Finding the Safest Investments in an Uncertain Market

Understatement: People nearing retirement have had good reason to be concerned in the last few weeks.

Our friend who likes to check on his stocks everyday has suddenly developed other interests. And who wouldn’t blame him. It’s no fund getting whipsawed - down in the depths one day, brought back to euphoria the next - only to have all hope snuffed out the following morning. Better to take up macrame.

Which leads so many folks to wondering what is a safe investment these days. Precious metals were red hot last week - for a while. Ditto for commodities. Stocks - only the bravest went there. Even staid money market funds, last refuge for the faint of heart, took big hits with net outflows of $173 billion for the week. The Primary Fund “broke the buck” - going below a net asset value of $1. Fortunately the Treasury Department announced a new insurance program like the FDIC for money market funds, helping bring stability back to that market.

All this uncertainty leads one to the question - is real estate a good investment now? Not being liquid, it is only for those with a long term perspective. Only time will tell when the bottom hits, although a few experts think it will come soon. We were cheered by one blogger’s report from Las Vegas that investors are cherry-picking foreclosed properties, snapping up the most desirable ones and bringing some measure of stability to the chaotic market there. If true, more of that would be a good thing to see!

New Social Security Retirement Income Calculator

Want to know how much you will receive from Social Security when you retire? How much will your check will be if you start taking benefits at 62, 66, or “full” retirement age (70). The Social Security Administration has just unleashed a powerful tool, The Retirement Estimator, that will give you these figures in less than a minute.

It’s a great retirement calculator that has many uses. We’ve been doing some work with retirees lately and it is truly sad to see how many people are not financially prepared. They’ve retired, and now many are running out of money because expenses have been higher than they expected - property taxes, fuel, and food being some of the worst culprits. Their choices are not pretty. Often it means selling a home and moving to a new town, a reverse mortgage, going back to work, or poverty. So we recommend this tool as the first step in figuring out if you can afford to retire. The second step is to calculate your expenses - with a generous escalator for the unknown. Check it out.

PS - when we ran the calculator we were amazed at the difference in the monthly check if we wait until we are 70, instead of taking social security at 62. The age 70 monthly payout would be more than $1200 higher than the age 62.

Retirement Calculators Give the Magic Number

July 28 — Are you the type of person who has a certain “magic number” in mind? The magic number being the amount of savings you think you need to quit the working world and retire. It’s always been an interesting exercise, with the problem that all too often these numbers tend to be unscientific, often relying on shaky assumptions about spending and income.

Finding the magic number is an essential step in every baby boomer’s preparations for a worry-free retirement. Nowadays there are any number of retirement calculators available on the internet. These nifty web pages take the mystery out of the process. On most of them, just enter a few facts like your age, life expectancy, current income and assets - then presto - you get how much you need to save for the retirement income you specify.

At Topretirements.com we have looked at several of these calculators and continue to be impressed with their simplicity. Useful too, at least in terms of knowing in an instant whether you are going to have a retirement problem or not. Since only 50% of baby boomers aged 55+ have saved more than $50,000. it might be a good thing for more people to get the dose of reality that a retirement calculator can provide.

Most of the retirement calculators we list (see first section, Financial) are easy to use. Almost all are identical too, so once you’ve seen one, you seen almost all. The exception is FIRECalc. This one provides more options and sensitivity about different market conditions, giving a range of investment results under very different scenarios A more realistic approach, since who knows what types of returns will affect your portfolio. We recommend you take a look at FIRECalc

Housing Slump Postpones Moves to Retirement Communities

Thousands of retirees are having to postpone their planned moves to retirement communities - a different kind of housing crunch victim. Many have selected the active adult community or CCRC of their dreams, only to find a big catch - they can’t sell their primary residence, which is how they will fund their new home or entry fee into a CCRC (Continuing Care Retirement Community).

Topretirements has heard much anecdotal evidence from various CCRCs about this phenomenon. In fact many continuing care communities are experiencing a sales slowdown for this specific reason. Buyers are ready to move in, but they don’t have the cash on hand to complete the deal. Realtor Magazine recently wrote on the subject as well. One of the problems with the issue is many retirees only want to sell if they can realize 2005 type prices - accepting anything less seems like some sort of defeat. Unfortunately that is the state of the current market - prices are off at least 20% in many parts of the country, and probably won’t be headed higher for some time to come.

Vanguard Posts Helpful Retirement Financial Advice

Probably you get a lot of newsletters from your financial advisors. We confess we don’t pay too careful attention to most of them, but recently a newsletter came in from Vanguard that we thought was particularly helpful. Although the focus of this site is primarily to help you choose the right retirement community, being able to afford that community is pretty important too!

The Vanguard articles included:
- What your partner should know about your financial situation (in case something happens to you)

- Sensible spending tips for retirees

- How to support your favorite charities in a down market (some interesting stuff here)

Low Savings Reduce Retirement Community Options

February 20 - You’ve heard it before, Americans don’t save enough. Unfortunately, failure to follow this sage advice is going to mean a bleak retirement for many baby boomers, unless they get very busy. The Motley Fool’s recent article, “Prepare for a Gruesome Retirement”, shows just how pathetic those savings are. Of boomers aged 55+, 42% have saved less than $25,000, and only 50% have saved more than $50,000. Those aged 45-54 aren’t doing any better - 44% haven’t saved more than $25,000. With very few years left to for heir savings to compound and grow, these boomers are going to be forced to accept a very low standard of living, or continue working long into the future. As a point of reference, a nest egg of $50,000 that doesn’t raid the principle will usually give you a whopping $2500 a year to live on (plus social security, and a pension if you one of the fortunates to get one).

