10 Ways You Could Avoid the 10% Early Retirement Penalty

Retirement is something each of us must plan for. Not surprisingly, you want to make sure you’ll have enough income to last throughout your lifetime. Theoretically, if you plan well, you could even retire early. Perhaps you’ve sold your business for a profit, maximized your retirement account contributions, invested in non-qualified accounts, and own multiple rental properties. 

In such a perfect scenario, you could take a blended distribution from various accounts and investments, allowing your money to continue to grow in tax-sensitive ways. On the other hand, taking distributions from your retirement accounts before age 59½ could cause you to owe the IRS a 10% early distribution penalty. However, there are a few conditions in which the government will waive that 10% early retirement penalty.

Before I continue, I’d like to make one thing clear. The purpose of this article is to inform you of ways you might be able to avoid the 10% income tax penalty. If you take money from your qualified retirement accounts early, you will still pay ordinary income taxes on that money. You cannot avoid that.

With that out of the way, let’s take a look at some of the ways you might be able to avoid the early retirement penalty.

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No. 1: IRA Withdrawal for Medical Expenses

A piggy bank with a stethoscope.A piggy bank with a stethoscope.

Life is full of surprises. Some are great, but others can cause major problems. Oftentimes, surgeries, hospitalizations and accidents are unpredictable circumstances. Adding to the stress of these moments are the significant medical expenses they can bring. Although your health insurance should offset some of those costs, you could still owe hundreds or even thousands of dollars out of pocket. What do you do if you’re on a tight monthly budget? How do you pay for those expenses if billing companies won’t accept small monthly payments?

Fortunately, you can make a withdrawal from your traditional IRA for significant medical expenses without having to pay the 10% early withdrawal tax penalty. Keep in mind that there are a few stipulations. You don’t want to withdraw small increments of money from your IRA to pay for medications or occasional doctor visits. Instead, those expenses should come from your normal monthly budget.

To withdraw money and avoid the 10% penalty, your medical expenses must exceed 10% of your adjusted gross income. Likewise, you must use the money to cover expenses that your health insurance did not cover.

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No. 2: IRA Withdrawal to Pay for Health Insurance

File folders with one labeled insurance.File folders with one labeled insurance.

Similarly, you can pay for health insurance premiums using IRA dollars if you meet certain conditions. IF you lose your job AND collect unemployment compensation for 12 consecutive weeks, you can use funds from your IRA to pay for health insurance for you, your spouse and your dependents.

Once again, there’s a catch. To use IRA funds for this, you MUST take the distribution within the same year you received the unemployment compensation.

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No. 3: IRA Withdrawal for Disability

A man in a wheelchair raises his arms in celebration.A man in a wheelchair raises his arms in celebration.

Unfortunately, many of my clients have had to take early distributions from their IRAs due to disability. If you become disabled, you may be eligible for Social Security Disability Insurance (SSDI) and/or Supplemental Security Income (SSI) benefits, but most SSDI recipients receive between $800 and $1,800 per month. The average monthly benefit for 2021 is only $1,277. Anything is better than nothing, but if you’re a business owner, you’re probably used to taking home significantly more than that. 

Therefore, if you become disabled AND you have a physician who signs off on the severity of your condition, you could take money out of your IRA, penalty-free, to supplement your SSDI income. While I hope you never have to use this option, at least you know it’s a possibility.

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No. 4: IRA Withdrawal for a First Home Purchase

A young woman celebrates inside her new home.A young woman celebrates inside her new home.

On a more uplifting note, you can take an early withdrawal from your IRA for the purchase of your first home without incurring the 10% penalty. I know you may be nearing retirement, but it’s possible that you’ve never owned a home. Perhaps you’ve rented apartments or houses your entire life due to work-related travel, commutes or other circumstances. I’ve even seen instances where a person has lived in a house they inherited from a family member and then sold it before moving into a smaller home for their retirement.

 If you’re buying or building your first home, you can withdraw $10,000 if you’re single, or $20,000 if you’re married (if you both have IRAs) from your traditional IRA.

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No. 5: IRA Withdrawal through a 72(t) Calculation

A red change purse.A red change purse.

According to Rule 72(t), section 2 of the Internal Revenue Code, IRA owners can withdraw funds penalty-free, IF they take them as annuity payments. To do this, you must have an actuary run calculations to determine what the substantially equal periodic payments (SEPPs) will be. Additionally, you must take the payments for the greater of either five years or until you turn 59½.

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No. 6: 401(k) Withdrawals

A piggy bank is overflowing with cash.A piggy bank is overflowing with cash.

If you have a 401(k) at your job, but leave or retire from that job, between the ages of 55 and 59½, you could avoid the penalty by keeping your money in the 401(k) and making withdrawals from it. This strategy is often called the Rule of 55. However, if you roll the funds into an IRA, you would no longer be able to withdraw them without subjecting yourself to the early retirement penalty. 

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No. 7: 401(k) Loans

A man pulls his pocket inside out and it's empty.A man pulls his pocket inside out and it's empty.

Another method you could use is to take a loan from your 401(k). Loan provisions apply to 50% of your account balance, up to $50,000. Therefore, if you have an account at work that has $100,000 or more in it, you can take out a loan for up to $50,000. However, if you only have $20,000, your maximum loan, from that 401(k), is $10,000.

