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3 Tax Mistakes That Could Ruin Your Retirement – The Motley Fool

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No matter how much you try to avoid it, Uncle Sam will always take a chunk out of your paychecks.

The same is true in retirement, although taxes in retirement can potentially have greater consequences than when you're working -- because you'll likely be living on a fixed income in retirement, spending more than you anticipated can throw off your entire plan. And if you're not prepared for them, taxes can take a serious bite out of your retirement budget.

To ensure your retirement savings go as far as possible in your golden years, there are a few tax mistakes you should do your best to avoid.

Image source: Getty Images.

It's easy to forget about taxes when you're saving for retirement. When you get caught up in determining how much you expect to spend in retirement and how much you should be saving, taxes may not figure into that equation.

However, the only way to completely avoid paying taxes on your retirement account withdrawals is to store all of your savings in a Roth IRA, where your contributions are taxed upfront but you can withdraw your money tax-free. If you have money in a different type of retirement account -- such as a 401(k), 403(b), or traditional IRA -- you can expect to pay income taxes on the money you withdraw from your retirement fund.

There are a few ways to trim your tax bill in retirement so you're not caught totally off-guard. One option is to invest primarily in a Roth IRA. You'll still pay taxes when you make the initial contributions, but it may be easier to plan for retirement when you know that the money in your account is that amount you'll be able to spend.

Another way to prepare for retirement taxes is to start thinking of your savings goals in terms of pre-tax dollars. For example, say you estimate you'll need $50,000 each year to pay all your bills in retirement, and you base your retirement plan around that number. Even if you save according to your plan and you can afford to withdraw $50,000 per year, you'll actually end up with less than that once taxes are taken out. Instead, you might want to increase your annual spending estimate to, say, $65,000, so that you'll have roughly $50,000 each year to spend after taxes. Of course, the actual numbers will vary based on your tax bracket and your state's tax rate, but figuring taxes into your retirement plan can help avoid any surprises.

Yes, you'll likely still owe taxes on your benefits even when you've been paying Social Security taxes throughout your entire career. There are different thresholds for how much you'll pay in taxes, and it depends on your income. If your benefits are your only source of income in retirement, you may get away with not paying any taxes. However, the majority of people will have to pay taxes on at least a portion of their benefits.

The first step to determining how much you'll owe in Social Security taxes is to estimate your combined income, which is half of your annual Social Security benefit amount plus all your other annual retirement income (money from a pension, savings from your retirement fund, etc.). So if you're receiving $25,000 per year in benefits and are earning $40,000 per year in other retirement income, your combined income is $12,500 + $40,000, or $52,500.

Here's how much of your benefits may be subject to taxes depending on your combined income:

Source: Social Security Administration.

Keep in mind that these tax rates are only for federal taxes, and some states will make you pay state taxes on your benefits as well (although 37 states don't tax Social Security benefits at all). By being aware of what you may pay in taxes on your benefits before you retire, it can help ensure your retirement plan is as accurate as possible.

Assuming you'll need to pay taxes on your retirement account withdrawals, the exact amount you'll owe depends on your tax bracket.

Income taxes are the same in retirement as they are when you're working, but the difference is that in retirement, you get to choose how much income you're earning. You can withdraw however much you want from your retirement fund each year, and that amount determines what tax bracket you fall under. If you're spending roughly the same amount in retirement as you were when you were working, you likely won't notice much of a difference in your tax bill. But if you decide to splurge during your first few years of retirement and withdraw a lot of cash, you may push yourself into a higher tax bracket.

There are a couple of things you can do before you retire to ensure your taxes don't get out of control. First, make sure you understand what tax bracket you'll be in when you retire. That will impact how much you pay in income taxes each year, which then affects how much you actually have to spend.

Second, adjust your withdrawal strategy so you stay within your desired tax bracket. It's smart to have a withdrawal strategy when you retire so you don't blow through your savings too quickly, but it can also help limit what you pay in taxes. Spending even a few thousand dollars over your bracket will result in a heftier tax bill, which can potentially throw off the rest of your retirement plan.

Taxes aren't the most exciting part of planning for retirement, but they are a vital aspect of your retirement plan. And the more accurately you account for them, the more financially secure you'll be in your golden years.

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3 Tax Mistakes That Could Ruin Your Retirement - The Motley Fool

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Four ways to not outlive your retirement savings – CNBC

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A man fishes in a lake.

Twenty20

With some experts warning that $1 million in retirement savings might not even do the trick these days, it's understandable if you're kept up at night wondering: Will I have enough?

Here's another question worth asking: How should I spend what I have?

A good answer to the latter can help you with the former.

Whether your nest egg is $1 million, $250,000, more or less, you'll need to devise a smart strategy of how to spend your money so that you don't outlive your savings. "Withdrawing too much money early in your retirement can have a devastating effect on your standard of living," said Arielle O'Shea, a retirement and investing expert at personal finance website Nerdwallet.

On the other hand, O'Shea said, you don't want to be led by fear. "Being too conservative could mean you don't enjoy these years you've worked so hard for," she said.

Below are some time-tested ways to spend your retirement savings.

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Now retired financial advisor William Bengen came up with the so-called 4% rule almost two decades ago. It's still in circulation.

It's simple: You draw 4% from your savings in your first year of retirement, and then adjust that amount for inflation every year thereafter.

For example, imagine you have $800,000 in savings. In your first year of retirement, you'd withdraw $32,000. If inflation was 3% for the year, the following year you'd take out $32,960. (In other words: 4% of $800,000, which is $32,000, plus 3% of that $32,000, which is $960, for a total of $32,960.)

"It's a good starting point, especially for someone doing their own planning," said certified financial planner Brad Bobb, owner of Bobb Financial in Springfield, Illinois.

