Best States to Die In (but it’s not a good year to do it anywhere)

March 15, 2010 — Notes: First,this article was prompted by an excellent suggestion from one of our visitors, Gerry. Second, it is really about the worst states to die in, but we didn’t want to have a negative headline. It will be easy for you to figure out the best states to die in - they are the ones NOT mentioned in this article.

It’s not the cheeriest topic, but what critics call the “death tax” is on the minds of many people. The Economic Growth and Tax Relief Reconciliation Act of 2001 set up lower estate tax rates and higher exemptions through 2009, and then repealed the estate tax in 2010. Now that we are in 2010, the federal estate tax laws are in a murky state. If Congress doesn’t act, people who die in 2010 might not have to pay any estate tax, unless a law is passed this year or retroactively in the future. With no congressional action 2011 will be a worse year to die, since the exemption will revert from $3.5 million to what it was in 2002 ($1 million) and the tax rate will climb back to what is was in 2001 (55%).

Most experts expected that by now the Congress would have enacted a law specifying what the estate exemption would be. Thanks to the ongoing health care log jam, it appears that Congress is miles away from taking up other business.

A complex subject
Let’s start by saying that estate and inheritance taxes are a complex subject, one where you should have a competent professional helping you. If your estate is worth less than $1 million, at least you don’t have to worry about that problem - your estate will not be taxed under current laws. Some definitions - an “estate tax” is levied on the net value of what you are worth when you die, an “inheritance tax” is levied on your heirs from what what they collect from the estate. The estate tax is more common. Your spouse will not pay inheritance taxes from your estate, but your children and other heirs might in some states.

State laws change quickly so it is important, particularly if your estate will be large, to look into your state’s laws carefully. One of the further complications relates back to the federal exemption problem we discussed above. Many states had their estate taxes pegged to the federal law. But faced with the prospect of declining revenues, many have since “decoupled” their laws from the federal, allowing them to ignore the federal exemptions that steadily climbed through 2009. Other states have changed their laws so they can set their estate and inheritance taxes and exemptions independently. According to an article about state estate taxes at About.com, 14 states and the District of Columbia collect estate taxes in 2010:

Connecticut
Delaware
District of Columbia
Maine
Maryland
Massachusetts
Minnesota
New Jersey
New York
Ohio
Oregon
Rhode Island
Tennessee
Vermont
Washington

Inheritance Taxes
There are currently 7 states that collect inheritance taxes (Maryland and New Jersey levy both estate and inheritance taxes!):

Indiana
Iowa
Kentucky
Nebraska
Maryland
New Jersey
Pennsylvania

What does all this mean to you?
If your estate will be worth more than $1 million and you are very concerned about these taxes you might consider moving to one of the states not listed above. A state without an income or inheritance tax will let more of your hard-earned money reach your heirs. However, as one savvy estate attorney advised us, choosing a place to live based on tax policy is a case of the tail wagging the dog. Better to choose the place you want to live in first, then if all things are equal, you could tilt to the low-tax state. Of course, before you make any decisions you should consult a competent estate attorney and/or accountant.

The other issue arising from this discussion points out the dis-functionality of our Congress in 2010. We rely on the government to set laws so that we can follow them. But this year millions of citizens have no idea what the estate laws will be this year or next. As a result they are having to make complex decisions that involve significant dollars without knowing the law. Some experts predict that Congress will pass exemptions similar to what they were in 2009 ($3.5 million), with a worse case prediction of a $1 million exemption (The House has passed a bill with the $3.5 exemption, but the Senate has not acted). Some predict that the eventual law will be retroactive, covering estates of people who died in 2010. If a law is passed reinstating the estate tax with a $1 million exemption and a 55% tax rate, 2010 could be a very bad year to die for people whose estates are worth more than $1 million. Take this overly simplistic and hypothetical example to see why: You die in 2010 and your estate has a net worth of $3 million. Subtract your $1 mill. exemption, so $2 million is taxable. If the tax rate is 55%, $1,100,000 will be paid in federal taxes by your estate, plus any applicable state estate and/or inheritance taxes. For a more detailed discussion see the AARP Estate Tax Calculator.

