Thursday, March 31, 2022

Financial Concerns of Older Adults

 Last fall, I participated in a group discussion among personal finance content creators (e.g., authors, speakers, bloggers, and podcasters) attending the FinCon 2021 conference. Our topic: financial concerns of older adults. The consensus was there is no “one size fits all” content. Personal finance messages need to be customized for specific older adult audiences.


Below is a description of eight key topics that were discussed:

Adequate Health Insurance- Health issues are a big drain on even the best laid financial plans because “the greatest wealth is health.” Older adults worry about health care costs and how much their health insurance will cover. Managing chronic conditions, such as diabetes, over a lifetime can, especially, be expensive. A local SHIP (called SHINE in some states) State Health Insurance Assistance Program office can help older adults compare Medicare supplement policies. The Extra Help program can help those with limited incomes and resources to pay for prescription drugs.


Use of Time- Some older adults miss the daily structure and socialization that work provided and become bored, even depressed. Suddenly, they have about 2,500 hours of free time available when they exit the labor force. The key to avoiding this situation is to identify one or more “big rocks” that take up 6-8 hours each day. As I wrote in my book, Flipping a Switch, examples of “big rocks” include working, volunteering, blogging, care-giving, and socializing.


Too Much Togetherness- Some couples decide to retire simultaneously while others leave their jobs at different times. Unfortunately, some spouses feel compelled to retire because their spouse keeps “bugging them.” This can cause resentment and can especially disadvantage women who are often younger and have shorter work histories than male spouses. This Wall Street Journal article has some good insights about assessing retirement readiness.


Inadequate Savings- Many older adults are afraid of a big gap between their Social Security benefit and other income versus the amount of money they need to live on monthly to retire comfortably. Others are afraid of running out of money during their remaining lifetime. The best way to address these concerns is to plug some numbers into a retirement savings calculator, such as the Retirement Calculator from the FINRA Investor Education Foundation, and see where they fall. Strategies to close the gap include increasing income, reducing expenses, or doing both.


Shame About Savings Shortfalls- Some older adults are experiencing shame and embarrassment about their lack of retirement savings. This is especially true if their adult children are regular savers and the parents fear they may need to “lean” on their family in the future. Many are afraid to look at their numbers and just plan to keep working indefinitely because they know they don’t have enough. Again, calculators or a financial counselor or coach may be able to assist.


Skepticism About Social Security- Some of the content creators reported hearing doubts expressed about the long-term sustainability of Social Security and people viewing it as “gravy” that they can’t count on. Indeed there is cause for concern as the Social Security trust fund is projected to be depleted by 2033, with just 76% of benefits able to be paid at that time. This potential “haircut” speaks to the need to have multiple streams of income available in later life.


Gray Divorces- Two types of divorces in later life were discussed: 1. the kind where couples have grown apart  and 2. the kind where one spouse with health or long-term care issues and major expenses does not want to drain the finances of the other. Women tend to fare more poorly after divorces than men due to lower average earnings and retirement benefits. This helpful article from Kiplinger encourages readers to treat a gray divorce like what it is: a business deal.


Need for Flexibility and Resilience- One content creator noted “There are many things that come up in life and you have to be willing to adapt.” Another advised “Plan for good and bad times because it is going to rain sometimes.” A third participant noted that “present choices affect your future options.” Resiliency resources don’t just include financial assets such as savings and insurance. Relationships (social capital) and skills (human capital) also foster resilience.


For more information about older adult finances, review this Consumer Financial Protection Bureau (CFPB) website.

This post provides general personal finance 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.

Thursday, March 24, 2022

Financial Planning Tips for Older Women

 I recently taught a 90-minute personal finance class for women age 50+. While preparing for the class and delivering it, I noted some major financial concerns of this demographic group that I am personally part of. This post describes ten things that older women need to consider about personal finance during the second half of their financial life:


¨     Unique Financial Characteristics- Women are more likely than men to have gaps in their employment history and to be more negatively impacted by divorce than men. Some defer financial tasks to others and, thereby, lack financial experience. This is a mistake. About 90% of women will need to manage money alone at some point in their lives.


