Quirky Travel Tips

IMG_3752

A selfie with the open-top of the dome over the German Bundestag in Berlin. If you’re going to Berlin, don’t miss it. Also, make reservations, they and the visit are free.

Phone and Tablet dependence

First, I need to admit that I am dependent on my phone and tablet.  They let me be a cyborg in terms of finding important information, taking pictures, communicating, and keeping up with useless trivia. On the more serious side, my only camera is my phone’s camera, so I really do need it charged and ready to go in the morning.

The extension cord

I now travel with a 10-foot extension cord with three outlets on the end.  Why? It all started in Europe when I had three of my five Euro plug adapters fail, break, or get lost.  I was on the verge of not being able to charge my devices!  I made it through the trip but needed a better solution than taking 30 plug adapters every trip.

Somewhere I read of someone who used one plug adapter to plug in the extension cord, which then allowed multiple devices to connect with their standard US-style plugs. The charging devices do not draw very much electricity. An adapter draws .3-.5 amp each (as a comparison one 100-watt bulb draws .9 amps), so it is safe to connect two or three to one cord.  The length also gives me flexibility to have the device where I want regardless of where the outlet is located.

Now I carry one everywhere I travel, even in the US, just for the flexibility.  Definitely consider one for your trips to areas with different plugs.  I still carry five plug adapters and three chargers, just in case.

The compact phone battery pack

I was in a seminar (on life insurance!) at work and won a battery pack.  Embarrassingly enough, I didn’t know what it was at first, as it was a promo item and didn’t come with instructions. Once I figured it out, it is great.  It’s about 2.25”x 3.25” x 3/8” and weighs maybe an ounce.  It has a built-in cord and connector for a non-iPhone and, even better for me, an adapter for that cord to charge an iPhone.

The fully charged battery pack will fully recharge my iPhone once in about an hour. That’s important, because a morning of taking pictures in a museum can drain my battery. I can charge it in my pocket, or hold the battery and phone together if needed – it’s that compact and light.

You can see one like it on Amazon here.

The Chip with PIN Card

All credit cards now have chips, so they are much more secure when using the card payment devices. Most US-based cards are chip and signature, which works fairly well in Europe, but far from perfectly.  Most of the time when I charge something, the person helping us hands over a bill to sign and we’re on our way.  We’re also likely among the few in the store that don’t use a PIN. Full disclosure – I was likely using a card with a 1.5% rebate to get the rebate rather than paying cash.

We pretty exclusively use public transportation when traveling and I have found that automated ticket terminals almost exclusively require a chip and PIN card.  I have also been in a very few stores that only support chip and PIN. I have one card with a PIN that I use for these and it’s worked great.  If I could find another with no-fee, I might get one as a backup.

Would you like to pay in dollars?

It’s fairly easy for European waiters/waitresses to identify US tourists. You might find that they kindly offer to let you charge your food bill in dollars, which makes it easy to instantly know your cost as opposed to multiplying Euros by 1.1247 in your head (or on the calculator on your phone).

Don’t take advantage of their offer.  If you do, you’ll get their credit card processor’s exchange rate (and they will get a cut) which will be much less advantageous then your credit card company’s rate.

Share, please.

Please share your travel tips in the comments!

Actions you can take include:

If you have not seen the “Why you should read this blog…WIIFY” post, it’s here.

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Mis-underestimated

Scottish

Scottish Widows is a life insurance company in the UK.  I’d prefer not to to have the bad retirement surprise of an early death. She does look vaguely sinister….

Surprised!

At one of the Friday AM breakfast group meetings I posed the question of retirement surprises to my fellow diners. No one seemed to have had a severe bad surprise, thank goodness. Of the surprises that were mentioned, most indicated that home maintenance was the culprit.

Ken and Bobbi (pseudonyms) had a water heater go out, as did Sean and Deala (more pseudonyms). Sean’s water heater was particularly problematic and expensive due to code issues.  Water pipe issues and remodeling project scope creep were also mentioned by the group.

