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Preparing for Retirement: Financial Surprises You May Not Have Anticipated

Retired Kiplinger's Personal Finance editor Janet Bodnar joins our Your Money's Worth podcast to talk about how to prepare for choppy waters in retirement, as well as the lessons she’s learned along the way. Also, our hosts Ryan Ermey and Sandy Block go over rules for reversing required minimum distributions.

Ryan Ermey: Living in retirement comes with twists and turns, no matter when you retire. But life has been particularly chaotic for retirees of late. Former Kiplinger's editor and current retiree Janet Bodnar joins the show, to tell us how retirees can navigate turbulent times, in our main segment. On today's show, Sandy and I remind you to reverse your required minimum distributions (RMDs) before the imminent deadline. And the new edition of Wild Pitches, features folks moving out of state, and used private jets. That's all ahead on this episode of Your Money's Worth. Stick around. 

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Ryan Ermey: Welcome to Your Money's Worth. I'm Kiplinger's associate editor Ryan Ermey, joined as always by senior editor Sandy Block. Sandy, we are going back to some -- let's not call it a well trod territory -- but something that we've talked about on the show before, which are RMDs... as we know the requirements for RMDs in 2020 were waived.

Sandy Block: Right, if you're 72 or over, you're usually required to take a minimum amount out of your IRAs every year. In the beginning of the year, back in March when the market was really in a lot of trouble, that was grievous for people who didn't need the money, because you don't really like to take money out of your accounts, when the market is down. So in March, Congress enacted a law that waived required minimum distributions for a certain period in 2020. And that's what created a lot of consternation and confusion.

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Ryan Ermey: Right, because people wrote in to us and said, "Well, what if I already took it? Can I now put it back in?" And the good news was yes. You can actually return your RMDs this year and the reason that we bring it up again is because the deadline for that is coming up rapidly. August 31st. Now, we were thinking about doing this in next week's episode, but that literally would have been-

Sandy Block: That day.

Ryan Ermey: ...on the day.

Sandy Block: You would've had to stop listening and run to your broker.

Ryan Ermey: Put your headphones down and call your financial advisor.

Sandy Block: So we're giving you a heads up right now.

Ryan Ermey: Right. So, you may not want to put your RMD back. It could be that you're in a low tax bracket, so you're not going to pay that much tax on your distribution, or maybe you want to convert it to a Roth. That would be a financially responsible thing to do as well. But if you want to avoid the tax, you'll have to undo it by August 31st. And we do have some notes here from our friend Ed Slott, who people might recall is a financial expert and a former guest and friend of the podcast. So all unwanted 2020 RMDs can be rolled back over if done by the date. The once per year, IRA rollover rule is also waived. Now what's that Sandy?

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Sandy Block: A while back the IRS said you could only do one rollover -- IRA rollover a year. If you wanted to move your money from one IRA to another, you could only do it every 12 months. And that created problems for people who wanted to rollover RMD, maybe had done a rollover before then, and the IRS just basically said, "Nevermind, ignore that rule." The other thing the IRS said, the guidance that they put out, which we talked about with Ed at the time was very, very broad. It basically, it was, I think I said at the time, was like Oprah, everybody gets a rollover.

Sandy Block: And one of the other things that Ed pointed out is that even a non-spouse IRA beneficiary, maybe you inherited an IRA, and you're required to take RMDs because that changed. But in the past, if you inherited an IRA from your dad, you were required to take a minimum amount every year based on your life expectancy. The IRS said, "No, those people are included, too. And if they took an RMD, they can put it back, as long as they do it by August 31st. It must go back to the same IRA, inherited IRA, they took it from -- but a little caveat, if you're a non-spouse and you took an RMD from say a 401(k), you can't return an unwanted RMD."

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Ryan Ermey: That doesn't count.

Sandy Block: That doesn't count, but most people don't inherit 401(k)s, they inherit IRAs. So those folks get a break, too.

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Ryan Ermey: And finally, the last note that he gave us was that, multiple RMDs taken in 2020 can be returned. So because that once a year rule is waived, if you took multiple RMDs in 2020, those can be returned as long as you do it by August 31st. And after that day, all the regular rollover rules are back.

