A common mistake by retirees is to underestimate their costs of Medicare, Medicare supplements, and out-of-pocket medical expenses. For instance, it’s not uncommon for a retiree couple to pay $9,000 per year on Medicare premiums and also thousands of dollars out-of-pocket on medical bills. And don’t forget about annual inflation. Underestimating these expense items can ruin a good day and maybe someone’s retirement years.
Featured in a recent Slott Report on Roth IRAs posted May 16th were some of the top Roth conversion mistakes common today. These are mistakes advisors work to help clients avoid – ones that can sometimes be overlooked or just misunderstood. One to be aware of: the incorrect valuation of assets when doing a Roth conversion. As Beverly DeVeny and Jared Trexler noted, “Many tax scams are based on undervaluing assets. This is also true when it comes to Roth IRA conversions. A fair market value must be used for the asset converted. A common example is an annuity contract with riders. Such riders can increase the fair market value of the annuity contract, increasing the tax you will owe if you do a Roth conversion of the IRA annuity.” When considering a Roth conversion, be sure you are working with a professional that can help you avoid this or other common mistakes.
According to William Bengen’s study, published in the 1994 Journal of Financial Planning, the amount a retiree can withdraw each year from their portfolio is somewhat related to market volatility and the sequence of their investment returns. Therefore as retirees manage investment risks, the size of their withdrawals, and market volatility it’s possible to improve their retirement outcome. Additionally, according to a Vanguard study, investment advisors can improve an investor’s situation using well-known and accepted best practices for wealth management compared to those of portfolios that are not.
According to retirement studies conducted by J.P. Morgan, two-thirds of the average American’s retirement income comes from their Social Security and their earnings. And many of these people find themselves having to work longer and retire later. And remember, Social Security benefits only replace 27% of higher incomes (past wages of at least $113,700) and up to 58% of lower incomes (past wages of $20,172) of one’s past wages (Source: 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance Trust Fund).
One simple way for a 60-year old pre-retiree to improve their situation is to delay starting their Social Security income. According to The Social Security Administration each year you wait to draw Social Security you gain an increase of approximately 7%, much like receiving a “raise” in your retirement pay check. And though a few can’t delay, we have found with some adjustments many can wait to begin this benefit until at least their full-retirement age (age 66 if you were born between 1943–1954). This may be a particularly important consideration if a spouse has “good genes” and stands a reasonable chance of living into their 90’s.
To possibly help, remember that the Social Security Administration now provides access to online benefit calculators through their website, www.ssa.gov.
According to several recent studies the younger generation today would rather rent than own their home. True, the recession has done a number on their job opportunities. Plus, many are busy paying down debt and working hard to make themselves ready to own one day. But unfortunately we all know tougher mortgage credit requirements are eliminating “too many” good, potential home buyers.
What’s alarming is that a greater number that can buy are simply choosing to rent. And the main reason… well, you guessed it: they are saying that they aren’t ready to settle down. They possess a strong desire to travel and explore before they get more “serious” with life.
So what’s the concern? Well, a couple things come to mind. First, the obvious negative effects on our economy from less Americans owning homes. Second, if this group chooses to rent for a long period of time before they purchase a home their personal wealth could suffer long-term. With the time-value of money principles working against them and delaying this traditionally effective form of saving (building equity) through home ownership at young ages, some of this generation may never replenish the cost of such a delay.
After a very slow 1st quarter, partially due to weather, signs are showing the U.S. economy is improving. For instance, according to the Bureau of Labor Statistics, April added 288,000 jobs. Also, of the 150 companies tracked by the Wall Street Journal, as much as 75% reported positive earnings compared to earnings projections. Though stock markets correct from time to time (like recently), don’t bet against the U.S. economy. Listen to this WSJ Video: Economists See Growth Rebound and decide for yourself.