Your Retirement Benefit: How It Is Figured
Many people wonder how their benefit is figured. Social Security benefits are based on your lifetime earnings. Your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. We apply a formula to these earnings and arrive at your basic benefit, or “primary insurance amount” (PIA). This is how much you would receive at your full retirement age—65 or older, depending on your date of birth.
Factors That Can Change the Amount of Your Retirement Benefit
•You choose to get benefits before your full retirement age. You can begin to receive Social Security benefits as early as age 62, but at a reduced rate. Your basic benefit will be reduced by a certain percentage if you retire before reaching full retirement age.
•You are eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you do not get benefits until your full retirement age or even age 70. Cost-of-living increases are added to your benefit beginning with the year you reach 62 up to the year you start getting benefits.
•You delay your retirement past your full retirement age. Social Security benefits are increased by a certain percentage (depending on your date of birth) if you delay receiving benefits until past your full retirement age. If you do so, your benefit amount will be increased until you start taking benefits or you reach age 70.
•You are a government worker with a pension. If you also get or are eligible for a pension from work where you did not pay Social Security taxes (usually a government job), a different formula is applied to your average indexed monthly earnings. To find out how the Windfall Elimination Provision (WEP) affects your benefits, go to www.socialsecurity.gov/gpo-wep and use the WEP online calculator. You also can review the WEP fact sheet to find out how your benefit is figured. Or, you can contact Social Security and ask for Windfall Elimination Provision (Publication No. 05-10045)
Source: Social Security Administration
Women Face Challenges in Ensuring Financial Security in Retirement
In general, women have less retirement income than men, largely because o fwomen’s lower labor force attachment and lower earnings, on average. Fewer women than men have income from most major retirement sources, and women have less income from these sources. Women’s median Social Security income is 70 percent of men’s. Also, fewer women than men have pensions. Among the population age 65 and over who continue to work, women earn just over half of what men earn. Women also have somewhat smaller income than men from assets, such as interest and dividends. Accordingly, rates of poverty among those 65 and over are substantially higher for women than for men. Although their participation has increased substantially in the last century, women still spend fewer years in the labor force than men, and they more often work part-time. Also, women tend to earn less than men, despite increases in their wages over time relative to men. Although work patterns are key in earnings differences, in prior work, we found that even after accounting for behavioral differences such as education or labor force participation, women still earn less than men.
Certain life events—including changes in marital status, labor force interruptions, and long-term care needs—can significantly reduce the amount of pension income and Social Security benefits women receive—and leave women with fewer financial resources at retirement than men. Social Security divorced spousal benefits are available only if the marriage lasted at least 10 years. Furthermore, pension benefits are available to a divorced spouse only under certain circumstances. Women’s role as primary family caregiver for children and elderly relatives can reduce their career earnings, on which retirement income is based. Because women tend to live longer than men, widowhood and costly long-term care assistance may further reduce their retirement resources.
GAO’s simulations of some Social Security changes that would compensate for low earnings or time out of the workforce showed that those changes tend to increase benefits for beneficiaries overall, and particularly those in lower income quintiles. Alternatively, changes that focus on shifts in family structure, such as increases in two-earner couples and increased incidence of divorce, tend to increase the benefits of groups targeted by the change, but produce mixed results for others. Some pension changes that have been proposed in the past several years take into account the changing labor force and norms of employer-provided retirement plans; while these changes are gender-neutral, they may provide important new opportunities for women to increase their retirement income. For example, decreased vesting requirements may provide additional pension income to those with intermittent workforce participation who would not qualify for pension benefits under a longer vesting schedule.
To download the complete report click here.
Source: United States Government Accountability Office
Evaluating Teacher's Retirement Options
As an employee of a public school, you likely have access to both a pension and a retirement savings plan called a "403(b)" plan. Let's examine what a 403(b) plan is, and then go through the choices you'll likely need to make if you decide to invest in a 403(b) plan. What Is a 403(b) Plan?
