How to Make a Retirement Budget So You Don’t Outlive Your Savings

You’ve spent decades in the workforce earning a living, your schedule dictated by the demands of the job. All the while, you’ve been steadily adding to your savings so that one day you could get to this point. Retirement.

Now, there’s no alarm to wake you up in the mornings and no boss to answer to. You can finally get around to crossing items off your bucket list — or simply have the opportunity to catch a midweek matinee movie.

The world is your oyster.

Life may feel more relaxed and carefree, but that doesn’t mean you no longer have financial responsibilities. In fact, now’s the time you might need to be even more diligent about budgeting your money.

Living on What You Have Saved

When you say goodbye to your 9-to-5, you also say goodbye to your regular paycheck. You’ll rely on Social Security benefits, the money in your retirement accounts and any additional income, like a pension, to cover your expenses.

Sticking to a budget is vital so your retirement savings last. That money you’ve squirreled away in your working years has to stretch for decades. Remember, life on a fixed income means there are no bonuses, overtime or promotions to increase your cash flow.

How Much Should You Have Saved?

If you’re already retired or nearing retirement age, hopefully you’ve done the math to determine whether you’ll have enough money to keep you afloat.

One popular rule of thumb is to have 25 times your average annual expenses saved up. But how much money you need in retirement depends on many factors, like your age, where you live and the type of retirement you want to enjoy.

If you want to retire at 60, rent a highrise in New York City and travel every couple of months, you’ll need considerably more money than a retiree who leaves the workforce at 70, lives in a paid-off home in rural North Dakota and just stays home and knits.

There are also a lot of unknowns in retirement — like what medical conditions you could develop and exactly how many years you’ll need your money to stretch.

That’s why it’s important to have robust retirement savings and be cognizant of your spending in your golden years.

How to Make the Most of Your Nest Egg

To make your savings last, you’ve got to be prudent about how much you withdraw each year.

“The gold standard has always been 4%, but new research has revealed a different number,” said Chuck Czajka, a certified estate planner and owner of Macro Money Concepts in Stuart, Florida.

He said withdrawing 3% a year instead gives you a 90% success rate to last through a 25-year retirement.

Keep in mind, once you’ve determined how much you can withdraw per year, you’ll want to divide that amount by 12 to come up with how much to withdraw each month. Czajka recommends withdrawing money from your retirement accounts on a monthly basis rather than taking out all you’d need for a whole year.

Meeting with a financial adviser can help you come up with a personalized plan to fit your individual situation.

“As people approach retirement, they should work with a retirement professional to determine their expected retirement income,” said Lisa Bamburg, a registered investment adviser and owner of Insurance Advantage in Jacksonville, Arkansas.

Two grandmothers dress in funky classes and brightly colored shirts.
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Factoring in Income Beyond Your Savings

In addition to the money you’ve saved in your 401(k), individual retirement account (IRA) or other investment accounts, a portion of your retirement income will come from Social Security benefits.

You can start collecting Social Security benefits as early as age 62, but you’ll receive less money per month than if you waited until full retirement age — 66 or 67, depending on when you were born.

If you delay claiming Social Security benefits past your full retirement age, you’ll receive even more each month. However, there’s no additional increase once you’ve reached age 70.

Pro Tip

This calculator from the Social Security Administration gives you a rough idea of your retirement benefits. This retirement estimator is more accurate but requires plugging in your personal info.

In addition to Social Security, you might have other sources of retirement income, like money from a pension plan or an annuity.

A report from the National Institute on Retirement Security found that many retirees don’t have a great diversity in their retirement income, though more income sources provide for a more secure retirement.

The report found less than 7% of older Americans have retirement income that’s made up of a combination of Social Security, a pension plan and a retirement contribution plan like a 401(k). About 40% rely on Social Security alone.

“Social Security benefits typically are not the equivalent of what it takes for most people to maintain their standard of living,” Bamburg said.

The Social Security Administration states its retirement benefits only replace about 40% of earnings for people with average wages — more for low-income workers and less for those in higher income brackets.

How to Create a Retirement Budget

Once you determine what your retirement income will be, it’s time to make your retirement budget.

If you’ve already been budgeting, you’re off to a great start, though your new budget will likely differ from that of your working days.

Take Stock of Your Essential Expenses

First you’ve got to get an overall look at your current spending. If you don’t already have a budget or track your spending, pull out the past several months of bank or credit card statements. Dig up old receipts if you tend to pay in cash.

Reviewing the past three months will help you find what you spend on average, but an even deeper dive — looking at the last six to 12 months — will give you a more accurate picture and will reveal things like your annual car insurance bill and holiday spending.

Group your spending into categories to get a good picture of where your money’s going. You’ll have fixed expenses, like your mortgage, where the cost stays the same each month. Other expenses, like groceries or utilities, will vary. For those, you should calculate your average monthly spend.

Account for Changes

After leaving the workforce, you’ll probably notice some differences in your spending. You’ll no longer have to pay for downtown parking near the office, dry cleaning your suits or pricey lunches with coworkers. Your monthly retirement contributions will be a thing of the past.

However, not everything will be budget cuts. You’ll have to account for new retirement expenses, like health care premiums your employer previously covered. If you’re 65, you can get health insurance through Medicare, but it’s likely you’ll have increased out-of-pocket medical costs as you age.

And of course, now that you have an influx in free time, you can pursue the things you’ve always wanted to do — which means more new expenses.

A group of retired women have fun.
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Make Room for Fun in Your Retirement Budget

A big part of retirement planning is determining what type of lifestyle you want to have when you’re no longer at work 40 hours a week.

