Keep the Information Flowing

Small contributions go a long way. Your donation to Consumer Action, a 501 (c)(3) nonprofit, nonpartisan organization, can help us cover the cost of research, writing, and translation of our materials. To keep our services free for those who need them. Select an amount to give.

---

---

---

---

Published: September 24, 2010
Updated: January 06, 2011

Money Management 1-2-3: THREE: Planning a Secure Future

The “Money Management 1-2-3: Be Smart about Money All Your Life” series focuses on basic money skills at the beginner, intermediate and advanced level. Planning a Secure Future focuses on leaving the workforce, retirement, winding down, cutting back, downsizing, living on a reduced budget, using credit wisely, investing for income, Medicare and reverse mortgages. Topics include debt and collections, being underinsured, bankruptcy, medical expenses, estate planning, home equity loans.

At some point, the working years become the retirement years. Changes in income and expenses can be difficult to adjust to at first. To make the transition as smooth as possible, you’ll need to step up your planning and saving in the years before you plan on retiring. This will help you put together sufficient assets and insurance to maintain a comfortable lifestyle throughout your retirement, and to create an estate plan that reflects your wishes.

Investing for a longer life

People are living far longer. It’s not uncommon for at least one member of a couple to live to 90 or beyond. That means preparing for decades without a paycheck instead of just a few years.

To start, take advantage of your retirement plan’s “catch up provision.” If you’re 50 or older, you can save additional money each year in a traditional or Roth IRA (individual retirement account). The amounts change each year—see Internal Revenue Service Publication 590 (www.irs.gov). If you have a 401(k) or similar employer-sponsored plan, check with your benefits administrator about catch up amounts.

Many financial planners say that even retirees need to keep some of their money invested for growth and income—in other words, in stocks and bonds—to meet the needs of a longer life. Certificates of deposit (CDs) and other conservative, or safe, choices do not offer the returns necessary to make your money last. The investment plan that will work for you depends on many factors, including your risk tolerance and your financial resources. The key is to understand that you must plan for decades of retirement and be aware of your various investment options and their associated risks.

Learn more about retirement planning and investing by visiting the Securities & Exchange Commission (SEC) Investor website. Consider consulting a fee-only financial adviser rather than someone who earns a commission through your investments.

Retirement income

You can begin receiving Social Security retirement benefits anytime between age 62 and 70, and receive them as long as you live. The longer you wait, the larger your monthly check will be. To get an estimate of your monthly retirement benefit at different ages, read the statement the Social Security Administration (SSA) sends a month or so before your birthday each year. Or visit the SSA online.

Under typical circumstances, IRAs, 401(k) plans, pensions, annuities and other retirement plans can only be tapped without penalty beginning at age 59. However, employees can take penalty-free distributions from their 401(k) or similar plan before age 59 if they are at least 55 the year they leave their job. Check with the plan administrator to find out its rules before counting on this option.

You may also be able to tap your retirement savings before age 59 without penalty if you meet the requirement for a hardship withdrawal, or if you take equal, regularly scheduled distributions according to an IRS formula. Learn more by visiting www.irs.gov and reading Topic 410-Pensions and Annuities and Publication 575, Pension and Annuity Income.

The way you tap your retirement accounts is a major financial decision, and one that shouldn’t be left until the last minute. Consider talking to a financial adviser before making any decisions that could result in a penalty or a tax bill.

Non-retirement accounts allow you to withdraw money at any age without penalty—a valid reason to continue saving even after you have maxed out contributions to employer-sponsored plans and IRAs.

Home equity loans

Your home equity is the value of your home minus what you owe on it. How much of your equity you can borrow—or whether you can borrow at all—depends on a number of factors including your income and debt and your credit score.

Interest rates on a home equity loan are typically lower than those on consumer credit and some other types of loans. And, the interest you pay often is tax-deductible.

While a home equity loan can be a good financial tool for many homeowners, it can also put your home in jeopardy. You could lose your property (foreclosure) if you are unable to make the monthly loan payments.

