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Most people dream of retirement long before they arrive. Perhaps you imagine hours spent on the golf course, taking a class on a subject that has always intriqued you or volunteering for your favorite cause. Of course, that’s the idealized version of retirement. And then there’s reality.

Preretirees, be forewarned.


The cost of health care naturally comes up most often as a top retirement challenge among retirees. According to Fidelity Investments, the average 65-year-old couple will spend about $400,000 out-of-pocket throughout retirement until age 92, not including long-term care costs.

Those new to Medicare may find it’s more costly than they bargained for, too. While Part A of traditional Medicare, which covers hospital benefits, is free, you will pay a premium for Part B to get coverage for outpatient or doctor services and in most cases, a premium for Part D to get prescription-drug coverage.

Add in the premium for a private Medigap policy, which helps cover the portion of Medicare approved costs, and a couple can end up paying as much as $6,500 a year in Medicare premiums.

High-income beneficiaries get an extra shock – they are subject to a premium surcharge. Even if your income isn’t always high, you can land yourself in surcharge territory if you spike your income in one year with a Roth conversion, for example, or exercised stock options. The surcharge starts to kick in if your annual adjusted gross income (plus tax-exempt interest income) tops $85,000 if you are single or $170,000 if you are married filing jointly.

Keep in mind that Medicare does not cover long-term care or short-term care costs – an additional expense.


You no longer need to budget for work clothes or commuting. But you may have to start paying for some things that you used to receive as perks through work, such as the employer portion of health insurance premiums, travel expenses, etc. Small business owners and professionals who retire are often surprised how many of their expenses were picked up by the company.

Many retirees plan to see the world in their first few years of retirement, but the costs of transportation, lodging and entertainment can add up quickly. Retirees’ actual travel budgets tend to be at least 10% to 20% higher than what had been budgeted.

Even if you stay put, you will have free time to fill, and activities, such as golf or fixing up the house cost money, too. The ‘common wisdom’ that retirees spend 75% of what working people do is a dangerous thing to believe. It’s a good idea to picture your retirement and then try to put a price tag on it.


Most people realize that they are paying a tax into the Social Security system during their working years, but did you know that you may also have to pay tax on your benefits once you start receiving them?

Up to 85% of Social Security benefits are taxable, and the income thresholds that trigger Social Security income taxation are low – $32,000 for a married couple, for example.

Retirees have a difficult time adjusting to the taxability of Social Securty income and the low income thresholds. Most retirees don’t see Social Security as taxable deferred income since they paid into the government fund using after-taxed dollars during their employment years. In their minds, retirement income should not be taxed twice.

You will also forfeit some benefits if you continue to work before you hit full retirement age – you give up $1 in benefits for every $2 you make over the annual earnings limit (for 2013, that limit is $15,120).

The good news is that once you pass full retirement age, your benefit will be adjusted upward to account for the forfeited benefits.


Uncle Sam not only wants a piece of your Social Security benefits, but he’s ready for his slice of your pretax retirement savings. When you withdraw money from a traditonal IRA or 401(k), those “stashed away pretax dollars” have a tax bill attached to them when they are drawn out of the account.

Money you pull from tax-deferred retirement accounts is taxed at your top ordinary-income tax rate. So if you need $30,000 to buy a new car and you are in the 25% tax bracket, you will need to withdraw $40,000 from your IRA to cover the cost of the car and the $10,000 tax bill on the withdrawal.

You can leave the money in tax-deferred retirement accounts until age 70 1/2. Starting at that age, seniors are required to take minimum withdrawals from IRAs and 401(k)s. If you have a large amount of money in those accounts, a sizeable RMD (required minimum distribution) may push you into a higher tax bracket than you thought you would end up in upon retirement.

To mitigate the tax hit, it could be advantageous to tap those accounts sooner than later. Another smart strategy: start stashing money in a Roth IRA, which has no RMDs for account owners and can be tapped tax-free.


Estate planning is critical to make sure your assets are passed down as you wish. But another critical componet of estate planning for couples is making sure that the surviving spouse will have enough money to live on.

One thing people don’t plan for is the reduction of income if a spouse or partner dies – without corresponding reduction in expenses.

For example, if both spouses are both receiving Social Security benefits, a significant chunk of that income stream will disappear.

The surviving spouse can switch to a survivor benefit if that is higher than their own, but the survivor benefit will not make up for the lost income of going from two benefits down to one.

This is one reason why boosting the potential survivor benefit through delayed retirement credits is a smart strategy for couples.

The higher-earning spouse can wait to take his or her benefit, which can earn up to 8% a year in delayed credits up to age 70, and at that spouse’s death, the survivor can switch to a benefit worth 100% of the deceased spouse’s benefit, including the delayed credits plus cost-of-living adjustments.

The same income reduction can happen if a spouse who receives a pension hasn’t signed up for a joint-and-survivor annuity. If the annuity is only based on his or her life expectancy, at his or her death, that income source will dry up with no payments for the surviving spouse.

Choosing the joint-and-survivor option may result in less money monthly, but it will provide income for the surviving spouse if the pensioner dies first.


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The oldest Baby Boomers turn 67 this year. The rest of the generation are not far behind. For those looking to retire in 2013, what are some of the important things to keep in mind? 

Many of the first wave of baby boomers have already retired, while others may be contemplating taking the plunge this year.