I actually used this method with a client once. He retired at 58 years old, only one year from 59½ and needed a little bit of money.  So he borrowed money through a loan provision in his work 401(k). Instead of paying taxes on his withdrawal when he took the loan (because he was in a much higher tax bracket because of his pre-retirement income), he waited until he rolled over the 401(k) into an IRA at 59½. Then, he paid taxes on the rollover.

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No. 8: Inherited IRA Withdrawals

Hands cradle a knitted red heart.Hands cradle a knitted red heart.

Inherited IRAs are becoming more and more common. If you’re not familiar with this method, let’s say that your parents or an aunt or uncle passed away and left you an IRA for an inheritance. If you receive that before you are 59½ years old, you can take the money out of that inherited IRA penalty-free. You will still have to pay ordinary income tax, but you’ll be exempt from the 10% early distribution penalty.

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No. 9: Roth IRA Contribution Withdrawals

A gold egg labeled Roth sits in a bird's nest.A gold egg labeled Roth sits in a bird's nest.

Any money you put into a Roth IRA is after-tax money. Because you’ve already paid taxes on that money, you can pull your contributions out of a Roth IRA tax-free and penalty-free anytime. However, you can’t take your earnings (money that has grown from your contributions) out before age 59½ or before the earnings have been in the account for five years. On the other hand, you can always withdraw from your Roth IRA contributions.

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No. 10: Roth IRA Qualified Education Expense Withdrawals

A college student reads a book on some stairs.A college student reads a book on some stairs.

Last but not least, you can pull money from your Roth IRA to pay for qualified education expenses for yourself or your dependents. As I stated in method No. 9, you can always pull your contributions out. However, in this case, you can also pull your earnings out early and penalty-free if you follow the rules.

If you’re blessed enough to be able to retire early, that’s fantastic! But make sure you let your pre-planning work for you. You obviously want to have enough income to last throughout your retirement, but you also need protection from events as they happen in your life. Whether you need to cover unexpected medical bills or send your children to college without racking up mountains of student debt, know your options.

While you can’t avoid paying ordinary income taxes on early retirement account withdrawals, there may be ways you could avoid paying the 10% penalty. Speak to your financial adviser to determine if any of these methods are right for your unique situation.

Founder & CEO, Financially Simple

Goodbread is a CFP, CEPA and small-business owner. His goal is to make the world of finance easy to understand. He loves digging into complex issues and explaining the details in simple terms.

Source: kiplinger.com

What Is the Social Security COLA?

For 2021, Social Security benefits increased by 1.3%. That was the smallest cost-of-living adjustment (COLA) since 2017 — but consider that, initially, thanks to pandemic-induced price gyrations — retirees were looking at the prospect of no increase at all in 2021. As for 2022, seniors could get a significant increase in their benefits. In September, the Kiplinger Letter forecast that the annual COLA for Social Security benefits for 2022 would be 6%, the biggest jump since 1982, when benefits rose 7.4%

The estimated average monthly Social Security benefit payable in January 2021 increased from $1,523 in 2020 to $1,543 — that’s one Andrew Jackson. The average monthly benefit for a couple who are both receiving benefits rose $33, from $2,563 to $2,596. And the maximum Social Security benefit for a worker retiring at full retirement age increased from $3,011 per month to $3,148, an additional $137.

Also, more of workers’ income is subject to the Social Security tax in 2021. The Social Security tax will apply to the first $142,800 of earnings, up $5,100 from $137,700 in 2020.

COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (similar to, but not exactly the same as, the urban dwellers’ consumer price index used in inflation reporting). If prices don’t increase and even fall, the COLA is zero. That happened in 2010 and 2011, as the economy struggled to recover from the Great Recession, and again in 2016, when plummeting oil prices swept away any chance of a COLA for that year.

How Is the 2021 Social Security COLA Calculated?

As mentioned, any COLA adjustment is driven by changes in the wage earners’ consumer price index. National average prices are used, not regional. SSA also calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year. The reason the fourth quarter isn’t used is because that number is typically not available from the U.S. Bureau of Labor Statistics until mid-January, and the SSA has to make its adjustment on January 1.

History of Social Security COLA Adjustments, 2009-2021

  • 2021: 1.3%
  • 2020: 1.6%
  • 2019: 2.8%
  • 2018: 2.0%
  • 2017: 0.3%
  • 2016: 0%
  • 2015: 1.7%
  • 2014: 1.5%
  • 2013: 1.7%
  • 2012: 3.6%
  • 2011: 0%
  • 2010: 0%
  • 2009: 5.8%

Source: kiplinger.com

Who Gets Your Social Security if You Die Tomorrow?

When you die, your Social Security payments will stop. If you die before starting benefits, you won’t get the money you’ve paid in.

Who Gets Your Social Security When You Die?

Their benefit depends on:
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]
Most of us never see the first 6.2% of our paychecks. That money goes straight to Social Security, with the primary goal of giving you a monthly retirement benefit someday. But what if you suddenly died tomorrow? What happens to all that money you’ve paid into the system?

The money you’ve paid into Social Security may help your loved ones if you die tomorrow. But be realistic. If you have dependents, survivor benefits alone probably won’t be enough.

If You’ve Never Been Married and Don’t Have Dependents

Ex-spouses are generally eligible for the same survivor benefits as current spouses, provided you were married at least 10 years and have been divorced for two years. If you’ve remarried and your ex-spouse claims survivor benefits based on your record, it won’t affect your current spouse’s benefit.

