8 Steps to a

How to build, secure & Better tap your wealth.

Retirement Step One Find more to invest

hile there is no hard-and-fast rule, workers should strive to save at W least 15% of their gross salary (including employer contributions to retirement savings plans), beginning early in their career. (People who get a late start should try to save even more.) Saving more for retirement usually means spending less now. And the first step toward spending less is identifying where your money is going day by day. Tracking every item you buy is one of the best ways to spot leaks in your budget that spring from impulse spending. On these pages, you’ll find ways to come up with extra cash for your retirement. Even a little can add up: Saving $50 a month over 25 years—and investing it so it earns 8% a year—will add almost $50,000 to your nest egg.

Flex your savings muscles If your employer offers a flexible spending account for medical and child-care expenses, take full advantage of it. A flex plan lets you put pretax money into an account and then pull it out tax-free to pay child-care and out-of-pocket medical bills. (Caveat: You can’t spend FSA funds on non-prescription medica- tions, and your FSA is capped by federal law at $2,700.) FSA contributions avoid federal income and Social Security taxes and, in almost every state, state income taxes, too. If you would other­wise lose 30% of your annual salary to those levies, you save $300 for every $1,000 you run through the flex plan. Many workers shy away from flex plans because of the notorious use-it-or- lose-it rule—that is, funds have to be spent by year-end. But your employer may allow a grace period that gives you until March 15 to spend your FSA money, or you may be able to roll over $500 to the following year.

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8 Steps to a better retirement © 2019 The Kiplinger Washington Editors Inc. kiplinger’s personal finance magazine cable. Or, if you’re not ready to cut the cord, a cable/wireless Internet/phone bundle from your cable provider could save you money.

adjust your withholding It’s always been a good idea to review the amount of taxes withheld from your paycheck, but now it’s more important than ever. The Tax Cuts and Jobs Act signed into law in late 2017 lowered tax rates, increased the standard deduc- tion, eliminated personal exemptions and capped or eliminated some popular tax breaks. Adjusting your withholding could put more money in your paycheck or help you avoid IRS penalties if you’re not having enough withheld. The IRS says a withholding checkup is particularly important for two-income families, families who are eligible for the Child Tax Credit, taxpayers who usually itemize on their tax returns, and taxpayers who have received large refunds or paid large tax bills in the past. Use the IRS’s updated withholding calculator at www.irs.gov/payments/tax-withholding to figure out whether you should submit a new Form W-4, which tells your employer how much to withhold from your paycheck. You’ll need recent pay stubs and your most recent tax return to complete the program.

Trim the cost of car insurance The company with the lowest price the last time you shopped may no longer have the best deal. Reshop your auto insurance by using a comparison website, such as Insurance.com or insuranceQuotes (www.insurancequotes .com). Or work with an agent. To find one near you, go to www.trustedchoice .com; also contact agents who sell for one company, such as Allstate or State Farm. Even if you don’t change insurers, boosting your deductible from $250 to $1,000 can reduce your collision and comprehensive premiums by 15% to 20%.

Save on life insurance Competition continues to keep premiums for term life insurance low. You may be able to find a lower rate (even though you’re older), or you may be able to lock in the same rate for a longer period. One place to get price quotes is AccuQuote (www.accuquote.com), whose agents can steer you to compa- nies that are in sync with your health conditions and family history.

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8 Steps to a better retirement kiplinger’s personal finance magazine Pay off your credit cards If you make the minimum payment on a $1,000 balance at 18%, it could cost you nearly $2,400 and take more than 12 years to pay off. Consider a balance transfer to a card with a 0% or low introductory rate, if you’re confident that you can pay off your balance during the introductory period (check for deals at CreditCards.com or WalletHub.com). And it’s worth a call to your credit card company to find out whether it will lower your existing rate. If you carry balances on multiple cards, focus on paying off the highest-rate cards first while continuing to make the minimum payments on your other accounts. And put your payments on autopilot. Most card issuers let you set up automatic payments from a checking account and allow you to decide how much you pay.

Save on vacations Travelers with flexible vacation plans should look for “flash sales” to capture vastly reduced fares. These deals—usually available only for a few hours or days—require quick reflexes. To get a head start, follow airfare-alert sites on Twitter or Facebook and sign up for their e-mail notifications. Google Flights sends out e-mail alerts for routes you want to track, while Airfarewatchdog, Scott’s Cheap Flights and The Flight Deal broadcast alerts over social media and by e-mail. If you swear allegiance to one airline, it makes sense to register for fare-sale notifications through its site. For hotels, try sites such as Priceline and Hotwire, where you book knowing the neighborhood and the number of stars, but not the name; look for bargains of up to 60% off.

