Five Common Retirement Planning Errors

The retirement planning process has many “moving parts.” It includes calculations to determine required savings, selecting savings plan investment products, “finding” money to invest in a retirement savings plan, and managing income withdrawals in later life so that savings lasts a lifetime. Whew!

The planning process is even more difficult if errors and misinformation seep in. Below are five common retirement planning errors to avoid:

RPS (a.k.a., Retirement Postponement Syndrome)- Save as much as you can as early as you can to maximize the awesome power of compound interest. That being said, the next best time to plan for retirement is today. Get with an online Social Security benefit estimate and the Ballpark Estimate online retirement savings calculator.

Banking On Unsure Things- Do not plan on “guaranteed” retirement savings that may or may not materialize when calculating retirement savings needs. Examples include a certain amount of profit on the sale of a home or business, having a certain investment account balance, and receiving an inheritance.

Counting On an “Econo-Retirement”- Prepare a post-retirement spending plan with anticipated income and expenses. Spending on travel, entertainment, and health care often increases in later life and routine household expenses such as property taxes and utilities will probably continue to increase.

Forgoing Retirement Saving Resources- Aim to take maximum advantage of retirement saving supports including auto escalation (where employer retirement plan savings increases with a pay increases), employer plan matching, and tax-deferred savings plan contributions.

Not Getting Help When Needed- Seek information and guidance, when needed, from employer human resources staff, government agencies (e.g., Social Security and Medicare and SHIP for health insurance questions) and financial services professionals such as a certified financial planner.

Retirement Catch-Up Strategies-Part 2

It is not uncommon for people to get a late start on their retirement savings. When they get older, or do an online calculation such as the Ballpark Estimate, they realize that they have a lot of catching up to do.

 

What to do? There are basically two courses of action: save more before retirement and/or spend less after retirement. Below, in Part 2 of this two-part blog series are six ways to spend less after retirement:

¨      Trade Down to a Smaller Home- Consider moving to a smaller living space for reasons that include lower maintenance, lower utility bills, and lower property taxes. Disadvantage: having to downsize.

¨      Geographic Arbitrage- Consider moving to another location where you don’t have to downsize and will have lower living costs and property taxes. Disadvantage: moving away from familiar people and places.

¨      Work After Retirement- Consider some type of paid employment or self-employment to supplement Social Security and other income sources. Earnings will reduce the amount the amount of savings required.

¨      Tap Home Equity- Consider ways to convert equity in your home into a stream of income. Two common strategies are taking out a reverse mortgage and selling your home to a close relative who rents it back to you.

¨      Spend Less- Prepare a budget that is aligned with your anticipated retirement income. Identify expense categories that can be trimmed, if necessary. It is also not uncommon for expense reduction to occur naturally as older adults realize that they have “enough” of certain items such as clothing and home furnishings.

¨      Make Tax-Efficient Asset Withdrawals- Decide whether to take withdrawals first from taxable or tax-deferred accounts. For many people, it makes sense to withdraw money first from taxable accounts, then tax-deferred accounts, and then Roth IRAs to allow tax-deferred accounts to grow as long as possible.

Retirement Catch-Up Strategies-Part 1

It is not uncommon for people to get a late start on their retirement savings. When they get older, or do an online calculation such as the Ballpark Estimate, they realize that they have a lot of catching up to do.

 

What to do? There are basically two courses of action: save more before retirement and/or spend less after retirement. Below, in Part 1 of this two-part blog series are six ways to save more before retirement:

 

¨      Increase Retirement Savings- Raise the percentage of your pay that is put into a tax-deferred retirement saving plan such as a 401(k). Even a 1% boost can make a big difference over time.

 

¨      Spend Less and Pay Off Debt- Reduce expenses, especially “discretionary” items such as food, clothing, and entertainment, and redirect this money to savings.


¨      “Moonlight” for Additional Income- Look for ways to earn extra income through “side hustles” and save all or part of this income for retirement.

 

¨      Invest More Aggressively- Increase the percentage of your investments in stock or stock mutual funds. You will take on more risk but will also have the potential for a higher long-term return vs. cash assets and bonds.

 

¨      Preserve Lump Sum Distributions- Reinvest lump sum distributions when you leave a job into a rollover IRA or a new employer’s retirement savings plan to keep this money tax-deferred until retirement.


