Retirement Rules, Long-Term Care, and the High Cost of Financial Mistakes
When it comes to retirement planning, Ric Edelman doesn’t sugarcoat things. On this episode of The Truth About Money, he tackled everything from tax penalties on retirement accounts to estate planning, long-term care insurance, and the emotional toll of unexpected financial disaster. If you’re looking for real-world guidance on how to protect your money and your peace of mind read on.
1. The Goldilocks Rules of Retirement Withdrawals
Withdrawing from retirement accounts isn’t just about timing it’s about getting it “just right.” Ric explained that pulling money out before age 59½ hits you with a 10% early withdrawal penalty, plus income taxes. Wait too long, and the IRS slaps on an even bigger fee: by April 1 of the year after you turn 70½, you’re required to take minimum withdrawals (RMDs), or you could face a 50% penalty.
That’s right between late withdrawals and missing the mark on the amount, you could owe up to 95% in penalties. Ric’s advice? Don’t guess. Work with a qualified tax preparer or advisor who knows how to thread the needle.
2. Saving During Career Interruptions
Mary called in with a common issue: she’s working temp jobs after being laid off and doesn’t know what to do with her leftover income after covering essentials. Ric encouraged her to strike a balance—build emergency savings first, then contribute to retirement, even if it’s just a little.
Skipping savings during tough times might seem logical, but retirement is inevitable. “Don’t stop saving,” Ric said. “Even if it feels small, consistency is key.”
3. Estate Taxes: Federal vs. State
Opening a loved one’s estate can raise unexpected questions. One listener asked about federal estate taxes after her mother-in-law passed. Ric broke it down: if the estate is under $5 million ($10 million for couples), it’s exempt from federal tax under current law. But some states still tax estates separately, so working with an accountant is essential to avoid surprises.
4. Long-Term Care Insurance: A Lifeline for Longevity
If your family tree is full of folks living into their 90s, you should be thinking about long-term care insurance. That was Ric’s advice to a caller whose grandparents lived well into their 90s.
The average cost of long-term care is $84,000 per year, and many people need care for over a decade. Without insurance, this can devastate your savings. Ric’s message was clear: “If you’re likely to live a long time, plan for the years when your health won’t keep up.”
5. Cashing Out Insurance? Know the Tax Consequences
Another caller wondered about taxes on a life insurance cash-out. Ric explained that only the gain the amount received above what was paid in premiums is taxable, and it’s taxed as ordinary income. That rate can be higher than capital gains.
Before cashing out, consider the alternatives. If left intact, the policy’s death benefit may go to heirs tax-free. Make sure you ask the right questions before making irreversible decisions.
6. Carol Joynt’s Financial Nightmare and What We Can Learn
Carol Joynt inherited her husband’s D.C. restaurant and a $3 million tax mess. The IRS came calling, but she was unaware of the fraud. Thanks to “Innocent Spouse” protection, she avoided liability.
Carol’s advice? Don’t be blind to your partner’s finances. Hire an independent accountant. File separate tax returns if you manage money separately. Her story, captured in her book Innocent Spouse, is a wake-up call for anyone who thinks “it could never happen to me.”
7. Roth vs. Traditional 401(k): Which One Wins?
Should you choose a Roth 401(k) or a traditional 401(k)? Ric said if you’re in a high tax bracket (25% or more), go traditional. You get the deduction today, and you’ll likely be in a lower bracket later. Only those in lower brackets (15% or less) should favor Roth contributions, where immediate tax breaks aren’t as valuable.
8. Facing Financial Crisis? Get Help Fast
Ric’s parting advice: if you’re facing IRS problems or financial uncertainty, don’t go it alone. Professionals exist for a reason. And don’t be ashamed of financial struggles. Carol Joynt’s public story shows that resilience starts with transparency.
The Bottom Line
Retirement isn’t just about saving it’s about protecting what you’ve saved. From withdrawal rules to estate planning and insurance needs, the stakes are high and the rules can be punishing if misunderstood. Whether you’re entering retirement or just starting your journey, remember Ric Edelman’s core message: preparation is everything.
All information provided is for educational purposes only and does not constitute investment, legal or tax advice; an offer to buy or sell any security or insurance product; or an endorsement of any third party or such third party’s views. The information contained herein has been obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness. Whenever there are hyperlinks to third-party content, this information is intended to provide additional perspective and should not be construed as an endorsement of any services, products, guidance, individuals or points of view outside Edelman Financial Engines. All examples are hypothetical and for illustrative purposes only. Please contact us for more complete information based on your personal circumstances and to obtain personal individual investment advice.
Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.