Step Two save early and often

he general rule for saving for retirement is simple: Save as much as you T can, starting as early as you can, and let your investments compound inside a tax-sheltered 401(k) or IRA. What hoped-for return should you build into your retirement planning—and enter into online calculators, such as those found at Kiplinger.com—to estimate how much retirement income you’ll need

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8 Steps to a better retirement kiplinger’s personal finance magazine and how much you must save each year to attain that goal? For a realistic projection, you have to take a long view. We believe that your long-term savings should be placed in stocks and that you can expect the stock market to deliver an annualized return of about 7% over time. That’s less than the average annual return of stocks over the past century. Past performance does not guarantee future results, but a 7% benchmark gives you a reasonable expectation of how much you need to save. And making an investment plan and sticking to it will give you the confidence to weather stormy markets.

Step Three GO FOR GROWTH WITH A ROTH

f your company doesn’t offer a 401(k) retirement plan—or a 403(b) Ior 457 plan—or doesn’t match your contribution, take matters into your own hands and open a Roth IRA. There are two kinds of IRAs: the original, traditional account and the Roth, which debuted in 1998. The big difference is that a Roth is all yours in retirement, while Uncle Sam will claim his share of a traditional IRA. That’s the main reason we believe that, for most investors, the Roth is the best way to go. For 2019, you can put up to $6,000 into an IRA—$7,000 if you’re 50 or older. If your spouse doesn’t have a job, you can stash $6,000 (or $7,000) of your earnings in an IRA for him or her as well. While there are no income limits for making contributions to a traditional IRA, to contribute to a Roth IRA in 2019, your income may not exceed $137,000 if you’re single or $203,000 if you’re married. With a traditional IRA, you can deduct your contributions if you’re not covered by a retirement plan at work or if your income falls below a certain threshold. For 2019, individuals with incomes up to $64,000 and married couples with incomes up to $103,000 can deduct their full IRA contributions even if they’re covered by another retirement plan.

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8 Steps to a better retirement kiplinger’s personal finance magazine This deduction can be a sweet deal. If, say, you’re in the 24% tax bracket, putting $6,000 in an IRA will cut your tax bill by $1,440. Put another way, you’ll squeeze $6,000 into your nest egg for an out-of-pocket cost of just $4,560. But in retirement, you’ll pay a stiff price. Every dime you withdraw from your traditional IRA will be taxed in your top tax bracket (except to the extent that you made any nondeductible contributions). Contributing to a Roth IRA doesn’t earn a tax deduction today, but neither does it require signing over a big chunk of your retirement nest egg to the government. Although it costs you $6,000 to put $6,000 in a Roth, the entire $6,000 and everything it earns is yours—Roth withdrawals in retirement are tax-free. (And you can retrieve your contributions to a Roth at any time, tax- and penalty-free.)

Bragging rights The Roth IRA boasts other advantages over the traditional IRA. The regular IRA tax shelter begins to unwind when you reach age 70½. At that point, contributions must end and withdrawals must begin at a rate designed by the IRS to make sure that all the money is taxed before you die. Neither restriction applies to a Roth. Traditional IRA withdrawals boost your taxable income and can cause more of your Social Security benefits to be taxed. Roth withdrawals can’t. And the balance in a traditional IRA is taxable for your heirs in their top tax bracket. A Roth goes to heirs income-tax-free. To withdraw earnings from a Roth without restrictions, you must pass a couple of tests. First, the Roth must be open at least five years. Then earnings can be withdrawn tax- and penalty-free if the withdrawal is made after you reach age 59½ or become disabled. Another exception lets you withdraw up to $10,000 of earnings to help buy a first home for yourself, your spouse, your kids, your grandchildren or your parents—again, as long as you have met the five-year test. Once you’re 59½, there is never a penalty on withdrawals from a Roth, but earnings will be taxed if you haven’t met the five-year test.

The Roth 401(k) If you work at a company that offers a Roth 401(k), it could be the best of all possible choices. Like a Roth IRA, the Roth 401(k) involves a critical