Do you want to travel? Spend more time with your grandkids? Explore a new hobby? After you’ve covered your essential expenses, how you spend what’s left in your budget is totally up to you.

Don’t forget to include run-of-the-mill discretionary expenses, like cable, magazine subscriptions and dining out. It won’t all be cruise ships and Broadway plays.

If you’re married, be sure to share your vision for retirement with your partner, so you’re both on the same page about how you’ll spend your time and money.

Adjusting Expectations to Reality

As you create your monthly budget, you may discover you don’t have nearly as much money as you thought you’d have in retirement. That doesn’t mean you have to live out the rest of your life kicking yourself for not saving more. You have a few options to get by.

Take another look at your living expenses. Are there any ways you can cut costs? Slash your food spending with these tips to save money on groceries. Consider downsizing to a smaller home.

When it comes to your discretionary spending, look for ways to enjoy a more frugal retirement. Take advantage of senior discounts. Check out free activities at your local community center. Find ways to save money on traveling.

Although retirement means leaving your working days behind, you may find it necessary to pick up a side gig or part-time job to supplement your income. Seek out opportunities that match your interests so it doesn’t feel like work.

Don’t forget to enjoy this new stage of life. You worked hard — you deserve it.

Nicole Dow is a senior writer at The Penny Hoarder.

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When Should You Open a Roth IRA for Kids?

A lot of people regret not investing in their 20s. But what if you could go back in time even further and invest some of the money you earned from babysitting or mowing lawns in your teens?

If you invested $100 a month at age 25 and earned 8% annual returns, you’d have over $320,000 by your 65th birthday. But if you started investing at 15? You’d have over $710,000 by age 65.

Obviously, there’s no way to turn back the hands of time. But it could be possible for you to give your kids the gift of compounding and tax-free growth by opening a Roth IRA on their behalf.

The Rules on Starting a Roth IRA for Kids

Opening a Roth IRA for kids is perfectly legal as long as your child has earned income. Age doesn’t determine eligibility. If your kid is the Gerber Baby, they would qualify as long as their paychecks don’t put them above the Roth IRA income limits.

Your kid is eligible if they make money at a part-time job or they earn income through babysitting, tutoring or odd jobs. However, if they’re earning income from work that doesn’t come with a W-2, check with a tax pro because they could be responsible for Social Security and Medicare taxes.

What’s not allowed: You make up a job for them and say they’re on the family payroll. If you own a business, you’re allowed to employ your minor children, but you have to pay them what the IRS considers a reasonable wage. Paying your teen $10 an hour to do clerical work would probably count as reasonable. But making your 4-year-old a business associate with a $6,000 salary? Not so much.

You’ll need to open a custodial Roth IRA for a minor child. That means they’ll own the account, but as the child’s parent, you’ll make the investment decisions until they reach the age of majority, which is between 18 and 21, depending on the state. Once they reach the age of majority, they’re in control of the money.

Pro Tip

Not all brokerages have custodial Roth IRAs. Three brokerages that offer Roth IRAs for kids: Charles Schwab, Fidelity and T.D. Ameritrade.

Technically, it doesn’t matter who contributes to the account. You’re allowed to fund it, or your child can contribute money they’ve earned. But their contribution is capped at their earned income for the year. So if they earn $4,000 in 2021, that’s their maximum contribution even though someone under 50 can contribute up to $6,000.

The great thing about a Roth IRA for kids is that unlike with a traditional IRA, a Roth IRA is funded with post-tax dollars. Your kid probably doesn’t need a tax break now. Minors typically fall into a low tax bracket or their earnings are low enough that they don’t pay taxes at all. By paying any taxes due now, their money will compound for decades. When they reach retirement age, it’s theirs completely tax-free.

Plus, the Roth IRA rules allow you to access the contributions (but not the earnings) any time without taxes or a penalty.

Will a Roth IRA Affect Financial Aid Eligibility?

Retirement account balances don’t affect financial aid eligibility, regardless of whether they belong to the parent or the child.

But withdrawing money from a Roth IRA for tuition will count against financial aid, whether the account belongs to the parent or child. Even if you limit the withdrawal to the contributions — meaning you or your child won’t owe taxes or a penalty on the withdrawal — it will count as income for financial aid purposes.

This can get confusing because the ability to take penalty-free withdrawals for tuition is one of the much-touted Roth IRA benefits. It’s true that using a Roth IRA for tuition won’t result in a 10% IRS penalty if the account is at least 5 years old (though the owner of the account will pay income tax if they touch the earnings). But for many families, the reduction to financial aid simply isn’t worth it. A 529 plan is typically a better bet when college savings is the goal.

Let’s recap all that: Having a Roth IRA in your child’s name won’t affect their college financial aid award. But if they withdraw that money for any reason, they can significantly reduce their financial aid.

Should You Open a Roth IRA for Your Kid?

Obviously, the answer depends a lot on your kid. Here’s when a child’s Roth IRA makes sense and when you should avoid it.

Consider a Roth IRA for Your Kid if:

  • They’re willing to contribute at least part of their earnings. Sure, you could just throw money into a Roth IRA for your kid, but that won’t teach them the value of investing. A better solution is to match their contributions. You can show them the importance of taking advantage of a 401(k) plan match later on. Plus as their money grows, they’ll see that it pays not to spend every cent.
  • You’re OK with them getting control of a nice chunk of change at age 18 or 21. Once your child reaches age 18 or 21, depending on your state, the money is theirs to control. Obviously you can’t predict what your kid will do in the future, especially if they’re young. But if your child is older and they’ve been responsible with money thus far, that’s a good sign they can handle a Roth IRA.
  • They don’t need the money for college. Roth IRAs are designed for retirement, not education savings. If the goal is to use the money for college, a 529 plan is a better option.
  • You’re willing to manage the account. Because minors need a custodial account, you or another trusted adult will be responsible for the account until they reach majority age.

