Here are some retirement saving tax tips that should help you keep more of that money for yourself:

If You Plan on Converting to a Roth IRA,  Do It This Year

If you are planning to convert any of your pre-tax investments to a Roth IRA, this is a great year for it.  Why?   Because taxes will likely increase on most income tax brackets next year, making that rollover more costly.

Don’t Take Early Distributions

The IRS conducted a study in 2003 which revealed that nearly 5 million taxpayers took money out of retirement accounts before they were 59 ½ years old. The retirement account penalties for withdrawing money early were about $3.4 billion!  In addition to paying income taxes on your distribution, you are also smacked with a 10% penalty when withdrawing before the eligible distribution age.

If you use retirement savings plan specifies a minimum age to withdraw money, do not withdraw it before you are the appropriate age. If you feel there is a possibility of having to withdraw money prior to retirement, keep more than one retirement savings; one that allows withdrawals anytime, and another which does not.

When Changing Jobs, Take a Rollover Instead of a Distribution

When you change jobs, it’s in your best interest to roll your funds directly to the new employer’s retirement plan or your own IRA plan.  If you choose a distribution instead of a rollover,  you’ll lose 20% because the of the 20% IRA Withholding tax law. This rule applies to a 401k or 403b plans and not to a SEP IRA. Sometimes, it is smart to roll a 401k to a SIMPLE or traditional IRA because you will not only avoid paying taxes on the distribution, but will also have unlimited investment choices (compared the the few options most 401(k) plans offer).

You Can Designate Your Children as Your Beneficiaries

Many people commonly put their spouses on their retirement accounts as their beneficiary. If you have an IRA, you can designate children and/or grandchildren as beneficiaries, which allows the money to be stretched out over the child’s project life span. The child can take IRA pay outs over their lifetime if they choose. This means the money earns decades more tax-deferred or tax-free growth than it would have if the surviving spouse was named the beneficiary. Realize that naming your children as beneficiaries requires the corresponding spouse needs to sign a waiver; otherwise he or she is automatically the beneficiary.

You should consult a professional for setting up an IRA trust for minor children to make sure you avoid any money traps.

In Most Cases Don’t Take a Lump Sum When You Retire

In most cases, when you’ve finally said goodbye to the world of employment, do not take a lump sum or you’ll have an insanely high tax bill and the money will no longer grow tax free. Instead, you may consider moving your retirement funds from an employer-sponsored plan into an IRA to allow you to maintain tax-deferred status while taking distributions (that are subject to only ordinary income taxes at 59 1/2). There is a loophole in Section 72(t) where you can take equitable distributions from an IRA before 59 1/2 (but after 55) and avoid the 10% early withdrawal penalty (this loophole has other provisions to be aware of). It is highly recommended that you consult with a financial planner or tax professional who specializes in retirement plan distributions as the Internal Revenue Service’s code is complex and making the right decision depends upon your financial needs and situation.

photo credit: Pug50

This is a guest post by TaxDebtHelp.com, a website that provides advice and guidance for taxpayers with tax debts and other major State and IRS tax problems.

It seems that brokerages and employers are increasingly competing for those retirement funds. According to the Investment Company Institute, more than 50 million employees and retirees hold $3 trillion in 401(k) plans, which means that brokerage firms and mutual fund companies are clamoring for the business. TD Ameritrade and E*Trade are offering up to $500 to buy rollover business.

At the same time, employers who have been historically non-committal about keeping retirees in their plans have begun offering low-cost index and exchange-traded funds, target-date retirement funds and annuities as a carrot to hang on to 401(k) participants.

So…should you roll your 401(k) to an IRA or not?

Advantages of rolling a 401(k) to an IRA

More investment choices

The very best 401(k) plans have limited investment options whereas an IRA gives you access to nearly unlimited investment options.

Flexibility

With an IRA, you can withdraw money whenever you need it, but not necessarily with a typical 401(k). Some limit the frequency of withdrawals; others set all or nothing restrictions.

Simplicity

Many workers leave a string of 401(k) investments behind as they switch jobs over their career. Rolling all into a single IRA greatly simplifies the retirement savings; making it easier to monitor investments, plan allocations and rebalance.

Easier to handle required minimum distributions (RMDs) at age 70 ½

With traditional IRAs (there is no RMD for Roth IRAs), the RMD is based on the total amount in all your IRAs with the RMD distribution coming from any account or combination of accounts. With 401(k)s at age 70 ½, you must calculate each RMD separately and take the money from that account.