If You’re Married

If you have a spouse, ex-spouse or dependents, they may be able to use your record to qualify for survivor benefits when you die. Here’s who gets what.
No one will receive survivor benefits based on your record if you’ve never married and you don’t have children or other dependents. The money you’ve paid in is simply part of the Social Security trust. It will be used to pay Social Security’s other obligations.

  • Whether you had started benefits at the time of your death: If you died before starting benefits, your spouse’s benefit would be based on your primary insurance amount. That’s the benefit you qualify for at full retirement age. But if you die after starting your Social Security, your spouse’s benefit is based on your benefit. For example, if you claimed Social Security at 62, but your full retirement age was 67, your monthly checks would be one-third lower. Your spouse’s benefit would be based on that lower amount.
  • How long your spouse waits: If your spouse claims survivor benefits before their full retirement age, they’ll receive between 71.5% and 99% of your benefit — your primary insurance amount if you hadn’t started yet, or your actual benefit if you had.

Your children who are over 18 (or 19 if they’re still in high school) won’t qualify for survivor benefits. The exception: If they’re at least 22, unmarried and have a disability that started before they were 18, they can receive 75% of your benefit.

If You’re Divorced

However, Social Security has a maximum family benefit of 150% to 180% of your primary insurance amount. So if you die tomorrow and you’re survived by your spouse and four children under 16, they’d still only get 150% to 180% of your benefit.

If You Have Minor Children

First let’s address a common misconception: Social Security doesn’t set money aside in an account for you. Your payroll taxes fund the Social Security trust. Once you’re eligible, you receive benefits from the trust. But the Social Security Administration doesn’t have a pot of money with your name on it.
If your parent is your dependent, meaning you provide at least half of their support, they could qualify for survivor benefits. They’ll only be eligible if you’re 62 or older when you die. They can get up to 75% of your benefit amount — but only if the survivor benefit is larger than their own benefit.

If You Have Adult Children

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If Your Parents Are Your Dependents

If you leave behind a spouse who’s caring for your child who’s 16 or younger or disabled, they’ll receive 75% of your benefit, regardless of their age.

Are Survivor Benefits Enough?

But sometimes, someone else can receive Social Security based on your record. That’s the case with spousal benefits, ex-spouse benefits and survivor benefits. Another person may be able to receive a Social Security benefit based on your benefit — but they aren’t taking your Social Security.
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Survivor benefits can certainly help your loved ones after your death, but they aren’t enough to protect your family, especially if you have young children. A Value Penguin survey found that survivor benefits would leave a widowed spouse caring for two children with an average monthly shortfall of ,695.
Any children 18 or younger (or under age 19 if they’re still in high school) qualify for 75% of your benefit, provided that they aren’t married. That’s on top of the 75% your current or ex-spouse may receive for caring for your child.
It’s also essential to have a will and keep it up to date. If you have a 401(k) or individual retirement account (IRA) make sure you review the beneficiary at least once a year. The individual(s) listed will receive the money, regardless of your will’s instructions. <!–


If you have loved ones who depend on you, life insurance is a must. One common guideline is to buy enough life insurance to cover 10 times your annual income. However, this may not be enough if you have children whose college education you want to pay for, or if you and your spouse have significant debt.

No, Social Security Isn’t Going Broke. 5 Shortfall Myths, Busted

There’s a bit of truth to this myth, though: Social Security invests its money in U.S. Treasury securities. These are bonds issued by the federal government. Bonds are debt instruments. The investor (Social Security in this case) is the creditor, and the issuer (the federal government) is the debtor. The federal government then pays that money back to Social Security, plus interest.
Don’t panic over the latest trustee’s report. You can still expect Social Security to be around in 2034 and beyond.
Social Security replaces about 40% of earnings for an average worker who retires at age 65. Benefits are expected to replace a shrinking percentage of income for younger generations.

5 Things Everyone Gets Wrong About Social Security’s Shortfall

One reality to prepare for as you plan for retirement: Your Social Security checks won’t stretch nearly as far as they did for your grandparents. Social Security cost-of-living adjustments, or COLAs, lag behind the actual cost increases seniors face. Benefits have lost 30% of their purchasing power since 2000, according to The Senior Citizens League.

1. Myth: Social Security Will Run Out of Money in 2034

It’s essential to start saving for retirement as soon as possible. If your employer offers a 401(k), contribute at least enough to get your company match. Also consider saving in an individual retirement account (IRA).
The truth: Social Security now pays more in benefits than it rakes in through payroll taxes. But workers are still paying into the system. As long as they continue to pay in, Social Security won’t go broke.

2. Myth: You’ll Only Get 78% of Your Projected Benefits

This graphic shows that the trust fund will be depleted by 2034.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

3. Myth: If You’re in Your 20s or 30s, You Shouldn’t Expect Benefits

The reduction in costs has been overshadowed by the drop in payroll taxes caused by massive unemployment in 2020. Immigration and birth rates both fell steeply during the pandemic. Both decreases are expected to decrease Social Security revenue over time.

