Cheer Up, You’re Not as Far Behind on Retirement Savings as You Think

If you’re like the average American, retirement savings has you totally bummed out. The Employee Benefit Research Institute (EBRI) reports that 27 percent of Americans are “not at all confident” about having enough money for a comfortable retirement, and only 13 percent are “very confident.”

You don’t have to go far to find other scary retirement savings figures, like how the average working person in their 60s has only $144,000 in their 401(k). At a recommended 4 percent withdrawal rate, that’s enough to produce $5,760 per year in retirement income. Ouch.

I don’t want to minimize how scary it is out there for the retirement saver. But I’m an upbeat guy, and I want to inject a Pollyanna-tinged ray of sunshine into this gloomy glade. You may not be as far behind on retirement savings as you think you are, and if you are genuinely behind, it may be easier to catch up than you think.

The standard model of retirement planning assumes you’ll take money you’ve accumulated in your 401(k) and other investments and withdraw it gradually over the rest of your life to replace the salary you were receiving at the time you retired. In order to keep up with inflation but minimize the risk of outliving your money, various studies have found that you can withdraw 4 percent of your portfolio in the first year and an equivalent amount, adjusted for inflation, each year thereafter.

In math terms, the standard model goes something like this:

Your salary × 25 = Your retirement goal

You see this formula all the time. Here’s how the Motley Fool put it: “So if you’re planning to live comfortably on $50,000 a year in retirement, you’ll need to have $1.25 million saved by the time you get there.” Plenty of online retirement calculators make the same assumption.

But even if you assume Social Security will disappear by the time you retire, that number is way too high. Here are five reasons why.

1. You won’t be saving for retirement any more when you’re retired

If you’re putting 10% of your salary into your 401(k), that’s 10% you won’t need to replace in retirement. This is an absolute no-brainer, but it has some interesting consequences we’ll get to in a minute.

2. You’ll spend less, year after year

People in their 80s are different from people in their 30s, 40s, and 50s in plenty of ways beyond wise aphorisms and Metamucil. As we get older, we spend less.

In a 2005 paper, financial planner Ty Bernicke offers evidence that spending drops off precipitously as we move into our 60s and 70s. (People in the 55-64 range even spend less than those aged 45-54.)

That’s even taking into account the fact that the elderly spend more on health care, and it holds even for wealthy retirees whose net worth is steadily increasing. That is, even retirees who are sitting on an ever-growing pile of loot for their heirs tend to voluntarily decrease their spending.

Facing down this data is kind of unnerving in the same way thinking about wills and life insurance is unnerving: I don’t want to think about slowing down, traveling less, spending less on food and entertainment, any more than I want to think about eventually spending zero on these things for eternity. But taking what Bernicke calls a “reality” approach to retirement planning could enable a typical retiree to save less or retire earlier.

3. Your tax bracket will go down

Most retirees are in the lowest tax brackets. Money you take out of your 401(k) or traditional IRA is taxable, but Social Security is only partly taxable, and Roth IRA distributions aren’t taxable at all. Sure, the tax code is going to change a dozen times between now and when you retire, but chances are, your taxes are going go down the day you kiss that cubicle goodbye.

If you’re budgeting for retirement based on the assumption that you’ll spend as much on taxes as you do today, you’re budgeting too much.

4. You can always annuitize

If your retirement savings are marginal (but not way below par), you can turn them into a lifetime monthly income stream by buying a single-premium immediate annuity (SPIA) from an insurance company. Basically, you hand the money over to an insurance company and it gives it back, with interest, over the rest of your life. If you live longer than the insurance company expects, you win. Even in the current low interest rate environment, an inflation-adjusted SPIA pays over 4 percent annually if you annuitize at age 65.

Annuities are backed, up to a maximum, by a state guaranty agency. And you don’t have to make an all-or-nothing decision at 65. You can annuitize some of your money—maybe enough to guarantee a minimum base level of income you don’t want to drop below—and invest the rest. You can wait until you’re 70 and see how things look then; the older you are, the bigger the monthly payout from a SPIA. And interest rates could go up.

5. Every dollar you save reduces your current standard of living

Ah, “reduces your current standard of living” is such a negative way to put a beautiful concept.

Here’s what happens if you decide to bump up your retirement savings by 2 percentage points today—say, from 8% of your paycheck to 10%. For a couple of months, you grumble about your smaller paycheck. Then you get used to spending slightly less and forget about the supposed good old days. Your retirement account will grow faster, and by the time you need to draw upon it, you’ll be able to make smaller withdrawals thanks to your lower standard of living.

In other words, you have more savings to replace less spending. It’s like the universe just gave you a 401(k) match. If you took that extra 2 percent and gave it to charity or sent it to me every month instead of saving it, you’d still be better off, because you’d be saving at the same rate as before but have less spending to replace.

Hmm, did I just prove you’d be more financially secure if you sent me some money? I reckon so.

Matthew Amster-Burton is a personal finance columnist at Find him on Twitter @Mint_Mamster.

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10 Steps for Boomers Approaching Retirement

Baby boomers are used to shaking things up. Due to their large numbers and political activism, boomers have transformed America at every stage of their lives.

Born between 1946 and 1964 and numbering more than 76 million, boomers are the largest generation born in America so far.

Doing well in the prosperity that followed World War II, Baby boomers have a reputation of being big spenders and poor savers.

Now the Great Recession has hit many baby boomers hard. They’re dealing with decreased value in their retirement funds and homes and job layoffs. As a result, the number of baby boomers who are ill-prepared for retirement is increasing.

If you’re a baby boomer who wants to retire, here are 10 tips to help you figure out today’s retirement challenges:

1. Estimate your Retirement Income and Expenses.

It’s important to have a realistic plan for retirement. If you don’t have a budget now, keep track of your expenses for several months to see where your money goes. Based on the figures, make a budget. Be sure to include money to set aside for an emergency fund of at least three to six months of living expenses. Use the pre-retirement numbers to develop your retirement budget. Remember to include things that will change with retirement such as no commuting costs, less money spent for clothes and shoes, and fewer meals out. Estimate your income in retirement as well. See Mint’s Create a Budget for information on how to set up a budget.

2. Decide When to Retire.

After you’ve looked at your projected retirement income and expenses, you’ll have a better idea about when you can retire. Part of this decision is estimating what you think the rate of inflation will be and taking a guess at how long you’ll live. Figuring out what percentage of your pre-retirement you want to live on also is important. You can find online calculators to help you or you may want to hire a certified financial planner to advise you. See the Certified Financial Planner Board of Standard’s website to locate a planner near you.

3. Keep Working or Start a Second Career

If you’ve planned to retire at age 62 or 65 but find your estimated retirement income isn’t adequate to provide the lifestyle you want, continuing to work or finding a new career are two options. In a recent study, workers in their 50s said they are likely to have to delay their retirement due to the recession, a Pewstudy reports.