If you decide to take out a home equity loan, work only with a reputable lender. There are dishonest lenders who intentionally give expensive home equity loans that are impossible to repay so that they can foreclose on the property. Be very careful of anyone who approaches you about any loan that uses your home as collateral.

Review any loan contract with someone you trust. Many local bar associations, senior organizations and colleges have low-cost lawyer services. Or contact a HUD-approved housing counseling agency for guidance. To find one, search the HUD site for “HUD-approved housing counseling agencies” or see additional contact numbers under “Reverse mortgages” below.

To compare loan rates in your area, visit www.bankrate.com.

Reverse mortgages

A reverse mortgage allows older homeowners (generally, age 62 or over) who owe little or nothing on their property to borrow against their equity without having to make monthly payments for as long as they live in the home. Borrowers can receive a lump sum, a monthly payment, a line of credit, or some combination of these.

Interest accrues on the loan, which must be paid off only when the borrower sells the home or dies. If the value of the home exceeds the loan balance, you or your heirs would keep the difference. If the amount you borrowed exceeds the value of the home, the lender can’t seek additional payments.

One of the reasons reverse mortgages are attractive is because they do not require the borrower to have an income or a particular credit score to qualify. And, they do not put the home in jeopardy of foreclosure.

A reverse mortgage isn’t right for everyone, however. The loans are relatively expensive. If you plan to leave the home soon, or you don’t need much money, there may be better options.

To be referred to a HUD-approved reverse mortgage counselor in your state, call AARP (800-209-8085), the National Foundation for Credit Counseling (866-698-6322), Money Management International (877-908-2227), or HUD (800-569-4287).

If you receive state or federal benefits, such as Medicaid or SSI, you must spend your advance within the month you receive the money or it could jeopardize your eligibility for these programs. Consult a qualified adviser for guidance.

Protecting assets

It would be very difficult, or impossible, to recover from the losses that could result from a fire, car accident, or lawsuit. As your assets increase, so does the need for sufficient insurance coverage. This includes health (uncovered medical bills are one of the top reasons people file for bankruptcy), auto, and a homeowners or renters policy.

A major risk is being underinsured. It’s very important to increase your coverage as your needs increase. Review your coverage every few years, and anytime there is a significant change in your life (for example, you get a dog, or your teenager begins driving) or assets (you add on to your home or get a new car, for example).

If you have significant assets, consider buying an umbrella liability policy. This extra coverage, which is relatively inexpensive, kicks in to provide additional liability protection when you reach the limit on your homeowners, renters or auto policy. Considering the number of lawsuits and the dollar-amount of damages awarded, an umbrella policy can provide important protection.

Learn more about insurance coverage from the Insurance Information Institute, or from Consumer Action at Consumer Action’s insurance site.

There are three ways to buy insurance: directly from the insurer, through an insurance company agent, or through a broker who sells insurance for more than one company. Shop around—the difference in coverage and price (premiums) among insurers can be hundreds of dollars. A great way to find a good insurance company or agent is to talk to people you know.

When you apply for insurance, answer all questions truthfully. A false statement can be a reason for insurers to refuse to pay your claim.

Covering medical expenses

Medicare, government-sponsored health insurance, only kicks in at age 65. If you retire before 65, or if you lose your employer-sponsored coverage and can’t find a new job right away, you will need other coverage.

Options include COBRA (Consolidated Omnibus Budget Reconciliation Act), which allows you to continue coverage under your employer’s plan. You’ll have to pay higher premiums than you paid as an employee, but they most likely will be lower than you would pay for a comparable individual policy. Contact your employer to find out if you are eligible. Learn more about COBRA by visiting the Department of Labor. Coverage lasts for a maximum of between 18 and 36 months, so this may not be a permanent solution.

If you have a spouse or domestic partner who works, you could try to get onto their plan. The company may or may not pay a portion of your premium.