Here are some tips for those planning to retire in 2013:

1. Make sure you are vested in your retirement benefits.

While you always get to keep the money you contribute to your workplace retirement account, you don’t necessarily get to keep your employer’s contributions until you are vested in the company retirement plan. Some retirement accounts don’t allow you to keep any employer contributions until you have been with the company for a specific number of years, while others allow you to keep a proportion of your benefit based on your years of service. Make sure you know the date after which you can keep all of your benefits, especially if you have only been with your current employer for a few years. In some cases, it can be well worth it to stick around for a few extra months or years to get a bigger retirement payout.

2. Strategize about when to claim Social Security.

Personalized Social Security statements became available online for the first time in 2012, and more than 1 million people have already downloaded them. Check your statement to make sure your earnings were accurately posted to your Social Security record, and make note of how much you will receive from Social Security at various dates. Most baby boomers can claim the full amount of Social Security they have earned beginning at age 66. Boomers who sign up before age 66 will get a reduced payout. Retirees can further boost their monthly payments by delaying their first payout until age 70. You don’t have to sign up for Social Security in the year you officially retire. Some people who, by default because they are going to retire, decide to take Social Security, and that’s not always the smartest decision. There are delayed retirement credits the longer you wait between age 62 and 70. For most people, it makes sense to wait.

3. Sign up for Medicare on time.

You are first eligible to sign up for Medicare three months before the month you turn 65. This initial enrollment period lasts through the three months after that birthday. If you don’t sign up during this seven-month window, your monthly premiums will increase by 10 percent for each 12-month period you were eligible for, but did not enroll in Medicare Part B. If you are covered by a group health plan based on your or your spouse’s current employment after your turn 65, you need to sign up within eight months of leaving the job or health plan to avoid the penalty.

4. Protect your savings.

If you haven’t done so already, you need to shift your primary investment strategy from increasing your wealth to protecting what you have. As you get closer to retirement, you normally are not willing to take on as much risk because you can’t stomach another downturn like we did during the Great Recession. For most people, as they get closer to retirement, they can stand less risk, so they get more conservative. They are going to start living off their portfolio, so they can’t afford to lose portfolio value because they need the income.

5. Develop a plan for spending down your assets.

Retirees need a plan for how they will convert their retirement savings into a stream of income that will pay their monthly bills. You want to be careful not to take too much from your savings early in retirement. You want to have a plan about where to take your assets from and try to stay within the plan. Remember to factor in the income tax that will be due on traditional 401(k) and IRA withdrawals. If all your money is in a 401(k) or IRA, and you want to spend $100, $30 of that may go to Uncle Sam first, and you only have $70 to spend. You should have funds saved and accumulated outside of those types of accounts to avoid spending a lot of money on taxes.

6. Don’t forget to take required minimum distributions.

After you turn age 70 1/2, you will be required to take annual withdrawals from your traditional 401(k) and IRA accounts. The penalty for failing to take these distributions is a stiff 50 percent penalty on the amount that should have been withdrawn.

7. Consider maintaining your connection to the workforce.

Some retirees find they miss many of the friends and daily challenges they encountered in the workplace. If you still enjoy some aspects of your job, consider shifting to part-time or consulting work instead of pursuing a full-time life of leisure. Keep an open mind and don’t burn any bridges. Plenty of people think they are ready for retirement and retire only to find that they really enjoy working and at least want to keep working on a part-time basis.



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Annuities seem to be a scary subject. Consumers are scared about getting burned because financial celebrities say annuities are evil. Carriers are scared about the impacts to their capital. Producers are scared about compliance and suitability rules. Yikes!

Are annuities really that scary? Not in the textbook sense. When you think back to the 10th grade, remember learning about annuities in math class? They were defined the same way Wikipedia defines them:

“In finance theory, an annuity is a terminating ‘stream’ of fixed payments, i.e., a collection of payments to be periodically received over a specified period of time.”

Annuities were a subject under the category of “time value of money.” They helped us understand how to turn a lump sum into a stream of payments and vice versa. You could just plug in interest rate assumptions, the number of payments and either the principal or the payment amount into a formula and solve. Remember the HP calculators in 1984 that did the math for you? The annuity was pretty straightforward and nothing to really be scared about. In a geeky way, it is sort of cool!

So why all the fear?

In an open-minded opinion, it’s the misalignment of intention that’s scary, not the annuity.

Let’s face it. The Annuity with the capital “A” is not the same as the annuity with the lowercase “a.” Generally, the annuity is just a math equation. It can be designed to last any length of time or a lifetime. Today, however, the industry has designed it to try and outwit its assumptions, with the return as the main attraction.

Variable annuities, GMIB Annuities, Indexed Annuities…these “innovations” are the ones with the capital “A.” They are used to defer taxes and possibly even make up for a boomer’s shortfall in retirement savings. In order for them to work, they have to sustain some pretty fancy assumptions. That means someone in the equation is taking a big risk.

Were those products driven by what consumers would buy or what carriers could sell? No wonder annuities are scary. Have we forgotten the purpose?

The purpose of the annuity is to manage large sums, whether owned or owed. That’s it!

Very few know that. In fact, a 2010 study indicates that the general population, Gen Y in particular, has no clue what an annuity is. The industry will blame it on complexity, but really the annuity is simple. Good advice comes from helping people see it that way.

Forget market return assumptions. Forget indexes. Imagine only how an annuity really works. Go ahead, plug in the numbers. Decide what is realistic. Determine how to fund it and how long to take the income. Only people scare people.

An idea without an insight is just an invention. An idea driven by insight is an innovation.