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8 Steps to a better retirement kiplinger’s personal finance magazine trade-off: You give up a tax break now in exchange for a break later. With a regular 401(k), pretax money goes into the account. But if you contribute to a Roth 401(k), after-tax money goes into the account. By forsaking the up-front tax break, you avoid taking on Uncle Sam as a partner in your retirement investment. With the regular 401(k), the govern- ment will be standing by with an outstretched hand when you tap the account. If you’re still in the 24% bracket, you’ll be expected to pay back the tax you saved on the contributions plus one-fourth of all your investment earnings over the years. With the Roth 401(k), the money is all yours. Withdrawals in retirement are completely tax-free, as long as you’re at least 59½ and the account has been open for at least five years. The Roth also allows you to diversify between taxable and tax-free accounts. If your employer matches your 401(k) contributions, the matching money goes into a traditional 401(k). With cash in both Roth and regular accounts, you’ll have more control over your tax situation in retirement. There may be times, for example, when dipping into a tax-free Roth will let you avoid being pushed into a higher tax bracket. The Roth 401(k) has several other appealing aspects. Because there are no income-eligibility limits, a Roth 401(k) is available to higher-income workers who are prevented from using a Roth IRA to generate a tax-free retirement stash. You can contribute up to $19,000 to a 401(k) in 2019, whether the contributions are to a Roth 401(k) or a traditional version or a combination of both. You can add an extra $6,000 if you’re 50 or older. There’s a special attraction for young, low-income workers. Because they’re in a low tax bracket, passing up the up-front tax savings of a tradi- tional plan doesn’t hurt as much—and it’s more likely that they’ll be in a higher bracket when they retire, making the delayed gratification of the Roth account an even better deal. But the Roth 401(k) is not best for everyone. If you’re in your peak earning years and approaching retirement—and you’ll have to tap your 401(k) soon after retirement, when you’re likely to be in a lower tax bracket—you’re probably better off taking the up-front tax break of the traditional 401(k).

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8 Steps to a better retirement kiplinger’s personal finance magazine Or if money is so tight that switching to a Roth would strain your budget and require you to reduce your contributions—forfeiting part of your em­ ployer’s match—don’t do it. Finally, if you’re on the cusp of losing certain tax breaks—such as the child tax credit or the college-tuition credit, both of which phase out at higher income levels—be careful that switching to a Roth doesn’t push up your taxable income to a level that jeopardizes other tax breaks.

Step Four SET THE STAGE

he five years before you leave your job and the five years after are T the most critical transition period for investing and financial planning. Workers 50 and older can make catch-up contributions to their 401(k)s and other retirement plans. You’ll also confront crucial decisions about retirement benefits and investments.

Get a fix on your pension If you are among the approximately 15% of private-sector workers with a traditional pension, you may be able to choose between receiving a monthly check for the rest of your life or taking a lump sum, which gives you more investment options when you roll it over to an individual retirement account. Your decision should be based partly on health—both yours and your com- pany’s. If you have medical problems or longevity doesn’t run in your family, you may want to choose the lump-sum payment. But before you do, ask your human-resources manager whether you would be giving up valuable benefits, such as employer-provided health insurance after you retire or cost-of-living adjustments on a monthly pension check. Calculate how much monthly income you could receive if you used your lump sum to buy an immediate annuity (go to www.immediateannuities.com), then compare that to your monthly pension check. Men may come out ahead in this scenario because they have shorter life expectancies and receive larger monthly benefits from annuities sold by insurance companies. Women,

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8 Steps to a better retirement kiplinger’s personal finance magazine however, may want to stick with company pensions, which are required to be gender-neutral. A lump sum could also be a good choice if there’s a risk that your company’s pension plan is underfunded and might be taken over by the Pension Benefit Guaranty Corp. Although about 85% of retirees in PBGC-managed plans receive their full pension benefits, higher-paid workers whose monthly checks exceed the limits of the government’s insurance program could come up short. For a pension plan taken over in 2019, a 65-year-old may receive up to about $67,000 a year; the limits are lower for those who retire at a younger age. If you’re married and entitled to a traditional pension and you decide to receive monthly payments, then you have to decide whether you want your spouse to receive survivor benefits. You’ll get smaller monthly checks now, but your spouse will still get benefits if you die first. As an alternative, some people choose to take the larger pension benefit and buy a term life insurance policy to provide for the surviving spouse. But that could backfire if the breadwinner outlives the term policy and then dies, leaving the survivor with nothing.

Explore rollover arrangements If you have a 401(k) or other tax-deferred retirement plan, find out what you’ll need to do to transfer it to an IRA tax-free. Make sure the assets go directly to the new custodian. If your employer cuts you a check, the company will be required to withhold 20% for taxes and you will have to roll over the entire amount—including the 20% you didn’t receive—into an IRA within 60 days. Any money not deposited into the IRA would be treated as a distribution subject to taxes and early-withdrawal penalties. While rolling over your 401(k) into an IRA is generally a good idea, it may not be the right decision when you own company stock inside your plan. That’s because distributions from IRAs, 401(k)s and other tax-deferred retirement plans are taxed at your regular income-tax rate, which can be as high as 37% in 2019. Sales of investments held longer than one year inside taxable accounts, however, are taxed at a maximum capital-gains rate of 23.8% through 2019, which includes a 3.8% Medicare surcharge. To let you take advantage of lower tax rates, there is a way to move employer

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8 Steps to a better retirement kiplinger’s personal finance magazine stock out of your 401(k) when you retire, but you have to follow the rules precisely. First, you must take a lump-sum distribution of the entire balance in your 401(k). Then you roll all of the money, except the company stock, into an IRA; you deposit the stock into a taxable account. The money in the IRA won’t be taxed until you start taking withdrawals. You’ll owe income taxes on the stock you transfer (plus a 10% penalty if you’re younger than 59½). But the tax bill will be computed based on what you paid for the stock, not its higher, market price. Subsequent sales of the stock are taxed at the top capital-gains rate.