A 403(b) plan is a type of tax-deferred retirement savings program that is available to employees of public schools, employees of certain non-profit entities, and some members of the clergy. Because you do not have to pay taxes on the amount you contribute to a 403(b) plan for the year in which you contributed to the plan, investing in a 403(b) plan can lower your overall tax burden — at least in the present. You can defer the income tax on your contributions until you begin making withdrawals from your account — typically after you retire. The earnings on your account also grow tax-free until withdrawal. Investment Options
If you are eligible to participate in a 403(b) plan, you may have to choose among different types of investments, depending on how your employer structures the plan. It will be up to you to choose investments that will best meet your financial objectives. 403(b) plans typically offer fixed annuities, variable annuities, and mutual funds. Here is a brief description of each: Fixed Annuities are contracts with insurance companies that guarantee that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse. Equity Indexed Annuities are a special type of contract between you and an insurance company. During the accumulation period — when you make either a lump sum payment or a series of payments — the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum. For more information, please see our "Fast Answer" on Equity Indexed Annuities, and read NASD's investor alert entitled Equity-Indexed Annuitiies — A Complex Choice. Variable Annuities are contracts with insurance companies under which you make a lump-sum payment or series of payments into a tax deferred account. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. You can choose to invest your purchase payments in a range of investment options, which are typically mutual funds. The value of your account in a variable annuity will vary, depending on the performance of the investment options you have chosen.
Tip: Make sure that the features you're buying when you invest in a variable annuity are worth the money you're paying. If you invest in a variable annuity through a tax-advantaged retirement plan (such as a 403(b) plan), be aware that you receive no additional tax advantage from the variable annuity. Investors typically pay for each benefit provided by any given product. Be sure you understand the impact of these costs and all others fees and expenses.
Mutual Funds are companies that pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds come in many varieties. For example, there are index funds, stock funds, bond funds, money market funds, and more. Each of these may have a different investment objective and strategy and a different investment portfolio. Different mutual funds may also be subject to different risks, volatility, and fees and expenses. What Questions Should I Ask About My Investment Choices?
The best tip we can give on how to invest wisely boils down to two words: ask questions. Over the years, we've seen far too many investors who suffered avoidable losses because they didn't ask basic questions from the start. When it comes to planning your financial future, take nothing for granted — ask questions, demand answers, and make sure you understand the consequences of your choices before you commit your hard-earned money.
Although you may be eligible to participate in a 403(b) plan, don't assume that your employer has checked out or approved any particular investment product or any firm or professional that sells potential 403(b) investments. School districts typically do not engage in that sort of screening, and some states prevents school districts from limiting the companies that can sell 403(b) plan investments. That's why it's so important to do some homework on your own to assure yourself that the choices you make as the best for you in light of your personal circumstances and financial objectives.
For starters, be sure to ask at least the following three key questions:
1. Will I have to pay any penalties if I change my investment choices? If so, how much?
Make sure you know the answer to this critically important question before you make your investment choices. The answer will depending on the type of product you initially chose and when you purchased that product in your account. For example, if you withdraw money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as ten years), the insurance company usually will assess a "surrender" charge. A surrender charge is a type of sales charge that compensates the financial professional who sold the variable annuity to you. Generally, the surrender charge is a percentage of the amount you sell or exchange, and it will decline gradually over a period of several years, known as the "surrender period." For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies. Some variable annuity contracts will allow you to withdraw part of your account value each year — 10% or 15% of your account value, for example — without paying a surrender charge.
Some mutual funds have a back-end sales load known as a "contingent deferred sales load" (also referred to as a "CDSC" or "CDSL"). Like a surrender charge for a variable annuity, the amount of this type of load will depend on how long the investor holds his or her shares, and it typically decreases to zero if the investor hold his or her shares long enough. The rate at which this fee will decline is disclosed in the fund's prospectus.
A redemption fee is another type of fee that some funds charge their shareholders when the shareholders redeem their shares. Although a redemption fee is deducted from redemption proceeds just like a deferred sales load, it is not considered to be a sales load. Unlike a sales load, a redemption fee is typically used to defray fund costs associated with a shareholder's redemption and is paid directly to the fund, not to a broker. The SEC generally limits redemption fees to 2%.