Goal

Remember – our goal here is to try and avoid retirement surprises.  After thinking about the problem, I decided to see what we might do with the useful life of home items, such as appliances and paint, combined with costs.

The solution, but stay tuned for the mis-underestimated part

I mentally walked through my house and developed a list of appliances and maintenance items.  Once I had the list I researched the usual lifespan of the item and what the cost to replace it might be. This took a lot longer than I thought it would, but no gain without pain, right?

With the costs and lifespans, I put together a spreadsheet. We’ll talk about it next, but you can find one to use here, available in both Excel and Google Sheets versions.

Mis-underestimated

Well golly, I tried the house maintenance costs spreadsheet.  According to the spreadsheet, I mis-underestimated fairly significantly the amount of money that maintenance costs for a house over time. Especially if you try to accrue the money for those costs on a monthly basis.  On the other hand, when some things wear out, such as a furnace or refrigerator, they are hard or impossible to live without.

When you look at the spreadsheet, you will see average life and average costs.  You can enter your estimate of the remaining life, in years (ex. 5 for 5 years or .25 for 3 months), of your item and what you estimate your replacement cost to be. The spreadsheet will calculate a monthly cost to accrue (save up), so that when you need the replacement, the money is already in the bank.

Good news – surprise eliminated. Bad news – shock at the amount needed per month. Seriously, mine was three times what I had previously budgeted. I was shocked, but now at least I can plan in advance.

On the plus side, it looks like plumbing, electrical wiring, and walls last a very long time, so I did not need to include those.

Some of the reference sites I used:
https://www.thisoldhouse.com/ideas/how-long-things-last
https://www.thespruce.com/lifespan-of-household-appliances-4158782
https://www.homeadvisor.com/cost/heating-and-cooling/install-a-furnace/

Actions you can take include:
Download and personalize your House Maintenance Costs Spreadsheet.
And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here 

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

I RAPped!

blizzard

Blizzard, A. Goicolea, Phoenix Art Museum

Per the NWS, we’re getting a blizzard here this afternoon – three to eight inches of fluffy snow!

Don’t miss the retirement action calendar after ‘Rapping’.

Rapping

As part of my RAP (Retirement Activity Plan and Free stuff!), one of my goals is to remain socially connected. Connection is not usually a problem when you’re employed because you have coworkers.  I’m still employed 80% of the time and my coworkers are great (now, please tell me where my laptop is…).

Fortunately, for the 20% of the time when I am retired, the gentlemen from the old neighborhood have invited me to their weekly breakfast meeting. They are interesting and engaged people and the restaurant has excellent coffee and is extremely generous with the meat on the country breakfast. They are now one key part of my social connection in retirement. Excellent people and good food – what more could one ask for?

If you’ve seen the RAP template, it has areas for creativity, social, personal, and activity.

Looking back at last year, I give myself about a C for activity.  I tracked exercise and averaged almost 12 times per month.  My goal is about 17 times per month (4 times per week) or better.

I was pleased with my personal work. I made it through Pimsleur French I and most of II.  I watched a French subtitled movie.  I read a couple of investing books.  (The one I recommend is The Four Pillars of Investing by William J. Bernstein. Get the old version; it’s cheaper and has 99.9% of the content.)

I was also happy with my creativity. I continued the blog. I completed some house projects and fixed a few laptops.

Retirement Action Calendar

I borrowed a genius idea from Vanguard, Merrill, Kiplinger, and Forbes and synthesized (RAP – creativity!) a spreadsheet with key dates for pre- and post-65 retirees. Excel and Google Sheets versions are located here.

The one time events show some dates for my friends Rick and Jean (pseudonyms), but will likely be useful you, too. The one time tab includes Medicare sign-up, initial RMD, any initial pension payments, and starting Social Security.  You’ll need to research and customize your own dates. As an example, Rick will sign up for Medicare on, or soon after, 6/1/2020 because his Medicate will start 9/1. If Rick is too late (after 12/1), he’ll have a Medicare penalty.

The annual events tab includes Medicare open enrollments, estimated tax payments, a budget and RIP checkup, and a medical (Obamacare) open enrollment.

