Advice for Savvy Retirement Planning

What is the Social Security Leveling Option?

Social Security Leveling Option

A Social Security Leveling Option on your pension may help you afford early retirement

The Social Security Leveling Option

The Social Security Leveling Option is a pension plan payout option offered by pension plans to level out the income of someone who retires early. The leveling applies to the amount of pension payments and not to the amount of Social Security you will receive. If your employer offers a Social Security level option as a Pension Plan Payout Option, it may be easier to take an early retirement.

How Social Security Income Works

If you were born after 1942, Social Security retirement age is between 66 and 67 to collect full retirement benefits, depending on year of birth, . You can begin receiving reduced Social Security checks as early as age 62, but these benefits are reduced forever. However, there is no option (for non-disabled individuals and non-widowed spouses) to receive Social Security benefits prior to age 62. If you decide to retire prior to age 62, you will need other sources of income. Social Security is indexed to inflation, so every year the Social Security Administration will determine by how much (if at all) they will increase Social Security benefits.

READ: 401K Contribution Limits

How Social Security Level-Up Options Work

The idea behind the Social Security Leveling Option is to provide an increased pension benefit to early retirees while they wait for Social Security Benefits to kick in. Once SS benefits commence (or generally speaking, at age 65), the pension stream would be lowered, thus keeping the retirees total retirement income stable both before and after Social Security begins. It should be noted that the pension leveling option is independent of any Social Security decisions. In other words, you could elect the pension leveling option and then take Social Security benefits as early as 62, or as late as 70.

For example, let’s assume you opted to retire at age 60, and your initial pension payment would be $1,500 per month. In a couple of years when you turn 62, you will start receiving $1,000 per month from Social Security for a total retirement income of $2,500 at that time. If you elected the level pension option, your initial pension amount would be increased to $2,000 and then reduced to $1,000 when you start receiving $1,000 from Social Security. The level pension plan keeps your retirement income at a steady $2,000 per month throughout retirement instead of starting your retirement earning $1,500 and then jumping to $2,500 per month when you start to receive Social Security.

READ: Pension Plan Payout Options – Lump Sum or Other Annuity Options (including Social Security Leveling)

Considerations as a Pension Plan Option

Social Security Leveling has two main requirements: you must be eligible to receive benefits from your employer’s pension plan and you must provide your employer with a written estimate of your Social Security benefit. Although the estimate is usually based on benefits available at age 62, some plans will accept an estimate of benefits available at full retirement age (66), or age 65.

Whether leveling is a pension plan option that makes sense depends on how early you are retiring compared to how much money you give up in long-term pension payments. Social Security has cost-of-living increases, and your pension may also, which could also affect the long term results. But most private company pensions (versus municipal) do not have inflation adjustments. It is best to map out your various income options over time to determine which might work best for your circumstances.

READ: Desired Replacement Rate

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About Robert Henderson and Lansdowne Wealth Management

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

See my Google+ Profile

 

Interview with Robert Henderson on Saving for Retirement Later in Life for NewRetirement.com

Retirement Planning Later in LifeSee my interview in NewRetirement.com, talking about how to make up for lost time when saving for retirement…

“We’re guessing there might be one or two readers out there who are overwhelmed about the amount of money they need to save to retire comfortably.

But there’s no need to panic, says Robert Henderson, president of Landsdowne Wealth Management in Mystic, Conn.”

Read the full interview here.

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Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

See my Google+ Profile

Connect with me on FacebookGoogle+LinkedInPinterest and Twitter.

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About NewRetirement

We started NewRetirement to help our own parents and the millions of baby boomers and seniors like them to retire securely. When our parents asked for help with their finances, we realized that most people do not have the resources to hire an advisor and most financial advice is only geared toward wealthy households, not the average retirees.

Retirement planning is a very complex and tremendously important endeavor. Our goals are to make high quality retirement planning: 1) easy to understand 2) available to and affordable for everyone and 3) inclusive of products and strategies beyond asset allocation and drawdowns.

http://www.newretirement.com/

 

IRA Contribution Limits 2017

IRA Contribution LimitsIRA Contribution Limits

Each year the IRS publishes updated IRA contribution limits, as well as catch-up contribution limits for the new year. Typically, the limits the IRS sets each year is based on inflation factors (with minimum $500 increases), so they do not necessarily increase the limit each year.

The IRA Contribution Limit for 2017 has been established with NO increase over 2016.

The limit on IRA contributions applies to both deductible and non-deductible Traditional IRA’s, as well as Roth IRA’s. You may contribute to either type (if you qualify), but you are still subject to the same total aggregate contribution limit.