Of late, however, some experts say retirees might not be able to depend on the strategy. "The 4% rule hasn't really been tested against such low interest rates," said Wade Pfau, professor of retirement income at the American College for Financial Services.

Most experts agree that retirees will need a portion of their savings still invested in the stock market, where returns are typically higher in the long run than those produced by bonds or certificates of deposit. Even so, not all nest eggs will be able to endure a 4% annual drain.

And for those with really large savings, the 4% rule could leave you living more frugally than you need to. "The goal is not to die the richest person in the graveyard," said Allan Roth, CFP and founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.

Another issue with this tool? It's awfully rigid, said Colleen Jaconetti, senior investment analyst at Vanguard. There are a number of factors that can make your budget vary from one year to the next, including health care and travel expenses and when you claim Social Security.

"Every individual's needs are different and it's likely that their annual spending will fluctuate throughout retirement," Jaconetti said.

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Some retirees prefer a dynamic spending strategy, which "provides retirees with the flexibility to account for unexpected expenses or rocky market conditions," Jaconetti said.

With this technique, you might still begin your retirement at a 4% withdrawal, but you can also establish a withdrawal "ceiling" and "floor" rate the most and least you'll take out in a given year.

For example, say you have a $1 million nest egg. Your maximum annual withdrawal might be 5%, and your minimum could be 2.5%.

"One of the drawbacks of the 4% rule is that annual withdrawals from the portfolio are indifferent to the returns of the capital markets," Jaconetti said. The dynamic spending strategy, she said, offers an antidote.

For example, if the market dropped 20% in a year, a retiree might slash spending by a fifth for a few years. Or he or she could permanently cut spending by a smaller percentage, say 3%.

"In short, this rule helps retirees maintain income for basic expenses while allowing for more discretionary income if market returns are favorable," Jaconetti said.

The strategy might be unnecessary for retirees who really do anticipate a consistent overhead.

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A third spending tool is the bucket strategy, which divides your retirement savings into segments, said Jon Beyrer, CFP and director of wealth management at Blankinship & Foster in Solana Beach, California.

He says there are typically two buckets: one for withdrawal, one for growth. "These could also be called a short-term bucket and a long-term bucket," Beyrer said.

The withdrawal bucket should have enough to cover your annual expenses for a set period of time. For example, if a retiree needs to take out $50,000 a year, and they want the money to cover five years, the bucket should have at least $250,000. "The withdrawal bucket will typically be invested in low-risk, highly liquid investments such as high-grade bonds and money market funds," Beyrer said.

The timeline with this strategy is less overwhelming than with the 4% rule, Beyrer said. "By having rules about how many years worth of spending should be in the withdrawal bucket, the retiree is more tuned into what their withdrawals need to be," he said.

The other bucket will be for long-term growth. "The investments in this bucket can include higher-risk, more volatile investments such as stocks," he said.

It'll be important for retirees to strike a balance between the two buckets, to make sure they're not being too conservative or too risky. The strategy can also get complicated fast.

You might have more than two buckets: one for emergency savings, or one for children and grandchildren. "Lifestyle buckets like travel or philanthropy force some discipline on how much to spend on those items," Beyrer said.

A big advantage of the strategy, he said, is that it reduces people's risk of making regrettable moves with their savings.

"When a retiree knows their withdrawal bucket is secure, it's easier not to panic in the face of bad stock market news," Beyrer said. "It gives retirees peace of mind."

Some retirees might want to use the IRS's required minimum distributions tables for individual retirement accounts and 401(k) plans as guidance on how to spend down all of their savings, including any brokerage accounts or certificates of deposit.

An RMD is the amount you're required by the government to withdraw each year from your IRA (but not Roth IRAs, which have no required withdrawal). The mandates kick in the year you turn 70. (The number is calculated by dividing your account balance as of Dec. 31 of the prior year by the IRS life expectancy tables.)

So let's say you have $1,000,000 saved. If you don't have a spouse, and were born in December of 1953, your first RMD would be roughly $50,500, according to calculations on the Charles Schwab website. Assuming an annual return of 6%, your nest egg shouldn't dry out until after your 115th birthday.

Check out this handy calculator to figure out your math.

More from Personal Finance:Earning income after 65? Make it work for youHow to start an emergency fundWhat we might learn from Trump's tax returns

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Four ways to not outlive your retirement savings - CNBC

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How to Plan for Retirement and Special-Needs Care – Barron’s

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Retirement planning can be difficult. Retirement planning and securing a future for a child with special needs can be doubly so.

The good news is there are a number of government programs that can help parents provide for special-needs children, depending on the level of disability, such as ABLE accounts, Medicare or Medicaid, nutritional assistance and Social Security programs.

The bad news, says James Fox, a certified financial planner and a chartered special needs consultant at AXA Advisors, is that missteps can cause children to lose benefits and lead to significantly higher taxes in estate planning. The twin goals need to be done concurrently and with care, he says.

Here, experts who specialize in this often-complex area share tips.

Similar to 529 college-savings plans, ABLE accounts are tax-advantaged savings accounts for people with disabilities and their families. To be eligible for the account, the onset of a significant disability must occur before age 26. People who receive Supplemental Security Income or Social Security Disability Insurance automatically qualify. Others may qualify if they meet Social Securitys definition of disability and have a physicians disability certification.

The beneficiary, family, or friends may contribute up to $15,000 a year in total to the account.

As with a 529 plan, the money can be invested and grows tax-deferred. Contributions to the account arent tax-deductible. As long as the money is used for a qualifying expense, it comes out tax-free and wont be counted as a resource against any needs-based government programs, Fox says. To qualify for SSI and Medicaid, a person must have no more than $2,000 in assets, excluding a few items like housing.

Qualified expenses need to be related to the disability and can include costs for education, transportation, and other expenses that help to improve quality of life, says Nancy Spain, attorney at Spain, Spain & Varnet PC, whose practice specializes special-needs trusts.