4. Myth: The Government Drains Social Security to Pay for Other Programs.

The truth: The trustee’s report estimates actually weren’t as bleak as many forecasters feared. But it’s too early to determine COVID-19’s long-term effects on Social Security.
You can still count on receiving Social Security someday. But your monthly checks should only be one component of your retirement plan.
Source: thepennyhoarder.com

5. Myth: Covid-19 Will Have a Dire Impact on Future Benefits

Ready to stop worrying about money?
You may hear that “Social Security is going broke” or that Social Security won’t be around for you. Neither statement is true. Here are five common myths about Social Security’s future.
Treasury securities are among the safest investments in the world. They’re backed by the full faith and credit of the U.S. government, which has never defaulted on its debt.

What Does This Mean for You?

Hundreds of thousands of lives have been lost to the pandemic. That tragedy lowers Social Security’s short-term costs because fewer people will receive benefits. Forecasters estimate that mortality will remain higher until 2023.
Taken out of context, the numbers look frightening. But if you understand how Social Security works, you’ll see that things aren’t quite so dire.

A new trustee’s report provides some scary projections about Social Security’s future. Social Security’s trust is now expected to be depleted by 2034. That’s one year sooner than originally estimated, in part due to the economic shock of COVID-19.
For decades, Social Security took in more than it paid out in benefits. That’s how it amassed .9 trillion in reserves. The latest projections estimate that those reserves will only last until 2034. At that point, Social Security will still bring in money from payroll taxes. But payroll taxes alone would fund just 78% of Social Security’s obligations.
Lawmakers could raise the full retirement age, as they did in 1983. They could also  increase the payroll tax rate or raise the ceiling on payroll taxes. In 2021, workers pay Social Security taxes only on the first 2,800 of earnings. Congress could also borrow more money to make up for the impending shortfall.
The truth: It’s true that Social Security will only have enough to pay 78% of projected benefits by 2034. But that’s if Congress does nothing. That seems highly unlikely. Social Security is widely popular with voters across the political spectrum. <!–


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Preserving 401(k) for Retirement Is Step in Right Direction

After years of systematically saving for what once looked like a faraway retirement, you’re beginning to look ahead. You’re reviewing your 401(k) and other retirement accounts, and you’re getting ready to live the dream.

Congratulations! Many Americans don’t have nearly enough retirement money set aside. You should appreciate your success.

But don’t start kicking back just yet. As much as you’ve planned and worked to get to this point, there’s still much to do. After all, you will now have fewer years to fully recover from any missteps with investment choices or fluctuations in the stock market. So your decisions matter even more at this stage.

To make the most of your retirement money once retirement is within reach, here are six steps to take.

1. Understand Your Retirement Money and Financial Life Stage

A financial advisor will frequently divide clients’ financial lives into five stages. The names may vary, but here’s the gist:

  1. Early career

  2. Family/growing career

  3. Prime earning years

  4. Pre-retirement

  5. Retirement

Each period has different concerns. The first three focus on accumulating wealth. The next two stages focus on harvesting what you’ve managed to accumulate.

If retirement is changing from a distant goal to something more definite for you, welcome to stage 4: pre-retirement.

The timing for pre-retirement will be different for everyone depending on your investments, not to mention market volatility and other factors. But a good rule of thumb is five years in advance of your actual retirement.

At this phase, you’ll want to start thinking differently about your investment choices. Just like a sports team that’s way ahead at the end of the game, this phase focuses on avoiding mistakes instead of trying to run the score up.

For instance, chances are you will want your portfolio to be less volatile. That will help ensure a predictable, comfortable fifth stage, which is, of course, retirement.

2. Update Your List of Financial “What Ifs?”

Planning is a continual exercise of asking “what if?” until you’ve found the right balance between achieving your most treasured goals and the risk of running out of money too early. But if you’re like most investors, you either haven’t written up a formal financial plan or, if you have, you haven’t updated it for quite a while. That time has come.

Your up-to-date plan will help you understand your next steps. For instance, you will need to:

  • Estimate the amount of income you can safely draw from your portfolio during retirement.
  • Calculate any effects of large purchases or sales you want to make when you retire.
  • Consider your new tax bracket once you are no longer working.
  • Plan how your estate should be transferred.

Once you have this information, you can reassess your financial goals to make sure that, first, they are still meaningful and, second, you can afford them.

3. Consider Hiring a Professional to Look After Your Retirement Accounts

Unfortunately, employers aren’t able to give specific advice about how to invest your 401(k) investments for pre-retirement. Since all these topics can be complex — and costly to get wrong — now is the time to get advice from a pro or schedule an appointment with your advisor if you haven’t had one in a while.

If you need to find a financial advisor for advice about your retirement funds, it’s a good idea to find someone holding the Certified Financial Planner® designation, which means they have established experience in planning, completed a rigorous course of study and are required to follow a code of ethics.

Good financial advisors tend to be expensive, but the wrong advice is even more costly. For example: withdrawing money from your retirement account too early can lead to costly penalties.

You can save money by only hiring an advisor when you need one. Try to find a planner who works on an hourly basis or, if you have a large account balance, charges a fixed fee.

4. Get Your 401(k) Ready for Retirement

The term you’ll hear is “preserving 401(k) for retirement,” which essentially means making sure you optimize the return on your 401(k) investments in this stage of your financial life. You’ll want to ratchet back risk so a few bear markets over the years won’t decimate your savings.