Income Limits Adjusted Up $1,000-2,000

IRA contributions are only allowed if your Modified Adjust Gross Income is below a certain level . For single filers in 2016, that income threshold starts at $118,000 (up from $117,000) and ends at $133,000 (up from $132,000). In that range, your contribution is limited, eventually reaching zero. For married filers in 2016, that income threshold starts at $186,000 (up from $184,000) and ends at $196,000 (up from $194,000).

2017 2016
Roth IRA Contribution Limit $5,500 $5,500
Roth IRA Contribution Limit if 50 or over $6,500 $6,500
Traditional IRA Contribution Limit $5,500 $5,500
Traditional IRA Contribution Limit if 50 or over $6,500 $6,500
Roth IRA Income Limits (for single filers) Phase-out starts at $118,000; ineligible at $133,000 Phase-out starts at $117,000; ineligible at $132,000
Roth IRA Income Limits (for married filers) Phase-out starts at $186,000; ineligible at $196,000 Phase-out starts at $184,000; ineligible at $194,000


READ:
2016 Social Security Inflation Adjustment
401K Contribution Limits 2017
Don’t Buy-and-Forget the Investments in Your 401K Plan

Recent History of IRA Contribution Limits:

As you can see, the IRA contribution limits do not rise dramatically each year. Although over time, if investors are diligent about increasing their contributions, it can certainly make a difference.

  • 2017 – $6,000
  • 2016 – $6,000
  • 2015 – $6,000
  • 2014 – $5,500
  • 2013 – $5,500
  • 2012 – $5,000
  • 2011 – $5,000
  • 2010 – $5,000
  • 2009 – $5,000
  • 2008 – $5,000

Over Age-50 Catch Up IRA Contribution Limits

For those of you that are over age 50 (or turn age 50 before the end of the year), you are allowed an additional IRA “catch-up” contribution. These limits have not adjusted for inflation, but may at some point in the future:

  • 2017 – $1,000
  • 2016 – $1,000
  • 2015 – $1,000
  • 2014 – $1,000
  • 2013 – $1,000
  • 2012 – $1,000
  • 2011 – $1,000
  • 2010 – $1,000
  • 2009 – $1,000
  • 2008 – $1,000

IRA Deduction Limits

Roth IRA contributions are not tax deductible.

Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.

If you ARE covered by a retirement plan at work, you can see the income limitations at the IRS website by going here.

IRA Income Limitations for Deductible Contributions:

If you ARE covered by a company sponsored retirement plan:

If Your Filing Status Is… And Your Modified AGI Is… Then You Can Take…
single or
head of household
$61,000 or less a full deduction up to the amount of your contribution limit.
more than $61,000 but less than $71,000 a partial deduction.
$71,000 or more no deduction.
married filing jointly orqualifying widow(er) $98,000 or less a full deduction up to the amount of your contribution limit.
 more than $98,000 but less than $118,000  a partial deduction.
 $118,000 or more  no deduction.
married filing separately  less than $10,000  a partial deduction.
 $10,000 or more  no deduction.
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “Single” filing status.

If you are NOT covered by a company sponsored retirement plan:

If Your Filing Status Is… And Your Modified AGI Is… Then You Can Take…
singlehead of householdor qualifying widow(er) any amount a full deduction up to the amount of yourcontribution limit.
married filing jointly or separately with a spouse who is not covered by a plan at work  any amount a full deduction up to the amount of yourcontribution limit.
married filing jointly with a spouse who iscovered by a plan at work $183,000 or less a full deduction up to the amount of yourcontribution limit.
more than $183,000 but less than $193,000 a partial deduction.
$193,000 or more no deduction.
married filing separately with a spouse who is covered by a plan at work  less than $10,000  a partial deduction.
 $10,000 or more  no deduction.
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “Single” filing status.

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Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

See my Google+ Profile

Pension Plan Options – Lump Sum or Annuity?

Pension OptionsPension Plan Payout Options

Most corporate pension systems offer a range of payout options when choosing how to receive benefits. It is extremely important to choose wisely, as in virtually all cases, once an election has been made, it cannot be “undone”. Make the wrong choice, and you must live with it for the rest of your life.

Read: 401K Contribution Limits

Typically, a pension will offer several different pension payout options, and possibly a single lump-sum payout option or leveling options. An “annuity payout” option is essentially a monthly benefit that is paid to you for life (and possibly the life of a spouse). Some pension plans may offer a “period certain” payout option as well. Below is a summary of some of the typical annuity options:

Annuity Options for Pension:

 

Annuity Payout

In addition to the basic options above, some pension plans will offer some unique strategies such as Social Security income-leveling or “pop-up” provisions that are great in certain situations. The Social Security Leveling options will typically offer higher benefits in the beginning, and then be reduced once you are eligible for social security income (thus “leveling” your income across all years). The “pop-up” provision would provide for a higher monthly benefit if your beneficiary should pre-decease you.