4. Decide When You’ll Start Taking Social Security Payments.

If you decide to take your Social Security benefits at age 62 or 65, you’ll receive lower monthly payments than if you work longer. The date to receive full Social Security benefits increases annually. For example, if you’re a baby boomer born between 1946 and 1954, your full retirement age will be 66 years. If you’re a boomer born in 1960 or later, your full retirement age will be 67. Baby boomers should work until their full Social Security retirement age, or better yet until age 70, Eleanor Blayney, CFP, spokeswoman for the Certified Financial Planner Board of Standards, said in an email. If married, the higher paid spouse should delay retirement until age 70, Blayney said. See the Social Security Administration’s Benefits Calculators to estimate your potential benefit amounts using different retirement dates and levels of future earnings.

5. Decide Where You Want to Live.

If you’re like most baby boomers, you want to age in place. A new trend that could help you achieve this goal is the emergence of Neighborhood Villages. In these membership organization, older citizens are assisted by their neighbors so they can stay in the homes as they grow older. See the Village to Village website for information on where the villages are located or how to set one up. Another positive development for boomers who don’t want to move is the inclusion of provisions in the recent health care reform law to help older adults stay in their homes longer. While staying put is desired by most boomers, some may want to move to be near their children or to enjoy warmer weather. If you plan to relocate, do thorough research to find out the cost of living in the area, what medical facilities are available, and what the amenities are. If you need to make significant savings for your retirement, Blayney suggests taking a look at where you live and how much house you really need.

6. Pay off Credit Cards and Mortgage.

Since your income will be lower in retirement, it’s a good idea to get rid of much debt as you can before you leave your job. This will give you more flexibility with your cash flow and tax planning. While many Americans are challenged by credit card debt, it hits seniors particularly hard. Bankruptcies among seniors are rising sharply, driven largely by credit card debt, a study by the University of Michigan Law School shows.

7. Get to Know Medicare.

Begin gathering information about Medicare before you’re ready to retire. You’ll also need to buy Medigap insurance because Medicare only covers basic services. Be prepared to do research on Medicare and Medigap insurance. Both are complicated.

8. Learn About Long-Term Care Insurance.

Medicare and private insurances don’t pay for the majority of long-term care costs, the costs for nursing home care. You need to evaluate many factors when considering whether to buy this insurance: your health; whether the elders in your family went to nursing homes or died suddenly; whether you can afford the insurance; and if you want to leave money for your children. See this AARP fact sheet for details.

9. Plan for Out-of-Pocket Medical Costs.

Set money aside for medical costs not covered by Medicare or private insurance in short-term bonds or money markets. You could incur as much as $200,000 to $300,000. If you still have several years until retirement and are reasonably healthy, consider a high-deductible health insurance policy and set up a Health Savings Account for accumulating funds for these out-of-pocket costs in retirement, Blayney suggests.

10. Examine your Emotional Portfolio as well as your Investment Portfolio.

Baby boomers are a diverse group and their task during retirement is to find their path, Nancy K. Schlossberg, professor emerita at the University of Maryland and author of the book Revitalizing Retirement, said in an interview. The transitions of retirement aren’t easy. “It takes a while to get a new life.” Retirement is a challenge for many baby boomers. With these 10 steps boomers can begin to look at their spending and set goals for retirement.

Rita R. Robison is a consumer journalist who blogs at The Survive and Thrive Boomer Guide. Rita blogs via

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Guide to retirement plans

Couple using a calculator to budget.

Note: If you are
considering retirement or beginning your financial planning for retirement,
please talk to a financial adviser for information fitting your particular
circumstances and needs.

According to a 2019 study from Northwestern Mutual, around 1 in 5 Americans have $5,000 or less in retirement savings, and close to half believe they’ll outlive their savings. Even so, only around 45% say they’ve acted to solve this issue.

One reason many people may avoid planning for retirement is that the sheer number of retirement plans and options can be daunting.

Differentiating Between Retirement Plans

There are a variety of retirement plans available, each
with their own benefits and potential drawbacks. You might consider working
with a financial advisor to get started. Whether retirement is close at hand or
decades away, take some time to create a retirement savings plan to support
your future goals.

Defined Contribution Plans

Defined contribution plans are employer- or organization-sponsored. That means they’re offered as a benefit to employees who can contribute pretax dollars from each paycheck into the account. Employers may match those contributions up to a certain amount, which can lead to greater savings.

Defined contribution plans are offered as a benefit to employees who can contribute pretax dollars from each paycheck into the account.


401(k) plans are defined contribution plans offered by employers in the private sector. The IRS limits how much can be contributed to 401(k) plans each year. As of 2020, the maximum amount is $19,500 for most people.

Money in a 401(k) may be available for use through a 401(k) loan prior to retirement. Ordinarily, individuals who take money out of their 401(k) early would pay a 10% tax penalty. With the passage of the CARES Act, however, penalty fees on 401(k) retirement accounts and other employee-sponsored accounts and personal retirement accounts have been changed.


A 403(b) plan is similar to a 401(k), but it’s for employees in the public sector and those working for tax-exempt organizations, such as teachers or clergy members. Annual contribution limits for 403(b) are also $19,500 as of 2020.


A 457(b) plan is also similar to a 401(k), but it’s for people who work for local and state governments, such as police officers. The annual contribution limit for 457(b) plans is also $19,500 as of 2020 for most people.

IRA Plans

While 401(k) plans are commonly known, they’re not the only option for saving for retirement. IRA plans are individual retirement plans. These are plans that individuals can contribute pretax dollars to, but employers are not involved and there isn’t a match.


As of 2020, individuals can invest up to $6,000 a year in pretax dollars into this retirement account. Those over the age of 50 can make an extra $1,000 in annual contributions for the purpose of catching up on retirement savings.

Taxes aren’t paid on IRA funds until they’re withdrawn as income during retirement. Individuals must begin taking minimum required deductions from IRA funds at age 70.5 if they were born before July 1, 1949, and at age 72 if they were born after June 30, 1949. Taking withdrawals before retirement age can result in penalties.

As of 2020, individuals can invest up to $6,000 a year in pretax dollars into traditional IRAs.

Roth IRA

Roth IRAs are similar to traditional IRAs and come with
the same contribution limits. However, contributions are not pretax, and there
are no taxes on withdrawals made in retirement. Roth IRAs also don’t come with
minimum required deductions in retirement, which can allow people to hang on to
investments longer.


SIMPLE stands for Savings Incentive Match Plan for
Employers. These plans combine some features of 401(k) and IRA plans to create
an option for very small businesses or self-employed individuals.

Contribution limits are $13,500 annually as of 2020, with catch-up contributions capped at $3,000 each year. Employers are typically required to make at least a small match of up to 3%. SIMPLE IRAs do come with a hefty tax penalty of up to 25% if someone makes a withdrawal within two years of setting up the plan.


SEP stands for Simplified Employee Pension. It’s an IRA that’s set up and funded by an employer. Employers can contribute up to 25% of an employee’s compensation or $57,000 max annually.

Spousal IRA

To contribute to an IRA, someone must earn an income.
But the IRS provides a provision for spouses who don’t work via a spousal IRA.
If one spouse is drawing an income and the couple files federal returns as
married, filing jointly, the other spouse can have their own IRA. All the
standard rules for the IRA type—whether traditional or Roth—apply.

