5 important rollover questions

Consider cost, investments, services, and convenience.

Fidelity Viewpoints

Key takeaways

• When you leave a job, having a plan for your 401(k) can help ensure that your retirement savings continue to work hard for your future.
• As you think about your options, these considerations may be top of mind: investment choice, fees and expenses, services, convenience, and when you'll need the money.

Your retirement savings are important. After all, the money you've saved will likely provide a large part of your income in the future. Managing your savings well will mean more choices for you after you stop working.

Take your time to make good decisions for an old 401(k). Before you make any moves, take stock of your options and choose the best one for you.

• Leave the money in your previous employer's plan
• Roll your savings to your new employer's plan (if permitted)
• Roll your savings to an IRA
• Cash out your savings and close your account

Most people who are still working should eliminate cashing out as a choice: Consider it only if you desperately need money to pay immediate, essential expenses. The reason? Taxes and penalties make cashing out enormously expensive. You'll owe income taxes on withdrawals from pre-tax funds, and typically you must pay an additional 10% penalty if you are under age 59½.

Even if you are already over that age and in retirement, there are still good reasons to keep your retirement savings in a tax-advantaged account—namely the benefit of deferring tax payments and keeping your money invested for your future.

Here are important things to consider as you decide which option may be right for you:

1. What are my investment choices?

Not all retirement accounts provide the same investment options. Some 401(k)s and 403(b)s offer a menu of investments, chosen by the plan's administrator—typically, mutual funds. Some include lower-cost, custom funds not available outside the employer-sponsored plan, and company stock. Plus, some employer-sponsored plans offer a self-directed brokerage option that allows access to brokerage investment options through the plan. Brokerage IRAs typically provide access to a wide variety of mutual funds, exchange-traded funds, stocks, bonds, and other investments. Whatever you decide, make sure that you choose an account option that meets your investment needs.

2. How much are fees and expenses?

Every retirement account—an employer-sponsored plan like a 401(k) or 403(b), or an IRA—has costs, such as administrative fees for maintaining the account, management expenses charged by each investment, and transaction costs associated with trades and other account activity.

After you leave your job, some 401(k) or 403(b) plans may also charge annual or quarterly account recordkeeping fees. On the other hand, large employers might offer institutional-class shares that are less expensive than shares of the same mutual fund in an IRA.

On the IRA side, some providers offer an account with no maintenance fee or annual cost. But there are costs associated with investing in an IRA. You could choose low-cost ETFs, but still be charged a fee for buying and selling them. There may also be costs associated with the purchase of mutual funds. If you're interested in trading stocks, there are costs associated with that as well.

Be sure to examine the total costs associated with each option carefully—even a small difference in fees can have a big impact.

3. What services do I care about?

Many employer-sponsored plans and IRA providers offer online tools that provide education and advice to help you plan and manage your investments. Managed account solutions that provide investment advisory services to help you invest more effectively have also become more common across many employer-sponsored plans and IRA offerings. Other examples of services you may want to consider when deciding what to do with an old 401(k) are check-writing and wire transfers.

4. When do I expect to need the money?

Workplace retirement plans and IRAs may have different rules for withdrawals. For example, sometimes a 401(k) or 403(b) won't be subject to required minimum distributions (RMDs) while you're still working.

• If you plan to continue working after age 70½, you might consider a rollover to your new employer's plan.
• If you're age 55 or older when you leave your job, and you don't plan to go back to work, you might consider leaving the money in your old 401(k), which may allow you to take penalty-free distributions, even if you haven't reached 59½ yet. (Taxes will still apply.) You should contact your plan administrator for rules governing your plan.

5. Is convenience important?

Having your retirement savings in one place could make it easier to track and manage your investments, evaluate fees, and manage distributions in retirement—particularly if you have more than one old workplace retirement account. If you prefer to manage all your finances in one place, you might consider consolidating your savings in a new employer's retirement plan or an IRA.

It's your choice

Everyone has different needs and circumstances. Regardless of your unique situation, make sure to consider costs, investment choices, service, convenience, and other factors, to help determine what may be right for you. Be sure to consider all available options and the applicable fees before moving your retirement assets. And, as always, consult a tax advisor for help with this important decision.

A way to secure retirement income later in life

Turn some of your traditional IRA or 401(k) into lifetime income.

Fidelity Viewpoints

Key questions

• Are you nearing age 72¹ or already taking required minimum distributions (RMDs)?
• Can you cover expenses without needing to take your full RMD?
• Would you like a stream of guaranteed income to start later than age 72?

Turning age 72 is an important milestone if you have a traditional IRA or 401(k). That's when you must begin taking mandatory minimum yearly withdrawals, known as required minimum distributions (RMDs) from these accounts.² But what if you don’t need that money for current living expenses and would prefer to receive guaranteed lifetime income later in retirement? Fortunately, the US Treasury Department issued a rule creating Qualified Longevity Annuity Contracts (QLACs) in 2014. QLACs allow you to use a portion of your balance in qualified accounts—like a traditional IRA or 401(k)—to purchase a deferred income annuity³ (DIA) and not have that money be subject to RMDs starting at age 72.

What is a QLAC?

A QLAC is a DIA that can be funded only with assets from a traditional IRA⁴ or an eligible employer-sponsored qualified plan such as a 401(k), 403(b), or governmental 457(b). At the time of purchase, you can select an income start date up to age 85, and the amount you invest in a QLAC is removed from future RMD calculations.

"The creation of the QLAC has opened up the opportunity to defer income past age 72, the RMD start age, using tax-deferred savings like an IRA or 401(k)," explains Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company.

QLACs address one of the biggest concerns among individuals in retirement: making sure they don't outlive their savings. After all, more than 30% of American workers aren't confident they'll have enough money to maintain their standard of living through retirement, according to the 2019 Retirement Confidence Survey conducted by the Employee Benefit Research Institute.

A QLAC delivers a guaranteed⁵ stream of lifetime income beginning on a date you select. For instance, you may purchase a QLAC at age 65 and have your payouts begin at age 75. Typically, the longer the deferral period, the higher your payout will be when you're ready to start receiving income payments.

Prior to the 2014 ruling on QLACs, funding a DIA with qualified funds from an IRA posed a problem: IRAs and other tax-deferred plans such as 401(k)s include RMD rules that require you to begin taking withdrawals after you reach age 72. There are rules, however, about how much money you can use to fund a QLAC. Currently, you're subject to 2 limitations: Total lifetime contributions cannot exceed $135,000 across all funding sources, and QLAC contributions from a given funding source cannot exceed 25% of that funding source's value.⁶

How a QLAC can create steady, later-in-life income

Let's say you own one or more traditional IRAs with a total balance of $200,000 as of December 31 of the previous year. You would be limited to using $50,000, which is 25% of $200,000 and is less than $135,000, to fund the QLAC. (Some 401(k) plans offer access to QLACs; check with your employer or plan sponsor to learn more about the rules for your plan.) But if your total IRA balance is worth $540,000 or more, the maximum you can contribute to a QLAC is $135,000. Keep in mind that in both cases the money that remains in your IRA or 401(k) is still subject to RMDs.

Use our interactive widget below and adjust the green options in the white box to match your situation:

To make it easier to understand how a QLAC might fit into your retirement income plan, enter your personal information in the interactive widget. It assumes you're age 70 and investing $135,000 in a QLAC. You can personalize whether you're male, female, or purchasing as a couple. Then you can adjust when you want to start receiving income, as early as age 75 or as late as age 85. Finally, you can see what the amount of total lifetime payments would be if you lived to age 90, 95, or 100.

To provide a working example, let's assume a woman is approaching age 70½ and does not need her full RMD to cover current expenses. By investing a portion of her traditional IRA assets in a QLAC at age 70, she would not have to take RMDs on the assets invested in the QLAC, and she would receive guaranteed lifetime income starting at a date of her choice, up to age 85. During the deferral period, she would rely on Social Security, RMDs from the remaining money in her IRA, withdrawals from investments, and other income, such as part-time work or a sale of a business, to cover expenses. If she invests the $135,000 in a QLAC and defers to age 80, her guaranteed income would be $15,200 a year no matter what happens over time, and she would receive a total of $228,000 in payments if she lived to age 95—or more if she lived longer.

Decisions, decisions

Purchasing an annuity can be complicated, with many kinds to choose from. "Fortunately, QLACs don't add a layer of complexity," says Ewanich. "The restrictions within the US Treasury Department's QLAC rule simplify the process."

Consider these options:

Single or joint life? If you are married, you can choose a joint contract, which will provide income payments that will continue for as long as one of you is alive. Choosing a joint contract may decrease your income payments—compared with a single life contract—but may also provide needed income for your spouse should you die first.

Should you include a cash refund death benefit? When purchasing a QLAC, the income lasts for your lifetime (joint contracts pay income for you and your spouse, as long as one of you is alive). You may also want to consider adding a cash refund death benefit. This provides for a lump sum paid to your beneficiaries if your lifetime payments do not exceed the dollar amount you invested in the QLAC. While a contract without the cash refund death benefit may provide higher income payments, it does not include beneficiary protection for your heirs. Compare QLAC options, including a cash refund death benefit, with Fidelity's Guaranteed Income Estimator tool.

When do you want income to start? A QLAC should be part of a broader income plan, to help ensure that your essential expenses like food, health care, and housing are covered during retirement—ideally with lifetime income sources such as Social Security, a pension, or lifetime annuities. Deciding on an income start date will depend on how this income stream will best fit into your overall plan. Here are some hypothetical examples of how someone might choose an income start date:

• A 70-year-old retiree with an existing income stream that will stop at age 75 (for example, proceeds end from the sale of a business, the retiree stops working part time, inheritance income ceases) might start income at age 76 for the QLAC to replace the income that is ending.
• A couple in their late 60s might like to include an income stream that begins at age 80 or 85 as part of their overall plan, to help cover higher anticipated health costs later in retirement.
• A couple at age 65 might be comfortable taking withdrawals from their investment portfolio to cover their expenses at the beginning of their retirement, but they are concerned about the potential need for it to last 30 years or more. They might consider a QLAC that provides lifetime income starting at age 85 to help address these concerns.

Can I change the income start date? For contracts that include a cash refund death benefit, you typically have the ability to change the income date by up to 5 years in either direction (subject to an age-85 maximum). For example, if you initially select age 78 as your income start date, you could subsequently change this date to any time from age 73 to age 83. Of course, the amount of income that you will receive will typically be adjusted to a lower amount if you decide to change the date to an earlier age, and a higher amount if you change the date to a later age.

Should I consider a QLAC?

Ewanich notes that the decision to purchase a QLAC is a personal one and should take into account your family's needs and financial goals. For instance, you may not want to take RMDs on the entire pretax balance of your IRA if doing so would provide you with more income than you need. But will your financial standing be as strong 20 or even 10 years from now? "A QLAC would allow you to enjoy your earlier retirement years knowing that you have guaranteed income in place when you really might need it," explains Ewanich.

In terms of when to make a decision about purchasing a QLAC, Ewanich suggests weighing the options before reaching age 72: "While the QLAC rule allows you to purchase after age 72, it's a good decision to make when you're initially planning your RMD strategy."

5 common annuity myths

Dispelling myths about annuities may reveal unique investment solutions.

Fidelity Viewpoints

Key takeaways

• Deferred annuities can help savers.
• Many annuities are low cost.
• Certain annuities can help protect your future income.
• Annuities are the only product that can guarantee a stream of income that you can't outlive.
• Your beneficiaries may be able to receive payments after you die.

Dispelling myths about annuities can open the door to many unique investment solutions.

Over the years, annuities have gotten a bad rap as being complex and expensive, the kind of investment only an insurance professional could love. Well, some are, but there is still quite a lot to love in these products—no matter what phase of life you are in—if you know what you need and you shop smart.

For example, annuities designed for accumulation let your money grow tax-deferred before and during retirement. You can also buy protection against market losses and, unique to annuities, outliving your savings. These guarantees¹ come with a price, but for some investors the price is worth the peace of mind. The key is knowing what you need, the difference between various types of annuities, and how to shop wisely.

Here we debunk 5 of the most common myths and misconceptions around annuities, so you can make better decisions about your financial plan.

Myth 1: Annuities are only for retirees

Reality: Annuities can help savers too.

While immediate annuities are designed to turn savings into an income stream right away—typically, for retirees, deferred annuities (variable or fixed) are a tax-deferred savings vehicle used by investors to save more for retirement. With a deferred annuity, you can grow your investment tax-deferred, then turn it into an income stream at some point in the future. If you have maxed out on contributions to your 401(k), 403(b), other employer-sponsored retirement savings plan, or an IRA, deferred annuities can offer an additional tax-deferred vehicle to help you build wealth.²

You can choose from 2 types of deferred annuities:

Deferred variable annuities have investment options that are very similar to mutual funds. You can typically make unlimited³ contributions and control how you allocate among investment options. To benefit most from a deferred variable annuity’s tax-deferred savings opportunity, use a low-cost annuity—some products are available for fewer than 50 basis points (0.50%) of your investment annually.⁴

Deferred fixed annuities include single premium deferred annuities (SPDAs), which are similar to a certificate of deposit (CD). You are guaranteed an interest rate for a specific period of time, typically 1 to 10 years. These fixed annuities are insured by the issuing insurance company rather than by the FDIC.

For both types, investors need to be comfortable not taking withdrawals before age 59½.²

"It's important with any annuity product to make sure you're investing with a highly rated company," says Tim Gannon, vice president at Fidelity Investments Life Insurance Company. "A good way to tell is by checking with a rating agency like Standard & Poor's or Moody's. These are independent rating agencies that conduct regular reviews of an insurer’s financial strength and ability to pay its contractual obligations."

For information on how annuities can help savers, read Viewpoints on Fidelity.com: How to invest tax-efficiently.

Myth 2: Annuities cost too much

Reality: Many annuities are low cost. Others offer potentially valuable additional features at higher costs, which you should consider only if you need to address a specific risk.

When it comes to choosing an annuity, first consider what you need the annuity to do: build savings or create income. Be sure to compare the cost against the value of each additional guarantee, feature, and benefit—and only pay for what you need and align it with when you need it to avoid paying surrender charges.

If you need to maximize your tax-deferred savings, choose a low-cost deferred variable annuity. According to Morningstar Annuity Research Center, variable annuity annual fees range widely, from 0.10% to 2.25%, with an industry average of 1.16%.^4,5 Of course, you will pay more if you need to address a specific risk with a guarantee, such as a guaranteed living benefit, which provides income or asset protection from down markets.

Generally, variable annuities charge explicit fees, while fixed annuities tend to embed their costs in the interest rate or income payout amount. Focus on finding a competitive payout rate and an insurance company that is reputable and financially sound.