Some families say that they will work forever. You may not be able to work forever.

There are some limits to ABLE accounts, Fox says. The number to watch is $100,000. If the balance rises above that level, the beneficiarys SSI payments will be suspended until the balance drops below that figure. It doesnt affect the beneficiarys Medicaid eligibility. Although it doesnt happen often, he recommends families watch if the balance starts to creep to $90,000.

Any time a benefit gets shut off, its a mountain to climb for families to go through the red tape to get that put back on, he says.

He says ABLE accounts are owned by the beneficiary, even if there is a guardianship established with control. That direct ownership is key as ABLE accounts may be subject to a Medicaid payback provision once the individual dies, where the state may try to recoup some of its Medicaid costs.

Special-needs trusts are another way parents can give financial resources to adult children while protecting access to needs-based programs like SSI and Medicaid, Spain says. These trusts can be created to care for the child who isnt able to work as an adult while the parents are alive or after the parents death.

There are two basic types of trusts, third-party and first-party trusts, and Spain recommends when possible parents set up a third-party trust for the child. Third-party trusts protect the funds from the Medicaid payback provision because the money is not left directly to the child. Additionally, because the trust is not in the childs name, if the child dies while money remains in the trust, parents or the trustee can give that money to someone else.

Costs to set up a special-needs trust vary, Spain and Fox say, and can range from $3,000 to $10,000. There also are annual costs, including having an accountant file taxes for the trust and having a trustee administer the trust.

Parents of children with special needs often defer saving for retirement because their resources are limited. Often one parent may stay out of the workforce to care for the child, which also limits their ability to save for retirement.

But parents shouldnt forgo retirement savings, says Kristian Finfrock, founder and CEO of Retirement Income Strategies. Some families say that they will work forever. You may not be able to work forever, he says.

When it comes to retirement-savings choices, Finfrock recommends parents at least save enough to get the employer match on 401(k)s and then, if possible, Roth IRAs because of their withdrawals are tax-free, before returning to max out a 401(k).

If parents realize their retirement assets wont be enough to care for their child after the parents death, Finfrock recommends buying life insurance to have the death benefit fund a special-needs trust.

Fox says using life insurance and Roth IRAs to fund a special-needs trust is a smart tax decision, too. He recommends using a special-needs attorney to create one.

To do so, the trust needs to be listed as the beneficiary of the Roth IRA or life-insurance policy. The life-insurance policies can be new or active, he says. If the policy is already active, the owner can change the beneficiary to the trust.

The trust must file annual taxes, and trusts tax rates are at the highest tax bracket, close to 40%. Since Roth IRAs and life-insurance money is tax-free, the beneficiary receives more money. Life insurance for the special-needs trust can also help for parents worried about inheritance equity with other children. These parents can leave funds in their tax-sheltered accounts, such as traditional IRAs, to their other children to reduce the tax hit.

Obviously it depends on each family situation. But looking for tax-free dollars to actually fund the special-needs trust makes the most sense, he says.

Questions? Comments? Write to us at retirement@barrons.com

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Where’s the Retirement Wave? – GovExec.com

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In fiscal 2018, the number of federal employees who filed for retirement jumped a dramatic 24%, from about 85,000 to 105,000. The sudden increase set off alarm bells that the long-awaited retirement wave was hitting with full force.

Then, last week, the Office of Personnel Management reported the fiscal 2019 retirement numbers. A little less than 104,000 feds filed their retirement papersa decrease of 1.4%.

So whats up? Is the retirement wave a myth? Not exactly. Its just that its not a tsunami, crashing ashore and destroying everything in its path, but more of a tidal phenomenon, with ebbs and flows over time, and substantial variations from agency to agency.

A couple of things to remember: First, the number of employees who file retirement applications has in fact been steadily increasing over time, and is higher now than in the recent past. From fiscal 2008 to fiscal 2017 the number of retirements averaged a little over 61,000 per year, substantially less than todays rate.

Second, the increase in the percentage of federal employees who are eligible to retire continues to go up. As of June 2018, 14% of the workforce was retirement-eligible, and OPM projects that figure to increase to 30% in just a few years.

Retirement eligibility rates vary widely from agency to agency. At the Housing and Urban Development Department, more than 23% of employees were eligible to retire in 2018, a figure that will rise to almost 45% in four years. At the Homeland Security Department, by contrast, only about 10% of employees were eligible to retire last year. That percentage will go up up to 25% in the near future.

The good news is that federal agencies have had plenty of time to prepare for the slow, inexorable demographic change in their workforces. Sotheoreticallythey should have effective plans in place for for recruiting the next generation of workers and retaining the institutional memory of those who are departing.

It's good that we haven't seen a full-scale wave, because OPM is still struggling with a substantial backlog of retirement applications awaiting processing. The backlog fell from 17,576 applications in August 2019 to 17,376 last month, but thats still a mountain of paperwork to move through the system.

And it literally is paperwork, with hard-copy federal employee records stored deep beneath the earth at a secure location in Pennsylvania. Tammy Flanagan, your regular retirement planning columnist, will describe the processing systemand ongoing efforts to finally modernize itin more detail in a future column.

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Retirement at 38 and 41: heres how this couple saved enough to retire early – Vox.com

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Welcome to Money Talks, a new series in which we interview people about their relationships with money, their relationships with each other, and how those relationships inform one another.

Tanja Hester and Mark Bunge achieved financial independence and early retirement in 2017, when Tanja was 38 years old and Mark was 41. Prior to retirement, they were political and social cause consultants who went from entry-level salaries in the low five figures to six-figure salaries during their final earning years. They started saving for early retirement around 2011 and got really serious in 2013.

Theyve been chronicling their pre- and post-FIRE the movement focused on Financial Independence and Early Retirement journey at the popular Our Next Life blog, which includes plenty of tips and insights for people who want to follow a similar path. Tanjas book Work Optional: Retire Early the Non-Penny-Pinching Way, published earlier this year.