¨     “Through Retirement” Goals- Working age women often focus on “to retirement” goals (e.g., saving for later life in an IRA or 401(k) plan) while older women need “through retirement” goals. Goals should be SMART (Specific, Measurable, Achievable, Relevant, and Time-related.  To write a SMART goal, use this language: “I want to” [describe goal] “by” [list a time deadline] “so I will” [describe action steps required to achieve the goal on time].


¨     Cash Flow Challenges- Women at all ages are concerned about cash flow, i.e., the relationship between income and expenses. Ideally, cash flow should be positive (income greater than expenses) or, at the very least, flat (income = expenses). Three ways to achieve positive cash flow are increasing income, reducing living costs, or doing both.


¨     Smart Borrowing Decisions- Tips shared at the class include shopping around for credit and paying credit card bills in full, if possible or, otherwise, more than the minimum. Also, avoiding being “upside down” on a loan (owing more than the item money was borrowed for is worth), checking credit reports and scores regularly, and selecting credit cards that match your repayment style (e.g., “convenience user” that pays in full or “revolver” that carries a balance).


¨     “Large Loss” Risks- Insurance experts recommend spending limited insurance premium dollars on risks that carry the potential to cause large financial losses. Five major “large loss” risks for older women are the death of a spouse (resulting in reduced income or benefits), damage to (or destruction of) a home, liability claims due to court judgements, large medical expenses, and high long-term care expenses (e.g., assisted living and nursing home costs).


¨     Investment Risks- Four common risks that all investors are experiencing now are market risk (when securities drop as a result of an overall market downturn), interest rate risk (the inverse relationship between interest rates and bond prices), inflation risk (loss of buying power due to a rise in prices), and business risk (risks associated with only one company or industry sector that cause it to fall out of favor and lose money).


¨     Retirement Spending- Expenses likely to increase in later life include medical/dental expenses, health insurance premiums (e.g., Medicare Part B and Medigap policy premiums), travel and entertainment, and philanthropy/gifts. Those likely to decrease include auto expenses, clothing, and home maintenance/utilities (if downsizing). Depending on household income/assets and lifestyle decisions, income taxes and housing costs may increase or decrease.


¨     Sources of Retirement Income- Income sources include Social Security, employer defined-benefit pensions or defined-contribution retirement plans (e.g., 401(k)s), tax-deferred accounts (e.g., IRAs), taxable accounts, rental real estate, other assets (e.g., reverse mortgage and collectibles), and employment earnings. Social Security benefits are based upon 35 years of career earnings and the earnings limit applies to benefits prior to full retirement age.


¨     Retirement Asset Withdrawals- Many older adults use IRS required minimum distribution (RMD) rules to determine how much money to withdraw from savings. Others follow (or tweak) the so-called “4% Rule” where they withdraw a percentage of savings (e.g., 4%) and adjust the amount annually for inflation. Another common strategy is to create a retirement “paycheck” with annuities that provide guaranteed income for life or a certain time period.


¨     Loose Ends- Many older adults want a “good ending” to their life. Estate planning can help. Tips shared at the class include preparing the “Big Three” documents (will, durable power of attorney, living will), writing a letter of last instructions, regularly reviewing beneficiary and personal representative designations, tax-advantaged charitable gifting, and making sure that property titles do not conflict with a will.


The class for older women was based on content from the book Money Talk: A Financial Guide for Women that can be downloaded for free online.

This post provides general personal finance 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.


Friday, March 18, 2022

Inflation Insights and Work-Arounds

A work-around (a.k.a., hack) is a strategy designed to circumvent an “issue” (problem) or challenge. It does not solve the problem or make it go away, but it makes life more manageable and allows people to get things done.


Right now, inflation is an issue of concern to many people. Inflation puts upward pressure on prices and makes them rise, leading to a reduction of the purchasing power of a dollar. According to the U.S. Bureau of Labor Statistics, the U.S. inflation rate for 12 months ending in February 2022 was 7.9%, the largest 12-month increase since January 1982.

What to do until inflation subsides? Below are 10 inflation-fighting work-arounds:

Review Your Budget- Track current income and expenses to clearly see the impact of inflation. For example, how much more you are paying for gas, utilities, and food than you did a year ago? Once you have a number, see if you can “find” it via increased income and/or reduced expenses. In other words, try to “claw back” the amount inflation has taken away.