Myth 3: There is no point in buying an annuity for income before retirement

Reality: As you approach retirement, certain annuities can help protect your future income from market volatility, and some annuities can help protect against inflation.

If your retirement is 10 years away or less, you probably worry that a drop in the market could erode the savings you've worked hard to accumulate. There are 2 types of annuities available that may grant you some peace of mind: a deferred income annuity⁶ (DIA), and a fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB) rider.

When you purchase a DIA, you select the future date on which your payments will begin, providing guaranteed income for the rest of your life no matter what the market does. Because they are designed to create future income, DIAs provide the greatest advantage if you don’t need to access the money until you reach your selected income start date.

You can lock in a future cash flow that starts on the future date you selected when you purchased the annuity. At age 58, to create a $1,000 monthly lifetime income payment beginning at age 70, you would invest approximately $108,000 today. If you waited until you were age 68 to purchase an annuity, you would need to invest slightly more than $170,000⁷ for the same level of income.

These types of annuities also enable you to plan for inflation by offering a cost-of-living adjustment, known as a COLA. When you purchase the contract and for an additional cost, you can select to have your income increase annually by a percentage, typically 1%–5%. This COLA adjustment takes effect after you begin receiving income, but not during the deferral period.

Another alternative is a fixed deferred annuity with a GLWB, which allows some flexibility with your investment but may offer a slightly lower guaranteed payment. When you purchase this type of annuity, you will lock in predictable, guaranteed lifetime income that begins on a date you select. Your lifetime withdrawal benefit amount will be tied to your age when you begin withdrawing and deferral period—generally, the longer you wait to take your lifetime withdrawal benefit amount, the higher it will be.⁸

Work closely with your financial consultant as you build a comprehensive retirement income plan to determine whether these annuities are appropriate for your personal situation.

Myth 4: I can easily create lifetime income from my retirement accounts

Reality: Besides Social Security and pensions, only annuities guarantee a stream of income that you can't outlive.

Because you can't predict the markets, you can't be sure that you won't outlive your investment portfolio. Indeed, our research suggests that to have a high level of confidence that that won't happen—even if the markets turn bearish just when you retire—you may consider limiting your withdrawals to 4% a year, adjusted annually for inflation. With an annuity, however, you enter into a contract with an insurance company that will pay you a certain amount for the rest of your life, giving you the peace of mind that comes from knowing that this specific income stream is guaranteed to never run out during your lifetime.

For example, a single premium immediate annuity (SPIA) or a DIA can play that important role in your retirement income plan. A key benefit of SPIAs and DIAs is that they ease money management as you enter your 80s or 90s. That’s because when you invest a lump sum with an insurer today, the insurance company guarantees you will receive a monthly income payment for the rest of your life. No maintenance is required.

"What people may not realize is, once you have your essential expenses covered by guaranteed lifetime income, you gain peace of mind and the freedom to pursue the things you love in life," observes Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company. "Additionally, you may invest your remaining assets for growth, rather than worrying about how to preserve and stretch your portfolio for the rest of your life." Just be aware that once you purchase an SPIA or a DIA, you generally lose access to these assets after the "free look" period—a brief period of time immediately after purchasing a contract when you can cancel the contract and have your money refunded.

For more on lifetime annuities, read Viewpoints on Fidelity.com: Create income that can last a lifetime.

Myth 5: The insurance company gets my money when I die

Reality: Your beneficiaries can receive payments after you die.

Most deferred annuities are designed to pass the account value on to your heirs. Income annuities offer options that can also provide for your beneficiaries in some situations. With income annuities, as long as you don't select the largest payout option of "life only," you can arrange to have income payments continue on to your beneficiaries if you were to pass away prematurely. Of course, this adds to the cost, but it could be worth the extra price, depending on your situation. Be sure to work with your financial consultant and discuss the beneficiary options available to you for each type of annuity you're considering.

Bottom line

Annuities can offer flexibility both in how you save for and receive money in retirement. It all comes down to understanding that there are several different types of annuity products, each of which is designed to address a specific need or life stage. And remember, the best way to explore how they might complement your investment strategy is to work with your trusted financial consultant.

7 things you may not know about IRAs

Make sure you aren't overlooking some strategies and potential tax benefits.

Fidelity Viewpoints

Key takeaways

• IRAs are available to nonworking spouses.
• IRAs allow a "catch-up" contribution of $1,000 for those 50 and up.
• IRAs can be established on behalf of minors with earned income.

It's the time of year when IRA contributions are on many people's minds—especially those doing their tax returns and looking for a deduction. The deadline for making IRA contributions for the 2018 tax year is April 15, 2019. Residents of Massachusetts and Maine have until April 17, 2019 to make 2018 IRA contributions.

Chances are, there may be a few things you don't know about IRAs. Here are 7 commonly overlooked facts about IRAs.

1. A nonworking spouse can open and contribute to an IRA

A non-wage-earning spouse can save for retirement too. Provided the other spouse is working and the couple files a joint federal income tax return, the nonworking spouse can open and contribute to their own traditional or Roth IRA. A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family. For 2018 the IRA contribution limit is $5,500, or $6,500 for those over age 50. For 2019, the limit is $6,000, or $7,000 if you're over 50. The amount of your combined contributions can't be more than the taxable compensation reported on your joint return.

2. Even if you don't qualify for tax-deductible contributions, you can still have an IRA

If you're covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your 2018 or 2019 modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution to a traditional IRA might not be tax-deductible.¹ But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax-free until the time of withdrawal. You also have the option of converting those nondeductible contributions to a Roth IRA (see No. 7, below).

3. After 2018, alimony will not count as earned income to the recipient

Unless the new tax rule changes, you will likely not be able to use money received as alimony to fund an IRA after tax year 2018.

That's due to changes in the law introduced by the Tax Cuts and Jobs Act of 2017: After 2018, alimony payments will no longer be considered taxable income to the recipient—and the source of IRA contributions must be taxable earned income.

4. Self-employed, freelancer, side-gigger? Save even more with a SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.

Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA. The SEP IRA is similar to a traditional IRA where contributions may be tax-deductible—but the SEP IRA has a much higher contribution limit. The amount you, as the employer, can put in varies based on your earned income. For SEP IRAs, you can contribute up to 25% of any employee's eligible compensation up to a $55,000 limit for 2018 contributions and $56,000 for 2019. Self-employed people can contribute up to 20%² of eligible compensation to their own account. The deadline to set up the account is the tax deadline—so for 2018 it will be April 15, 2019 (for a calendar-year filer). But, if you get an extension for filing your tax return, you have until the end of the extension period to set up the account or deposit contributions.

5. "Catch-up" contributions can help those age 50 or older save more

If you're age 50 or older, you can save an additional $1,000 in a traditional or Roth IRA each year. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for retirement. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $44,000 more in your account than someone who didn't take advantage of the catch-up contribution.³

6. You can open a Roth IRA for a child who has taxable earned income⁴

Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give them a head start on saving for retirement. That's because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to persuade a teenager with income from mowing lawns or babysitting to put part of it in a retirement account, gifting money to cover the contribution to a child or grandchild can be the answer—that way they can keep all of their earnings and still have something to save. The contribution can't exceed the amount the child actually earns, and even if you hit the maximum annual contribution amount of $6,000 (for 2019), that's still well below the annual gift tax exemption ($15,000 per person in 2018 and 2019).

The Fidelity Roth IRA for Kids, specifically for minors, is a custodial IRA. This type of account is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in their name. This age varies by state. Bear in mind that once the account has been transferred, the account's new owner would be able to withdraw assets from it whenever they wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.

7. Even if you exceed the income limits, you might still be able to have a Roth IRA

Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available any time without tax or penalty, all qualified withdrawals are tax-free, and you don't have to start taking required minimum distributions at age 70½.⁵ But some taxpayers make the mistake of thinking that a Roth IRA isn't available to them if they exceed the income limits.⁶ In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.

If you don't have a traditional IRA you're still not out of luck. It's possible to open a traditional IRA and make nondeductible contributions, which aren't restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings—if any—between the time of the contribution and the conversion.

However, if you do have any other IRAs, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account.

Read Viewpoints on Fidelity.com: Answers to Roth conversion questions

Tips for same-sex adoptions

Consider these 8 important steps and lessons from one family’s adoption.

Fidelity Viewpoints

Key takeaways

• Get your financial and personal records in order, as your net worth and tax returns may need to be reviewed.
• Consult a family law attorney to help navigate the path to adoption.
• Keep your retirement savings strategy on track as you prepare financially for the adoption.

When the phone call came in mid-January, Christopher Wilson-Byrne, 33, and his spouse, Norman Flynn, 43, were overjoyed and, admittedly, a little stunned.

The caller was from the adoption agency they had been working with for the past 5 months. She excitedly told the couple the time had come to fly to Kentucky to meet their new baby, Katie, and bring her home.

What was surprising is that the couple’s application to be considered as adoptive parents had been green-lighted only 5 days earlier. “It was surreal,” says Wilson-Byrne.” We thought we probably had a year or more to go before there would be a match and a birth parent would pick us.”

In truth, the couple, who refer to themselves as the Flynn family and live in Wellesley, Massachusetts, had their hearts set on becoming parents for some time and had been planning for it. When they married 3 years ago, they both agreed that they wanted to have children, either through adoption or surrogacy. For Wilson-Byrne, a vice president at Fidelity Investments, being a parent one day had been on his radar for years. “I had a great childhood growing up with 3 siblings and always assumed I would have kids. But when you’re gay, you realize your family formation will not be the way other families get formed,” he says.

Like the Flynns, LGBTQ+ couples are more likely than heterosexual couples to use adoption or surrogacy as a method for family formation. The percentage of same-sex parents with adopted children has risen sharply in the past decade,¹ according to research from the Williams Institute at the University of California, Los Angeles. The think tank is dedicated to conducting independent research on sexual orientation and gender identity law and public policy.

Today, same-sex couples are about 4 times more likely to raise adopted children than heterosexual couples, the Institute’s research has found. Moreover, as of 2016, same-sex adoption is legal in all 50 states and the District of Columbia, so the process is far easier than it was before gay marriage was legalized in all states.

“Now that gay couples are allowed to marry, they are treated like any other married couple who’s adopting,” says Michele Zavos, managing partner and founder of Zavos Juncker Law Group in Silver Spring, Maryland, a firm that specializes in family law for the LGBTQ+ community. “If they’re married, there is really no difference in the adoption process for same-sex and opposite-sex couples.”

If you’re contemplating adoption or surrogacy, here are 8 important steps to consider.

1. Make a future adoption an integral part of your financial plan

“I knew if I wanted to adopt children one day, it was going to be a large out-of-pocket expense,” Wilson-Byrne says. “I realized that I would need to have enough money saved up to be able to pay for it when the time came. I had been saving for years for the possibility.”

According to the Child Welfare Information Gateway, an adoption can cost in excess of $40,000, depending on the type of adoption pursued. Possible adoptions include adoptions through foster care systems, surrogacy arrangements, private agency adoptions, independent direct placement adoptions, and international adoptions.

With lesbian couples, frequently, one partner gives birth to a child born by using one partner’s egg and donor sperm. Donor insemination costs can range anywhere from $300 to $4,000, depending on whether anonymous donor sperm is used. Gay men can do essentially the same thing by using a surrogate to carry a child born from one partner's sperm and a donor egg. Surrogacy rates can easily top $100,000, says Zavos.

The challenge for many couples is figuring out how to save enough money for this sizeable one-time expenditure without abandoning saving for retirement. For the Flynns, the up-front cost was $6,000 for the application process to determine whether the 2 men were viable candidates for adoption. After their daughter was born and the match made, a placement fee of $38,000 was paid to the agency.

“I wish I had guidance from the time I started working,” says Wilson-Byrne. “I could have worked with a financial advisor who could have said, ‘You are a gay guy who is 25 and working, this is how much money you make, and you should be setting aside X amount for retirement and X amount for a family.’”

Fortunately, Wilson-Byrne was a saver by nature. “I was good about saving as aggressively as possible,” he says. “I made sure I lived below my means and was really diligent about saving a good chunk of my salary. I have never, for example, spent a bonus. In the back of my head, I knew there was always going to be this expense that I needed to save for.”

The drawback: Although Wilson-Byrne was saving, by his own account, he didn’t save for retirement very well during that time. “I didn’t know how much I should set aside in my 401(k) or IRA versus how much I would need for the adoption process. Ultimately, I had oversaved in my cash accounts but undersaved in my retirement accounts.”

2. Choose a form of adoption

The Flynns worked with a licensed private agency for their adoption. Private adoption agencies are funded with cash paid by adopting families for their services, which can range from screening applicants, home studies by a caseworker, background checks, matching children and adoptive parents, and legal counsel. In a private agency adoption, birth parents relinquish their parental rights to an agency, and adoptive parents work with an agency to adopt.

Another option is an independent adoption: Expectant parents (or a pregnant woman) are identified without an agency’s help, and in some instances by an attorney who specializes in adoption. The attorney may identify expectant parents who are seeking an adoptive family.

A third option is a public adoption agency. These agencies get their funding from local, state, and federal sources. They typically have a foster care and an adoption component. Children usually enter the system either by a parent surrendering the child to the local child welfare system or a local court terminating a parent’s rights because of abuse or neglect.

Finally, there are international adoptions where adopting parents cover all the cost. The US Department of State and the US Citizenship and Immigration Services set the procedure. Adoptions abroad are governed by the laws of both the US and the adoptee’s home country. In recent years, the US has banned adoption from several countries, including Cambodia, Vietnam, and Nepal, after evidence of fraud surfaced. Guatemala also stopped overseas adoptions. Moreover, many foreign countries don’t allow gay couples to adopt.

Tip: A pre-adoptive family must meet the requirements of their legal state of residence. The Child Welfare Information Gateway² has resources on licensed, private agency and independent adoption and offers information on state laws regarding consent, as well as detailed information on the process and requirements for different types of adoption.

3. Ask far-reaching questions

In addition to asking the adoption agency about all the costs involved, Wilson-Byrne and Flynn, for example, asked the following: Have you been successful placing children with gay men? Can you provide references from other couples with whom you have placed children in the last 2 years and who we can talk to?

Another upside: The couple was required to participate in group discussions orchestrated by the agency with other potential adoptive parents. The group consisted of gay, heterosexual, and single parents, says Wilson-Byrne, and “some were back for their second adoptions, so we could learn from their experience.”

4. Get your financial and personal records in order

The application process isn’t for the faint of heart. “It was a robust application process,” Wilson-Byrne says. “First, there’s an application, including a personal essay and references. We also put together ‘getting to know you’ material, which included a photo album of Norman and me. We wanted them to know what it would be like to live with us—our home and things we like to do, like cooking and traveling and going to the beach.”