In this conversation, Tanja and Mark discuss how they learned how to talk about money, why they decided to retire early, how they achieved financial independence, and what its like to live a post-FIRE life of travel.

The following conversation is lightly condensed and edited for clarity.

Mark: We started talking finances pretty early.

Tanja: Mark asked me how much I earned on our very first date.

Mark: I dont remember if it was actually our first date, but it was pretty early on, and I probably initiated some finance conversations.

Tanja: We had a weekend-long date, and I was coming in thinking we were each paying our share. He was a couple years older and I was pretty close to entry-level, so at that point Mark earned about double what I did. So he was asking if he could pay, because he earned more than I did and I had debt. It was out of a spirit of trying to be more equitable based on our means.

In the early years, it was like a whole new world. I was used to eating at only cheap restaurants, and all of a sudden we were going to nicer places, and it was a very different cultural shift for me. I had only ever had friends who were broke, I never had friends who could afford to splurge on things. So we did that for a while until we decided to dial the splurges back and focus on some bigger goals.

Mark: By the time we got together I was willing to foot more of the living expenses so that Tanja could really be aggressive about paying down debt. But its not like I was dragging Tanja into these conversations. Most of the time were pretty much on the same page with financial goals.

Tanja: We were really lucky. I managed to find a way-below-market-price rent-controlled apartment in LA so our rent never exceeded $1,000. In LA, I think we should get an Olympic medal for that. We had one car, a little Honda Civic that we still have, so our base living expenses were very low relative to the market. We could splurge quite a bit and not be talking massive numbers, so we didnt run into trouble.

It was about having low fixed expenses and earning more than we needed, to tell you the truth. I dont want to act like we did this by being the most principled or the most virtuous with our money. We earned more than we needed and we didnt have kids, so that gives you a lot more freedom than other folks might have.

When we first got married, for a few years we used those how long do you think the allowances lasted? A year and a half, maybe?

Mark: A couple years. Not that long.

Tanja: We used our individual checking accounts and gave ourselves a monthly allowance because we each wanted to be able to spend without questions. We ultimately decided that wasnt necessary because we had enough trust in each other to say, Okay, I know that if youre going to splurge on something, its for a good reason. I may not always agree that Mark needs a new mountain bike and he might not always agree that I need a new pair of shoes for one presentation

Mark: Way to make those perfectly gendered, by the way.

Tanja: Theyre not always so gendered! But we respect that the other is not being capricious about those things, so it works out.

Mark: I think it gave us space to trust each other. Having his and her accounts gave us time to realize that we could trust each other without having to scrutinize each others spending. If we had been completely combined with no allowance from the beginning, maybe it wouldnt have worked.

Tanja: We both had careers that we got a lot out of and that were fulfilling in certain ways but they really just took such a big toll on us, on our health, on our happiness, and on our marriage. We were political consultants before, and its the kind of work that you do because you feel very invested in the cause, but its also just really relentless in terms of the pace and the pressure.

As we moved up the ranks, it was always more work, never less. It was always being more reachable, never less reachable. We started to get to a point where we couldnt even go out of cell range on our vacations. We felt like, Okay, we cant do this forever. If we have to do this for 30 more years, what will we even be when we get to the end of it?

That was our overall motivation for the two of us, and then for me in particular, I have a genetic health condition in my family that forced my dad to retire when he was 42 and I knew that could be in my future too. A lot of the stuff we like doing is outdoorsy stuff and travel, so I had a lot of motivation to hurry up and get to early retirement while I was still physically able to do all of the stuff that I wanted to do.

Mark: We were living in Los Angeles and spending as much free time as we could in the mountains. Then we moved to Tahoe and bought a house after the market crashed. We realized if we just shoved all the money that we had been spending in Los Angeles and just started saving and investing, we would have a lot of extra money. We jokingly started talking about a 10-year plan to retirement, but it wasnt a plan, it was just kind of a running joke. We hadnt put any numbers on paper. Then we did sit down and start making spreadsheets and realizing we could do it.

Tanja: Right before we got married, we fully combined all of our accounts. We have our own credit card accounts, which is really because we both had a lot of work travel when we were travelling, and we each have a separate checking account, but thats really where we park money to pay the separate credit card bills. We dont do anything separate otherwise. We have joint checking, joint savings, joint investment accounts, obviously legally your 401(k)s and IRAs have to be separate, but we have access to each others. Were fully combined in that sense and have always thought of the money as fully joint, not as we pay some share each.

When we first moved in together when we were first dating, I had some debt, almost $30,000. Considering that I was earning barely more than that, it felt huge. So we at that point decided that paying off my debt was the top priority, so Mark started paying for more stuff and I focused all of my money on the debt. By the time we started saving for early retirement, it didnt feel like a new thing. It just felt like the next progression in some habits that we had been building for a number of years. We were reaching for a bigger goal, but the process to get there was the same as it was for the other goals.

The truth is that I did have an extreme couponing phase, but that was short-lived, it was time-consuming and I dont recommend it. Really what we did [to save] was that we tried to get to a spending level that felt comfortable but not extravagant, and any new money we earned we automatically banked. New raises would go directly into savings, investments would come out of our checking account on payday so wed never see the money, it would come in and right away leave, and that was the strategy we used from my debt payoff all the way through saving for two places and retiring early.

As we earned more, we saved more, and we never really saw the money. It was all automated. It didnt take willpower, and I honestly think thats the most powerful way someone can save. Not every career path has the same ability to grow your earnings, but if youre in one where your pay can go up, if you just dont see raises as an excuse to spend more and you just spend the same and save it, that stuff really compounds quickly over time.

Tanja: Its kind of a new world. Were experimenting with giving ourselves more of what feels like a paycheck, a regular infusion into our checking account, but we havent totally figured out what feels right yet. Were still learning as we go.