Actions you can take include:

Download and personalize your Retirement Action Calendar.

Do a check of your RAP for 2018. How did you do?  What will you change for 2019?

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here https://nosurprisesretirement.com/2017/07/09/first-blog-post/

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

…and taxes

A picture of the other Emirates cable car over the Thames.  You go for a very long way, on a cable, over water.  Screaming was heard from our car.

emirates

Taxes – retirement may provide planning opportunities

“…in this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin

“Anyone may arrange his affairs so that his taxes shall be as low as possible…” Judge Learned Hand

Dan and Mikala

I had the opportunity to talk to Dan and Mikala (pseudonyms) this week about their retirement plans. Because of their early planning and good benefits, they are in pretty good shape for full retirement next year. In fact, they reminded me of Bob and Sarah in the Success Story post. As part of the Dan and Mikala discussion, we talked about something that Bob originally discussed with me, taxes.

Mandatory, boring, but important disclaimer

I am not giving tax advice and do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Retiree planning opportunities

As always, you should strongly consider using an Enrolled Agent, CPA, or tax attorney to assist with your tax planning.  That being said, there are constraints and opportunities for retiree tax planning that you may not have had when working.

Required Minimum Distributions (RMD)

As part of the tax deferral deal with the government, you got to defer taxes on 401(k), IRA, and certain other types of retirement money. The second part of that deal is that the government requires you to remove a portion of those funds, based on your life expectancy, when you turn 70.5, to collect the taxes on the deferred funds (and any growth).

The amount you will need to withdraw is dependent on the size of the pot of deferred money and your age. It may be small or it may be large, but, regardless of size, there may be planning opportunities for you. As an example, you may find yourself in a low tax bracket in your early retirement years (10, 12, or 22% marginal rate). If you look out to age 70.5, you may find that the RMD moves you to the next higher rate (12, 22, or 24%). (The rates go all the way to 37% – if the higher marginal rates apply to you, quit reading and go to your CPA and estate tax attorney now.)

You may have a planning opportunity in earlier retirement years to take post-59.5 distributions from your deferred pot of money and ‘use up’ your lower marginal tax rate for a given year. That would leave less in the pot for 70.5 and beyond and may leave your RMDs taxed at one of the lower marginal rates when you hit 70.5.  If you, hypothetically, could get money out at the 12% rate early, you might save 10 percentage points over getting hit with the 22% marginal rate at 70.5. Heck, even a 2% saving, from 12% to 10%, is a win!

Even after age 70.5 there may be opportunities for planning for the lowest rate. One way could be taking a larger amount one year and lower the next, but it will depend on age, amount in the account, and tax rates at the time.

But there’s more

There are other factors to consider, such as capital gains on non-tax qualified accounts, non-taxable funds, eligibility for social service programs, and partial taxation of Social Security. You, and likely your tax professional, will need to factor these in also.

Martin Luther King, Jr. Day

I am writing this on Martin Luther King, Jr. Day, also known as the Martin Luther King Day of Service. Last week I finally got to attend the weekly retiree breakfast with the retired guys from the old neighborhood.  I was happy to hear of some volunteerism – Habitat for Humanity. Good for the community and the RAP (Retirement Activity Plan). I just finished my IRS volunteer recertification and will again volunteer with the IRS VITA program for tax season. What’s your volunteer plan?

Actions you can take include:
Assess your opportunities for RMD tax planning. Talk to your friends about who they use for tax advice. Remember, only Enrolled Agents, CPAs, and attorneys can legally give tax advice for your specific situation.

Find a volunteer activity that engages you and uses your talents. www.volunteermatch.org is a great website to help find opportunities in your area that fit your time and talents.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

The Survey Says…

dutch teu huis

Condos made from shipping containers, Amsterdam, NL.

The survey results

The first key result of the survey that was included in The Road to Hell post is, per my daughter and the tiny but loyal number of respondents, don’t put the survey link at the bottom of your blog post.  Thanks to those of you that responded.  The next survey will be easy to find.