Be prepared for a thorough vetting process. This may include full medical exams and a background check review process similar to an FBI clearance. Importantly, your financial picture is reviewed, including statements of your net worth and tax returns.

Tip: Where to keep important documents can be an issue for any couple. A secure virtual safe, such as FidSafe^®, is a good option.

5. Consult a family law attorney

If you are considering same-sex adoption, it’s wise to speak with an attorney in your state to learn the current laws and regulations in your jurisdiction, says Zavos. “We have ongoing relationships with adoption agencies, surrogacy agencies, egg/embryo/sperm donation agencies, fertility centers, and other organizations across the country and around the world that are dedicated to helping people with family formation.”

Some attorneys who specialize in adoption are members of the Academy of Adoption & Assisted Reproduction Attorneys, a professional membership organization with standards of ethical practice.

Every state has different family laws regarding adoption, says Zavos. Some states allow attorneys to actually place children for adoption like an agency would. Other states allow attorneys to only recommend an adoption agency. Some states allow adoptive parents to pay the living expenses and legal and medical expenses for the birth mother or for the child while they are under the care of the adoption agency. There are others that allow only legal and medical expenses and fees.

For surrogacy, a lawyer like Zavos can prepare and review gestational carrier agreements, review contracts with surrogacy agencies, and seek pre- and post-birth orders so that the intended adoptive parents will have legal rights to their child as quickly as possible.

“We also recommend that anyone intending to use an egg/embryo/sperm donor, or obtain an embryo in order to grow a family, prepare a contract that sets out all the agreements reached between the parties, including rights to confidentiality, disclosure of identities, payments, parental rights, court orders, and any other agreements that affect legal relationships to the child,” she says.

The common pitfalls: People are not aware how much it costs, says Zavos. They often forget about the birth father’s rights. They don’t fully understand their agency contracts. For example, a client of Zavos adopted in Texas and paid living expenses through an agency for the birth mother during her pregnancy. At the last minute, the woman decided not to place the child for adoption, which is her prerogative. They wanted all the money back from the agency, but that’s not how it works.

You typically lose your up-front money if the birth mother changes her mind, explains Zavos. Also, many couples don’t realize that they have no recourse if the birth mother decides to change her mind during the revocation period. In Maryland, the revocation period is 30 days after birth. The child may be placed with potential adoptive parents, but if the birth mother changes her mind on the 29th day, there is really no recourse. Every state has a different time period.

While the Flynns’ legal work was handled by the agency’s counsel, many adoptive parents hire their own attorney to smooth the process of adopting a child from another state. People who adopt children from other states must abide by the Interstate Compact on the Placement of Children for the state where the birth takes place and also for the state where the child will live.

Documents are presented first to the state in which the child is born and then to the state where the child will be living. The relocation of a child follows the state regulations of both states. Once both states approve the placement, the child can move to the new adoptive home. This process can be quick. The Flynns’ child, Katie, was born on a Saturday, and the couple was cleared to take her home to Massachusetts 4 days later.

Tip: Consider hiring an attorney to help you update your will, name guardians, and research life insurance needs.

6. Take advantage of employer benefits

Check with your human resources department to find what adoption benefits are available. Some employers will reimburse some or all of the expenses related to adoption. Many employers offer paid parental leave for adoptive parents. Wilson-Byrne, for example, qualified for 6 weeks of paid parental leave from his employer.

The Family and Medical Leave Act (FMLA) provides for a number of benefits, including up to 12 weeks of unpaid leave to care for a newly adopted child. The FMLA applies to all public agencies, including state, local, and federal employers, and local education agencies and schools. It also applies to all private sector employers who employ 50 or more employees. To be eligible for FMLA leave, you must work for a covered employer and have worked for that employer for at least 12 months.

7. Tap tax breaks

Tax benefits for adoption include a tax credit for the qualified adoption expenses paid to adopt an eligible child. The credit is nonrefundable, which means it's limited to your tax liability for the year in which the adoption takes place. The maximum credit for 2019 is $14,080 per child, if your modified adjusted gross income is equal to or less than $211,160. If your modified adjusted gross income is more than $211,160 but less than $251,160, you will receive a reduced tax credit.

Qualified adoption expenses include adoption fees, court costs and attorney fees, and traveling expenses (including amounts spent for meals and lodging while away from home). An expense may be a qualified adoption expense even if it is paid before an eligible child has been identified and you have not adopted in that tax year. Generally, the credit is allowable whether the adoption is domestic or foreign. However, depending on the type of adoption, the timing rules for claiming the credit for qualified adoption expenses differ.

8. Keep the door open

There’s no guarantee you will ever come into contact with the birth parents. The Flynns, however, met Katie’s birth parents on their January trip to Kentucky. “I am happy that we had communication with the birth parents,” says Wilson-Byrne. “It just makes it easier and healthier for us. She will know where she came from and her adoption story, and there will hopefully be less anxiety when she begins asking questions about where she came from.”

Your bridge to Medicare

Explore 4 health care coverage options as you transition to Medicare at age 65.

Fidelity Viewpoints

Key takeaways

• You might retire a few years earlier than anticipated: Explore your health care options before you become eligible for Medicare at age 65.
• Health care options between retirement and Medicare coverage include COBRA, private insurance, the public marketplace, and a spouse's plan.
• Once you've bridged the gap to Medicare coverage, you need to understand Medicare basics: eligibility, enrollment, and penalties.

Although you may have done a good job of planning your retirement, approaching age 65 is still full of complexities—including how your health care coverage will change and how you will pay for it.

According to Fidelity's Decision to Retire research, conducted with the Stanford Center on Longevity,¹ people retire an average of 4 years sooner than they had planned. For many who do have gap years between when they actually retired and when they had planned to retire, it can be a mad scramble to find affordable, quality health care coverage until they are eligible for Medicare at age 65.

Even after Medicare eligibility kicks in, there are still additional costs to cover. Health care is one of the biggest expenses for retirees. Fidelity's 2019 Retiree Health Care Cost Estimate² pegs the total out-of-pocket cost of health care in retirement at $285,000 for a couple both aged 65. This is up from $280,000 in the 2018 study.

4 key health care options between early retirement and Medicare

"With more and more employers dropping their pre-65 retiree medical plans,³ the questions of where and how to get the right coverage did not disappear with the Affordable Care Act, and may still create indecision and uncertainty in someone who is otherwise ready to retire," says Greg Gagliano, vice president of health solutions at Fidelity.

If you are retiring before you're 65 and don't have access to retiree health care coverage from your employer, there are 4 main ways to obtain health care coverage to bridge the period between retirement and Medicare:

1. COBRA coverage. The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to continue your current health care coverage for a certain amount of time, but you may be required to pay the full cost of your health coverage plus an additional 2% charge. While you are working, your employer will typically cover a significant portion of the cost of your coverage, reducing the cost for active employees, but that is rarely the case for those who continue coverage through COBRA.
2. Spouse's plan. If your spouse or partner is employed and has health coverage, you may be able to get covered on their employer's plan—and this may be your best and most cost-effective option. If your spouse or partner is already retired and has retiree medical coverage, you may be able to be added to that coverage as well.
3. Public marketplace. The marketplace was established by the Affordable Care Act and provides plan options available to anyone who is not yet eligible for Medicare. You can no longer be denied coverage for any reason, including a pre-existing condition. This was often a significant issue for those contemplating early retirement because affordable health insurance coverage was hard to find and obtain, particularly for those with pre-existing medical conditions. Costs for these plans can vary widely, but some people qualify for government-provided subsidies through premium tax credits that can make the coverage more affordable.
4. Private insurance. To obtain coverage, you can also look to your local health insurance agent, trade or professional associations, and other so-called "private exchanges" that offer plans from multiple carriers. You may have more plan options available to you through these outlets than the public marketplace, but note that government-funded premium tax credits cannot be applied to these plans.

"The public marketplace is usually a good outlet for pre-65 retirees who do not have access to an employer-sponsored retiree medical plan, but these exchanges are still very new and many insurance companies have withdrawn from the market," says Gagliano. "The good news is that there are other outlets available to you, such as private exchanges, which can offer coverage regardless of your health status."

Use our widget at the right to answer a few questions and find out what choices may be available to you until you can enroll in Medicare.

Getting ready for Medicare

Once you've figured out how to bridge the gap to Medicare, you'll need to explore Medicare itself as you approach 65, the age when most people become eligible. There's a lot to learn. If you're like most people, you may be confused about how and when to transition from your interim coverage to Medicare—and when you need to do it. And remember, Medicare coverage is provided to each eligible individual who enrolls—you cannot cover your spouse under your Medicare coverage; they will have to enroll on their own when eligible. Here are answers to 6 common questions:

1. I'm eligible to claim my Social Security benefit as early as age 62. Will Medicare kick in at the same time?
   The answer is generally no. For most of us, the age to qualify for Medicare is 65, with a few exceptions: People with certain disabilities, end-stage renal disease (ESRD), or amyotrophic lateral sclerosis (ALS) may qualify at a younger age.
2. Will Medicare contact me directly prior to my becoming eligible?
   If you are already receiving Social Security benefits or railroad retirement benefits, Medicare will mail you a Medicare enrollment kit a few months before you become eligible. If you are within 3 months of turning age 65, reside in the United States or one of its territories or commonwealths, and don't want to apply for monthly Social Security retirement benefits just yet, but do still want to apply for Medicare benefits, you can enroll in Medicare online.
3. Are there deadlines for Medicare sign-up?
   Yes. Retirees who are already receiving Social Security benefits are automatically enrolled in Medicare Parts A and B, and coverage generally begins the month they turn 65. But retirees who haven't claimed Social Security will need to take action to sign up for Medicare. You can first sign up for Medicare Part A hospital insurance and Medicare Part B medical insurance during the 7-month initial enrollment period that begins 3 months before the month you turn 65. If you enroll in Part A and/or Part B the month you turn 65 or during the last 3 months of your initial enrollment period, the start date for your Medicare coverage may be delayed.
   
   Regardless of how you get Parts A and B, you must sign up for Part D if you want prescription drug coverage. (See the section below about Medicare Part D for important information about penalties.) Or, if you prefer, sign up for a Medicare Advantage Plan (Medicare Part C), which replaces parts A, B, and often D. Medicare Advantage Plans, a private-sector alternative to original Medicare, have the same initial enrollment period, as does Part D for prescription drug coverage.
   
   If you don't enroll in Medicare during the initial enrollment period around your 65th birthday, you can sign up between January 1 and March 31 each year thereafter for coverage that will begin on July 1. However, you could be charged a late-enrollment penalty when your benefit starts. For example, if a penalty applies, monthly Part B premiums increase by 10% for each 12-month period you delay signing up for Medicare after becoming eligible for benefits.
4. How do I sign up for Medicare if I am still working at age 65?
   If you retire after age 65 and have employer-sponsored health coverage, you will have an 8-month special enrollment period to sign up for Part A and/or Part B, which starts the month after your employment ends or the group health plan insurance based on current employment ends, whichever happens first. Usually, you don't pay a late-enrollment penalty if you sign up during a special enrollment period.
5. Can I make changes every year?
   Yes. The Medicare open enrollment period runs from October 15 through December 7 annually. This gives you the opportunity to re-evaluate your situation every year and make any changes.
6. If I retire outside the United States, can I bring my Medicare coverage with me?
   In most cases, no. The US government generally precludes Medicare from paying for medical services for retirees outside the country and its territories. A possible silver lining: You may be able to purchase affordable health insurance in some countries or tap into their private health care systems. But, some insurance companies operating outside of the United States and its territories may limit your participation or acceptance based on your age.

Read Viewpoints on Fidelity.com: 6 key Medicare questions

You may have to pay more

High-income retirees—in 2019, individuals with a modified adjusted gross income (MAGI) over $85,000 or married couples with a combined MAGI of more than $170,000—pay higher monthly premiums for both Medicare Part B and the Medicare Part D prescription drug plans, and in some cases, a lot more.

There are 5 Medicare premium brackets for Parts B and D. In addition to the standard $135.50 monthly premium, surcharges for Part B may apply. The brackets are based on the income from your latest tax return, so your 2018 tax return filed in 2019 will be the basis for your Medicare premiums paid in 2020.

"Pre-65 retirees—particularly affluent ones who are unlikely to qualify for federal premium tax credits—need to know that even under the provisions of the Affordable Care Act, coverage is likely to cost significantly more than when they were active employees or when they become eligible for Medicare," adds Gagliano.

Remember to also sign up for Medicare Part D

Whether you are currently taking prescription medications or not, you need to know the ins and outs of Medicare Part D—the Medicare Prescription Drug Plan. Prescription drug coverage may be included as part of a Medicare Advantage plan. There are lots of options to compare. When you first enroll in Medicare, it's important to plan for your future needs. Take the time to look into Medicare Part D prescription drug coverage.

Keep these 2 additional things in mind when enrolling in Medicare Part D:

1. If you don't enroll in Medicare prescription drug coverage when first eligible, you may be hit with a late-enrollment penalty, which will apply for the rest of your life. If you waited for more than 63 days since you were first eligible for Part D coverage and did not have "creditable coverage" (such as employer-sponsored coverage with prescription drug coverage that is as good as or better than what is offered under Medicare Part D), you will be subject to permanent financial penalties of an additional 1% per month that you go without coverage. This penalty is added to the premium for the plan you enroll in.
   
   Tip: Don't delay signing up for Medicare Part D if you don't have other prescription drug coverage. Say you delay enrolling for 20 months from when you no longer have creditable prescription coverage; when you finally sign up, your premium will be 20% higher.
2. You may have heard of the so-called "donut hole." If you fall into this "coverage gap," you may have to pay more for medications because there is a temporary limit on what the drug plan will cover for prescription drugs. In 2019, once you and your plan have spent $3,820 on covered drugs, you're in the coverage gap. This amount may change each year.
   
   For generic drugs:
   Medicare will pay 63% of the price for generic drugs during the coverage gap. You'll pay the remaining 37% of the price.
   
   For brand-name drugs:
   You'll pay no more than 25% of the plan's cost for covered brand-name prescription drugs.
   
   Tip: You may want to consider scheduling a Medication Therapy Management consultation with your local pharmacist to explore combinations of prescriptions that may help you maintain your health, but at a lower cost. Then go back and discuss the pharmacist's recommendations with your doctor. All Medicare prescription drug plans (Part D) cover this consultation.

There are lots of health care and financial decisions to make as you transition to retirement. In addition to needing a strategy to generate retirement income and claim Social Security, you may need to develop a strategy to help you bridge the gap until you are eligible for Medicare coverage at age 65. Once you are eligible to enroll in Medicare, be sure to get the health care part of the equation right.

The Medicare system is different in many ways from employer-sponsored health coverage, so take time to understand the basics of Medicare. You and your spouse or partner may have different needs and may be better off choosing different Medicare plans. So do your homework, shop around, and compare prices. Remember, as long as you remain enrolled in the Medicare system, you can make changes every year as your situation and health care options and needs change and evolve.