Don’t Even Think About a Roth IRA for Your Kid if:

  • You’re making up a fake job for them on the family payroll so that they’ll be eligible. This is illegal. If your child’s earned income comes from your business, they need to have a legitimate job and a reasonable wage in the eyes of the IRS.
  • They’re not willing to chip in. If your kid isn’t interested in contributing their money, they probably aren’t mature enough to have a Roth IRA.
  • You think they might withdraw money early. The big reasons to open a Roth IRA for your kid are to give their money extra time to compound and lock in their ultra-low tax rates. But if your child is likely to withdraw the money, they’ll miss out on compound growth. They’ll also pay taxes and a 10% penalty in most cases if they take out the earnings before age 59 ½.
  • Your own finances aren’t in shape. If you’re way behind on your own retirement savings or you don’t have a good handle on your finances, catching up is your No. 1 focus. Your child has plenty of time to save for retirement. Getting your own finances in shape so you don’t have to depend on your kids when you’re older is a far better gift for your kids than a Roth IRA.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to AskPenny@thepennyhoarder.com.

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Dear Penny: I Have $700K, but Spending Gives Me Panic Attacks

Dear Penny,

I’m a 61-year-old woman with $700,000 saved for retirement. I own my own home (with a mortgage), and I have more than five months of daily expenses in a cash account. I have a few investment accounts in addition to the cash and I basically follow a 60/20/20 budget for my after-tax and after-retirement dollars.  

Why can’t I stop freaking out about money? I save for home repairs, and then freak out when I write the check. I save for a new car and then freak out when it’s time to buy it. I HAVE THE MONEY.

I’m not poor, but I have been cash poor in the past. I have always saved for retirement, but I can’t stop freaking out. And by freaking out, I mean literally days of heart-pounding panic attacks where Xanax is my only friend.  

How do other people handle this? 

-L.

Dear L.,

Fear is healthy to a degree. It’s what makes us wear our seatbelts and avoid dark alleys at night. Some level of money-related fear is also a good thing. If you didn’t worry there was a chance you’d run out of it, why wouldn’t you spend every dollar?

But there’s a big difference between healthy fear and the serious anxiety that you’re experiencing. An advice columnist is no substitute for mental health treatment. Whatever you do, it’s essential that you discuss your anxiety with a professional.

I wish I could tell you that $700,000 is more than enough for you. But that wouldn’t be an honest answer. There’s no way I can tell you with certainty that any level of savings is a guarantee you’ll never run out of money. Even billionaires wind up in bankruptcy court. But there’s plenty you can do to reduce the risk of whatever outcome you fear.

Financial health isn’t just about any one number. That $700,000 could be more than enough if you live in a low-cost area and plan to work for several more years. But if you live in Manhattan, you want to retire next year and people in your family frequently live past 100, it could leave you woefully short. Context is what matters here. The amount you have saved is meaningless without knowing your lifestyle, goals and concerns.

What I’m wondering is how much actual planning you’ve done beyond just saving. Do you have an age in mind for when you want to retire? Have you thought about when you’ll take Social Security? Do you plan to stay in your home and, if so, will you be mortgage-free by the time you retire?

All of this may seem overwhelming to think about when money already causes you so much stress. But worrying constantly plays a mind trick on you. You spend so much brain space and energy on worrying that it can feel like you’re actually taking action.

I want you to do what seems counterintuitive and think about the absolute worst-case scenarios. But I don’t want you doing this alone. I’d urge you to meet with a financial adviser, since you have the means to do so.

Write down your biggest fears so that you can discuss them together. Are you afraid of outliving your savings? Are you worried the market will crash right as you’re about to retire? Or that health care costs will eat up your retirement budget?

A financial adviser doesn’t have any special sourcery that can guarantee none of these things will happen. What they can do, though, is help you reduce the risk of those worst-case scenarios. If you’re worried about running out of money, they can help you plan how much you’ll safely be able to withdraw from retirement accounts and when you should take Social Security. Of course they can’t stop a stock market crash from happening, but they can make sure your investments are safely allocated based on your goals.

It sounds like you’re someone with a low risk tolerance, which means you probably want to invest conservatively. Perhaps a good investment for you would be to pay off that mortgage using a chunk of that savings. Will it be scary to fork over that much money at once? Of course, especially since the interest savings will probably pale compared to your investment returns. But if you can sleep more soundly knowing that what’s probably your biggest expense is taken care of, it could be worth it. I’m not saying that’s something you should absolutely do, but it’s worth discussing with your financial pro.

I suspect that when you think realistically about your worst-case scenarios, you’ll realize things aren’t as dire as you imagined. Suppose for some reason you had to quit working tomorrow. Your plans for retirement would probably change significantly. But at the same time, you wouldn’t be left without food or a home.

You say you’ve been cash poor in the past. Yet you overcame that and even managed to save for retirement when you didn’t have much money. You aren’t doomed to repeat your past.

I think if you do what’s scary and face your fears head-on — with the help of both a financial and a mental health professional — you can reduce the anxiety you feel about money. That’s not to say you’ll never worry about money again. But you can get to a place where fears about money aren’t dominating your life.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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5 Steps to Claim Your Ex’s Social Security After Divorce

Love and marriage don’t always last forever. But if your matrimony lasted 10 years or more, the financial benefits can last a lifetime. That’s because you may be able to take Social Security based on your ex-spouse’s benefits instead of your own, even if you divorced decades ago.