Some estate planning advantages

Heirs can normally take tax-deferred distributions from an IRA over their lifetimes; most 401(k) plans force heirs to take assets after the account holder dies. Note that the beneficiary has the option of rolling the 401(k) into an IRA, but this is a tricky process and is better done by the account holder while living.

Reasons for sticking with your 401(k)

Relaxed penalty rules for early distribution

If you retire or get laid off between ages 55 and 59 ½, you are able to take penalty free distributions from a 401(k) while you would be penalized 10% for withdrawing funds from an IRA.

Protection from creditors

The 401(k) funds can’t be touched by creditors in a bankruptcy or by plaintiffs in a civil lawsuit. IRA funds, however, have limited protection and differ from state to state.

Delayed RMD for workers over 70½

As long as you are still working at age 70½ , no required minimum distribution is taken from your 401(k). With an IRA, the RMD is a must whether you continue to work or not.

Possibility of rolling an inherited plan to a Roth IRA

New rules allow nonspouse beneficiaries to roll a 401(k) to a Roth IRA, something that cannot be done with an inherited traditional IRA.

Comfort

Some retirees are used to their 401(k) plans and are not comfortable with starting out fresh with the management of an IRA.

How about the costs?

Deciphering the management expense of your 401(k) or IRA can be a challenge. With your 401(k), you will need to find the expense ratio of each fund. How do you do this? Try the fund’s Web site or the plan’s Web site. According to Kiplinger’s Retirement Report, an expense ratio of 1% or less is reasonable. You shouldn’t have trouble finding funds in your IRA with comparable expense ratios. A new tool, by BrightScope, a San Diego firm, has tabulated the administration costs, investment fees, returns and quality of investments for 45,000 companies. Visit www.brightscope.com, enter the company name, and you will get a score of between 1 (worst) and 100 (best). Give this tool a try…it is really that simple.

Conclusion

Because of more choices, flexibility and simplicity of the IRA, most 401(k) holders should seriously consider rolling to the IRA. However, this decision is not a no-brainer. Think it through and understand what you are doing before deciding.

When leaving employment with a 401(k) provider, have you rolled your 401(k) to an IRA, rolled it to your new company’s plan, left it in your previous company’s plan, or cashed it out?   Why did you make the decision you made?  What recommendations would you give to others who are leaving a 401(k) employer?

photo credit: pfala

Spousal benefit

The lower earning spouse has a choice: to claim a “spousal” benefit of up to 50% of the higher earning spouse’s benefit or to claim his own earned benefit. The higher earning spouse must be already collecting benefits before the lower earning one can qualify for a spousal benefit. And this spousal benefit will be reduced for every month under full benefit age. For example, if the spouse is already drawing a $1600, the lower earning spouse could qualify for $800 a month at full retirement age; or 75% of $800 ($600) if starting at age 62.

Surviving spouse benefit

A surviving spouse of a retiree drawing Social Security will receive 100% of that pension, with the following provisions:

• The survivor must be full retirement age. If not, the benefit will be reduced based on age.

• If the survivor is insured on her own record and the benefit of the deceased spouse is higher, the survivor will continue to receive her own benefit and also the difference between her benefit and the deceased spouse’s benefit.

Simply put, the surviving spouse will receive the greater of her benefit or the deceased spouse’s benefit, providing she is full retirement age.

Got those definitions? Good! Now for some Social Security strategies.

For clarity’s sake (and because it is this way in most families), I will refer to the higher earner as the man and the lower earner as the woman throughout the rest of this article.

Strategy of waiting

All Social Security benefits are greater when delayed. Because the spousal benefit is dependent on the higher earner’s benefit, the advantages are compounded. Say the higher earning spouse’s benefit is $2,000 at full retirement age. If his spouse also waits until full retirement age to start her spousal benefit, she will draw 50%, or $1,000, for a combined $3,000 monthly benefit. On the other hand, if the higher earning spouse starts his benefit at age 62, it will be reduced by 25% to $1,500. Because 50% of $1,500 is less than 50% of $2,000, this reduction also affects the spousal benefit. But if the spouse starts drawing at age 62, she won’t even receive the full 50% of the $1,500; her benefit will likewise be reduced by 25% from $750 to $562.50 for a combined benefit of $2062.50. Obviously, waiting can make a huge difference.