Sandy Block: So you're getting a heads up -- and the multiple RMDs -- I think I heard from a lot of people, this is what got them in trouble. They automatically had a certain amount taken out of their IRAs every month, in the total 12 months equal what their RMD was. So some people could have taken multiple RMDs, because maybe they took one in January and February or March, you can put them all back. But you got to do it by August 31st.

Ryan Ermey: There you have it folks, timely news from Sandy and me. And we probably won't be talking about RMDs, for a little while here on the podcast. This is all you're going to get for a while, so enjoy it. Coming up, Janet Bodnar helps you deal with retirement's unexpected plot twists. Back in a sec.

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Ryan Ermey: We are back and we're here with Janet Bodnar. She is the editor-at-large for Kiplinger's Personal Finance and the author of the Living in Retirement column. Janet, thank you so much for coming.

Janet Bodnar: Oh my pleasure. Thanks for having me.

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Ryan Ermey: Living in retirement has gotten weird over the past several months. And we always say that retirees should expect the unexpected, but what are some things that folks can do in retirement to ensure that they can weather the storm when chaos strikes like this? In the stock market or the economy?

Janet Bodnar: Well, I think you have to have as many ducks in a row as you possibly can, so that you're not going to freak out when something happens. I wrote a column about this, because what made me feel better, when all this happened was that I knew I had a stream of income. A regular stream of income via Social Security. And I had waited as long as I could to apply for Social Security. So I knew that, I had income that was going to continue and that I could count on. That made me feel good. So first of all, I had money coming in at least from that stream of income. Another thing is, that as far as your investments go in Kiplinger we always say this, but you really need to have an asset allocation that you could live with through anything.

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Janet Bodnar: So that if the stock market drops like it did three months ago, you're not saying, "Oh my gosh, this is terrible." So I still had, even though I'm retired, I still had a stock allocation in my portfolio, but it was something that I could live with. And so, when the market tanked, I was obviously interested, curious I was following the news. But I wasn't panicking, because I felt that what I had initially going in -- the allocation that I had initially going in was something that I could live with. And those two things for me at least, were very comforting when all hell broke loose, at least in the stock market a few months ago.

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Sandy Block: So, Janet, following up on that. The stock market has just been going gangbusters lately, which makes some people think, okay, "We are due. We are still overdue for another big correction." What's your advice if that happens? Again, should retirees get more aggressive, and go bargain shopping, stay put or how should people prepare themselves for the next big dip?

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Janet Bodnar: Well, I don't think retirees should be aggressive in bargain shopping as people might be, investors might be, if they were not already retired. Because you do have to pull your punches a little bit here and you do have to be a little bit careful, I think. And it is true one of the things... you do have a certain allocation in mind, and if the market dips, then people say, "Well, now's the time you can rebalance from some of your other assets. From maybe your cash assets or your bond assets -- and rebalance into stocks until you can bring yourself back up to that, allocation that you're comfortable with."

Janet Bodnar: So that seems to be something that people can understand and can live with. But I wouldn't try to increase that allocation, beyond the point at which I feel comfortable. And in fact, if you've done that, you're probably back up depending on what your allocation was. You could potentially be back up to where you were before, simply because the market has, as you say, gone gangbusters ever since. So now you have this other situation, "Jeez maybe I have too much in stock. So what do I do? Well, I can put into cash, which yields nothing." That's the great conundrum for retirees. And, frankly, I cannot answer that question, Sandy and Ryan, because you can't get a lot of yield, if you're looking for safe yield on your money. You're almost being pushed into stocks, or at least dividend-paying stocks to a certain extent. But you don't want to over commit because, you don't want to again, to be in a position where you have too much in stocks, and then the bottom falls out again.

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Janet Bodnar: So I think it becomes a trickier situation for retirees than it has been in the past. Certainly at this point, it's a bit of a trickier situation, and you have to at least, learn to live with it. Or learn to feel comfortable with it, let's put it that way and not overdo it so that you're in panic mode. or you're too excited about, "Oh, the stock, market's going great. Hey, it's super." Well, you still have to remember that you've got to sleep at night, and you just have to balance your needs, your income needs. And that's where that steady income comes in. Because if you've got a steady income from Social Security, if you have a steady income from a pension, a traditional pension, if you're lucky enough to have one. If you have a steady income from something like an immediate annuity, that can cushion any market shocks you have, and just make you feel a little more confident, a little more comfortable.