The philosophy is that both spouses often contribute economically during the marriage, even if only one person was employed. The Social Security rules protect those who spent most of their working years raising a family or playing a supportive role to their spouse and may have no retirement savings of their own.

The Rules for Social Security After Divorce

The maximum benefit you can get based on the record of a spouse — whether you’re currently married or divorced — is 50% of their full retirement age benefit. Full retirement age is the age at which you qualify for 100% of your benefit. It’s 66 or 67, depending on when you were born.

If your ex-spouse dies before you, you’ll typically be eligible to receive survivors benefits of 100% of the monthly payment they were receiving, just as you could if your current spouse died.

People with a long employment record will typically qualify for a bigger benefit based on their own earnings instead of a spouse’s. Social Security will give you the bigger benefit, but not both.

If you do qualify for more money thanks to your ex-spouse, they’ll technically give you whatever benefit you earned based on your record. Then, they’ll use your ex’s record to make up the difference.

Seeking to get revenge on an ex-spouse by claiming their Social Security? Move on. Your decision won’t affect their benefits in any way, nor will it impact their current spouse if they’ve remarried. If they’ve been married multiple times, all their exes are allowed to claim on their record.

Occasionally, a divorce settlement will state that one spouse can’t collect Social Security based on the other person’s record. Such stipulations are utter nonsense. The Social Security Administration says they’re “worthless and never enforced.”

How to Get Your Ex’s Social Security in 5 Easy Steps

Since your Social Security checks won’t affect your ex in any way, the only reason to try to claim their benefits is if you think you can get more money. If you suspect their record will maximize your Social Security, follow these five steps.

1. Make Sure You Can Answer ‘Yes’ to These Questions

To qualify for an ex’s Social Security benefits, you need to be able to answer “yes” to these four questions.

  • Were you married for 10 years or more? If your marriage lasted less than 10 years, you won’t qualify for an ex’s benefits. Common-law marriages don’t count. You also need to have been divorced at least two years before you can start getting checks based on your former spouse’s history, unless they’ve already started receiving benefits.
  • Are you at least 62? This is the minimum age for starting Social Security retirement benefits, no matter whose record you’re using. However, you can qualify regardless of your age if you’re caring for your ex’s child who is under 16 or disabled. If your ex-spouse is deceased, you can qualify for survivors benefits at age 60, or age 50 if you’re disabled.
  • Are you still unmarried? If you’re currently married, you can only claim on your record or your current spouse’s record. You’ll only be eligible 50% of their full benefit as well. And if you’ve been married and divorced multiple times? Social Security will use whichever ex-spouse’s record gives you the biggest benefit. Remember, though: Only marriages that lasted 10 years or more will count.
  • Is your ex eligible for benefits? In addition to the minimum age of 62, Social Security requires at least 40 work credits, which amounts to 10 years of full-time work, to start benefits. If your ex doesn’t meet these criteria, there’s no benefit for you to claim. Note that they don’t need to be receiving benefits. They just need to be eligible.

2. Gather Your Ex’s Information

You’re going to need some information to prove to Social Security that you’re eligible for your ex’s benefits. Be prepared to provide your marriage license and your divorce decree.

Social Security will also need to locate their record. This will be easiest if you still have their Social Security number. If you no longer have it, Social Security may be able to find their record if you can provide their date of birth, where they were born and the names of their parents.

3. Resist the Urge to Tell Them

Remember: Your decision to seek more Social Security on your ex’s record does not affect them in any way. So there’s absolutely no reason to contact them about it. You don’t need their consent to get benefits based on their record. Social Security will not contact them about your application.

4. Ask Social Security Whose Record Gets You the Best Benefit

Now take that information you gathered about your ex to Social Security so you can figure out whose record will give you the biggest benefit. You can call them at 800-772-1213 or visit your local office. An appointment isn’t required, but scheduling one can cut down on your waiting time.

5. Delay as Long as Possible (but Not Too Long)

The earlier you take benefits, the lower your monthly checks will be, no matter whose record you claim on. The 50% you can qualify for from their history is the maximum you’ll get if you wait until your full retirement age of 66 or 67. For every year you claim before then, you’ll permanently reduce your benefits by 6.66%. If you claim at 62, you’d only qualify for 32.5% of their benefit.

Don’t wait too long, though. When you take benefits on your own record, you get an extra 8% for every year you delay past your full retirement age until your benefits max out at 70. But when you’re getting spousal benefits, you don’t earn delayed retirement credits. You won’t get extra money for waiting past your full retirement age, so there’s no point in delaying any further.

A final note: In the past, a common Social Security strategy was to claim based on a current or former spouse’s record as early as possible, then switch over to your own bigger benefit later on. But the rules changed under a 2015 law called the Bipartisan Budget Act. Now this is only an option if you were born Jan. 2, 1954, or earlier.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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10 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard for your retirement nest egg, so the idea of paying taxes on those savings isn’t exactly appealing. If you know what you’re doing, you can avoid overpaying Uncle Sam as you start collecting Social Security and making withdrawals (including RMDs) from IRAs and 401(k)s. Unfortunately, though, retirees don’t always know all the tax code ins and outs and, as a result, end up paying more in taxes than is necessary. For example, here are 10 questions retirees often get wrong about taxes in retirement. Take a look and see how much you really understand about your own tax situation.

(And check out our State-by-State Guide to Taxes on Retirees to learn more about how you will be taxed by your state during retirement.)

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Tax Rates in Retirement

picture of tax rate arrow chart showing upward trendpicture of tax rate arrow chart showing upward trend

Question: When you retire, is your tax rate going to be higher or lower than it was when you were working?

Answer: It depends. Many people make their retirement plans with the assumption that they’ll fall into a lower tax bracket once they retire. But that’s often not the case, for the following three reasons.