In the same way, waiting will also affect the surviving spouse benefit. In the above scenario, the surviving spouse benefit drops by $500 (from $2,000 a month to $1,500 a month) when the benefits start early. If you consider this benefit as a form of life insurance, a $500 per month decrease is substantial.

Should Spousal Benefit always be delayed until full retirement age?

Not necessarily. The age differential of the spouses should be considered. For example, if the husband is 70 and the wife is 62, she should consider beginning her spousal benefit at the reduced rate. Why? Because the husband is likely to die earlier and, at that time, her survivor’s benefit (based on HIS pension) would kick in. This is the same benefit she will receive whether she starts at age 62 or not, so she should consider bringing the extra money into the household now.

How to draw Spousal Benefit while waiting

Suppose the husband is full retirement age and wants to wait until age 70 before starting his benefits. Will the wife, who cannot draw the spousal benefit unless her husband has started his pension, need to wait until he is 70? Not if the couple takes advantage of voluntary suspension.

Here is how it works: The husband files for his benefit and the wife files for the spousal benefit. The husband then immediately requests a voluntary suspension of his pension. The wife will be able to collect her spousal benefit while the husband’s future benefit will grow by 8% annually. I like this strategy because the couple is bringing in “bonus” household income while the husband is patiently maxing out both his future pension and his wife’s future survivor benefit.

Another way to claim a Spousal Benefit while waiting

Suppose the husband wants to wait until age 70 to start his pension but his wife also qualifies for benefits based on her own work record. Think through this one with me: she could start her benefit and he could sign up for the spousal benefit while waiting until age 70 to start his own. At that point he switches to his own higher benefit. As in previous examples, this will increase the survivor’s benefit, but will do so while bringing extra income into the household. And the wife could also switch to a spousal benefit based on what the husband’s benefit would have been at age 66. This is very similar to having your cake and eating it too.

One caveat: the higher earning spouse cannot use this tactic if he is younger than full retirement age.

Summary

Social Security can be complicated, but you can make intelligent decisions if you understand these basics. This is your pension that you have paid into all of your working life. Make sure you maximize your benefits.

One more thing: Social Security rules change, so I strongly recommend that you check with the Social Security Administration with all of your questions.

Have you started receiving your Social Security benefits?  What strategies did you use?  Would you recommend to those who haven’t started yet?

photo credit: joguldi

photo credit: pfala

From its high in October 2007 through its low in March 2009, the S & P Index fell nearly 57%.  Many 401(k)s likewise plummeted drastically, forcing many to delay or scale back their retirements and bringing on the chorus of “failed experiment” in describing the 401(k) strategy.  But is it?

A recent Transamerica Retirement Study indicates that we shouldn’t put the 401(k) out to pasture quite yet.  What does the study teach us?

Greater participation

This study surveyed 3,598 full and part time for-profit workers between December 3, 2009 and January 18, 2010, discovering that 71% of the respondents had access to a 401(k) or other employee-sponsored plan at work, of which 77% contribute.  Forty-one percent have saved more than $50,000 toward retirement while 29% have topped $100,000.

How are the nearly 30% of the workers who are not offered a retirement plan at work doing?  Not as well.  Only 22% have saved more than $50,000 and only 16% have more than $100,000 put away.

Why the high participation?

Although the market had rebounded considerably by the time the survey was taken, I am nevertheless intrigued by the 77% participation rate on the heels of the recent dismal market performance.

Catherine Collinson, president of Transamerica Center for Retirement Research shares her thoughts, “The plans offer convenience of payroll deduction, a range of investment options that may not be available to them – especially new investors – because of account minimum requirements, and education.  Those are three very compelling reasons to save with  401(k) plans.”

Retirement savings outside the 401(k)

According to the report, 66% of those who have access to a plan also save for retirement outside the plan while only 57% of those without the access save for retirement…an encouraging statistic for those who are taking advantage of their work plan, but discouraging in that over 40% of those without a plan at work are not putting anything away for retirement.

Having a Retirement strategy

There is room for improvement here: 61% of workers with access to a plan have a retirement planning strategy compared with 40% of those without one, meaning, of course, that approximately half of all workers have no retirement strategy.  Even more telling is that hardly any participants (9% of those with a plan and 5% of those without a plan) have actually written the plan down somewhere.

More educated

As would be expected, those who participate in 401(k) plans are more educated about retirement than those who don’t.  Workers without a plan are more than twice as likely to state “not sure” when asked how their retirement savings are invested.