For further reference:
7 States to Avoid
Most Tax-Friendly States
What do you think?
Please use the comments section below to give us your input on this subject.

Budget Strapped Retirees Trade Work for Rent at Parks

As we have said before, if your retirement fund isn’t what you hoped it would be, it’s time to get creative. One of the most interesting ways to stretch your budget was profiled in a New York Times article last week, “Retirees Trade Work for Rent at Cash-Strapped Parks“. The article profiles the experiences of several retirees as they travel around the country and help keep state and national parks ticking under the serious budget constraints these institutions now face.

As Sharon Smith points out in the article, there are 3 simple reasons why she and her husband Bill want to work in these parks: “We’re here for three reasons,” she said…. “No. 1, we like to travel. No. 2, we like people. And No. 3, we’re on a budget.” At the time of that quote, Mrs. Smith was making cinnamon rolls for the park center. Others provide bird guiding, cleaning, and maintenance. As states and the federal government have cut back on their support for parks, retirees working for free RV or tent space are now taking over more and more roles previous provided by paid employees.

The same idea is often played out in private campgrounds as well. Owner operators have long relied on work campers with skills and a willingness to work to handle maintenance and special projects.

For further reference:
Don’t miss the special 6 part series at Topretirements by our writer friend Betty Fitterman - “Living the Mobile Lifestyle in Retirement”
Work for RVers and Campers
RV Park Store (work opportunities)

4 Reasons Why Not to Retire in These 7 States

February 15, 2009 - You have probably read about the problems Greece is having with its unmanageable debt these days. Well if you thought that sort of problem couldn’t effect you as a retiree in the good old USA, think again. A recent article, These 7 States are Headed for Something Worse, by Gregor Macdonald at Seeking Alpha makes a good case with 4 different reasons why 7 U.S. states are NOT the best place to retire. His conclusions are quite similar to what Topretirements reported on back in November (see links at end of article).

While Mr. McMacdonald’s piece was not specifically directed at retirement decisions, we think it is relevant. Here are the 4 reasons why he thinks these 7 states are in trouble:
1. All of the states on his list have large populations (at least 8 million people)
2. They are borrowing heavily,at least 1 billion dollars, to pay unfunded unemployment insurance claims
3. Each state has at least 15% underemployment
4. All are net importers of energy

The 7 states on his list are:
New Jersey
California
Illinois
Michigan
Ohio
North Carolina
Florida

So what does this mean to these states? Macdonald makes the point that all 7 states are being squeezed very hard, with no great resolution in sight. Real wage growth is stagnant or going backward. According to Macdonald, all “…seven states are squeezed hard at both ends: no wage growth at the top, and no relief through cheaper energy costs at the bottom.” The result - taxes will have to go up, interest costs on borrowing will increase, and services will decline. The spiral might get worse as residents get fed up and move elsewhere.

Is This Relevant to You as a Retiree?
For you as a potential retiree the impact of these states’ financial predicament might not be quite as bad. if you are retired, you probably don’t have to worry about being unemployed. You might have to pay higher taxes - if you have taxable income. You do have to be worried about cuts in services, as well as subsequent taxpayer revolts. And certainly it’s not much fun to live in a place where the news is bad and the economy is depressed.

We should note that Texas could have qualified for this list. But Macdonald took it off because it is a net energy exporter (not importer as erroneous first version stated) and thus doesn’t face quite as much pressure.

What do you think? Does his argument make sense to you, or could it affect your decision? Comment in the section below and let us know.

For further reference:
What are the most popular states for retirement
Be Careful about worst states to retire
“Best States to Die In”

Author Comment:
This article has stirred up the biggest controversy of any we have ever written. We view that as a very good thing, since it shows that people are thinking and expressing their opinions. The part of the article that was the most controversial was that North Carolina and Florida made both this “states to avoid” list and Topretirements’ “best” list, which is more accurately a “most popular” list. The fact is that these 2 states are such popular retirement destinations that even the most serious financial problems might not affect retirees’ plans to retire there.