The article goes on to list some dire scenarios that will happen if people don’t start saving and investing right away. They are definitely worth reading. Fortunately it ends on a high note: “You needn’t end up with a nightmarish retirement. Here’s the “tough love” part. If you take action now, you can set yourself up for a more comfortable retirement. So get going!” We echo that thought, particularly if you want to have a lot of options for your retirement lifestyle.

Florida Voters Roll Back Property Taxes

January 30, 2008 — Florida — In a crushing 64% to 36% vote Florida voters overwhelmingly brought in a new wave of property tax reform in their state, passing Amendment 1. The amendment would lower property taxes. It increases the homestead exemption by $15,000, saving voters an average of $240. It also provides “portability” of protected assessed values for Florida residents, meaning that if they sell their homes and move to a new one they can continue to have a 3% cap on the assessed value for their “protected” amounts.

The Miami Herald said that “… passage of the plan is only the first phase of what ((Governor Crist) promised would be ”just the start” of a prolonged push to lower property taxes.” The paper mentioned that Florida’s the Taxation and Budget Reform Commission will consider other tax-cut ideas, including replacing the property taxes for schools with a sales tax on services.

The vote is considered a landmark victory for tax reform. Other states may be expected to follow, which could have enormous consequences for the budgets of local municipalities across the nation.

TR’s Owner Has Property Tax Op- Ed Published in New York Times

December 16 — It’s a very exciting day for John Brady, owner of Topretirements.com: his Op-Ed feature on the need for Property Tax Reform, Time to Retire the Property Tax, was featured as an Op-Ed in the Connecticut section of today’s Times.
The thesis in his Op-Ed is that archaic property tax laws are not only unfair, but that they also hurt education budgets.

As many retiring baby boomers have already figured out, property taxes bear no relation to a person’s income or financial assets. In retirement this tax becomes a much larger percentage of a person’s new, reduced income (and you can usually assume there will be big annual increases). Many states have passed laws to protect full-time residents and retirees against unreasonable increases. Florida’s Save our Homes law is one of the most successful - it caps annual increases in assessed value at 3%. One of the most frequent questions asked in retirement forums is: “what are the most tax-friendly states?”

Increases in assessed value that occur in volatile real estate markets cause the most mayhem with property taxes. After a new assessment some homeowners see their taxes increase dramatically, severely affecting their ability to pay. Other homeowners, however, actually see their tax bills decline. Brady’s argument that the property tax hurts education is centered around that phenomenon - that the property tax is not as efficient as an income tax in collecting revenue from everyone who has the ability to pay.

Every state has property taxes. A relatively small number have municipal income taxes. The challenge Brady proposed to a very tradition bound CT legislature is to permit municipal income taxes as a way to accomplish 2 purposes: achieve better tax equity, and generate more revenue. Stay tuned!

How Much Can I Earn and Still Receive Social Security Benefits?

November 18 — You guessed it: The most popular question asked at the Social Security Administration is “How much can I earn and still receive Social Security benefits”. Fortunately the SSA has the answers to this question and many others at www.ssa.gov.

This question is an important one because many people living in retirement communities either need to or want to work in retirement. This question pertains to what is called the earning test. If you are under normal (or full) retirement age (FRA) when you start getting your Social Security payments (for example, you start taking benefits at 62), $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2008 that limit is $13,560 and for 2007, the limit is $12,960. In the year you reach your full retirement age (66 for the oldest baby boomers) $1 in benefits will be deducted for each $3 you earn above a different limit, but only counting earnings before the month you reach FRA. For 2008, this limit is $36,120; for 2007, this limit is $34,440. There is NO limit on your earnings starting with the month you reach full retirement age.

Some people seem to think that it’s not worth working under these circumstances, but most experts disagree. You will pay a fairly steep tax on your earnings, but only on those over the limit - and you are still making money anyway. Andrew Biggs, a deputy commission for Social Security, points out in this weekend’s Wall Street Journal another often overlooked benefit of working: the Agency recalculates your benefits at full retirement to make up for any benefits that might have been lost because of the earning test.

The Journal’s Guide to Social Security has many other useful facts to help you understand what is ahead. The Social Security website is one of the best government websites, it’s FAQ’s are very helpful.

Here is some helpful information about what age to start taking your social security benefits.

What to Do If You Retire Before Your Mortgage

September 19 — The Federal Reserve reports that almost 19% of families headed by someone 75 or older have a mortgage - up sharply from 10% in 2001. Today’s Wall Street Journal article provides some practical tips if you are in the situation of retiring before your mortgage does.

One of the common dilemmas that many people have is what to do if you have more savings than mortgage - should you pay it off quickly and forgo the home mortgage interest deduction? Jonathan Clements suggests that you take the plunge and use some of your savings in that case to reduce your mortgage. You will lose the deduction, but paying off is a better option because your loan rate is higher than your savings rate, and most interest you earn is taxable anyway. Clements cautioned about using 401k savings for this purpose, since you will have a tax penalty for taking out the money.

He also went through various scenarios including buying an annuity with money from your 401k to insure you will be able to make payments in future years. To do this properly you need to pay for the annuity directly from the 401k. Lastly, he laid out the situation where you still have a big mortgage and a long way to go to pay it off. Often the best strategy there is to sell your home and move to a smaller one to lower your monthly payments and insure your fiscal health. Of course your ability to sell your home in the current weak market comes into play, but assuming you purchase a new home quickly you will probably make up for whatever downside the market has now with a better deal on the new house. Wall Street Journal article on Retiring with a Mortgage.
When You Should Start Taking Social Security