Long way to go

Even with these 401(k) successes, Collinson admits that America has a long way to go in preparing for retirement.  For instance, those with a plan estimate that they will need a median of $800,000 to live comfortably in retirement, as compared to $500,000 estimated by those without a plan.  Collinson points out that most Americans will need far more than either of these amounts.

Joe’s Summary: a jaundiced look at survey results

While I believe this survey has merit, I tend to lean toward skepticism in how numbers are interpreted.  After all, Transamerica, the company who did the survey, offers a “wide array of innovative financial services and products”.  They have a stake in the conclusions and could possibly spin the results.   For example, they conclude that the 401(k) helped its users be more savvy investors, but one could also conclude that the reason these investors take advantage of their companys’ retirement plans is because they are already savvy.  Hmmm…kind of like the chicken and the egg.

However, I see no reason for cynicism here.  I am encouraged that 77% of those who have a company plan are actually taking advantage of it.  The 401(k) is certainly not a silver bullet, but (especially with a company match) it is still a solid plan for those who are offered the option.

Readers: Has the recession caused you to increase or decrease your 401(k) contributions?  Why?  If you don’t have access to a 401(k), what plans are you making for retirement.  Do you have a written plan?

photo credit: pasotraspaso

You have worked and planned for that glorious day when you could kick back, travel, golf, fish and simply do what you wanted.  But things happened.

Your 401(k) turned into a 201(k) and has grown back to a 301(k).  You have learned that your nest egg is vulnerable and volatile, making your life of leisure sound like a life of anxiety.  And now you realize that you are going to need some part time work during your retirement to stretch the maximum years from that nest egg.

Take a challenge

Sure you are disappointed, but instead of lamenting your circumstances, I challenge you to take advantage of them.  By redefining your retirement, you could be in for your most exciting and fulfilling years.  The best, for you, is yet to come.

Redefine retirement age

According to a study in EH.net, 78% of men over age 65 were still in the workforce in 1880.  As you might suspect, this percentage has dropped dramatically in recent decades to the current 18% level.

The point is this: we Americans have been trained to believe anyone age 65 or older should be put out to pasture.   Not so!  Continuing to work past age 65 simply means that you are still a valuable and productive person.

Redefine work

Work does not mean drudgery.  A dictionary definition is “Physical or mental effort or activity directed toward the production or accomplishment of something.”   Redefine “work” as a means to use your efforts to produce or accomplish something you are passionate about.  Grandma Moses began painting in her 70s.  Colonel Sanders was in his late sixties when he began frying his “finger licking good” chicken.

James Michener said it thusly, “The master in the art of living makes little distinction between his work and his play, his labor and his leisure, his mind and his body, his information and his recreation, his love and his religion.  He hardly knows which is which.  He simply pursues his vision of excellence at whatever he does, leaving others to decided whether he is working or playing.  To him, he is always doing both.”

Redefine your definition of retirement

We have accepted the myth that retirement means lazing around for twenty or thirty or forty years.  The problem is that many of us (I am a retiree) have been active all our lives and don’t want to be suddenly thrust into a role of inactivity.   Do you really want your life to atrophy as you set your sights on 30 years of leisure?  I don’t and I hope you don’t.  That diminished 401(k) may require you to be active, but that is not a bad thing.  You probably have more choices than you used to have, so redefine your retirement in terms of staying active.

Retirement means fulfilling your dreams

Ask yourself this question, “If money was no object, what would I do with the rest of my life?”  Got your answer?  Then find a way to do it.  That “some day” you used to talk about is today.  Dig out those dreams that you gave up on years ago, dust them off and start fulfilling them.

Retirement means serving others

Real joy in life comes from serving others.  Retirees have a lifetime of skills, wisdom and knowledge which qualify them like no other age group to contribute to the world around them.  Check out Senior Stars to learn about people like Dr. Michael DeBakey, a medical pioneer who continued to practice medicine until he died only two months short of his 100^th birthday or Ardell Lien, a 71-year-old Minnesotan who became the first heart and kidney recipient to solo circumnavigate the world so he could promote organ transplants.  You are surrounded by people who have needs you could serve.  What are you waiting for?

Retirement means serving God

He has a plan for you and your life.  He may surprise you with the plans he has for you at this point in your life, but as long as your heart is beating he has a purpose for you to fulfill.  Be open to him, seek him and serve him with all of your strength for all of your life.