Rollover IRA

A rollover IRA is simply a traditional or Roth IRA that
receives the funds from an employer-sponsored plan in a rollover. It allows
individuals to move funds from a 401(k) or another sponsored plan into a
different investment vehicle should the person leave employment or otherwise
want to migrate their funds. Typically, once you open a rollover IRA, the rules
for the IRA type take over as far as contributions and withdrawals are

Defined Benefit Plans

A defined benefit plan is typically a pension plan. It’s
employer-sponsored, and the company manages any investments related to it. The
company makes a promise to provide pension payments to retirees after their
employment service is over. Pension payment amounts and lengths can be based on
a variety of factors, including length of work service, level of service and
salary history.

Cash-Balance Plans

Cash-balance plans offer an option for lifetime
benefits once retired. During employment years, the employer adds a certain
amount each year to a fund, which is typically calculated as a percentage of
someone’s salary. The company manages the investment and any profits or losses.

Upon retirement, the former employee receives a pension benefit as agreed upon under the plan. Participants can typically take an annuity option, which pays benefits out over time, or a lump sum that can be reinvested in an IRA.

Pension Plans

Pension plans can work somewhat like 401(k) plans, with
both an employer and an employee making contributions. However, the employee does
not have any risk in the investment. They are guaranteed a pension payout
according to their benefits contract regardless of whether the investment gains
or loses. The risk to the employee is that the company’s portfolio might perform
so badly that all pensions must be diminished or that the company files for

Money Purchase Plans

A money purchase plan is a pension plan that allows the
employee to make investment choices based on options set up by the employer.
Only employers contribute to the plan.

Guaranteed Income Annuities

Annuities are similar to insurance in how you buy and
pay for them. You pay a premium for a set period of time. Your premium payments
are invested by the insurance company.

When you reach retirement, you receive a guaranteed annual
income according to your annuity plan. Annuity payments can be made monthly,
quarterly or annually, and with a lifetime annuity, they continue throughout
your retirement.

Cash Value Life Insurance Plan

A cash value life insurance plan is a type of life
insurance that builds cash value over time as you pay premiums. Once you meet
all your premium obligations—which might require you to pay premiums for a long
period of time, such as 20 years—you are guaranteed the life insurance coverage
for the rest of your life. You can also draw on any cash value that the plan
has accrued to pay for retirement expenses or other needs.

Nonqualified Deferred Compensation Plans

Nonqualified deferred compensation plans let employees
earn compensation but not receive it—or pay taxes on it—in the year that the
service was provided. Instead, they elect to receive the compensation at a
later time and can delay it even until retirement.

Retirement Resources

The sheer number of retirement plans can make it confusing to choose one, and that doesn’t even account for questions such as how much you need for retirement or when you can retire. Educating yourself about your retirement is the first step in protecting it.

Start your retirement planning with some resources, such as AARP’s retirement calculator. It helps you understand how much more you need to save and when you can potentially reach that goal.

The government also provides a basic primer for money management and retirement, which can be a good starting point. Talking to a financial advisor, a CPA or an attorney who normally handles retirement planning can also be a good idea.


When Should You Open a Roth IRA for Kids?

A lot of people regret not investing in their 20s. But what if you could go back in time even further and invest some of the money you earned from babysitting or mowing lawns in your teens?

If you invested $100 a month at age 25 and earned 8% annual returns, you’d have over $320,000 by your 65th birthday. But if you started investing at 15? You’d have over $710,000 by age 65.

Obviously, there’s no way to turn back the hands of time. But it could be possible for you to give your kids the gift of compounding and tax-free growth by opening a Roth IRA on their behalf.

The Rules on Starting a Roth IRA for Kids

Opening a Roth IRA for kids is perfectly legal as long as your child has earned income. Age doesn’t determine eligibility. If your kid is the Gerber Baby, they would qualify as long as their paychecks don’t put them above the Roth IRA income limits.

Your kid is eligible if they make money at a part-time job or they earn income through babysitting, tutoring or odd jobs. However, if they’re earning income from work that doesn’t come with a W-2, check with a tax pro because they could be responsible for Social Security and Medicare taxes.

What’s not allowed: You make up a job for them and say they’re on the family payroll. If you own a business, you’re allowed to employ your minor children, but you have to pay them what the IRS considers a reasonable wage. Paying your teen $10 an hour to do clerical work would probably count as reasonable. But making your 4-year-old a business associate with a $6,000 salary? Not so much.

You’ll need to open a custodial Roth IRA for a minor child. That means they’ll own the account, but as the child’s parent, you’ll make the investment decisions until they reach the age of majority, which is between 18 and 21, depending on the state. Once they reach the age of majority, they’re in control of the money.

Pro Tip

Not all brokerages have custodial Roth IRAs. Three brokerages that offer Roth IRAs for kids: Charles Schwab, Fidelity and T.D. Ameritrade.

Technically, it doesn’t matter who contributes to the account. You’re allowed to fund it, or your child can contribute money they’ve earned. But their contribution is capped at their earned income for the year. So if they earn $4,000 in 2021, that’s their maximum contribution even though someone under 50 can contribute up to $6,000.

The great thing about a Roth IRA for kids is that unlike with a traditional IRA, a Roth IRA is funded with post-tax dollars. Your kid probably doesn’t need a tax break now. Minors typically fall into a low tax bracket or their earnings are low enough that they don’t pay taxes at all. By paying any taxes due now, their money will compound for decades. When they reach retirement age, it’s theirs completely tax-free.

Plus, the Roth IRA rules allow you to access the contributions (but not the earnings) any time without taxes or a penalty.

Will a Roth IRA Affect Financial Aid Eligibility?

Retirement account balances don’t affect financial aid eligibility, regardless of whether they belong to the parent or the child.

But withdrawing money from a Roth IRA for tuition will count against financial aid, whether the account belongs to the parent or child. Even if you limit the withdrawal to the contributions — meaning you or your child won’t owe taxes or a penalty on the withdrawal — it will count as income for financial aid purposes.

This can get confusing because the ability to take penalty-free withdrawals for tuition is one of the much-touted Roth IRA benefits. It’s true that using a Roth IRA for tuition won’t result in a 10% IRS penalty if the account is at least 5 years old (though the owner of the account will pay income tax if they touch the earnings). But for many families, the reduction to financial aid simply isn’t worth it. A 529 plan is typically a better bet when college savings is the goal.

Let’s recap all that: Having a Roth IRA in your child’s name won’t affect their college financial aid award. But if they withdraw that money for any reason, they can significantly reduce their financial aid.

Should You Open a Roth IRA for Your Kid?

Obviously, the answer depends a lot on your kid. Here’s when a child’s Roth IRA makes sense and when you should avoid it.

Consider a Roth IRA for Your Kid if:

  • They’re willing to contribute at least part of their earnings. Sure, you could just throw money into a Roth IRA for your kid, but that won’t teach them the value of investing. A better solution is to match their contributions. You can show them the importance of taking advantage of a 401(k) plan match later on. Plus as their money grows, they’ll see that it pays not to spend every cent.
  • You’re OK with them getting control of a nice chunk of change at age 18 or 21. Once your child reaches age 18 or 21, depending on your state, the money is theirs to control. Obviously you can’t predict what your kid will do in the future, especially if they’re young. But if your child is older and they’ve been responsible with money thus far, that’s a good sign they can handle a Roth IRA.
  • They don’t need the money for college. Roth IRAs are designed for retirement, not education savings. If the goal is to use the money for college, a 529 plan is a better option.
  • You’re willing to manage the account. Because minors need a custodial account, you or another trusted adult will be responsible for the account until they reach majority age.