Good news

Our survey respondents, may they be representative of our entire readership, are in pretty good shape with written budgets and spending tracking, but they need a little more attention to written retirement strategies/plans.  The numbers:

Do you have a retirement plan or strategy?
Yes, but it is not written – 77.8%
Yes and it is written – 22.2%
No – 0%

Do you have a household budget?
Yes and it is written in one place – 66.7%
Yes, but it is not written in a single place – 22.2%
No, we wing it – 11.1%

Do you track your spending?
Yes and track on paper, spreadsheet, or app – 66.7%
Yes, but informally (ex. look at bills and checks) – 33.3%
No – 0%

The other survey says

I just glanced at The Insured Retirement Institute 2nd Biennial Study on the American Retirement Experience (with that long of a name it takes a biennium to write!) Their results show that 80% of retirees have the same or less income as they did pre-retirement.  53% have less income, 27% about the same.

Mrs. NoSurprisesRetirement and I took note of the above and have had some success offsetting the less income thing as a pre-retirement practice.  We used a BOGO (buy one, get one free) coupon at Jersey Mike’s subs on Friday, then used our Walgreens Balance Rewards to score 4 containers of our favorite coffee at the lowest price we’ve seen in the past 9 months.  We got a deal on Blue Diamond almonds, too! Sunday got sweet as we used another BOGO at Dairy Queen for Blizzards. Overall savings was near $30! And, we won’t need to buy coffee for a couple of months!

What Mrs. NoSurprisesRetirement and I did was consistent with another study I saw (and can’t find to cite right now) that people in retirement tend to pull back on their spending, even with reasonable resources.

Actions you can take include:
What coupons should you be using?  What staples should you stock up on when the deal is excellent? By the way, Target is having the equivalent of a 30% off sale on household cleaning products this week – a $15 Target gift card with a $50 ‘household essentials’ purchase.  

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here 

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

I got surprised!

Me, surprised last year in Bayeux, France.

I surprise

The surprise!

Well, Mr. Smartypants-no-surprises got a bad surprise! Ouch! For those of you that saw the last post that looked at budget to actual, you may have noticed that I said, “We did find some areas that needed refinement which will push us closer to the retirement income spending ceiling next year.  I under-budgeted for home maintenance expenses.”  That was the understatement of 2018.

While most of our retirement budget was pretty well researched, the one area for which we really ‘winged it’ was maintenance. Basically, we just guessed at it. The guess was way low for the year. I decided that we should do a better job of quantifying how much ‘maintenance’ would really cost.

First, find out what maintenance is

In our case, last year maintenance was a new water heater, a furnace service call, a dryer service call, and a new dryer. I suspected the water heater would need to be replaced soon, but not quite so soon. The rest were true surprises.

In the spirit of no surprises, we researched all the items that we know have a maintenance life.  These included the roof, driveway, appliances, HVAC, outside paint, snowblower, mower, and bed.

‘Personal association fee’

An association fee is a fee from, for example, a condo association that takes care of outside maintenance, snow shoveling, lawn mowing, etc. You might think of a monthly allocation for maintenance as your ‘personal association fee’. Take the monthly allocation and put it in a savings account for when you do need it. I’ve seen savings accounts and money funds now yielding over 2%!

After we assembled our list of maintenance items, we looked at the cost for a new comparable item and estimated the life of our current installations. The cost of the new item divided by the number of months until replacement gave us our monthly maintenance cost. Wow, we were surprised that our new ‘personal association fee’ has tripled over our ‘wing-it’ maintenance budget. The good news is that now we plan for maintenance expenses that will, no doubt, happen. Advance planning will help avoid a bad surprise dent our retirement savings.

Thank you

Thank you for reading the blog this year.  Health, happiness, and prosperity to you in 2019.  Also, may you have no bad surprises in 2019.

Actions you can take include:

Try your own assessment of what your ‘personal association fee’ should include and cost.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

The Road to Hell…

Is paved with good intentions.  In that spirit is this post’s picture:

HAUS-RUCKER-CO, Environment Transformer, 1968. Walker Art Center, Minneapolis.

