Matthew Krantz

Article / Updated 08-31-2023

Protecting your retirement funds from disaster is a critical part of retirement planning. That’s where insurance comes in. You want to make sure your plan can withstand an unexpected event. Typically, health scares are the culprits in disrupting a plan, but home and auto accidents can be major expenses, too. Find your insurance declaration pages. These documents will tell you how much coverage you have, which you’ll need to evaluate your plan and make certain you’re protected. Check property and casualty coverages If you’re planning for retirement, it’s important that you have in place the right amount of automobile and homeowner's (or renter's) insurance coverage, in addition to healthcare coverage: Automobile insurance: Your car can be the source of enormous financial losses, not only to your vehicle but to someone else's vehicle and other personal property. Additionally, the financial hit from injuries can wipe out a financial plan overnight. If you’re nearing retirement age, you likely have significant assets to protect. Simply accepting the minimum coverage required by your state is likely not enough. Homeowner's (or renter's) insurance: If you own your home, it might be one of the pieces of bedrock in your financial plan. If you don’t have rent or a mortgage, you’re well ahead of those who spend 30 percent of their budget for housing. Protecting your home from a devastating fire or other catastrophe is important. Don’t count on the insurance company to verify that you have enough coverage. Renters insurance can help safeguard your personal belongings. Insurance needs remain fairly unchanged as you near retirement—you need to protect your home whether you’re 34 or 64. But one factor that you might want to modify as you age is your deductible. Your deductible is how much of a loss you’re responsible for in an accident. Let’s say your car sustains $1,500 in damage. If you’re young, you might not have the financial resources to handle a large hit and so you opt for a lower $250 deductible. The lower deductible comes at a cost, in the form of a higher monthly payment. As you age, however, you probably have a larger financial reserve. One easy way to save money on insurance is to push up your deductible to $1,000 and save on your monthly premiums. Log into your insurance provider’s site, as shown, to see whether a higher deductible is available. You’ll also want to double-check that the limits are appropriate. Get ready for a rainy day: Umbrella insurance Knowing your coverage limits on your automotive and homeowner’s insurance policies unlocks the next phase of insurance. As you age and amass more money, you have more at risk from a big accident. Not only do you have more money to lose, you have less time to recover from a financial blow. After looking at your limits on your homeowner’s and automotive plans, you might see a disconnect. If your net worth exceeds your insurance limits, that’s a red flag. If you’ve accumulated a big nest egg, you don’t want to see it evaporate if you’re caught in a massive car pileup on the freeway. Similarly, if someone gets seriously hurt on your property, lawsuit damages can be enormous. How do you protect yourself other than never leaving the house or never inviting someone over to visit? Enter umbrella insurance, which unlocks millions of dollars of extra coverage beyond what your homeowner’s and auto policies cover. Umbrella policies don’t kick in until the limits of your homeowner’s and automotive policies are exceeded. Because the umbrella policy doesn’t pay anything until your homeowner's or auto policy’s limit is topped, the rates on umbrella policies tend to be reasonable. It’s common to buy $1 million of coverage for $100 or $200 a year. It’s a small price to pay for such a large amount of protection and peace of mind. How much umbrella coverage to you need? You could figure it out yourself, but I like Kiplinger’s How Much Umbrella Insurance Do I Need? calculator. The calculator, which is shown here, helps you buy just enough umbrella insurance to safeguard you from a major financial shock. To use the calculator, start with your net worth and work backwards: Enter your net worth. Your net worth is the value of what you own minus what you owe. To err on the side of safety, consider buying an umbrella policy valued at your net worth. Yes, some of your money is protected against creditors, as you’ll see in Steps 2 and 3. But when you take the money out of protected accounts, such as retirement accounts, it’s exposed. This approach isn’t necessarily recommended, but it's a conservative way to go. Enter your home equity value. The equity value is the market value of your home minus mortgages or loans. Most states protect at least some of your home equity. The Kiplinger calculator can tabulate how much of your home equity is at risk. Enter your retirement plan balances. Enter the value of your retirement plans, including 401(k), IRA, Roth IRA, SIMPLE IRA, and SEP IRA. Assets held in these accounts are protected from creditors. Set a limit to your homeowner's and auto policies. Remember that your auto and homeowner’s liability coverage pays injury claims first. Most umbrella policy insurers will require your homeowner's liability limit to be $250,000 or higher. And you’ll likely need to have a per-person liability limit on your auto policy of $250,000 or more and $500,000 per accident. You’ll usually get the most bang from your insurance buck if you raise your auto and homeowner's liability limits to the lowest required by your umbrella policy provider. Because you buy umbrella coverage in giant $1 million chunks, you can usually boost your total protection at a lower cost with an umbrella than with homeowner's or auto policy limits. Also, to save money on premiums, see if you can get your umbrella policy from the same company that provides your auto and homeowner’s policies. It’s also easier to coordinate payments from a single company. Protect your family with life insurance Thinking about all the things that can go wrong in life is no fun. That’s why I left the chapter on insurance for the end of the book. Planning for retirement should be fun. It gets you thinking about what’s most important in life and how to enjoy what you have for as long as possible. But you need to prepare for unhappy events, too. Understanding the benefits of life insurance Life insurance isn’t for you. It’s for your beneficiaries. You buy a life insurance policy on your life with the idea that it will cover your financial role if you pass away. Life insurance is especially critical when you’re starting a family. If you’re the primary breadwinner and you die, imagine the financial hardship your family would suffer. To combat this potentially cataclysmic crisis, you can buy a term-life insurance policy. By agreeing to pay an annual premium, if you were to die in a certain amount of time (or term), the insurance company agrees to pay out a pre-determined sum of money. The premium is the fee you pay to keep the policy active. Life insurance is there only to take care of people who count on you financially, after you die. If you’re not supporting anyone financially, you probably don’t need life insurance. Also, other forms of life insurance wrap savings and investment plans in with the death benefit. These plans are called whole-life plans. Whole-life plans might make sense for a subset of people, but they’re so complicated and potentially expensive that you should consult with an expert before buying one. Or you could just buy a term-life insurance policy and keep it simple. Estimating how much life insurance you need If you decide that you need life insurance, the next question is how much coverage you require. Some excellent online calculators, such as the following, can help you make the calculations: LifeHappens Calculate Your Needs calculator: Steps you through the important questions you need to answer to decide how much life insurance coverage you need. As you can see in Figure 16-8, the site shows you the two variables that determine how much money your dependents would need if you died and in the future. The site helps you measure both. LifeHappens Human Life Calculator: Puts a price tag on your existence by showing how much of a financial blow your family would suffer if you died today. Putting a price tag on your life is another way to think about your life insurance needs, as you can see in the sidebar, “What’s a Life Worth?” The calculator is an eye-opening tabulation of what a human life is worth. Bankrate Life Insurance Calculator: Looks at the question of how much life insurance you need in a slightly different way. Most life insurance calculators differ in their approach, so it’s a good idea to run your numbers through a few. Don’t fixate too much on how much life insurance you need. The biggest question is whether or not you need it. And if you do need it, don’t waste any time. Just buy it. An easy rule-of-thumb on how much you and your spouse collectively need is to buy? You’ll want a policy with a payout that’s 10 times your combined household income. Buying life insurance Talk about a tough sell. How would you like to buy something that costs you money every year, doesn't benefit you personally, and pays out only if you die? Not exactly uplifting. That’s why the moment someone hears that you’re interested in buying life insurance, sellers will come out of the woodwork to sell you a policy. Just search for life insurance online and you'll get life insurance ads on your screen for months. If you do decide that you’re ready to buy a policy, first check with the carrier that provides your auto, homeowner’s, or umbrella coverage. Most also sell life insurance and provide a multi-policy discount. In addition, online insurance forums, such as LendingTree.com and SelectQuote, will shop your insurance needs against a network of bidders. You can then compare coverage and prices to get the best combination for you.