¨      Work Longer Before Retiring- Decide to remain on the job longer than planned. Even 1-2 years can make a big difference by providing more years to save and accrue benefits and fewer years to withdraw savings.

 

Current Events in Personal Finance-Part 2

Rutgers Cooperative Extension recently sponsored Financial Education Boot Camp (FEBC), a full-day conference designed to build the capacity of New Jersey educators to teach personal finance. FEBC featured a presentation about trends and current events about financial topics. Below are five more questions that were asked and a brief explanation of each answer:

What factor influences helps people make better spending decisions according to a 2019 study?

Peer pressure. Researchers found that people cut their spending- sometimes drastically- when they are told they are spending more than others in similar circumstances. Information was provided to respondents via a phone app with peer spending data.

What record number did outstanding consumer debt in the U.S. exceed for the first time ever in 2019?

The new consumer debt record was $4 trillion. Factors contributing to this staggering number included strong holiday spending in 2018 and a steady rise in student loan balances and automobile financing. Consumers, on average, are spending about 10% of their disposable income on non-mortgage debts.

Which type of retirement savings plan is being mandated (or at least considered) by an increasing number of states in 2019 for use in state-run retirement plans for workers in small and medium-sized companies?

Laws to establish state-run Roth IRA-like retirement plans for private sector workers are increasingly being passed (or considered) because large numbers of U.S. workers, particularly those in small or medium-sized companies, are not saving enough for retirement. Employees are automatically enrolled in the state-run plan but can “opt-out” if they want to.

What percentage of taxpayers filed their federal income tax returns electronically in 2018?

There has been a steady increase in the number of tax returns that are e-filed each year from 30.7% in 2001 to 92% in 2018. Taxpayers who e-file and use direct deposit typically receive a refund within 21 days. Paper filing adds another 6 to 8 weeks.

What happened in 2019 with respect to the CFPB’s payday lending rule that requires lenders to check borrowers’ ability to repay short-term loans including payday loans and car title loans?

The CFPB reversed course in 2019 and rolled back proposed protections that would have required lenders to ensure that borrowers could repay payday loans. Another rule to halt repeated withdrawals directly from borrowers’ accounts (often resulting in pricy overdraft fees and/or damaged credit scores) was delayed until at least November 2020.

 

Current Events in Personal Finance-Part 1

Rutgers Cooperative Extension recently sponsored Financial Education Boot Camp (FEBC), a full-day conference designed to build the capacity of New Jersey educators to teach personal finance. FEBC featured a presentation about trends and current events about financial topics. Below are five questions that were asked and a brief explanation of each answer:

Which 47-year old personal finance magazine ceased print publication in June 2019?

Established in 1972, Money magazine printed its last issue in June 2019. Two prime culprits for its demise were decreased advertising revenue and online personal finance content that is continually updated and often available free of charge.

 

Approximately how many Americans who received federal tax refunds in 2018 owed the government money in 2019?

Total tax refunds in 2019 were about $6 billion lower than during the 2018 tax filing season and about 1.6 million taxpayers who received refunds in the past owed the IRS. Many people who had planned to use their refunds to pay outstanding debt or buy “big ticket” items instead received an unwelcome “surprise.”

According to a 2019 government report, the Medicare program for older adults will become insolvent in what year?

Medicare’s hospital insurance fund is expected to be depleted in 2026 according to the 2019 annual report provided by Social Security officials. At that time, doctors, hospitals, and other medical providers would not receive full Medicare compensation and patients could face a greater financial burden for health care costs. Public policy solutions are needed.

According to the 2019 P-Fin Index survey, Americans’ personal finance knowledge is lowest on what topic?

 The third annual P-Fin survey by the TIAA Institute and GFLEC found that U.S. adults answered only 51% of the P-Fin Index questions correctly. Lack of knowledge was especially apparent about risk-related concepts and this is consistent with other research studies about financial literacy.

What percentage of Americans adults is not saving any money for retirement according to a 2019 report by the Center for Financial Services Innovation (CFSI)?

More than 4 in 10 workers (42%) are not saving anything for retirement. As a consequence of not saving for their “future self,” they are de facto counting on Social Security, alone, to pay their bills in retirement. However, Social Security- from the start- was always meant to be a base of income to build upon. In addition, its trust fund (surplus) is gradually decreasing.