READ: Social Security Leveling Options

Joint Survivor Pension Payout Options

In most cases, the pension managers know that a spouse will require continued financial income after the pensioner passes away. Of the pensions I have seen, they generally require the spouse to sign away their right to survivor benefits if the pensioner elects the single life annuity option.

One strategy for couples where this might make sense is commonly referred to as pension maximization or “pension-max”. This involves the pensioner electing the single-life annuity option, which offers the highest payout. At the same time, the couple purchases a permanent life insurance policy on the pensioner, which will be used to replace the annuity upon their death. The strategy here only makes sense if the cost of insurance premiums is significantly less than the reduction on lifetime annuity payments if the couple were to elect the joint survivor option.

Annuity or Lump Sum?

If your pension plan offers a lump-sum pension payout option, you are fortunate. While there are differing professional opinions on whether to take the annuity or the lump-sum, simply having that feature available to you is a nice added benefit.

There are a lot of things to consider when deciding between the pension annuity or lump-sum. We will look at some of the pros and cons of each option, which will better guide you to the best decision for you and/or your spouse.

Annuity Pension Payout Option

Pros:

  • Guaranteed payout. Assuming the pension plan stays solvent, you are guaranteed the income promised to you for the rest of your lifetime (and possibly your spouse’s lifetime).
  • No need to manage the money. Because you don’t control the money, you have no “investment” risk.

Cons:

  • Most pension incomes do not rise with inflation. So the amount you receive now may be the same amount you and your spouse receive for the rest of your lifetimes (and possibly a reduction to your spouse if you select a reduced joint survivor option). And considering interest rates are at an all-time low, with predictions of increased inflation in the years ahead, pensioners may be locking themselves into artificially low pension streams for their lifetime.
  • No control over the money. If you need a large sum of money for a particular reason (buy a car, home renovations, etc.) there is no way to access the principal.
  • Once you and/or your spouse dies, the money is gone. There is no way to pass on a legacy to your heirs.
  • If you leave your company prior to your retirement age (prior to starting pension benefits), the base value of your pension may only rise moderately. For example, right now because interest rates are so low, pension values may only be rising between 2-3% per year until the date that the pension begins. Typical interest factors utilize the U.S. Treasury or Corporate Bond index.
  • If you don’t need the money right away (or don’t need all of it), you would still receive the pension payments and be required to pay income taxes on it.
  • Potential that corporate mismanagement could result in a reduced pension payment. Most pensions participate in a pension insurance system (PBGC), but that insurance will not always cover 100% of the original pension (benefits are capped), and the rules may not necessarily fit your expectations.

Lump Sum Pension Payout Option

Pros:

  • Have control over the money. Whether you want to spend it today or never, you can control when and how much spend.
  • Opportunity to create legacy for heirs. Since the money will now be under your control, with proper planning, you may be able to pass on significant assets to heirs.
  • Potential for significantly more income over time. If properly managed, your investment returns may outpace the income generated from the pension annuity.
  • Potential for income that will keep pace (or exceed) with inflation. This will help maintain your purchasing power as the years go by.
  • Ability to better manage taxes. Depending on how much income you require, if you defer (or reduce) withdrawals from your pension balance (which would typically now be within an IRA account), you may be able to defer taxes until a later date (or eliminate the income taxes on the unused portion that is eventually passed on to heirs at your death).
  • If you change your mind, you still have the opportunity to buy a “personal pension” buy buying an annuity from an insurance company. In some cases, the private annuity may end up offering better payout options than the corporate pension plan. The best part is that this can be done at virtually any time after receiving the lump sum.
  • You are now free to manage your beneficiaries based on your own desires and the needs of your family and heirs.

Cons:

  • You are now required to manage the money. While you could hire a talented advisor, there is still no guarantee that investment returns will match your needs or expectations.
  • If you lack financial self-control, you may risk depleting assets too early in your retirement years and be left without sufficient assets in your later years.

Making a decision on pension payout options is not easy. Careful thought and analysis should be done before making your decision. It may also be wise to invest in the services of a financial planner to help you make this important decision, and present various scenarios for you to consider.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

See my Google+ Profile

Social Security Cost of Living Adjustment 2016

Couple Planning Their Finances** 2016 Social Security Cost of Living (COLA) Update **
As was widely expected, the Social Security Administration has announced that there will be no Cost of Living Adjustment (COLA) for 2016. The primary force behind this is lower gasoline prices, which brings down the overall inflation rate. Unfortunately, this does not necessarily represent how most seniors spend their money.