Article / Updated 03-04-2020

Keeping track of your pension, which is important for planning your retirement, isn’t as easy as logging onto your online brokerage. Most companies are eager to get out of the pension business, so they farm the entire thing out to firms that specialize in pensions, such as Willis Towers Watson. If you need to call for pension help, you'll probably be talking to people who work for the firm your employer hired to handle the pension plan. However, the site operated by the pension firm will usually look like it’s run by your employer. How to use online tools Getting logged into your company’s pension plan usually takes a bit of a work. You might need to call your employer’s human resources department. Then, if your employer has outsourced their pension plan management, you'll probably be handed off to the company running the pension plan. Most pension systems will allow you to look at the following information: Pension estimate: By entering your dates of employment, age, and beneficiary information, the site will tell you the payment you can expect when you retire, as shown in the following figure. As you can see in this example, the single-life annuity results in the largest monthly payout of $641.39. When you add a 50 percent survivor annuity, you’re looking at a monthly payment of $603.54. The survivor annuity payment is smaller than the single-life payment because the payments are likely to last for a longer period of time. Why? When the pensioner who worked at the company dies, a payout continues to the surviving spouse, who gets only half the payment, just $301.77. Lump sum calculator: The pension site should also show your lump sum payment if taken now versus later. This information will help you decide which choice to make. Scenario analysis: Pensions are complicated, with many variables affecting your payout amount. To help you understand the complexities, most pension sites offer scenario analyzers. You enter different retirement ages and whether or not your spouse will get benefits. The scenario analysis calculator then shows how these different choices affect your payout. You don’t have to be retired to take money out of a pension. If you leave a company, you can activate monthly payments or take a lump sum. However, your payments will be reduced if you start taking them before reaching full retirement age. Also know that if you take a lump sum payout and don’t roll it over into another retirement account, you might trigger a nasty tax surprise. How to calculate the value of a lump sum payment One of the trickier decisions with pensions is whether you should take monthly payments or the lump sum. The pension's website can help you make this decision. Although your decision is final, a workaround exists. You can create your own pension, in a way, by using your lump sum payout to buy an annuity. By using both your pension provider’s site and an annuity pricing site, you can easily put some numbers around this complex decision. Here’s how: 1. Use the pension's online tool to get your lump sum payout. Let’s say a 48-year-old worker left a company and wants to take her pension with her. As shown in the figure, her lump sum payout is $70,897.10. The monthly payout amount is $338.46 for a single-life annuity and $337.62 for a ten-year certain and continuous annuity. 2. Go to an annuity pricing site, such as www.immediateannuities.com and do the following: a. Enter the lump sum information. b. Enter your pension details and select the immediate payment option. For the amount to invest, enter the lump sum payout from your pension site. I entered $70,897.10. 3. Compare the monthly payouts. As you can see in the following figure, the monthly payout from the pension plan is higher than what our retiree can buy in the open annuity market. Using the lump sum amount, the payout from the privately bought annuity is $280 for a single life, which is 17 percent less than the pension payout. Similarly, the pension payout with the ten-year certain option is $675 a month. But with the annuity provider, it’s 6 percent less, or $637 a month. 4. Get another estimate. You wouldn't get only one medical opinion for a serious health condition, would you? The same is true for deciding what to do with a pension. Many online brokerages and mutual fund companies, such as Vanguard and Fidelity, tell you what size payment you’d get in exchange for a lump sum. For information on annuities, go to Vanguard's site, Fidelity's site, and Schwab’s annuity site (see the following figure). It’s typical for the payouts from a pension plan to be higher than what you can buy on your own from an annuity. An annuity has fees whereas an employer-sponsored pension doesn't. However, don’t make your decision solely on the size of the lump sum. If you’re young, you could easily invest the lump sum, and then, years later when you’re looking to retire, buy an annuity with the now-larger amount of money. Rolling over a pension Never assume you’re trapped in a pension. And that’s a good thing because many workers tend to not stay at the same job for more than five years. When you leave a job, you can take the pension with you by rolling it over. The rules around rolling over a pension are strict. Even a small mistake can make the lump sum you take from your pension a taxable event. You must rollover the pension into a qualified retirement plan, which for most people means a rollover IRA. Depending on how long you worked at the company, a rollover is likely a good option. You might consider rolling over your pension if you Know the pension won’t grow: Check the pension's documentation. Many pensions provide only a modest cost-of-living annual adjustment, which is just the inflation rate. If you put the money into a diversified portfolio of stocks and bonds, your portfolio will likely grow much faster than inflation. Don’t expect to retire in many years: The longer the amount of time you have to put your money to work, the better. If you don’t plan to retire in ten or more years, you still have time to put your portfolio into areas that are likely to grow faster. Have other forms of guaranteed income: If you have other options for a steady cash flow, it makes sense to try to get a better return from your pension assets. If you don’t have another form of guaranteed income, you can buy one, such as an annuity, by using other savings. How do you conduct a rollover from your pension to a qualified plan? The steps are straightforward: 1. Set up a rollover IRA. All the major online brokerages and mutual fund companies can help you with this task. 2. Initiate your distribution with your pension provider. Most pension providers’ sites allow you to begin the distribution process. You’ll need to take the lump sum distribution method. The pension provider will mail you paperwork to fill out. 3. Fill out the paperwork from the pension provider. Your spouse will need to sign a benefit waiver for you to get the lump sum. 4. Make sure the check is made out to the company you’re rolling into. This step is important. The pension lump sum amount must be made out to the financial firm where you have your rollover IRA. The check should not be made out to you. Depositing the lump sum and then immediately writing a check to the rollover IRA provider will not work. The Internal Revenue Service will think you took the money and want to tax it.

Article / Updated 03-04-2020

When you turn 70-1/2, you’re no longer allowed to contribute to a traditional IRA. You can contribute to a Roth IRA at any age as long as you have earned income below limits dictated by the IRS. Remember that earned income is money you make from reportable income-producing activities—in other words, a paying job. Gearing up to take money out of your IRA requires a change in mindset. Fortunately, your IRA provider can be of help here, too. Getting money out early: 72(t) distributions Taking money out of a traditional IRA before you turn 59-1/2 is generally a no-no with retirement accounts because it triggers a bad tax day. You owe not only the taxes on the money you took out but also a 10 percent early withdrawal penalty—unless you know the 72(t) trick. This rule is named after an arcane section of the IRS code that says you can take money out without a 10 percent penalty if you do so in “substantially equal periodic payments.” You must take out the distributions, in equal amounts, for at least five years or until you turn 59-1/2. You can calculate how much money you must take out in three ways: the required minimum distribution method, the fixed amortization method, and the fixed annuitization method. As you can guess from their names, the calculations are complicated. If you’re interested in a 72(t) withdrawal, your IRA provider can help. You can take money out of an IRA before you turn 59-1/2 without paying the 10 percent penalty in a few other ways, without invoking the 72(t). A big exception for the 10 percent penalty is when you’re permanently or completely disabled. In that case, you can take money out of both a traditional IRA and a Roth IRA. Also, if you die, your beneficiary can take withdrawals. Taking your required minimum distribution When you blow out a cake with 70 candles, know that in six months you’ll be in for a big change with your traditional IRA. That’s when Uncle Sam says it’s time for your required minimum distribution (RMD). It must be taken out before April 1 of the year after you turn 70-1/2. The RMD is calculated using a complicated formula based on your life expectancy. You must take your RMD from all of your traditional IRAs. This requirement is another reason to have your retirement money in one place; you’ll deal with just one annual check. As part of their service, most IRA providers will calculate your RMD. Vanguard shows the calculation in its RMD calculator, shown in the figure and available. Don’t ignore the RMD. If you don’t withdraw the RMD and pay the tax, you’ll owe a 50 percent penalty tax on the money you should have withdrawn. Yes, half will be gone in taxes. Most IRA providers calculate your RMD for you and even withhold some of the tax due from what you’re paid. IRA providers will even deposit the money into your account electronically — almost like a paycheck. Setting up a beneficiary Your retirement funds are there for you and your spouse, if you have one, or other beneficiary to enjoy later in life. Make sure that your IRA provider knows who to give the money to if you die before your beneficiary. Yes, you could do this in a will, but it’s a better idea to set up a beneficiary. Your beneficiary instructions will take precedence over a will. When you die, the IRA provider knows to shift the ownership of the IRA to your beneficiary. Listing beneficiaries on IRA accounts is so important that many IRA providers won’t let you fund an account until you choose a beneficiary. If you have a large or complicated estate or unusual wishes for where your money should go when you die, you might want to create a trust. A trust is a legal entity that can take ownership of assets and follow your instructions in distributing them. Consult with an estate-planning attorney or pick up Estate & Trust Administration For Dummies, 2nd Edition, by Margaret Munro and Kathyrn Murphy (Wiley). A word about inherited IRAs Don’t keep your IRA a secret from the beneficiary. After you die and your IRA passes to your beneficiary, new rules kick in. The beneficiary will need to contact the IRA provider and let them know you’re dead. Most IRA providers require a death certificate. The rules surrounding inherited IRAs vary based on whether or not the IRA is inherited by a spouse. If spouses inherit an IRA, they have a choice on how to take it over: Make it their own: Spouses can choose to take over the IRA in their own name. This allows spouses to contribute or take distributions as if it were theirs in the first place. Turn it into an inherited IRA: If you go this route, you’ll need to follow rules set out by the IRS, which have many options. A beneficiary who isn’t a spouse has only one avenue: transferring the IRA into an inherited IRA. Again, your IRA provider will help with the details. If you’d like to read more about how inherited IRAs are handled, check out Vanguard's description. Schwab shows all the inherited IRA rules, too.