The good news for Florida is that it has cut expenses in the face of declining revenues. Whether other states can do that is another matter - some are in worse shape than others. As other commenters noted, we also wonder why states like Oregon or New York didn’t make the list. The Pew Center’s report, “Beyond California“, offers a more thorough review of states in trouble, and we highly recommend it. Their list has 10 states on it, but does not include 2 states on Macdonald’s list - North Carolina and Ohio.

Retirees don’t have to be as concerned about the financial health of their state as do younger workers. Retirees usually don’t pay that many taxes, and it is the younger people who are going to have to struggle with future debts. Lastly, some readers were concerned that Macdonald was trashing every city in the state (e.g.; Asheville). NC might have economic woes, but that doesn’t mean all of the cities within it will be all that affected. Asheville remains the most popular retirement destination, and for good reason.
Everyone, thanks for the wonderful, spirited comments! John Brady

How to Retire in Style and on a Budget

Let’s just say that Plan A for your retirement didn’t quite work out the way it was supposed to do. Whatever the reasons, the fact is you are a 60-something baby boomer looking to retire on a lot less money than you thought you would have. Luckily for gritty you, sulking is not an option. Here are 10 of our best ideas on what you can do to retire in style - and on a budget.

1. Move, now. Most people about to retire are living in a lot more house than they really need. So downsizing, the sooner the better, is the smart move. You’ll end up paying less in taxes, utilities, and maintenance right away. But you say the market for your home is terrible? It is, but this works two ways - you’ll get less for your current house than at the peak but you’ll be able to replace it with a steal. By selling your suburban home in the northeast or rust belt you might be getting out when the getting is good, while setting yourself up for possible sun belt real estate appreciation.

2. Look for low cost housing areas. Up until a year ago we would caution anyone to move away from the coasts to get a good deal in real estate. In Tennessee, Kentucky, Oklahoma, Alabama, Texas, and Mississippi you can usually pick out a very nice home or condo in a desirable area for less than $100,000. While it is still almost always true that real estate more than 50 miles away from a coast is less expensive, the real estate melt down has created opportunity in south Florida, the southeast, and Arizona. There are some really nice homes in the Fort Myers and Miami areas going for unbelievable prices (the median was $92,000 in October, 2009). For recommendations on low cost housing towns at Topretirements use our free Retirement Ranger (just specify lower than average cost of living when you take the quiz).

3. Look for a short sale or foreclosure. While not for the faint of heart, short sales and foreclosures offer the potential for huge savings (the National Association of Realtors says they typically sell for 15 to 20% less). They are the big reason why real estate prices are so low - other types of sellers just can’t compete with these sales. To succeed you need to be smart and energetic. You need to have a good real estate agent with expertise in short sales and foreclosures. You also have to use common sense. To find good deals spend time cultivating banks, checking out neighborhoods, and talking with residents (See NY Times article about the Cape Coral, FL real estate market, where over one fourth of the homes have been foreclosed). Many experts advise individuals from buying at auction because of the risks, which can include faulty title. In south Florida you can even go on foreclosure tours as a way to find properties. Just be careful, you are usually buying a home “as-is” with no recourse. (see foreclosure resources at bottom).

4. Look for a resale. Many marketers of new 55+ communities have a lot of unwelcome competition in their own projects - previous buyers who want to sell their units. You can almost always pick up a unit for less than a brand new one. You might not get to specify all of your personal touches, but you will probably get many custom features at no or low cost, with the bugs worked out.

5. Consider moving abroad. This plan is not for everyone. But if you like learning foreign languages and customs, don’t need to frequently visit friends or family, and are up for adventure, an expatriate retirement might be for you. Mexico, Guatamala, Costa Rica, Ecuador, Panama, and Nicaragua all have very desirable and safe towns where the almighty dollar actually still has some purchasing power (see our Directory of Active Adult Communities).

6. Go with a manufactured home. Prices are generally much lower in communities of manufactured homes. You won’t live in fancy architecture, but you will generally get a well-built, comfortable home for fewer dollars.

7. Look for a cooperative community. Florida, California, and Arizona are filled with cooperatively owned active adult communities. These are places where the developer long ago sold all of the lots and built all possible homes. Now the community is owned and run by the residents, who generally try to keep expenses (dues/HOA fees) low and services efficient. With the housing market down, resales are almost always available at a good price.