Apologies dear readers for the long gap (since September (at least it was late-September.)  Excuses abound – work, election campaigning, colds.  Hopefully we’re back on track and this post will be valuable and enjoyable.

Did we do as we said?

First off, I was gratified that The Balance again listed the budget spreadsheet which I started using last year as one of their best.  It’s the Google Sheets ‘Best-Personal-Budget-Planner’ (when used, it says Personal-Budget-Planner-Extended.)  The spreadsheet developer named it, not me.  I converted it to Excel and have been pretty happy with it.

How did we do with using a budget spreadsheet? I give us an A. As far as use goes, we entered virtually every expense into the appropriate category on the correct date. (Yes, I would like a receipt for my McDonald’s Breakfast Burrito, please. $1.61 to ‘Dining out’.)  We entered our data in a timely manner, usually the same week. We reviewed the budget v. actuals together at least every other month.

Great, you say.  You used the spreadsheet. Tell us how the budget came out! Good question. Hindsight is always 20-20, so I should have defined my success criteria last year before I started this. I didn’t, but here are the results:

-We reviewed past bills and budgeted pretty accurately.  We included mortgage, property tax, homeowners, utilities, life insurance, travel, car payment, taxes, gifts, groceries, gas, subscriptions (Amazon Prime, Netflix), Uber (we only have one car, so Uber is our backup), medical, medications, and personal care (shampoo, health club!). The ‘Best-Personal-Budget-Planner’ developer did pretty good on categories so the spreadsheet required few changes (they are on a template page, so you don’t need to know how to modify spreadsheet ‘code’.)

-We used the retirement budget and came in slightly under budget!  The budget was accurate and we adhered to it.  Big win because that means with continued good fortune we should not have bad retirement surprises! (Knock on wood.) The expense side of the budget was pretty well documented in my retirement income plan which helped with the initial load of the spreadsheet.  The income side is also well documented and that was the base for what we could spend.

-We did find some areas that needed refinement which will push us closer to the retirement income spending ceiling next year. I under-budgeted for home maintenance expenses. Mrs. No Surprises Retirement had a surgery that exceeded the budget for medical, but that should not happen every year.

Many people have proven that written plans go a long way toward making an endeavor successful and this one was no exception. I think we watched our spending effectively and we are pleased with the results.

I have already updated the spreadsheet into a 2019 version that is more tuned to our expenses.  We seem to be reasonably well organized to avoid bad retirement surprises (but I am still working.)

Why bother?

Why bother with written retirement income plans and budgets?  Well, as you know, the whole focus of this blog is helping you avoid bad retirement surprises. 

One bad surprise is finding out that you’re spending more than you expected!  A recent study from Global Atlantic found that almost two in five (39%) retirees are spending more than they expected.  I suspect that these retirees may not have set up a written and researched budget, ideally pre-retirement.  Paraphrasing Andrew Tobias, for some people life is 15% more expensive.  Something to consider here is what level of emergency fund you feel comfortable with.

2018 study  from The Transamerica Center for Retirement Studies found that only ten percent have a written retirement strategy! They noted, “Fifty-four percent of retirees currently have a retirement strategy – but only 10 percent have it in writing, while 44 percent have a plan but it is not written down.” 46 percent did not have a retirement strategy!

Wow, only 10 percent have a written strategy.  When I read ‘written strategy’, I think Retirement Income Plan and a retirement budget based on what your really plan to spend. Without those two, you might have a bad surprises retirement!

Budgeted spending must be equal to or less than the retirement income after taxes. If it is not, you need to alter the plan to either spend less or increase income (potentially work part time in retirement.)

I’m a big fan of written plans, preferably reviewed by a knowledgeable critic. I did mine as DIY (do it yourself), but I have quite a bit of background in financial planning. You may want to DIY or check with your trusted financial professional if you don’t have a plan.  You can ask them for samples and compare to the RIP (retirement income plan) here.