Article / Updated 03-04-2020

Getting money into your IRA is where the magic begins. You can’t build a portfolio until a source of funds exists. IRAs give you not only big leeway in what investments you buy but also lots of control over how you buy those investments. Set up IRA deposits When you’re talking about putting money aside that you can’t touch for decades, it’s easy to understand why lots of people put off retirement savings. Let’s face it, blowing $800 on a new smartphone is more immediately satisfying than putting $800 in an IRA. IRA providers know this, and go out of their way to make it easy for you to get money into your account. You can make ongoing contributions to your IRA in two main ways: One-time contribution: The IRA provider lets you connect multiple checking and savings accounts to your retirement account. You can then tell the provider to digitally pull money from one or more of those accounts as a contribution. Vanguard’s one-time contribution screen, shown in Figure 8-5, asks you to choose the investment you want the money to go into. It also tracks your annual contribution to date. Automatic contribution: You can also tell your IRA provider to take money from a checking or savings account, say every month or quarter. This method puts your retirement plan on autopilot. It’s up to you to make sure your contributions meet the requirements and don’t exceed limits. If you’re covered by a retirement plan at work, the IRS spells out whether you can deduct your IRA contributions. If you make too much money, the deducible amount of your contribution is reduced or eliminated. In a nutshell, if you made more than $74,000 as a single taxpayer or $123,000 married filing jointly and are covered by a plan at work, you can’t deduct IRA contributions. Roll over Beethoven: IRA rollovers Another way to fund an IRA is a rollover. You might opt to rollover your old 401(k) from a previous place of employment, which can be a good idea if your old 401(k) has high fees or poor investment choices. You can rollover funds also from one IRA to another, although that process is usually called a transfer. Generally, it's best to keep your retirement accounts in as few places as possible. Consolidating your retirement funds with one IRA provider helps you qualify for lower-priced investments and makes it easier to keep track of your money. A rollover involves three steps: Fill out your IRA provider's rollover form. The form is usually short, asking for the account number and the provider holding the funds now. You’ll also be asked if you’d like to roll the funds into a new IRA or an existing one. Notify the 401(k) or IRA provider you’re moving from. Tell them you’re moving the money and where you're moving it. The provider will cut a check for the money. Make sure the check is made out to the firm where the money is going, not to you. If the money goes to you, the IRS might think you took a distribution and hit you with a tax bill. Wait. A rollover can take a few weeks. Your new IRA provider will let you know when the process has been completed. Fund an IRA with a Roth conversion With traditional IRAs, you get a tax break now. With a Roth IRA, you pay now but take out the money later free and clear. Guessing which will be best for you is difficult. In general, a Roth is a good idea if you think your current tax rate is lower than it will be when you’re retired. Roth IRAs are preferable also if you think you might need to pull the money out sooner than in retirement, or if you think you won’t need the money and want to leave it for a spouse or an heir. Traditional IRAs require you to take money out when you turn 70-1/2. With a Roth, you can leave the money in. Given all the guesswork in choosing a Roth IRA versus a traditional IRA, you might change your mind about the kind of IRA you want. That’s where a Roth conversion comes in. You can turn a traditional IRA into a Roth IRA if you pay the taxes now. Converting a traditional IRA to a Roth can make sense. It’s also a back door way to open a Roth for people who earn too much to fund a Roth. A Roth conversion has several drawbacks, however. You must wait at least five years after a conversion to take money out of a Roth. The conversion also triggers a tax event — you’ll have a tax bill on those tax-deferred contributions. Does a Roth conversion make sense for you? To answer that question, you can use a variety of online tools, including the following: Schwab IRA Conversion Calculator: This tool helps you think about all the important variables that determine whether or not you should convert to a Roth. These variables include the amount of money you’d like to convert and your taxable income. CalcXML’s Roth Conversion Calculator: This tool does all the math to see whether a Roth conversion makes sense. The calculator considers the size of the conversion as well as your age and income needs.

Article / Updated 03-04-2020

If you’re not online with your IRA provider, it’s time you were. If your IRA provider is keeping up with industry trends, you’ll be amazed at the digital resources available to you. You just need to know what to look for. It might seem tempting to skip the process of registering for online access of your IRA account. If you do that, though, you’ll seriously miss out. Yes, you could manage your IRA over the phone and through the mail. But even if you’re a hands-off investor, you’re much better off doing everything online. Be sure you know how to get online access to your 401(k)as well. How to open your IRA account Opening an IRA varies based on the provider, but you can expect a basic script similar to the following, which is the way Vanguard does it: Go to the IRA provider's website and find the button for opening an account. IRA providers make this button easy to find. On most sites, it's in the upper-right corner of the screen. Choose a new account or a rollover. Remember, you can always open a brand new IRA account if you’re just getting started. But if you’ve been saving for retirement somewhere else, you can rollover, or transfer, money from a 401(k), another IRA, or sometimes even a pension. Show me the money. The first thing the IRA provider will want to know is how you’ll fund the account. You can electronically move money from a checking or savings account. You can also rollover from another plan or transfer securities you own elsewhere. If you're funding your account through your bank, you need your bank account information. Do one of the following: If you already have another account with the IRA provider: You might have an older account with the IRA provider. If you do, sign in. By opening the new IRA with your existing login information, you'll avoid typing lots of information all over again. It’s also easier to manage your accounts if they’re associated with the same username. If you’re opening a first account with the IRA provider: Be prepared to answer a bunch of questions. You’ll need to enter information about yourself, including a Social Security number and address. Choose the type of account: You need to know the type of account you want to open. You'll be asked if the account is for retirement, general savings, or education (as shown in Figure 8-1). If you choose a retirement account, you’ll be asked if you want a traditional IRA, Roth IRA, SIMPLE IRA, or SEP IRA. Answer questions, set up funding, and e-sign. You’ll be asked to enter the amount of your initial investment. If you’re opening an account with this IRA provider for the first time, you’ll also need to enter a username and password for online access. Wait. Some IRA providers will open your account immediately if everything you entered checks out. Others, such as Vanguard, confirm your information, which can take a day or two. Log in and look around The long road to setting up your IRA is over and you're now an IRA owner. How cool is that? Next, it’s time to see what you can find on the IRA provider’s site. The list is long: Account information: All IRA sites can tell you how much is in your account (your balance) and your investments, or Account activity: Any time you put money into (contribute to), your IRA or take money out of (withdraw from), your IRA, the transaction is recorded. Your account activity shows the comings and goings of the money in your account. Money can come into or go out of your account, even if you’re not putting it in or taking it out. Is your long-lost rich uncle putting money into your IRA? Nope. If you own stock in a company that makes a profit beyond what it needs, the company might pay you, the investor. These payments are called dividends and appear in your account activity. What about money coming out? Fees. The IRA provider might take money out of your account for account-servicing costs. If you own mutual funds, the (sometimes large) fees they charge won’t appear in the account activity listing. Mutual fund fees are taken out of the fund itself. Performance: Remember getting a report card when you were a kid? Your IRA's report card is its performance tracking. Here you see how much your IRA is growing or shrinking during the year and over the long term. Asset mix: Your asset mix, or asset allocation, is the combination of asset classes in your portfolio, such as stocks and bonds. The more stocks in your portfolio, the riskier your portfolio but the more it's likely to grow in the long term. Understand your portfolio holdings If you want to dig deeper into what you own in your IRA, look for an area called Holdings. In this section, you’ll find the following important attributes of the investments in your account: Summary: Here you’ll find the name of each investment you own and its symbol. Mutual funds and other investment funds are identified by a multi-character abbreviation, or symbol. This symbol is useful if you want to look the fund up using a third-party site. Returns: The amount of money you make or lose from an investment is more than how much its price has changed. It’s also a tally of the dividends paid. The Returns section adds all this together. You can find your return on an investment during several time periods, such as one, three, five, and ten years. Cost basis: Your cost basis of an investment is how much you paid to buy it. If you paid $100 for a share of a mutual fund that’s now worth $110 a share, your cost basis is $100. If you sell the mutual fund for $110 a share, you have a realized capital gain, or profit, of $10. If you don’t sell the mutual fund but hold it, you have an unrealized capital gain of $10. Your IRA provider tracks capital gains for you. Tracking your capital gains is a big deal with taxable accounts but not with tax-deferred ones such as traditional IRAs. With a taxable account, you pay taxes on only your realized gains. But with an IRA, your entire withdrawal is taxable—even your cost basis because it hasn’t been taxed yet.