Tax reform and retirees

New tax deduction and rate rules may mean lower taxes for many retirees.

Fidelity Viewpoints

Key takeaways

• Retirees may benefit from higher standard deductions and lower tax rates.
• The rules for required minimum distributions, Social Security taxes, and charitable IRA distributions have not changed.
• Some deductions have been eliminated or altered.

If you are retired and thinking about your tax situation, you may wonder what last year's tax reform will mean for you. Most of the changes from the tax law went into effect in 2018. The new tax brackets, tax rates, rules for itemized deductions could all impact retirees. At the same time, the law left the rules for capital gains, tax loss harvesting, Social Security, and required distributions unchanged.

Will senior citizens still get a higher standard deduction?

Perhaps the most important tax rule change for many retirees will be the increase in the standard deduction. For older taxpayers who don’t carry a mortgage and have limited deductions, that standard deduction is often more valuable than itemized deductions. That will be the case for even more people, as the tax law roughly doubled the size of the standard deduction.

At the same time, the additional standard deduction for the elderly will still be available. In 2017, the tax rules allowed individual tax filers over age 65 to claim an additional standard deduction of $1,550, and married couples over the age of 65 could increase their standard deduction by $2,500. The new rules would increase these higher standard deductions for people over age 65 to $1,600 per individual and $2,600 per couple.

On the other hand, the new tax code eliminated personal exemptions. Still, many retirees may come out ahead due to the higher standard deduction, rate cuts, and other changes (see case studies below).

What happens to taxes on Social Security?

The new rules would not change the taxation of Social Security benefits. Under current and future laws, Social Security benefits are subject to federal income taxes above certain levels of combined income (see table below). Combined income generally consists of your adjusted gross income (AGI), nontaxable interest, and one-half of your Social Security benefits.

What has changed are the applicable tax brackets—the new law lowered most tax rates and adjusted the income thresholds for the different tax brackets (get details). So the taxes paid on the same Social Security benefit could be lower.

Can IRA withdrawals still be treated as charitable distributions?

The existing rules for IRA distributions to charity have not changed. If you are over age 70½, you may distribute up to $100,000 per year directly to charity from your IRA, and the IRS will count that money as a qualified charitable distribution. The IRS will not include the funds as taxable income, but the distribution can satisfy your required minimum distribution (RMD).

What happens to the deduction for medical expenses?

The new tax rules preserve the deduction for medical expenses, and for the 2017 and 2018 tax years the AGI threshold for that deduction will be lowered from 10% of AGI to 7.5%. That could make this deduction available to more people with significant health issues. In 2019, the threshold will revert to 10% of AGI.

At the same time, the higher standard deduction may make this deduction irrelevant for many people, because the standard deduction may be greater than their total itemized deductions, which would include the itemized deduction for medical expenses.

Do the taxes on investment gains and investment income change?

The short answer is no, the same rules exist for short- and long-term capital gains, qualified and ordinary dividends, and interest income. The rules for tax losses are left unchanged.

However, the tax rates have changed. Short-term capital gains, ordinary dividends, and interest income from most bonds are generally taxed at ordinary income tax rates, so those rates will change along with the new tax brackets (get details).

Hypothetical case studies – the new rules in action
Here are some simplified case studies to see how these changes may play out.

Higher standard deduction
Let’s take a hypothetical couple over age 65 that has already been claiming the standard deduction. Their income included pension payments worth $12,000 a year, and an RMD of $50,000 from a traditional IRA and $24,000 a year from Social Security.

Because their combined income exceeds $44,000, 85% of their $24,000 Social Security benefit is taxable, equal to $20,400.

Their itemized deductions include charitable contributions, state and local taxes, and investment interest expenses totaling $11,000. In 2017, the couple opted for the standard deduction of $12,700, plus the additional standard deduction for the elderly of $2,500, and the personal exemptions totaling $8,100.

In 2017, the couple had a marginal tax rate of 15% and had to pay income taxes on $59,100 of income. In 2017, the federal income tax bill would have been $7,933.

Assuming the same income and deductions, in 2018 the couple would again use the standard deductions and additional deduction for the elderly, but those are now worth $24,000 and $2,600, respectively. The personal exemptions are no longer available.

The increased deductions reduce the income they are taxed on to $55,800. And tax reform lowered the tax rates—they are now in the 12% marginal tax bracket. So their new tax bill is $6,315. That’s a tax cut of about $1,600, or about 20%.

No longer itemizing
Let's look at a hypothetical higher-income couple over age 65 that had itemized their tax returns. This couple earns $50,000 a year from Social Security, withdraws $120,000 a year from a traditional IRA, and still earns $20,000 a year from a position on a board. Their total income was $190,000. Only 85% of Social Security was taxable, or $42,500.

Their mortgage interest, charitable giving, and local tax deductions totaled $18,000. 

In 2017, the couple claimed the personal exemption of $8,100 and itemized deductions worth $18,000, a total of $26,100. That left $156,400 in income, a marginal tax rate of 28%, and a tax bill of $30,676.

In 2018, the new standard deduction would be worth more than the itemized deductions, and the personal exemption is gone. The standard deductions would total $26,600, leaving them with $155,900 in income, but the tax brackets changed and they would now have a marginal income tax bracket of 22%, and a tax bill of $26,177. That’s a tax cut of $4,499, or 15%.

The bottom line

The tax law changed a large number of rules, but many of the provisions most important to retirees were unaffected. Many retirees will see their tax bill go down, but not everyone. The complex changes will affect individuals differently, so be sure to consult a tax advisor.

Key takeaways

• Medicare does not cover all health care expenses in retirement.
• Medigap can help eliminate many Medicare out-of-pocket costs, extend skilled nursing home and hospital coverage, and cover health care costs when traveling abroad.
• You can generally keep your doctors under Medigap.

Jeff and Alison Otto of Framingham, Massachusetts, knew picking a Medicare plan would take time and effort. So they talked to friends, family, and their doctor, and read extensively about their options. What really surprised them was the realization that Medicare would not cover all their health care costs in retirement, including those when traveling abroad.

"We travel a lot and want the security of knowing we can get medical treatment away from home," says Jeff, who with Alison is looking forward to visiting her family in England. So the Ottos decided to buy Medigap insurance to cover health care costs that Medicare does not.

Medicare and Medigap

Since its introduction in 1965, Medicare was designed to cover only a portion of a retiree's health care needs. "Original Medicare" includes 2 parts: Part A, hospitalization coverage, and Part B, physicians and outpatient services. Only selected services are covered, and costs are shared between Medicare and you.

When it's time for you to sign up for Medicare, you have 3 primary options: You can choose to pay what Medicare doesn't cover from your own pocket, buy supplemental insurance, such as Medigap, or buy an all-in-one policy called a Medicare Advantage Plan.

Medigap plans are sold by private insurance companies and are identified by capital letters—A, B, C, D, F, G, K, L, M, and N.¹ Each lettered plan, regardless of the insurance company, must offer the same standardized features. Beneficiaries eligible for Medicare starting January 1, 2020, won't be offered Plan F and Plan C. Beneficiaries who are already in Plan F and Plan C can continue their coverage as it is.

Why buy Medigap?

Here are 4 common reasons retirees choose to add Medigap to traditional Medicare.

1. Medigap can eliminate most of your Parts A and B out-of-pocket costs. Generally, under Medicare, you are responsible for a portion of the cost after deductibles. Your Medigap insurance may pay for your portion of coinsurance, copays, and other costs you owe.
2. Medigap provides some long-term care coverage. With Medicare, you get a limited number of coverage days for hospital stays, time in a skilled nursing facility (for example, after surgery or for rehabilitation services after a fall), or if hospice care is needed. Medigap provides additional time in these facilities, just in case.
3. Medigap covers health care needs when traveling abroad.² If you don't plan to travel frequently, it might be more cost effective to look into travel insurance, including medical evacuation insurance for emergencies overseas. Pricing will depend on where you are going, your age, and how long you will be traveling.
4. Medigap generally lets you keep your doctors. Still, it's important to check with your doctors, specialists, hospitals, and medical facilities to make sure they accept the exact insurance company and Medigap policy you are considering.

When should you enroll in Medigap?

You can enroll in a Medigap plan after you've enrolled in Medicare Part B. Generally, there are 2 time periods when you'll be eligible without any medical underwriting or worry about pre-existing conditions.

• You've turned 65 and enrolled in Part B. In this "initial enrollment period," you have 6 months to select and enroll in a Medigap policy.
• You are older than 65 and losing employer coverage. Once you enroll in Medicare Part B, you'll have 6 months to buy a Medigap policy.

If you miss your initial 6-month enrollment window, insurance companies generally require medical underwriting and you can be denied coverage, or may have to pay a higher premium for a Medigap policy, sometimes substantially higher.

As time passes, you can switch plans based on cost or a different level of coverage, but do so cautiously. Do not stop paying premiums on your existing plan before you find a new plan that will accept you. Switching by choice usually means you'll be subject to medical underwriting. Higher costs or outright denial may be the outcome.

How much Medigap coverage?

When deciding how much gap coverage you'll need, it's important to think about your health situation at age 65 and how healthy you might be at 75, 85, and 95. Steve Feinschreiber, senior vice president at Fidelity Financial Solutions, offers 4 rules of thumb to consider as you shop for Medigap insurance:

1. Don't overestimate the status or durability of your good health. "Consider the practical reality of needing more insurance as you age," advises Feinschreiber. "Even elite athletes run into health problems as they move through the decades."
2. Use your family health history as a guide. "Talk to your doctor about aging and take a look at your family history," says Feinschreiber. "It could be a good guide to help decide the kind of coverage you might want to plan for."
3. Choose your insurance separately from your spouse. Since there is no "joint" or "family" coverage under Medicare, it may be most cost effective for you and your spouse to choose different coverage options from separate insurance companies.
4. Weigh costs vs. coverage. Medigap plans can be quite costly. "If you find the costs for gap insurance are hurting the overall health of your retirement income plan, think about where you might be able to make trade-offs," says Feinschreiber. "It's about finding the right balance so you have sufficient coverage and don't run out of money over the course of your retirement."

Countdown to Medicare

Because choosing a Medigap plan can be rather time consuming and complicated, it's a good idea to get started early, perhaps by age 64, or at least 6 months before you retire. To simplify the process, use our checklist.

Checklist: Medicare and Medigap steps to take before you turn 65

(or at least 6 months before losing your employer health insurance)

Age 64

• Download your "Medicare and You" book from the Medicare website.
• Talk to your employer about coverage options if retiring or if continuing to work.
• Schedule an appointment with your primary care physician to discuss Medicare and Medigap options.
• Use Medicare Plan finder to search and compare various Medigap options in your area.
• Schedule any medical appointments needed, including vision and dental (to maximize your existing coverage).

1–3 months before turning age 65

• Apply online for Medicare Parts A & B.
• Make final decision for a Medigap policy.
• Finalize any details with your employer.
• Look for your Medicare cards to arrive in the mail.

65th birthday month

• Confirm that your coverage is in place for the first day of your birthday month.
• Apply for your Medigap Supplement Insurance.

Hopefully for you, like the Ottos, the transition into Medicare and Medigap will be quite seamless. The Ottos realize that their needs may change over time, especially as they curtail travel plans as they get older. "Although we've seen costs increase over the last 2 years since we enrolled in Medigap, we have the right level of supplemental coverage for now and think we're getting good value at $800 per month for the both of us including dental coverage," said Alison.

How to save money on prescription drugs

Practical tips to help you be a smarter health care consumer and reduce your family’s prescription drug costs.

Fidelity Viewpoints

Key takeaways

• Understand the details of your plan’s coverage.
• Speak frankly with your doctors about cost.
• Make your pharmacist a member of your team.

When it comes to the cost of prescription medications, the prognosis isn’t encouraging. Drug costs continue to climb: Total spending on prescriptions grew more than 16.8% in 2018 and is expected to do the same this year, according to a study by the Department of Health and Human Services.¹ In fact, prescription drugs today account for the largest share of your health plan premium, edging out even physician services (see chart).

Why have costs risen so much? A shortage of raw materials, delays in generics manufactured outside the United States, and high demand for certain drugs all play a role, says Sharon Frazee, a spokesperson for the Pharmacy Benefit Management Institute (PBMI). The average cost to bring a new major drug to market now exceeds $2.5 billion and can take up to 10 years.² People are also using more medications, with nearly half of the population taking at least one prescription medication in the past 30 days and nearly 11% taking five or more.^3,4 High-priced “specialty meds,” while offering new hope for hard-to-treat illnesses, also come at a cost. In a recent survey by the National Business Group on Health, large employers cite the use of specialty drugs to treat such conditions as cancer and hepatitis C as a leading contributor to higher health costs.⁵

To manage these escalating costs, health plans and employers are looking for ways to negotiate lower rates, including tightening their lists of covered drugs (called formularies) and requiring patients to shoulder more of the cost through copayments and coinsurance.⁶ Many employers have moved toward high deductible plans, too, in which enrollees must pay the full cost of their non-preventive prescriptions until they meet a deductible that can range from $1,350 to $6,750 for an individual.⁷ Not surprisingly, 4 in 10 adults worry about being able to afford prescription drugs.⁸ If you are among that group, or you simply want to keep your drug costs down, here are some tips:

1.Understand the details of your plan’s coverage

Review and make sure you understand the basics of your plan, such as the amount of your deductible and what your co-pays or out-of-pocket expenses are for different benefits. Do you have to meet a deductible before your non-preventive drug coverage kicks in? Approximately half of all medical plans have a deductible of some kind, says Frazee. “For others, you pay a copayment or coinsurance right away,” she explains. (See last section.)

Next, ask about your plan’s formulary, or its list of covered drugs. “During open enrollment at the end of the year, check that your plan covers your current medications, and how much of their cost it covers,” says Lisa Gill, deputy content editor for Consumer Reports Best Buy Drugs.

Many plans group the medications they cover into price categories called tiers. Tier-one drugs are typically your plan’s preferred generics, and they require the lowest copayment or coinsurance. If your medication is in a higher tier, you’ll pay a much larger share (see graphic). “Pharmacy benefit managers have moved a lot of drugs to more-expensive tiers,” adds Gill. “So out-of-pocket spending has gone up, even if the drug price hasn’t.”