Concluding thoughts

Your arrival at retirement age didn’t turn out the way you had planned.  But if you were planning on a life of leisure, this turn of events may be the best thing that could have happened to you.  These next several years could be the most exciting and fulfilling years of your life.  I challenge you to redefine your retirement into years of productive work, fulfilling your dreams, serving others and serving God.  You will find yourself energized, invigorated and passionate about life.

This post has been included in the following carnivals:

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• Boomers and Seniors Blog Carnival hosted by Seniors for Living
• Carnival of road to financial independence #17 hosted by One Family’s Blog

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Have you been tracking the buzz that our government is considering the takeover of our retirement funds?

There has been talk since last fall,  but, according to Money Morning, this talk is leading to action.  In late January, both the U.S. Treasury Department and the Department of Labor announced plans to stage a public-comment period before implementing regulations that would require U.S. savers to invest portions of their 401(k) savings plans and Individual Retirement Accounts (IRAs) into annuities or other “steady” payment streams backed by U.S. government bonds.

Can they do this?

Our 401(k) and IRA investments belong to us.  We invest them as we wish and live with the results.  Can our government dictate how these investments are made?  Evidently so.  I know that I have quit saying, “they would never do that.”

Why would they do this?

With spiraling national debt at $14 trillion and a projected deficit of $1.35 trillion for this year alone, politicians are looking for money.   Japan and China can no longer be counted on as dependable buyers of U. S. government debt, and the U. S. Federal Reserve is supposed to stop buying Treasury bonds.  So, as our administration scrambles for debt buyers, their eyes stop on the $3.6 trillion sitting in U.S. retirement plans, including 401(k) plans.

How can they justify it?

After reading the story in Money Morning and My Fox, I will try to condense the rationale our administration is considering.

We may be hearing something like this:  “Our current system is commonly called a  defined contribution plan, meaning the eventual retirement benefit is based on how much was contributed and how well those investments performed.  This system is different from the traditional defined benefit plan in which the retirement benefit is defined by salary history and years of service.  Most government retirees, all Social Security beneficiaries and recipients of traditional pensions receive defined benefit plans.”

The rationale continues: “Because of the volatility of the market, as evidenced by the recent downturn in which nearly every 401(k) and IRA lost value, our future retirees would be well served by putting a portion of their portfolio into an annuity type investment that will guarantee payouts, much like the defined pension plans of old.  One such type of investment would be a Government Bond.  Everyone wins under this scenario: future retirees have greater security and government has buyers for its debt.”

What do I think?

My first reaction is one of incredulity.  The issue is not what is best for future retirees; it is who gets to make that decision.  I am a big boy and able to live with my decisions, even if they don’t work out the way I like.  For my government to dictate what is best for me leaves a stench of socialism, if not communism.

The secondary issue is whether this intervention will actually benefit future retirees.  I would answer that one with this question, “Would you loan money to someone who is deeply in debt, on a spending frenzy, and cannot get credit elsewhere?”  I wouldn’t either.  When the same government that manages Social Security wants to manage my future retirement payouts in the form of Government bonds, I get really queasy.   Why?  Either the money won’t be there to pay me, or inflation will have outpaced the return of the bonds, making any future payout worth very little.

What can we do?

I started this post by asking if you had been tracking this story.  With the announcement that public comment periods are being planned before implementing regulations, the story is becoming fact.  We need to be vigilant about tracking it and speaking up when opportunities arise.  We can expect our government to frame the argument with innocuous language that will sound like they are watching out for our best interests, but will hide the downside of these changes.

Jesus once told his disciples, Mat 10:16 “Behold, I am sending you out as sheep in the midst of wolves, so be wise as serpents and innocent as doves.”

It seems to me that we need lots of wisdom,  salted heavily with innocence, as we live among wolves.

This post was included in The Carnival of Personal Finance hosted by Len Penzo dot Com

photo credit: Itinerant Tightwad

1Co 10:14 Therefore, my beloved, flee from idolatry.

Surely Not Me

Paul was writing to a culture where people worshipped wood and stone statues. Of course the statues weren’t innately evil, but believing they had power to do only what God can do (good weather, good crops, give children, etc.) is idolatry. Because this ancient practice is primitive and superstitious, I tend to ignore the admonition (flee from idolatry), thinking, “That is good advice for those people but it surely doesn’t apply to me.”

Think Again

But then I realized something: if idolatry means giving credit to anything other than God for doing only what God can do, is it possible that I could be committing 21st century idolatry? Do I believe, for example, that my retirement pension and savings account can do something only God can do: give me security? Hmmm.