Article / Updated 03-04-2020

Many employers tout their 401(k) plans as a job perk. But, typically, you're on your own when it comes to setting up online access. In some ways, this situation is symbolic of how the responsibility for retirement planning has shifted to employees. Not only do employers want to scale back how much they contribute to your retirement, many don’t even want to help you manage the account. How to register for 401(k) access Most 401(k)s are established on paper. The paperwork you sign when you join a company opens the account and gives the 401(k) plan administrator the right to take money out of your paycheck. But you can’t do much with the account until you register for online assess with the 401(k) plan site. After that, you can see your balances, make changes, and evaluate how you’re doing. You might be surprised at some of the online tools you can pick up right from your 401(k) plan provider. Nearly all 401(k) sites offer useful calculators and information to help you better prepare for retirement. What kicks off the process of setting up 401(k) account access? Ironically, it’s probably snail mail. At some point after starting a job or signing up for a 401(k), you should get a letter in the mail from your 401(k) administrator with your summary plan description. This document, similar to the one shown, lets you know that the account is established and that you can set up online access. If you look closely, you’ll see a website address in the upper-right corner of the summary plan description in the figure. In this example, it’s www.voyaretirementplans.com. From here, you’ll want to follow these steps to register: Click the Register Now button. Just about all 401(k) sites put the button just below the log-in section, as you can see in this figure for the Voya example. Choose an identification method. Sites usually ask for either your personal identification number (PIN) or your Social Security number and date of birth. The PIN would have been sent to you in the mail. If you didn’t get a PIN, go with door #2, because you know your Social Security and birthday. Create your log-in information. You are asked to choose a username and password. Try to choose something difficult to guess—or better yet, use a password manager. Passwords are getting more complicated in an effort to keep hackers out. Choose a password that’s not a real word, and use a string of symbols, numbers, and uppercase and lowercase letters. Try to come up with something only you will know. For example, suppose you’re a Star Wars fan. Rather than using starwars as a password, use MT4ceBWY. (Get it? May the Force be with you.) Get to know your 401(k) tools The beauty of 401(k) plans is their hands-off nature. If you’re like many 401(k) investors, after you sign up for the plan, you don't want to think about it—and you certainly don't want to do is dig around the various features of the 401(k) provider’s website. But you might be surprised at some of the online tools you can pick up right from your 401(k) plan provider. Nearly all 401(k) sites offer useful calculators and information to help you better prepare for retirement. Using the tools on your 401(k) plan provider’s site is helpful because you already have log-in information with them, and many of the tools can be personalized because your details are already there. A few helpful tools to look for on your 401(k) plan provider’s site follow: Calculators: Most 401(k) providers will use your account details as inputs for calculators. You’ll likely find a contribution calculator that will tell you if you’re putting enough in your 401(k) to meet your full-year contribution goal. This tool is useful if you want to max out your 401(k), putting in the most legally allowed. The tool will also tell you what percentage you should take out of your paycheck to hit your annual contribution target. Also look for a retirement overview calculator. This tool helps you see how much money you should have when you retire based on your savings rate, income needs, and rate of return. Lastly, 401(k) providers offer retirement income estimate calculators. These tools look at how much you’re saving and your expected returns, and estimate how much income you might expect in retirement. Investing education: You’ll likely find useful articles and videos to coach you on the importance of diversification and asset allocation. You might also find information on related topics such as estate planning. Risk questionnaires: Some 401(k) sites feature basic questionnaires that will help you see how much risk you can handle. You’ll be asked how much you know about investing, how much volatility you can handle, and your age. Some 401(k)-planning sites use this information, paired with what the plan administrator already knows about you, to offer a possible asset allocation, as shown. Your asset allocation is the mix of asset classes expected to give you the best return for your level of risk. Typically, your appetite for risk is a function of how much volatility, or ups and downs in portfolio value, you can endure. For example, suppose that the target-date fund for your retirement year suggests a middle-of-the-road portfolio of 60 percent stocks and 40 percent bonds. But after taking the questionnaire, the 401(k) provider’s site might suggest a more aggressive portfolio with 70 percent stocks and 30 percent bonds. Check out your 401(k) performance Before you think about making your 401(k) work better for you, it’s wise to see how it’s doing so far. 401(k) provider sites help you track how much return you’re getting on your money. Measuring investment performance is important and something you should count on from your 401(k) provider. The results of the calculation tell you if your investment choices are delivering what you need to reach your goals. Performance statistics also tell you if you’re getting results that are at least keeping up with the average. If your portfolio returns are less than market returns, or indexes, that’s a big sign that you should optimize your 401(k). Most 401(k) sites will help you see your portfolio performance in two ways: At the fund level: Nearly all 401(k) plans have an Investments section. Here you can look up how the funds have performed over various time periods, including short periods (such as a month or year) and longer periods (such as five or ten years). The data is typically shown in a table like the one shown here. If you own only the 401(k)’s target-date fund, look up your particular fund in the investments list. This might be all the information you need to know how you’re doing. As a personal rate of return: 401(k) providers don’t just tell you how the funds in the plan have performed. They also keep track of how you have done. What’s the difference between the funds’ returns and your returns? Keep in mind that some investors spread their portfolios over multiple funds. They might also move money from one fund to another. The timing of your contributions matter, too. The personal rate of return incorporates all these factors to arrive at your total return.