Something to look forward to

On the plus side, you will likely enjoy retirement.  The Transamerica Center for Retirement Studies study found, “Four in Ten Retirees Indicate Enjoyment of Life Has Increased. Since entering retirement, 40 percent of retirees indicate that their enjoyment of life has “increased,” 39 percent say it has “stayed the same.” Nineteen percent of retirees say their enjoyment of life has “decreased” since they retired.”

And the survey says!

I set up an anonymous survey on retirement plans and budgets, so let’s see how our readers are doing!  Here is the link to the survey which is completely voluntary and anonymous. I will publish the results in one of the next couple of blog posts.

Just do it

As Nike would say, just do it.  My budget and plans have been worked on and revised over about 6 years. Your plan and budget may not be perfect at first, but you’ll be on the way. Budgeting and tracking takes practice, but it all starts with doing it.  Good luck!

Actions you can take include:

If you’re part of the 90% without a written retirement income plan, work on one.  Maybe set a goal to have a draft by January 15th.

Choose and use a budget spreadsheet and follow a written budget.  Compare to your forecast retirement income and see if you’ll be safe from a bad retirement surprise.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here 

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Beni, Bene, Benny?

In remembrance of the ongoing centenary observances of WW I

CDN soldier

Augustus John, A Canadian Soldier, 1918. Tate Britain.

I like to refer to them as benes (pronounced like bennies)

Benes, short for beneficiary or beneficiaries.  The people or organizations who receive something of value from what is left when you pass. (A nice way of saying when you die.  Not if, unfortunately, but when.)  Things benes often receive include money from life insurance, pension plans, 401(k)s, IRAs and the like.

Benes are important because if you’re like me, they mean a lot to you.  Fortunately for my kids as benes, the cat predeceased them.  Benes are also a bit like a car, because they require checking and maintenance.  I read an excellent article on benes this week from Ed Slott, “The No. 1 IRA Mistake”

Put the message first

The message of this post is to check all your beneficiaries, IRA, life insurance, annuities, 401(k), 403(b), other number letter combinations, and any pensions.  Check them at least annually and on any change in family status.  (Although not necessarily after each family disagreement…) Adjust the benes as necessary.

Don’t give the money to the wrong person/people

Apparently, according to Ed’s article, there’s no shortage of people who don’t update their benes after major life events like marriage, divorce, and births.  Strangely, this seems to happen more often than you might think.  The wrong bene issue actually happened to me. A relative of mine did not update their life insurance beneficiary when they got married and the proceeds of the policy went to a relative that was the bene before the marriage.  To compound the issue, bad blood had developed between the deceased and the bene in the period after the marriage.  I guess the good news was that the relative who passed never knew what they had done.  The posthumous cash did not seem to heal the rift on either side.

Double check the plan administrator

One of Ed’s points in his article was that an individual did have their benes arranged correctly, then the plan administrator changed and the new system ‘forgot’ the correct designation and, at death, caused an issue.  Somewhat like another maintenance item on a car, double check the bene designation when the plan (401(k), 403(b), IRA, etc.) administrator changes.  Like if you move from Fi****** to Va******.

Be kind to the insurance company and/or plan administrator

When you update a beneficiary designation, let them know the address and phone number of the beneficiary.  After you’re dead, the company will have to try and track down these people (or organizations), especially if you have not told them they are a bene!  If you make it easier, the transfer of the money goes faster.  The claims people are on your side and want a fast and flawless claim process. (I know as I work with a claims team sometimes.)

Stretch IRAs

If you die with money left in your IRA, your beneficiary may be able to stretch out the receipt of the money, thus delaying taxes and potentially growing the funds even more.  I won’t get into details here, but it’s a good deal and you should discuss it with your tax advisor.  The success of the Stretch IRA concept does depend on having the bene designated correctly.

Trivia

Beni, bene, benny is a play on the Latin, veni, vidi, vici (I came, I saw, I conquered) which used to show up fairly often in cartoons when I was a kid. And no, I don’t know Latin.