Substitute to Save: Non-Food Items- Consider purchases of clothing, furniture, housewares, electronics, and more at thrift shops, garage sales, and online sales platforms such as Facebook Marketplace, Etsy, Craigslist, Nextdoor, and eBay. Not only will prices likely be lower than new items, but purchases will be available now without any supply chain delays.


Substitute to Save: Food Eaten at Home- Consider eating less of items that have risen sharply in price (e.g., beef, pork, poultry, eggs, and cereal) and more items with modest price increases, consistent with dietary guidance from your doctor. Another option is to consider store brands of inflated items (if they are less costly) or to stock up on items during sales.


Substitute to Save: Food Eaten at Restaurants- Try to “claw back” the higher cost of entrees that restaurants are now charging in response to higher costs for raw ingredients and labor (cooks and servers). One easy way to do this is to order water, instead of alcohol or a soft drink, and skip the dessert. Some restaurants also reduce prices if you pay with cash.


Time-Shift to Save- Try using energy for “elective” tasks at less expensive “off-peak” hours. For example, many utility companies have “time of day” meters and price structures that reward consumers for doing laundry or dishes at night and on weekends. Ditto for doing anything at less crowded (and expensive) times such as traveling by air or attending events.


Change Habits- Consider one or more of these money-saving strategies: turn the thermostat down a degree or two, consolidate errands to reduce gas consumption, turn off lights when they are not being used, shut down electronics with a power strip, do full loads of laundry and dishes, wash clothes in warm water, air dry dishes, and take shorter showers.


Review Your Portfolio: Try to earn the minimum rate of return (MRR) needed to stay ahead of taxes and inflation as an average savings/investment return. The MRR formula is inflation % rate ÷ 100 minus marginal tax bracket. For example, with a 6% inflation rate in the 22% marginal tax bracket, the MRR is 7.7% (6 ÷ .78). Some investors seek out inflation-indexed investments such as Series I savings bonds and inflation-indexed bonds and bond mutual funds. The best way to achieve positive, long-term, real (after inflation) returns is to build a diversified portfolio with different types of securities.


Review Your Debt- Expect that interest rates will typically rise to “cool down” inflation resulting from high consumer demand. Therefore, existing variable rate debt (e.g., mortgages, credit cards) will likely cost more (i.e., higher monthly payments). Strategies to address this concern include refinancing to a fixed-rate loan and accelerating debt repayment.


Postpone Purchases- Try not to purchase items impacted the most by pandemic-related inflation, at least right now. For example, new vehicles affected by the chip shortage and used vehicles affected by the shortage of new vehicles. Wait for prices to settle down if you can. Ditto for home improvements with highly inflated lumber, materials, and labor costs.


Reframe the Positives- Not everything about inflation is “gloom and doom.” Consider these three positives: 1. Inflation erodes the value of existing debt (i.e., loans are paid back with money that is worth less), 2. Inflation underlies cost-of-living adjustments (COLAs) such the 5.9% increase in Social Security benefits in 2022, and 3. Not everyone is impacted by inflation in the same way. For example, older adults typically spend less than others on gas and new/used cars.

This post provides general personal finance 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.




Thursday, March 10, 2022

Ten Things to Know About Target-Date Funds

Target-date funds (TDFs), which are frequently described as a “set it and forget it” approach to investing for retirement, have grown in popularity during the past two decades. Below are ten “need to knows” about investing in TDFs:


How They Work- Target-date funds hold a mix of stocks, bonds, and/or cash equivalent assets and gradually become more conservative (read: a smaller percentage of stock in the fund portfolio) and income-oriented as the “target date” (e.g., 2050) approaches and, once it is reached, going forward. The mix of securities within a TDF changes over time.


Where They Are Used- Target-date funds are a frequent “menu” option for workers to select in tax-deferred employer retirement savings plans. For example, federal government workers have “L Funds” in the Thrift Savings Plan. TDFs are also a popular “default option” for retirement plans where workers are enrolled automatically unless they “opt out.”