The 0% COLA announcement from the Social Security Administration, which had been widely expected, affects 70 million people, about 60 million retirees plus disabled workers and spouses and children who receive benefits.

The SSA also released a Social Security COLA Fact Sheet with additional details.

** 2015 Social Security Cost of Living Update **

The Social Security Cost of Living Adjustment (COLA) for 2014 will increase by 1.5%. This is among the smallest increases granted since the inception of Social Security. Each year the Social Security Inflation Adjustment is announced in late fall.

This will affect nearly 60 million social security recipients. See the announcement here by the Social Security Administration: http://www.ssa.gov/cola. The annual Cost of Living adjustment is based on an inflation measurement adopted by the government.

READ: When To Take Social Security Benefits

Social Security Benefits

There is also considerable debate surrounding the COLA inflation measurements the government uses to calculate the annual adjustment. Some advocates believe that the calculation artificially lowers the “real” impact of inflation, especially on retirees that have been hit hard by a combination of lower real estate values, steep losses in retirement savings due to multiple market corrections that past 10 years, as well as staggering increases in health care and prescription drug costs. Meanwhile, certain lawmakers feel the government data actually overstates the actual inflation numbers.

Below is a table of historical SS COLA adjustments:

Automatic Social Security Cost-Of-Living Adjustments”

July 1975 — 8.0%
July 1976 — 6.4%
July 1977 — 5.9%
July 1978 — 6.5%
July 1979 — 9.9%
July 1980 — 14.3%
July 1981 — 11.2%
July 1982 — 7.4%
January 1984 — 3.5%
January 1985 — 3.5%
January 1986 — 3.1%
January 1987 — 1.3%
January 1988 — 4.2%
January 1989 — 4.0%
January 1990 — 4.7%
January 1991 — 5.4%
January 1992 — 3.7%
January 1993 — 3.0%
January 1994 — 2.6%
January 1995 — 2.8%
January 1996 — 2.6%
January 1997 — 2.9%
January 1998 — 2.1%
January 1999 — 1.3%
January 2000 — 2.5%(1)
January 2001 — 3.5%
January 2002 — 2.6%
January 2003 — 1.4%
January 2004 — 2.1%
January 2005 — 2.7%
January 2006 — 4.1%
January 2007 — 3.3%
January 2008 — 2.3%
January 2009 — 5.8%
January 2010 — 0.0%
January 2011 — 0.0%
January 2012 — 3.6%
January 2013 — 1.7%
January 2014 — 1.5%
January 2015 — 1.7%
January 2016 — 0.0%
(1) The COLA for December 1999 was originally determined as 2.4 percent based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554, however, this COLA is effectively now 2.5 percent.

READ: Social Security Leveling Option

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

When to Take Social Security Benefits

Question MarkEach week, readers pose various questions related to personal finance. To submit your personal finance question, please send an e-mail to QA@lwmwealth.com. This week we answer one question from a local reader.

Q. I am turning 62 this January, and I am confused about when the best time is to start taking Social Security Benefits.  Most of my friends have told me to take it as early as possible (62 I believe), but I have also read many places to defer taking benefits as long as possible. – D.W. from Ledyard, CT

A. This is one of the most frequently asked questions I get from people. The question has been around almost as long as the Social Security system itself. However, it’s become a much bigger issue as people live longer and longer.

The short answer is that it depends on several things. Here’s the long answer: You mentioned in your original e-mail that you are married and you were the primary breadwinner. This is not uncommon, so let’s look at it from this perspective first.

A lot of people are of the same opinion that they should take the benefit now and enjoy the money and security of knowing you won’t die without having claimed much of the benefit. The fundamental problem with this attitude is that, assuming you have other benefits to draw from as well, you would end up dying with other assets in your estate along with the balance of your social security benefits. But, the single, biggest financial threat to any retiree is outlasting your money. Deferring your social security benefit helps reduce this risk by significantly increasing your benefit each year from age 62 to 70. In fact, if you were born after 1943, your benefit will compound by 8% per year, each year until age 70. And this is in addition to the normal cost-of-living adjustments (COLA) added to all recipient benefits each year.