And here’s a picture of the delicious hot chocolate at the sidewalk café at Rivoire in Florence, Italy, during the off-season:

Hot chocolate - Florence

Actions you can take include:

Make a list of your assets with beneficiaries – insurance policies, IRAs, pensions, etc.

Use the list to annually check the beneficiaries with the firms that administer the asset.  You can usually check online.

Discuss beneficiaries with your tax advisor so that you don’t put a bene in a bad tax position.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here 

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Danger, money mirage!

First a picture that’s kind of a mirage.

Okeefe canyon

Georgia O’Keefe, Canyon Country, 1963. Phoenix Art Museum.

Fidelity says

Fidelity Investments recently published their second quarter 2018 Retirement Analysis .  Fidelity administers over 30 million retirement accounts, so my suspicion would be that their results should be reflective of the total population of retirement account holders.  For the second quarter of 2018, Fidelity found average account balances $104,000 for 401(k)s, $106,900 for IRAs, and $83,400 for 403(b)s.

For millennials, Fidelity determined an average IRA balance of $15,150.

So far, very positive, but there’s more. Fidelity has 168,000 401(k) millionaires and 156,000 IRA millionaires.

Money mirage

You may look at Fidelity’s figures, and possibly your own 401(k) or IRA, and feel reasonably good about the state of retirement savings. You are in a money mirage and seeing what is not real.

What makes the Fidelity figures (or yours!) a mirage has three parts:

  1. Taxes – in a regular 401(k)/IRA/403(b), you will likely owe taxes on your withdrawals and that makes the money shrink, like water in a mirage as you get closer.
  2. Price changes – if you are in mutual funds, your amount could go up but it could also go down. If the market goes down, that makes the money shrink, like water in a mirage as you get closer.
  3. Longevity – the amount may look big, but it may need to last you for a 20 to 30 year retirement. Taking some out, year over year means the money shrinks, like… you get the idea.

Taxes

The problem with taxes on regular 401(k)/IRA/403(b)’s (let’s call them retirement savings), is that the more you withdraw, the more tax you will owe.  Not only more tax, but if you withdraw enough from your retirement savings in a year, you may make your Social Security payments subject to tax.  Depending on how much your MAGI is, you may make 50% to 85% of your Social Security taxable.

The $62,000 example

Now let’s say you’re a couple (the Example family!) with close to the average Social Security of $1400/person per month or about $33,700/year.  The Examples’ budget and retirement income plan (see the RIP here) has them grossing $62,000/year so they will need about $28,300 from their 401(k).  Now the mirage hits.  The Examples are well over the standard deduction of $20,000 for a married couple, so there will be tax on the 401(k) distribution, plus they will exceed the Social Security MAGI so part of their Social Security benefits will be taxable.  I eyeballed it (don’t try this at home if you don’t do a LOT of 1040’s) and it looks like the Examples will have approximately a $1,900 Federal tax liability. The mirage was the $28,300 from the 401(k) that turned out to be about $26,400 after Federal taxes.  There may also be state income taxes that shrink the initial amount.

Price changes

If your retirement savings are in a mutual fund (non-money market) and the price goes up, we’re all happy.  If the price goes down (remember 2007-2008?), we have the mirage of shrinking fund balances.  If you are nearing retirement, this mirage can be a real problem unless you have some cash for the early years of retirement, so you don’t have to sell shares at a low price.  Consult your financial planner to have a plan for this.

But I saw it with my own eyes!

We saw Fidelity’s decent average retirement plan balances and the impressive number of retirement plan millionaires, above. But what happens if they live too long?

Your retirement savings balance, like the average balances above, may sound fairly high, but once you start withdrawing funds, your accounts can deplete rapidly.  Remember the Example family, above.  They were planning to use approximately $28,000 from their retirement plans annually.  Unfortunately, if they have an average 401(k) or IRA balance, that will only be possible for about three to four years before they are out of money and living solely on Social Security and any other sources of income.

And here’s a mirage-like Victor Vasarely (Tridim-mc, 1974) from the Phoenix Art Museum:

Vasarely

Actions you can take include:

Develop a retirement income plan and discuss it with your tax advisor and your financial planner.

