The #1 Secret to a Richer Retirement
Does your retirement strategy involve researching your family tree looking for a long-lost, wealthy relative? “Life doesn’t work like that,” says one expert with a national brokerage firm. “I’ve been a financial advisor for 16 years, and I have seen one person get an unexpected inheritance. And yes — they did know the rich aunt.”
Besides pinning your future on a financial fluke, he says one of the worst money mistakes you can make in retirement is being too conservative or too aggressive with your investments — especially when you’re on a fixed income.
- It’s a risky proposition to have all your money in stocks. This investing pro explains if you had retired with 100 percent of your savings in stocks, in 2008, when the market crashed, you would have lost 37 percent of your savings. Not everyone can recover from that financially.
- On the other hand, put all of your savings in Certificates of Deposit (CDs), and these days you’ll earn too little interest to survive on.
Both extremes are bad news and could have you running out of money in retirement. Instead, meet with a financial advisor, and together decide on a mixture of investments that’s right for you. “You don’t want a cookie-cutter formula,” he warns. “You want to base your investment plan on your personal health, the longevity in your family, your individual risk tolerance, and your individual needs.”
Tap your retirement early without paying penalties.
It’s time for a desperate decision. You’re facing a financial crisis, and the money you need is sitting right there — in your retirement account. But if you’re not yet 59 1/2, oh, the penalties. Not only will you pay income tax on whatever you withdraw, but you’ll also hand over an automatic 10 percent penalty to Uncle Sam. Take out $5,000 to cover a new roof, for instance, and you’ll pay $500 to the IRS, on top of income tax on the withdrawal.
The government isn’t completely hard-hearted, though. You can escape the penalty — but not necessarily the income tax — if you’re withdrawing the money for one of these reasons.
You’re out of work.
It doesn’t matter whether you got laid off, were fired, or quit in a huff. Only two things need to be true:
- You had a 401(k) with this job.
- You were at least 55 years old by December 31 of the year you lost your job.
Meet both criteria, and you can start withdrawing money — but only from that job's 401(k), not an IRA or a different 401(k). Keep in mind this trick doesn't work if you rolled that 401(k) over to an IRA.
No matter your age, you can pull money from your IRA penalty-free to pay for health insurance if you lost your job and have collected unemployment checks for at least 12 weeks.
You’ve racked up huge, health-related bills.
You may be able to pull money out of your 401(k) or IRA to partially cover unreimbursed, deductible medical expenses.
- If you’re under age 65, you can withdraw, penalty-free, money to pay medical expenses that are more than 10 percent of your adjusted gross income (AGI).
- If you or your spouse are 65 or older, figure out 7.5 percent of your AGI. Subtract that amount from your medical bills. The difference is what you can pull out free of penalty.
You must withdraw money the same year you racked up the medical bills. Here are some examples:
You need a “take back.”
Quick. Pull out this year’s contribution before filing this year’s tax return, and, voilà, no penalty. Already filed? Want to pull from last year’s contribution? You can still withdraw money if you do it within six months of the tax-return deadline. You’ll just need to file an amended return.
Look for other loopholes.
You also might be able to tap retirement funds early without penalty if:
- you or a loved one need to cover college expenses.
- you are buying, building, or rebuilding your first home.
- you become disabled and can’t work anymore.
Talk to your financial or tax advisor to see if you qualify. IRS rules are prone to change, and an expert can make sure you’re eligible for an exemption and help you fill out any required paperwork.
- FC&A Staff Writer
