Retirement Planning: Answers to a Podcaster’s Questions

I periodically participate as a guest on podcasts to answer questions about personal finance topics. Below are five questions that I answered recently on a podcast about retirement planning:

Your book, Flipping a Switch, covers 35 key financial and lifestyle transitions in later life. What are some of the most overlooked transitions that impact financial security?

Many people underestimate the impact of income taxes in later life. Some may even have a higher income in retirement than when they were working due to multiple streams of income (e.g., Social Security, pensions, investments, and required minimum distributions (RMDs) from tax-deferred accounts). Another thing that is often overlooked is making specific plans for long-term care.

How can people ensure they have enough income to support a desired lifestyle in retirement?

Personalized calculations are best, with or without the assistance of a financial advisor. For “do-it-yourselfers,” I recommend using at least three different online calculators because their data inputs and assumptions vary. Some retirement calculators will tell users the amount of money they need to save to fund their desired lifestyle. Others, called Monte Carlo calculators, will project a probability of “success” (not outliving one’s assets) and how much more savings is needed to avoid this.

What are some common financial mistakes retirees make, and how can they be avoided?

Spending errors are a common mistake. Some people spend too much or too little of their accumulated savings, resulting in a large surplus upon their death or running out of money. Other errors are lack of estate planning, lack of long-term care planning, and lack of communication about legal documents and the location of financial records, including access to digital assets.

What are the biggest financial shifts impacting retirees today?

One big shift, compared to previous generations, is “do it yourself” retirement planning. Baby boomers were “guinea pigs” for both IRAs and 401(k)s and needed to make three key decisions: whether to contribute, how much money to contribute, and how to contribute (i.e., asset allocation decisions about the percentage of contributions to different types of investments). Subsequent generations have had to do the same. Another big shift is decumulation from retirement plans.

What are the biggest financial challenges for baby boomers in retirement?

One big challenge is not outliving assets. Not surprisingly, running out of money is the top fear of older adults. Another challenge is the potential for costly long-term care expenses. Nobody knows how much care they will need but they need a plan “just in case.” A third challenge, for retirees who have been super savers, is the impact of taxes and determining ways to mitigate this expense.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

IRA Insights: Take-Aways From a Recent Webinar

 I recently attended a webinar about individual retirement accounts (IRAs) and income taxes that was sponsored by the Financial Planning Association (FPA). The speaker was Ed Slott, a leading national authority on IRAs who is widely quoted in financial publications for professionals and consumers. Ed and two of his staffers answered dozens of questions live and via the online chat.

Below are six key take-aways:

Tax Season Never Ends- Most people think they are done with taxes on April 15. That may be true for tax return preparation, but not for tax planning. Tax planning is an ongoing process throughout a taxpayer’s lifetime and beyond (i.e., tax-deferred accounts inherited by beneficiaries).

Many People Have a “Tax Problem”- There is more than $40 trillion invested in tax-deferred retirement savings accounts. Once account owners reach age 73, they must start taking required minimum distributions (RMDs). These withdrawals are taxed as ordinary income, which can push them into a higher marginal tax bracket.

The 10-Year Rule- This rule applies to most non-eligible designated beneficiaries (e.g., adult children, grandchildren, and non-spouse individuals) who inherit a tax-deferred retirement account, such as a traditional IRA or 401(k), when the original account owner passed away after 2019. This rule took effect as a result of the SECURE Act. The entire inherited account must be fully distributed by December 31 of the 10th year following the year of the original owner’s death.

The “At Least As Rapidly” Rule- This is an additional guideline for inherited tax-deferred accounts that applies when account owners of a tax-deferred retirement account, such as a traditional IRA, pass away after beginning their RMDs. If the original account owner had already started RMDs before passing, the beneficiary must continue withdrawing RMDs each year during the 10-year period, thereby making withdrawals at least as rapidly as the original owner was required to.