Weve saved enough to not ever need to work again. To not need to write the book, to not need to have the blog though I dont make any money off the blog, I always want to be really clear about that but we did earn more in our first year than we expected because I did get a small book advance, Mark did a little client work that he felt really passionate about. So we spent more the first year since we earned a little more. Were calling it the gravy approach to budgeting. We have a fixed income floor, but if we earn a little extra, were allowed to spend that.

Mark: We did a lot more rigorous planning in terms of the saving and investing side and projecting the growth in our nest egg. When it comes to the spending side, our general approach has been a little less line-itemy

Tanja: A lot less line-itemy.

Mark: When we were working, we always did the pay-yourself-first approach, where we would put X amount [of your paychecks] in savings and X amount in investments and keep doing our 401(k) and the rest would go into our checking. We found that once we had been together for a while we naturally spent whatever was in our checking, so if we had a car repair, we would without discussing it just go out to eat less. Or if we went on a trip that month, we would not do XYZ when we got back home. We found a way to accidentally budget, but it wasnt like we would sit down and look at our spreadsheet this month and say, Whoops, we had this expense, so we cant do these other things wed planned. Im not advocating that method, its just what worked for us.

When we started making progress toward financial independence, we started ratcheting up our savings and tightening our spending. Wed still find ways without discussing to make it work.

Tanja: The bottom line is that we dont let money sit in our checking account that we are not allowed to spend. Now were experimenting with different accounts. We paid off our house so we dont have a mortgage payment, but if we hadnt we would set up an account for the mortgage payment and put the money there. Then whatevers in checking is discretionary, and we can spend it but if we spend a lot on groceries, we cant spend as much on everything else. As long as we dont run out by the end of the month, were fine. [Tanja and Mark have a life happens fund to cover any unexpected expenses that cant be funded through their checking account, and any money pulled from the life happens account is replenished in subsequent months.] Our tracking is really in our investments. How are our accounts doing and are we running through our money too quickly?

Mark: Now that were in this brave new world of fixed income, we might need to do a three-month analysis and actually scrutinize our spending a little bit. Be a little more deliberate about it than we have been.

Tanja: Were traveling so much that its hard to define what a normal month of spending looks like. It might be easier to define a normal year than a normal month.

We just got back from the UK, where we were for almost a month, and we did have a moment because Im laughing because we didnt throw money at a problem, but we did throw points at a problem. We had a bad hotel and we needed to find another, and I was able to quickly call Marriott and say, Hey, can I use some points to fix this? Its helped that we both travel a lot for work and stockpiled a lot of points during that time. Weve used credit cards for points for a number of years, so weve got a pretty good cushion there.

Mark: Thats one of the things, both when we were saving and ratcheting down our spending to save more, and now that were early retired and trying to spend on a modest budget, weve sort of had to get out of the mindset of throwing money at problems generally. So far weve been lucky and not really had to do that on travel. Were traveling at a pretty modest level these days, not staying in five-star hotels or anything like that. Were doing hostels and Airbnbs.

Tanja: This last trip I took was for my 40th birthday so I was pretty particular about what I wanted to do, but the other travel weve done has been pretty opportunistic. We went to France last fall for a month when we basically just put into Google Flight Search look at fares from San Francisco to Europe, or from San Francisco to Asia, we priced the whole world and found that France was the cheapest. That dictated that trip. Not being attached to a particular trip or a particular set of things also helps diffuse a lot of that stress.

Mark: After each trip we try to figure out when we were feeling stressed and what was it in the trip planning we could have changed. For example: not spending just one night in places. The quick turnaround doesnt give you time, you feel like youre rushed. We try to spend at least two nights in places, even small cities where theres not much to see.

I think when youre talking about money or life in general, most people think about where you want to go, and then life just starts happening. Your spending habits start getting engrained and you get a job and the career path often has a kind of inertia to it. For us, once we had this big and audacious goal of retiring early, it just got us thinking more deliberately about money, what its for, the life choices we were making and why. Realizing that you can do something different, to align with your goals, is the biggest thing.

If you have a compelling story about how money comes into play in one of your relationships whether with a partner, a friend, a sibling, a coworker, or what have you we want to hear about it! Email alanna.okun@vox.com and karen.turner@vox.com with a little about yourself.

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Impeachment to Index-Mania, and in between

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Retiring in the next few years? Feeling confident about how your portfolio will hold up? If you answered yes to the first question, and did not immediately answer yes to the second question, this is a good time for a little stress test.

If timing is everything, then you are retiring at the right time. That is, at least from the standpoint of the financial market cycle. The S&P 500 Index is near an all-time high. It has just had one of its best 10-year runs in history. If you had any part of your retirement wealth in that stock index, you have done well.

Bonds have been in an even bigger bull market than stocks. Theirs lasted nearly 40 years. You may remember your parents talking about when Treasury Bills yielded about 17%. That was in 1980.

Today, they also yield 17%...except that there is a decimal between the 1 and the 7! That is, 3-month T-bills yield about 1.7%. Times have changed, but the sustained decline in bond rates also translated to historically-high returns on bonds. This is because as bond rates fall, bond prices rise. That created a big add-on effect

For instance, if you owned a bond fund yielding 5%, and rates went down after you bought it, you probably earned more than 5% return. This impact of falling rates has been so consistent since the Reagan administration, investors approaching retirement could be excused for thinking things always work this way.

SPOILER ALERT

However, investing does not always provide this type of wind at your back. And, if you are about to convert your life from earning money to spending what you earned all of these years, it can really help to be aware of what may change the weather.

Here is a quick list of what I see today that investors should account for. The overriding issue: investor confidence and complacency is still extremely high. There are a variety of factors that alone or together could spell the end of the party for a while. That is when you will want to be more resourceful than that old 60/40 portfolio, or the asset allocation whats-a-ma-jig you own (but dont truly understand) allows you to be. That is when risk management will matter more. In other words, a more attentive approach to reducing major loss.