8. Get creative. There are lots of ways to lead the good life without paying top dollar. Buy a 2nd hand mobile home (or boat) and move south in the summer. If you live in a desirable place, swap or rent your home during the season and go on vacation. Swap your handyman skills for lower rent. Talk with everybody you know, read, and look online for different ideas.

9. Keep working. If you have a good job and you can save some money, consider working a few years longer to give yourself more options. Or, cut down your hours and semi-retire. Other options are looking for part-time work or starting a home based business. Is there a way you can make money with your hobby? If you want part time work, be careful about where you retire. Make sure there is industry nearby that matches your skills, or a vibrant tourist trade where part-timers are always in demand.

10. Be positive. Maybe everything hasn’t worked out the way you dreamed it would. Keep looking for the silver lining, and don’t waste your time complaining. You’ll be happier, and so will your friends and family.

Foreclosure/Short Sale Resources:
Redfin.com, Foreclosures.com, Foreclosure.com, Realtytrac.com, Zillow.com

Most Affordable Places to Retire
Most Affordable College Towns
Most Important Criteria for Best Place to Retire

What Are Your Ideas?
Please post your ideas for great retirement living on a budget in the Comments section below.

Most Important Best Place to Retire Criteria: Taxes, Affordability, or Location?

November 23, 2009 - It’s impossible to see into the minds of our readers to try to assess their motivations in finding their best place to retire. We do, however, have some evidence based on which of our articles get read the most. No surprise, articles on low-tax states and most affordable always attract many readers. As in that rude truism, “It’s the Economy, Stupid”.

One of our pet peeves is the overemphasis that many people place on low taxes as a retirement criteria. In this article we will argue why overall affordability and location should be more important than blind allegiance to the “lower taxes is better” search priority.

First, with the exception of property taxes, most taxes are based on your income. If your retirement financial position hasn’t worked out as well as you wanted, then income is what you tend not to have. So paying taxes on that lack of income shouldn’t be much of a problem. If you choose to live in a state that doesn’t tax social security income that’s a plus, but not an overwhelming factor. Some examples might help illustrate the point. Assuming that you will get $20,000 from social security a year, at a typical state income tax rate of 5% you would pay $1000 in state income taxes before exemptions. Not trivial, but perhaps not a big-enough reason to move to a different state. The potential payoff gets better in a state that also doesn’t tax pension income. Assuming you also get a nice pension of $20,000, you will save an additional $1000 in states that exempt that form of income.

Unless your investment portfolio is very large and very successful, the taxes on your dividends and interest income are going to also be very small. If your $100,000 portfolio could throw off $5,000 in income, then that would mean another $250 in taxes. Sales tax is not that big a factor either. Assuming you spent $20,000 a year on taxable items (food, clothing, and some other items are often exempt), that would be another $1000 you would save if the state sales tax was 5%.

Seven states have no income tax, while 5 have no sales tax. Alaska, the most expensive place to live in the U.S., is the only state with neither a state or an income tax. You can find a complete list of states that do not have income or sales taxes at our “Most Tax-Friendly States“. The Tax Institute has a good approach to this issue, where they look at overall tax burden (where all taxes are combined). The 3 states with the lowest tax burdens are Alabama, Delaware, and Tennessee.

Another factor about taxes is that most, but not all of the time, taxes are associated with services provided. The low tax states have typically lagged behind in support for schools, libraries, social services, etc. Be prepared for fewer services in lower tax states, a factor which sometimes results in lower property values and appreciation. Taxpayer revolts about tax increases and service cuts can lead to social and inter-generational strife, as we saw last week in the California university system.

Property tax is to a certain extent a regressive tax - it is based on the value of your home or property, not your income. So if you continue to live in your current home after retirement, but now have a greatly reduced income, don’t expect to see your tax bills correspond to your changing ability to pay. If you pay high property taxes now and are worried about money, it makes sense to either downsize in your current community or move to state or town where property taxes are lower.

