Lies We Tell Ourselves About Retirement

by David Ning

We may not want to admit it, but our own beliefs are often the biggest obstacle in the journey to financial freedom. Sometimes our own behaviors make it more difficult for us to achieve a financially secure retirement. Here are a few lies you may be telling yourself that are preventing you from reaching a comfortable retirement:

Everybody works until full retirement age. In recent years there has been a surge in the proportion of people who expect to work past 65, but the reality is that a significant number of people will stop working well before the traditional retirement age. Whether it's due to choice or a disability that prevents mature employees from being able to endure the daily grind, more than a few individuals will stop working well before age 65. Not everyone gets to choose when they enter their retirement years.

The Joneses have everything. It may seem like everybody else is able to go out to buy whatever they want while you barely scrape by, but that's probably not the case. You may be concentrating solely on what they just bought versus their total budget. Bill may have a brand new car, but perhaps he doesn't eat out much. Perhaps Sandy spends a few hundred dollars on fine wine, but she may not spend much on clothes. Retirement savers are spending too, but their focus is on building a nest egg. If you want to have a comfortable retirement, you need to make saving for it a priority.

There's a secret to investing that I don't know about yet. There may turn out to be a secret investing formula, but the odds of finding the holy grail are so slim that it doesn't make economic sense to pursue the hunt. Stick to the boring but effective strategy of saving early and often, watch investing fees, and pick an asset allocation plan where you can stay the course when the market inevitably takes a dive. This will give you a much better chance at living a comfortable retirement than trying to pick winning investments.

I can always save later, so why start now? This may be true, but there are few things in life more comforting than being financially free. Start saving as soon as possible, and you'll become financially independent sooner. When you do, you'll notice that your stress level will decrease. This could help not only with your relationships to others, but also your work performance, possibly helping you to increase your income.

It's too late to save, so let's not even try. It doesn't matter how old you are, because putting money aside for retirement is always a step in the right direction. Put some effort into saving money and you may find that reducing your expenses might be easier than you first thought. The more you have saved up, the more you get to spend in your golden years.

Money is safe in a bank account. Too many people have the illusion that money is safe as long as the balance doesn't go down, but the reality is that inflation will eat into your purchasing power unless you learn how to properly manage and invest your wealth. Those who put all their money in a savings account may not experience the volatility that comes with different investments, but they are sure to be able to afford less and less as years go by, which is a real threat too.

Our false beliefs about money can often get in the way of our investment growth. But if you can overcome these common obstacles you will be on a better path toward financial freedom.

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Don't Forget to Take These Tax Deductions and Credits

Taxpayers preparing to file their 2012 returns can breathe a collective sigh of relief.

The alternative minimum tax or AMT has been patched - permanently - and several tax credits and deductions that technically expired at the end of 2011 were extended as part of the "fiscal cliff" legislation that Congress passed and President Barack Obama signed into law in January.

"It certainly puts back into place many of the tax benefits that had expired for many people," said Mark Steber, chief tax officer with Jackson Hewitt Tax Services. "The extenders will be back on people's tax returns, making their 2012 refunds larger than they would have been."

But the delay in congressional action could mean confusion for some taxpayers over what credits and deductions still exist.

That could make going it alone on tax day costly. Experts say people should seek some guidance, whether it's from a professional tax preparer, up-to-date software programs or tax guides, before filing returns.

More than 90 percent of taxpayers go to a tax preparer or use tax software to file their returns, estimated Jim Buttonow, a 20-year IRS veteran who is now vice president of products for New River Innovation, a tax technology company.

The Internal Revenue Service will begin accepting returns Jan. 30, an eight-day delay necessitated by the late congressional action.

"We have worked hard to open tax season as soon as possible," IRS Acting Commissioner Steven T. Miller said in a statement. "This date ensures we have the time we need to update and test our processing systems."

The agency said most taxpayers - more than 120 million households - would be able to begin filing Jan. 30. But filing for those claiming energy credits, depreciation of property or general business credits will be delayed until late February or March.

Last year, the agency received 137 million returns.

Electronic filing increased by 6.2 percent to 113 million in 2012, an upward trend that tax experts expect to continue. Although most electronically filed returns are by tax professionals, increasing percentages of individuals are doing their own returns electronically.

Nearly 104 million people received refunds last year totaling about $283 billion. The average refund was $2,707, slightly less than the year before, according to the IRS.

As people sit down to do their taxes this year, they'll find that the standard deduction has been adjusted higher for inflation, to $11,900 for married couples filing jointly, $8,700 for heads of households and $5,950 for single taxpayers.

About two-thirds of taxpayers claim the standard deduction, according to Barbara Weltman, an author of J.K. Lasser's Tax Guide 2013.