Note: The question of whether you must pay a penalty or other fees for switching among investment choices in your plan is completely different from whether you must pay a penalty for taking money out of your 403(b). The tax laws generally impose penalties for early withdrawals from tax-deferred retirement plans, such as 403(b) plans, IRAs, and 401(k)s. Before you take money out of your 403(b) account, be sure to consult with a tax adviser.
2. What annual fees will I pay?
As you might expect, fees and expenses vary from product to product — and they can take a huge bite out of your returns. An investment with high costs must perform better than a low-cost investment in order to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time.
For example, if you invested $10,000 in a product that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the investment had expenses of only 0.5%, then you would end up with $60,858 — an 18% difference. It takes only minutes to use the SEC's Mutual Fund Cost Calculator to compute how the costs of different mutual funds add up over time and eat into your returns.
For mutual funds and variable annuities, you can find information on costs and fees in the prospectuses. For fixed annuities, check the sales literature or the contract.
3. Does my financial professional make more money for selling one product over another?
Regardless of how much you trust your financial professional, it is always legitimate to ask how - and how much - he or she receives for selling a particular product. For example, you could ask the following: Do you receive a commission for selling Product X to me? If so, how much? Do you get any other type of compensation for selling Product X? If so, what? (This could include a bonus or points toward some other reward, such as a trip or a cruise.) Do you get more for selling Product X over Product Y? Are there any other products that can meet my financial objectives at a lower cost to me (even if you do not sell those products)?
It will be critical for you to know in advance which products can best meet your financial objectives and to identify a financial professional who sells those products. Different types of financial professionals sell different types of products, and some financial professionals will offer only a limited number of choices. When deciding what's best for you, shop around for the best fit. When brokers or insurance salespersons stand to earn more money for selling Product X over Product Y, they have a natural incentive to steer you toward Product X — even if Product Y might ultimately be a better choice for you.
Our online publication entitled Ask Questions lists in greater detail the questions you should ask about all of your investments. To learn how you can check out the background of a financial professional (before you purchase products or as soon as you finish reading this publication), be sure to read Check Out Brokers and Advisers. For More Information
For more information about the types of products available through 403(b) plans, please read the following SEC publications:
* Annuities — A brief description of fixed, variable, and equity-indexed annuities.
* Equity-Indexed Annuities — Describes key features of equity-indexed annuities, including factors indexing methods and interest rate calculation.
* Variable Annuities: What You Should Know — More information about variable annuities, including the bonus credits, transfer issues, and fees.
* Invest Wisely: An Introduction to Mutual Funds — Basic information about investing in mutual funds. Much of this information applies to variable annuities, as well.
* Mutual Fund Investing: Look at More Than a Fund's Past Performance — Describes some of the factors you should consider in choosing a mutual fund.
* Mutual Fund Cost Calculator — Allows you to compare the total costs of owning different mutual funds.
For problems concerning the management of the plan — such as money being credited to your account or being put in the wrong investment — be sure to complain in writing to the firm that is handling your account. You may want to send a copy of your complaint (or write a separate letter) to the school district that provides the plan and your state attorney general.
We have provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.
Source: Securities and Exchange Commission
Before You Retire:
Getting Your Finances Ready for Your Golden Years
If you're seriously considering retirement, you also should be seriously thinking about how to ensure that your financial life is as comfortable and stress-free as possible. Here are a few tips.
Make the most of your remaining paychecks to save for retirement. How much money you'll need to set aside for retirement — which for many people could last 30 years or more — will depend on a variety of factors. Among them: When do you expect to quit working? Will you continue to earn some income part-time? How much money do you have in savings and pensions? And, what kinds of expenses will you incur for housing and health care?
Because the future is uncertain, it makes sense, while you're still working, to put as much money as possible — 10 to 20 percent of your annual income, if not more — into savings for your golden years. Also make use of employer-sponsored retirement plans (especially if you'll receive matching contributions) and tax-advantaged Individual Retirement Accounts (IRAs).
Try to reduce or eliminate debt. "Another way to save more money now for a more enjoyable retirement later is to cut back on unnecessary expenses," especially if you will need to go into debt to pay for them, said Luke W. Reynolds, Chief of the FDIC's Community Affairs Outreach Section. He said to try to pay off most or all of your credit card balances and other loans to save on interest charges and avoid being burdened with repayment during your retirement years.
