/articlenet/article.aspx?id=287783

Avoiding a loan is NOT easy. I managed to cover expenses without one but only by working summers at Harris Corp, working the rest of the year at college, living very cheap and having a Merit Scholarship. I was very lucky.

Personal Information

“In a real estate man's eye, the most expensive part of the city is where he has a house to sell” - Will Rogers

Any time you fill out forms with personal information you run the risk that that information will be misused or lost. A recent story said that Monster.com had its data base hacked and the passwords and personal data stolen for all its customers.
And today I see this story about a real estate office that dumped old records in the street.

What are those papers blowing down Columbus Avenue? Why, those are your tax returns, driver's licenses, credit reports, bank statements, and 401k statements. It seems that the real estate company, Citi Habitats, dumped an entire years worth of sensitive client documents in the streets of New York. - ABC7 News

Bottom Line

The real estate office claims that the papers were disposed of improperly due to their offices being renovated. But that is just a lame excuse for a serious lack of fiduciary responsibility. Don't expect others to keep your information safe.

Who gets your 401(k) when you're dead?

“I have known not a few men who, after reaching the summits of business success,
found themselves miserable on attaining retirement age.” -B. C. Forbes

A 401(k) is a great way to save money if you work for a company that supports this program. You can request that each month, money is taken from your pay check and kept in an account (often mutual funds you select from a list) that will be manged by the company until you retire. Since this blog is about preparedness I won't go into further 401(k) details except to recommends these web sites:
http://money.howstuffworks.com/personal-finance/financial-planning/401k.htm
http://employeebenefits.about.com/od/retirementoptions/a/401kBasics.htm

The reason I bring up 401(k)s is the article , You're dead: Where's your 401(k)? on MSN Money. One common mistake with 401(k)s is the lack of follow-up when your life changes. When you register for a 401(k) your current spouse is automatically entitled to survivor benefits under Federal Law unless he/she agrees to sign away their rights. That's true even if you identified someone else when you filled out the paperwork to start contributing to the plan. If you divorce and remarry, the first spouse gets the 401(k) money unless you fill out the paperwork requesting a change AND the first spouse agrees.

Perhaps you're single and named a college friend as your 401(k) beneficiary but now you are not on speaking terms. Update the paperwork!

Bottom Line
I recommend reading You're dead: Where's your 401(k) for more information including naming your minor-age children as beneficiaries and for instructions on how to collect the 401(k) money without penalties after a death.