Each personal exemption is worth $3,800 this year, up from $3,700 in 2011. Look expansively at dependents beyond your children under 19, or 24 if in college. For example, if you're paying more than half the support for your parents and their taxable income is less than the $3,800 exemption, you might be able to claim them as dependents even if they're not living in your own home.

"If a parent's only income is Social Security, chances are little or none of the Social Security will be taxable. Otherwise, very few people would get to claim a parent," said Jackie Perlman, principal tax research analyst with H&R Block's Tax Institute.

Single taxpayers with qualified children or relatives as dependents also may be able to use head of household filing status, which is more advantageous to the taxpayer.

There also are higher mileage rate deductions — 55.5 cents per mile if you use your car for business, 23 cents per mile for moving or medical issues and 14 cents a mile for charity.

Capital gains rates are unchanged from 2011 - a maximum of 15 percent for assets held more than a year.

And don't forget planning for retirement. You can contribute up to $5,000 to a traditional individual retirement account - $6,000 for people age 50 and older - and reduce their income by that amount. If you haven't made a contribution yet, there's still time. You have until April 15, the tax filing deadline.

Be aware, however. Many deductions and credits phase out at higher incomes.

Dozens of credits and deductions that affect 2012 taxes had been due to expire at the end of 2011, but were extended as part of the legislation that restored the Bush-era tax cuts for most taxpayers.

The measure breathed new life into deductions for state and local sales taxes and an array of education-related credits and deductions. Not to mention the lack of an AMT patch.

"There was broad bipartisan agreement it had to be fixed," Steber said.

Originally set up to make sure millionaires were paying taxes, the AMT was ensnaring increasing numbers of middle-class taxpayers. To avoid that, the tax has been adjusted for inflation every year, but the last patch expired at the end of 2011. Without a new one, Miller said in a letter to Congress last fall, about 33 million taxpayers would have to pay the AMT in 2012, up from about 4 million in 2011.

Congress, as part of the fiscal cliff bill, passed a permanent fix for the AMT. Going forward, it will be indexed according to inflation.

For 2012, the AMT exemption is $50,600 for unmarried individuals and $78,750 for joint filers.

"It's just not that they passed the threshold amount and indexed it for inflation," said Kathy Pickering, executive director of H&R Block's Tax institute. "The other nugget in there is that the nonrefundable credits are allowed."

That means filers subject to the AMT may still be able to use these credits, as long as their income doesn't exceed the phaseout limits.

The fiscal cliff bill signed by Obama also extends the $1,000 per child tax credit, the expanded earned income tax credit and the credit for adopting a child.

Several education-related credits and deductions also were extended in the legislation.

The American Opportunity Tax Credit can be worth up to $2,500 for college tuition. The credit, which can be claimed for each of the first four years of college, was extended through 2017. Elementary and secondary school teachers will still be able to deduct up to $250 of their out-of-pocket expenses for the classroom.

And taxpayers will have the choice of deducting state and local sales taxes instead of state and local income taxes. This is especially important to residents of states like Florida, which doesn't have an income tax.

Knowing what tax credits and benefits you're eligible for is key. No one wants to pay more than is required in taxes.

"You certainly want to understand the tax law," Steber said. "Look to life changes" like retirement, losing a job, getting married, having a child or an elderly parent moving in as events that can affect your taxes.

For people in the Northeast, Superstorm Sandy certainly was a life-changing event. State officials have estimated the total damage at more than $80 billion, most of it in New York, New Jersey and Connecticut.
Tax law allows victims in federally declared disaster areas to file casualty claims in the year the incident happened or file an amended return for the previous year.

If they don't have all the material they need yet to file 2012 returns, they can amend their 2011 return now to include the casualty losses.

"It's one of the unique things about those disaster areas," Pickering said.

That's just one of the reasons people file amended returns.

Amended returns are often filed when taxpayers discover discrepancies in the income that was reported.

Sometimes they receive a 1099 form late or a corrected one after they filed their returns. Or they may discover that they didn't take a deduction or credit to which they were entitled.

Some people are reluctant to file amended returns out of fear that they might be audited.

Mark Luscombe, principal tax analyst for CCH, said the IRS closely guards statistics on what type of returns invite audits. "An amended return would not necessarily be an invitation for an audit," he said.

"It depends what's contained in there," said Greg Rosica, a partner at Ernst & Young. "If it's a very large refund it could get a different level of review."

Are You Planning a Big Life Change This Year?

by Andrea Coombes

Life goes on. If you are anticipating some major changes in 2013, you'll need to do some planning.

Here's a checklist of essential money strategies to consider before you take one of these five key steps in your life.

So, if you're ...

... Getting Married, Then

Talk with your intended about money. Discussing finances before the wedding can help forestall disagreements that can ruin a marriage.