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Ryan Ermey: Now for people who don't necessarily have quite as much of a cushion, and all hell breaks loose, as you say, if someone's going through a rough patch like that, what's a financially responsible way, that you can give yourself a little bit of a boost, to bridge the gap until your portfolio comes back a bit.

Janet Bodnar: Well you do have some other options. If you have whole life, if you have accumulated savings, for example, in a whole life insurance policy, and you need the money, it might be a time that a good point for you to tap that. That might be one thing you can do. You could use a reverse mortgage, if you wanted to increase your income in that way. Or, if you still have a regular mortgage, rates are so low that you could potentially refinance that mortgage, and get more cash flow. You could increase your cash flow. And something else you might do, is just cut back on your spending.

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Janet Bodnar: That's just a traditional thing that you do in a case like this, whether it's caused by a pandemic or anything else. You retire and suddenly the market goes down and so you want to cut back on your spending. And ironically, because of the pandemic, it's been easier to do that, at least in the beginning because there wasn't that much to spend on. And so now of course there is more to do, and people are spending more. But, I think they're being careful about how they're spending their money. So you just have to be watchful, of where your money is going.

Sandy Block: So, Janet, you've been retired I think for a couple of years now, and obviously you oversaw Kiplinger's and we had retirement advice for years. But now that you've actually been out there in the trenches, is there anything that surprised you financially or otherwise about being retired?

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Janet Bodnar: Well, you know what's interesting, we write a lot in Kiplinger about how you prepare for retirement, how you file for Social Security, how you file for Medicare. And we give people really good advice, but until you actually have to do it, you think, "Oh my." And I think I've written at one point on this, you really have to prepare for this, by giving yourself three to six months to get ready [to sign up for Medicare]. Just to get all your paperwork together, because almost certainly there are glitches that are going to turn up. You're trying to sign up for Medicare, you have a question you really can't get through to Medicare. Your income has changed, because now the income that you earned two years ago, is no longer the income you're earning now, you have to file forms for this.

Janet Bodnar: The forms come back at you, because you haven't filled them out correctly. Or you file the forms and you don't hear anything. And you say, "Oh my gosh, where is everything." And you're constantly on the phone with the folks from Social Security. My sister-in-law just had this experience, she couldn't get her Medicare signed off on and she finally found a person, she lives up in Maine, Ms. Caldwell or Ms. Anderson or Ms. Someone up in Maine.

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Janet Bodnar: Some nice woman up in Maine, finally called her back and said that what she had done when she had filled out her form, she had used her landline phone number. But then in another place on the form, she had used her cell phone number. And she had done that, because she thought it would be easier for the Social Security folks or the Medicare folks to get in touch with her. Well, no. Red flag, red flag. Who would have thought. You're trying to make things easier for people, but there were two phone numbers. So that held things up for weeks. Little things like that happen. And you just learn that when you're out there actually filing for all this, I'm sure that perhaps there are people out there for whom it goes incredibly smoothly, but frequently that does not happen. And so, you really have to steel yourself for this. So that's one thing that I would really warn people about.

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Ryan Ermey: Well, and you've also been getting a lot of mail, it seems, from retired readers about what life in retirement has been like. And we always learn so much from our readers, about the financial realities that people face. What have you been learning from your readers about living in retirement?

Janet Bodnar: Oh, I get so many letters and this is interesting, because the letters that I get from readers, what's always strikes me is that they are extremely busy. And I don't know whether everyone in retirement is extremely busy, but certainly the people who write to me are extremely busy. Maybe they just make time to write, but they all agree and this is a line that I think I just used in one of my columns, and I think it sums things up. You don't want to think that you're retiring from something, you want to think that you are retiring to something. And that could be a lot of things.

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Janet Bodnar: A lot of people go back to work. They're home for a few months and they are bored out of their minds. And so they go out to work again, maybe in a field that's related to the field that they worked in when they retired. Maybe it's a part-time job, at the local Walmart, or the local Lowe's, or something like that. But they go back to work. So a lot of people volunteer. Huge numbers of people volunteer. Lots of people do charitable work through their churches or places of worship. And some people do really interesting things. One of the gentlemen who wrote to me is an extra in movies.