Compare Social Security options Deciding when to collect Social Security benefits can substantially affect your cash flow. You may start collecting benefits as early as age 62, but your checks will be reduced by 25% or more for the rest of your life (see the chart at www.ssa.gov/planners/retire/agereduction.html). Your payments may be reduced even further if you take benefits early and continue to work. If you earn more than $17,640 in 2019, you’ll forfeit $1 in benefits for every $2 you make over the limit. For example, if you earn $25,000, that puts you $7,360 over the limit and you lose $3,680 in benefits ($1 for every $2 in earnings above $17,640). The retirement age to claim full benefits is currently 66, and it grad­ually rises to 67 for those born in 1960 or later.

Plan for retirement income Once upon a time, retirement income was a simple affair. You received, for example, a monthly pension check and another check from Social Security, and together they dictated how much you could afford to spend. If you were lucky, you had enough personal savings to take an occasional trip or to make needed home repairs. But the days of simple solutions are pretty much over. Most retirees will have to rely on a patchwork of sources to get income. And retirees are increasingly responsible for investing their assets in a way that protects their nest eggs from market volatility as well as the ravages of inflation, while withdrawing funds at a modest rate to ensure that they don’t outlive their savings.

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8 Steps to a better retirement kiplinger’s personal finance magazine If you are uneasy about going it alone, you can work with a financial adviser to create an investment plan that generates current income and provides for future growth. To find a fee-only adviser—meaning one who does not accept commissions—contact the National Association of Personal Financial Advisors (www.napfa.org). A number of investment companies, including Fidelity Investments, T. Rowe Price and Vanguard, offer similar retirement-income management services. They recommend appropriate investments to fund your immediate and long-term goals and link your investment and checking accounts so you can pay your bills and write yourself a regular paycheck.

Review your estate plan Update your will and both general and health-care powers of attorney so that someone else can handle your affairs should you become unable to do so. Make sure primary and contingent beneficiaries on retirement plans, brokerage accounts, life insurance policies and other assets not controlled by your will are current and mesh with your overall estate plan.

Stay on the job If you’ve started your countdown to retirement and discovered that your savings will fall short, fear not: Time is on your side. Getting a late start on building your nest egg means playing catch-up—which may not be easy, but is possible. The most important thing you can do to secure your future retirement is to work a little longer and save as much as you can. A recent study by T. Rowe Price found that even a 55-year-old who has no retirement savings can build a sizable nest egg during the last decade of work. The study assumes she earns $80,000 per year with annual salary increases of 3%. If she contributes the maximum amount to her 401(k) account, including catch-up contributions, and her employer matches 3% of pay, she could have more than $400,000 by age 65, assuming a 7% annual return on her invest- ments. If, however, she contributes only 6% of salary each year—enough to capture her employer’s 50% match—she could amass less than $140,000 during the same ten-year period. (In 2019, workers 50 and older can contribute up to $25,000 to a retirement plan, compared with $19,000 for younger workers.)

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8 Steps to a better retirement kiplinger’s personal finance magazine Step Five PLAN FOR HEALTH CARE

edicare, the government-subsidized health-care program, continues M to cover the bulk of medical expenses for Americans who are 65 and older. Medicare Part A, which covers hospital costs, is free. The premium in 2019 for Medicare Part B, which covers doctor bills and outpatient services, is $135.50 for most people. Higher-income beneficiaries will pay a surcharge— as high as $460.50 for married couples who earn more than $750,000. But Medicare has some major gaps in coverage, so it’s important to plan how you’ll pay for these potential costs. There are three ways to fill the gaps in Medicare coverage: Participate in a retiree health plan from your former employer, if one is available to you; buy a private supplemental insurance policy, known as a medigap policy, plus a separate Part D policy to pay for prescription drugs; or buy a Medicare Advantage plan, which provides all-in-one coverage for medical services and prescription drugs and sometimes offers extra benefits, such as vision and dental care.