Article / Updated 03-04-2020

Your IRA is an important part of your overall retirement plan. One of the great perks of using an IRA is the full control you have over it. You’re free to choose the financial firm you’ll work with and your investments. But this extra control means you’ll have to do some additional legwork to get things set up to your specifications. Don’t let the choices stymie you. Know what you’d like to own It might be tempting to call the usual suspects — the financial firms that always advertise their IRA services during golf matches. But first think a bit about what investments you plan to buy. The number of financial firms offering IRA services is almost infinite. All the big players and many smaller ones will let you set up an IRA. Most will also waive setup costs just to get you in the door. IRA providers are distinguished by their investment menus. You'll typically put the following investments in an IRA: Individual securities: If you want total control, consider choosing individual bonds or stocks. Rather than owning a mutual fund that holds hundreds of stocks, you might want to own the ten stocks you like best. Mutual funds: A mutual fund is the most common investment in IRAs. You put money into a fund that’s used to buy individual securities. You then pay a fee. With index funds, you own all the securities in an index, such as the Standard & Poor’s 500. With active funds, you pay fund managers to select the best investments. These funds usually cost more than index funds. Mutual funds are priced at the end of the day. Exchange-traded fund (ETF): With an ETF, you own a portion of a basket of investments. Most ETFs are based on indexes and have very low fees. ETFs are priced like stocks, meaning their value changes during the day. ETFs are increasingly popular due to their low fees and no minimum investment. If you want to actively trade individual stocks in your IRA, you might not get what you’re looking for from a traditional mutual fund company. Consider a discount broker instead. Similarly, if you like the products from a particular mutual fund company, you might want to work directly with that fund company to create an IRA. Keep your investment strategy in mind when you look at IRA providers. Choose someone to handle your IRA The company you choose to house your IRA is important because it will be your financial wingman. If you call just about any financial firm and ask if they’ll take your IRA, the answer will always be yes. IRA customers are dream clients. They invest large sums of money, typically have jobs, and usually don’t touch the money for a long time. And many don’t pay attention to the fees they’re paying. With that said, most of the firms you’ll want to consider for your IRA needs are in one of three main categories: mutual fund companies, traditional and discount brokerages, and robo-advisors. Robo-advisors are making waves in the IRA business. Originally, robo-advisors were a handful of tech startups with smart people who found a way to make the investing process easier. You’d go to a website and answer a survey, and the site would choose your investments and diversify your holdings. Robo-advisors measured your appetite for risk and spread your money over low-cost investments. But the world of robo-advisors has become blurry. Although many firms that are exclusively robo-advisors are still in action, mutual fund companies and brokerages are into the game, too. For example, mutual fund company Vanguard offers one of the most popular robo-advisor services. Keep the changing robo-advisors landscape in mind while considering which route is best for you. If you like your online brokerage, inquire to see if it offers a robo-advisor before moving your money to another firm. Mutual fund companies All mutual fund companies are happy to handle your IRA account, and most make the process as simple as possible. However, it’s difficult to paint them all with the same brush. For instance, just a few, such as Fidelity, have impressive technology tools. And only some mutual fund companies, Vanguard among them, have adopted innovations such as exchange-traded funds. If you’re interested in using a mutual fund company, you need to understand the advantages and disadvantages it offers for your IRA. The advantages of mutual fund companies follow: If you buy the company’s own funds, you can often avoid paying trading commissions. Customer service representatives have a good understanding of the investments. The companies typically have long track records. These firms are focused on long-term retirement plans. You won’t be urged to buy hot stocks or to trade. Some mutual fund companies offer excellent educational materials to help you avoid making short-term decisions that you’ll regret later. The disadvantages of mutual fund companies follow: You’re typically encouraged to use the offerings from just one fund family. This restriction might be a problem if you like, say, one fund company for bonds and another for stocks. Mutual fund companies are typically slow to innovate and might not offer some investments you're interested in. Their technology tools can be rudimentary. Popular target-date funds are made up of their own funds, which may or may not be the best for you. Some of the largest mutual fund players follow: Vanguard is the king of low-cost passive investing. The company’s founder, John Bogle, created the company based on the idea that most mutual fund companies spend too much money trying to beat the market, when so few reliably do. With a Vanguard IRA, you can invest in the fund company’s massive suite of best-in-class index funds. You can open an account with an initial deposit of $1,000. To buy many of Vanguard’s mutual funds, you must invest at least $3,000. There’s no cost other than the low Vanguard fund fees. And if you sign up for electronic documents, Vanguard will waive the $20 annual fee. Vanguard is a leader in increasingly popular exchange-traded funds (ETFs). You can buy them for no commission at Vanguard, and many ETFs don’t have minimum deposits. Fidelity shows that a mutual fund company can have major technology chops. The company’s website and mobile apps keep up with those offered by brokers and robo-advisors. Meanwhile, Fidelity is challenging Vanguard on the fees front. Fidelity offers a number of index mutual funds that do not charge an expense ratio, which is the annual fee you pay to own a fund and is measured as a percentage of how much you’ve invested. For example, if you have $10,000 invested and a fund has a 0.2 percent expense ratio, you'll pay a yearly fee of $20. Fidelity offers the Fidelity ZERO Large Cap Index Fund, which is even less expensive than the rock-bottom 0.05 percent annual fee charged by Vanguard’s comparable fund. Fidelity seems aware of its head-to-head competition with Vanguard, as you can see in the following figure. Fidelity also offers a range of actively managed mutual funds, which hire people who try to find stocks that they think will do better than index funds. These funds typically charge more than index funds, up to 1 percent. Rowe Price is a well-regarded traditional mutual fund company. What makes T. Rowe Price unique is that it focuses on actively managed funds. (It also offers a few index funds, but not as many as Vanguard or Fidelity.) Unlike some other actively managed fund companies, though, T. Rowe Price works directly with investors instead of only through financial advisors. The fees charged by T. Rowe Price funds tend to be higher than the fees for index funds. Some of the other mutual fund companies that offer IRAs, such as Franklin Templeton, work directly with investors to set up accounts. If you're interested in a particular mutual fund company, see if they work directly with individual investors. Some other large mutual fund companies, such as BlackRock, Invesco, and American Funds, typically work with financial advisors or brokerages. So, if you want a BlackRock fund in your IRA, you must hire an advisor to buy it for you or buy it yourself through a brokerage. You see how to do this later in the "Connecting with a Financial Planner" section. Traditional and discount online brokerages Sticking with a mutual fund company may be comfortable and convenient, especially if you opened an IRA because your employer doesn’t provide a 401(k). But using a mutual fund company for your IRA takes away one of the reasons why you may have opened it: control. Using an IRA allows you to be in the driver’s seat of your retirement. Buckle up! Following are the advantages of an IRA: You’re the boss. You can mix and match investment products from different providers. The brokers, especially discount online brokers, usually have best-in-class websites and apps. You have access to brokerage services. Many of these firms started as places to buy and sell stock. If you’re interested in online investing, you might want an account here. Many of these brokerages can not only hold your IRA but also help you with checking and savings accounts. Many brokerage firms have branches, so you can head to an office and meet with a person face-to-face. Online brokers are quick to add new features such as ETFs, robo-advisory services, and human help. Following are the disadvantages of an IRA: Commissions might be charged on investments you could get free elsewhere. This is especially true with some mutual funds. Brokers might steer you toward certain products. Some brokerages are more geared for online trading rather than long-term investing. Some of the major players are the most popular names in financial services: Charles Schwab: It’s hard to talk about do-it-yourself IRAs without mentioning Chuck. An industry pioneer, Charles Schwab has just about any product you could want. You can buy mutual funds, including thousands with no commission. You can open any type of IRA with no fees and no minimum requirements. The company also offers its own ETFs and provides a robo-advisor, as shown in the following figure. And if you want to buy or sell individual stocks to avoid annual fees charged by funds, you can do that, too. Schwab used to charge $4.95 a trade. But in late 2019, Schwab, along with most of the major online brokers, cut stock trading commissions to $0. If you buy any of the 500 ETFs in its Schwab ETF OneSource, there’s no commission. Schwab also has offerings for people who are not interested in choosing their own investments. Its Schwab Intelligent Portfolios, which is essentially a robo-advisor, will assess your risk appetite and put your money in