Don’t Even Think About a Roth IRA for Your Kid if:

  • You’re making up a fake job for them on the family payroll so that they’ll be eligible. This is illegal. If your child’s earned income comes from your business, they need to have a legitimate job and a reasonable wage in the eyes of the IRS.
  • They’re not willing to chip in. If your kid isn’t interested in contributing their money, they probably aren’t mature enough to have a Roth IRA.
  • You think they might withdraw money early. The big reasons to open a Roth IRA for your kid are to give their money extra time to compound and lock in their ultra-low tax rates. But if your child is likely to withdraw the money, they’ll miss out on compound growth. They’ll also pay taxes and a 10% penalty in most cases if they take out the earnings before age 59 ½.
  • Your own finances aren’t in shape. If you’re way behind on your own retirement savings or you don’t have a good handle on your finances, catching up is your No. 1 focus. Your child has plenty of time to save for retirement. Getting your own finances in shape so you don’t have to depend on your kids when you’re older is a far better gift for your kids than a Roth IRA.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].




6 Ways to Bounce Back after Being Forced into Retirement

When it comes to retirement, expectations and reality may collide, resulting in what might seem unthinkable – sudden retirement. Unexpected retirement can throw a wrench in the best laid plans, or worse, force a need for fast planning if none exists.

While Americans anticipate, on average, to retire at age 66, the average retirement age is actually 65 for men and 63 for women. Half of retired Americans surveyed by financial services firm Allianz reported that they retired earlier than they planned. Why? Just over one-third of those surveyed reported unanticipated job losses, while one-quarter reported health care issues.

What those reasons have in common is this: a lack of choice. In other words, working Americans faced factors beyond their control that forced them to retire.

Fortunately, if you’re on the wrong end of an unexpected event that forces you to retire — or if you have to retire for your own reasons — there are approaches you can follow to get organized financially, including these six strategies.

Strategy #1: Avoid reactive decisions

Because sudden retirement is, well, sudden, you may be tempted to make a big change, such as selling your house or moving away from your longtime home. In situations out of your control, it may feel better to do something rather than nothing.

However, it is much better to take your time and assess the situation before taking action. You may end up regretting a quick decision, especially if it is a major one.

Strategy #2: Determine your sources of income

Your sources of income likely include Social Security and income from your retirement savings. They may also include a defined benefit pension or rental property income.

You can claim Social Security as early as age 62. While taking Social Security early will reduce your overall benefit over waiting until you are older by up to as much as 30%, you may not have a choice if you need the income. If you have a spouse or partner, it’s important to coordinate claiming approaches.

To receive your full Social Security benefit, you’d need to wait until your full retirement age to claim it. For anyone born in 1960 or later, full retirement age is 67. For those born between 1943-1954, full retirement age is 66. If you were born between 1954 and 1960, retirement phases up in two-month increments between ages 66 and 67.

If you claim Social Security before your full retirement age and continue working, your benefit will be reduced if you exceed a certain income threshold. In 2021, Social Security deducts $1 from your benefit for each $2 earned above $18,960.

Your retirement savings are a significant source of retirement income. The more income you can squeeze out of those savings, the less you will have to tap the actual principal. Spending principal now means you won’t have it later to generate income.

If you have a defined benefit pension, you’ll have to decide whether to take a lower payout to provide for your spouse after you’re gone and whether to get a lump sum that you can manage yourself or opt for annuity payments on a monthly basis.

Strategy #3: Balance expenses and income

In sudden retirement, there’s not much luxury or time to optimize your sources of income. That means you need to ensure that your expenses match your available income. This is where creating a budget comes in handy.

Start with your non-discretionary expenses — the expenses you must pay each month — including your mortgage payment, property taxes, utilities, car payment, groceries, internet, etc.

Then move on to your discretionary expenses, such as eating out or takeout, entertainment, such as streaming services, vacations, etc. Use your online banking app or checkbook register to get a handle on your monthly spending.

Once you’ve got a handle on your monthly expenses, you’ll have increased insights into how your money is spent. Budget-tracking apps such as Clarity Money, PocketGuard or YNAB can collect spending information going forward so that you can refine your budgeting numbers over time.

Once you’ve gathered data about your expenses, match it up with the income sources that you’ve already identified to locate any gaps. If you prefer to work by hand, get a pad of paper and create two columns — one for expenses and the other for income. If you prefer to work on the computer, create a Google Sheets or Microsoft Excel worksheet.

If you identify an imbalance between expenses and income, you’ll either have to decrease your expenses or increase your income or some combination of the two to create the right balance.

It’s vital to achieve a balance between expenses and income because retirement can last a long time. The Social Security Administration estimates that a woman turning 65 in 2020 will live to 86.6, and a man will live to 84. In addition, one out of every four 65-year-olds will live past age 90, and one in 10 will live past 95.

Strategy #4: Assess health insurance options

Many sudden retirees are younger than 65, which is the age when you qualify for Medicare. That means you need to find insurance coverage. If you get an exit package from your former employer, you may be able to negotiate health insurance coverage until you turn 65.

Some employers offer short-term cash payments to help toward the cost of insurance coverage. You might be able to access COBRA coverage from your former employer, which is available for up to 18 months after separation from employment. However, COBRA can be quite expensive.

An option for anyone seeking health insurance is the U.S. Healthcare Exchange, aka Obamacare. Several individual states — including New Jersey, Pennsylvania, Maryland, California, Colorado, Connecticut, Idaho, Massachusetts, Nevada, Minnesota, New York, Rhode Island, Vermont and Washington — as well as the District of Columbia have their own exchanges. If you live in a state that doesn’t have its own exchange, use the federal exchange.

Federal and state exchanges offer income-based subsidies for coverage. That means if you have a significant amount of assets, but not a lot of income, you may receive a significant subsidy. Those websites facilitate exploring and comparing plans, finding out costs and determining whether you are eligible for a subsidy on a state or federal exchange.

Strategy #5: Consider a part-time job

If you’re short of income or have too much time on your hands, a part-time job may work for you. Retail offers many part-time opportunities. If you’re handy, a part-time job at Lowe’s or Home Depot will bring in some income, offer you some socialization opportunities and may earn you an employee discount on tools and home improvement items.

You may not need to work part-time for very long. Even $10,000 or $15,000 a year in part-time wages can give you some breathing room in your budget and allow you to postpone taking distributions from your retirement account or defined benefit pension or claiming Social Security.

Waiting to cash in on those income sources means they will have more time to grow, potentially providing you with a bigger source of income later in your retirement, even if it is three or five years down the road.

Strategy #6: Create or adjust your retirement plan

If you already have a retirement plan, it probably needs to be adjusted because it’s likely that your plan didn’t include a sudden early retirement.

If you don’t have a plan, now is an excellent time to create one. Why?  Because retirement isn’t an event, it’s a journey. To successfully navigate through the decades that are involved in retirement, you need a road map. That plan may not always be exactly on target, but it can be adjusted as circumstances warrant.