Retiree health benefits If you’re lucky, your employer may still provide retiree health benefits. But there may be a downside: Your premiums have probably increased over the past few years while your benefits have dwindled. Consequently, an employer- provided retiree health plan may no longer be your most cost-effective option.

Medigap A medigap policy fills most of the holes in Medicare coverage. As long as you buy a policy within six months of signing up for Medicare Part B, insurers can’t reject you or charge higher rates because of your health. These policies are offered by private insurers, but the government has standardized coverage by assigning a specific letter—plans A, B, C, D, F, G, K, L, M and N are currently sold—to make it easier to comparison-shop. Plan F continues to be the most popular. It covers Medicare’s $341 daily co-payment for days 61 to 90 in the hospital (basic Medicare covers the first

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8 Steps to a better retirement kiplinger’s personal finance magazine 60 days) and the $682 co-payment for days 91 to 150 of hospital stays, plus it pays the full cost of up to 365 additional days in a hospital during your lifetime. Plan F also covers the 20% co-payment for doctors’ services; the cost of three pints of blood; the $1,364 Part A hospital deductible; the $170.50-a-day co-insurance for a skilled-nursing facility; the $185 Part B deductible; Part B excess charges; and emergency care outside the U.S. Plan F can’t be sold to newly eligible beneficiaries after January 2020, but Plan G covers all of the same expenses, except the $185 Part B deductible. Plans M and N, introduced in 2010, are a bit cheaper than the others because they don’t provide coverage for the $185 Part B deductible or excess charges. Plan M requires you to pay 50% of the Part A deductible; Plan N requires co-pays for visits to the emergency room and doctors’ offices. Unless you have a lot of doctors’ visits, however, the premiums for Plan N are generally so much lower than for other medigap policies that you may still come out ahead. To get more information, go to www.medicare.gov/find-a-plan/questions/medigap-home.aspx. Each medigap plan with the same letter has exactly the same coverage, so begin by picking the letter plan that works best for you and then compari- son-shop to find the best price. Most state insurance departments list prices for medigap policies in your area. Visit the website of the National Association of Insurance Commissioners (www.naic.org/state_web_map.htm) for links to local resources. The Medicare Rights Center also offers comprehensive consumer information on medigap policies at www.medicareinteractive.org. After comparing prices, check the pricing method. Attained-age policies increase in price as you get older. Issue-age policies’ prices increase only because of health-care inflation. An issue-age policy may cost a little more than an attained-age policy at first, but it will generally have fewer rate increases over time. Community-rated policies are similar to issue-age policies, but everyone in the area pays the same price regardless of age. You’ll usually fare best with the lowest-cost issue-age or community-rated policy available in your area.

Drug coverage Medigap policies don’t provide coverage for prescription drugs. So if you decide to stick with traditional Medicare, you’ll want to buy a stand-alone,

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8 Steps to a better retirement kiplinger’s personal finance magazine Part D prescription-drug policy, too. Medicare Part D policies have always had a coverage gap. Individuals who have income of more than $85,000 ($170,000 if married filing jointly) pay a surcharge for Medicare Part D, similar to the extra fee they pay for Part B. Be sure to reshop your Part D coverage during open enrollment, which runs from October 15 through December 7. Open enrollment is generally the only time of year you can switch Part D plans. Compare premiums as well as out-of-pocket costs for your medications. Part D co-payments have been rising, too, and many insurers have been changing pricing tiers. For example, your out-of-pocket costs could increase if your insurer moves one of your regularly prescribed drugs from a “preferred” category with lower co-payments to a “non-preferred” category with higher co-pays. Ask your doctor whether you can switch any of your prescriptions to a generic or lower-cost medication, which could save you a lot of money. The Medicare Plan Finder (www.medicare.gov/find-a-plan) can help you compare total costs for your medications for each plan available in your area. Also look at the company’s star ratings, which show each plan’s complaint and customer-service records.

All-in-one Medicare Instead of paying for a Medicare supplemental policy and a Part D prescription drug plan, you could sign up for a Medicare Advantage plan, which provides all-in-one coverage. These plans generally come in two varieties: Medicare health maintenance organizations (HMOs) and regional preferred provider organizations (PPOs). Medicare HMOs tend to offer the lowest premiums, but they also have the tightest restrictions on which doctors and hospitals you can visit. Regional PPOs usually cost a bit more but cover a network of providers that often spans several states (ask your doctors whether they participate). You can review plans in your area by using the Medicare Plan Finder tool (www.medicare.gov/find-a-plan). Type in your drugs and dosages, then choose your general health (poor, good or excellent) in the “refine your search” menu. Click on “Medicare Health Plans” to shop for Medicare Advantage plans.