Develop a plan to stretch your money through a long retirement. "The idea is to determine where your money will come from during retirement, so you won't have to live in fear of running out of money," said Susan Boenau, Chief of the FDIC's Consumer Affairs Section.
For example, consult with the Social Security Administration or your accountant to learn how much Social Security and pension income you'd get each month if you "retire early" — any time between 62 and your "normal" retirement age — and how much more you would receive if you hold off on retirement. The penalty for starting to collect Social Security payments early can be substantial.
Discuss with a financial advisor how and when to withdraw money from your tax-deferred retirement accounts, such as employer-sponsored retirement plans and traditional IRAs. Also periodically review your retirement portfolio — your mix among stocks, mutual funds, CDs (certificates of deposit), bonds and so on — to be sure it's well-diversified. And as you get closer to retirement, consider a more conservative investment strategy than in the past so you can avoid losses to principal that could mean having to postpone retirement or struggle financially.
For additional guidance, see "Helping Your Money Last...After Your Last Paycheck".
Source: FDIC
After You Retire:
Managing Your Expenses on a Fixed or Reduced Income
Once you've retired, you finally have the opportunity to work at your dream job — keeping yourself happy. It's your chance to visit places you've always wanted to see, take up a new hobby and spend more time with your family and friends. But to be successful at this new position, you've got to make the most of your income and investments. Here are suggestions.
Make it easy to manage your money and pay the bills. One way is to have your Social Security benefits, pension payments and other income automatically deposited into your bank account each month. "Direct deposit isn't just safe and reliable — it also ensures that you don't need to schedule your activities around a visit to the bank just to deposit your funds," said Susan Boenau, Chief of the FDIC's Consumer Affairs Section.
Signing up for direct deposit of Social Security or other government payments is easy and free. Contact the U.S. Treasury Department's "Go Direct" hotline. Make it easy to manage your money and pay the bills. One way is to have your Social Security benefits, pension payments and other income automatically deposited into your bank account each month. While there are potential benefits to reverse mortgages, they don’t make sense for everyone. Among the reasons: The fees can be high. You still will be responsible for maintaining the house and paying property taxes. And, your beneficiaries won’t inherit the full value of the house.
Banks also offer quick and easy money-management and bill-paying services by telephone or online by computer, usually for free or at low cost. With telephone banking, you can monitor your account balance, find out if checks or deposits have cleared, or transfer money between accounts at the same bank. If you have a personal computer with Internet access, you can do your banking and bill paying online 24 hours a day, seven days a week. Be sure you know about any fees.
Look for banking services geared to older consumers. Find out if your bank has special accounts, clubs, discounts, events, publications or other services for senior citizens, sometimes including people as young as 50. Comparison shop among several banks to get the best package of services to meet your needs.
Consider a second career or working part-time. "Working longer, even part-time, can allow you to increase your savings and may boost your retirement income," added Boenau. "That alone could also enable you to delay or reduce withdrawals from your savings to cover living expenses."
But if you already are collecting Social Security benefits, find out if income from a job could reduce what you are entitled to collect from the government. Likewise, understand if going back to work could reduce any benefits from an employer's retirement or pension plan.
Be careful with credit cards. You'll probably find that credit cards in retirement are just as necessary as they were when you were younger. But be cautious with your credit cards. If you carry a large balance, you'll pay a lot of money in interest charges for a long time. If you have many accounts and get too deep in debt, your credit record could be damaged, which means you would have a tougher time getting the best deal the next time you apply for a loan, insurance or an apartment.
Another problem with having numerous credit cards is that if you're not closely monitoring your accounts, you can forget to send a payment (and incur late fees and additional finance charges) or you may not notice if a thief has stolen one of your cards and made purchases with it.
Understand the pros, cons and costs before borrowing money with a "reverse mortgage." This is a type of home equity loan — a way to get cash by borrowing money using your home as collateral (see: Be cautious when borrowing against the "equity" in your home). But there are some important differences between a reverse mortgage and the traditional home equity loan.