Overall affordability. To us, overall affordability is a better criteria for selecting a new retirement town or state than is tax-friendliness. Is real estate less expensive, allowing you to maintain your state of living but take equity out of the home you are selling? Are income, sales, and property taxes lower? Is the overall cost of living (energy, food, services) lower? Is there a chance to work part-time to make some income? The combined weight of these factors can be a lot more important than tax reasons alone. You can use this site, your library, and government sites to get a handle on overall affordability.

Location. In our opinion location should be the number 1 priority in your retirement decision, assuming you have sufficient income to have several options. People who retire near their children or friends are often happier than those who decide to move far away from them. Obviously if you or the children/grandchildren are willing to travel, that could be less of an issue. What is the community like - is it pretty, the homes well-maintained, and the zoning strong? Weather, climate, and available activities associated with particular locations are also important in letting you pursue the lifestyle that keeps you busy, active, and fulfilled.

Bottom line: We are of the opinion that life is meant to be lived. So basing important retirement lifestyle decisions on taxes is like having the tail wag the dog. Please be sure to contribute your comments and opinions in the comments below.

For further reference:
20 Most Affordable Places to Retire

With Some States in Trouble, Be Careful About Worst States to Retire

Deciding which state you ought to retire to is hard enough. First you have to find the right climate, tax structure, environment, culture, crime, etc. But with the economic recession of the last few years another factor enters in - is your state in financial trouble so deep it might not be able to dig itself out (think worst states to retire)? The Pew Center on the States issued a report last week that should be enough to give you pause before you move to a new state, and might even convince you to move out of others.

The Pew Center named 9 troubled states in addition to California in its report, “Beyond California: States in Fiscal Peril”.

The top 10 Troubled States in the report are:
- California
- Arizona
- Florida
- Illinois
- Michigan
- Nevada
- New Jersey
- Oregon
- Rhode Island
- Wisconsin

These states’ budget troubles can have significant repercussions for retirees as well as general residents. Everyone in an affected state will be displeased to see higher taxes or fees; layoffs or furloughs of state workers; longer waits for public services; more crowded classrooms; higher college tuition, and less support for the poor or unemployed. But retirees could also see reductions of favorable treatment for retirees (such as property tax or income tax relief) as well as declining property values. Intergenerational strife is another possibility, as young families and seniors square off over education budgets.

California appears to be teetering on insolvency at times. “But while California often takes the spotlight, other states are facing hardships just as daunting,” said Susan Urahn, managing director of the Pew Center on the States. “Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers.”

In the report, Pew’s researchers identified factors that have contributed significantly to California’s difficulties, then determined the degree to which other states are experiencing the same challenges. These factors are: (1) loss of state revenues; (2) the relative size of budget gaps; (3) increasing joblessness; (4) high foreclosure rates; (5) legal obstacles to balanced budgets—specifically, a supermajority requirement for tax increases or budget bills and (6) poor money-management practices.

While the rest of the states share important characteristics with California, they may not be destined to follow in the Golden State’s footsteps. Some of these states already have responded aggressively to their budget crisis, although it is too soon to tell whether their actions will put them on solid fiscal footing.

“The 10 states are hardly the only ones at risk in this time of record-setting revenue drops, high unemployment and far-flung fallout from the housing bust and credit crisis. Virtually all states have been stressed by the downturn,” Urahn said. “We expect that when state lawmakers next spring turn to crafting their new budgets for 2011, many will confront an even tougher set of challenges. States already have made significant cuts, revenues continue to drop, and stimulus funds will be running out. ”

The Pew Center identified 4 trends running through the economic troubles of these 10 states:
- Unbalanced economies
- Revenues and expenditures out of alignment
- Limited ability to act.
- Putting off tough decisions

States’ fiscal situations are widely expected to get worse even if the national economy starts to recover. At the end of 2010, federal stimulus money that helped states meet some of their expenses will begin to run out.