Schwab ETFs to fit your goals. There’s no fee for the service, but there is a $5,000 minimum. You’ll also pay the fees on the Schwab funds, which may not be the lowest. If you want a more customized portfolio, you can use Schwab Intelligent Portfolios Premium, which costs $300 upfront and $30 a month thereafter. The minimum deposit is $25,000. Don’t be fooled by the so-called free nature of Schwab Intelligent Portfolios. You pay the underlying fees of the ETFs. Also, Schwab will put part of your portfolio in cash. That cash will get next to no return, which costs you in lost interest. For example, suppose Schwab puts $50,000 of your portfolio into cash. If you instead put that money in a savings account at 2 percent interest, you’d get roughly $1,000 a year in interest. TD Ameritrade: TD Ameritrade is another behemoth in the IRA business. The company, whose roots are in stock trading, is a leader in providing top-notch tools for monitoring your portfolio and the market. They also provide state-of-the-art stock and bond research tools. TD Ameritrade in 2019 cut its $6.95 per stock trade commission to $0. It also has no minimum and no ongoing fees. If you’re looking for more help, check out TD Ameritrade's Essential Portfolios, a robo-advisor that will put your money into low-cost ETFs to match your goals. You pay 0.3 percent a year for Essential Portfolios and up to 0.9 percent for more customized portfolios. Ally: Ally has rapidly grown from being an online bank to a legitimate option for retirement investors. Ally is focused on two types of retirement investors: do-it-yourselfers and those looking for a turnkey solution. If you’re a do-it-yourselfer, you can buy and sell stocks, including ETFs, for no commission. If you’re looking for more automated help, Ally offers its Ally Invest Managed Portfolios, a service that is essentially a robo-advisor. You answer questions about your financial goals and Ally puts your money in a number of low-cost ETFs. The service charges a 0.3 percent fee on your balances. E-Trade: This online brokerage firm has come a long way since its Super Bowl ads featuring a talking baby. Like TD Ameritrade, the company’s roots are in low-cost online stock trading, and it offers online stock trades for no commission. E-Trade has since broadened its offerings. In addition to the standard traditional IRA and Roth IRA, it also has an E-Trade Complete IRA that helps you manage withdrawals after you turn 59-1/2. You can choose from a number of prebuilt portfolios that match your risk tolerance. For an initial deposit of $500, you can build a portfolio made up of mutual funds. If you prefer ETFs, the minimum deposit is $2,500. You do not pay a fee for the portfolio, but you must pay each fund’s fee. For a 0.3 percent annual fee, E-Trade also offers a robo-advisor that is more customized than the prebuilt portfolios. You can choose from five sample portfolios. This option also gives you more control to increase or decrease investments to make your portfolio more or less aggressive. JPMorgan Chase’s You Invest: JPMorgan is competing aggressively with its You Invest offering. If you want to decide which investments you want, you can. The You Invest Trade offering lets you buy stocks and ETFs for $2.95. If you meet certain balance requirements, you may qualify for free trades. A separate offering called You Invest Portfolios is JPMorgan’s robo-advisor. You pay 0.3 percent of your portfolio balance, and JPMorgan puts you into its lineup of ETFs. What’s a bit different is that you don’t pay any fees for the underlying investments. For a summary of the offerings described in the preceding list, check out this table. Five Brokers to Consider for Your IRA Broker/Bank Stock Commission Commission-Free ETFs Available Robo-Advisor Fee (Annual) Charles Schwab $0 All trades free, including ETFs $0 for basic, $300+$30 a month for advanced version TD Ameritrade $0 All trades free, including ETFs From 0.3% to 0.9% plus investment fees Ally $0 All trades free, including ETFs 0.3% plus investment fees E-Trade $0 All trades free, including ETFs 0.3% plus investment fees JPMorgan Chase’s You Invest $2.95 (after the first 100 free trades) First 100 trades free; some customers get more free trades if they have other relationships with the bank 0.35% Most major banks offer their customers IRAs. If you already have a savings or checking account with a bank, see whether an IRA account at the same bank makes sense. You might get additional perks if your balance is high enough. Robo-advisors Online shopping has made it easy to get a Bart Simpson chess set delivered to your door the next day. Technology is trying to bring the same convenience to your IRA. Some financial firms are first and foremost robo-advisors. Betterment and Wealthfront were pioneers in the robo-advisor business, but they broadened their offerings as traditional brokers launched robo-advisory businesses. Why are online brokers opening their own robo-advisors? For people who don’t want to think about IRAs, a robo-advisor can be a good option. Just answer a risk questionnaire, and the system chooses a handful of investments that fit your risk profile. Most robo-advisors charge 0.3 percent or so a year, which is much less than the 1 percent or more charged by human advisors. In addition to simplicity, robo-advisors offer the following advantages: Automatic rebalancing: All robo-advisors, including those from the mutual fund providers listed in the “Mutual fund companies” section and the brokers listed in Table 6-2, handle rebalancing. This is the process of shifting money from one asset class to another if one is doing so well you own too much of it. Automatic tax-loss harvesting: If you’re losing money on an investment and sell it and then wait more than 30 days to buy it back, you might get a tax write-off. Most robo-advisors are smart enough to do this for you. Instant diversification: You know to not put too many eggs in one basket. The same is true for investing. You can let a robo-advisor handle it for you. Dollar investing: This perk is subtle. If you want to invest a set amount in your robo-advisor account, you can. The robo-advisor handles all the math on how many shares you can buy. No commissions on transactions: Typically, after you pay the annual fee, there’s no commission when you buy or sell. Most of these advantages of robo-advisors apply to the robo-advisory businesses of the brokers, too. Following are the disadvantages of robo-advisors: Fees: All this robo-magic isn't free. You can save money by doing everything the robo-advisors do, including rebalancing. A 0.3 percent fee might sound small, but it adds up fast. The fee is $300 a year on a $100,000 portfolio. If you don’t trade much, a broker might cost less. Little to no control: If you want any say in what you’re buying, a robo-advisor might frustrate you. Some robo-advisors allow you to customize what you’re buying, but fees might rise. Difficulty seeing what you’re buying: Robo-advisors can be a black box. You might know only that you’re buying a stock ETF or a bond ETF, not that you're buying an ETF from BlackRock, Vanguard, or State Street, or another provider. If you’re looking to team up with a pure-play robo-advisor, consider the following: Betterment: When you get to Betterment’s site, shown here, you immediately get a sense of its mission: simplicity. The site breaks down the three objectives you might have: Getting started for the first time, completely automating your portfolio, and having more of a say. Unlike some robo-advisors, Betterment gives you more control and lets you tweak its suggestions. Prefer to be 30 percent invested in bonds rather than the 40 percent Betterment recommends? You can change the allocation. Betterment’s basic offering costs 0.25 percent a year, plus the fees of the underlying investments. If you want access to a financial planner, you can get the Premium service for 0.4 percent. Wealthfront: Wealthfront is the chief pure-play robo-advisor rival to Betterment. Wealthfront is more focused on people who want total automation. It also adds some nice banking features. For instance, Wealthfront offers a high-interest savings account where you can put cash you don’t want to invest right now. Many brokers pay next to nothing for cash sitting in your account. The service charges 0.25 percent of the amount in your portfolio, including cash. Personal Capital: At first, Personal Capital looks similar to a money-tracking service such as Mint.com. It has two powerful tools: The financial accounts monitoring tool helps you pinpoint your spending, and the retirement planning tool looks at your balances and tells you how you’re progressing toward retirement. But Personal Capital is also an advisory service, including a robo-advisor. For a 0.89 percent annual fee, Personal Capital will recommend a portfolio of ETFs. Personal Capital also offers live financial planners who will help you online not only with retirement planning but also other goals. Acorns: When planning for retirement, you just have to get started—even if you have only a small amount to invest. Acorns takes this theory to the extreme. This robo-advisor lets you save and invest your pocket change. Acorns offers several services to help you with your spending and investing. And its Acorns Later service can give you a hand planning for retirement. It all starts with an Acorns debit card linked to an Acorns checking account. When you buy goods and services with your Acorns debit card, Acorns will round up the amount and invest the rest. If you buy a can of soda for $1.50, Acorns will round up to $2 and invest the 50 cents. You might decide to put this round-up money to work for retirement. If so, Acorns will recommend the right type of IRA for you. Everything is automatic, and Acorns will spread your money in a variety of ETFs, primarily from Vanguard. The Acorns IRA service is a reasonable $2 a month—until you’re a millionaire. Then it’s a pricey $100 a month per million invested. Bill Gates, you might want to put your IRA somewhere else. This table compares the major robo-advisors. Comparing Robo-Advisors Broker/Bank Account Minimum Robo-Advisor Fee (Annual) Betterment $0 for basic digital and $100,000 for premium 0.25% for basic digital and 0.4% for premium, plus investment fees Wealthfront $500 (more for additional services) 0.25% plus investment fees Personal Capital $25,000 0.89% for first $1 million invested Acorns Later $5 $2 a month with under $1 million invested, and $100 per million a month after $1 million