First, a reverse mortgage is available to homeowners age 62 or older. Second, you don't need an income to obtain a reverse mortgage. And third, you don't need to pay back what you owe until you move out of the house, sell the property or die.
While there are potential benefits to reverse mortgages, they don't make sense for everyone. They generally are not advisable if you plan to stay in your home for less than five years or need extra monthly income for relatively small expenses. Among the reasons: The fees associated with reverse mortgage loans can be high. You still will be responsible for maintaining the house and paying property taxes. And, your beneficiaries won't inherit the full value of the house. They will have to pay off the loan either by refinancing or selling the house.
Also be aware that some unscrupulous individuals or companies have promoted reverse mortgages that were not in the consumers' best interest or that involved extra payments for unnecessary services.
For example, there have been reports of companies attempting to sell questionable home repairs or investments in connection with a reverse mortgage, or they charged a fee for information about reverse mortgages that is available for free from the U.S. Department of Housing and Urban Development (HUD) or other sources. One problem with using any loan product to fund an investment is that you could lose money on the investment and still owe on the loan.
How can you protect yourself? As with any loan you're considering, do some research using information from neutral, unbiased sources, such as HUD. If you later decide that a reverse mortgage is right for you, contact several reputable lenders and read and understand all documents and contracts, perhaps with the help of an attorney you trust, before you agree to anything.
Do your research before purchasing "variable life insurance" or a "variable annuity." Both products are part insurance and part securities.
The first is a type of "whole life" insurance product (also called "permanent life" insurance) for which the policyholder's cash value is invested in one or more portfolios of securities.
The second product is an annuity, for which the consumer invests, through the insurer, in a variety of investment options, typically mutual funds.
Insurance companies issue both products, and anyone who sells them must be registered under state insurance laws and state and federal securities laws.
Although these products provide tax-deferred earnings, you can lose money investing in them. Income and value can move up and down. That's what the "variable" in the name means.
These products also may carry relatively high sales commissions, fees and "surrender charges" if you withdraw money early, typically within the first five to eight years after purchasing the product but sometimes after a longer period.
So, think of variable annuities as long-term investments that can tie up your money for many years. The older you are, the less likely a variable annuity is suitable for you.
Of special concern is that securities and insurance regulators have reported an increase in unsuitable sales of variable products to older investors, who experts say should generally stick to low-risk, low- or no-fee financial products instead of those with potentially high risks and fees.
"Before you invest in a variable life insurance or variable annuity product, be sure that you fully understand how the product works, the risk of loss, and the applicable fees and surrender charges," said Victoria Pawelski, an FDIC Policy Analyst. "Carefully evaluate whether the product is suitable for you given your investment objectives and time frame. And beware of high-pressure sales tactics from sales representatives who may have an incentive to generate high commissions and fees."
Also consider going to the Web site of the Financial Industry Regulatory Authority, the largest non-governmental regulator of securities firms operating in the United States. It publishes investor alerts and provides background and disciplinary information about securities firms and brokers that sell these products.
Source: FDIC
1. Look for official notification
If your employer wants to end the plan, your plan administrator must notify you in writing that your plan is ending. You must get this notice, called the Notice of Intent to Terminate, at least 60 days before the "termination" date.
If PBGC is terminating the plan, we notify the plan administrator and often publish a notice about our action in local and national newspapers.
* In a standard termination, you should receive a second letter describing the benefits you will receive, called the Notice of Plan Benefits, generally no later than six months after the date proposed for your plan’s termination. * In a distress termination, or a termination initiated by PBGC, our communication with you begins when we take over your plan as trustee. Initially we will provide you with general information about the pension insurance program and our guarantees. We will be able to provide more specific information about your benefits after we have had an opportunity to review the plan’s records, assets, benefit liabilities, and your participation in the plan.
2. Complete all requests for information promptly
PBGC reviews your plan's records to determine what benefits each person will receive. To ensure PBGC has the correct information, we will ask you to complete an information form.