Social Security BenefitsI did a quick calculation to compare someone that would have a normal retirement benefit of $1,500/mo. (at FRA, or Full Retirement Age of age 66). If they opted to receive benefits at age 62, their benefit would be $1,140/mo. for life (plus COLA’s). By deferring to age 70, their benefit would be $1,980/mo. for life (plus COLA’s). Ignoring time value of money, taxes, and investment income, the break-even period by deferring to age 70 would be approximately 12.5 years. So theoretically, if you lived to age 83, you would have collected the same amount of money over your lifetime under either scenario.

But let’s not forget that the average male (all races) has an average life expectancy of 17.5 years if they live to age 65. For a married couple, the average life expectancy of one spouse is 29 years. That’s average life expectancy. So chances are, at least one of you will live to age 94. On top of that, if the primary breadwinner is male, and more than likely dies first, the surviving spouse is left with a benefit that will be 32% higher than if he had opted to take the age 62 early benefit. This is where we get to the heart of the issue.

While I generally advocate that a healthy married couple defer benefits as long as possible, there may also be circumstances where this is not the right answer (such as illness, poor family history, financial burden, etc.).

READ: Social Security Leveling Options

To submit your personal finance question, please send an e-mail to QA@lwmwealth.com.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

What is the Right Income Replacement Rate in Retirement?

Percent SignWhat’s Your “Number?”

If you’re like most people approaching retirement, one of your main concerns is what level of income you are going to need in retirement.

If one were to Google the phrase “Retirement Income Replacement Rate”, they would find about 1.3million results. It seems every financial website, financial calculator, brokerage firm, and mutual fund company has their own perspective on the appropriate “Number” – that is, the percentage of your pre-retirement income that you need in retirement.

Many so-called “retirement experts” like to use a specific number, or “Rule of Thumb” to identify the appropriate number. In reviewing many of the top search-engine results, one would be led to believe that the number falls somewhere between 70% and 135%. That’s a big variation. Why the disparity of results? Simple. Because there are so many variables and many different assumptions. It might seem straight-forward, but let’s look at a few reasons why.

RetirementFirst, your taxes are most likely lower in retirement. Excluding any “work” you do in retirement, you won’t pay any payroll taxes (social security) on your income. That alone will save you 7.65% of your income, the current employee rate (excluding the current, temporary social security tax “discount” in place). Also, much of your income may not be taxable at ordinary income tax rates. For example, Social Security income is taxed between 50-85% (or zero if your income falls below the taxable threshold). Income received from capital gains on securities is taxed at a lower capital gains rate, and certain dividends are taxed at preferential rates as well.

Second, you will have fewer income “deductions” in retirement. I’m not talking about tax deductions, but payroll deductions. While working, if you were contributing to your company-sponsored retirement plan, those payroll deductions go away. And there may be other deductions as well such as life insurance, short and/or long-term disability, and health insurance. Now, some of these expenses may now take other forms, such as personal life insurance policies and other forms of health insurance (ie. Medicare, Medigap policies, etc.). But overall, you may find that your “take home” pay is higher.

READ: Social Security Leveling Option

Third, there may be expenses that have phased out of your life, such as your mortgage, college expenses, raising of children, and possibly a smaller home or, if you choose to move, a lower cost of living overall. You might no longer be saving for major expenses like a home, college costs, weddings, and significant home expenses (new furniture, appliances, etc.) that you tend to purchase when you are younger and establishing your household. So there is less need to set aside savings for those items.

Finally, you have more free time on your hands, and the desire to fill that time with travel, hobbies, dining out, spoiling the grandkids, and a general desire to make up for your leisure “lost time”. With that comes added expenses.

Although these various factors seem to compound the issue of pinpointing your true “number”, the exercise can be quite simple – and it doesn’t involve creating a line-by-line household budget.

Desired Income Replacement Rate

In my financial planning practice, I have found the simplest way to come up with your income needs is to follow this exercise:

