College Debt for Life?

When I was in college in the '80s the growth rate for college tuition was 10% much higher than the rate of inflation at the time. And it appears that things have not changed since then. The cost of college continues to growth faster than anything else and beyond reasonable expectations (see graph at right).

The result is that many Americans now graduate with a huge debt that takes decades to pay back and prevents them from buying a house and otherwise establishing a normal middle-class life.

What was new to me this morning is that even senior citizens are affected by college debt. SmartMoney.com reports the Federal government is docking an increasing number of Social Security payments to pay back college loans, up to 15% of the monthly benefit. Now these are not deadbeat seniors who failed to pay back their own loan after 40 years but rather parents & grandparents who co-signed loans for their children or grandchildren.

So beware, co-signing a loan can follow you into retirement!

My Social Security

Remember when computers were supposed to eliminate paper and make offices paperless? Well our government is one step closer. For the first time ever you can read your Social Security statement online at http://www.socialsecurity.gov/mystatement/?WT.qs_osrc=fxb-114144910

Included at no extra cost are

• Estimates of the retirement and disability benefits you may receive;
• Estimates of benefits your family may get when you receive Social Security or die;
• A list of your lifetime earnings according to Social Security’s records;
• The estimated Social Security and Medicare taxes you’ve paid;
• Information about qualifying and signing up for Medicare;
• Things to consider for those age 55 and older who are thinking of retiring;
• General information about Social Security for everyone;
• The opportunity to apply online for retirement and disability benefits; and

And best of all  :-)

• A printable version of your Social Security Statement.

Common Mistakes with Retirement Planning

The biggest mistake in retirement planning is not planning at all. I know many families who cannot afford to retire because they failed to save money when younger.

So let's assume you are planning and are saving. Moneyland at Time.com has identified The 7 Biggest Retirement Planning Mistakes

1. Assuming you can work until age X
   Two in five retire before they had planned to due to illness or job loss. So start early!
2. Ignoring Taxes
   Take advantage of IRA's and 401(k) reduce the taxes you'll spend for access to your money
3. Not saving enough for Medical
   The average couple who retires at age 65 will spend $285,000 in health-care costs!!!
4. Failing to Establish a Lifetime Income
   Few now-a-days (other than union or government workers) will have a pension for life. The article suggests an "immediate fixed annuity" to supply cash flow.
5. Retiring too soon
   You get less from Social Security if you draw from it the first year you are eligible.
6. Underestimating how long you'll live
   Many will live to 95 or 100 and outlive the money they saved
7. Spending your retirement too quickly
   Spend no more than 4% of retirement savings each year.

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.

Retirement Savings

The trouble with retirement is that you never get a day off.
~Abe Lemons

How much retirement savings do you need? Probably more than you think. I read one column about a couple that thought 1 million dollars would be enough. But the children needed help with their mortgages and the money was greatly depleted.

Megan McArdle at TheAtlantic.com says, You Need More Retirement Savings. The old school thinking was that your expenses will be less during retirement. The house is paid off. (Maybe? Did you get a second mortgage or treat the house as an ATM with repeated home equity loans?) The kids have graduated college. Your house is furnished and you're not planning any major changes. Only a car loan remains.

In retirement the work expenses of commuting driving or train, business lunches, business clothes, etc are a thing of the past. But there'll be new expenses for health care - especially once you're off the Cadillac quality health plan and facing higher copays and deductions.

"Medicare does not cover everything--Medigap insurance is costly, and may still leave you with considerable out-of-pocket expenses."

You may also find that you'll need to hire a maid service to keep the house clean, or someone to mow the lawn, shovel the snow, etc. Not that you're lazy or lack the time but you might be physically unable to do the labor like you used to.

But I've thought of that you say. I'm planning to sell the house, buy a cheaper condo or assisted living apartment and pocket the difference. But suppose you're trapped in a terrible housing market like we have now where no one is buy or you get half of what your home used to be worth? Or you're competing with the other baby boomers for decent retirement space and prices for "retiree" homes shoot up.

Bottom Line

McArdle concludes that you retirement spending habits will be "about the same amount as I need now ... Even assuming that Social Security continues as promised, most people don't have nearly enough saved to make up their current incomes."

Financial Advice for Baby Boomers

“The trouble with retirement is that you never get a day off.”-Abe Lemons

The financial advice you should follow changes as you age. When you're young and single you can afford to take risks. When you're married with children you want you be more conservative with the family savings. When you reach 50 it's time to be ultra safe so you don't destroy the nest egg that has to last you another 40 years.
MSN.com smartSpending has these tips for Baby Boomers over the age of 50.

1. Get out of debt.
   Good advice at any age but you really, really want to be debt free by the time you retire. What option will you have if you lose your house because you can not pay the mortgage at age 60? Good luck finding a new job.


2. Maximize retirement savings
   At age 50 you're in the final inning for building up your retirement.


3. Beware of big expenses that might drain your savings
   Do you still have kids in college or a child not yet married?


4. Seek career freedom
   Look for a job you'll be happy to work part time, on your terms, as an alternative to retiring. Most of the tour guides my wife works with are post-retirement and do the job for fun and spare cash.


5. Think about where you will retire
   Pick a state and look at the tax impact. For example, Florida is popular because there is no state income tax.

Bottom Line

Don't wait until the last minute to plan your retirement. Begin early.

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.

Tax Breaks

“I'm proud of paying taxes. The only thing is--I could be just as proud for half the money.” - Arthur Godfrey

CNNMoney.com has some ideas for lowering the federal taxes you owe. But you must act before Dec 31 to take advantage of these tax incentives:

· New-car sales tax deduction: you can deduct the state and local taxes you paid for a new car purchased between Feb 17 and Dec 31 up to a vehicle price of $49,500 and if you earned less than $125,000 single or $250,000 as a couple.

· “First-time” homebuyers: there is a credit for anyone buying a new house who has not owned a house in three years.

· Green Appliance rebates: see energystar.gov (click on Tax Credits for Energy Efficiency)

· Use your stock market losses: if you sell a deadbeat stock with a loss, you can subtract that loss from profits made on other stocks sold. If you have more losses than gains, you can deduct up to $3000 from ordinary income. For losses to count you cannot buy a new “substantially identical” stock within 30 days of the sale.

· Watch out for the AMT penalty. See the article for details.

· Deduct any gifts you give to charity: this is the last year you can do a direct rollover from an IRA to a tax-exempt organization.

Bottom Line

Be careful with any financial advice. The tax law is full of holes and tricks and it’s easy to make a mistake. See a professional.

We got burned once with bad advice from our estate lawyer. He suggested cashing in the IRA of my wife’s deceased mother over two years to minimize the financial impact on our tax bracket. However he overlooked that there is a one-time partial IRA exemption that is not taxed with an inheritance. By splitting the IRA in two we did not get the full benefit of the exemption and ended up paying more taxes.

Misc

I also liked an article at FiLife.com but there wasn’t enough there for a full post so I’ll tack it on here. How much money can you safely withdrawal from your retirement account without draining it dry before you die? The recommendation is 4.1% to 4.6% annually. At a rate of 4.6%, in order to withdraw $50,000 in the first year, your retirement account needs to exceed $1.1 million dollars. Ouch!