Another critical question: Does your plan have preferred pharmacies where you’ll be charged a smaller copayment? Last year, 36% of plans had a preferred network, according to the Pharmacy Benefit Management Institute (PMBI). Almost all plans offer a mail-order option that will allow you to fill your prescription for 90 days at a drastically reduced cost.⁹ “People throw away a lot of savings by not filling a 90-day supply,” says Frazee. “A 30-day regimen may cost $10, compared to $17 to $22 for a 90-day supply. Some insurers even offer free maintenance drugs if you get them through mail order.” And some preventive medicines are also free under the Affordable Care Act. For instance, bowel preparation medicine before a colonoscopy is covered for people age 50 to 74.¹⁰

Tip: Find out if your health plan offers an app to help you estimate the cost of filling a prescription. If it does, use your smartphone to access information quickly about your covered meds and their costs. For instance, United Healthcare has a Health4Me app that lets you enter your prescription and get its cost at a network pharmacy or through mail order even before you leave the doctor’s office.

2.Speak frankly with your doctors about cost

“When doctors prescribe a drug, they may choose from several options, but they don’t necessarily know which ones are covered in your plan or how much each option will cost,” explains Dr. Michael Rea, a pharmacist and CEO of Rx Savings Solutions, which helps employees of member companies reduce their drug costs. “Sometimes one drug is clearly best for you. Other times, there may be less expensive alternatives that work equally well.” Bring up cost with your doctor and check your company’s formulary together to determine the lowest-cost solution for you.

Generic drugs typically cost 80% to 85% less than brand-name drugs.¹¹ Even among generics, drugs designed to treat the same condition may vary greatly in price. “The fastest-growing component of savings is from generic to generic,” says Rea. You may save money by moving from one generic to another, just as you would by moving from a brand-name drug to a generic.

In some instances you can save money and treat your condition equally well through the use of something called a pharmaceutical alternative. Unlike a generic, which has the same active ingredients as its brand-name counterpart, alternative medications use different active ingredients to treat the same condition.¹²

Alternative medications aren’t always an option, but when they are, they can provide big savings. Take the brand-name medication Crestor, which is used to treat high cholesterol. A 30-day supply of Crestor 5mg may cost around $222, according to Rx Savings Solutions. Substituting the generic Rosuvastatin 5mg could reduce the cost to $35.92 per month, but switching to a drug alternative such as Simvastatin 40 mg may cost as little as $1.12 per month—a savings of more than $2,500 a year.¹³ Be sure to talk to your doctor about what might work best for your particular situation.

Sometimes taking a low-cost drug before using a higher-cost one isn’t a matter of choice. In fact, 83% of insurers require so-called “step therapy” for at least 1 class of drugs, says Frazee. In step therapy, you and your doctor try lower-cost medications first, and move on to more expensive alternatives only if necessary. This strategy is especially common for medications that treat common conditions like diabetes and high cholesterol, says Frazee.

Tip: Read Viewpoints: How to talk to your doctor—and save money and research prescription drug costs and alternatives on Consumer Reports Best Buy Drugs™.

3.Make your pharmacist a member of your team

"Pharmacists can be some of your best advocates for making sure you get the best price,” says Gill. Instead of simply handing over your insurance card so the pharmacist can fill your prescription, take a few minutes to ask if there is a way you can save money. “Taking a few extra minutes to talk to your pharmacist could potentially save you thousands," says Frazee.

For instance, pharmacists can suggest such cost-reducing options as changing from a liquid to a capsule, taking 2 different prescriptions rather than 1 combination drug, or getting a higher-dose pill and splitting it. “In many cases, doctors don’t know if a medicine is scored and can be easily split,” says Dr. Heather Free, a pharmacist and spokesperson for the American Pharmacists Association.

Pharmacists also can help you determine if it would be better to use your insurance plan or pay cash. For a brand-name drug, your insurer’s negotiated price usually will be lower than you’d spend in cash, says Rea. Many pharmacies offer discount cards, too. However, you should be aware that when you use a discount card, your payment doesn’t count toward your deductible. If your family goes to the doctor a lot and tends to meet your annual deductible, a pharmacy discount card may not be a good option.

The app OneRx works with your insurance to help you determine how to get the best price. Take a photo of your insurance card, and OneRx will show estimated copayments based on your plan. The app also shows cash prices, which in some cases may be less than your copay.

Of course, getting the best price isn’t the only consideration when purchasing medications. “Once you find a pharmacy that gives you a good deal on your most expensive medication, move all of your medications to that pharmacy,” says Gill. The reason: If you take several medications, one pharmacy should oversee them to help prevent the possibility of harmful drug interactions.

While drug costs may continue to climb, you can save a bundle if you take the time to be a more careful consumer of health care, says Gill. Before filling a prescription, ask your doctor and your pharmacy if there are ways to keep your costs down. Keep tabs on your health plan benefits too, particularly during open enrollment. “People often assume that their plan will remain the same,” says Gill, “but covered benefits often change. If you don’t know the new details of your prescription drug coverage, you could end up spending a lot more in out-of-pocket expenses than you need to.” That’s money you could put in your pocket—or, better yet— in your retirement plan, where it could help you live a happier, healthier future.

Tip: When shopping at online pharmacies, use only US websites that have the blue and red “VIPPS” seal, recommends Consumer Reports. VIPPS, which stands for Verified Internet Pharmacy Practice Site, is awarded by the National Association of Boards of Pharmacy to online pharmacies that meet strict criteria, such as the use of specific practices related to quality assurance and customers’ right to privacy.¹⁴

How to grow old in your own home

Know these 6 success factors to help you age in place.

Fidelity Viewpoints

Key takeaways

• Develop a housing strategy that will serve your needs as you age. Staying in your home with modifications can be less expensive than moving to an assisted-living community.
• Run a complete safety check, looking for potential hazards, including area rugs that may cause you to trip, loose stair railings, or furniture that obstructs pathways.
• Avoid isolation. Find ways to stay in contact with friends, family, and neighbors on a daily basis—both via technology and in person.

When Marguerite Sullivan's spouse passed away, the 78-year-old had no interest in moving. She’s healthy, has many friends, and her 2 sons live nearby. Plus, she’s a confident driver and gets herself to doctor’s appointments and the grocery store.

Those are all important prerequisites for people who want to stay in their homes as they grow older, or "age in place."

According to an AARP survey , nearly 90% of those over age 65 want to stay in their homes as long as possible. But Sullivan and others like her "need to have a housing plan—and a support system—in place to ensure that they’re living safely and independently," explains Suzanne Schmitt, vice president for family engagement at Fidelity.

Here are 6 things that aging singles or couples—and their children, other family members, or caregivers—should keep in mind when assessing the living situation. For more detail, read our "Aging well: A planning, conversation, and resource guide."

1. Develop a real estate and housing strategy

As you plan for living in your later years in retirement, you should have a strategy for how to leverage any real estate assets along with a plan to support your need for future housing.

Real estate is an asset often used to fund retirement and to help pay for long-term health care expenses. Some people find it necessary to sell the family home to pay for higher levels of care or senior living accommodations. Some decide to sell after a spouse dies. Others may have a family member who moves back in to help take care of both the aging parent and the property. Whatever your situation, it makes sense to work with a financial advisor to help determine the role of real estate in your overall financial planning (see Senior Housing Options chart below).

"As people age, housing and caregiving go hand in hand. If your loved one will require higher levels or care, you’ll need a housing strategy that can serve their needs," says Schmitt. "Keep in mind that what works today in terms of independent living, living with relatives, assisted living, or skilled nursing care may not work for you or your loved one indefinitely."

2. Explore the benefits of staying put

There are many reasons why aging in place can be a win. For starters, staying in your home can be less expensive than moving to an assisted-living community. There are the upfront costs of moving, an often steep entrance fee, and monthly payments for room and board, which can easily top $3,000 a month.

Even more important are the psychological payoffs of not moving away from one’s friends, medical professionals, and faith community. Though these factors are hard to place a financial value on, they are a vital component of healthy aging.

"The single most predictive factor of whether you’re going to age well—meaning be able to be independent and live a long and healthy life—isn't money," says Schmitt. "And it isn’t even necessarily your health. It’s your social connections, which may get lost if you move."

3. Do a home safety check

The first step in an "aging in place" plan is to run a complete safety check of your home. "Many people don’t know what to look for," says Schmitt. "There are some hazards that you might take for granted—for example, furniture obstructing pathways or stairs."

Sullivan’s children did just that. They walked around her house with an eye for any potential hazards that might cause trouble should her vision or mobility begin to deteriorate. Then they hired a home modification professional to help make needed changes.

The good news is that many of the improvements that may make it easier to stay in your house—such as raising electrical outlets to make them more accessible, and installing brighter outdoor lighting—aren’t expensive.

Sullivan’s home was retrofitted by installing secure handrails alongside the stairs to the front door, switching doorknobs to levers, adding automatic lights to hallways, removing rugs that might become tripping hazards, and placing grab bars in the shower.

"There are plenty of easy and relatively low cost options to modify a home," says Schmitt. "The sooner you start preparing, the better."

4. Assess transportation

"Driving may be your lifeline and independence," Schmitt points out. "Coming to the ‘I don't think I can drive’ moment is tough, but it can’t be avoided." If you are at the point that you can no longer drive or walk to the grocery store or reach other important services, consider other transportation options.

If you have access to public transit, great. But it doesn't exist in a lot of places. Meanwhile, the driverless car may still be a few years away. So you may need to make other arrangements, such as ride sharing with friends and neighbors, or transportation assistance that many companion-care services offer. When it comes to groceries and getting things like prescriptions filled, automatic delivery or online delivery can be a great option. A family or friend can help manage orders and accounts and can track order history to help make sure you are getting what you need.

Senior Housing Options

When assessing the option that's right for you, consider the following:

1. Health: How is your overall health?
2. Activity level: How active and independent are you?
3. Life stage and style: What kinds of access and activities are important to you?

5. Ensure a supportive community or network

Isolation can be a stumbling block to aging well. And it can creep up slowly. No matter how safe the inside of a home is, if there isn’t enough interaction with a community, a plan can fall apart.

"Part of aging in place successfully is being able to stay connected, and not fall into the depression that many people experience because they are isolated," says Schmitt.

Getting comfortable on a computer so you connect online with your children, grandkids, and others is a good strategy. You might also investigate some of the companionship services available in the community, through websites such as Caregiving.org or tap into local Council on Aging resources.

Pull together a list of friends and relatives who can take you to a doctor’s appointment, or someone to help with errands. If your family doesn’t live nearby, you may want to have a pipeline to neighbors you can call for periodic checkups, especially if you live in an area of the country that experiences power outages and severe weather.

A growing number of communities use the "village" concept for services and support to seniors. The idea, originating in the Beacon Hill neighborhood of Boston, is to create a nonprofit organization that arranges for services—including transportation, home repair, and social activities—for a fee.

6. Make it an ongoing process

"One of the living in retirement myths is that people think they can make a plan once, and they’re done," says Schmitt. "This is something that needs to be reviewed regularly by you and your family member or caregiver."

What if you experience a health event, such as a bout of pneumonia that requires a lengthy hospital stay, or a fall that affects your cognitive ability or mobility? These are going to be very important points when you have to take a look at whether the plan you put in place is still going to work going forward.

Are you a concerned friend or family member? If so, check the home of your loved one after it is retrofitted and keep an eye open to see how your loved one is adapting to the changes. You may want to look out for any unexplained bruising on the aging person’s arms or legs. "It can be an indicator that they may be having trouble moving around," Schmitt notes. Also, look around the home when you visit. Is there a pile of mail? Are things in disarray? Check the refrigerator. Is it bare? Is food spoiling?

"In an ideal world, we will age gracefully in place, but that doesn't happen very often without careful preparation," says Schmitt. "Take the time to sit down and get the aging-in-place conversation going."

Working after 65? Avoid 5 Medicare pitfalls

Learn how Medicare works if you are still employed after 65.

Fidelity Viewpoints

Key takeaways

• Your health insurance generally terminates when you leave your job. Apply for Medicare 2 to 3 months before you end employment to avoid a gap in coverage.
• If you enrolled in Social Security before your 65th birthday, you will be enrolled automatically in Medicare Parts A and B. However, if you are still covered by an employer's health plan, you could be paying for 2 plans.
• Speak with your HR department to coordinate the timing and coverage options between your employer plan and Medicare as you approach age 65.

As you turn age 65, your mailbox will likely be full of birthday cards, well wishes, and a deluge of information packets on Medicare, the government health care program for people age 65 and over. But what if you're not ready to retire? Do you keep your employer-sponsored health care coverage or go for Medicare?

Today, more than 23% of baby boomers* are choosing to continue to work, either part-time or full-time, beyond age 65. Although most retirees enroll in Medicare at age 65, if you're still working, you have more options to consider for quality health care coverage—and the information in the Medicare brochure you receive from Uncle Sam may not be suitable for your situation because Medicare does not know whether you are still working.

There's a lot to keep track of: enrollment deadlines, health care coverage options, and possible penalties to avoid. But with some planning and homework, you can avoid the common pitfalls if you continue to work beyond age 65.

Medicare basics

Because Medicare works very differently from employer health insurance, there are lots of things to learn. If you continue to work after reaching age 65, you technically become eligible for Medicare, but you may or may not want to enroll right away.

Here's the dilemma: Your employer must continue to cover all eligible workers, regardless of age, under its group health insurance—yet, Medicare is telling you to sign up now.

It may not be clear that you only need to sign up for Medicare once—at the point when your employer group coverage is ending—so here's the 2-part general rule for when to join Medicare:

1. Enroll during your Initial Enrollment Period (IEP)—3 months before to 3 months after the month you turn age 65; but only if
2. You also lose access to your employer group health insurance coverage.

If you don't enroll during your IEP because you have employer group health insurance coverage, you can enroll at any time you still have employer group coverage or within 8 months after the month your employment or group coverage ends—whichever happens first. You'll need to know what your coverage options will be at age 65 and adjust your Medicare enrollment to meet your needs.

One other situation that can cause confusion occurs if you leave your job with a "retiree" health care plan or coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985). Neither of these health insurance options is considered employer group health insurance coverage, so you would be classified as a "former worker." In this case, you would need to enroll in Medicare during your IEP.

Who pays first?

As with many laws and regulations, the devil is in the details. In the case of health insurance, you need to know who the "primary payer" is—the party responsible for paying your medical bills first and covering the majority of the costs.

• Medicare becomes the primary payer for your health care expenses once you reach age 65 and lose your employer group coverage (assuming you work for an employer with more than 20 employees)
• If you continue to work, your employer's insurance pays first
• And, if you've already left the company and have a retiree plan or COBRA, those plans typically become the secondary payer the month you turn age 65. So, if you don't have Medicare in place already, you become the primary payer.

If you work for an employer with fewer than 20 employees, you need to enroll in Medicare at age 65, during your IEP. Medicare becomes the primary payer and your employer's insurance becomes secondary.

5 pitfalls to avoid when working past age 65

1. Not doing your homework: If you plan to work past age 65, or if your spouse or partner continues to work and covers you, you've got some research to do to make sure you know your options, the costs, and any restrictions.