  1. Begin with your take home paycheck every month. In other words, what gets deposited into your bank account. Depending on how often you were paid (weekly, bi-weekly, etc.), you will have to figure out your annual take-home pay and divide by 12. This is your monthly take-home pay. This was the amount you were actually living on. So for example, let’s say your gross salary was $75,000, but after taxes, social security, state and federal income taxes, and 401K contributions, your take home pay was $50,000, or $4,166 per month. So your starting point for after tax income needs in retirement is $4,166 per month.
  2. Begin the process of adding back and taking away adjustments to your paycheck that will change in retirement.
    1. First, determine what tax rate your income will be subject to. You will need to determine what level of taxation will apply to your various forms of income (ie. IRA and 401K withdrawals, interest and dividends, capital gains, Social Security income, etc.). Do not assume the same level of taxation as during your working years. You may need the assistance of your tax professional on this one. If you have always done your taxes yourself, and you are not completely comfortable with estimating this, I strongly recommend working with a tax professional and financial planner for at least a year or two to get yourself set up properly for retirement. A good financial planner will help you estimate the amount and forms of various income you will have, and your tax professional will make the necessary tax estimates.
    2. Make changes in your budget for expense changes such as a paid-off mortgage or any other major additions or changes to your expenses. Don’t forget to include things like insurance (ie. medical, long-term care) that may have been covered by an employer, or may be new to you. Also, do your best to anticipate unforeseen expenses like the financial support of an adult child or an ailing parent. And remember, you will always need to replace things like cars, roofs, and major appliances that have aged or broken down.
    3. Finally, make adjustments for lifestyle changes – no commute (less gas), more or less eating out, travel, entertainment, etc.
  3. The result will be what amount of income you need on a regular basis. So in our example, we started with gross income of $75,000, take home pay of $50,000, and then adjustments to what your needs will be in retirement – without going through every line-item in your budget.

In our next installment, we will review how you are going to create the income that you need in retirement, including social security, pensions, retirement accounts, annuities and savings.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog.

The 10 Most Difficult Retirement Decisions

See Robert Henderson of Lansdowne Wealth Management quoted in this article by Emily Brandon of U.S. News and World Report’s Money & Retirement section:

Before leaving your job, you’ll need to make these tough choices

August 29, 2011 RSS Feed Print

The decision to retire can be sparked by a number of factors: reaching a specific age, hitting a savings goal, or being laid off in a tumultuous job market. To support yourself without income from a job, you’ll have to make a series of choices about Social Security, health coverage, and your investments. Here are 10 of the toughest decisions you will make before you retire.

[See One Move That Could Boost Your Retirement Security.]

When to retire. For some people, it’s a financial calculation. You know you’re financially ready when the combination of your Social Security, traditional pension, and investment income produces enough cash flow to cover all of your anticipated expenses for the rest of your life. “Working two or three more years can make an incredible difference to your long-term plan if you continue to save in your 401(k) or 403(b) and continue to pay into Social Security,” says Mary Alpers, a certified financial planner and founder of Alpers and Associates in Colorado Springs, Colo. But retirement also often involves an identity shift from your former job title to a free agent. Sometimes this decision is made for you because of a layoff or buyout. Many people also like to coordinate their retirement with a spouse.

When to claim Social Security. You can sign up for Social Security beginning at age 62, but payouts increase for each year you delay claiming until age 70. “Wait as long as you possibly can, because the additional percentages that are added on are enormous,” says Jane Nowak, a certified financial planner for Kring Financial Management in Smyrna, Ga. “Since we are living longer, you certainly want your paycheck from Social Security to be as fat as possible.”

Health coverage. It’s essential to find affordable health insurance if you want to retire before age 65. “If you are not entitled to retiree medical benefits or if they are deferred to a later date, make absolutely certain you have access to and can qualify for individual coverage,” says Robert Henderson, president of Lansdowne Wealth Management in Mystic, Conn. “Also verify the costs. Health insurance can be prohibitively expensive in some cases.” Even after you qualify for Medicare, the decisions don’t end. You have to choose whether to purchase a supplemental policy and shop around for the Medicare Part D plan that best meets your prescription drug needs each year in retirement.

How much you can safely spend each year. If your nest egg isn’t sizeable enough to finance your retirement completely, you’ll need to calculate how much you can safely spend each year without depleting your savings too quickly. “Three to 4 percent is my comfort zone, and I hope less,” says Alpers. An annual draw-down rate of 4 percent on an investment portfolio with 35 percent in U.S. stocks and 65 percent in corporate bonds has an 89 percent likelihood of lasting 35 years or more, according to Congressional Research Service estimates.

[See Why Your Retirement May Not Be Permanent.]

How much investment risk. Retirees need to balance their investment needs for safety and continued growth. “Hold as little equities and higher-risk assets as possible, while still enough to meet your long-term goals,” says Henderson. “Most retirees need no more than 50 to 60 percent in equity and equity-like investments.” You’ll also need an emergency fund and several years’ worth of living expenses set aside in a safe place. “Always make sure that you have your first three to five years of withdrawals invested in very conservative investments. Good choices are CDs, money market accounts, short-term treasuries or mutual funds that invest in them, and fixed-immediate annuities,” says Henderson. “This way, regardless of what the stock market is doing today, you don’t have to worry about withdrawing assets that have dropped in value.”