A final word

Unexpected retirement can be a shock. With some careful planning and a long-term outlook, it’s not only possible to survive a sudden retirement, but thrive and enjoy your golden years.

Disclosure: Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Humphrey Financial LLC & Cambridge are not affiliated.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. The presenting professional is not sponsored or endorsed by the Social Security Administration or any government agency.

Financial Adviser, Humphrey Financial LLC

Paul Humphrey specializes in helping union members and their families plan for their future. He has been in the financial services industry since 1999. He holds FINRA Series 7 and 66 licenses, as well as life and health insurance licenses. Paul is a Certified Financial Educator through the Heartland Institute of Financial Education. Humphrey Financial LLC is an independent financial services firm built on a stable foundation of consideration, care and knowledge.


How To Save for Retirement on a Small Income

If there’s one personal finance tactic that almost everyone agrees on, it’s the value of saving for retirement, or at least saving for your second act. There will come a point where you will no longer want to or will no longer be able to do the work that you’re currently doing and switching to something else will mean a significant drop in income. When that point comes, you will be glad to have every drop of savings. Life without retirement savings can be incredibly challenging.

What about Social Security? It helps, but Social Security alone is a pretty threadbare retirement existence.

While retirement savings sound great on paper, actually putting it into practice can be difficult, especially if you are earning a small income. The median American household income charts at below $70,000 per year, which means that half of American households bring in less than $70,000 per year.

In that situation, finances can be a real challenge. Contributing to things like retirement can be hard to justify when you’re worried about keeping the rent paid or the ominous noise coming from your car or making sure everyone has plenty of food to eat. How do households earning a relatively low income save for retirement?

It’s important to note that if your income is relatively low, you don’t need millions in retirement savings to replace your income. Don’t get caught up in people talking about needing millions to retire. You don’t need millions to retire.

In this article

Start NOW. Do not wait.

In terms of retirement savings, you’re better off saving even a tiny, tiny amount now than waiting until later to do so. Save as much as you can as early as you can, even if that amount you can save now is only a few bucks a week.

Why is this so important? It’s because of the power of compound interest.

Let’s say you’re going to retire at age 70, and that between then and now, your retirement investments will return 8% per year. Let’s say you can only afford to put away $500 per year – literally $10 a week, with a two-week break.

  • If you start doing that at age 40, you’ll have $50,000 saved for retirement.
  • If you start doing that at age 30, you’ll have $160,000 saved for retirement.
  • If you start doing that at age 20, you’ll have $370,000 saved for retirement.

Why is there such a huge difference? It’s compound interest. If you invest your money and just let it sit there and grow, it will grow faster and faster the longer it sits. Thus, the sooner you start saving, the more time you give it. If you choose to wait 10 years, you lose a lot of growth.

The point is simple: Take action now, even if you can only take small steps.

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Invest today for more retirement savings tomorrow.

Prioritize getting your daily finances straight

The first, most important actions you can take don’t actually involve retirement savings at all. They involve getting your day-to-day finances straightened up. There are likely financial obstacles already in your way that make it difficult to effectively save for retirement, so take care of those as quickly as you can.

First, pay off your high interest debt. Any debt you have with a double-digit interest rate needs to go. Credit cards. Payday loans. Get rid of them as fast as you can.

Second, build a cash emergency fund. Break free of relying on credit cards or payday loans for emergencies. Start socking away some cash in a savings account somewhere — and if you don’t have one or can’t get one, start by saving it at home for now. Eventually, you’ll want to get a savings account at a bank, which you should be able to do once you have some cash built up.

How can you afford to do these things? Live as cheaply as you can possibly stand it. It’s fine to relax and treat yourself, but explore ways to do it that don’t involve money leaving your pockets. Splurge with long walks without your cellphone. Invite a friend to do something free. Get lost in a book from the library. Don’t splurge by buying stuff or paying for experiences. If you can’t think of fun, free things to do, here’s a giant list of ideas to start with, and it’s highly recommended to do them with friends.

If you’re really struggling financially, there are tons of programs out there that exist solely to help people in your situation get back on their feet. Stop by and discover what might be out there that can help you.

If you get these things under control, you’ll have less stress in your life, and you’ll also find it much easier to come up with a few bucks to save for retirement.

Start small and automatic

Once you have your daily finances stabilized, start your savings off slowly. You don’t need to contribute thousands a month to retirement. In fact, that will probably destabilize your finances and put you in a worse position.

Instead, start by contributing what feels like a completely manageable amount. Go low, not high. If you feel like you can manage $10 a week, save $10 a week. If you can manage more, do it, but don’t push it. You are better off saving a small amount and keeping your day-to-day finances stable than trying to save too much and ending up in a mess.

Whatever you decide to save, make it automatic. If it’s through a workplace plan, have it automatically deducted from your paycheck. If it’s your own plan (see below), have it pulled automatically from your checking account each week. You don’t want to have to think about doing it, or else you’ll find ways to talk yourself out of it. Start small, start automatic.

Increase your savings when your income increases

If you get a raise, use some of it to bump up your retirement contributions. For example, if you’re earning $1 an hour more than you once did while working 35 hours a week, bump up your weekly contributions by $5 or $10. You’re still bringing home more than you were before, but you’re saving more, too.

As you earn more, you’ll naturally inflate your lifestyle a little, and that means you’ll want to save more to be able to maintain a better lifestyle in retirement. So, whenever you get a raise, put aside some of that raise for the future. Just change your automatic contribution whenever your paycheck goes up.

Take advantage of the Saver’s Credit

There’s actually a very nice but little known tax benefit for lower income earners who contribute to retirement savings. It’s called the Saver’s Credit and it will really help come tax time.

Provided that you’re over 18, not a full-time student, and not claimed as a dependent on someone else’s taxes, you can earn a credit for up to $2,000 of retirement plan contributions, both through workplace plans or your individual plan. That credit is worth 50%, 20%, or 10% of your contributions, depending on your income level.

For example, if you’re a married couple that earned $38,000 last year and managed to save $2,000 in a retirement account, you could claim the Saver’s Credit and get 50% of that amount back as a tax credit. That would mean your tax bill would go down by $1,000. That’s a great deal!

Use your workplace account if you can

So, how do you save? If your workplace offers a retirement plan that you can contribute to, such as a 401(k) or a 403(b) plan, use that plan. Your retirement plan contributions will come straight out of your paycheck, making it as easy as can be to sign up and keep it going. If you ever switch jobs, roll your old plan into your new one — just ask for help in doing so. A normal 401(k) or 403(b) allows you to defer taxes on that money until you withdraw it from the account in retirement.

Some workplaces offer a Roth 401(k) or 403(b) option. As a low income earner, you’re in a very low tax bracket, so the tax benefits of a Roth account are particularly beneficial. In a nutshell, a Roth account means you pay the taxes NOW at your current tax rate rather than later at whatever rate you’ll have in retirement (Roth withdrawals are entirely tax-free in retirement). The lower your income, the more likely it is that you’re paying very low or no taxes right now. Our retirement guide will fill you in on all the details if you want to know more.