Who knows how it turns out? All we know is that the more the market behaves like it did during Watergate, the more you will want to emphasize risk management. The current stock market essentially stopped going up about 21 months ago. Ironically, that is about the same number of months it took for the S&P 500 Index to lose about half of its value in 1973 and 1974. That was when Watergate went from hearings and rhetoric to something relevant to the markets.

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Remember when the Feds next move dominated the daily headlines. That was way back in...September. Fed rate cuts tend to be friendly to markets in the near-term. But later on, they are often looked at as a signal that risk was rising. We may be in the midst of such a transition.

Pick your hot-spot, any hot-spot. The globe is full of them. Yet somehow, the ultimate confidence-breaker could be something not even on the radar right now. What we do know about the global economy is that manufacturing is weak, and it spreading to the services sector. Thats the big one in todays consumer-driven world.

The S&P 500 earnings yield (shown below) has been sinking since it peaked in 2011. This is similar to saying that the S&Ps price-earnings ratio is very high. It is also similar to saying that this is no time to be complacent or uncertain about the role the stock market will pay in your retirement portfolio.

YCharts.com

Indexing has become synonymous with easy. That is never a good sign. A herd mentality ultimately leads to a stampede on the way out. Dont invest in what is currently popular, unless there is a more important reason you own that investment.

Consumers are leveraged, and most have not saved much for retirement. Governments and corporations (especially smaller ones) are drowning in credit. just because they learned nothing from the Financial Crisis of a decade ago, that does not mean you have to fall in line with them.

About half of all bonds owned in bond mutual funds are rated BBB. That is abnormal. It means that we are one little step away from the junk bond market being flooded with former investment grade bonds. That will tie big investors like pension funds up in knots, more than they already are. This is a threat to your retirement in a variety of ways.

This is the last and most important of this list of 8. Because as we have seen time and again, markets are strong until they are not. And they dont ring a bell to signal when warning signs transition to reality.

Markets are more emotionally-driven than at any time in my 33-year career. That in itself is a reason to keep your own head about you, as you make your own transition from accumulating assets to spending them.

That will likely require you to maneuver your portfolio more than you needed to in the past, as a bear market rolls through, everyone freaks out, and we set up for the next big bull market. No one knows the timing of that. But I do know that being prepared for the inevitable is always a good idea.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors

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Retirement often seems far away, leading many Americans to think they have plenty of time left to save for it. But as anyone who's ever reminisced about the past knows, time goes by faster than you think. Putting off retirement savings for too long can make it difficult to save enough when you do begin, which could jeopardize your financial security.

It's a problem that 62% of Americans are facing, according to a recent TD Ameritrade survey. Approximately half of baby boomers, three-quarters of Gen Xers, and three in five millennials say they're behind on retirement savings. But perhaps more disturbing is that roughly 58% of these individuals also said they could retire comfortably on $1 million -- which is probably not accurate for most people. This indicates that many of these individuals might be even further behind than they thought. Here's what you can do to get back on track if you're one of them.

Image source: Getty Images.

In order to figure out how much you must save each month for retirement, you must first estimate the cost of your retirement. This estimate will never be completely accurate because you don't know how long you'll live or what unforeseen expenses might arise, but it can get you close.

Start by estimating the length of your retirement. Subtract your preferred retirement age from your estimated life expectancy. Plan to live a long life just in case. The Social Security Administration says that one in three 65-year-olds retiring today will live past 90, and one in seven will live past 95, so you could be looking at 30 or more years in retirement if you retire at the traditional age of 65.

Next, you must total up your estimated living expenses in retirement. This includes your food, housing costs, insurance, clothing, and entertainment. If you plan to travel, add these costs in as well. The average household headed by an adult 65 or older spent about $50,000 in 2018, and you can expect this average to rise over time as inflation drives up costs. You can use this figure to judge whether you're in the right ballpark, but your expenses could be much higher or lower than this, depending on your lifestyle and where you live.

Multiply your estimated annual expenses by the number of years you'll be in retirement, adding 3% annually for inflation. It's easiest to let a retirement calculator do this for you. It can also calculate your investment rate of return. This could be as high as 8%, but use 5% to 6% to be conservative in case the markets take a turn for the worse. Your calculator should tell you how much you must save in total and per month to reach your goal. Subtract money you expect from a 401(k) match, a pension, or Social Security. Make a my Social Security account to estimate your Social Security benefit if you're unsure how much to expect from the program.

Just based on the estimates listed above -- a 30-year retirement spending $50,000 per year with adjustments for inflation -- a typical retirement could cost around $2.4 million. You won't have to save all of this yourself. Social Security will likely knock off a few hundred thousand dollars if you qualify for it, but the $1 million estimate that those surveyed by TD Ameritrade thought they would need might not go as far as they'd hoped.

Now that you know how much you need to save for retirement, you can begin crafting a plan for how to make that happen. This might be as simple as raising your retirement contribution rate if your current budget allows for it. Just stay mindful of your retirement account's contribution limits. This is $19,000 for a 401(k) in 2019 and $6,000 for an IRA. Adults 50 and older may contribute up to $25,000 and $7,000, respectively.

Those unable to save as much as their retirement plan recommends should try making adjustments to their budget. Cut back on dining out and unnecessary purchases, and prioritize debt repayment if you have credit card or student loan debt that's preventing you from saving for your future. Put the extra money you free up toward your retirement. You could also look for ways to boost your income, like pursuing a promotion or starting a side business, and put any windfalls like a year-end bonus or tax refund toward retirement.

