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The Major Retirement Planning Mistakes

Brent E Chavez

The Major Retirement Planning Mistakes

Why are they made again and again?

retirement mistakes, warning sign

Much is out there about the classic financial mistakes that plague start-ups, family businesses, corporations, and charities. Aside from these blunders, some classic financial missteps plague retirees.   

Calling them “mistakes” may be a bit harsh, as not all of them represent errors in judgment. Yet whether they result from ignorance or fate, we need to be aware of them as we plan for and enter retirement.        

1. Leaving work too early. As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher retirement income. Filing for your monthly benefits before you reach Social Security’s Full Retirement Age (FRA) can mean comparatively smaller monthly payments. Meanwhile, if you can delay claiming Social Security, that positions you for more significant monthly benefits.1     

2. Underestimating medical bills. In its latest estimate of retiree health care costs, the Center for Retirement Research at Boston College says that the average retiree will need at least $4,300 per year to pay for future health care costs. Medicare will not pay for everything. That $4,300 represents out-of-pocket costs, which includes dental, vision, and long-term care.2     

3. Taking the potential for longevity too lightly. Actuaries at the Social Security Administration project that around a third of today’s 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might duplicate the relatively brief ones of our parents.3

4. Withdrawing too much each year. You may have heard of the “4% rule,” a guideline stating that you should take out only about 4% of your retirement savings annually. Many cautious retirees try to abide by it.

So, why do others withdraw 7% or 8% a year? In the first phase of retirement, people tend to live it up; more free time naturally promotes new ventures and adventures and an inclination to live a bit more lavishly.         

tax efficiency, budgeting, planning

5. Ignoring tax efficiency & fees. It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, you may want to assign this or that investment to its “preferred domain.” What does that mean? It means the taxable or tax-advantaged account that may be most appropriate for it as you pursue a better after-tax return for the whole portfolio.

Many younger investors chase the return. Some retirees, however, find a shortfall when they try to live on portfolio income. In response, they move money into stocks offering significant dividends or high-yield bonds – something you might regret in the long run. Taking retirement income off both the principal and interest of a portfolio may give you a way to reduce ordinary income and income taxes.   

6. Avoiding market risk. Equity investment does invite risk, but the reward may be worth it. In contrast, many fixed-rate investments offer comparatively small yields these days.    

7. Retiring with heavier debts. It is hard to preserve (or accumulate) wealth when you are handing portions of it to creditors.   

8. Putting college costs before retirement costs. There is no “financial aid” program for retirement. There are no “retirement loans.” Your children have their whole financial lives ahead of them. Try to refrain from touching your home equity or your IRA to pay for their education expenses.   

maze, retirement plan

9. Retiring with no plan or investment strategy. An unplanned retirement may bring terrible financial surprises; the absence of a strategy can leave people prone to market timing and day trading.

These are some of the classic retirement planning mistakes. Why not plan to avoid them? Take a little time to review and refine your retirement strategy in the company of the financial professional you know and trust.

Do you have your retirement plan in place? Set up your FREE initial consultation with Brent E Chavez today:

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Learn more about Brent E Chavez, the Services We Provide, and Our Philosophy. Do you have any questions? Give us a shout: Contact Us, info@aeinvestmentsgroup.com, (215) 766-7002.

Citations
1 – forbes.com/sites/bobcarlson/2019/01/25/5-ways-to-maximize-social-security-benefits [1/25/19]
2 – fool.com/retirement/2019/12/11/4-steps-to-making-sure-youre-ready-to-retire.aspx [12/11/2019]
3 – ssa.gov/planners/lifeexpectancy.html [12/11/2019]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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February Newsletter

Brent E Chavez

MONTHLY NEWS AND INFORMATION FOR CURRENT AND FUTURE RETIREES

PRESENTED BY BRENT E. CHAVEZ – FEBRUARY 2020

QUOTE OF THE MONTH

“Rest is the sweet sauce of labor.”
– PLUTARCH

WHAT MATTERS MORE IN RETIREMENT: INCOME, OR SAVINGS?

Retirement saving is not just about accumulating assets. It is also about laying the groundwork for retirement spending. Any retirement strategy has a core goal: the goal of helping an individual or couple pursue their retirement dreams once their careers have concluded. So, from that perspective, the amount that needs to be saved directly relates to the amount a retiree household may need to spend. To live your best retirement, your degree of retirement savings needs to be great enough to try and correspond to that vision.

