Top Ten Stupid Retirement Tricks

I couldn’t resist.  In honor of David Letterman’s retirement I had to weigh in with a Top Ten list of my own.

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 #10.  Putting all your retirement money into equity-indexed annuities. Granted, if you do this, you just made your annuity salesperson very happy because you may have helped them earn enough to make The President’s Trip. But, before you sign up, do your homework and read up on them. Here’s what has to say: Equity Indexed Annuities.

#9. Quitting your job before you have enough quarters for Social Security.   Learn more here: Social Security Guidelines 

#8. Quitting your job before you have enough quarters for Medicare.  Use this calculator to verify you have worked enough to qualify:  Medicare Eligibility

#7. Quitting your job before you verified your pension benefits.  If you are one of the lucky ones who still qualifies for a pension at work, make sure you know what you’re getting.  For some people, taking the lump sum distribution is best while for others, the annuity payment makes the most sense.  Be sure to evaluate all your options before submitting that final paperwork.

#6.  Forgetting to sign up for Medicare.  Within 3 months of turning age 65 you need to sign up unless you are part of a group plan.  If you don’t sign up on time you may have to pay an enrollment penalty of 10% per month for twice the number of years you could have had Medicare but didn’t sign up.  Certain restrictions apply; learn more about them here:  More Medicare Information

#5.  Holding on to the distribution check from your 401(k) rollover for more than 60 days.  You need to deposit the distribution in a qualified account, like an IRA or another 401(k) plan sooner than that to avoid paying taxes on the entire amount.

#4.  Spending the lump sum distribution from your retirement plan on a timeshare while on vacation in Mexico.   Yes, the warm sun, sparkling waters, and colorful drinks inspire many people to do silly things.  I also know many people who own and love their timeshares but don’t buy new, while under pressure, on vacation.  There are thousands of timeshares for sale online that are available for a fraction of the cost of a new one.  But don’t use your retirement plan distribution to pay for it; invest that money in a tax-deferred account so it can continue to grow to support you through your retirement.   If you don’t have separate savings available, skip the timeshare altogether.

#3. Waiting until you’ve given notice at your job to figure out how much money you need in retirement.  Your desired lifestyle may cost more than you think and it is difficult to get a do-over on that final job departure.

#2. Making investment decisions on what you heard yesterday on CNBC or FOX News.  Retirement is a phase of life, not an event. You need a plan, not a hot tip.

And, finally,

#1. Not verifying your financial advisor is a fiduciary.  You need to make sure the person you are working places your interests before his or her own.  The CFP Board lays it out pretty clearly: CFP Board Fiduciary Standard.  

Happy Retirement, David Letterman!

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Readers, if you have any retirement tips of your own, please share.


Year of the Dentist

We smile, we chew. We grit and we grind.  Day in and day out we use our teeth. If you think about it, they never get a day off. Many of us go to the dentist regularly for check-ups, teeth cleaning, and the occasional cavity.  At some point, though, the fillings we got in our youth have been at work for decades and they’re unstable.  They’re in danger of cracking the teeth they were put in place to preserve and, let’s face it, those years of Jolly Ranchers had to catch up to us at some point. Good dental hygiene can only go so far and there comes a time when we need major dental work done.  I call this the Year of the Dentist.  Crowns, bridges, and implants become part of our daily conversations because in the Year of the Dentist, we’re spending a lot of time in the chair. It’s not just time either.  We’ll be spending a lot of money, too. Most dental insurance covers only a portion of what is needed to tackle all that deferred maintenance so restoring our smile to its proper glory usually involves money out of pocket as well. On the bright side, where there is expense, there is also opportunity.  With just the right planning you can save money.