1. Retirees typically no longer have all the tax deductions they once did. Their homes are paid off or close to it, so there’s no mortgage interest deduction. There are also no kids to claim as dependents, or annual tax-deferred 401(k) contributions to reduce income. So, almost all your income will be taxable during retirement.

2. Retirees want to have fun—which costs money. If you’re like many newly retired folks, you might want to travel and engage in the hobbies you didn’t have time for before, and that doesn’t come cheap. So, the income you set aside for yourself in retirement may not be much lower than what you were making in your job.

3. Future tax rates may be higher than they are today. Let’s face it…tax rates now are low when viewed in a historical context. The top tax rate of 37% in 2021 is a bargain compared with the 94% of the 1940s and even the 70% range as recently as the 1970s. And considering today’s political climate and growing national debt, future tax rates could end up much higher than they are today.

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Taxation of Social Security Benefits

picture of a Social Security card surrounded by stacks of coinspicture of a Social Security card surrounded by stacks of coins

Question: Are Social Security benefits taxable?

Answer: Yes. Depending on your “provisional income,” up to 85% of your Social Security benefits are subject to federal income taxes. To determine your provisional income, take your modified adjusted gross income, add half of your Social Security benefits and add all of your tax-exempt interest.

If you’re married and file taxes jointly, here’s what you’ll be looking at:

  • If your provisional income is less than $32,000 ($25,000 for singles), there’s no tax on your Social Security benefits.
  • If your income is between $32,000 and $44,000 ($25,000 to $34,000 for singles), then up to 50% of your Social Security benefits can be taxed.
  • If your income is more than $44,000 ($34,000 for singles), then up to 85% of your Social Security benefits are taxable.

The IRS has a handy calculator that can help you determine whether your benefits are taxable. You should also check out Calculating Taxes on Social Security Benefits.

And don’t forget state taxes. In most states (but not all!), Social Security benefits are tax-free.

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Withdrawals from Roth IRAs

picture of a jar labeled &quot;Roth IRA&quot; with money in itpicture of a jar labeled &quot;Roth IRA&quot; with money in it

Question: Are withdrawals from Roth IRAs tax-free once you retire?

Answer: Yes. Roth IRAs come with a big long-term tax advantage: Unlike their 401(k) and traditional IRA cousins—which are funded with pretax dollars—you pay the taxes on your contributions to Roths up front, so your withdrawals are tax-free once you retire. One important caveat is that you must have held your account for at least five years before you can take tax-free withdrawals. And while you can withdraw the amount you contributed at any time tax-free, you must be at least age 59½ to be able to withdraw the gains without facing a 10% early-withdrawal penalty.

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Taxation of Annuity Income

picture of an elderly couple discussing finances with an advisorpicture of an elderly couple discussing finances with an advisor

Question: Is the income you receive from an annuity you own taxable?

Answer: Probably (at least for some of it). If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income. In addition, be aware that you’ll have to pay any taxes that you owe on the annuity at your ordinary income-tax rate, not the preferable capital gains rate.

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Age for Starting RMDs

picture of elderly man blowing out candles on a birthday cakepicture of elderly man blowing out candles on a birthday cake

Question: At what age must holders of traditional IRAs and 401(k)s start taking required minimum distributions (RMDs)?

Answer: Age 72. The SECURE Act raised the age for RMDs to 72, starting on January 1, 2020. It used to be 70½. (Note that, although the CARES Act waived RMDs for 2020, they’re back for 2021 and beyond.)

As for the amount that you are forced to withdraw: You’ll start out at about 3.65%, and that percentage goes up every year. At age 80, it’s 5.35%. At 90, it’s 8.77%. Figuring out the percentages might not be as hard as you think if you try our RMD calculator. (Note that, beginning in 2022, RMD calculations will be adjusted so that distributions are spread out over a longer period of time.)

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RMDs From Multiple IRAs and 401(k)s

picture of a spiral notebook with &quot;Required Minimum Distributions&quot; written on the front coverpicture of a spiral notebook with &quot;Required Minimum Distributions&quot; written on the front cover

Question: Are RMDs calculated the same way for distributions from multiple IRAs and multiple 401(k) plans?

Answer: No. There’s one important difference if you have multiple retirement accounts. If you have several traditional IRAs, the RMDs are calculated separately for each IRA but can be withdrawn from any of your accounts. On the other hand, if you have multiple 401(k) accounts, the amount must be calculated for each 401(k) and withdrawn separately from each account. For this reason, some 401(k) administrators calculate your required distribution and send it to you automatically if you haven’t withdrawn the money by a certain date, but IRA administrators may not automatically distribute the money from your IRAs.

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Due Date for Your First RMD

picture of a piggy bank with &quot;RMD&quot; written on the sidepicture of a piggy bank with &quot;RMD&quot; written on the side

Question: Do you have to take your first RMD by December 31 of the year you turn 72?

Answer: No. Normally, you have to take RMDs for each year after you turn age 72 by the end of the year. However, you don’t have to take your first RMD until April 1 of the year after you turn 72. But be careful—if you delay the first withdrawal, you’ll also have to take your second RMD by December 31 of the same year. Because you’ll have to pay taxes on both RMDs (minus any portion from nondeductible contributions), taking two RMDs in one year could bump you into a higher tax bracket.

It could also have other ripple effects, such as making you subject to the Medicare high-income surcharge if your adjusted gross income (plus tax-exempt interest income) rises above $88,000 if you’re single or $176,000 if married filing jointly. (Note: Those are the income thresholds for determining 2021 surcharges.)