TDF Logistics- TDFs are built on the long-standing assumption that investors should have less stock and more fixed-income securities in their portfolio as they get closer to retirement age. Asset allocation changes are made automatically for them. The target dates in TDFs are generally provided in five- or ten-year intervals (e.g., 2030, 2035, 2040, etc.).


TDF Glide Paths- “Glide path” is the planned changes in asset class (e.g., stock and bond and cash equivalent assets like money market fund) weightings over time as a TDF approaches its target date and beyond. Glide paths and, hence, stock and bond allocations vary among TDF providers and should be compared side-by-side for TDFs with the same target date.

More About Glide Paths- Three key elements of a TDF glidepath to compare are the initial equity allocation, the slope of the glidepath (how much and how frequently asset allocation changes), and the equity landing point. This is the date when the equity (stock)-to-fixed income ratio remains unchanged throughout the remainder of an investor’s life.

TDF Fees- Many target-date funds are “funds of funds” that create their portfolios by investing in other mutual funds. With these funds, investors pay two sets of expenses for the fund itself and its underlying funds. The lower the expense ratio (expenses as a percentage of fund assets), the lower the cost to investors so they keep more of what they earn.

TDF Advantages- TDFs provide diversification across asset classes and time intervals to meet a variety of planning needs. Investors can buy TDFs in taxable or taxable or tax-deferred accounts. Many have low required minimum deposits and fund managers make all asset allocation decisions. TDFs offer a low-maintenance starting point for new investors.


TDF Disadvantages- As with any investment, TDFs can lose money. They also do not guarantee anyone a sufficient retirement income. TDF characteristics vary among investment companies, which can make “apples to apples” comparisons difficult. In addition, certain glide paths may leave investors exposed to more risk than they want.


Investor Flexibility- Investors planning to retire in between two TDF target dates can choose the nearest date (up or down). For example, if planning to retire in 2042, they might select a 2040 TDF or a 2045. If someone is a conservative investor, they might decide to “go shorter” (2040), while a more aggressive investor might “go longer” (2045 or beyond).

TDF Selection Criteria- Like any mutual fund, there are three key factors to consider when selecting a TDF: 1. the fund’s composition and investment style, 2. historical performance, and 3. fees and expense ratio. Small differences in fees can translate into large differences in returns over time.

For additional information, check out this webpage from the U.S. Securities and Exchange Commission.

This post provides general personal finance 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.



Friday, March 4, 2022

Thirteen Tax Topics for Older Adults

 Personal finances can get complex for many older adults with multiple streams of income, the need to create a retirement “paycheck,” Social Security benefits, required minimum distributions, and more. All of these events impact income taxes. 

This post describes thirteen tax-related topics (in no particular order) that people should be familiar with in later life.


Required Minimum Distributions (RMDs)- Taxpayers with traditional IRAs, SEPs (self-employed), and employer retirement savings plans (401(k), 403(b), 457, and TSP) must begin annual RMDs upon reaching age 72. At this point, RMDs are added to taxable ordinary income. RMDs are reported to taxpayers and the IRS on form 1099-R. Income taxes on RMDs need to be planned for with tax withholding by the plan custodian or quarterly estimated payments to the IRS.


Qualified Charitable Distributions (QCD)s- Taxpayers aged 70 ½+ can donate RMDs from their traditional IRA to a qualified charity. QCDs count toward  RMDs, thereby reducing taxable income. QCDs are made directly from the IRA custodian (e.g., a mutual fund company) to the charity. The maximum annual exclusion for QCDs is $100,000 ($200,000 for married couples filing jointly). Funds must be withdrawn by the RMD deadline: December 31 of each tax year.


Increased Standard Deduction- Taxpayers age 65+ (and those who are blind) get an increased standard deduction on federal income taxes. For singles in 2022, the standard deduction is $14,700 ($12,950 + $1,750 additional for age 65+). For married couples filing jointly, the standard deduction is $28,700 ($25,900 +$1,400 x 2 or $2,800 additional).


Form 1040-SR- This tax form was designed for taxpayers age 65+, who can use either the standard Form 1040 or Form 1040-SR, which uses larger type and highlights tax benefits for older adults, such as a “standard deduction chart” that lists the larger standard deductions available to older taxpayers by filing status (single, married filing jointly, etc.). Taxpayers do not have to be retired to use Form 1040-SR and it can be used whether they itemize or take the standard deduction.