Here are some basics to consider when preserving 401(k) for retirement:

  • You can reduce risk by diversifying more and shifting part of your portfolio to more predictable assets such as high-quality fixed income, dividend-paying stocks, preferred stock and cash or money market funds.
  • Unless you go entirely cash — that’s usually a bad idea — your portfolio’s value will still fluctuate after you’re retired. Bond and high-dividend-paying stock prices tend to move in the opposite direction as interest rates. One way to insulate against that is to have some money coming due every year so it can be invested at the current interest rate. That’s called “laddering” your bond portfolio.
  • Since stocks have historically grown faster than inflation, you should plan on holding at least some stocks.
  • Low-cost mutual funds can help you stay diversified when you have fewer dollars to put in the stock market.

Remember, even in retirement you still won’t be done trying to grow at least some of your money. You’re going to be retired for a long time! Inflation will nibble away at your purchasing power, so preserving 401(k) for retirement is an important step.

5. Don’t Rush to Roll Over Your 401(k) Account

If your 401(k) has enough low-cost investment choices and you don’t have a complicated estate to leave behind, you may not automatically need to roll over the funds into an individual retirement account when you retire.

Why a 401(k) Rollover Might Be a Bad Idea

If a financial advisor recommends you roll your 401(k) account into an individual retirement account (IRA), first estimate the cost of investing into a whole new portfolio and then get a second opinion.

There can be a lot of paperwork and expense involved in a rollover in exchange for very little value. And if it’s done wrong, you could trigger costly tax consequences.

Why a 401(k) Rollover Might Be a Good Idea

There are times when rolling over your retirement money to an IRA makes sense.

Even the most wonderful employers can have outdated retirement plans. Retirement-plan laws and investment products have evolved over the years. If your plan provider hasn’t updated its investment options in years, you might be better off having more control and options in an IRA.

6. Be Ready to Adjust Your Plans

If you’ve walked through these steps and you don’t like what the numbers are telling you, don’t panic. It’s better to know now than be caught short when you need your investments the most. There’s no better time to adjust your retirement plans and perhaps work with a financial advisor on new retirement investment goals.

Contributor Sam Levine holds Chartered Financial Analyst® and Chartered Market Technician® designations and has written on finance topics since 2003. He is an adjunct professor of finance at Wayne State University in Michigan.



Source: thepennyhoarder.com

Lower Your Future Income Risk by Taking Action Now

The news about the stock market has been wonderful for a lot of your retirement savings. The portion of your portfolio invested in the stock market has recovered from the thrashing the pandemic delivered and, if it followed the broad market, it has reached new highs.

However, other aspects of the economy aren’t necessarily the most favorable for individuals entering or in retirement:

  • Interest rates are still low by historical standards.
  • Expenses, such as travel, food and your car, have increased. Home prices have jumped too.
  • Federal income tax rates may be going up.
  • And, of course, there’s always the possibility of a stock market correction

Finally, some investors took their money out of the markets during the crash of 2020 and stayed on the sidelines during the historic upswing.

All of that means the income from your savings may not cover current or future expenses. So, the decisions you make for your retirement income plan are more important than ever.

But don’t worry. A simple six-point point program that you can use any time — not just during times of uncertainty — will help you determine whether you need to take some action to keep your retirement plan on track.

Six ways to take control of your retirement

1. Create a plan for retirement income

Most importantly you should have a plan for retirement income. It doesn’t have to be elaborate, but it should be recorded and updated at least annually; it will help to guide your decisions going forward. The plan should be about income allocation — not asset allocation. An Income Allocation plan recommends that you allocate your income among interest, dividends, annuity payments and IRA withdrawals. And in some cases, drawing down or extracting equity from a primary residence.

For more on how an Income Allocation model works, please read Fill Your Income Gaps — And Then Some.

2. Generate more income from your retirement savings

A lot of retirees with savings in both IRA or 401(k) accounts, and personal (after-tax) savings follow this strategy: (1) Take required minimum distributions from your IRA or 401(k), and (2) Spend interest and dividends from personal savings. They cover any shortfall in income with capital withdrawals or hopedfor capital gains. These latter two sources, however, should not be considered “income,” because they are dependent on the market.

An Income Allocation Plan adds annuity payments to your monthly income, providing cash you can count on for life that also offers tax advantages. Annuity payments can start immediately and be a multiple of interest you’d earn on your savings. Or they can start in the future, enabling you, for example, to invest your rollover IRA savings more aggressively.

3. Build in more security

Investors understand the need for security in their retirement planning. For example, a large percentage of 401(k) participants invest their savings in target date funds, which automatically reduce risky holdings in their account as they near retirement.

Once investors retire, increasing income from annuity payments can provide similar security — guaranteed income for life no matter how long you live. Research shows that consumers generally do not reap all the rewards of stock market gains because they sell their holdings during bad times and are not invested when the market begins to climb again. A concentration on income, with a percentage of your retirement income coming from annuity payments, relieves that pressure and allows you to stay the course in volatile markets. In other words, the money you have invested in stocks can stay there, and you have time to let the market recover.

4. Minimize your stress level

Besides setting up a plan that is less dependent on market fluctuations, you can look for an adviser who will help manage your plan and make real-time adjustments to that plan to reflect changes in the market and your personal situation. The difference is this: You and your adviser are managing your plan, not just your investments.

Using an adviser to manage your plan and a low-cost robo-adviser to manage your investments could be the perfect combination. Look for your adviser to deliver holistic planning that considers your income goal and your employment-related guaranteed income, while pointing out the potential risk of withdrawing capital to manage any income gap.