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Taxation of Life Insurance Proceeds

picture of a life insurance contract with money laying on itpicture of a life insurance contract with money laying on it

Question: If your spouse dies and you get a big life insurance payout, will you have to pay tax on the money?

Answer: No. You have enough to deal with during such a difficult time, so it’s good to know that life insurance proceeds paid because of the insured person’s death are not taxable.

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Estate Tax Threshold

picture of the words &quot;Estate Tax&quot; next to a judge's gavel and moneypicture of the words &quot;Estate Tax&quot; next to a judge's gavel and money

Question: How valuable must an individual’s estate be at death to be hit by federal estate taxes in 2021?

Answer: $11.7 million ($23.4 million or more for a married couple). If the value of an estate is less than the threshold amount, then no federal estate tax is due. As a result, federal estate taxes aren’t a factor for very many people. However, that will change in the future. The 2017 tax reform law more than doubled the federal estate tax exemption threshold—but only temporarily. It’s schedule to drop back down to $5 million (plus adjustments for inflation) in 2026. Plus, during his 2020 campaign, President Biden called for a reduction of the exemption threshold sooner.

If your estate isn’t subject to federal taxes, it still might owe state taxes. Twelve states and the District of Columbia charge a state estate tax, and their exclusion limits can be much lower than the federal limit. In addition, six states impose inheritance taxes, which are paid by your heirs. (See 18 States With Scary Death Taxes for more details.)

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Standard Deduction Amounts

picture of a 1040 tax form with a pen laying on it next to the standard deduction linepicture of a 1040 tax form with a pen laying on it next to the standard deduction line

Question: If you’re over 65, can you take a higher standard deduction than other folks are allowed?

Answer: Yes. For 2021, to the standard deduction for most people is $12,550 if you’re single and $25,100 for married couples filing a joint tax return ($12,400 and $24,800, respectively, for 2020). However, those 65 and older get an extra $1,700 in 2021 if they’re filing as single or head of household ($1,650 for 2020). Married filing jointly? If one spouse is 65 or older and the other isn’t, the standard deduction increases by $1,350 ($1,300 for 2020). If both spouses are 65 or older, the increase for 2021 is $2,700 ($2,600 for 2020).

Source: kiplinger.com

14 Social Security Tasks You Can Do Online

If you’ve ever had the chore of going to your closest Social Security office for, say, a name change or a replacement for your ancient (and MIA) Social Security card. . . well, I’m so sorry. The wait was likely interminable and the experience uncomfortable; at least it was for me.

In pre-internet days, you had no choice but to physically go to a Social Security office for many tasks. These days, you can manage your own Social Security profile and execute many critical moves yourself online. (Note: During the COVID-19 emergency, Social Security offices nationwide are staffed but are mostly closed for face-to-face services. They are offering limited in-person meetings but these are being reserved for critical situations. Call your local office — they’re typically staffed until 4 p.m. weekdays — if you need help.)

Whether you’re a pre-retiree on the cusp of claiming your hard-earned Social Security benefits or a young worker decades away from retirement, you should set up a free MySocialSecurity account. It’s a good way to protect against Social Security fraud, and it’s a prerequisite for many of the items on our list here.

Once you’ve set up your MySocialSecurity account, take charge of your Social Security benefits by reviewing your earnings history, calculating your benefits, ultimately filing for Social Security and Medicare, and much more. Let us show you how.

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Request a Replacement Social Security Card

a stack of social security cardsa stack of social security cards

If you’re just looking for a replacement Social Security card, there’s no need to trek to a Social Security office and wait, and wait, and wait. You can do it online. The replacement card should arrive within two weeks.

The Social Security Administration is still rolling out this service, and you cannot request a replacement Social Security card online if you live in Minnesota, Nevada, New Hampshire, Oklahoma or West Virginia. If you live in one of those states, you can apply with a mail-in application or in person when the offices finally fully reopen. You can find the office closet to you here. 

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Request a Replacement Medicare Card

A social security and medicare cardA social security and medicare card

Can’t locate your red, white, and blue Medicare card? You can request a replacement card through the Social Security website. Sign in to your MySocialSecurity account, hit the “Replacement Documents” tab, then tap “Mail My Replacement Medicare Card.” You should receive it in approximately 30 days.

For other Medicare questions and issues, head over to Medicare.gov, where you should also have a My Medicare.gov account because, c’mon.

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Estimate Your Social Security Benefits

A federal checkA federal check

Hey, you’ve been paying into Social Security for years. It’s only fair to want to know how much you’ll have coming your way when you apply for the benefits.

With your MySocialSecurity online account, you can quickly access and review your Social Security statement that the SSA otherwise mails once a year. (Here’s a PDF of what a Social Security statement looks like). Whatever your age, it’s good to keep up with your Social Security benefits projections — for claiming at 62 when you are first eligible to take Social Security (40% of Americans do so at this age), at “full retirement age” (66 or 67, depending on what year you were born), and at age 70 (the age at which benefits cease to increase.

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Review Your Earnings History

a blurred image of George Washington on the dollar billa blurred image of George Washington on the dollar bill

Take a fun stroll down memory lane by looking at exactly how much money you earned each year since you turned 18.

But the fun can stop if you spot an error in your earnings history. If the SSA doesn’t have that record correct, you could be shorted in benefits (and that’s one of the reasons your earnings history is available). Check it out, and if you see something’s wrong, report it to the Social Security Administration. There’s a link to contact them about errors. See our article How to Fix Your Social Security Earnings Record for more.

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Apply for Social Security Benefits

A senior woman on her laptop computer in her kitchenA senior woman on her laptop computer in her kitchen

You’re of age, and you’ve picked your retirement date. Now, it’s time to apply for the Social Security benefits you’ve earned. You no longer need to drive to a Social Security office or make an appointment with a representative. You can apply online to start receiving your retirement benefits. The online process takes all of 15 minutes, according to the SSA. If there are questions about your application, you will be contacted by the SSA by phone or through the mail.