Often, articles state that pre-retirees will need to live on 70% to 80% of their final working incomes. This is a general guideline, yet it may or may not prove true for a particular household. Some people retire and find they are spending less than they once did. Others spend as much as they did while working, maybe even a bit more, due to traveling, hobbies, and social engagements. What does this imply for retirement saving? While you arguably cannot save too much for the future, you can save too little.1

Travel Tip

Clear cookies, and you might score a cheaper flight

Airlines use dynamic pricing to adjust airfares relative to demand, and they can actually do this per consumer. Most airline websites screen your search history, including the browser cookies you may have picked up while visiting other airline or travel websites. Based on these cookies, they may present you with more expensive flights than they would otherwise. Deleting cookies from your browser just before a fare search may help you avoid this dynamic pricing.
Source: MSN2

HOW THE SECURE ACT IMPACTS RETIREMENT ACCOUNTS

A new federal law, the Setting Up Every Community for Retirement Enhancement (SECURE) Act, directly affects retirees and retirement savers. It changes the rules regarding “stretching” an Individual Retirement Account (IRA) as well as longstanding retirement account rules keyed to age 70½.

Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking required minimum distributions (RMDs) from traditional Individual Retirement Accounts (IRAs) and most other employer-sponsored retirement plans. (This new RMD rule applies only to those who will turn 70½ in 2020 or later.) The SECURE ACT also lets seniors contribute to traditional retirement accounts after age 70½, as long as they have earned income; previously, this was forbidden. Both these changes have big implications for savers; large account balances can potentially grow and compound a little more before being drawn down, and amounts contributed after age 70½ could have a chance to compound as well. Turning to the workplace, the SECURE ACT allows employer-sponsored retirement plans the option to include insurance products, offering the potential for lifelong income. It also opens a door for small businesses to join multi-employer group retirement plans (MEPs). 

The new law does curtail the Stretch IRA estate strategy. Anyone who inherits an IRA of any kind in 2020 or later must withdraw the whole IRA balance within 10 years of the IRA owner’s death and pay linked taxes, unless that heir is a minor child or a surviving spouse. (Existing inherited IRAs are exempt from the new rules.) The SECURE Act is certainly worth a conversation.3,4

Learn more: The SECURE Act

Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.

Under the SECURE Act, your required minimum distribution (RMD) must be distributed by the end of the 10th calendar year following the year of the Individual Retirement Account (IRA) owner’s death. Penalties may occur for missed RMDs. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements.

DID YOU KNOW?

The Romans may have built the earliest retirement villages

In the first century B.C., Julius Caesar, Sulla, and other Roman generals founded special colonae (colonies) to serve as retirement communities for Roman army veterans. Pompeii actually began as one of these communities.5

ARE BABY BOOMERS FLOCKING TO BIG CITIES?

A quick look at some federal government statistics provides a quick answer: no. Perhaps it seems like big cities are filled with baby boomers because of the simple fact that this demographic group is larger than others. Research does not back up this assumption, however. As a recent New York Times analysis of Census Bureau data noted, 17.2% of Americans aged 54-72 lived in urban areas in 2018; back in 1990, 21.6% did. This percentage declined gradually, but steadily, over these 28 years, and looking more closely at the decline, the 54- to 72-year-olds of 2018 were 11% less likely to live in urban neighborhoods than the 54- to 72-year-olds of 2000.

As other Census Bureau data from 1990-2018 reveals, the Americans most likely to live in urban settings have been those aged 25 to 29. The least likely? Those aged 70 to 74. The odds of urban living start to increase again after age 80. Even so, just two years ago, only 19.8% of Americans aged 85 or older lived in urban settings.6

ON THE BRIGHT SIDE

A fair number of employers are offering phased retirements. According to the Transamerica Center for Retirement Studies, 30% of U.S. companies permit their workers to move from full-time hours to part-time hours as part of a retirement transition, and 21% allow employees to move into less-stressful roles prior to retiring.7

BRAIN TEASER

What goes up and down each day, yet does not physically move?

STUMPED? CALL 215-766-7002 FOR THE ANSWER!