Bottom line: The Pew Center emphasizes that some of the 10 states are making moves to solve their problems. There are plenty of other states that are also in trouble, and they might not be working on their problems. The point is that you should think twice about the state you might be considering moving to. Keep tabs on their fiscal health to make sure they are headed in a positive direction. If they are not, maybe you should reconsider moving there. Likewise if you live in a state with problems and were already thinking about moving out - maybe this is a good time.
For more information:
Read the full Pew report

No 2010 COLA Increase in Social Security - Is “Stimulus” Payment an End Run on the System

October 15, 2009. It’s official, there will be no social security COLA (Cost of Living Allowance) increase in 2010, the first time this has happened since 1975. The reason is simple, this year there was no increase in the Consumer Price Index (CPI-W) from the third quarter of 2008 to the third quarter of 2009, hence no need for a payment.

A press release from the Social Security Administration is advocating passage of a special 2nd round stimulus package for seniors, veterans, and the disabled (the same people who would have received a COLA). The amount of the payment in the Economic Recovery Act
Payment for 2010 would be $250, about a 2% increase to the average social security recipient. The press release has one of the great non-sequiturs of the season as its reason for recommending passage of the proposal: “Last year when consumer prices spiked, largely as a result of higher gas prices, beneficiaries received a 5.8 percent COLA, the largest increase since 1982. This year, in light of the human need, we need to support President Obama’s call for us to make another $250 recovery payment for 57 million Americans.”

So let’s see, prices went up in 2008 so we needed an increase, but in 2009 prices went down but the “human need” went up. Conservative critics are citing the special stimulus package as an end-run on social security system’s rules, building a slippery slope where annual increases come no matter what happens to prices. In our mind the criticism seems valid, particularly since the only recipients of this stimulus program would be social security recipients. If we really need another round of stimulus, let’s give it to everyone and preserve the integrity of the social security system rules.

What do you think?
Sound off in our Comments section below.

For further reference:
When to Start Taking Social Security
No Social Security increase planned for 2010

All States Not Equal When It Comes to Tax-Friendly Retirements

With many of us baby boomers increasingly worried about their finances in retirement, reducing what we pay in taxes is an attractive option. It’s one option that might not impact our lifestyles in any way. So, if you already live in a high tax state, voting with your feet to escape some of those taxes might be a good idea.

The principal state taxes you typically face in retirement are income, property, and sales taxes. Gasoline, cigarette, and estate taxes certainly exist, but they probably won’t be deal breakers for most people.

The various states that have income taxes differ considerably on how they treat social security benefits and pensions. Your particular situation could have a significant impact on the taxes you pay. For example, if you will get a large military pension you might want to consider a state that considers that income exempt. Some states tax social security (or part of it), and some do not. A few states only tax out of state pensions, while others give exemptions for some government pensions. Many states have a wide variety of exemptions for veterans, people over 65, etc. In some cases those could be big factors. The trick is to research the states you are considering, and know the tax situation before you move. For more specifics about which states tax what kinds of benefits, see Most Tax-Friendly States for Retirement.

Property tax is often the largest tax that retirees pay, so that factor is definitely worth considering in deciding where to live. States like Florida, California, and Arizona have programs that limit how much the appraised value of full time residents’ home can go up, which can be a very important protection. On the downside, these states are now having problems raising enough revenue, so who knows what might happen in their future fiscal troubles.

Income Taxes
These states do not have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire only tax certain amounts of dividend and interest income.

Sales Taxes
Alaska, Delaware, Montana, New Hampshire, and Oregon do not have any sales taxes. Note that in the states that do have sales taxes, local municipalities often have the right (and do) charge additional city sales tax.

State Tax Burden
The Tax Foundation reports on and ranks each state for its tax burden. You can find the entire list at the Tax Foundation Research.

Not the Only Consideration
A word of caution. Taxes should not be the tail that wags the dog. Being close to family should be a lot more important, as is the type of community and environment you want to live in. You can always change other factors to make ends meet: you can take a part-time job, move to a smaller or less fancy house, or move to a lower cost state.

More Help
Kiplingers has a terrific article on tax-friendly states at Yahoo Finance, along with many other factors you should consider about state taxes and your decision to move.
Topretirements has individual state guides to retirement, each of which has a detailed section on retirement tax factors for that state.
Barron’s article, “Fleeing the Tax Man“, is a great read that explains the flight from high to low tax states.