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Apply for Social Security Disability Payments

A view of the sign on the social security buildingA view of the sign on the social security building

If you have a medical condition that leaves you unable to work for at least a year, you may be eligible for Social Security disability benefits.

On the Social Security website, you can click into the disability planner to see if you qualify. You can also apply online for disability benefits.

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Apply for Medicare Benefits

A social security and medicare cardA social security and medicare card

Turning 65 soon? Take advantage of the Social Security website to enroll in Medicare parts A and B. Note that your initial enrollment period starts three months before your 65th birthday and ends three months after your birthday month. Medicare Part A is hospital insurance, and Medicare Part B is Medicare Part B is medical insurance, which you pay for (and can turn down). The Social Security website answers a ton of questions about Medicare options and offers you plenty of links.

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Check the Status of Your Social Security Application

A senior couple on a laptop computer A senior couple on a laptop computer

Have you already applied for Social Security benefits? You can check the status of your Social Security benefits application online, rather than trucking to your nearest Social Security office or trying to raise somebody on the phone.

Within your My Social Security account, you’ll be able to see your re-entry number for an online benefit application or appeal that has not been submitted; the date the SSA received your application or appeal; your scheduled hearing date and time; the location where your current claim or appeal is being processed; and if a decision has been made.

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Appeal a Social Security Decision

A senior man on his laptop computerA senior man on his laptop computer

What? You were denied Social Security benefits when you applied? You can appeal that negative decision online. You have up to 60 days after you hear about that denial to file an appeal (the reasons for the denial will be in that letter). You have several recourse options: You can request a reconsideration; you can ask for a hearing by an administrative law judge; you can seek a review by the SSA’s Appeals Council; or you can seek a federal court review.

For more, see our article Appeal a Decision by Social Security.

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Change Your Address and Telephone Number

A senior couple smile at the camera in front of their homeA senior couple smile at the camera in front of their home

If you’ve bounced around a time or two in your career, make sure the Social Security Administration knows where to find you. You can update your contact information online via your MySocialSecurity account. Log in, click “My Profile,” then click the “Update Contact Information” button, and make and submit your changes. Simple.

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Set Up or Change Direct Deposit

A direct deposit slipA direct deposit slip

New Social Security beneficiaries (since 2013) must receive their benefits electronically. Older beneficiaries can switch to direct deposit at any time.

It’s easy to set up or change your direct deposit of Social Security benefits online if you have a MySocialSecurity account.

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Print Proof of Social Security Benefits

A senior man takes something off a printerA senior man takes something off a printer

Before you go off and print your proof of benefits — online, people, you don’t have to head to an SSA office — you’ll first probably want to know what Social Security Benefit Verification Letter is. Kinda self-explanatory, this, but here goes: Also known as a benefits letter or Social Security award letter, this document serves as proof of your retirement benefits. It includes your name, date of birth and the Social Security benefits you are receiving. To print it you’ve got to access it and to access it you need (everyone, say it with me) a My Social Security account. Easy peasy.

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Print Your 1099

A senior man on his computerA senior man on his computer

At tax time, you need your documents — and early-bird files may not want to wait for their Form 1099 for any Social Security benefits received in the previous year to arrive in the mail. You can print that Form 1099 from your MySocialSecurity account.

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Get Answers to Frequently Asked Questions About Social Security

A street sign that reads &quot;questions&quot; and &quot;answers&quot;A street sign that reads &quot;questions&quot; and &quot;answers&quot;

Do you have a burning question about Social Security benefits, whether offices are open, how to replace a Social Security card for one of your children or some such? Head over to the Social Security website, and tap the FAQs. They have answers.

Source: kiplinger.com

When You Have To Retire due to COVID-19

Here’s a stunning fact: The Bureau of Labor Statistics reports that unemployment during the pandemic for workers 55 and older jumped from 3.3% in March 2020 to 13.6% in April 2020. The numbers settled down in the later months, but the question remains: What happened to those older workers laid off from April to July, when the rate remained a high 8.7%?

This type of extended unemployment or forced retirement can cause people to fall completely off the career ladder in their field, leaving them in a difficult spot where they rely on their limited remaining unemployment benefits as they figure out what’s next.

The exact path forward from forced early retirement isn’t the same for everyone. Some people may choose to completely retire and live off their retirement savings and Social Security. Others may chart some way to re-enter the workforce. Let’s take a look at some of the options available to folks who found themselves in forced early retirement due to COVID-19.

In this article

Six steps to take after getting laid off

This situation presents a spectrum of options, ranging from trying to get back into your previous field, looking for a parallel field into which you can transfer skills, starting over professionally, or simply retiring for good.

Lean in on personal and professional relationships

If you’re hoping to stay in your current field, job searching is an obvious next step, but don’t just spend your time looking at Indeed and other job listing sites. Instead, reach out to people that you have worked with and had a positive relationship with in the past and see what opportunities they may know about.

Do your contacts know of any jobs in your previous field that you might be a good fit for? Are they willing to provide a reference to you if you seek a new job in this field or a related field? Can they recommend you internally for any open positions?

Often, the path out of an unwanted early retirement back into your old career path is through an old contact. That personal connection matters, both between you and that person and between that person and the job you may be able to get.

Consult or freelance

If you want to stay in your current field but there aren’t any employment opportunities available to you, consider using your skills for freelancing or consulting work. While this may not be the outcome you desire, as freelancing and consulting work comes with fewer professional benefits, it does allow you to keep your feet in the field and keep income coming in.