If an individual health insurance policy is your only option, consider purchasing a high-deductible policy. You’ll have higher out-of-pocket expenses, which you will need to be prepared for with savings, but you’ll avoid being uninsured for a major medical event such as surgery. A health savings account (HSA) would bring down costs by allowing you to put aside pretax dollars to be used to pay premiums, copayments and deductibles. Learn more about HSAs online at www.ustreas.gov/offices/public-affairs/hsa/.

If you have very low income, you may be eligible for government-sponsored health insurance. Learn more at www.usa.gov/Citizen/Topics/Health/HealthInsurance.shtml.

Before you turn 65, look into Medicare supplemental insurance, also known as Medigap insurance. This private insurance pays all or part of the deductibles and copayments you are responsible for under the Original Medicare Plan. If you are in a Medicare Advantage plan, you don’t need a Medigap policy.

If you have low income and low assets, you may not need Medigap insurance because your state may have a program that helps you pay for the expenses that Medicare doesn’t cover. Visit www.medicare.gov or call 800-Medicare (800-633-4227) for more information.

If you have medical bills you can’t afford to pay, a collector may contact you. If that happens, know your rights under the Fair Debt Collections Practices Act. Visit the Federal Trade Commission online at www.ftc.gov for information. Or get help from an accredited non-profit credit counseling agency. Contact the National Foundation for Credit Counseling (www.nfcc.org; 800-388-2227) or the Association of Independent Consumer Credit Counseling Agencies (800-450-1794).

If your debts become overwhelming, bankruptcy may be an option. While bankruptcy damages your credit, it gives you a fresh start when you need it most. There are many rules, guidelines and requirements for filing bankruptcy. Visit the National Association of Consumer Bankruptcy Attorneys website to find an attorney. The U.S. Trustee Program provides information and links to pre-bankruptcy credit counseling.

Long-term care insurance

Long-term care insurance pays the costs of receiving help with daily activities, such as eating, bathing and dressing. This care could be provided in a nursing home or at home.

Be aware that Medicare and most private health insurance pay only for skilled care, not for the “custodial” care that long-term care insurance covers.

Unlike auto and homeowners insurance, which are required by lenders, long-term care insurance is optional.

Generally speaking, premiums—and the chances of your application being rejected—increase with age. Many experts recommend that consumers buy long-term care insurance in their 50s, while premiums are still relatively low.

If you are considering long-term care insurance, shop around not only for rates but also for the features and terms of the policy. For example, does the policy pay for care in any facility and at home, and under what medical conditions? Is there a waiting period before benefits begin, and how long will they last? Will premiums go up?

Estate planning

Estate planning is not just for the wealthy. Regardless of your net worth, you should have at least a basic estate plan in place that answers the following questions:

• Whom do I want to inherit my assets and personal property?
• Whom do I want to take care of my minor children?
• Whom do I want to handle the finances for my minor children?
• Whom do I want to make financial decisions on my behalf if I become incapacitated?
• Whom do I want to make medical decisions on my behalf if I become incapacitated?
• What medical treatment do I want or not want if I am unable to express my wishes?

The answers to these questions will be provided in a few key documents: your will, your power of attorney, your health-care proxy (medical power of attorney), and your living will.

In addition to expressing your wishes, a key goal of any estate plan should be to avoid probate and reduce taxes. For some people, this may mean establishing a trust.

Although there are many do-it-yourself software programs and guides for estate planning, you should consider consulting an experienced attorney in your state (state laws differ). This is particularly important if you have a more complex situation, such as a blended family, an unmarried life partner, or young children.

Learn more about estate planning at www.nolo.com. Nolo provides free information on a wide range of legal topics.

Download File

Money Management 1-2-3: THREE: Planning a Secure Future
File Name: MM-123 (three).pdf
File Size: 0.12MB

For More Information

Sponsors

Consumer Action’s Managing Money Project

Notes

This publication was funded by Consumer Action’s Managing Money Project, founded with a cy pres award from the Griego v. Rent-A-Center class action settlement.

Filed Under

Money Management   ♦   Mortgages   ♦  

Copyright

© 2010 Consumer Action. Rights Reserved.