When do good things become idols?

A retirement pension…your IRA…your 401(k)…your career…your house…your family. These are all good things. The question for me, and for you, is this: “When can good things become idols?”

James tells us, “Come now, you who say, ‘Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit’– yet you do not know what tomorrow will bring. What is your life? For you are a mist that appears for a little time and then vanishes. Instead you ought to say, “If the Lord wills, we will live and do this or that.” As it is, you boast in your arrogance. All such boasting is evil.”

When can good things become idols? When we put our trust in them instead of in God. The recession should have taught us that our IRA’s and 401(k)s and investments and even our homes are precariously fragile. I have been guilty of saying “Tomorrow (or next year or ten years from now), I will be in this financial position because of what I am doing today.” Wrong. James calls this practice arrogant boasting, because I am trusting my future to my own plans, not to the God who controls the future. For all I know, everything I have worked and planned for can disappear in an instant.

How to avoid idolatry

It is an easy thing to drift into idolatry. None of us want to; it is just that over time, as we plan and see our plans come to fruition, we begin a subtle process of starting to think that we are in control of our own destinies. How do we check that process? By never losing the perspective that God and God alone is ultimately in control. James gives us a hint: “You ought to say, ‘If the Lord wills, we will live and do this or that.’”

Of course we should continue to save, plan, invest and be smart with our money. But we should never for an instant believe that our bankroll is our security. The good news is that we can have real, unconditional and eternal security through a loving, sovereign, all powerful God. Even if everything else it taken away, He has promised to never leave us or forsake us.

That is true security.

photo credit: mtungate

I recently read two seemingly unrelated articles, which, when dovetailed together, become the basis for this post.

The first, a recent Principal Financial Well-Being survey, indicates that less than one third of Americans are setting aside what they think they need to for retirement.

The second, from the “The Culinary Review”, tabulated the following costs per serving of homemade sandwiches:

• A peanut butter and jelly sandwich: $0.20
• A grilled cheese sandwich: $0.43
• An egg salad sandwich: $0.51
• A bagel with cream cheese: $0.89
• A tuna salad sandwich: $1.24
• A cheese BLT sandwich: $1.29

So I ask: do you know what you need to be doing today so you can retire with dignity? Are you actually doing what you know you should? If you are like most Americans, you probably need to do something different. But don’t despair; something as simple as changing how you eat can make a huge difference.

For example, what if you were to start packing your lunch instead of joining your co-workers at the diner? You could realistically save $5 a day, or $100 a month, which would grow to $150,000 if your investment earned 8% annually for thirty years. Not bad, but double it to $300,000 if both spouses start brown bagging.

Need to bump up some more?

Another Culinary Review article lists 10 meals you can prepare at home for under $1 a serving. These are my top five picks:

• Potato pancakes – Polish Platskis – Latke: $0.61
• Smooth black bean soup: $0.80
• Paula Deen’s almond chicken salad: $0.96
• America’s test kitchen’s twice baked potatoes: $0.58
• Alton Brown’s baked macaroni and cheese: $0.96

It is not unreasonable for a family of four to expect a savings of $120 a month by using one of these recipes each week instead of eating out. Investing these savings will add another $180,000 to that retirement kitty, bringing our total to nearly a half million dollars. Not bad pay for eating some grilled cheese sandwiches and potato pancakes.

You get the idea.

Making small changes today can make huge differences tomorrow. But this is more than simple math; it is a test of character. In today’s instant gratification society, you need to be very intentional about delaying that gratification today in order to beef up your future retirement. Getting started, therefore, requires character. The good news is that once the changes become habit and once you see that retirement fund growing, you will gain momentum.

In the end, of course, it is your choice.  Just make sure you are not eating your retirement.

This post has been included in the following Carnivals:

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“My parents, in their late 70’s, have no financial needs and a substantial emergency fund. In addition to the emergency savings, they also have $60,000 in a passbook savings account which they don’t know what to do with. They are not interested in taking much risk, but would like to do something better than the passbook. Any ideas?”

I emailed her the following response, but I am asking the help of my readers for any ideas that I may have overlooked. Thanks ahead of time for your comments. By the way, she gave me permission to put this in a post.

“Your parents have a unique situation in that they are financially secure, have a good emergency fund and some “extra” money laying around. They want to do something smarter than having the money in a passbook checking account, but they don’t want much risk either.