Debate Over How Much You Can Safely Spend in Retirement Simmers On

For many baby boomers one of the questions we have always loved to debate is about to change. The old question was - how much do we need to accumulate in savings to afford a comfortable retirement? The old question had a corollary which is also changin - when will we be able to retire and start spending?

These questions will change direction because retirement is either here for a lot of us boomers, or it will be here within just a few years. We will have saved and invested what we did, and that is what we have to work with. for many of us, our traditional careers are over. So now the question has mutated into - how much can we safely spend each year and not run out before we die in 30 years or so from now. The decision is a momentous one, because if we miscalculate we might end up working as a greeter at Walmart to make ends meet. Or almost as bad, we will reach the age when we can no longer do anything with a pile of money, but regret that we never took the trips or had the fun we actually could have afforded.

According to several financial analysts inteviewed in the New York Times, (How Retirees Can Spend Enough, But Not Too Much) the question of how much we can take of our 401ks, IRAs, and other retirement savings isn’t that clearcut. And it has even gotten a lot murkier since the recent stock market crash. Will our portfolios ever get back to where they were? Will future returns be assured as they have been in the past?

A rule of thumb used to be that 4% or 4.5% of the principal a year was the right number. So say we had savings of $200,000, that means that we could withdraw $9000 a year and add that to our Social Security and any other pension income. Using that formula we would be able to keep up with inflation, so every year we could safely give ourselves a 4 or 4.5% raise.

Now some experts are questioning that rule of thumb. Some suggest that the right withdrawal rate might be 5 or even 6%. As you might expect, after the experience of this down market that type of thinking has given a lot of people the willies.

Michael E. Kitces is a financial planner with Pinnacle Advisory Group and Jonathan Guyton is with Cornerstone Wealth Advisors in Edina, MN. They have different approaches to setting a withdrawal figure, although they share one principle: flexibility might be the key to finding the right number. If the stock market is overvalued, it might be a good year to take a little extra out of your retirement fund - maybe even 5.5 - 6.5%. The thinking is the market is about to head down anyway, might as well spend it as lose it. Similarly, if the market is severely beaten down (sound familiar?), then we might be looking at a good belt-tightening year. Save the capital now and it will probably come back. Guyton has another idea we like. Carve out a separate discretionary fund for special trips, projects, or down years. His idea gives us some fun money, we just have to realize that once it is gone it is gone.

You can find more about this question at the New York Times - www.nytimes/yourmoney
Also Robert Shiller’s data used in this story

For further reference:
Article: A Surprising Answer: When You Should Start Taking Social Security
Forum Discussion: When to Start Social Security (including buybacks)

Clunkers for Cash Program Gets Underway

Update - July 31: As of today the Cash for Clunkers Program has been so unexpectedly successful that 250,000 cars have been sold. Result: the program has run out of money, and the New York Times reports that the Transportation Department told dealers to stop taking new applications. But today (Friday) the House added $2 billion to the original $1 billion level. The Senate has not yet voted on it, but government officials said the program will continue running at least through this weekend.

July 27 - The program to take gas-guzzling cars off the road while stimulating new car purchases was so successful in Europe that it is now in place in the good old U.S. The law was signed by President Obama in late June and went into effect on July 27, after the resulting regulations were published in the Federal Register on July 24. Dubbed CARS by the government, The CAR Allowance Rebate System is a $1 billion government program that helps consumers buy or lease a more environmentally-friendly vehicle from a participating dealer when they trade in a less fuel-efficient car or truck. The program is designed to energize the economy; boost auto sales and put safer, cleaner and more fuel-efficient vehicles on the nation’s roadways.

Consumers will be able to take advantage of this program and receive a $3,500 or $4,500 discount from the car dealer when they trade in their old vehicle and purchase or lease a new one. Consumers you do not need to register anywhere or at anytime for this program. However, to find out eligibility requirements click here.

If you are a retiree or have a family member considering taking advantage of the program, here is a link to the government’s FAQs about the program.   Or call CARS Hotline at (866)-CAR-7891 (note, the hotline was overwhelmed when we called it today).

Pop Quiz: One question we can’t find the answer to - if you trade in an eligible truck but purchase a more efficient car in its place, are you eligible? If anyone knows the answer, please post in the Comments below.