No Extension on the 10-Year Rule- There was a five-year delay in IRS clarification about exactly how withdrawals under the 10-Year Rule must be taken by non-eligible designated beneficiaries. This did not, however, extend the ten-year window to deplete an inherited account. For example, if an account owner died in 2022, the ten-year period is 2023 to 2032, and the account must be fully withdrawn by December 31, 2032. RMD penalties for non-spouse beneficiaries are now in effect. The penalty is 25% of the amount that should have been withdrawn but was not.

Tax Laws Are Transitory- Mr. Slott noted that tax laws “are always written in pencil” and are subject to change. A big unknown right now is the future of the Tax Cuts and Jobs Act (TCJA), which is set to expire at year-end. If the TCJA is left to expire, marginal tax rates will revert to higher rates that were in effect in 2017. Slott advised the audience to “always pay taxes when rates are the lowest” and to take a long view and consider, not only current year taxes, but taxes in the future.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Losing a Cell Phone: Lessons Learned

 You never think it can happen to you…until it does. After years of uneventful cell phone ownership (e.g., no lost phones, no broken screens, no water damage), I lost my cell phone, thankfully for less than 24 hours. I was on a bus trip, the driver made a sharp turn, the bag that I was carrying toppled over, and- unbeknownst to me at the time- my cell phone fell out onto the floor under my seat.

I realized this soon after I got home and couldn’t find my phone. My husband called the number and the phone rang- but not in our home or vehicle. I soon put the pieces together and called the bus company. They found the phone where it had fallen and I quickly retrieved it. Thankfully, the bus we were on was not in service the next day. I shudder to think of what could have happened otherwise.

This incident got me thinking about lost phones, what I did right, and what I could have done better.

What I Did Right

• Retracing My Steps- I worked the problem, thinking through all possible places my phone could have been and ruling out different options (e.g., by the mailbox when we stopped to get mail).

• Password Protection- My phone is password protected and locks down quickly using auto-locks when it is not actively being used. This gave me peace of mind that it could not easily be tampered with if it got into the wrong hands.

• No Financial Data- I do not- and will never- have any personal financial information on my cell phone. For example, apps for financial institutions that I have accounts with. I also do not use phone wallets such as Apple Pay or Google Pay. Less sensitive data that could be stolen.

• Cell Phone Pocket- The back of my phone has an adhesive “pocket” that contains some of my business cards as well as contact information for my husband in case I am unreachable.

What I Could Do Better

• Use Phone Finder Apps- I could have found the phone sooner with an app like “Find My Device” (Android) or “Find My” (IOS). I have since installed one on my phone.

• Use Different Authentication Methods- I am seriously considering different two-factor authentication (2FA) methods, such as biometrics and third party apps, after realizing how vulnerable I was with all my 2FA being done via text messages sent to my phone.

• Double Check for My Phone- I have a new decision rule for the rest of my life. Never leave a venue or a mode of transportation (bus, plane, etc.) without checking for my phone.

So much of our lives are tied to our phones: our contacts, photos, social media, and more. I hope you are never in a similar situation and lose your phone and that my insights, above, are helpful. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

PowerPay Your Way Out of Debt

 

Are you still revolving a balance on your credit card for purchases made during the 2024 holiday season or before? If so, you are not alone. Nearly half (48%) of credit cardholders are in the same boat, especially young adults in the Millennial and Gen Z generations.

I recently attended a webinar about current U.S. debt statistics and features of the PowerPay debt repayment acceleration program as a tool to reduce debt repayment time and interest costs. PowerPay is a free online program developed by Utah State University Cooperative Extension. Below are seven key webinar take-aways:

Outstanding Debt- The average American carries almost $7,000 in credit card debt, up from about $5,000 in 2021, largely due to inflation. In addition, average total debt per U.S. household is $149,358, with mortgage debt comprising 70% of this amount.

Causes of Debt- One cause is inflation, especially the historically high percentage increases in the Consumer Price Index seen in 2022. Credit card balances increased more than wages. Two other causes are medical debt (the primary reason that people file for bankruptcy) and child care costs, which have risen at nearly double the pace of overall inflation.

