Your Retirement … with Brian and Bob: Financial planning misconceptions
Published in the September 20 – October 3, 2017 issue of Gilroy Life
“Stupidity is a talent for misconception,” wrote Edgar Allan Poe. While his statement can be viewed as humorous, most people do not desire this so called “talent.” This is especially true when tackling issues such as planning finances. Because financial planning involves a variety of topics like investments, insurance, taxes, and retirements, it is not uncommon for people to encounter fallacies or misconceptions about planning.
Here are five of the most common misconceptions to aid in smarter financial decisions.
Electing to take early Social Security benefits while working
While some people think they are getting ahead by electing early benefits, it is almost always better to avoid early Social Security withdrawals.
Should you draw benefits early and keep working, your benefit amount can be reduced. This reduction takes place each year until you reach full retirement age about 66 or 67. In 2017, benefits will reduce $1 for every $2 of earned income above $16,920. This is a substantial loss of benefits that could be avoided.
Taking qualified retirement account withdrawals before 59 ½
Typically, this should be the last place you pull money from before age 59 1/2. Early withdrawal of qualified retirement money before 59 ½ causes a 10 percent early withdrawal penalty in addition to triggering ordinary income tax. Should you decide to retire early and want to start taking penalty free withdrawals before age 59 1/2, one should explore using IRS rule 72t. Under this rule, a person age 55 can elect to start taking retirement account withdrawals, avoid the 10 percent penalty, and satisfy required minimum distributions mandated by the government over one’s lifetime.
Taxes will be lower in the future.
While this is true for some, it is not true for most. Currently, taxes are historically low when compared to our nation’s growing debt.
As taxes rise, consumers can expect all tax brackets to be affected. Over time, expect more tax deductions to be disallowed. With less tax-deductible expenses (such as mortgage interest and children) during later years in consumers’ lives, you should plan on being in a higher tax bracket to play it safe. Distribution strategies from taxable and non-taxable retirement income sources are often critical tools for stretching retirement dollars and reducing taxes.
Maximizing retirement dollars with “risk-free” investments
Risk-free investments simply do not exist. Whether you’re using financial vehicles that protect market losses or not, there is always some sort of risk associated with financial planning tools. Protected growth strategies are popular ways to protect accumulated wealth and fight costs of inflation. If investments aren’t keeping up with inflation, one’s ability to purchase goods and maintain their current lifestyle in retirement will dwindle.
Long-term care coverage is subsidized by the government
Many people believe they do not need to plan for medical expenses like long-term care later in life because Medicare or other government subsidies will care for them. While subsidies are available given certain financial circumstances, you should be clear on the differences in program coverage and qualifications. Medicare helps cover acute care and hospitalization for people age 65 and older.
Medicare does not cover long term care and has only limited coverage for rehabilitation. While Medicaid does have some long-term care benefits, it covers only financially distraught retirees with little to no assets. Many who think they will qualify do not. And if you do qualify for aid, the government subsidies can be recaptured from a person’s estate after death. Most people will need to plan for this future need on their own and evaluate policies to help alleviate stress from medical costs.
Bob Price and Brian Harrigan are the owners of Executive Plan Design. For a free consultation to discuss a plan that best suits your needs, call (408) 767-2572.
