Living without a steady paycheck
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Once you give up the security of a steady paycheck, you're exposed to a host of uncertainties: interest rate moves, stock market corrections and tax changes, to name a few.
To hedge against things that are out of my control, I've elected to wait till age 70 to collect Social Security benefits as well as to take my pension as an annuity rather than a lump sum, both of which will maximize my regular income.
The latter is a popular strategy among Kiplinger's readers. “I totally underestimated the value of a guaranteed income stream,” writes Bill Kleine. To create one for himself, Kleine converted a lump-sum payout from a former employer into a simple fixed annuity. Another reader converted a whole life insurance policy into a fixed annuity.
To protect against potentially higher future tax rates, Dennis Kelly is withdrawing more than his required minimum distributions to take advantage of today's relatively low rates. David and Janet Dennison are making charitable contributions from their pretax accounts to reduce the amount they'll be required to take in RMDs when they turn 701/2, which will also cut their tax bill.
When the stock market hit bottom in 2009, Mike Hagedorn began putting $1,000 a month into a bank CD, later upping that to $2,000. Now he's sitting on a six-figure cushion to protect against market downturns.
To preserve his savings, Del Richter is planning to use an ultraconservative 2 percent annual withdrawal rate instead of the traditional 4 percent benchmark. But Richter may be playing it too safe.
Wes Moss, a certified financial planner in Atlanta, recently took an updated look at the 4 percent rule and found that it's still valid. In 70 percent of Moss' scenarios, retirement funds lasted 50 years or more, and in the worst-case scenario, the money ran out in 29 years.
In fact, there's a lot of evidence that retirees may be worrying too much about preserving their money. A recent study by the Employee Benefit Research Institute found that people are reluctant to dip into their assets, often spending down significantly less than half of their savings within the first two decades of retirement and sometimes increasing their nest egg.
One reason is that retirees are selfinsuring against potentially catastrophic expenses. Nevertheless, says EBRI CEO Lori Lucas, “they're living sub-optimally, not spending money even though they could be.”
How to overcome their fear? Sometimes the solution is to put into place a financial plan “that gives you permission to spend,” says Brian Sykes, a CFP in Blue Bell, Pa. Sykes also recommends maintaining separate accounts for things such as basic bill-paying, travel and investment.
Frequently the spending barrier is mostly psychological. For years you've been saving regularly, and now you have to create a new habit by training yourself to do what doesn't come naturally, says financial therapist Olivia Mellan. Her advice: “Practice spending your money, and reward yourself for the experience.”
Janet Bodnar is editor at large at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.
Here are three things you should do now to make sure your IRA and/or 40l(k) accounts don't get caught in the year-end crunch — and to set you up for success in 2019.
Check not only your balances, but your “asset allocation” online. Evaluating your investment choices is the first step in making smart year-end decisions about your retirement plan.
Review asset allocation
Most people can't name the top three funds in their 40l(k) plan. They might have set it up years ago, and each new contribution goes into the same few funds. The headline indexes don't always reflect the performance of different asset classes.
For instance, if you've been sending money to a bond fund, this might be the time to switch to a more balanced fund. When interest rates rise, as they are likely to continue to do, bond prices fall. A balanced fund may own some bonds, but also derive income from dividend-paying stocks.
Don't think you can avoid this review of your 40l(k) plan because you're inside a target-date fund — one that promises to adjust the asset mix to become more conservative as you reach retirement age, and beyond.
Many of those target date funds have very high percentages allocated to stocks, reflecting the likelihood that you'll live at least 25 years after retirement and will need the growth stocks provide over the long run. But in the shorter term, a large equity allocation could cause acute anxiety if the market declines sharply.
Consider putting some money in a stable value fund inside your 40l(k) or a money market fund in your IRA to create liquidity for withdrawals and to mitigate market risk.
Take RMDs now
Now is the time to take your annual required minimum distribution if you are over age 70 1/2. Remember, you must total the value of all your retirement accounts. A custodian will do the calculation for you, if you give them the total assets.
Don't wait until the last minute to liquidate some mutual funds to raise the cash you need to withdraw.
Remember, nothing says you must spend all that money you withdraw.
Set up higher contributions next year
After years of unchanged contribution limits since 2013, the IRS has announced an increase for 2019. The current contribution limit of $5,500 will rise to $6,000 in 2019. And for those age 50 or older, the catch-up limit jumps to $7,000. These limits apply to traditional and Roth IRAs.
For 40l(k), 403(b) or similar workplace plans, the allowable contribution limit rises to $19,000 in 2019 — although the catch-up contribution limit for workers age 50 and older remains at $6,000.
Contact the HR department now to increase your payroll contributions next year to take advantage of the new, higher limits in 2019. And similarly, if you make automatic contributions to an IRA through a mutual fund, you'll want to adjust your monthly contributions higher.
The income limitations for Roth IRA contributions will rise, as well, in 2019. The income phase-out for allowable Roth contributions will rise from $122,000 to $137,000 for singles, and from $193,000 to $203,000 for couples.
Workers who want to contribute to a deductible IRA, even though covered by a workplace plan, will also see increases in allowable income limits. And 2019 will bring increased opportunity to set up an IRA for non-working spouses whose spouses contribute to a workplace retirement plan.
This lets the stay-at-home parent contribute to her or his own IRA until the family income reaches $203,000, at which point the deduction is fully phased out.
Take the time to deal with retirement accounts before the year-end rush. You'll be glad you did. And that's The Savage Truth.
Some retirees embrace
annuity strategy
Terry Savage is a registered investment adviser. She responds to questions on her blog at TerrySavage.com.