Janet Bodnar: That's what he does. He's a movie extra. And so they have found things that they enjoy doing. Babysitting for grandchildren. Grandchildren play a huge role in retirees' lives. And sometimes they actually do babysit for the grandkids. And sometimes it's just a case of visiting them every couple of weeks and being part of their lives. So it's important to have something to go to when you retire -- and that's very important. Now some people say they go overboard, and they just willy-nilly volunteer for everything that they possibly can. And that's not really good either, because then they have to edit down. Some people develop new interests. One guy said that he thought he was going to do creative things, like brew his own beer. And he ended up doing more physical sporting things like pickleball. Pickleball, the huge sport of retirees.

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Ryan Ermey: My parents love pickleball.

Janet Bodnar: Do they really?

Ryan Ermey: And they're both excellent at it.

Janet Bodnar: And who knew? Because that's something that didn't even exist a couple of years ago. And certainly they probably never played before they got retired or got close to retirement. And it does take some getting used to, they all say that. And for some people, frankly it's harder than others. It's a bigger adjustment. So you just have to be prepared, not just financially. At Kiplinger,  we always tell people how to be financially prepared, but you really have to be psychologically prepared for this. It can take a while to find your purpose, your niche. And that can be a challenge.

Ryan Ermey: Well, whether it's financial or psychological preparation, Janet has you covered be sure to go out and check out her columns on Kiplinger.com. We'll have all her latest coverage up in the show notes. Janet, thank you so much for coming on.

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Janet Bodnar: Oh my pleasure. Invite me any time. I'm retired.

Ryan Ermey: After the break, a dubious statistic leads to some nevertheless good tax advice, if you've moved out of state during quarantine. Don't go anywhere.

Ryan Ermey: We are back, and before we go a new edition of Wild Pitches, tales from our strangest and wackiest PR pitches. And mine is not the wildest Sandy, it's not the shark bracelet. It's not the advertisement for the portable bidet, from Kickstarter that we both received this week. Mostly because I think it's actually a good idea. But in fact, a classic category of mine, which is "dubious surveys." And this one is surprising to me, because the survey cited in this PR pitch is from Pew Research, who you rely on as a reliable survey provider. But it says, "One in five Americans, have relocated during the pandemic." It's like, "Wow."

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Sandy Block: Whoa, everybody's moving.

Ryan Ermey: So, "One to five have relocated, or know someone who has." Wow. That makes that first number useless.

Sandy Block: We could all know the same guy.

Ryan Ermey: And so I drilled down a little bit, to the extent that they drilled down, and they say, "3% of people in the survey have moved permanently." Wow. "Or temporarily." Oh. "And 6% have had someone move into their household, 14% say they know someone." That's where you get your one in five Americans. So these are squishy, imprecise, and relatively useless numbers, not the kind that we would ever print in the vaunted pages of Kiplinger's Personal Finance. But no matter how you slice it, people are on the move. Many of them from cities to suburbs. And depending on where you are, that can have tax implications.

Sandy Block: Well, that's right. And this issue has come up time and time again, mostly with retiree snowbirds. If you spend part of your time in one state and part of your time in another and you want to claim the lower tax state as your residence, understand that there are lots of things you have to do to prove that the lower tax state is your domicile state. States like New York and New Jersey are very vigilant about people who live there part time, but want to claim somewhere else as their permanent home, and thus avoid paying taxes. So there're all kinds of things that you need to do.

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Sandy Block: And frankly, people who are just hunkering down. Maybe they live in Brooklyn or the upper East side, and they're hunkering down in North Carolina or something, until they feel safe to come home probably aren't going to meet these tests, because they did not really move. They have a home in New York or New Jersey. And New York and New Jersey expects them to pay taxes unless they can prove that they have an intent to move to this other place. So I think a lot of these people who, maybe are just taking a break, in a rural area or something like that, fine go ahead. But don't expect to cut your taxes that way, because it's tough to do.

Ryan Ermey: And correct me if I'm wrong, Sandy, but even if you do establish residency somewhere other than where you typically live, if where you typically live is also where you work, you may have to pay taxes for where you work, unless you have some reciprocity agreement between two States, right?

