Suze Orman: Why Even Big Retirement Savers Are at Risk

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Having a hefty retirement account is great, but that alone isn’t enough.

If you don’t understand essential retirement planning topics, you’re in trouble, according to Suze Orman. On her website, she cited a recent study — participants were in the 50-to-75-year-old age bracket — examining knowledge of topics such as longevity risk, Medicare, investing concepts and annuities.

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Those with at least $1.5 million saved for retirement only answered half of the questions correctly. Of all respondents, 34% of those who answered the questions correctly were male and 29% were female. This concerned Orman, but she said it didn’t really surprise her, given the complexity of our retirement system.

“I am thrilled if you have done a great job of saving a lot for retirement,” she wrote. “But that’s not all that you need to do. Making smart financial choices before and during retirement is going to be the key to maintaining your security.

The good news is, it’s never too late to learn more about the retirement system. Here’s an overview of a few basis concepts to get you started.

Longevity Risk

It’s impossible to know exactly how long you’ll live. Longevity risk is the chance that your life expectancy and actual survival rate will surpass expectations, causing the need for more cash than expected from your insurance company or pension funds.

Since average life expectancy rates are on the rise, even slight changes can be problematic for pension plans and insurance companies. This can lead to solvency issues, if there isn’t enough money to cover the lifespan of all participants.

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One of the topics Orman mentioned was the difficulty of choosing between Original Medicare and Medicare Advantage. There’s a lot of information to review for this decision, but basically, Original Medicare offers more flexibility than Medicare Advantage.

Under the Original Medicare plan, you’re able to go to any doctor or hospital in the U.S. that accepts Medicare. As for costs, you typically pay 20% of the Medicare-approved amount after you meet your deductible — i.e., your coinsurance.

Medicare Advantage only covers doctors and other providers in your plan’s network and service area for non-emergency care. Your out-of-pocket costs will vary by service, and you may also be required to pay an additional premium.

Social Security

You can start receiving Social Security benefits as early as age 62 or as late as age 70. However, the longer you wait to begin taking your benefit, the greater the size of your monthly check — if you wait to start taking your benefit until your full retirement age or up to age 70, you’ll receive an increased benefit.

For example, if your monthly benefit is an estimated $1,000 per month at a full retirement age of 66, you would receive $750 per month at age 62. However, if you wait until age 70 to start receiving it, you’ll get 132% of your full benefit.

Retirement Plans

The IRS has rules that must be followed for money in 401(k) plans, 403(b) plans, 457(b) plans, traditional IRAs and IRA-based plans — i.e., SEPs, SARSEPs and SIMPLE IRAs.

Required minimum distributions are minimum amounts you typically must withdraw starting the year you turn 72 — or 73, if you turned 72 after Dec. 31, 2022.

Your IRA custodian or retirement plan administrator might calculate your required minimum distribution on your behalf, but you’re responsible for making sure it’s correct. If needed, you can also withdraw more than the required minimum distribution.

If you don’t withdraw the full amount of the required minimum distribution by the due date, the amount you didn’t take out will be subject to a 50% excise tax. With that said, the Secure 2.0 Act decreases the excise tax rate to 25% or possibly 10%, if the required minimum distribution is corrected within a two-year period.

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This article originally appeared on Suze Orman: Why Even Big Retirement Savers Are at Risk