• Your employer is required to offer you coverage, but is that your best option?
• Is it more expensive to stay in your employer plan or join Medicare?
• Which plan offers you the best coverage for your health needs?
• Can your spouse or partner remain in your employer’s plan if you decide to leave?

Tip: Review your health benefits documents and schedule a call with your company's HR or benefits group to discuss your insurance options. Read the information on Medicare.gov about working after age 65 and the coordination of benefits.

2. Failing to notify Social Security that you want to delay Medicare: If you enrolled in Social Security before your 65th birthday, you will be enrolled automatically in Medicare Parts A and B. However, if you are still covered by an employer's health plan, you could be paying for 2 plans.

• If you signed up for Medicare as part of your Social Security application process (online, in person, or over the phone), you'll need to contact the Social Security Administration by phone or by visiting your local office to explain that you do not want Part B at this time—that's because Social Security manages the administration of Medicare.
• If you automatically receive your Medicare card, you'll need to follow the instructions that came with the card to cancel your Part B coverage. Generally, there is a short time frame of several weeks to return your Medicare card and cancel enrollment.
• If you haven't enrolled in Social Security by age 65, there is no automatic turn on of your Medicare benefit—you just continue as an active employee, and you can enroll in Social Security at a later date.

Read Viewpoints on Fidelity.com: Social Security tips for working retirees.

3. Enrolling in Medicare Part A, but losing the ability to contribute to your health savings account (HSA): Many employees with access to HSAs have funded their accounts hoping that they could use their HSA dollars to pay for qualified medical expenses in their retirement.

But here's the glitch: If you enroll in any part of Medicare, you lose the ability to continue contributions to your HSA. Some people who continue to work after age 65 decide to enroll only in Medicare Part A because they think it's free and that it may provide some secondary insurance coverage in the event of hospitalization; however, this move may have unintended consequences.

"If you have both employer health insurance and Medicare Part A, Medicare becomes the secondary payer," explains Steven Feinschreiber, senior vice president of Fidelity's Financial Solutions Group. "Medicare coverage typically kicks in after the employer's insurance and covers unpaid expenses up to Medicare's cost limit." He continues, "In general, employer insurance pays more to health care providers and hospitals than Medicare, so you may not get any cost savings benefit by having both plans—and you've lost the ability to contribute to your HSA."

Tip: Decide which option is more important to you: the ability to continue to contribute to your HSA or enrolling in Medicare at age 65, because you cannot do both. When you enroll in Medicare after turning age 65, your actual coverage becomes effective up to 6 months earlier. Therefore, you'll want to end contributions to your HSA at least 6 months prior to leaving your job. This will help you avoid a possible tax penalty for making ineligible contributions to your HSA after your Medicare coverage has kicked in.

4. Not coordinating the timing of your Part B with losing your employer group health plan coverage. As you leave your job, your health insurance generally terminates at the end of that month. It's important to apply for Medicare a couple of months before you end employment so that your coverage will be in place on the first month of your retirement. Otherwise, you may have a gap in health insurance coverage leaving you fully responsible for paying any medical expenses you incur during this period.

For example, say you are age 68 and retire on March 15. The last day of your employer health coverage would be March 31. If you enrolled in Medicare in advance of your retirement, Medicare coverage would begin on April 1. If you wait until after you retire to enroll in Medicare, you will have a coverage gap. Your Medicare coverage could begin on May 1 or as late as December 1, and you would be responsible for paying any medical bills that you incur during those months without health care coverage.

Tip: Fill out the appropriate Medicare forms to enroll in Part B as your employer coverage is ending (Forms CMS-40B and CMS-L564). Do so about 3 months before your last day on the job.

5. Missing the "open enrollment period" to buy a Medigap plan after employer health insurance ends. The timing for buying supplemental insurance such as a Medigap policy is different from enrolling in Medicare. If you decide to do so, you'll have 6 months to buy a Medigap plan without underwriting once you have enrolled in Part B and have been assigned your Part B plan number. You may be able buy a Medigap plan after the open enrollment period, but, generally, you then become subject to medical underwriting, and the insurance company can decline to sell you a policy or can charge you more. For more on Medigap options, read Viewpoints on Fidelity.com: Medigap 101.

Learning the ins and outs of Medicare and getting the timing just right is each individual's responsibility. Do your homework, understand your options, ask for help if you need it, and make sure you receive confirmation of your enrollment.

"Talking with your benefits department is one of the most important steps you can take if you are planning to work after age 65," Feinschreiber advises. "You don't want to be in a situation where you have a gap in your primary insurance coverage. Make sure you know how your health insurance will work after age 65, and coordinate the timing between your employer plan and Medicare."

5 ways to help protect retirement income

These rules of thumb can help keep your retirement on track.

Fidelity Viewpoints

Key takeaways

• Plan for health care costs.
• Expect to live longer.
• Be prepared for inflation.
• Position investments for growth.
• Don't withdraw too much from savings.

If you're approaching the off-ramp to retirement—or already there—it's important to think about protecting what you've saved and helping to ensure that you'll have enough income throughout your retirement. After all, you worked hard to get to retirement. So you want to be able to enjoy it without having to worry about money. That means thinking ahead and planning for a retirement that may last 30 years or longer.

Here are 5 rules of thumb to help manage some things that can affect your income in retirement.

1. Plan for health care costs

With longer life spans and medical costs that historically have risen faster than general inflation—particularly for long-term care—managing health care costs is important for retirees. Retirement planning conversations should include a discussion of the impact long-term care costs have on individuals and their family’s future.

According to Fidelity's annual retiree health care costs estimate, the average 65-year-old couple retiring in 2019 will need an estimated $285,000 to cover health care costs during their retirement, and that is just using average life expectancy data.¹ Many people will live longer and have higher costs. And that cost doesn't include long-term care (LTC) expenses. Having a dedicated pool of monies for long-term care expenses may be an important consideration to cover long-term care expenses, ultimately protecting your retirement income.

As reported by the US Department of Health and Human Services, about 70% of those aged 65 and older will require some type of LTC services—either at home, in adult day care, in an assisted living facility, or in a traditional nursing home.² According to the Genworth 2018 Cost of Care Survey, the average cost of a semiprivate room in a nursing home³ is about $89,297 per year, assisted living facilities⁴ average $48,000 per year, and home health care homemaker services⁵ are $48,048 a year.

Consider long-term-care insurance: Insurers base the cost largely on age, so the earlier you purchase a policy, the lower the annual premiums, though the longer you'll potentially be paying for them. It is also important to research the strength of the company you select, as well as investigate other potential options for funding LTC costs.

Read Viewpoints on Fidelity.com: Long-term care: Options and considerations

If you are still working and your employer offers a health savings account (HSA), you may want to take advantage of it. An HSA offers a triple tax advantage:⁶ You can save pretax dollars, which can grow and be withdrawn state and federal tax-free if used for qualified medical expenses—currently or in retirement.

Read Viewpoints on Fidelity.com: 3 healthy habits for health savings accounts

2. Expect to live longer

As medical advances continue, it's quite likely that today's healthy 65-year-olds will live well into their 80s or even 90s. This means there's a real possibility that you may need 30 or more years of retirement income. And recent data suggests that longevity expectations may continue to increase. People are living longer because they're healthy, active, and taking better care of themselves.

Without some thoughtful planning, you could outlive your savings and have to rely solely on Social Security for income. And with the average Social Security benefit for a retired worker currently at just over $1,419 a month, it may not cover all your needs.⁶

Read Viewpoints on Fidelity.com: Longevity and retirement and How to get the most from Social Security

Consider annuities: To cover your income needs, particularly your essential expenses  (such as food, housing, and insurance) that aren't covered by other guaranteed income like Social Security or a pension, you may want to use some of your retirement savings to purchase an income annuity. It will help you create a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.⁷

Read Viewpoints on Fidelity.com: Smart retirement income strategies

3. Be prepared for inflation

Inflation can eat away at the purchasing power of your money over time. Inflation affects your retirement income by increasing the future costs of goods and services, thereby reducing the future purchasing power of your income. Even a relatively low inflation rate can have a significant impact on a retiree's purchasing power.

Consider cost of living increases: Social Security and certain pensions and annuities help keep up with inflation through annual cost-of-living adjustments or market-related performance. Choosing investments that have the potential to help keep pace with inflation, such as growth-oriented investments (e.g., stocks or stock mutual funds), Treasury inflation-protected securities (TIPS), real estate securities, and commodities, may also make sense to include as a part of an age-appropriate, diversified portfolio that also reflects your risk tolerance and financial circumstances.

4. Position investments for growth

Overly conservative investments can be just as dangerous as overly aggressive ones. They expose your portfolio to the erosive effects of inflation, limit the long-term upside potential that diversified stock investments can offer, and can diminish how long your money may last. On the other hand, being too aggressive can mean undue risk of losing money in down or volatile markets.

An investment strategy (asset mix) that seeks to balance growth potential and risk (return volatility) may be the answer. You should determine—and consistently maintain—an asset mix that reflects your investment horizon, risk tolerance, and financial situation.

The sample target investment mixes below show illustrative blends of stocks, bonds, and short-term investments with different levels of risk and growth potential. With retirement likely to span 30 years or so, you'll want to find a balance between risk and growth potential.

Consider diversification: Build a diversified mix of stocks, bonds, and short-term investments, according to how comfortable you are with market volatility, your overall financial situation, and how long you are investing for. Doing so may provide you with the potential for the growth you need without taking on more risk than you are comfortable with. But remember: Diversification and asset allocation do not ensure a profit or guarantee against loss. Get help creating an appropriate investment strategy by working with a Fidelity advisor or utilizing our Planning & Guidance Center.

5. Don't withdraw too much from savings

Spending your savings too rapidly can also put your retirement income at risk. For this reason, we believe that retirees should consider using conservative withdrawal rates, particularly for any money needed for essential expenses.

We did the math—looking at history and simulating many potential outcomes—and landed on this guideline: To be confident that savings will last for 20–30 years retirement, consider withdrawing no more than 4%–5% from savings in the first year of retirement, then adjust that percentage for inflation in subsequent years.

Consider a sustainable withdrawal plan: Work with a Fidelity advisor to develop and maintain a retirement income plan or consider an annuity with guaranteed lifetime income⁷ as part of your diversified plan, so you won't run out of money, regardless of market moves.

Read Viewpoints on Fidelity.com: How can I make my retirement savings last?

You can do it

After devoting many years to saving and investing for your retirement, switching from saving to spending that money can be stressful. But it doesn't have to be that way if you take steps leading up to and during retirement to manage these 5 key rules of thumb for your retirement income.

No 401(k)? How to save for retirement

Don't worry—there are tax-advantaged options for people without a 401(k).

Fidelity Viewpoints

Key takeaway

• Freelancers and independent contractors have some of the same retirement plan options as small-business owners including the IRA, SEP IRA, SIMPLE IRA, and self-employed 401(k).

When it comes to saving for retirement, the advice is usually, "Save in your 401(k)." But lots of people don't have a 401(k), 403(b), or other workplace retirement savings account. About 30% of working households don't have access to workplace retirement plans, according to data from the Department of Labor.¹

If you are one of the millions of freelancers, entrepreneurs, workers with a side gig—or an employee with no workplace retirement plan—you can still save for retirement. As long as you have some earnings, you have some tax-advantaged saving options.

IRA

You've probably heard of IRAs, short for individual retirement accounts. If not, or you're not sure how they work, here are the basics. An IRA is a type of retirement savings account that comes with some nice tax benefits, including tax-free or tax-deferred compounding. Other tax breaks depend on the type of IRA you choose—the basic types are a traditional IRA and a Roth IRA.

Who can open one?
Anyone with earned income (including those who do not work themselves but have a working spouse) can open an IRA. You can contribute up to $6,000 in 2019 ($7,000 if you’re age 50 or older). The Internal Revenue Service (IRS) periodically adjusts the contribution limit for inflation.

There are some income limitations on both traditional and Roth IRA contributions.^2,3

How it works
Contributions to a traditional IRA might be fully deductible, partially deductible, or entirely nondeductible depending on whether you and/or your spouse are covered by a retirement plan through your employer. If a taxpayer is covered by a retirement plan at work, their income determines whether their IRA deduction will be limited. Retirement plans at work include 401(k) plans, 403(b) plans, and pensions.

Deductibility of traditional IRA contributions depends on your modified adjusted gross income (MAGI). Deductibility is phased out at applicable MAGI levels.

After age 59½, you can withdraw contributions and earnings without penalty—but your withdrawals will be taxed as ordinary income. An exception to this occurs if your contributions were not deducted from your taxable income when you made them. In that case, the portion of your withdrawals that corresponds to the nondeductible contributions will be tax-free. After age 70½ you can no longer contribute to the traditional IRA and must begin taking required minimum distributions (RMDs).

A Roth IRA contribution does not give you a current tax deduction—contributions are made with after-tax money. But when you withdraw money after age 59½ (provided that the 5-year aging requirement has been satisfied), no taxes are due on earnings or contributions as long as you have met the 5-year holding requirements for the account. The Roth IRA does allow you to withdraw up to the total amount of your contributions from the account at any time tax-free and penalty-free—but not the earnings on these contributions. If you have earned income, you can contribute up to that amount past age 70½—with no required minimum distributions at any time during the lifetime of the original owner.

Who it may help
The IRA—either a traditional or Roth IRA—is good for nearly everyone with an earned income, or a nonworking spouse. High earners who have, or whose spouses have, workplace plans may not be able to get a deduction for a traditional IRA contribution, and those who have high incomes may not qualify for a Roth contribution, either—but they may be able to convert a traditional IRA into a Roth IRA.^2,3 Other than that, the only drawback is, that compared with other retirement accounts, the IRA has a relatively low contribution limit.

Things to keep in mind
The deadline for contributing for 2019 is the tax deadline next year—April 15, 2020. Every tax year, you get about 15½ months to get your contribution into the account. The deadline is generally set in stone—getting an extension on your taxes won't give you any extra time to contribute to a traditional or Roth IRA.

Though there is typically a 10% penalty imposed on early withdrawals, some situations like disability and first-time home purchases qualify for a waiver of the early withdrawal penalty. Visit IRS.gov for more information about qualified early distributions.

Read Viewpoints on Fidelity.com: Traditional or Roth account —2 tips to choose

SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA. Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA.

Who can open one?
The SEP IRA is available to sole proprietors, partnerships, C-corporations, and S-corporations.

How it works
The SEP IRA, like a traditional IRA, allows contributions to potentially be tax-deductible—but the SEP IRA has a much higher contribution limit. The amount you can put in varies based on your income. In 2019, the most an employer can contribute to an employee's SEP IRA is either 25% of eligible compensation or $56,000, whichever is lower. (Note that the rules on determining eligible compensation, which are different for self-employed and employee SEP participants, can be complex. Consult a tax expert or the IRS website for details.)