Otherwise, start a Roth IRA

If your workplace doesn’t have a 401(k) or 403(b), you can still save for retirement with tax advantages by opening a Roth IRA. This is an individual retirement account where you can pull money from your checking account. The value will grow within that account and when you reach retirement age, you can start withdrawing that money tax free, even the gains.

You can set up a Roth IRA on your own with most investment houses, including well-regarded ones like Vanguard, Fidelity and Charles Schwab. Then, set up an automatic small contribution from your checking account each week or each month. It’s easy!

We welcome your feedback on this article. Contact us at with comments or questions.


How To Prioritize Emergency Funds, Savings and Paying Off Debt

We all want to be more responsible with our money. While that sounds great in theory, it can get confusing once you start to break things down. Emergency funds, savings funds and debt all need to be addressed regularly, but trying to figure out a consistent method leaves some paralyzed with indecision.

One of the problems that tends to trip people up is prioritization. Allocating your finances to the right place is crucial, but how do you decide how much to put towards any one purpose? How can you cut through the confusion and get your finances on the right track?

Read on for our tips.

1.   Save a Mini-Emergency Fund

You need to save at least a partial emergency fund first. If you don’t have one and have to face a crisis, you’ll probably need to borrow the money. That means you’ll end up in more debt – whether you owe a family member or a credit card company.

A basic emergency fund should be around $1,000. That will cover minor emergencies like new tires after your car has a blowout on the highway, last-minute plane tickets to a funeral, or a brief ER visit.

Each time you deplete your emergency fund, halt any other debt-reducing or saving until you build it back up. Once you’re debt free, you can focus on building a more substantial emergency fund, covering between three to six month’s worth of expenses.

2.   Refinance Debt

Before you start paying off your debt, you should find other ways to reduce it. If you have high-interest credit card debt, do a balance transfer onto an account with a 0% offer. See if you can refinance to get a lower interest rate for your other debt, including car loans, mortgages and student loans.

When you refinance, make sure that your new loan doesn’t extend your terms. The longer your loan, the more you’ll pay in interest. You should use the refinance as an opportunity to save money, not spend more of it.

After you refinance, keep making the same payments you were previously. Doing so will shorten how quickly you pay off your debt without forcing you to make any changes to your lifestyle.

3.   Focus on Saving

The general rule of thumb is that you should put between 10-15% of your income towards retirement. While some people advocate for focusing all your efforts on debt payoff, putting money toward retirement now can save you money later.

Why? Because saving for retirement is designed to be a long-term approach, and the most important aspect of saving for retirement is time. The more time you spend saving, the more you’ll have – simple as that. That’s why putting a little bit away for 40 years is better than putting a lot away for 20.

“A 28 year-old that saves $5,000 a year into a retirement account – if they average 8% and retire at age 68 – should earn approximately $1,295,000,” said CFP Peter Creedon of Crystal Brook Advisors. “To match the $1,295,000, a 40 year old would have to contribute $13,583 a year until retirement if we use the above parameters.”

4. Create a Debt Payoff Plan

Once you’ve started saving for retirement, you should focus on becoming debt free and creating more money to throw at that debt. There are two ways to do this – lower your living expenses or increase your income.

You can increase your income by asking for a raise, finding a new job or starting a side gig. Working an extra 10 hours a week at $10 an hour will yield about $400 a month before taxes.

To decrease how much you need to live on, you should find areas of your budget that you can cut. Do you eat out too often or have a yoga studio membership that goes unused? Are you paying too much for car insurance or internet? Take the money that you cut from your budget and apply that to your debt payments.

With the help of a loan repayment calculator, you can pay off your debt with one of two strategies – the snowball or the avalanche method (more on that later this week).

Once you’ve paid off your debt, put the money you were spending on monthly payments and beef up your emergency fund. Now you’ll be saving for yourself and your future instead of paying off old debt.

Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Debt Free After Three.

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Dear Penny: I Have $700K, but Spending Gives Me Panic Attacks

Dear Penny,

I’m a 61-year-old woman with $700,000 saved for retirement. I own my own home (with a mortgage), and I have more than five months of daily expenses in a cash account. I have a few investment accounts in addition to the cash and I basically follow a 60/20/20 budget for my after-tax and after-retirement dollars.  

Why can’t I stop freaking out about money? I save for home repairs, and then freak out when I write the check. I save for a new car and then freak out when it’s time to buy it. I HAVE THE MONEY.

I’m not poor, but I have been cash poor in the past. I have always saved for retirement, but I can’t stop freaking out. And by freaking out, I mean literally days of heart-pounding panic attacks where Xanax is my only friend.  

How do other people handle this? 


Dear L.,

Fear is healthy to a degree. It’s what makes us wear our seatbelts and avoid dark alleys at night. Some level of money-related fear is also a good thing. If you didn’t worry there was a chance you’d run out of it, why wouldn’t you spend every dollar?

But there’s a big difference between healthy fear and the serious anxiety that you’re experiencing. An advice columnist is no substitute for mental health treatment. Whatever you do, it’s essential that you discuss your anxiety with a professional.

I wish I could tell you that $700,000 is more than enough for you. But that wouldn’t be an honest answer. There’s no way I can tell you with certainty that any level of savings is a guarantee you’ll never run out of money. Even billionaires wind up in bankruptcy court. But there’s plenty you can do to reduce the risk of whatever outcome you fear.

Financial health isn’t just about any one number. That $700,000 could be more than enough if you live in a low-cost area and plan to work for several more years. But if you live in Manhattan, you want to retire next year and people in your family frequently live past 100, it could leave you woefully short. Context is what matters here. The amount you have saved is meaningless without knowing your lifestyle, goals and concerns.

What I’m wondering is how much actual planning you’ve done beyond just saving. Do you have an age in mind for when you want to retire? Have you thought about when you’ll take Social Security? Do you plan to stay in your home and, if so, will you be mortgage-free by the time you retire?

All of this may seem overwhelming to think about when money already causes you so much stress. But worrying constantly plays a mind trick on you. You spend so much brain space and energy on worrying that it can feel like you’re actually taking action.

I want you to do what seems counterintuitive and think about the absolute worst-case scenarios. But I don’t want you doing this alone. I’d urge you to meet with a financial adviser, since you have the means to do so.

Write down your biggest fears so that you can discuss them together. Are you afraid of outliving your savings? Are you worried the market will crash right as you’re about to retire? Or that health care costs will eat up your retirement budget?

A financial adviser doesn’t have any special sourcery that can guarantee none of these things will happen. What they can do, though, is help you reduce the risk of those worst-case scenarios. If you’re worried about running out of money, they can help you plan how much you’ll safely be able to withdraw from retirement accounts and when you should take Social Security. Of course they can’t stop a stock market crash from happening, but they can make sure your investments are safely allocated based on your goals.

It sounds like you’re someone with a low risk tolerance, which means you probably want to invest conservatively. Perhaps a good investment for you would be to pay off that mortgage using a chunk of that savings. Will it be scary to fork over that much money at once? Of course, especially since the interest savings will probably pale compared to your investment returns. But if you can sleep more soundly knowing that what’s probably your biggest expense is taken care of, it could be worth it. I’m not saying that’s something you should absolutely do, but it’s worth discussing with your financial pro.