Article / Updated 03-04-2020

If you’re like most retired people, you and your partner will spend $285,000 for medical expenses in today’s dollars over the course of your retirement, says Fidelity Investments. And that doesn’t include the costs of long-term care, such as assisted living or a nursing home. To best prepare for healthcare costs in the future, begin by taking certain steps while you’re still working. For example, the Health Savings Account, or HSA, should be a critical part of your overall retirement plan. And don’t think all your medical costs will go away after you hit the magical age of 65 and qualify for Medicare. Fidelity found that 15 percent of retirees’ annual budgets is consumed by healthcare costs, including your Medicare premiums and costs that aren’t covered by Medicare. Most retirees also need to buy additional medical insurance. The best way to make sure healthcare costs don’t crush you is to prepare for them. The problem is that forecasting how much you’ll spend on healthcare in the future isn’t easy. Or is it? Fidelity offers a nifty online tool that will estimate your healthcare costs. You’ll step through a number of estimates, shown in the following figure, to arrive at a reasonable guess of what you might expect to spend in retirement on medical care. Unlock the health savings account One of the best ways to prepare for your medical costs in retirement involves taking smart steps while you’re still working. You might not think much of medical costs as an employee because your employer is picking up much of the tab. Annual healthcare premiums hit $20,576 in 2019 for a family, up 5 percent from 2018, says Kaiser. And of that amount, workers are generally responsible for paying $6,015. That’s just the insurance premiums. You'll also incur out-of-pocket costs, such as deductibles, ranging from $800 to $5,000 a year. What’s the solution? A fairly new innovation in medical savings that you can take advantage of while you’re still working is the health savings account, or HSA. An HSA is a unique account into which you can put tax-free dollars, as long as you’re in a high-deductible health plan. HSA are usually offered to you by your employer if you're eligible. If you’re looking to reduce taxes, you’ll be hard-pressed to beat the HSA. You get triple-tax benefits at the federal level. You put in money tax-free, the money accumulates and grows tax-free, and then you can take the money out tax-free as long as you use it for medical costs. Most states extend tax breaks on contributions, growth, and withdrawals, too. But California and New York, for example, don’t allow state tax-free HSA contributions. Also, state tax deductions don't exist in states that don't have income tax. Be sure to check your state’s HSA tax rules. Even so, you won’t find a better federal tax-shielded account that’s so widely available. Given the HSA’s superior tax status, if you’re still working and can swing it, you should put as much money in one as you can afford. If you can’t max out both your 401(k) and your HSA, you might put in enough in your 401(k) to get the most from your employer match. And with any money left over, you can contribute to your HSA. Seeing if you're eligible for HSA If you want an HSA, you must be enrolled in a high-deductible health insurance plan, or HDHP. The definition of an HDHP changes periodically; for 2020, it’s a plan with a deductible of at least $1,400 for an individual or $2,800 for a family. A deductible is the portion of medical costs that are your responsibility before insurance will pay. You can look up what defines an HDHP plan. When you’re signing up for a medical plan at work and would like to fund an HSA, look for a designation such as HSA eligible. And don’t confuse the HSA with the flexible spending account (FSA). With an FSA, you must use up the money in a 12-month period; HSA funds can remain until you use them. Understanding the limits of HSAs Like most tax-shielded accounts, the Internal Revenue Service limits how much you can put into an HSA. The contribution limits change annually and are lower than you’ll find for retirement accounts such as 401(k)s, but they 're high enough to add up over time. The HSA contribution limits for 2019 and 2020 are shown in the following table. HSA Annual Contribution Limits Year Individual Family Catch-Up (55 or older) 2019 $3,500 $7,000 $1,000 2020 $3,550 $7,100 $1,000 www.investors.com/etfs-and-funds/personal-finance/hsa-contribution-limits-hsa-rules/ and https://blog.healthequity.com/hsa-contribution-limits Keep in mind, though, that after you enroll in Medicare, you can no longer put money in an HSA. Using HSA money The money you put in your HSA can be invested much like your funds in an IRA. The money grows tax-deferred, shielding you from tax hits from dividends generated by your investments or capital gains. Investment options vary based on the HSA provider. A minimum HSA balance is usually required before you may invest in funds or stocks. When you do have enough money to invest, most HSA plans will offer you one of three choices: Full robo-advisor: Here you turn the management of the investments completely over to the HSA’s algorithm. The plan will select your investments, usually low-cost index mutual funds, and buy them and rebalance them for you. Fees can be upwards of 1 percent a year. Robo guidance: Some HSAs will tell you what they recommend, but you do the buying and selling. The HSA plan will typically recommend a mix of low-cost index funds. You’ll save some money with this approach, with fees up to 0.7 percent a year. But you’ll need to do the transactions and keep the account in balance. Self-guided brokerage: With this option, you’re on your own and decide which funds to buy. You'll save a bundle on fees by doing the work yourself and typically pay only the annual fees charged by the funds you choose. However, you can choose from only the funds and investments made available by the HSA provider. HSA accounts are flexible. You can take money out, tax-free, to pay for medical costs ranging from co-payments to eyeglasses, hearing aids, and other medical equipment. However, the money can't be used to pay for over-the-counter medication unless you get a prescription from a doctor. While you’re working, consider saving your HSA funds and paying for medical costs out of pocket instead. If you leave your HSA relatively untouched while you work, you can put the account’s tax shield to maximum use over time. So rather than using the $200 to pay for the X-ray, the $200 stays invested and can grow so you’ll have more money when you’re retired. Money taken out of an HSA for non-medical purposes before you turn 65 is socked with a 20 percent penalty. But wait until after you turn 65, and you pay only income tax on the withdrawal. If you think about it, that’s not so bad. After all, it’s no different from how money is treated when you take it out of a traditional IRA. To read about more ways to maximize your HSA for preparing for retirement, check out the blog from HSA provider Health Equity. Opening an HSA In nearly all instances, if you have a high-deductible plan with your employer, your employer will open your HSA. You can also open your own HSA. And if you had an HSA with a previous employer, you can transfer the money into another HSA account. If your employer offers an HSA, it’s best to simply use that one. Doing so will make it easier for your employer to make contributions and for you to make tax-free contributions straight from your paycheck. Keep an eye on any fees charged by an HSA plan. Many charge $2.50 a month unless you keep a minimum deposit of $5,000 or more. That doesn’t sound like much, but given that you’ll likely have your HSA a long time, the small fees add up. If you’re being charged excessive fees, it might be time to choose your own HSA. Investor’s Business Daily ranks the best ones. Medicare supplemental plans Three months before turning 65, it’s time to sign up for Medicare. You do this even if you’re not ready to start receiving benefits. You can find all the details about signing up for Medicare benefits. Many retirees think Medicare takes care of all their medical costs, but that’s far from the truth. You have to pay for your deductibles and co-payments. Need glasses, dental care, and hearing aids? Those aren’t covered. If these costs scare you, think about getting additional coverage. The drawback is the cost. I am not saying Medicare is worthless. Medicare Part A, which covers trips to the hospital, costs nothing annually if you worked at least 10 years. Medicare Part B, which handles doctor visits, and Part D, which handles prescriptions, are based on your income. Most people pay $136 a month for Part B and $33 a month for Part D. (You pay more if you earn more.) When you first enroll in Medicare, you can choose between the following: Original Medicare: Here you get Medicare Part A and Part B coverage. You can also join a separate Part D plan for drug coverage. Medicare Advantage (also called Part C): These plans include Part A, Part B, and Part D coverage and are offered by third-party insurers. You might pay less out of pocket with the Medicare Advantage plan than you would with Original Medicare if the limits are different. Some Medicare Advantage plans cost more if dental and eye coverage are included, too. If you’re worried about the out-of-pocket costs that Medicare might not cover, you can buy additional Medigap policies. Medigap covers items Medicare doesn’t. If you think that understanding Medigap could be an entire book, you’re right! The government’s free book on Medigap policies is the de facto and most accurate resource. You can download it for free. What if you decide you’d like to buy a Medigap plan, also known as a Medicare Supplement or Medicare Supplement Insurance plan? The Government can help you find a plan. Simply enter your zip code, and you’ll see all available Medigap plans. The screen details the plan type, coverage, and cost. You can drill down and get particulars by clicking the Plan Details button, as shown. Explore the exchanges If you’re not quite 65 and find yourself without employer-paid healthcare, you’ll need to do some planning. After all, you’d hate to have unexpected medical costs eat away at money you’ve saved and invested as part of your retirement plan. If you find yourself in this situation, you have a few options, including the following: COBRA: COBRA is government-mandated coverage that your employer must offer to you if you leave. COBRA will keep you on the company healthcare plan for at least 18 months (longer in some states). The catch? The employer no longer must make their part of the premium payments. The entire premium payment is your responsibility, and it’s not cheap. COBRA can be a good option if you leave a job in your early-to-mid 60s and are close to enrolling for Medicare. You’ll have access to the same physician network and your coverage will stay the same. COBRA might make sense also if you’re currently undergoing treatment and don’t want any coverage changes. Health insurance through your spouse: It’s common for your spouse’s employer to bar you from being on its health plan while you’re working. But if you’re not working, joining your spouse’s plan is a great option. Losing your job is usually a qualifying event for you to join the plan. You don’t need to wait until the end of the year’s open enrollment period. Affordable Care Act Marketplace Exchange: Major healthcare reforms in 2009 created an option for people who need health insurance. The system is surprisingly straightforward to use, given how long the idea was debated by Congress. First, go to gov to see if you’re eligible to enroll, as shown. The site will take you to a directory of all major medical insurers who participate in your state’s healthcare exchange. You can also shop for vision and dental plans. From your state’s exchange site, you can look up what available plans cover and cost. Given the highly personalized nature of healthcare, examine how much you typically spend on medical expenses to help determine the best option. It pays to take a close look at your typical healthcare spending, so you can match your needs with your plan. Consider a high-deductible plan so you can also open a health savings plan. Consider long-term care insurance When you hit your 50s and 60s, you have another insurance decision to make: whether or not to buy long-term care insurance. As mentioned, Medicare does not pay for all your medical costs, and those uncovered costs include nursing homes and other skilled care. Genworth, an insurance company, estimates that seven out of ten people will need long-term care during their lifetime. And the cost of long-term care is astronomical, as you can see in the following table. Cost of Long-Term Care Type of Care Monthly Median National Cost (2018) Homemaker services $4,004 Home Health Aide $4,195 Adult Day Health Care $1,560 Assisted Living Facility $4,000 Nursing Home (semi-private room) $7,441 Nursing Home (private room) $8,365 Genworth Financial Genworth has a tool to help you calculate long-term care costs in your area. Simply go to the website and enter your zip code. Given these sky-high costs, it’s only natural that pre-retirees or retirees want to hedge their bets. Enter long-term care insurance. With a long-term care insurance plan, you pay a premium, usually in your 50s and 60s, and the insurance company agrees to pick up part of the cost of care if you need it. Long-term care plans sound reassuring, but they’re not cheap. A single 55-year-old man looking for $200 in long-term coverage every day for up to five years would pay $3,094 a year in premiums. To look up how much a long-term care policy would cost, go to Genworth's calculator. In addition to deciding the number of years of long-term coverage and the amount of daily coverage, you decide whether you want an annual inflation adjustment. Long-term care costs are likely to only increase, so you might want at least a 2 percent annual inflation adjustment so your coverage can keep up somewhat. You also need to carefully research the financial strength and reputation of the long-term care insurer. Nothing would be worse than to land in a nursing home only to find out that your insurer won’t make the payments or find some reason to not cover your claim. Stick with reputable long-term care providers, such as members of the American Association for Long-Term Care Insurance.

Article / Updated 03-04-2020

Building a comfortable retirement is up to you. If you follow sound rules by saving as much as you can and maxing out your retirement accounts, your golden years will likely be pleasant. However, many perils can stand between you and a successful retirement. Some of these easily avoidable mistakes can severely injure your plans, resulting in the need to work longer than you expected or spend less than you’d hoped. Waiting to save You might think that your earning potential is infinite and you can worry about retirement savings later. But time is an investor's top ally. If you start saving early, you will amass more than a person who saves much more but later in life. Make life easy for yourself: Start saving now. You should save at least 15 percent of your income as soon as you can. Make your savings plan automatic by having the money taken out of your paycheck. The sooner you get used to living on 85 percent of your income or less, the better off your retirement plan will be. Ignoring fees Fees are like termites. They nibble imperceptible amounts in the short term, they never stop, and over time, they do enormous damage. Seek out and destroy fees that don’t add value to your retirement plan. Bankrate.com’s Mutual Fund Fee calculator will help you see how much mutual fund fees add up over time, eating away at your retirement. Not securing your information You might think it’s the responsibility of your broker and bank to safeguard your digital information. And it is. But you’ll be the one suffering if your account information is stolen. Lock all your digital information in a digital vault. Windows 10, for example, has a free digital vault. Also use a password manager such as Lastpass. A password manager is software that stores all your passwords in an encrypted file that’s easy for you to access. And don’t sign in to your bank site from a public hotspot such as Starbucks or McDonald’s unless you’re using a VPN (virtual private network). Prioritizing college savings over retirement If you must choose between saving for the kids’ college fund versus your retirement, your retirement wins. Your children might decide not to go to college or might be able to get a scholarship or a loan. But you can’t borrow for your retirement. Not diversifying your portfolio Your uncle says he knows about a stock that will double your retirement fund. Sure he does. Never chase after hot stocks in your retirement fund, which is your long-term money. Diversified low-cost funds are tough to beat. With that said, don’t play it too safe. Holding too many bonds or too much cash will all but doom you to subpar returns. Remember, you won’t get a decent return if you don’t take any risk. Even people in retirement should own stocks. Waiting for the “right time” to invest “I’ll put money in my 401(k) when the market is cheaper.” Those are words spoken by people who’ll never put money in a 401(k). They’ll either wait and wait for a crash that never comes or get too nervous to put in money when markets do fall. When’s the best time to contribute to an IRA or 401(k)? Now. Having inadequate insurance No one likes to pay for life insurance or healthcare premiums. But skipping a key insurance plan at the wrong time could set you back so far you might never retire. Review your insurance plans, including an umbrella policy, and keep them current. You’ve worked too hard saving and investing to have it all wiped away by a natural disaster or accident. Taking money from your accounts early Retirement accounts are made for retirement, not for fixing a leaky roof or paying for an insurance deductible. Make sure you have an emergency fund to cover life’s unexpected events. Yes, you can borrow from your 401(k) or take money out of your Roth IRA. But you shouldn't. This Vanguard calculator will tell you how much borrowing money from your retirement accounts will actually cost you. Not checking your Social Security benefit I hate to doubt the capability of the federal government to track the payroll deductions of millions of workers, but I do. Mistakes happen in recording contributions to Social Security. Not catching these errors can seriously reduce your benefit. It’s up to you to check. And while you’re at it, you can see what your Social Security payments would be so there are no surprises when you finally do collect. Not thinking about income Financial planners tell me that people are shocked the first day they don’t get a paycheck. When you’re working, you get accustomed to a steady income. But when you’re building a retirement plan, you need to think about where you’ll get the monthly income you need to pay your bills. Building an income strategy is usually a multi-pronged approach. Your retirement accounts will likely pay interest and dividends. But for most people, that investment income will not be enough. You must also consider income you might get from a pension, and if not that, what kind of income stream you might line up by buying an immediate annuity.