Student Loans- About 42.8 million Americans have outstanding federal student loan debt and 64% of student loans are carried by women, who earn lower average incomes than men. The average student loan balance in the U.S. in 2024 is $37,853 per borrower. Absent any debt acceleration, it may take borrowers up to 20 years to repay what they owe.

Debt Repayment Options- There are different ways to deal with debt including credit counseling with a non-profit agency, a debt consolidation loan, bankruptcy, and the use of PowerPay to create a debt acceleration payment calendar. PowerPay works by applying the monthly payment on a repaid debt to the amounts owed to remaining creditors.

Avalanche vs. Snowball Method-  PowerPay can do debt reduction calculations using both methods. The avalanche method prioritizes paying off the debt with the highest interest rate first, even if it has a larger balance. The "snowball method" prioritizes paying off the smallest debt balance first, regardless of interest rates on debts.

Benefits of PowerPay- PowerPay crunches all the numbers for users to show them how much time and interest they can save by following a personalized debt reduction calendar vs. paying off debts without PowerPay. Money going toward combined debt owed to multiple creditors remains constant but the way it is allocated to monthly payments changes as debts are repaid.

Key Caveat- The key to success when using PowerPay is not accumulating new debt. The debt reduction calendar that is created is based on existing debt only and will not work if balances on outstanding debts continue to grow.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Takeaways From a Conference About Retirement Savings

I recently attended (virtually) a conference about retirement savings sponsored by the Employee Benefit Research Institute (EBRI). Below are some of my key take-aways:

Funded Contentment- I ever heard that phrase before. It means a person’s ability to underwrite a happy and meaningful life. The focus is on having enough money instead of reaching a specific number (i.e., dollar amount of retirement savings). Instead of a “greed is good and more is better” mentality, many retirees want to focus on meaning and purpose in later life.

Narrative Species- One speaker noted that humans are not a “numeracy species” focused on math and numbers but, rather, a narrative species. In other words, people learn best about personal finance (and other topics) through stories and case study examples.

Automatic Non-Decisions- An easy way for people to save money for retirement is to “turn decisions into non-decisions.” In other words, take action once to automate financial transactions such as payroll deductions for a 401(k) or regular automatic deposits to buy stock or mutual funds.

The Impact of Vividness- When people’s “future self” is made vivid through aging apps and other tools, they are more likely to make decisions and sacrifices today to have a better future in later life. For example, they might save and invest more money and eat more healthy food.

RMDs as an Income Withdrawal Strategy- Findings from a study of the effects of increasing required minimum distribution (RMD) age from 70.5 to 72 to 73 were reported using data from a sample of over 3 million IRA owners. The study found that not a lot of people take RMDs until they are required to do so. As the RMD age got pushed back, so did the frequency of people taking later distributions. In other words, changes in RMD age as a result of the two SECURE acts affected investor behavior because many retirees use RMD rules as a default income withdrawal strategy.

Retiree Financial Challenges- Retirees with significant sums in tax-deferred accounts are facing challenges from RMDs, which can trigger tax on Social Security, higher income taxes in general, and higher Medicare premiums call IRMAA. Even still, people have an aversion to withdrawing money from tax-deferred accounts earlier than RMD age.

The Impact of Guaranteed Income- Older adults with guaranteed lifetime income (e.g., pension or annuity) are more likely to spend money and less likely to feel financial stress than those who withdraw money from investments to pay living expenses. The latter group is subject to longevity risk (risk of outliving savings) and sequence of returns risk (risk of withdrawing funds during a market downturn) and tend to hold back on spending. The #1 fear of retirees is running out of money.

Cultural Norms- In some cultures, family members serve as a de facto “emergency fund” for each other. This expectation can hinder the financial progress of those who save. Some people may want to have a place for their money that relatives don’t know about because it is hard to say no to family members. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.