5. Lower your fees

While you’ll want to keep a portion of your savings invested in the market, make sure you invest in diversified, low-cost index funds, ETFs or direct indexing portfolios. These investments can be managed within an automated, or “robo-adviser” platform, to cut your fees in half or more. Robo-platforms can even suggest investment models and allow you to adjust those models if you choose.

When your objective is a plan for retirement income, think about the fees you’re paying as coming directly out of your income rather than out of your savings. With a full-service advisory fee averaging 1% of assets under management, they can represent a large percentage of your income.

For more on how to cut your fees, please see How to Cut Your Investment Fees in Half.

6. Lower your tax rate

Conventional wisdom says that when you generate more income, your tax rate will be higher, too. But your taxes are very much dependent on the source and composition of the income, and by following an Income Allocation approach on your personal savings as well, you can lower your retirement tax rate. As suggested above, a portion of annuity payments made from your personal savings is free from tax during the first 15 or 20 years.

(For more on that, please see How to Lower Your Retirement Tax Rate to Less Than 10%.)

Putting the numbers together

The six principles listed above show the power and flexibility of an income allocation planning system and demonstrate how one simple move — adding annuity payments — can positively affect income, tax rate, fees and your peace of mind.

How much more income could you expect by developing an Income Allocation plan? The chart below shows how a 70-year-old man with $1 million in savings, and 50% in rollover IRA using a robo-adviser investment platform, enhances his retirement finances by switching some of his bond investments into income annuities generating lifetime annuity payments.

Comparison of Plan With and Without Annuity Payments

A bar chart shows how stable income is when an annuity is added to the mix.A bar chart shows how stable income is when an annuity is added to the mix.

Here are some of the highlights:

  1. First year income from the plan with annuity payments is $14,000 per year higher than the plan without annuity payments.
  2. Cumulative income to age 95 is $420,000 higher.
  3. Assuming $36,000 from Social Security benefits, the first-year retirement tax rate is less than 4% on the plan with annuity payments vs. nearly 7% on the plan without annuity payments.
  4. And to reduce stress, a lower percentage of the income is subject to market risk.

Importantly, that higher income and lower taxes can be spent, gifted or reinvested for a future legacy.

An extra benefit: You can apply those principles to your retirement plan at any time, wherever the market is.

Are you a DIY investor who just wants some guidance to make sure you are on the right track with your income plan? Income Allocation Planning at Go2Income enables you to design your own plan to address the retirement issues you are facing now and will continue to face in the future. For answers to other retirement questions, contact me at Ask Jerry.

President, Golden Retirement Advisors Inc.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.

Source: kiplinger.com

Dear Penny: Should I End My Happy Marriage to Get My Dead Ex’s Social Security?

Dear Penny,
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I am 62. It’s wonderful that I’m happily married, but I’m not happy about missing out on my former husband’s Social Security. We were pretty penniless for 10 years building a business together. After that, the business became very lucrative.
-Missing Out
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Technically, what you’re suggesting could work as long as you got divorced according to the laws of your state. People do get divorced purely for financial reasons. This is often referred to as a strategic divorce. Some couples divorce to help one partner qualify for Medicaid or so that a child can get more financial aid.

For example, some states require that you maintain separate residences for a certain amount of time before you can get divorced. If one of you is on the other’s employer-sponsored health insurance, a divorce could seriously increase the cost of your medical coverage.
Source: thepennyhoarder.com
My husband and I got divorced after 21 years of marriage. I thought I would be eligible for his Social Security. I didn’t know about the pre-60 remarriage penalty and remarried before age 60.

Is it illegal to get divorced to get my former husband’s Social Security? He is deceased.
If you need more from Social Security, you may be better off delaying and claiming on your own record. You’ll earn an extra 8% delayed retirement credit for each year you wait past full retirement age until 70. You can’t earn delayed retirement credits when you claim on someone else’s record.
Few people emerge from divorce court feeling like they got a fair deal. Seeing your husband get the business you built together must have been an especially tough pill to swallow. It’s understandable that you don’t want to leave Social Security money on the table now.
Dear Missing Out,
The basic rules are as follows. You’re allowed to claim Social Security on an ex-spouse’s work record, provided the marriage lasted at least 10 years. The maximum benefit is 50% of their full retirement age benefit, but Social Security doesn’t let you double dip. You get the higher of your benefit or your ex’s benefit, but you won’t get both.
Before you start phoning divorce attorneys, you’ll want to find out how much money is actually on the table. I’d suggest calling your local Social Security office. They can estimate your benefits if you claim on your own record, as well as what you’d get from your ex’s survivor benefits if your current marriage ends. There’s no need to go into details about why the marriage may end.
At the same time, you’ve built a new life and a happy marriage. Extra Social Security money would certainly be nice, but not if it jeopardizes your current relationship with the person you love. So if your current spouse is even remotely uncomfortable with the idea of divorcing to get more Social Security, that should be the end of discussion.
If they die, you can collect up to 100% of their primary insurance amount through survivor benefits. As you note, you can only collect the ex-spouse’s survivor benefits if you wait until age 60 (or 50 if you’re disabled) to remarry. But if the second marriage ends in divorce or because the second spouse dies, Social Security will allow you to take whichever spouse’s benefit is larger, provided that it’s higher than the amount you qualify for on your own. Again, you get your benefit or his benefit, but not both.
In the divorce, he got the business and the retirement accounts. I was awarded the house (and mortgage), child support and alimony for 20 years (which ended 17 years early because I remarried).
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].
Another option is to take benefits based on your current spouse’s record. The rules for married spouses are similar to the ones for ex-spouses who are both still living. The most you can get is 50% of their full retirement benefit. <!–


Keep in mind that divorce isn’t free, even when you’re both in complete harmony. On top of court costs and attorney fees, you may have to jump through extra hoops.