CITATIONS
1 – forbes.com/sites/kristinmckenna/2019/07/10/debunked-6-myths-about-retirement [7/10/19]
2 – msn.com/en-us/travel/tips/travel-tip-clear-your-browser-before-booking-a-flight-to-get-a-better-deal/ar-AAISUPG [10/17/19]
3 – inquirer.com/news/secure-act-retirement-2020-annuities-rmd-529-plan-taxes-20191223.html [12/23/19]
4 – investmentnews.com/the-stretch-ira-is-dead-175775 [12/27/19]
5 – livius.org/articles/concept/colonia/ [6/8/19]
6 – nytimes.com/2020/01/24/upshot/myth-urban-boomer.html [1/24/20]
7 – cnbc.com/2019/10/04/earning-income-after-65-how-to-make-it-work-for-you.html [10/4/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

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Annual Financial To-Do List

Brent E Chavez

Annual Financial To-Do List

Things you can do for your future as the year unfolds.

What financial, business, or life priorities do you need to address for the coming year? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:

Can you contribute more to your retirement plans this year? In 2020, the contribution limit for a Roth or traditional individual retirement account (IRA) remains at $6,000 ($7,000, for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $139,000 and joint filers with MAGI above $206,000 cannot make 2020 Roth contributions.1

Before making any changes, remember that withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.2

Make a charitable gift. You can claim the deduction on your tax return, provided you itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the Internal Revenue Service (I.R.S.) does not equate a pledge with a donation. If you pledge $2,000 to a charity this year, but only end up gifting $500, you can only deduct $500.3

These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your strategy. 

See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.4

Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,550 contribution for 2020, if you are single; $7,100, if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.5

If you spend your HSA funds for nonmedical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

Pay attention to asset location. Tax-efficient asset location is an ignored fundamental of investing. Broadly speaking, your least tax-efficient securities should go in pretax accounts, and your most tax-efficient securities should be held in taxable accounts.

Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Before adjusting your asset allocation, consider working with an investment professional who is familiar with tax rules and regulations. 

Review your withholding status. Should it be adjusted due to any of the following factors?

  • You tend to pay a great deal of income tax each year.
  • You tend to get a big federal tax refund each year. 
  • You recently married or divorced.
  • A family member recently passed away.
  • You have a new job and you are earning much more than you previously did. 
  • You started a business venture or became self-employed. 

These are general guidelines and are not a replacement for real-life advice. So, make certain to speak with a professional who understands your situation before making any changes.

Are you marrying in 2020? If so, why not review the beneficiaries of your retirement accounts and other assets? When considering your marriage, you may want to make changes to the relevant beneficiary forms. The same goes for your insurance coverage. If you will have a new last name in 2020, you will need a new Social Security card. Additionally, the two of you may have retirement accounts and investment strategies. Will they need to be revised or adjusted with marriage?

Are you coming home from active duty? If so, go ahead and check the status of your credit as well as the state of any tax and legal proceedings that might have been preempted by your orders. Make sure any employee health insurance is still there and revoke any power of attorney you may have granted to another person.

Consider the tax impact of any upcoming transactions. Are you planning to sell any real estate this year? Are you starting a business? Do you think you might exercise a stock option? Might any large commissions or bonuses come your way in 2020? Do you anticipate selling an investment that is held outside of a tax-deferred account? 

If you are retired, and in your seventies, remember your RMDs. In other words, Required Minimum Distributions (RMDs) from traditional retirement accounts.There is a new development to report on this, as the Setting Every Community Up for Retirement Enhancement (SECURE) Act just altered a key rule pertaining to these mandatory withdrawals.Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking RMDs from most types of these accounts. The previous “starting age” was 70½.6

This new RMD rule applies only to those who will turn 70½ in 2020 or later. If you were 70½ when 2019 ended, you must take your initial RMD(s) by April 1, 2020, at the latest.6

If you have already begun taking RMDs, your annual deadline for them becomes December 31 of each year. The I.R.S. penalty for failing to take an RMD can be as much as 50% of the RMD amount that is not withdrawn.6

Vow to focus on being healthy and wealthy in 2020. And don’t be afraid to ask for help from professionals who understand your individual situation.

Do you have any questions? Please feel free to reach out to me at bchavez@aeinvestmentsgroup.com.

Citations
1 – thefinancebuff.com/401k-403b-ira-contribution-limits.html [7/16/19]
2 – kiplinger.com/article/retirement/T032-C000-S000-how-much-can-you-contribute-traditional-ira-2020.html [1/10/20]
3 – irs.gov/newsroom/charitable-contributions [6/28/19]
4 – nerdwallet.com/blog/taxes/home-office-tax-deductions-small-business/ [1/22/19]
5 – cnbc.com/2019/06/03/these-are-the-new-hsa-limits-for-2020.html [6/4/19]
6 – thestreet.com/retirement/secure-retirement-act-makes-big-changes-to-how-you-save [12/21/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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New I.R.S. Contribution Limits

Brent E Chavez

New I.R.S. Contribution Limits

Changes for 2020.