If you have employees, you have to set up accounts for those who are eligible, and you have to contribute the same percentage to their accounts that you contribute for yourself. Employees cannot contribute to the account; the employer makes all the contributions.

The employer contributions to a SEP IRA won't affect your ability to contribute to an IRA as an individual. So, depending on your eligibility, you could still contribute to a traditional or Roth IRA.

Who it may help
This account works well for freelancers and sole entrepreneurs, and for businesses with employees (as long as the owners don't mind making the same percentage contribution for the employees that they make for themselves). The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are generally no tax forms to file.

Things to keep in mind
Catch-up contributions aren't allowed with the SEP IRA, nor are employee deferrals. As the employer, you can contribute up to 25% of each employee's eligible compensation, up to $56,000 per employee—as long as the same percentage is contributed for all employees.

The deadline to set up the account is the tax deadline—so for 2019 it will be April 15, 2020. But, if an extension is granted for filing the employer's tax return, the employer has until the end of the extension period to set up the account or deposit contributions.

• Read Understanding the SEP IRA for more information.

Self-employed 401(k)

A self-employed 401(k), also known as a solo 401(k), can be an option for maximizing retirement savings even if you're not making a ton of money. Before-tax and after-tax employee contributions are technically allowed in a self-employed 401(k) but not all financial institutions offer the option.

Who can open one?
If you are self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A spouse who works in the business can participate as well.

How it works
You get 2 opportunities for contributing to a self-employed 401(k)—first as the employee, and again as the employer.

As the employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $19,000 in 2019. Once you're over age 50, you can also make catch-up contributions—for 2019 you can save an extra $6,000, for a total of $25,000.

As the employer, you can contribute up to 25% of your eligible earnings The employer contribution is always made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.)

Who it may help
The self-employed 401(k) is another account that offers a high potential contribution limit for self-employed people. The total that can be contributed for employee and employer is $56,000, plus an additional $6,000 for people age 50 and over.

Things to keep in mind
The self-employed 401(k) can be a little complicated to run. After the plan assets hit $250,000, you have to file Form 5500 with the IRS.

The deadline for setting up the plan is the end of the fiscal year, generally the last business day of the year, which in 2019 is Tuesday, December 31. You can make employer contributions to the account until your tax-filing deadline for the year, including extensions.

• Read Understanding the Self-Employed 401(k) for more information.

SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is another option for people who are self-employed. Like a 401(k), this account offers tax-deferral and pretax contributions, plus an employee contribution and an employer match.

Who can open one?
Anyone who is self-employed or a small-business owner can open a SIMPLE IRA. Small businesses with 100 employees or fewer can also open a SIMPLE IRA plan.

How it works
Like the self-employed 401(k), you get 2 chances to contribute.

• As the employee, you can contribute up to 100% of your compensation, up to $13,000 in 2019.
• As the employer, you must either put in a 3% matching contribution or a 2% non-elective contribution. The latter is not contingent on the employee contribution, the way a matching contribution to a 401(k) typically is.

But be aware that a SIMPLE IRA can require the employer to make contributions to the plan even if the business has no profits.

Who it may help
The SIMPLE IRA is an inexpensive plan for businesses with fewer than 100 employees. It also allows for salary deferrals by employees and there are no tax forms to file.

The SIMPLE IRA also allows those age 50 and over to save an additional $3,000 a year.

Things to keep in mind
The deadline to set up the plan is October 1. You can make matching and nonelective contributions until the company's tax filing deadline—including extensions.

• Read Understanding the SIMPLE IRA for more information.

Pick a plan and start saving

There's a wide variety of retirement saving options. After evaluating your choices, get started saving. Time is one of the most important factors when it comes to building up your retirement fund. While you're young, time is on your side. Don't let the absence of a workplace retirement plan like a 401(k) stand in your way. There are plenty of other retirement savings options—pick a plan and start saving and investing.

Social Security strategy for women

Women face unique Social Security challenges: These tips can help.

Fidelity Viewpoints

Key takeaways

• Women face unique challenges when it comes to Social Security benefits.
• Getting the most from your benefits requires strategic thinking and taking advantage of available opportunities.
• Timing to take benefits, marital status, and retirement plans all play a key role in shaping your Social Security strategy.
• Making informed decisions about Social Security can help you make the most of your money in retirement.

When you play your cards right with Social Security, you get the most from your benefits. When you don't, you end up with money left on the table.

And because women, on average, outlive men and are more likely, as they get older, to be single and dependent on one income, they need to have a good strategy for Social Security, which can play out differently for women than for men:¹

• Women age 65 or older have an average annual Social Security income of $12,587, compared with $16,590 for men.
• Almost 49% of elderly unmarried women rely on Social Security benefits for 90% or more of their income.
• In contrast, Social Security benefits provide only 35% of the income of unmarried elderly men, and only 30% of the income of elderly couples.

Keep the following in mind to optimize your Social Security strategy:

Timing: It can pay to delay

The biggest factor in making the most of your Social Security benefits is deciding when to take them.

You can start receiving reduced benefits at age 62, rather than waiting until your full retirement age (FRA), which ranges from 65 to 67, depending on your birth date (See your full retirement age).

• If you take Social Security benefits before your FRA, the amount of your monthly benefit payment will be reduced.
• If you delay collecting benefits beyond your FRA, the amount of your monthly benefit will increase monthly until you reach age 70.

To strategize timing around taking Social Security, consider factors such as family longevity, how much money you'll need for retirement, and other income sources.

If you can delay taking benefits until your FRA or age 70, and you live into your 80s or 90s, you could benefit from doing so. If you have a savings shortfall, consider delaying retirement by a few more years or working with an advisor to create an income bridge from savings or other assets.

Bottom line: If you're in good health and have sufficient savings, it may be better in the long run to wait until your FRA or longer to begin taking Social Security.

Investing for the future

According to Fidelity's 2018 Women and Investing Study,² only 29% of women see themselves as investors—but to build financial security in your golden years, it helps to think like an investor and to strategize about Social Security.

"When it comes to planning their retirement income, some women could be doing a lot better," says Ann Dowd, CFP^®, a vice president at Fidelity Investments. Fidelity's study found that 56% of women are not investing outside of retirement, and may be leaving money on the sidelines by keeping it in cash.

Dowd adds, "Women who claim Social Security at the earliest possibly age of 62 may be leaving money on the table. For every year you delay claiming Social Security past your FRA, you increase your annual benefit by 8%— a guaranteed source of income that is also adjusted for inflation over time."

Claiming a spouse's benefit

Your marital status also plays a significant role in your benefits strategy:

Married women may have the option of claiming benefits based on their own work record or 50% of their spouse's benefit. For couples with big differences in earnings, claiming the spousal benefit may be better than claiming your own.

Divorced women may be able to receive benefits on their former spouse's record—even if the spouse has remarried!—but only if: the marriage lasted 10 years or more; the claimant is unmarried and age 62 or older; the former spouse is entitled to Social Security retirement or disability benefits; and the benefit you're entitled to receive based on your own work is less than the benefit you'd get based on your ex-spouse's work.

Widowed women are eligible to receive their late spouse's Social Security payment as a survivor benefit, provided it's higher than their own monthly amount. The surviving spouse can claim the higher monthly benefit for the rest of their life. So, for a couple with at least one member who expects to live into their late 80s or 90s, deferring the higher earner's benefit may make sense. If both members of a couple have serious health issues and therefore anticipate shorter life expectancies, claiming early may make more sense.

To find out more about claiming Social Security based on your spouse's benefit, read Viewpoints on Fidelity.com: Social Security tips for couples

Get Social Security, keep working

You can collect Social Security even if you are still working or earning self-employed income—with a few important caveats:

• If you collect before your FRA, you can earn up to $17,040 in 2018 without any impact on your benefit.
• If, however, you exceed the earnings limit before your FRA, your benefits will be reduced by $1 for every $2 you earn over $17,040. In the year in which you reach FRA, $1 is deducted for every $3 you earn above $45,360 (the limit in 2018).

Once you reach FRA, there is no penalty for working and claiming Social Security at the same time, and your benefits will not be adjusted for earned income. Also, once you reach FRA, the benefit would be adjusted up to account for benefits withheld due to earlier earnings.

However, that's only part of the story. If you continue to work, you don't have to live on your savings, and it gives you the opportunity to keep building retirement savings. Keep working and you can contribute to a 401(k) or other tax-deferred workplace savings plan, or an IRA. Lastly, you can also make catch-up contributions into your 401(k) or IRA, which allows you to set aside larger amounts of money for retirement.

Tip: Your Social Security benefit is based on your top 35 years of qualifying income. If you have been out of the workforce for a number of years—say, to raise a family—or you expect to rely heavily on Social Security in retirement, consider working a few extra years, which can lead to additional savings and greater retirement assets.

Make leaving your job its own decision

Although some 39% of women claim Social Security early at age 62,³ it may not be the best financial decision for them longer term. "Many women make the mistake of coupling their decision to leave the workforce with their Social Security claiming strategy," says Ann Dowd.

"By age 60, you may decide it's time for a change after many years of working and raising your family, but don't think about Social Security as a way to quit your job early," she advises. "Make leaving your job its own decision. The good news is that you may have more resources available to you than you think. You may be able to delay claiming Social Security, especially if your husband or partner is still working."

Dowd suggests women look at the big picture and think about the future. "You still have options in your 60s, so don't leave too much money on the table. Remember, you've still got a lot more great years ahead of you and fulfilling things to do in retirement. But by the time you get into your 80s, you have fewer financial options, so don't jump at the first opportunity to claim Social Security at age 62 just because you really want to quit your job," she adds.

Read Viewpoints on Fidelity.com: 3 key decisions to make before you retire

Develop your strategy

According to Fidelity's 2018 Women and Investing Study,² women of all ages say they're looking for opportunities to make their money work harder, with nearly three-quarters (72%) of women saying they want to take steps within the next 6 months to help make their savings grow.

That spirit can apply to taking Social Security benefits. Take the time to understand exactly how much income Social Security will provide for you at different ages. Use our Social Security calculator to estimate your future benefits based on different scenarios, then create a retirement income strategy that can help maximize your monthly Social Security payments.

6 habits of successful investors

Planning, consistency, and sound fundamentals can improve results.

Fidelity Viewpoints

The power of investing to build wealth and achieve long-term goals has been proven time and again. But not everyone takes full advantage. What separates the most successful investors from the rest?

Here are the 6 habits of successful investors that we've witnessed over the years—and how to make them work for you.

Develop a long-term plan—and stick with it

Tall tales about the lucky investor who hit it big with a stock idea may be entertaining. But for most people, investing isn't about getting rich quick, or even making as much money as possible. It’s about reaching their goals—be they owning a home, sending a kid to college, or having the retirement they have long imagined.

Successful investors know that this means developing a plan—and sticking with it. Why does planning matter? Because it works.

A Fidelity analysis of 401(k) participants found that engaging in planning, either with a Fidelity representative or using Fidelity's online tools, helped some people identify opportunities to improve their plans, and take action.¹

Roughly 40% of the people who took the time to look at their plan decided to make changes to their saving or investing strategy. The most common change was to increase savings, with an average increase of roughly 2.6% of pay.¹ The next most common action was a change in investments (see illustration below).

A plan doesn't have to be fancy or expensive. You can do it alone, or with the help of a financial professional or an online tool like those in Fidelity's Planning & Guidance Center. Either way, by slowing down, focusing on your goals, and making a plan, you are taking the first and most important step.

Be a supersaver

While lots of attention is paid to how much your investments earn, the most important factors that determine your financial future may be how much and how often you save.

Fidelity's Retirement Savings Assessment analyzed financial information for more than 4,500 families and found that, on average, the single most powerful change that millennials and Gen Xers could make to improve their retirement outlooks was saving more. For workers closer to retirement, a combination of delaying retirement and saving more would have made the biggest difference, on average.²

How much should you save for retirement? As a general rule of thumb, Fidelity suggests putting at least 15% of your income each year, which includes any employer match, into a tax-advantaged retirement account, though your individual situation may be different.

"You can't control the markets, but you can control how much you save," says Fidelity vice president and CFP^® Ann Dowd. "Saving enough, and saving consistently, are important habits to achieve long-term financial goals."

Stick with your plan, despite volatility

When the value of your investments falls significantly, it's only human to want to run for shelter due to our inherent aversion to suffering losses. And it can certainly feel better to stop putting additional money to work in the market. But the best investors understand their time horizon, financial capacity for losses, and emotional tolerance for market ups and downs, and they maintain an allocation of stocks they can live with in good markets and bad.

Remember the financial crisis of late 2008 and early 2009 when stocks dropped nearly 50%? Selling at the top and buying at the bottom would have been ideal, but, unfortunately, that kind of market timing is nearly impossible. In fact, a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during the downturn far outpaced those who went to the sidelines.³

From June of 2008 through the end of 2017, investors who stayed in the markets saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. That's twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.³ More than 25% of the investors who sold out of stocks during that downturn never got back into the market—missing out on all of the recovery and gains of the following years. The vast majority of 401(k) participants did not make any asset allocation changes during the market downturn, but, for those who did, it was a fateful decision that had a lasting impact.

If you are tempted to move to cash when the stock market plunges, consider a more balanced, less volatile asset mix that you can stick with. Imagine 2 hypothetical investors: An investor who panicked, slashed his equity allocation from 90% to 20% during the bear markets in 2002 and 2008, and subsequently waited until the market recovered before moving his stock allocation back to a target level of 90%; and an investor who stayed the course during the bear markets with a 60%/40% allocation of stocks and bonds.⁴

As you can see below, the disciplined investor significantly outperformed the more aggressive investor who pulled back his equity exposure radically as the market fell. Assuming a $100,000 starting portfolio 22 years ago, the patient investor with the 60% stock allocation would have had about $540,000 by October 2018, versus $410,000 for the impatient investor. A difference of $130,000.

Be diversified

An old adage says that there is no free lunch in investing, meaning that if you want to increase potential returns, you have to accept more potential risk. But diversification is often said to be the exception to the rule—a free lunch that lets you improve the potential trade-off between risk and reward.

Successful investors know that diversification can help control risk—and their own emotions. Consider the performance of 3 hypothetical portfolios in the 5 years after the financial crisis 2008–2009 financial crisis: a 100% stock portfolio; a diversified portfolio of 70% stocks, 25% bonds, and 5% short-term investments; and an all-cash portfolio.

By the end of February 2009, both the all-stock and the diversified portfolios would have declined sharply (50% and 35%, respectively), while the all-cash portfolio would have risen 1.6%. 5 years after the bottom, the all-stock portfolio would have been the clear winner: up 162%, versus 100% for the diversified portfolio and just 0.3% for the cash portfolio. But over a longer period—from January 2008 through February 2014—the all-stock and diversified portfolios would have been neck and neck: up 32% and 30%, respectively.