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8 Steps to a better retirement kiplinger’s personal finance magazine You’ll see the premiums, deductibles, drug costs and estimated total costs based on your health condition. Click on the plan name for details about the coverage and costs. Another resource is the free annual Cost Share Report (available at www.medicarenewswatch.com). You can sign up for a Medicare Advantage plan when you are first eligible for Medicare or during open enrollment. Open enrollment is also a good time to decide whether an all-in-one plan or multiple policies is best for you. You need to consider your health, your specific medications and whether your doctor works with the plan. You can get personalized help with your decision through your State Health Insurance Assistance Program (SHIP). Go to www .shiptalk.org or call 800-633-4227 to find SHIP counselors­ in your area.

Step Six BUY LONG-TERM-CARE COVERAGE

f you’re thinking about buying long-term-care insurance, consider this: The Imedian annual cost of a private room in a nursing home was $100,375 in 2018, according to Genworth’s Cost of Care Study. A year of assisted living was $48,000, and 44 hours per week of home care—which most people prefer— came to $50,300. Care costs have been going up by 3% to 4% per year over the past five years. Some employers now offer long-term-care insurance as an employee benefit, and both inside and outside of group plans, insurers are rolling out policies that hold down premiums by shifting some of the cost of future care to policyholders. One way to protect a big portion of your retire- ment savings while keeping the premiums affordable is to figure out how much long-term care your retirement savings and income will cover and use insurance to fill the gap. Some companies are offering new strategies to hedge your bets when it comes to choosing the appropriate length of coverage. Others are introducing new types of policies that combine long-term-care coverage with life insurance benefits.

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8 Steps to a better retirement kiplinger’s personal finance magazine Cheaper inflation protection Because you may wait 20 years or more to tap your long-term-care policy, the amount of your daily benefit should keep up with rising costs. Traditionally, most policies increase your benefits by a compound inflation factor of 5% per year. But insurers have been experimenting with more-affordable ways to provide inflation protection. A few have introduced lower-cost policies that link payouts to the consumer price index. In years of high inflation you could come out ahead. But in low-inflation years, your benefit may increase little or not at all. The most popular policies sold now offer inflation protection based on a 3% annually compounded rate, which have lower premiums than policies that boost benefits by 5% per year but still cover the average increase in cost of most types of care.

Shared benefits One of the most difficult decisions is how long your benefit period should be. A typical 65-year-old is likely to need some form of long-term-care services for three years, according to the National Clearinghouse for Long-Term Care Information. A minority of people, such as those with Alzheimer’s disease, may need care for a much longer time. But policies that provide lifetime benefits are rare and very expensive, if they are available at all. One way to hedge your bets while holding down the price is to buy a shared-benefit policy. A three-year shared-benefit policy, for example, provides a pool of six years of coverage to divvy up between you and your spouse. Buying such a policy costs about 15% to 22% more than buying two separate policies. But the flexibility may make you more comfortable with the shorter benefit period.

Combo policies Several insurers have introduced policies that combine life insurance and long-term-care coverage. You invest a lump sum or pay premiums for a limited time, and you’re guaranteed to get either long-term-care payouts or a death benefit. Long-term-care benefits are triggered when you need help with at least two activities of daily living, similar to stand-alone long-term-care policies, and you may receive care at home, in an assisted-living facility or in a

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8 Steps to a better retirement kiplinger’s personal finance magazine nursing home. Any money you use for long-term care reduces the amount of the death benefit.

Essential planning When it comes to buying long-term-care insurance, 50 is the new 60. Consumers are buying coverage at younger ages, often on their financial adviser’s recommendation, to take advantage of lower premiums. (Bear in mind, however, that you’ll have to pay those premiums longer.) Long-term- care policies have so many moving parts—and there have been so many changes in the long-term-care business—that it helps to have an expert agent, preferably one who deals with several insurance companies, lead you through the maze of options, costs and trade-offs.

Step Seven Take out a reverse mortgage

or some older homeowners, a reverse mortgage can be a good way to F stretch retirement income. But there are both advantages and disadvan- tages, so you need to understand the terms before you take the plunge.

What is a reverse mortgage? It’s a loan that lets you tap your home’s equity. A bank fronts you the money— either as a lump sum, a line of credit or monthly draws. You retain title and ownership of your house, and you are responsible for maintaining it and paying the taxes and insurance. Unlike a traditional mortgage, a reverse mortgage doesn’t have to be repaid as long as you remain in the house. Homeowners must be 62 or older to qualify and must pass a financial assessment of their income and credit history. If you still have a regular mortgage, you’ll have to retire it before taking out the reverse mortgage or use some of the reverse- mortgage proceeds to pay it off.