Know what the tax impact of withdrawals will be to your income.

Manage your retirement budget with your income plan to avoid bad surprises.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here 

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Maybe MAGI is not a gift

We got to visit the Aalsmere flower auction facility near Amsterdam a few years ago.  They have a cafeteria for visitors and workers, welcomed by what I call scary Chef!

Scary Chef

The Gift of the Magi

The original Gift of the Magi is an O. Henry story about a young couple sacrificing their individual prized possessions to give the other a special Christmas gift.  For Social Security and Medicare, MAGI is a whole different ballgame that gives you the potential opportunity to plan (a gift to yourself!) to avoid sacrificing (money.)

This blog post will be a little technical, but could contribute to tax savings when you plan for MAGI.  I will try to keep it as entertaining as possible given the subject matter.

What is MAGI

MAGI is Modified Adjusted Gross Income and is calculated by taking your Adjusted Gross Income (AGI) and adding in tax-free income, like interest on state and municipal bonds.  There are some other, less common items, that get added back also, for example savings bond interest excluded from income because it was used for post-secondary education; check with your tax advisor.

Why is MAGI important?

For pre-retirees, a higher MAGI may restrict your ability to contribute to a traditional pre-tax or a Roth IRA.

For retired people, a higher MAGI may subject some of your social security income to taxation and may cause you to pay higher Medicare Part B premiums.  The Medicare higher premium, the Income Related Monthly Adjustment Amount, is called IRMAA (I pronounce it like the name, Irma.)  The wind is called Mariah. (The Mariah link is fun, really.)

But I’m not rich!

Most of us aren’t rich, but MAGI can still affect us.  A MAGI as low as $25,001 for a single person (or $32001 for a married couple) will start to subject Social Security payments to income taxes.

How can I plan around MAGI?

First the disclaimers – If you’re a wage earner, like me, your planning possibilities are limited.  Small business owners have more control over wage versus business income and can exercise some control over timing of income.  I have to warn you again to discuss planning with your qualified tax advisor; we are discussing generally available information here that will not directly apply to your personal tax situation.

For pre-retirees, you may be able to use a technique called the ‘backdoor Roth’ to fund a Roth IRA, regardless of MAGI.  A good article from Ed Slott, an IRA expert, on backdoor Roth IRAs is here.

For both pre-retirees and retirees, the ways to lower MAGI are fairly straightforward:
-lower your W-2 and/or 1099-R income
-lower your tax-exempt income.

One way for retirees to lower 1099-R income is to take out less from the retirement accounts you have control over (IRA, SEP, 401(k), 403(b), etc.), subject of course to the Required Minimum Distribution (RMD) for those 70 ½ and over.  If you have a Roth IRA, withdrawals from the Roth won’t count towards MAGI.

Zero coupon municipal bonds exist that would pay out no tax-exempt interest until maturity.  Your financial advisor could help you plan the use of municipal zeros, instead of municipals paying semi-annual interest, to support MAGI planning.

If you have bank accounts, you could use withdrawals from savings accounts or CD’s as a substitute for the 1099-R income that you are avoiding.

Finally, selling mutual funds or stocks that have capital gains will contribute to AGI and MAGI only to the extent that you have a gain when you sell.

MAGI – gift or not?

I guess there are similarities to the Gift of the Magi because MAGI planning and executing requires you to give up something special, your time and perhaps payments to a tax advisor.  The gift you get back (a gift to yourself and loved ones) is the tax and Medicare Part B premium savings from your efforts that could be significant.

Citroen

When I was a child I lived in France for a while courtesy of the USAF.  Citroen cars were popular and this model of a DS in the window of a toy car shop in Haarlem, NL brought back memories.

Citroen

Actions you can take include:

-Consider how MAGI can affect your tax situation pre- and post-retirement.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here.

A correction

Back in the post Why not make money on your groceries? I thought a quote was from the movie ‘An Officer and a Gentleman’.  A reader informed me it was from ‘A Few Good Men’.  Thank you for the correction!

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.