Taxable Social Security Income- Income ranges for taxation of Social Security benefits are not inflation-indexed so more older adults pay taxes on part of their benefit each year. Up to 50% of Social Security income is taxable for singles with a combined income (adjusted gross income + non-taxable income + ½ of Social Security benefit)  of at least $25,000 and couples with a combined income of at least $32,000. Taxes rise to 85% of Social Security benefits for singles earning at least $34,000 and couples with a combined income of at least $44,000.


Catch-Up Savings Contributions- In 2022, workers age 50+ by year-end can contribute an additional $1,000 to a traditional or Roth IRA for a maximum contribution of $7,000. This same group of older workers can contribute an additional $6,500 to an employer savings plan (401(k), 403(b), 457, and TSP) for a maximum contribution of $27,000. Over 10 to 20 remaining years of an older worker’s career, the additional amount that can be saved is impressive.


Income-Related Monthly Adjusted Amount (IRMAA)- IRMAA is the additional Medicare Part B and Part D premium charged to higher earners. It is based on modified AGI from two years prior (e.g., 2020 tax returns for 2022 premiums). In 2022, singles who earned $91,000 or less or couples filing jointly who earned $182,000 or less pay the standard $170.10 Part B premium. Above that, there are five income ranges with monthly premiums from $238.10 to $578.30.


No More Early Withdrawal Penalties- Once taxpayers are age 59 ½, they are no longer subject to the 10% early distribution tax (penalty) for withdrawals from IRAs, SEP plans, and employer retirement savings plans. This provides flexibility to withdraw money anytime in the 12 ½ years between age 59 ½ and when RMDs must begin at age 72.


Death of a Spouse- While this can happen at any age, it is more common in later life. In the year of a spouse’s death, the surviving spouse can file as “married filing jointly.” After that, unless survivors meet the criteria for two years of qualifying widower status, they must generally file as single for the year following the death. This can unleash all sorts of tax implications including a higher or lower marginal tax bracket and IRMAA payments and changes in tax withholding.


Income Tax Scams- Again, while scams can happen at any age, older adults are often frequent targets because they have greater accumulated wealth and may be more trusting and easier to contact. Common tax scams ask victims to disclose their bank account information for a fake “deposit” or make immediate payments with prepaid debit cards or wire transfers. Another common scam is using victims’ stolen Social Security numbers to file false returns to obtain refunds.


Medical Expense Tax Deduction- This itemized deduction can be taken at any age, but may be more valuable to older adults with increased medical expenses in later life. Qualified unreimbursed medical expenses that exceed 7.5% of AGI can be deducted on Schedule A. For example, with an AGI of $40,000, expenses exceeding $3,000 ($40,000 x 0.075). Expenses such as false teeth, hearing aids, glasses, wheelchairs, and premiums for long-term care insurance qualify.


Larger Account Balances- For older adults who saved/invested for 4+ decades, accumulated assets bring tax concerns (I hesitate to call large accounts a “problem”) they didn’t have when they were younger. This includes portfolio rebalancing large dollar amounts (within tax-deferred accounts can avoid immediate taxation) and large capital gains distributions from mutual funds (e.g., when you own thousands of shares vs. a few hundred). This speaks to the need for adequate tax withholding and tax diversification (ownership of assets in a combination of taxable, tax-deferred, and tax-free accounts).


Tax Rules and Resources- Older adults can earn slightly more money than those under 65 before they are required to file a tax return. The tax filing threshold for 2021 taxes due in April 2022, is $14,250 for single filers age 65+ (vs. $12,550 for younger taxpayers) and $28,500 for a married couple with two spouses age 65+  (vs. $25,100 for younger couples). As for income tax resources, there is an income-based tax credit for low-income older adults that requires the use of Schedule R. In addition, the Tax Counseling for the Elderly (TCE) program offers free tax help to taxpayer age 60 or older.

This post provides general personal finance 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.



Loud Budgeting: A Financial Discipline Strategy

  Have you heard the term “loud budgeting?” It started gaining traction earlier this year on TikTok (where else?) and has been covered by fi...