The I.R.S. increased the annual contribution limits on IRAs, 401(k)s, and other widely used retirement plan accounts for 2020. Here’s a quick look at the changes.

• You can put up to $6,000 in any type of IRA. The limit is $7,000 if you will be 50 or older at any time in 2020.1,2

• Annual contribution limits for 401(k)s, 403(b)s, the federal Thrift Savings Plan, and most 457 plans also get a $500 boost for 2020. The new annual limit on contributions is $19,500. If you are 50 or older at any time in 2020, your yearly contribution limit for one of these accounts is $26,000.1,2

• Are you self-employed, or do you own a small business? You may have a solo 401(k) or a SEP IRA, which allows you to make both an employer and employee contribution. The ceiling on total solo 401(k) and SEP IRA contributions rises $1,000 in 2020, reaching $57,000.3

• If you have a SIMPLE retirement account, next year’s contribution limit is $13,500, up $500 from the 2019 level. If you are 50 or older in 2020, your annual SIMPLE plan contribution cap is $16,500.3

• Yearly contribution limits have also been set a bit higher for Health Savings Accounts (which may be used to save for retirement medical expenses). The 2020 limits: $3,550 for individuals with single medical coverage and $7,100 for those covered under qualifying family plans. If you are 55 or older next year, those respective limits are $1,000 higher.4

Have questions? Please contact us at (215) 766-7002 or info@aeinvestmentsgroup.com.

Citations
1 – irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits [11/8/19]
2 – irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500 [11/6/19]
3 – forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/ [11/6/19]
4 – cnbc.com/2019/06/03/these-are-the-new-hsa-limits-for-2020.html [6/4/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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The SECURE Act

Brent E Chavez

The SECURE Act

Long-established retirement account rules change.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is now law. With it, comes some of the biggest changes to retirement savings law in recent years. While the new rules don’t appear to amount to a massive upheaval, the SECURE Act will require a change in strategy for many Americans. For others, it may reveal new opportunities.

Limits on Stretch IRAs. The legislation “modifies” the required minimum distribution rules in regard to defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.1

It’s important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance.

A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements. 

Let’s say that a person has a hypothetical $1 million IRA. Under the new law, your non-spouse beneficiary may want to consider taking at least $100,000 a year for 10 years regardless of their age. For example, say you are leaving your IRA to a 50-year-old child. They must take all the money from the IRA by the time they reach age 61. Prior to the rule change, a 50-year-old child could “stretch” the money over their expected lifetime, or roughly 30 more years.

IRA Contributions and Distributions. Another major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions as long as you meet the earned-income requirement.2

Also, as part of the Act, you are mandated to begin taking required minimum distributions (RMDs) from a traditional IRA at age 72, an increase from the prior 70½. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income.2

The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020. For these taxpayers, RMDs will become mandatory at age 72. If you meet this criterion, your first RMD won’t be necessary until April 1 of the year after you reach 72.2

Multiple Employer Retirement Plans for Small Business. In terms of wide-ranging potential, the SECURE Act may offer its biggest change in the realm of multi-employer retirement plans. Previously, multiple employer plans were only open to employers within the same field or sharing some other “common characteristics.” Now, small businesses have the opportunity to buy into larger plans alongside other small businesses, without the prior limitations. This opens small businesses to a much wider field of options.1

Another big change for small business employer plans comes for part-time employees. Before the SECURE Act, these retirement plans were not offered to employees who worked fewer than 1,000 hours in a year. Now, the door is open for employees who have either worked 1,000 hours in the space of one full year or to those who have worked at least 500 hours per year for three consecutive years.2

While the SECURE Act represents some of the most significant changes we have seen to the laws governing financial saving for retirement, it’s important to remember that these changes have been anticipated for a while now. If you have questions or concerns, reach out to your trusted financial professional.

Have questions? Please contact us at (215) 766-7002 or info@aeinvestmentsgroup.com.

Learn more about Brent E Chavez, the Services We Provide, or Why Choose AE?

Citations
1 -waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf  [12/25/19]
2 – marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [12/25/19]

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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