Article / Updated 03-04-2020

You probably have some questions about your retirement plan. And that’s a good thing because rock-solid retirement plans are often built as you seek answers to your questions. This list dives into ten questions people routinely ask about retirement planning. Each question might prompt you to learn more about your retirement plan or make the one you already have even better. Along the way, you also learn about tools to tailor your retirement plan. So, what are you waiting for? Ask away! How much money do I need? The big question on every pre-retiree’s mind is "How much money do I need?" Frustratingly, no one right answer exists. Retirement plans are as unique as people’s personalities and constantly evolving. Your retirement plan is a reflection, at the time, of your hopes and dreams for the future. Your retirement plan also reflects your personality. Are you a worrier? You’ll probably want a bigger nest egg before you’re comfortable enough to retire. Are you a planner? You’ll probably start saving early. A good rule of thumb if you retire at 65 is to have saved at least 25 times what you spend annually. If you spend $50,000 a year, try to have $1.25 million saved. That way, you should be able to take out 4 percent the first year, adjusted annually, for 30 years without running out. If you want to retire younger, shoot for at least 30 times what you spend annually. That’s $1.5 million in this example. In addition, online calculators do a good job estimating with more precision how much you’ll need. Is Medicare enough? Healthcare costs are a giant wild card faced for anyone thinking about retirement. Given the magnitude of potential costs, you don’t have a retirement plan until you have a healthcare plan. For most people, Medicare is not enough. With Medicare Part A, you get hospital coverage. Part B, which costs most people $135.50 a month, covers doctor visits and lab tests. You can also pay to get drug coverage with Part D. Many people find that they need more coverage and buy a Medigap policy. Others purchase a Medicare Advantage plan, offered by private insurers, which combines Parts A, B, and C. Medicare provides information to help you sort out all these plans. What will I do with my free time? More pre-retirees should ask themselves how they will fill their free time. Although you might be able to afford retirement financially, are you ready to step away from your work life emotionally? Many people tie their identities to and structure their days and social circles around office life. If you love what you do and are good at it, retirement might not be the goal you think it is. A good friend of mine who considered taking an early retirement package figured that he needed at least three new activities or goals to fill up his time if he was no longer working. Unable to come up with them, he passed on the buyout and stayed at work. What three activities or goals do you have? Will I run out of money? After you retire, you might wonder how long your money will last. You can measure the likelihood of your money going the distance, given a number of reasonable assumptions. Vanguard’s Nest Egg Calculator provides a quick and easy estimate of how long you might expect your money to last. It also shows you how to make adjustments, if needed. For instance, suppose you are still working and have saved $1 million, spend $45,000 a year, and plan to need the money for 30 years after you retire. If you invest 60 percent of the $1 million in stocks and 40 percent in bonds, Vanguard estimates that you have an 85 percent chance of having enough. If you cut spending to $40,000 a year, the probability of having enough jumps to 91 percent. Or if you hold spending at $45,000 annually but work longer and save another $300,000, the odds of success jumps to 96 percent. Should I have a Roth or traditional IRA? You’ll read lots of opinions regarding whether a Roth IRA is better than a traditional IRA. For me, it boils down to whether you think your tax rate will be higher or lower in the future. If you think your tax rate will be higher, the Roth IRA is for you. If you’re in a low tax bracket now, why not pay your taxes now? If you think your tax rate will be lower in the future, skip the Roth and go with the traditional IRA. Perhaps right out of college you got a high-paying job that you plan to do for only a few years before joining the Peace Corps. You might as well pay taxes when they’re likely lower in the future. If you think your tax rate will be the same, the Roth and traditional IRA plans are the same, taxwise. The Roth does have the advantage of not requiring you to take distributions when you turn 70-1/2. How good is my 401(k)? If your 401(k) offers a match of any kind, it’s good. You should contribute at least enough to get the maximum match. Beyond that, deciding whether the 401(k) is the best place to put your retirement money gets trickier. To find out, look at the funds in the plan. If you can choose low-cost funds and a sampling of low-cost index funds, the plan is likely good. If you’re not sure whether the plan is suitable, head over to BrightScope and enter the plan’s name. The site will analyze your 401(k) and help you decide if you could do better setting up your own IRA. What’s an RMD? Deferred taxes on retirement accounts are good while they last. But eventually, the taxman will want his cut. Enter the required minimum distribution, or RMD. With traditional IRAs and 401(k) plans, when you turn 70-1/2, you must start taking money out of your retirement accounts by April 1 of the following year. Going forward, you must take money out by December 31. And yes, you must pay taxes on the money you’re taking out. The amount you must take out varies based on your age. Vanguard can estimate your RMD. Failing to take an RMD is a massive fail. If you take out less than your minimum RMD, you owe a 50 percent tax on the shortfall. Yes, 50 percent. That pretty much wipes out any tax benefit of putting money in a tax-deferred account in the first place. Remember, you don’t have to take a required minimum distribution from a Roth 401(k) or Roth IRA. That’s a big advantage of those types of accounts. Can retirement rules change? Retirement rules can change. In May 2019, for example, the U.S. House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act is poised to revise many important aspects of retirement planning. At press time, it was unclear which changes to retirement planning the Senate would adopt, but the sweeping nature of the House version showed that lawmakers weren’t afraid to make some major changes. Specifically, the House version went after Stretch IRAs, which are given to non-spousal beneficiaries after you die. The House wants to force the money to be taken out — and taxed — more rapidly. Other rules open to revision include pushing back the age at which you must take RMDs and allowing annuity products to be offered in retirement plans. The fact that Congress can change the rules around the tax status of retirement accounts is one reason why some critics are opposed to Roth IRAs and Roth 401(k) plans. Some fear that Congress might try to tax distributions taken from Roth accounts in the future. If so, this would result in double-taxation of the money. This scenario is unlikely, but the possibility argues for tax diversification. Using the tax diversification idea, why choose between a Roth or traditional account? Why not have both? That way, no matter how retirement accounts change in the future, you can maximize your tax benefit (or at least minimize the cost). What can I do if I’m near retirement age and don’t have a plan? Are you getting close to retirement age but still don't have a retirement plan? The key thing is to not panic. You need a retirement plan, of course. However, you might first need to adjust your expectations. Rather than targeting retirement at age 65, you’ll want instead to find ways to boost your savings rate and lengthen your time in the workforce. The key for you is recognizing that your employment income is your top asset and should be protected. Make sure your skills remain relevant in your field. Get disability insurance. You’ll want to maintain your enthusiasm for your work, too, because you’ll likely be working longer than many of your similarly aged friends. Also do your best to not take Social Security until after your full retirement age. For every year after your full retirement age that you wait to claim Social Security, your benefit goes up by 8 percent, according to Charles Schwab. You’ll rely on Social Security more than others, so you should try to maximize your benefit from it. Do I need a financial advisor? You don't need a financial planner. You can do all your retirement planning yourself. The question, though, is will your retirement plan improve if you hire a planner? Consider the following factors: Do you have time to monitor your portfolio and developments in financial planning? If you’re busy with other obligations, it might be worthwhile to have someone watching over your financial affairs. Are you interested in personal finance? If you find personal finance topics interesting, managing your own money might not only save you money on fees but also give you something to do in retirement. Do you know a financial planner you’re comfortable with? A skilled advisor who has experience optimizing plans like yours can add value. Do you know a planner like this? Do the fees the planner charges fit into your plan? Have you looked up the planner on BrokerCheck to make sure he or she has the proper licenses and a clean record? Is your financial situation complicated? If you’re a multi-millionaire or a divorced business owner with interests in multiple partnerships, the complexity of your situation might warrant getting help. With large estates, one major smart move can save enough money to justify the fees. Are you comfortable with technology? If you’re comfortable with apps and online tools, you might want to sign up for a robo-advisor service. This type of service can help you optimize your plan at a reasonable cost. If you’re not comfortable with technology, or just want someone to talk to about your financial goals, it makes more sense to hire a human advisor.