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Sandy Block: Right. And I'm going to write a story about this pretty soon, because I think things are getting very interesting. I think this whole idea that everybody is leaving New York, might be a little overblown. But the fact of the matter is, we have many people working remotely. Many people thinking about moving because they're working remotely, nobody cares where they sit. Maybe they are really moving or maybe they're dividing their time between two states. And they live, full-time in two states, in which case they might have to file two state tax returns. There are all kinds of really interesting tax implications, I think that are going to come up, as people are a little more mobile than they used to be.

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Ryan Ermey: All right well, people should keep an eye out for your story on this. I'll certainly link anything up to date that we have in the show notes. Sandy, what is your pitch?

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Sandy Block: Okay. Mine falls into the new category I created, which is called the "Tone Deaf Pitch."

Ryan Ermey: Pandemic tone deaf.

Sandy Block: Yeah, exactly. Millions of people are out of work, and we know how bad things are. And I get a press release that says in the subject line, "This is a great time to buy a private jet."

Ryan Ermey: Must be nice.

Sandy Block: And then it gets worse. It says, "The pandemic has made 2020 the best time for purchasing/investing in an airplane, especially jet aircraft." Then it goes on. I may create a new category, not just Tone Deaf, but "let them eat cake." Because it goes on to say, "Private aviation allows travelers to avoid terminals, long waits, delays and all of the headaches that come with security health screenings, and other new precautions. It is predicted that travelers, will have to arrive three or four hours before flights, as we move forward." So, yes, this is how you avoid... forget TSA pre-check, buy a plane and you don't have to go through security. They point out that, "Many do not." Again, more cake, "Many do not realize the affordability of previously owned aircraft." Yes, you can buy used private jet-

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Ryan Ermey: Oh yes, used.

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Sandy Block: ... used private jet. "An investment of between $500,000 and $750,000 we'll get you an efficient technologically updated used jet with speed and safety factors equal to that of new models." So, yes, there are used jets to be had. But before I go on too much more, the most egregious line in this release says, "Individuals, especially business owners, who received assistance through the CARES Act and other programs, may have found themselves elevated, to a higher tax position than expected. Buying a plane by the end of the year could be an ideal strategy to address this issue. Favorable prices, combined with depreciation incentives, make the tactic even more advantageous." So what they're telling people, is if you got a bailout, and you're worried that it's going to move you into a higher tax bracket, you can go out and buy a jet, and use depreciation to bring your taxes down. Now, if you got a bail out, why are you buying a jet?

Ryan Ermey: Well, and if you got the bail out, how much over into the new tax bracket could you possibly have been pushed-

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Sandy Block: I can't imagine.

Ryan Ermey: ... that you need to take depreciation on a plane. It's wild.

Sandy Block: It's totally wild. And maybe I'm missing something here, but I don't think the CARES Act was designed to give people enough money to go out and buy a private plane, so they don't have to wait in TSA lines. So, again, I'm sure there are people out there buying planes and that is a legitimate business. But again, I just feel like it just seems so out of touch to the reality, that so many people are experiencing.

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Ryan Ermey: There are certainly ways that people are finding to travel. Ways that we've covered on this show. You can go back and listen to our interview with Emma Patch for an overview. You can go back and listen to our interview with Phil Ingrassia about purchasing or renting an RV, if that's something that you're interested in. And if you're interested in buying a private jet, you can also go back and listen to our discussion on buying C-Asset seizures from the U.S. Marshals. Because as this pitch says, if you want a used one you might be able to get El Chapo's jet.

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Sandy Block: A tricked out jet, there you go.

Ryan Ermey: Pablo Escobar's old jet. At any rate folks, we will be updating the show, if travel begins to open back up. It's something that we always like to cover in terms of how to score it cheaply. And these days how to do it safely. We think that the private jet is probably inappropriate for most people. So stay tuned, for all of the travel coverage that we have coming down the pike. And that'll do it for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit Kiplinger.com/podcast. You can stay connected with us on Twitter, Facebook or by e-mailing us at podcast@kiplinger.com. And if you liked the show, please remember to rate, review and subscribe to Your Money's Worth, wherever you get your podcasts. Thanks for listening.

Links and resources mentioned in this episode:

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