I suspect that when you think realistically about your worst-case scenarios, you’ll realize things aren’t as dire as you imagined. Suppose for some reason you had to quit working tomorrow. Your plans for retirement would probably change significantly. But at the same time, you wouldn’t be left without food or a home.

You say you’ve been cash poor in the past. Yet you overcame that and even managed to save for retirement when you didn’t have much money. You aren’t doomed to repeat your past.

I think if you do what’s scary and face your fears head-on — with the help of both a financial and a mental health professional — you can reduce the anxiety you feel about money. That’s not to say you’ll never worry about money again. But you can get to a place where fears about money aren’t dominating your life.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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5 Steps to Claim Your Ex’s Social Security After Divorce

Love and marriage don’t always last forever. But if your matrimony lasted 10 years or more, the financial benefits can last a lifetime. That’s because you may be able to take Social Security based on your ex-spouse’s benefits instead of your own, even if you divorced decades ago.

The philosophy is that both spouses often contribute economically during the marriage, even if only one person was employed. The Social Security rules protect those who spent most of their working years raising a family or playing a supportive role to their spouse and may have no retirement savings of their own.

The Rules for Social Security After Divorce

The maximum benefit you can get based on the record of a spouse — whether you’re currently married or divorced — is 50% of their full retirement age benefit. Full retirement age is the age at which you qualify for 100% of your benefit. It’s 66 or 67, depending on when you were born.

If your ex-spouse dies before you, you’ll typically be eligible to receive survivors benefits of 100% of the monthly payment they were receiving, just as you could if your current spouse died.

People with a long employment record will typically qualify for a bigger benefit based on their own earnings instead of a spouse’s. Social Security will give you the bigger benefit, but not both.

If you do qualify for more money thanks to your ex-spouse, they’ll technically give you whatever benefit you earned based on your record. Then, they’ll use your ex’s record to make up the difference.

Seeking to get revenge on an ex-spouse by claiming their Social Security? Move on. Your decision won’t affect their benefits in any way, nor will it impact their current spouse if they’ve remarried. If they’ve been married multiple times, all their exes are allowed to claim on their record.

Occasionally, a divorce settlement will state that one spouse can’t collect Social Security based on the other person’s record. Such stipulations are utter nonsense. The Social Security Administration says they’re “worthless and never enforced.”

How to Get Your Ex’s Social Security in 5 Easy Steps

Since your Social Security checks won’t affect your ex in any way, the only reason to try to claim their benefits is if you think you can get more money. If you suspect their record will maximize your Social Security, follow these five steps.

1. Make Sure You Can Answer ‘Yes’ to These Questions

To qualify for an ex’s Social Security benefits, you need to be able to answer “yes” to these four questions.

  • Were you married for 10 years or more? If your marriage lasted less than 10 years, you won’t qualify for an ex’s benefits. Common-law marriages don’t count. You also need to have been divorced at least two years before you can start getting checks based on your former spouse’s history, unless they’ve already started receiving benefits.
  • Are you at least 62? This is the minimum age for starting Social Security retirement benefits, no matter whose record you’re using. However, you can qualify regardless of your age if you’re caring for your ex’s child who is under 16 or disabled. If your ex-spouse is deceased, you can qualify for survivors benefits at age 60, or age 50 if you’re disabled.
  • Are you still unmarried? If you’re currently married, you can only claim on your record or your current spouse’s record. You’ll only be eligible 50% of their full benefit as well. And if you’ve been married and divorced multiple times? Social Security will use whichever ex-spouse’s record gives you the biggest benefit. Remember, though: Only marriages that lasted 10 years or more will count.
  • Is your ex eligible for benefits? In addition to the minimum age of 62, Social Security requires at least 40 work credits, which amounts to 10 years of full-time work, to start benefits. If your ex doesn’t meet these criteria, there’s no benefit for you to claim. Note that they don’t need to be receiving benefits. They just need to be eligible.

2. Gather Your Ex’s Information

You’re going to need some information to prove to Social Security that you’re eligible for your ex’s benefits. Be prepared to provide your marriage license and your divorce decree.

Social Security will also need to locate their record. This will be easiest if you still have their Social Security number. If you no longer have it, Social Security may be able to find their record if you can provide their date of birth, where they were born and the names of their parents.

3. Resist the Urge to Tell Them

Remember: Your decision to seek more Social Security on your ex’s record does not affect them in any way. So there’s absolutely no reason to contact them about it. You don’t need their consent to get benefits based on their record. Social Security will not contact them about your application.

4. Ask Social Security Whose Record Gets You the Best Benefit

Now take that information you gathered about your ex to Social Security so you can figure out whose record will give you the biggest benefit. You can call them at 800-772-1213 or visit your local office. An appointment isn’t required, but scheduling one can cut down on your waiting time.

5. Delay as Long as Possible (but Not Too Long)

The earlier you take benefits, the lower your monthly checks will be, no matter whose record you claim on. The 50% you can qualify for from their history is the maximum you’ll get if you wait until your full retirement age of 66 or 67. For every year you claim before then, you’ll permanently reduce your benefits by 6.66%. If you claim at 62, you’d only qualify for 32.5% of their benefit.

Don’t wait too long, though. When you take benefits on your own record, you get an extra 8% for every year you delay past your full retirement age until your benefits max out at 70. But when you’re getting spousal benefits, you don’t earn delayed retirement credits. You won’t get extra money for waiting past your full retirement age, so there’s no point in delaying any further.

A final note: In the past, a common Social Security strategy was to claim based on a current or former spouse’s record as early as possible, then switch over to your own bigger benefit later on. But the rules changed under a 2015 law called the Bipartisan Budget Act. Now this is only an option if you were born Jan. 2, 1954, or earlier.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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10 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard for your retirement nest egg, so the idea of paying taxes on those savings isn’t exactly appealing. If you know what you’re doing, you can avoid overpaying Uncle Sam as you start collecting Social Security and making withdrawals (including RMDs) from IRAs and 401(k)s. Unfortunately, though, retirees don’t always know all the tax code ins and outs and, as a result, end up paying more in taxes than is necessary. For example, here are 10 questions retirees often get wrong about taxes in retirement. Take a look and see how much you really understand about your own tax situation.

(And check out our State-by-State Guide to Taxes on Retirees to learn more about how you will be taxed by your state during retirement.)

1 of 10

Tax Rates in Retirement

picture of tax rate arrow chart showing upward trendpicture of tax rate arrow chart showing upward trend

Question: When you retire, is your tax rate going to be higher or lower than it was when you were working?

Answer: It depends. Many people make their retirement plans with the assumption that they’ll fall into a lower tax bracket once they retire. But that’s often not the case, for the following three reasons.

1. Retirees typically no longer have all the tax deductions they once did. Their homes are paid off or close to it, so there’s no mortgage interest deduction. There are also no kids to claim as dependents, or annual tax-deferred 401(k) contributions to reduce income. So, almost all your income will be taxable during retirement.

2. Retirees want to have fun—which costs money. If you’re like many newly retired folks, you might want to travel and engage in the hobbies you didn’t have time for before, and that doesn’t come cheap. So, the income you set aside for yourself in retirement may not be much lower than what you were making in your job.