I say unique because they really don’t need this money for anything. Not very many people can say that. So, I have several thoughts; some a little out of the box:”

Check to see if they have Long Term Care Insurance.

If they don’t, they should look into getting some. It is possible that they will not qualify for age or health reasons, and the cost will be substantial if they do. Nevertheless, I would put Long Term Care Insurance as a top priority.

Pay off debt, including house.

I assume that your parents don’t have any debt but this would be the first priority on my list. They will “make more” with their money by eliminating whatever interest they are paying on debt than they could earn with any risk free investment.

Find a high yield savings account.

The passbook account they currently have probably doesn’t pay anything, so any interest they could get would be better than nothing. Most of these high yield accounts pay little (currently less than 2%), but the money is FDIC insured so they are absolutely safe. The money is also liquid, meaning you can get to it any time without any penalties.

Consider a Certificate of Deposit.

They will earn a bit more and money is still safe but it is tied up, depending on the term length of the CD. I personally don’t like CD’s for that reason, but it may be a good choice.

Buy some conservative mutual funds.

Now we have risk, but a chance of higher return. Maybe or maybe not a good choice depending on your parent’s risk tolerance.

Have fun.

I am thinking that if they don’t need the money, they should do something fun with it. After all, they have done a great job of managing it over the years so they should make sure they don’t short change themselves. Have they ever dreamed of a European vacation or simply a cruise? Now would be a great time to go for it.

Remodel house.

Maybe they don’t need anything done to their house, but most people have ideas of what they would like changed. This is a way to invest in real estate and enjoy the money at the same time.

Give it away.

I know you won’t suggest this, but I will.

They can give up to $13,000 each per year to any individual without encountering any gift taxes. In other words, between the two of them, they could give up to $26,000 to each child without any tax repercussions. The rationale is that the money will some day belong to the heirs anyway, and if the parents don’t really need it, they could share some of the inheritance now.

Readers: What did I leave out? I appreciate your thoughts and so will the reader who asked the question.

My Decision To Take Social Security

I had planned to hold off drawing my Social Security benefits until I was full retirement age, but things changed and I signed up two months ago at age 62 ½. Am I wishy-washy? Do I lack backbone? Well, maybe, but let me explain. Some of you may be going through the same struggle and, whether you agree with my decision or not, following my thinking process may help. I hope so.

A little bio here:

I was fortunate, after working 30 years as an engineer, to retire 10 years ago with a life pension and mostly paid health insurance benefit. I have continued working in a part time capacity as an engineer ever since.

Three years ago I began my own financial coaching business, also part time. Then, four months ago, my part time engineering job came to a close as my firm had to cut back and started with their part time employees.

My knee-jerk reaction was to find another part time engineering job, but Janice (my wife) encouraged me to reconsider. Did I really want to continue to be on the road a couple of days a week? Did I really want to continue in a career that had long since lost its luster for me? What about starting a new phase in my life doing one thing (helping others with their finances) I am passionate about?

But what about the lost income? Of course Social Security was an option, but I had two reservations:

1. If I start now instead of waiting I will be locking myself into a lower income for life.
2. If I earn too much money, Social Security will penalize me $1 for every $2 over the maximum allowable income set annually by the SS Administration.

Social Security and Some Simple Math

Some simple math showed me that I will be 78 years old before the greater income I would get by waiting will catch up to the smaller income I get by starting now. Of course I plan to live much longer than 78, but I needed to weigh the quality of life I could achieve today with what I might need later. This is a dicey thought process and perhaps I rationalized a bit, but it helps knowing that I have some IRA funds that I don’t currently need and plan to leave alone until RMD starts at age 70 ½.

A bigger concern was the penalty. I never want to subconsciously (or consciously) cap my earnings because of a penalty. But studying the Social Security web site revealed that this is not a penalty at all. Yes, the deduction of $1 for every $2 earned over the max will take place, but the deducted money is credited to my account and will show up as higher earnings later on.

My First Social Security Check

So I am now a Social Security recipient. My benefit was more than I expected and actually replaced all I was earning with my part time engineering job. Because Janice and I are debt free, we have a great cash flow which allows us to save, spend and give more than we ever anticipated. I wake up every day knowing that I will be doing what I love to do. This fact alone validates my decision. Life, for Janice and me, is very good. I think I made the right decision.

Readers: how about you? Any similar experiences? Are you happy or not happy with your Social Security decisions?