Dr. Dawn Wehking, DDS, is the owner of Complete Family & Aesthetic Dentistry located in Lafayette, Colorado.  According to Dr. Wehking, there is a number of situations where patients require significant dental work.  Auto accident victims, hockey players, and the occasional loser of a bar fight need dental work in a hurry just to be able to eat and drink without pain. In other instances, major dental work is needed to help a patient recover from years of neglecting their teeth. Over time, though, even patients who have taken care of their teeth may need some major tooth repairs. “The cement used in old fillings breaks down and this can lead to cavities under the teeth,” Dr. Wehking says, “Sometimes teeth crack and need to be replaced with crowns. We also see patients who grind their teeth so severely we need to replace many of those as well.” Insurance only covers a portion of the cost and the expense can be substantial. You can’t minimize the amount of work that needs to be done but there are steps you can take to use these dental expenses to minimize something else: your taxes.

If this is your Year of the Dentist you may be able to save thousands of dollars through strategic tax planning. Dental and medical expenses are tax deductible so tax planning can help you reduce your tax bill for the year.  Of course, there are rules and restrictions that apply but the earlier in the year you begin planning, the larger your potential tax savings can be.  Let’s walk through the rules so you understand what you’re eligible to deduct.

1. The expenses are deducted through Schedule A: Itemized Deductions. If you pay state income taxes, mortgage interest, or make charitable donations, chances are you’re itemizing your deductions.


2. You’ll notice on the example above that there is a threshold. In order to deduct dental and medical expenses they have to add up to more than 10%* of your Adjusted Gross Income (AGI).  That’s why your Year of the Dentist can pay off.  In a normal year, you might not have enough medical bills to qualify and that’s okay because it means you were healthy!

*If you or your spouse is age 65 or older, the AGI threshold is only 7.5% through December 31, 2016.

3. Eligible expenses are only for what you paid; not for bills that were reimbursed by insurance or paid by others.  Expenses paid with Flexible Spending Account (FSA) or Health Savings Account (HSA) dollars are not eligible.

With the general rules in hand, let’s take a look at the strategy.  In the Year of the Dentist, you probably have dental bills that exceed what your insurance coverage allows.  Start a file or a folder and save all your medical and dental receipts – prescriptions, medicines, acupuncture treatments, chiropractic care, therapy, health insurance premiums you are paying (not your employer), and even a portion of your long term care insurance premiums. Make this the year you take care of all your physical and mental ‘deferred maintenance’ – not just your teeth.  Get that new pair of eyeglasses or LASIK eye surgery. The list of eligible expenses is lengthy so the IRS has detailed explanations in Publication 502 Medical and Dental Expenses .  Look through the list and make note of all the expenses that apply to you.   Track your mileage to and from the dentist’s office and doctors’ offices.  This, too, is deductible at a rate of 23 cents a mile.  Short trips add up so it’s worth tracking.  If you are married and/or have dependents, save receipts and track miles for all. You might be surprised at how they add up.

Here is an example to illustrate.  Let’s assume we have a married couple with a teen-aged son.

Combined Salaries:                                                       $120,000

Other income (Interest, Ordinary Dividends) :                  $5,000

Adjusted Gross Income:                                               $125,000

Dental/Medical Threshold (10%):                                $12,500

Year of The Dentist

Dental expenses (all 3)             $20,000

Prescriptions                               $1,600

Chiropractic payments                $2,500

Eyeglasses & contacts                  $750

Mileage (100 miles @ .23/mille          $23

Total:                                           $24,873

$24,873 – $12,500 = $13,373

Our example family can deduct dental and medical expenses above $12,500 so lumping expenses, as much as possible, into one calendar year gives them a larger tax deduction than if they spread the expenses out across multiple years.  In the example above, the family can deduct $13,373 in dental and medical expenses.  In the 25% tax bracket, this saves them approximately $3,000 in income taxes. The IRS has an Interactive Tax Assistant to help you see what can be deducted in your personal situation. It hasn’t been updated for 2015 yet but not much has changed so it is still useful.

Your Year of the Dentist may be two years away or ten but when it happens, plan to make the most of it.  By coordinating a year of substantial dental work with other medical expenses you may be eligible to deduct some of the cost on your income tax return.  Saving on taxes gives you the perfect reason to use that brand new smile!