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8 Steps to a better retirement kiplinger’s personal finance magazine How much can I borrow? The amount is based on several factors, including your age, the interest rate and the value of your home. The older you are, the lower the interest rate and the higher the house value, the more you’ll be able to borrow. There is also a limit on the amount of home value that can be taken into account for Home Equity Conversion Mortgages, or HECMs, which are backed by the Depart- ment of Housing and Urban Development: $726,525 through 2019. You can’t tap 100% of your equity. Instead, you can get only a portion of the equity in your home. The loan calculation leaves plenty of room for accrued interest.

How do I get the money? You can take a lump sum, open a line of credit to tap whenever you choose, or receive monthly payouts (for a set number of months or as long as you live in the house). Or you can choose a combination—say, a lump sum for part of the mortgage with the remainder in a line of credit. If all else is equal, the line of credit is better because you use it when you need it. Money you don’t tap won’t rack up interest, and the unused portion grows larger over time—gener- ally at the same rate as the loan’s interest rate. Unlike a home-equity line of credit, which a lender can reduce or freeze, a reverse-mortgage line of credit is safe, thanks to insurance from the Federal Housing Administration.

Is the money taxable? No. Because the reverse mortgage is a loan, the money you receive is tax- free. You can’t deduct the interest on your tax return each year, but you (or your estate) can write off at least part of the interest in the year the loan is repaid if you used the money to buy, build or substantially improve your home (see IRS Publication 936, Home Mortgage Interest Deduction).

What do reverse mortgages cost? Reverse mortgages involve interest paid on the principal, which grows over time, plus a variety of fees. Adjustable rates recently ranged from 3.3% to 6.7%, depending on the lender, the payout option and the type of rate. A fixed rate is typically available only if you take a lump sum, which could be suitable to lock in costs if you want to use all of the money at once—say, for

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8 Steps to a better retirement kiplinger’s personal finance magazine home improvements to make a dwelling more suitable for aging in place. A line of credit or monthly payout comes with an adjustable rate. In addition, there is an origination fee, which is the greater of $2,500 or 2% on the initial $200,000 of the home’s value and 1% on the balance, with a cap of $6,000 (although some lenders may waive the fee). You’ll also pay closing costs, such as title insurance and recording fees, that may run up to several thousand dollars. And you must also pay insurance premiums. The FHA insurance guarantees that you will receive your money and that the lender later receives its money. You’ll pay a one-time, up-front mortgage insurance premium of 2% of the home’s appraised value or the FHA lending limit ($726,525), whichever is less, from the loan proceeds. You’ll also pay an annual insurance premium of 0.5% of the loan balance. The premiums accrue over time and are paid when the loan comes due. You may take up to 60% of the full loan amount in the first year after closing. If you have an existing mortgage or other liens on the home, you can withdraw enough to pay those off plus another 10% of the maximum loan amount. Finally, the lender may charge a servicing fee of up to $35 per month, which can be a fixed monthly amount or factored into the interest rate on the loan. If the fee is a fixed monthly amount, the lender can “set aside” the money to pay the fee. Fees set by the government won’t vary, but some costs, such as the interest rate, may differ. Compare reverse mortgages from at least three lenders. You can use the “total annual loan cost,” or TALC, for each option to help you compare.

How do I know whether a reverse mortgage is right for me? A reverse mortgage is no longer considered a “loan of last resort” because it provides flexible access to your home equity. But if you have a short-term need for the cash or you plan to move within the next five years, consider other financing options, such as a home-equity loan or line of credit.

When must the loan be repaid? The money does not have to be paid back as long as the homeowner remains in the house and keeps up with taxes, insurance and repairs.

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8 Steps to a better retirement kiplinger’s personal finance magazine Generally, repayment is triggered when the homeowner dies, sells the house or moves out for 12 months or more. If a couple owns the home and one spouse dies, the surviving spouse can stay in the home without having to pay back the loan until he or she dies, sells or moves out permanently. When it’s time to repay the loan, you or your estate will pay the principal and the accrued interest.

What if I don’t have enough money to repay the loan? One of the most important features of reverse mortgages is that you will never owe more than the house is worth at the time of sale. If the debt exceeds the sales price, the government insurance will cover the shortfall.

Can my heirs keep the house? Sure, if they pay off the reverse mortgage. But if the debt is more than the house is worth, your heirs would have to come up with the difference. The insurance that covers such a shortfall only kicks in if the house is sold. If your heirs decide to sell the house and money is left over after the reverse mortgage is paid off, they will inherit that cash.