If you’re looking for quick and very simple freelancing opportunities, consider looking at Fiverr, which will provide small but simple freelancing jobs. For more challenging and more lucrative opportunities, take a look at Upwork. You may also want to look at any consulting opportunities with previous employers as a starting point.

Evaluate your skills

If you don’t have any such opportunities available to you, this may be an opportunity to step back and evaluate your skills from the perspective of considering what fields might actually be a good fit for you. What fields are open to you with the skills you’ve acquired in your previous career?

For example, although I was once in the data mining profession, I spent a lot of my professional time on documentation, report writing, and communication with collaborators. Those skills set me up for a new career path as a freelance writer.

Step back and look at the skills you’ve accumulated and ask yourself what career paths those skills might be a great fit for. You might find that the things you’ve learned lead you to a completely different destination.

Start a new career

If it appears as though your old career path is a dead end, it may be time to consider a new career entirely.

A good first step here is to take some skills assessments. Minnesota State University provides a great list of skills assessments for people considering a career path. These will often clearly illustrate what natural talents and skills you have and can point you toward some careers you might be suited for.

From there, you can assess some entirely new career options. Do you need further education? Do you need to go to a trade school? Maybe you just need to do some independent learning.

Downsize your lifestyle

From a practical perspective, unexpected forced early retirement likely means that you need to downsize your lifestyle. In the short term, you likely made a bunch of easy decisions about your spending choices, but if this is a more permanent change or one that will last years, you should start considering bigger changes.

Start with housing. Can you move to a smaller home or into an apartment? Can you share your living space with someone else in order to offset some of the costs? For transportation, do you need a car or can you get by with mass transit options, bicycling, and/or carpooling? Do you need a data plan for your cellphone? What about cable?

When you chop away a bunch of bigger expenses, suddenly the challenge of figuring out how to financially make it on a lower income becomes much easier.

Recalibrate your investments (if you have them)

If you’re fortunate enough to have investments put aside for retirement, the moment at which you’re forced into early retirement is a moment to consider recalibrating your investments into “retirement mode.” The reason is that, in effect, you’ve become a retiree who wants to be able to live off of those investments for as long as possible, and thus retirement requires a different investment strategy than trying to grow wealth over the long term.

How does a retiree approach investing, then? Someone who is more than 10 years from retirement doesn’t plan to withdraw anything over that period, so they’re likely invested in a very aggressive way. A fresh retiree will likely need to make withdrawals in the next 10 years, so that money should be invested in a more stable fashion with less volatility.

We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

What to Do With Your 401(k) During a Stock Market Crash

You know the story of “The Tortoise and the Hare”? It turned out slow and steady won the race.

That applies to investing, too.

Last year, as the Dow Jones Industrial Average rose and fell daily — and even hourly — to the economic effects of COVID-19, the financial roller coaster ride left plenty of investors feeling a bit queasy.

If you had a 401(k) or IRA, you may have felt your own steep drop in the pit of your stomach. As it turned out, though, the 2020 stock market crash — and more importantly, the subsequent recovery — provided a good lesson in playing the long game as an investor.

Here’s what you need to keep in mind if you’re inclined to panic about your 401(k) amid turmoil in the stock market.

How Your Retirement Investments Work

To understand why you shouldn’t panic too much about your retirement accounts, you need to know how they work.

A 401(k) is an employer-sponsored investment plan while Individual Retirement Accounts — either traditional or Roth IRA — are typically set up by the individual to invest money toward retirement.

If it’s a 401(k) or traditional IRA, you get the tax benefit up front and pay when you withdraw; with a Roth IRA, the withdrawals are tax-free. Either way, by adding money on a regular basis, these accounts let you grow your nest egg that you can live on in your retirement.

In the beginning, you’ll have more time to take risks on investments — like stocks — and when you get closer to retirement age, you’ll shift investments to less-risky categories like bonds and cash that don’t lose their value during a market slump.

So even if there’s a dip in the stock market, you’ll have time to recover if you’re younger and you’ll be better protected from fluctuations as you near retirement.

What to Do With Your 401(k) During a Slump

Watching your 401(k) balance take a tumble isn’t anyone’s idea of fun. We get it.

But a down market is not a time to panic, according to Certified Financial Planner Holly Donaldson of St. Petersburg, Florida.

That’s because the cash component of your account, as well as the contributions you should absolutely continue to make, can be used to buy up more funds at rock-bottom prices.

So selling is the last thing you want to do because you’d be locking in your losses.

In fact, Donaldson suggests ignoring your newsfeed if it puts you in a panic about your retirement accounts.

“What I advise is you use the calendar and not the news,” said Donaldson, who suggested checking in with your portfolio on a quarterly basis rather than a daily one.

Pro Tip

Even if your account balance takes a nosedive, don’t withdraw your money from an IRAor 401(k) — the penalties for early withdrawal are substantial.

She noted that it typically takes the stock market one to two years to correct itself, so a single day — or even a few weeks — of volatility should not change your long-term strategy.

Don’t try to time your investments. Instead, use dollar-cost averaging, which means you invest on a regular schedule no matter what’s happening in the stock market.

Avoiding the stress of hourly updates on your investments is key to not only a balanced financial portfolio but your mental health, too.

“If a 27-year-old wants to increase their chances of suffering chronic anxiety, then yeah, sure, look at your 401(k) every day,” she said.

And even if you’re closer to retirement, Donaldson recommended talking to a financial planner or speaking to your employer’s 401(k) representative to ensure your portfolio has the right mix of stocks, bonds and cash.

Slow and steady. Wins it every time.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

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Source: thepennyhoarder.com