* If you are already receiving pension benefits from your pension plan we will ask you to complete the Participant Information Form. (If you are already receiving a pension, we will continue paying you without interruption during our review. These payments will be an estimate of the benefits that PBGC can pay under the insurance program, and they may be less than you were receiving from your plan.) * If you are not yet receiving pension benefits we will ask you to complete a Beneficiary Designation (not currently receiving pension benefits) Form.
Please return your information form to PBGC within 30 days of receipt.
3. Review information on benefits information
Source: Pension Benefit Guaranty Corporation
Helping Your Money Last..After Your Last Paycheck
A Look at Different Ways to Afford Retirement
Today’s seniors can expect a longer retirement than their parents. That means more years to finally do what you want to do, including travel and hobbies (not to mention spoiling the grandkids). But a longer retirement also means more years of money going out and no paycheck (or only a small one) coming in. That’s why seniors need to be smart about how they pay for their retirement years.
“You really need to have a strategy to make sure your savings last,” said Lee Bowman, National Coordinator of Community Affairs at the FDIC.
To help you set or adjust your own plans for affording retirement, FDIC Consumer News offers this look at some different sources of money, including some potential pitfalls to avoid. But first, remember that this is general guidance only. Your own need for retirement money will depend on factors such as your health-care costs or whether you plan to earn part-time income. As with any major financial decision, be sure to consult with financial advisors and loved ones to decide what strategies are best for you.
Social Security and Pension Benefits: Your first order of business: Determine when the best time is to start tapping this money. For example, if you start receiving your Social Security benefits before your “full” retirement age (which could be anywhere from 65 to 67 under current laws), your benefits will be reduced permanently, and perhaps significantly, from what they would be at your full retirement age. And if you receive Social Security benefits early, but you continue to work and your earnings exceed certain limits, your benefits will be reduced even more until you reach full retirement age. On the other hand, if you delay collecting Social Security until after your full retirement age, you can continue to work and still get your full retirement benefits, or even higher benefits, no matter how much you earn.
Here’s basic guidance from the Social Security Administration (SSA): “As a general rule, early retirement will give you about the same total Social Security benefits over your lifetime, but in smaller amounts to take into account the longer period you will receive them. There are advantages and disadvantages to taking your benefit before your full retirement age. The advantage is that you collect benefits for a longer period of time. The disadvantage is your benefit is permanently reduced.”
Employer pension plans usually have options somewhat similar to those of Social Security. Contact your employer’s personnel department for guidance.
No matter when you decide to start receiving your benefits, remember that it could take several weeks to receive your first payment. Also consider having your payments deposited directly into your bank account so you don’t have to worry about a check getting lost or stolen in the mail.
IRAs, 401(k)s and Other Retirement Savings Plans: As with your Social Security and pension benefits, you may want to delay tapping into your retirement accounts as long as possible so they can continue to grow to cover unexpected medical costs in the future or to protect the inheritance for your heirs. However, if you need to supplement your income, Individual Retirement Accounts (IRA) and other retirement savings can be a good source.
Before you start withdrawing money from your retirement accounts, most financial planners suggest setting a target annual withdrawal rate. Make it low enough to avoid depleting these funds too quickly. You can fine tune your withdrawal strategy each year, preferably with the guidance of your financial or tax advisor. For example, if your personal situation changes, you can adjust how much you should withdraw.
Also review your retirement portfolio — your mix among stocks, stock mutual funds, CDs (certificates of deposit), bonds and so on — to be sure it’s welldiversified. (For ideas about how to rebalance your portfolio as you age, see Page 13.)
Another caveat: If you have retired, every year after age 701/2 be sure to take out at least the minimum required distribution from your tax-deferred retirement savings plans (except Roth IRAs) to avoid large IRS tax penalties.
(If you are still working at 701/2 or later, you do not need to start taking minimum distributions from your employer’s plan until April 1 of the year following the year you finally retire.)
“Remember, you only have to withdraw the money, you don’t have to spend it,” said Heather Gratton, an FDIC Senior Financial Analyst. “If you don’t need the money you can reinvest it somewhere else, such as in a bank savings account.” She added that, because each person’s situation is different, it’s best to discuss your strategy with your tax or other advisor.