Step Eight LOCK IN RETIREMENT INCOME

here is a push to find new ways to ensure lifetime income as life T expectancies increase and traditional sources of guaranteed income disappear. For a 65-year-old couple, for example, there’s an 11% chance that one spouse will live until age 97. Yet fewer people are retiring with defined-benefit pensions, and Social Security covers only a small portion of most people’s expenses. An annuity, either an immediate fixed or a deferred variable annuity, may be the answer. But not all annuities are alike, and some may not be appropriate for you.

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8 Steps to a better retirement kiplinger’s personal finance magazine Plain and simple An immediate annuity is based on a simple concept: You give an in­surance company a lump sum, and it promises to send you a monthly check no matter how long you live. For example, a 65-year-old man who invests $100,000 in an immediate annuity today could collect about $6,730 per year for the rest of his life. That’s much more than he could safely withdraw from his savings each year if he followed the widely accepted recommenda- tion to limit initial withdrawals to 4% of your portfolio. Part of the reason for the bigger annuity payout is that each distribution consists of interest as well as a return of principal. But the real secret behind the beefed-up annuity checks is that you pool your risk with other policyholders. People who die early end up subsidizing the payments of people who live longer. You get the biggest bang for your buck if you buy a “straight life” annuity, which pays out only for your lifetime, with no survivor benefits. But most married couples prefer to buy annuities that pay out as long as either spouse lives, even though it means smaller benefits. For example, a 65-year-old couple who invest $100,000 in an immediate annuity and choose dual coverage could receive an annual payout of about $5,800.

How to shop Add up your monthly expenses, subtract any guaranteed sources of income (such as Social Security and pension benefits), and consider buying an immediate annuity to fill the gap. But watch out. Payouts can vary enor- mously by company, so it’s a good idea to compare prices from many insurers. ImmediateAnnuities.com includes a database of more than a dozen com­ panies, making it easy to compare benefits. One risk of immediate annuities, however, is that your fixed monthly check will lose purchasing power over time, so it’s important not to tie up all your cash at once. Interest rates and your age at the time of purchase also affect the size of your monthly check. Because current interest rates are so low, you may want to ladder annuities, meaning you invest some money in an immediate annuity now and buy another one later when interest rates may be higher. Plus, you’ll get a bigger payout because you’ll be older

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8 Steps to a better retirement kiplinger’s personal finance magazine and have a shorter life expectancy. Another option is to buy an immediate annuity with annual payout in- creases linked to the consumer price index. Although the initial payouts are about 25% to 30% less than you would get by investing the same amount in a fixed annuity, you’ll preserve your buying power.

Hedge your bets Another way to deal with rising expenses is through a different type of annuity: a deferred variable annuity with lifetime income guarantees. Deferred variable annuities are complex products that try to do a lot at once. You invest in mutual fund–like accounts that can grow over time, and they promise you a minimum amount of guaranteed income in case the investments lose money. They are most attractive to preretirees in their fifties or sixties who want to capture stock market gains during their final decade of work without exposing their nest egg to investment losses. In addition to offering investors guaranteed income and a chance to let their account balances grow, deferred annuities are more flexible than immediate annuities, which generally require you to lock up your investment (see the box on the facing page). You can cash out of a deferred annuity at any time, although you’ll generally pay a hefty surrender charge if you do it in the first seven years or so, and you won’t be able to take the guaranteed amount as a lump sum if it’s less than your actual account value. Cashing out an annuity would then make sense only if your investments performed well and your actual account value was worth more than the guaranteed amount. Some of these variable annuities with guarantees have steep fees— as high as 2.5% to 3% of your original investment per year, when you add up the cost of insurance, underlying investments and added guarantees. But fund companies such as Vanguard and Fidelity are getting into the business, and are charging much lower fees. Some of these new products provide reduced guarantees—lifetime income is based on your highest investment value rather than a minimum 5% or so for every year before

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8 Steps to a better retirement kiplinger’s personal finance magazine you start taking withdrawals—but they can still be useful in protecting your nest egg.

Which Type of Annuity Is Right for You?

Immediate Fixed Annuity Deferred Variable Annuity purpose An investment product that allows An insurance product to help you you to participate in stock market stretch your retirement dollars gains while protecting against losses

How it works You invest in mutual fund–like You invest a lump sum and receive accounts and an insurance company a fixed monthly income for life guarantees future payouts, regardless of market performance

Typical investor

Retirees age 60 or older who Preretirees who want to grow their nest want current income egg without fear of scrambling it

how it works

You invest in mutual fund–like You invest a lump sum and receive a accounts and an insurance company fixed monthly income for life guarantees future payouts

Fixed payouts may not Potential to increase your account value keep pace with inflation if market performs well

Annual payouts of about 6% or more If market tanks, you can withdraw about of your initial investment for life 5% of guaranteed balance each year

Once purchased, you can’t Flexibility to cash out your investment change your mind after surrender period expires

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