When to pay taxes. After decades of deferring taxes on your retirement savings using 401(k)s and IRAs, the tax bill becomes due upon withdrawal in retirement. The timing of these withdrawals could affect how much you pay in taxes. “Try to balance out your withdrawals from taxable and nontaxable accounts each year so you are not kicking yourself into a higher tax bracket at some point,” says Henderson. Taking a large IRA withdrawal in a single year could result in an oversized tax bill. Withdrawals from traditional retirement accounts become required after age 70½.

Where to live. Once you are no longer tethered to a job, you can live anywhere that suits your tastes and budget. Moving to a place that costs less than where you live now can boost your standard of living and help stretch your nest egg. You could also test out a place with better weather, more opportunities for recreation, or move closer to family.

[Find Your Best Place to Retire.]

Whether your home should help finance retirement. A paid-off mortgage can help finance your retirement because it eliminates one of your biggest monthly expenses. In some cases, downsizing to a smaller home or moving to a place where the cost of living is significantly lower can even give a significant boost to your nest egg. “Especially if you live on the East or West coast, where housing can be extremely expensive, you may have an opportunity to downsize and realize quite a bit of the appreciation you had in your real estate,” says Henderson.

[See 10 Places to Buy a Retirement Home for Under $100,000.]

Whether to keep working. A part-time job is increasingly becoming common in the retirement years. Many people downshift to a job with shorter hours and less responsibility before retiring completely, while other people return to work after a break. The income, and sometimes benefits, a part-time job provides allows you to withdraw less of your retirement savings each year. Some people also find jobs they enjoy that allow them to interact with former colleagues, consult on the occasional project, or learn a new skill.

What you will do. Retirement isn’t only about quitting your job. It’s an opportunity to have complete control over how you spend your time. Make sure you have a few ideas about how you will fill the eight or more hours per day you previously spent working and commuting. Some people miss the sense of purpose and friends that their job provided for them, while others finally have the time for hobbies and projects they have been waiting years to tackle.

How to hike your Social Security benefits

By Robert Powell, MarketWatch

BOSTON (MarketWatch) — The Social Security Administration recently put the kibosh on a technique some retirees were using to boost their monthly benefits. But even though that loophole is essentially closed, experts say there are still plenty of ways households can legally maximize the amount of income they receive from Social Security.

In December, the SSA said retirees essentially can no longer do what are called do-overs, or the free-loan strategy. Here’s how it worked: You claim benefits at a given age and then years later repay what you received, pay no interest, and then file for benefits again, getting a higher monthly amount because you delayed filing until a later age. Read MarketWatch’s story on Social Security do-overs, from 2008.

“This strategy is equivalent to a ‘no interest’ loan from Social Security,” said Boston College’s Center for Retirement Research.

Social Security do-overs are basically gone, but there are a number of ways to make sure your monthly benefit is as high as it can be. 

Not many folks used this strategy, but the Center estimated the do-over tactic could cost Social Security an estimated $6 billion to $11 billion per year. Under the new rules, you can suspend and re-apply for your benefit only within the first 12 months of applying for Social Security, and you can only do it once in your lifetime. Read the Social Security Administration’s new regulations on Regulations.gov.Read 2009 report “Strange but True: Free Loan From Social Security” at the Center for Retirement Research site.

Now truth be told, many experts didn’t like this tactic. “I was never a fan of the repay-and-reapply method anyway,” said Elaine Floyd, certified financial planner and director of retirement and life planning at Horsesmouth LLC. “To take a permanently reduced benefit with the hope of cancelling it and raising it later was just too risky in my opinion, especially after the Center for Retirement Research at Boston College estimated the cost to the system if everybody did it. It was a loophole just waiting to be closed.”

Others agreed, including Jason Fichtner. He is now a senior research fellow at the Mercatus Center at Georgetown University but while he was acting deputy commissioner for the SSA, Fichtner started the push to remove the do-over option. “It was never meant to be a financial strategy for the wealthy to game the Social Security trust funds,” Fichtner said.

The do-over approach had its origins in the case of a woman “who initially claimed benefits in 1957 and later requested that she be allowed to re-file in 1964 in order to obtain a higher monthly benefit based on her more recent work history and older filing age,” according to the Center for Retirement Research. “The SSA granted this request on the grounds that it was in the best interest of the claimant to rescind the original claim. It was not specifically intended to allow zero-interest loans, but instead to allow for the possibility that changes in an individual’s circumstances could cause her to reconsider an earlier claiming decision.”

So, if you can’t use the do-over tactic any longer, what’s left? There are a few options, said Dennis Heywood of Social Security Solutions, but the choices available depend on whether a married couple includes one wage earner or two, the ages of each spouse, and the when one reaches full retirement age.