When you can't trim your budget enough to make ends meet, try delaying your retirement. This has the dual benefit of reducing your retirement expenses while also giving you more time to save. Another option is to transition into retirement slowly by working part time and reducing your hours until you're fully retired. This reduces your reliance on your retirement savings during the early years of your retirement, enabling what you do have to continue to grow in your account for longer.

If all else fails, consult with a financial advisor who may be able to give you advice on how best to invest your savings and alter your retirement plan so it works for you. Avoid fee-based advisors. Choose a fee-only advisor instead, as fee-only advisors charge flat fees for their services. Fee-based advisors, on the other hand, can also earn commissions when you invest in the assets they recommend, which can cause conflicts of interest.

Catching up on retirement savings is possible, but you need an accurate idea of how much you must save and the diligence to stick to a retirement plan. Re-evaluate your plan at least once per year and anytime you change employers or experience a major family or health event so you can make adjustments as needed.

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Its always good to learn from a mistake, especially if you are running a bond ratings firm. Its also, it seems, never too early to start an argument about the 2020 elections.

Donald Trumps election in 2016 surprised many, including the people at Moodys MCO, -0.67%, whose data analysis models had correctly predicted the outcomes of all previous elections since 1980.

So Moodys analyzed its 2016 miss, changed its methods and backtested three data models that would have predicted President Trumps victory, as well as all other presidential election outcomes back to 1980. MarketWatch readers left nearly 1,200 comments and you can join the conversation.

Here are more insightful MarketWatch reads on investing, finances and retirement.

Fort Myers, Fla., according to a new list from U.S. News & World Report. MarketWatch has a tool to help you put together your customized list of possible retirement destinations.

You can also offer suggestions for a reader who is looking to retire in a gun-friendly, affordable city with good weather.

Teslas TSLA, -1.92% stock has been on a wild ride over the past few years, but the company still makes the only electric cars many people would consider buying. Claudia Assis describes a fork in the road as Tesla gets ready to report its third-quarter results on Wednesday

Heres a very simple explanation of why Warren Buffetts Berkshire Hathaway BRK.A, +0.02% BRK.B, +0.07% is sitting on $122 billion in cash.

Heres how you and your spouse can time Social Security payouts to maximize payouts for both of you.

A couple who retired in Spain says health expenses keep them from returning to U.S.

If youre staying in the U.S., read this: What to know before switching to Medicare Advantage.

Youve heard, maybe forever, that a good diversified portfolio is 60% in stocks and 40% in bonds. Now Bank of America says thats no longer appropriate read what to do instead.

Quentin Fottrell MarketWatchs Moneyist has practical advice for a reader whose stepfather left his wife of 21 years nothing but a life insurance policy that was terminated a few months before his death because of a missed payment. His children say too bad.

Read how the Moneyist helped solve another family financial dilemma.

Related: Stop procrastinating and get an estate planheres how to get started

If you work for yourself, you wont have access to employer-sponsored retirement plans. Here are some alternatives as explained by Kerry Hannon.

Jurica Dujmovic has a plausible explanation for those UFO videos released by the U.S. Navy last month, based on government documents.

Want more from MarketWatch? Check out our Personal Finance Daily or other newsletters, and get the latest news, personal finance and investing advice.

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No one likes paying taxes, especially once you've retired and are no longer earning a paycheck. So here are some steps to consider now that could pay off later.

Although you cant control all the challenges you might encounter as you move toward and through retirement, having a well-thought-out plan can help you be better prepared. Thats especially true when it comes to two of the biggest risks to a confident and successful financial future: market volatility and taxation.

Youve probably heard a lot about volatility lately, as the market reacts to the latest news about interest rates, trade wars and the possibility of an economic slowdown. If those up-and-down movements make you nervous, it may mean your diversified portfolio isnt set to a mix that fits with your risk tolerance, and its time to talk to your financial professional about making some adjustments.

While youre at it, you should get the ball rolling on a plan to control taxes, which arent getting as much attention in the news right now but could be an even bigger threat to your income in retirement. Given the tax environment were in right now, and the potential tax environment we could see in the near future, its important to truly diversify your portfolio so that you dont own too many assets that are taxed in the same way or are taxed at the same time.

To do that, it helps to picture three buckets holding your investments.

If youre like a lot of savers, you probably have most or all your investments in that middle bucket the taxed-later bucket and that could be a problem. Heres why: Those accounts served you well by saving you on taxes every year while you were working, but when you start tapping into them in retirement, the money you withdraw will be taxed as ordinary income. Or, as I often tell my clients: Getting money into a retirement account is easy. Getting money out of that retirement account can be challenging and expensive.

Let me explain. Those tax-deferred accounts include a debt people often forget. Heres a good way to look at it:

If you own a house, and its worth $500,000, but you still owe $200,000 on the mortgage, you know you dont have a $500,000 asset. You have a $300,000 asset. In the same way, if you own a 401(k) worth $500,000, the money in there isnt all yours. You owe a good portion of it to the IRS, which has been waiting for payment for years. The taxed-later bucket is a tax postponement retirement plan.

As soon as you start taking your share of the money, the IRS is going to want its share as well. Even if you decide not to withdraw the money because you dont need it maybe your Social Security benefits and pension have you covered the IRS is going to require you to take minimum distributions (RMDs) starting at age 70.

Those distributions could bump you into a higher tax bracket and possibly cause you to have to pay taxes on a higher portion of your Social Security benefits. You might even have to pay more for your Medicare Part B and D premiums. Add to that the risk that if youre drawing money from your investments in a market downturn whether its necessary for income or RMDs you could end up with far less money to live on in your later years. This could have a devastating effect on your lifestyle.

Let me ask you a couple of questions: Would you borrow money from a bank if it didnt disclose in advance what the interest-rate charge was going to be over the life of a loan? Has the IRS disclosed how much it can charge you in taxes over your entire lifetime? This is the challenge with the taxed-later bucket!