3. Future tax rates may be higher than they are today. Let’s face it…tax rates now are low when viewed in a historical context. The top tax rate of 37% in 2021 is a bargain compared with the 94% of the 1940s and even the 70% range as recently as the 1970s. And considering today’s political climate and growing national debt, future tax rates could end up much higher than they are today.

2 of 10

Taxation of Social Security Benefits

picture of a Social Security card surrounded by stacks of coinspicture of a Social Security card surrounded by stacks of coins

Question: Are Social Security benefits taxable?

Answer: Yes. Depending on your “provisional income,” up to 85% of your Social Security benefits are subject to federal income taxes. To determine your provisional income, take your modified adjusted gross income, add half of your Social Security benefits and add all of your tax-exempt interest.

If you’re married and file taxes jointly, here’s what you’ll be looking at:

  • If your provisional income is less than $32,000 ($25,000 for singles), there’s no tax on your Social Security benefits.
  • If your income is between $32,000 and $44,000 ($25,000 to $34,000 for singles), then up to 50% of your Social Security benefits can be taxed.
  • If your income is more than $44,000 ($34,000 for singles), then up to 85% of your Social Security benefits are taxable.

The IRS has a handy calculator that can help you determine whether your benefits are taxable. You should also check out Calculating Taxes on Social Security Benefits.

And don’t forget state taxes. In most states (but not all!), Social Security benefits are tax-free.

3 of 10

Withdrawals from Roth IRAs

picture of a jar labeled &quot;Roth IRA&quot; with money in itpicture of a jar labeled &quot;Roth IRA&quot; with money in it

Question: Are withdrawals from Roth IRAs tax-free once you retire?

Answer: Yes. Roth IRAs come with a big long-term tax advantage: Unlike their 401(k) and traditional IRA cousins—which are funded with pretax dollars—you pay the taxes on your contributions to Roths up front, so your withdrawals are tax-free once you retire. One important caveat is that you must have held your account for at least five years before you can take tax-free withdrawals. And while you can withdraw the amount you contributed at any time tax-free, you must be at least age 59½ to be able to withdraw the gains without facing a 10% early-withdrawal penalty.

4 of 10

Taxation of Annuity Income

picture of an elderly couple discussing finances with an advisorpicture of an elderly couple discussing finances with an advisor

Question: Is the income you receive from an annuity you own taxable?

Answer: Probably (at least for some of it). If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income. In addition, be aware that you’ll have to pay any taxes that you owe on the annuity at your ordinary income-tax rate, not the preferable capital gains rate.

5 of 10

Age for Starting RMDs

picture of elderly man blowing out candles on a birthday cakepicture of elderly man blowing out candles on a birthday cake

Question: At what age must holders of traditional IRAs and 401(k)s start taking required minimum distributions (RMDs)?

Answer: Age 72. The SECURE Act raised the age for RMDs to 72, starting on January 1, 2020. It used to be 70½. (Note that, although the CARES Act waived RMDs for 2020, they’re back for 2021 and beyond.)

As for the amount that you are forced to withdraw: You’ll start out at about 3.65%, and that percentage goes up every year. At age 80, it’s 5.35%. At 90, it’s 8.77%. Figuring out the percentages might not be as hard as you think if you try our RMD calculator. (Note that, beginning in 2022, RMD calculations will be adjusted so that distributions are spread out over a longer period of time.)

6 of 10

RMDs From Multiple IRAs and 401(k)s

picture of a spiral notebook with &quot;Required Minimum Distributions&quot; written on the front coverpicture of a spiral notebook with &quot;Required Minimum Distributions&quot; written on the front cover

Question: Are RMDs calculated the same way for distributions from multiple IRAs and multiple 401(k) plans?

Answer: No. There’s one important difference if you have multiple retirement accounts. If you have several traditional IRAs, the RMDs are calculated separately for each IRA but can be withdrawn from any of your accounts. On the other hand, if you have multiple 401(k) accounts, the amount must be calculated for each 401(k) and withdrawn separately from each account. For this reason, some 401(k) administrators calculate your required distribution and send it to you automatically if you haven’t withdrawn the money by a certain date, but IRA administrators may not automatically distribute the money from your IRAs.

7 of 10

Due Date for Your First RMD

picture of a piggy bank with &quot;RMD&quot; written on the sidepicture of a piggy bank with &quot;RMD&quot; written on the side

Question: Do you have to take your first RMD by December 31 of the year you turn 72?

Answer: No. Normally, you have to take RMDs for each year after you turn age 72 by the end of the year. However, you don’t have to take your first RMD until April 1 of the year after you turn 72. But be careful—if you delay the first withdrawal, you’ll also have to take your second RMD by December 31 of the same year. Because you’ll have to pay taxes on both RMDs (minus any portion from nondeductible contributions), taking two RMDs in one year could bump you into a higher tax bracket.

It could also have other ripple effects, such as making you subject to the Medicare high-income surcharge if your adjusted gross income (plus tax-exempt interest income) rises above $88,000 if you’re single or $176,000 if married filing jointly. (Note: Those are the income thresholds for determining 2021 surcharges.)

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Taxation of Life Insurance Proceeds

picture of a life insurance contract with money laying on itpicture of a life insurance contract with money laying on it

Question: If your spouse dies and you get a big life insurance payout, will you have to pay tax on the money?

Answer: No. You have enough to deal with during such a difficult time, so it’s good to know that life insurance proceeds paid because of the insured person’s death are not taxable.

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Estate Tax Threshold

picture of the words &quot;Estate Tax&quot; next to a judge's gavel and moneypicture of the words &quot;Estate Tax&quot; next to a judge's gavel and money

Question: How valuable must an individual’s estate be at death to be hit by federal estate taxes in 2021?

Answer: $11.7 million ($23.4 million or more for a married couple). If the value of an estate is less than the threshold amount, then no federal estate tax is due. As a result, federal estate taxes aren’t a factor for very many people. However, that will change in the future. The 2017 tax reform law more than doubled the federal estate tax exemption threshold—but only temporarily. It’s schedule to drop back down to $5 million (plus adjustments for inflation) in 2026. Plus, during his 2020 campaign, President Biden called for a reduction of the exemption threshold sooner.

If your estate isn’t subject to federal taxes, it still might owe state taxes. Twelve states and the District of Columbia charge a state estate tax, and their exclusion limits can be much lower than the federal limit. In addition, six states impose inheritance taxes, which are paid by your heirs. (See 18 States With Scary Death Taxes for more details.)

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Standard Deduction Amounts

picture of a 1040 tax form with a pen laying on it next to the standard deduction linepicture of a 1040 tax form with a pen laying on it next to the standard deduction line

Question: If you’re over 65, can you take a higher standard deduction than other folks are allowed?

Answer: Yes. For 2021, to the standard deduction for most people is $12,550 if you’re single and $25,100 for married couples filing a joint tax return ($12,400 and $24,800, respectively, for 2020). However, those 65 and older get an extra $1,700 in 2021 if they’re filing as single or head of household ($1,650 for 2020). Married filing jointly? If one spouse is 65 or older and the other isn’t, the standard deduction increases by $1,350 ($1,300 for 2020). If both spouses are 65 or older, the increase for 2021 is $2,700 ($2,600 for 2020).