Full Retirement Age Is Based on Year You Were Born

Your full retirement age is based on the year you were born. If you were born in 1960 or thereafter, your full retirement age is 67. The Social Security Administration has updated information on benefits and age requirements.
If you were born from 1955 to 1960, your full retirement age increases gradually up to age 67.
If you were born between 1943 and 1954, your full retirement age is 66.
To confuse people even more about whether Social Security cares that you are turning 65, you must go to the Social Security website to sign up initially for Medicare. Your official information from Medicare will come in the mail from the Social SEcurity department of the federal government.
It is estimated that one out of every three Medicare recipients utilize a Medigap policy to defray medical care costs.
In the original Social Security Act of 1935, the “full retirement age” was 65 years old. But, improvements in life expectancy caused the Social Security Administration to increase the age of “full retirement” over time. If you were born in 1960 or thereafter, your full retirement age is 67. If you were born before 1960, your full retirement age is two months for every year before 1960, all the way back to 1937, when the full retirement age was 65. So, if you were born in 1957, your full retirement age is 66 and 6 months. More about benefits by birth year.
When you turn 65, you are eligible for Medicare, which matters if you are concerned about health care costs.

There’s more to claiming Social Security benefits than knowing your full retirement age. Our guide to how Social Security works will give you what you need to know about collecting benefits. 

Ages That Matter to Social Security

Anyone born since 1961 has a full retirement age of 67.

When You Turn 62

Social Security does not care when you turn 65 years old.

When You are 66 to 67

In 2021, the age 65 has only one official designation; It’s when American citizens are required to sign up for Medicare. Otherwise, 65 means nothing in particular.
This is the age when your monthly Social Security benefits stop increasing, unless there is a cost of living adjustment.
Kent McDill is a veteran journalist who has specialized in personal finance topics since 2013. He is a contributor to The Penny Hoarder.

When You Turn 70

So what does “full retirement age’’ mean? Effectively, nothing, though everything when it comes to collecting Social Security benefits.

Full Retirement Age for Social Security

Year of Birth Full Retirement Age Months Between 62 and Full Retirement Age
1943 – 1954 66 48
1955 66 and 2 months 50
1956 66 and 4 months 52
1957 66 and 6 months 54
1958 66 and 8 months 56
1959 66 and 10 months 58
1960 and later 67 60
From Social Security Administration

What Is ‘Full Retirement Age?’

The longer you wait to collect Social Security, the higher your monthly benefit will be until you reach age 70, when increases stop (unless there is a cost of living increase). If you do not need the money at age 66, and you think you will live long enough to make up the difference between receiving checks at age 66 versus age 70, then it is best to wait.
The longer you delay taking Social Security benefits, the more you will receive in monthly benefits until you pass away, up to age 70, when the increases stop.
Your monthly benefit increases for every month you do not accept Social Security benefits, up to age 70. The longer you wait, the more you are paid each month up to age 70. After you reach age 70, your monthly benefits do not increase unless there is a cost-of-living adjustment to the benefit schedule.
Today, the SSA has set the age of 67 as “full retirement age’’ for anyone born after 1960. It tells you that it is at “full retirement age” that you receive “maximum Social Security benefits.”
But it’s not true, and the SSA will tell you that!
The age 65 has always carried big significance. For Baby Boomers and those from the previous generation, the age 65 was a target. It was the unofficial age for retirement.
And that includes Social Security.

So, why do I care when I turn 65?

In the United States of America, there is absolutely no way to ignore the fact that you are about to turn 65 years old, because Medicare won’t let you.
According to AARP, the average Social Security benefit check in 2021 is ,543. The maximum allowable monthly Social Security benefit payment is ,148.
Six months prior to turning 65, you begin to receive mailings from private insurance companies offering you so-called “Medigap’’ policies which will cover the costs not covered by the standard Medicare Parts A and B, which are provided by the federal government. However, if you are married and your spouse made more money than you did during their lifetime, it is best for you to take your Social Security whenever it suits you and let your spouse wait for later. This story will help you determine who should take Social Security first. Again, life expectancy issues play a role for each individual.
But we need to adjust our thinking when it comes to that number.
Source: thepennyhoarder.com

Frequently Asked Questions (FAQs)

How Do I Find Out My Full Retirement Age?

Otherwise, the main reason to anticipate turning 65 is that you are likely to pay less for food at all of the restaurant chains in America which offer discounts to “senior citizens.”

What Age is Full Retirement Age?

Today, many people who turn 65 are still working and, thanks to improved life expectancy statistics, can look forward to 20 more years of good life and relatively good health.

Is It Better to Collect Social Security at 66 or 70?