Another thing to consider is that Congress is working on a new rule that would require most non-spouse beneficiaries to draw down inherited retirement accounts within 10 years of the original owners death, instead of letting heirs spread out their distributions over a longer time in whats known as a stretch IRA. If you planned to leave your tax-deferred account to your children, you might just be handing over a tax burden along with it.

The good news is its never too late to make changes that can help save you money and better secure your retirement. There is no better time than now to get those changes underway. Thanks to reforms that have reduced tax rates through Dec. 31, 2025, taxes are effectively on sale for the next seven years! By converting the money from your tax-deferred retirement accounts to an after-tax Roth IRA or similar type plan over the next few years, and paying the taxes on the money as you go, you can get rid of the debt you owe to Uncle Sam now for what is almost certainly a lower cost overall than what you would pay in retirement.

Most are predicting that tax rates will go up after the current reforms sunset and much higher rates arent unprecedented. The current top rate is 37% for those whose taxable income is over $510,300 (individuals) or $612,350 (married filing jointly). For the middle two tax brackets, the current rates are 22% and 24%. Historically, rates have been much higher. In 1944, the top federal rate peaked at 94%. And in the 1950s, 60s and 70s, the top rate remained high, never dropping below 70%.

This is an opportunity to start converting your assets by diversifying your portfolio into a more tax-efficient investment model. In a world filled with what-ifs and worrying news, its a positive step you can take to protect your retirement dream.

Kim Franke-Folstad contributed to this article.

Investment advisory services offered only by duly registered individuals through AE Wealth Management LLC (AEWM). AEWM and Retirement Planning and Investment Solutions LLC are not affiliated companies. Safe Money Financial Solutions LLC is our name and it does not promise or guarantee investment results or preservation of principal. Neither the firm nor its agents or representatives may give tax advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investing involves risk, including the potential loss of principal. Any references to security or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 00275976

As an Investment Adviser Representative and founder of Retirement Planning and Investment Solutions LLC (www.freshstartplans.com), Ronald Anno focuses on creating tax-efficient retirement plans that help people achieve their financial goals and strives to ensure they won't run out of money during retirement.

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USA, New York, Water Mill

As Gen Xers reach their 40s and 50s, they are starting to focus more on their retirement planning.One of the key steps in this process is to start working with a financial planner or other similar adviser.The addition of a planner to the process can often amplify the results in a positive fashion even if the concept runs contrary to the Gen X march-to-their-own-drummer style independence.

The planning experience provides benefits, but there are some common missteps that can occur regardless of the clients wealth level or positive relationship with the advisor. In developing a retirement strategy, planners typically use a form of Monte Carlo-style analysis in which historical returns are coupled with a series of assumptions on income, assets and spending. This helps them determine if the client has sufficient assets to meet their cash needs throughout their life.

For this analysis to be useful, the quality of the assumptions must be accurate, otherwise you may find yourself in something of a garbage in, garbage out (GIGO) situation. This expression was coined by an early IBM programmer and instructor who used it to remind students that a computer simply processes what it is given. Its no surprise that it also applies to retirement planning.

The need for accuracy in assumptions applies not only to income and assets, but also longevity.As Gen Xers recognize that they may live longer than their Silent (1925-1944) or Boomer (1945-1964) parents, the longevity assumption could be the key to success.

The Longevity Factor

As Gen Xers are helping their parents navigate their 70s, 80s, and 90s, its clear that longevity may be a burden if not planned for correctly.When long term scenario planning was done for their parents, the age assumptions may not have considered that living into their late 80s and 90s would be a common experience.

Life expectancy is constantly changing.When the first Boomers were born in 1945, the average lifespan was 63.3 years for men and 67.9 years for women. That was an increase over the averages for Silents born in 1925, which at that time were 57.6 for men and 60.6 for women. Seventy-five years later, the average lifespan has increased dramatically. For a baby born in the United States in 2019, the average males lifespan is projected to be 76 years and average female is 81 years, an increase of almost 14 years compared to Boomers.

Given medical breakthroughs and technology, Boomers and Silents are often living much longer than their projected lifespans at birth.But living longer doesnt mean living better.This is precisely what Gen X must remember when addressing their own retirement planning.

Assumptions on longevity must be applied correctly in retirement planning.In the late 90s and early 2000s, it was not uncommon to use 85 or 90 as the end point.But Gen Xers must insist to see numbers drawn out to 100 because an analysis showing success for an endpoint of age 90 might be a very different picture from one using an endpoint of age 100.In fact, using 85 or 90 as the end age in a Monte Carlo analysis is simply a garbage assumption.

Joint Life Expectancy Has Pros and Cons

For couples, married or unmarried, joint life expectancy is also an important consideration.It is unlikely that a couple will pass away at the same time, thus factoring in the longevity of a surviving partner is critical.

For example:a heterosexual Gen X couple where both partners are 50, the male partner has a 38% chance of living to age 85, whereas the female partner has a 50% chance. As a couple, they have a 69% chance of one of them reaching age 85.When using age 90 as the longevity assumption, the likelihoods change to 18% for the male, 30% for the female, and 42% for the couple.

Gen Xers should challenge their planner to extend the longevity scenarios as well as factor in expense assumptions at a commensurate level.What is spent on fun retirement activities in your 70s and 80s, might shift to cover more extensive medical aid or living needs in your 90s.

Its On You To Make Sure Its Factored In

As Gen Xers are hitting their prime wealth building years, there should be a focus on making longevity a blessing and not a curse.Working with a profession financial planner can be a huge benefit to the retirement process, IF the correct assumptions are used. Gen X cannot be passive in their planning but must demand to see extended numbers.While a planner may be apprehensive that Gen X clients could be wary of the planning process in the short-term if they see vulnerabilities, it is absolutely critical that they help clients recognize the positive long-term impact in order to navigate and plan for a long lifespan. Otherwise its just garbage in, garbage out.

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