“And most importantly, how an option fits into a person’s financial portfolio,” Heywood said. “My experience is that many people are taking their Social Security at an early age to preserve investments as they age. Social Security replaces what they would take out of investments to live on.”

Said Fichtner: We don’t know the best age for you to claim Social Security. Only you do.”

Work longer, earn more

Your earnings record for Social Security continues to be updated as long as you work and pay into Social Security, Floyd said. “If you keep working at a relatively high salary, it can cause one of your lower-earning years to drop off the 35-year earnings record and serve to boost your primary insurance amount or what’s called your PIA.”

This advice, she said, is especially important for people who do not have 35 years of high earnings; for example, women who have stayed home with their children. “It even applies to high-earners in their 50s and 60s; although the earnings in their early years are indexed for inflation, the indexed amount is likely lower than their current salary,” said Floyd.

Delay applying

Most people claim Social Security as soon as they become eligible, at age 62. But the benefits of waiting to apply for benefits cannot be underestimated. Consider it this way: If you claim early, age 62, your benefit is reduced by 25% for your lifetime. But if you wait until age 70, you’ll get a 32% increase in your benefit, said Fichtner.

“In today’s low-return environment, those 8% annual delayed credits that an unclaimed benefit earns between the ages of 66 and 70 end up being extremely valuable,” Floyd said. “Most people consider their ‘break-even age,’ or the age at which the cumulative total under the later-claiming scenario catches up to the earlier-claiming scenario. But this usually leads to earlier claiming behavior because people don’t want to start out ‘behind.’”

READ: Social Security Leveling Options

 

4 Social Security Changes Coming in 2011

From Emily Brandon at U.S. News & World Report

The Social Security program will be tweaked in several important ways in 2011. Workers will get a temporary tax break on the amount they pay into the entitlement program, and several claiming options for retirees will be eliminated. Here’s a look at how the Social Security program will change this year. 

Lower Social Security taxes. The amount workers pay into the Social Security trust fund will temporarily drop from 6.2 percent of taxable wages up to $106,800 annually to 4.2 percent in 2011 only. For self-employed workers, the Social Security tax rate will drop from 12.4 percent to 10.4 percent next year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed by President Obama on December 17. Employers will continue to pay 6.2 percent of wages into the entitlement program.

The Social Security system’s finances are not expected to be harmed because the trust fund will be reimbursed for the full amount of the tax break from the general fund of the Treasury. However, this change also means that the Social Security trust fund will no longer be completely funded directly by citizen contributions. “This pretty much ends the claim that Social Security is self-financing or that it doesn’t contribute to the budget deficit,” says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration.

Free loan option eliminated. Retirees will no longer be able to get an interest-free loan from the Social Security trust fund this year. The Social Security Administration announced in December 2010 that individuals will not be able to begin payments at age 62, pay back all the benefits received at age 70 without interest, and then reclaim at a higher rate due to delayed claiming. Under the new rules, Social Security beneficiaries may withdraw an application for retirement benefits only within 12 months of their first Social Security payment and are limited to one withdrawal per lifetime. “This free loan costs the Social Security trust fund the use of money during the period the beneficiary is receiving benefits with the intent of later withdrawing the application and the interest earned on these funds,” says the Social Security Administration in a statement about the rule change. The Center for Retirement Research at Boston College calculated that mass utilization of this claiming strategy could cost the system between $5.5 billion and $11 billion, primarily going to high-income households with enough liquid assets to pay back the benefits.

Retroactive benefit suspensions discontinued. Retirees will still be allowed to temporarily suspend their benefits and restart them later, which can result in bigger Social Security checks to account for the months or years in which payment was not received. However, beneficiaries will not be able to retroactively suspend benefits and pay back money already received in exchange for higher payments going forward. Retirees will be allowed to voluntarily suspend benefits only for months in which they did not receive payments or future benefits beginning the month after the request is made.

Paper checks retired. Retirees who apply for Social Security benefits on or after May 1, 2011, will no longer have the option of receiving a paper check in the mail. Seniors can have their entitlement payments directly deposited into a bank or credit union account or loaded onto a prepaid Direct Express Debit MasterCard. “This important change will provide significant savings to American taxpayers who will no longer incur the annual $120 million price tag associated with paper checks and will save Social Security $1 billion over the next 10 years,” says Richard Gregg, Treasury Fiscal Assistant Secretary. Retirees already receiving paper checks will need to switch to direct deposit or the prepaid debit card by March 1, 2013.