"Money is an area of intimacy that a lot of couples heading into marriage have not yet addressed," says Maura Griffin, chief executive of New York-based Blue Spark Financial. The conversation should include a discussion of the couple's money values and earliest money memories. That "sets the stage for being open about money," she says.

Get specific. Create a budget for managing expenses, discuss how to pay down debt outstanding, talk about specific savings goals and compare investing philosophies.

Decide how to merge finances. Some planners suggest separate checking accounts in addition to a shared account, but Randy Warren, chief investment officer with Warren Financial Service in Exton, Pa., says all of a couple's money should be pooled.

"If you want your marriage to be solid, then you need to work as a team," Mr. Warren says. Put all the money in one account, and agree on an amount above which neither spouse will go without talking to the other first.

Update beneficiary designations and add your spouse's name to accounts. "That's especially important for second marriages," says Keith Beverly, principal with New Paradigm Advisory Group in Durham, N.C. "If they haven't done proper planning, they don't necessarily know where their assets will be directed if something were to happen to them."

... Having a Baby, Then

Start saving for college. Many planners point to the tax advantages of 529 college-savings plans—they make it easy for grandparents to pitch in, too. But wherever you stash the money, try to save something.

"Even $100 a month can have a huge impact," says Stephen Johnson, a certified financial planner with Charles Schwab in Boston. That said, if a choice must be made, advisers often suggest that parents shouldn't let college costs trump retirement savings.

Prepare a will. Some couples might include creating a trust, Ms. Griffin says. A key task is to name a guardian for the child in the event a tragedy befalls the parents.

Revisit short-, medium- and long-term financial goals. For example, buying a minivan, then a house, and funding college and retirement.

Shop for life and disability insurance. Ms. Griffin says couples shouldn't rule out whole-life insurance—it allows policyholders to save a balance and borrow against it.

... Buying a House, Then

Assess how much house you can afford. Generally, housing costs, including principal, interest, property taxes and insurance, shouldn't exceed 28% of monthly gross income. And total debt obligations—including mortgage, student loans, credit cards—shouldn't exceed 36%. If your costs would top those figures, "you may need to wait or buy a less-expensive home," Mr. Warren says.

Consider the future. Spending less now may pay off later. "You're 55...and all of a sudden you want to join the Peace Corps," Mr. Johnson says. "Not having a mortgage allows you that flexibility."

Manage credit. Check your credit reports. If you find surprises or errors, it may pay to delay your mortgage application until clearing those up. You can get one free credit report from each of the three credit-reporting firms—Experian, Equifax and TransUnion—annually at annualcreditreport.com.

Negotiate loan terms. Mr. Beverly says he helps clients save thousands of dollars in interest and closing costs by telling lenders about competing offers.

... Paying for College, Then

Resist student loans. Try to keep debt to 50% or less of the student's expected starting salary, Mr. Beverly suggests. For example, if expected income is $50,000, take on no more than $25,000 in loans.

Be careful with financial-aid forms. "The number one thing is to accurately fill out those FAFSA and CSS Profile forms," says Ms. Griffin, referring to the Free Application for Federal Student Aid and the College Scholarship Service form. "Don't be afraid to pay a professional," she says. "There are so many mistakes that people can make."

Open a bank account, and discuss money management. High-school graduates "may not know how to budget or how to avoid fees," Ms. Griffin says.

Talk about costs you won't cover. Consider suggesting the student work over the summer to save for other costs, such as off-campus dining.

Shift investments. "Anyone who's within two years of college, that investment allocation should be conservative. You don't want a 2008-type situation to wipe out the earnings," Mr. Johnson says.

... Retiring, Then

Clarify your definition of retirement. "Think long and hard about what you will spend your days doing," Mr. Beverly says.

Detail income and expenses. "It can't be just a gut feel," says Jim Heafner, president of Heafner Financial Solutions in Charlotte, N.C. If you underestimate how much money you need, he says, "it can be hard to go back."

Develop a spending plan, delineating where your income comes from. The order in which you access assets can help maximize income while reducing taxes, Mr. Heafner says. For some, that might mean tapping taxable brokerage accounts first, and letting tax-deferred individual retirement accounts continue to grow. Or, it might make sense to pay taxes now and convert some IRA money to a Roth IRA, so it can grow tax-free.

Research Social Security options. When to claim benefits can get complicated, particularly for couples. Choosing right can mean hundreds of thousands of dollars more in retirement, Mr. Heafner says.

Consider long-term-care costs. Mr. Heafner likes index annuities that provide income and a long-term-care benefit. Others might opt for traditional long-term-care insurance.

Consult with a financial planner. They have access to sophisticated software that can help ascertain a portfolio's level of risk. Says Mr. Warren: "You want to know, 'Am I going to drown if I get the normal volatility of the stock market, or am I going to survive it?' "

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