The amount is determined by how many years a person contributed to the Social Security program through their paychecks from work, and at what age they decided to start accepting benefits.
It does care how old you are when you begin to accept Social Security benefits, because that sets the amount you will receive monthly until you die.
That is when you can first claim Social Security benefits, unless you have a health factor that would allow you to receive SS benefits at an earlier age. NOTE: You do not need to be “retired’’ to receive SS benefits, but your monthly benefit amount can be reduced if you are making more than ,580 a month from work. More details on working and collecting Social Security benefits.
This is the question for the ages, and is a very individual question.
There are certain ages that DO matter to Social Security, and here they are:

7 Tips for Retirement Saving After 40

That’s a lot of money, of course, but when it comes to retirement savings it might be less than it seems. With million, you’ll still have to live frugally in retirement. On the other hand, with a good chunk of capital like this, you’ll continue to see significant returns long into your retirement.
This is a particular problem for women, because according to the U.S. Department of Labor, women are likely to work part-time jobs that don’t offer a retirement plan of some kind. And even if they are working full time, women tend to invest more conservatively than men. And unlike men, they tend to have about twenty years of retirement.
By the time you turn 40, you are more than aware of the importance of saving for retirement.
In this guide, we’ll take you through a seven-point plan to start working toward a comfortable retirement, from setting your goals to structuring your accounts. This can lead to a vicious cycle, in which (slightly) older people feel guilty for not planning sooner for retirement, and end up ignoring the issue.

7-Point Plan for Over-40 Retirement Saving

Many people forget about insurance when they are planning for retirement, but this is a big mistake. Most bankruptcies are caused by unexpected accidents or illnesses, and a disaster of this type can wreck the most carefully planned retirement plans.

1. Don’t Lose Hope

Paying the maximum amount into a 401(k) might, of course, be easier said than done. Ultimately, your ability to save for retirement depends on the amount you can save each month during your working years. Increase this amount, even by a little a month, and you’ll see a big difference in your eventual retirement savings.
Today, there are plenty of online platforms that will allow you to explore freelance, remote work that can fit around your other commitments, and research shows that 75% of people working remotely make just as much money freelancing as they did when they were working full time. Taking on a second job, and pouring all of your earnings into a retirement fund, can be a neat and effective way of saving.
The truth, however, is that there are plenty of people who only start saving in their 40s, and go on to have a comfortable retirement. And, while you may have to make up for a little lost time by boosting your retirement savings, as long as you understand how to save for retirement it’s never too late to start planning for it.

2. Planning to Save

Assume that you are 40 years old, and have no savings. At this age, in 2021, you can save up to ,500 in a 401(k) plan, and this increases to ,000 once you turn 50. If you are able to invest the maximum in this account, and get a (more than reasonable) 7% rate of return, by the time you are 63 you will have million.
Roth IRAs are just one option at this point, though, and you should make sure you explore all the options available to you. You can use a retirement calculator to work out how much you will need in retirement, and how much you will need to save to realize this.
That’s not to say that you can’t get creative. Online trading can be relatively safe as long as you don’t put your entire retirement fund into high-risk stocks. An acceptable risk level when it comes to investing in stocks is to subtract your age from 120, with the resulting figure being the percentage of your portfolio that you invest into the stock market.

Looking for a second job to pad your retirement savings? Here is The Penny Hoarder list of the 25 best side hustles for 2021.

3. Open a Roth IRA

Don’t be tempted to take on extra risk because you feel that time is running out. Most retirement funds will pay about 7% in annual returns, and in your 40s this is an acceptable rate. Younger people can go for riskier options, because they have more time left in which to recover from the inevitable losses, but you really don’t want a stock crash just before your retirement date.
Source: thepennyhoarder.com

4. Make Sure You’re Insured

Last but definitely not least, be honest about what your retirement savings are for. Don’t be tempted to use them to send your kids to college, for instance, because ultimately your kids have more opportunities, and more time to save for their own retirement, than you do. You should, in other words, be a little selfish. When you’ve worked hard for your retirement savings, you should be able to enjoy them.
Ready to stop worrying about money?

5. Plan Your Risk

First and foremost, let’s get one thing out of the way. At 40, or even at 50, it is not too late to start saving for retirement, no matter what some pension products will claim. To see why, it’s worth running the numbers.
New York contributor Kiara Taylor specializes in financial literacy and financial technology subjects. She is a corporate financial analyst who also leads a group affiliated with the University of Cincinnati that teaches financial literacy to Black students and helps them secure employment and internships.

6. Pay Down Debt

Increasing the amount you save can be done in several ways. It might be cutting out an expensive indulgence, shopping in a supermarket that offers better value, or even getting an additional job.
In your 50s, it might be too late for whole life insurance to make financial sense. However, you can still reduce your financial risk by making sure you have the best health and disability insurance you can afford. You can also look at term life insurance, which will provide for your dependents should the worse happen.

7. Set Your Priorities

If you are in a position where you can save more than the maximum allowed amount in your 401(k), the next logical step is to take out a Roth IRA. These funds allow you to put extra money toward your retirement each year, and come with significant tax breaks. In fact, your contributions to a Roth IRA will grow tax-free, and you can withdraw a certain amount each year tax-free as well.
In fact, it might seem like every magazine and personal finance website, and even chats with friends raise the issue. The problem is that some of the advice out there is less than helpful, and sometimes downright depressing, because it will tell you that you should have started saving in your 20s. <!–


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