Credit Cards: Having a credit card is often a necessity for most senior citizens — from paying for medicine and emergencies to booking a vacation. But for seniors living on a fixed income, there are concerns about carrying a large balance from month to month and running up significant interest charges. In the worst cases, the debt becomes unmanageable and a major source of stress for the account holder and the family.
Another problem for seniors is having too many credit cards. That’s because the more cards you have, the more opportunities you have to get into debt. And that possibility could make it tougher for you to get the best deal the next time you apply for a loan, insurance, a mortgage or an apartment. Having a lot of cards also can make it harder to keep track of when your monthly payments are due or to even realize that a thief may have stolen one of your cards.
Home Equity Loans and Lines of Credit: These are loans that use the equity in your house as collateral and often are tax deductible (check with your tax advisor). The equity refers to the difference between what you owe on a house and its current market value.
A home equity loan is a one-time loan for a lump sum, typically at a fixed interest rate. A home equity line of credit works like a credit card in that you can borrow as much as you want up to a pre-set credit limit. The interest rate for a line of credit usually is variable, meaning it could increase or decrease in the future.
“For elderly people on a fixed income who have paid their mortgage in full or whose mortgage is almost paid in full, home equity loans are tempting to use to pay for expenses, but they can also be dangerous,” warned Janet Kincaid, FDIC Senior Consumer Affairs Officer. “In the worst-case scenario, if you are unable to make the required loan payments, you could lose your home.”
In general, the best uses for home equity-type loans are to purchase goods or services with long-term benefits, such as home improvements that add to the value of your property. The riskiest uses of home equity loans include a vacation or a car because you could end up paying a lot in interest charges for a purchase that’s only of short-term value or has gone down in value. Also beware that some unscrupulous people or companies (including home repair contractors) push high-cost, high-risk home equity loans to elderly people and other consumers.
Reverse Mortgages: These are home equity loans available to homeowners age 62 or older. In general, a reverse mortgage is a loan that provides money that can be used for any purpose, and the principal and interest payments typically become due when you move, sell your house or die. A reverse mortgage also differs from other home loans in that you don’t need an income to qualify and you don’t have to make monthly repayments.
While reverse mortgages can be a valuable source of funds, they also have serious potential drawbacks. In particular, you will be reducing your equity, perhaps substantially, after you add in the interest costs.
“Reverse mortgages can help in some situations, such as when you have large medical bills that are not covered, to make major home repairs or to help people on low fixed-incomes make ends meet,” said Cynthia Angell, a Senior Financial Economist at the FDIC. “However, you are reducing your ownership share of the home. That means the inheritance you are leaving to your heirs could be greatly diminished or you could have far less money available for other purposes, such as buying into a retirement community later on. That’s why a reverse mortgage should usually be used as a last resort, not as an integral part of a retirement strategy.”
Also, Angell said, the fees can be high, and that could make a reverse mortgage a poor choice to cover relatively small expenses.
Life Insurance: People mostly think about life insurance as a source of income when someone dies, but they forget that many insurance policies also can be a source of cash at other times.
If you have a life insurance policy with built-up cash value, you can borrow against that money and either repay the loan with interest or reduce the death benefit accordingly. Example: If you have a $100,000 life insurance policy but you owe $20,000 on a loan from that policy, your heirs would receive $80,000 as the insurance payout.
There are other options reserved for people who have been diagnosed with a terminal illness and have run out of other ways to pay their expenses. One example is a life insurance policy that can pay “accelerated death benefits” to an eligible policy holder — generally up to about 50 percent of the face value of the policy — in either a lump-sum payment or monthly payments that are deducted from the policy’s face value. When the policy holder dies, the rest of the death benefit is paid out.
Another possibility is to “sell” your life insurance policy to obtain a lump-sum of about 40 to 80 percent of the face value in exchange for the right to receive the full insurance payout when you die. This is known in the insurance business as a “viatical settlement.”
These and other options for tapping life insurance policies can be complicated (including tax and other implications), and they are not right for everyone. Consider getting guidance from your state government’s insurance regulator (listed in your local phone book or on the Web site of the National Association of Insurance Commissioners).
Source: FDIC
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