This is what diversification is about. It will not maximize gains in rising stock markets, but it can capture a substantial portion of the gains over the longer term, with less volatility than just investing in stocks. That smoother ride will likely make it easier for you to stay the course when the market shakes, rattles, and rolls.

A good habit is to diversify among stocks, bonds, and cash, but also within those categories and among investment types. Diversification cannot guarantee gains, or that you won’t experience a loss, but does aim to provide a reasonable trade-off of risk and reward for your personal situation. On the stock front, consider diversifying across regions, sectors, investment styles (value, blend, and growth) and size (small-, mid-, and large-cap stocks). On the bond front, consider diversifying across different credit qualities, maturities, and issuers.

Consider low-fee investment products that offer good value

Savvy investors know they can't control the market—or even the success of the fund managers they choose. What they can control is costs. A study by independent research company Morningstar found that expense ratios are the most reliable predictor of future fund performance—in terms of total return, and future risk-adjusted return ratings. (Read details of the study.) Fidelity research has also shown that picking low-cost funds is one way to improve average historical results of large-cap stock funds relative to comparable index funds.

Fidelity has also found great variation among brokers in terms of commission and execution—by comparing the executed price of a security with the best bid or offer at the time of the trade. The cost of trading affects your returns. Learn more about using price improvement for trading savings.

Focus on generating after-tax returns

While investors may spend a lot of time thinking about what parts of the market to invest in, successful investors know that's not the end of the story. They focus not just on what they make, but also on what they keep after taxes. That's why it is important to consider the investment account type and the tax characteristics of the investments that you have.

Accounts that offer tax benefits, like 401(k)s, IRAs, and certain annuities, can change to have the potential to help generate higher after-tax returns. This is what is known as "account location"—how much of your money to put into different types of accounts, based on each account’s respective tax treatment. Then consider "asset location"—which type of investments you keep in each account, based on the tax efficiency of the investment and the tax treatment of the account type.

Consider putting the least tax-efficient investments (for example, taxable bonds whose interest payments are taxed at relatively high ordinary income tax rates) in tax-deferred accounts like 401(k)s and IRAs. Put more tax-efficient investments (low-turnover funds, like index funds or ETFs, and municipal bonds, where interest is typically free from federal income tax) in taxable accounts.

Read Viewpoints on Fidelity.com: Why asset location matters

Consider the example in the chart. A hypothetical $250,000 portfolio is invested and returns 6% annually for 20 years. The different tax treatments of a brokerage, annuity, and tax-deferred IRA, along with fees for those accounts, could create a significant difference in the final value of the investment.

The bottom line

There is a lot of complexity in the financial world, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and beware of taxes, you will have adopted some of the key traits that may lead to investing success.

Retirement plans for small businesses

Understanding your options may help you save more for retirement and lower taxes.

Fidelity Viewpoints

Key takeaways

• Do you have, or expect to have, any "common law employees"?
• Do you want your employees to be able to contribute their own money too?
• Which is a higher priority—maximum contributions or simple administration?

As a small-business owner, you're probably used to handling a lot of responsibility—everything from drawing up detailed business plans to creating a budget. So it should come as no surprise that funding your retirement will likely fall on your shoulders.

But what type of retirement plan is the right fit for your business? There are several types to choose from and the options can be confusing. For example, some small-business retirement plans are better for sole proprietors, while others may be more appropriate for businesses with up to 100 employees.

"Many small-business owners say they want to set up a 401(k) plan because that is the plan they are most familiar with," says Ken Hevert, senior vice president, retirement products, at Fidelity. "However, after reviewing their situation, small-business owners often conclude that perhaps another plan type, such as a SEP IRA or a Self-Employed 401(k), may be more appropriate."

Basically, there are 4 types of retirement plans that small-business owners might consider:

1. Simplified Employee Pension Plan (SEP IRA)
2. Savings Incentive Match Plan for Employees (SIMPLE IRA)
3. Self-Employed 401(k) plan
4. 401(k) plan (better for larger companies given setup costs, administration, fiduciary responsibilities, etc.)

We will focus only on the first 3, which are generally more suitable for very small businesses—typically, 100 employees or less. Each of these plans has different characteristics—such as the ability to cover employees, contribution limits, and administrative responsibility, to name a few. To choose the right plan for your business, you need to understand the nuances of these plans and match them to your priorities (e.g., higher contributions or simpler administration).

Understanding the differences in the plan types is an important exercise. If you have been operating a plan that doesn't match your business needs, you could be missing out on important tax benefits, or possibly making mistakes regarding employee contributions.

Why have a small-business retirement plan?

Here are 3 very compelling reasons:

• Your plan not only helps secure your future—it may be the primary way your employees can help secure theirs.
• Offering a plan helps make your business competitive when it comes to attracting and keeping good employees.
• There are potential tax benefits to offering a plan, because plan contributions for the business owner are deductible as a business expense.

Consider your options

Each of the 3 small-business retirement plans may offer certain tax advantages, including:

• Tax-deferred growth potential, which allows contributions to grow without being reduced by current taxes
• The potential to deduct employer contributions as a business expense
• A tax credit of up to $500 for certain expenses incurred while starting and maintaining the plan each of the first 3 years, if this is your first time offering a plan

But this is where the similarities end, particularly about whether the plans cover employees and, if so, who is responsible for making contributions.

• A SEP IRA is for self-employed people and small-business owners with any number of employees. Contributions are made by the employer only and are tax-deductible as a business expense.
• A SIMPLE IRA is for businesses with 100 or fewer employees and is funded by tax-deductible employer contributions and pretax employee contributions [similar to a 401(k) plan].
• A Self-Employed 401(k) plan is a tax-deferred retirement plan for self-employed individuals that offers the most generous contribution limits of the 3 plans, but is suitable only for businesses with no "common law" employees, meaning any person working for the business who does not have an ownership interest.

Choosing the right plan takes careful consideration

"If you know what you are trying to accomplish with a retirement plan, it may be relatively straightforward to determine which plan is most appropriate for the business," Hevert says. "For example, is ease of administration an important consideration? Is it critical that employees be able to contribute to the plan? Knowing what you want and need ahead of time is a key component, because each plan has its advantages and disadvantages."

The chart below compares the 3 plans in detail.

Fidelity's small-business retirement plans at a glance

Matching a retirement plan to your business

As you consider the specific features of each plan, it's important to remember that there are always trade-offs. Think very carefully about your priorities.

Here are some factors that may be helpful as you consider the right retirement plan for your business:

Covering employees
If you have no employees other than you and your spouse (or business partner) and want the highest possible contribution limits, consider a Self-Employed 401(k). If, however, additional employees are a possibility in the future, you may need to choose between a SEP IRA and a SIMPLE IRA, both of which can cover employees. Then it's a matter of deciding whether you want to fund your employees' accounts by yourself (SEP) or you want your employees to contribute (SIMPLE).

Contributions: How much and who pays?
Next, think about how much flexibility you want in terms of contribution limits and who is responsible for making such contributions.

A Self-Employed 401(k) plan offers the largest possible contributions because it recognizes that self-employed people wear 2 hats—as an employee and as an employer. In fact, as an employee, you can make elective deferrals of up to $19,000 for 2019. As an employer, you can make a profit-sharing contribution of up to 25% of compensation, up to a maximum of $56,000 for 2019. (Total contributions as employer and employee cannot exceed $56,000 for 2019.) The plan also allows catch-up contributions of up to $6,000 for those who are age 50 or older in 2019. You are also eligible for added tax breaks. If your business is not incorporated, you can generally deduct contributions for yourself from your personal income. If your business is incorporated, the corporation can generally deduct the contributions as a business expense.

If you have a business with variable income and you want more flexibility, you might consider a SEP IRA. Just remember that, if you have employees in years you contribute, you have to contribute the same percentage for them as you contribute for yourself. As an employer, you can contribute up to 25% of compensation, up to a maximum of $56,000 in 2019. And you don’t have to contribute every year.

On the other hand, if you want your employees to help fund their retirement account, you may want to consider a SIMPLE IRA, available to businesses with up to 100 employees. With a SIMPLE IRA, employees can make salary deferral contributions of up to 100% of compensation, not to exceed $13,000 in 2019. You, as the employer, must also contribute to their accounts—you can either match the employees' contributions dollar for dollar up to 3% of compensation (contributions can be reduced to as little as 1% in any 2 out of 5 years), or contribute 2% of each eligible employee's compensation. The SIMPLE IRA also allows employees age 50 or older to make catch-up contributions of up to $3,000 in 2019.

Time and money
The good news is that all 3 of these plans are relatively low cost and easy to administer. Neither the SEP IRA nor the SIMPLE IRA requires annual plan filings with the IRS, just certain employee notifications. The Self-Employed 401(k) plan involves a little more effort, requiring an annual Form 5500 filing once plan assets exceed $250,000. To make the most of this retirement savings opportunity—both for yourself and your employees—make sure it's the right plan for your small business before you set one up.

Should you move in retirement?

The home and region where you retire can have a big impact on your finances.

Fidelity Viewpoints

Key takeaways

• Housing is primarily a lifestyle choice, not an investment. But unlocking equity and lowering the ongoing costs of ownership can improve finances.
• To overcome high transaction costs, aim to downsize by 25% or more if you are moving to improve your finances.
• Consider downsizing early in your retirement to maximize the benefit of cost savings.

When you buy a place to live, people often remind you it could be the biggest investment you will ever make. But a home is a lot more than just an investment. A home is shelter, to start with, but also an important part of your lifestyle, memories, and more. The many roles of a home make converting the value of your property into income a lot more complex than selling a stock and tallying up any profits.

Still, for many Americans, their home is their most valuable asset and a large portion of their total wealth (see chart). It’s also a big part of spending—accounting for almost a third of all money spent. That makes it worth considering the financial side of homeownership, along with the other facets of your home, as you build your retirement plan. For many people looking to decrease the risk of running out of money in retirement, deciding to work longer and choosing a home are the decisions with the greatest potential impacts.

If you want to consider using home equity, your options include a reverse mortgage and a home equity line of credit. But perhaps the most common approaches to reducing your housing expenses are downsizing to a smaller home in the same area, or relocating to a less expensive area, or combining elements of both—relocating to a smaller home in a less expensive area.

To really understand the financial impact a move might have, you have to consider more than just the potential sale price or equity in your home. The price of a new home, the taxes and costs connected with the transaction, changes in the cost of ownership, the cost of living (COL) in the new area, and other factors will all help determine just how much of a difference a move could make for your retirement income.

"Housing plays a huge role in personal finances and wealth," says Andrey Lyalko, vice president at Fidelity. "The impact of reduced costs on retirement planning, and the potential to walk away with some cash from the sale of a home, make housing a key part of a retirement income strategy."

The overlooked impact of costs

If you have owned a home for a long time, you may have seen the value of your home rise significantly. What’s more, you might have built up equity as you paid off a lot of your mortgage. If you sell and walk away with some cash, you can convert that into a stream of income. But it is easy to overlook the common costs of a real estate transaction. Along with the price of a new home, realtor fees, closing costs, moving fees, and the money that goes into redecorating all take bites out of your sale price. Estimates suggest these costs could average as much as 13% of the sale price of a home.

The impact of transaction and moving costs on profits will be even greater. Consider the sale of a home worth $500,000 and then a purchase of another home for $400,000. If costs add up to 13% of your sale price of $500,000, you have spent $65,000 by the time you are moved into your new home. That’s 65% of the profit you were going to use for retirement.

To overcome the high costs of moving, we suggest looking for a house that costs at least 25% less than your current home. This big reduction in price should mean that the savings from the move can ultimately be worth more than the added expenses. A 25% reduction may still not leave you with a huge cash inflow, but it is not the only benefit to downsizing.

Some major expenses drop when you move to a less expensive residence. Taxes, insurance, utilities, and maintenance costs all tend to scale with the price of a home, as they may average more than 4% of the sale price of a home each year. Reducing those ongoing costs could go a long way toward improving your retirement picture. If you relocate, the potential cost-of-living changes can make a big difference too.

"People tend to focus on differences in the prices of homes, while transaction costs and ongoing expenses tend to be overlooked," says Lyalko. "But for a retirement plan, those lower costs can make a big difference, sometimes far more than the lump sum realized by selling."

A case study: A move to save

To see just how much of an impact a move might have, let’s look at a hypothetical example. A couple is able to generate approximately $5,000 per month in retirement income and they are finding it is not providing the lifestyle they want. However, they own a home worth $750,000 with no mortgage. Let’s suppose they sell the house, and buy a smaller home for $500,000, again without a mortgage. The deal would produce a $250,000 gross profit, but they need to make changes to the new house, buy furniture, pay the realtor, the taxes, the movers, etc. We estimate that this would end up costing about $87,500, or roughly a third of the profit, leaving them with a $162,500 lump sum.

What does that mean for their retirement income? Assume that their taxes and cost of living stay the same. Also assume that they want to make their savings last, so they decide to spend about 4% of their savings each year. In this case, the lump sum could mean an extra $500 a month for the rest of their lives. But, the move will also result in lower ongoing expenses. Repairs, insurance, heating, cooling, taxes... all of those costs should drop as well. In fact, we estimate that these cost savings could total about $700 per month. That means the couple’s retirement cash flow could improve by an estimated total of $1,200 a month.

Taking it one step further, what if they bought a $500,000 home in a part of the country with a lower cost of living? Let’s suppose they relocated to another state with a 11% lower cost of living. The decreased costs in the new location could allow them to improve their standard of living by the equivalent of $2,200 a month. These additional monthly savings could mean even more in a place that costs less, and so could their existing retirement income. In total, the increased retirement income from the sale of the home, combined with the lower cost of living, could feel like a $7,200-a-month lifestyle. Put another way, this couple could increase the purchasing power of their retirement income by almost 50%, by downsizing and relocating.

Bottom line

Where to live is more than a financial decision. Leaving your memories may be difficult. Family and friends will likely also influence where you relocate in retirement. However, because housing is such a large part of our expenses and such a large store of wealth for so many people, it can be a powerful lever when it comes to the financial side of retirement. That’s why it’s critical to consider carefully where you will live as you map out your retirement income plan.

How and why to build a bond ladder

Ladders may offer predictable income and rate risk management.

Fidelity Viewpoints

Key takeaways

• Staggering bond maturities can help to create a predictable stream of bond income.
• The rungs help to manage interest rate and reinvestment risk.
• Build with diverse, high-quality, noncallable bonds.
• Fidelity's Bond Ladder Tool can help.

Investors looking for steady income have plenty of options, from a simple CD to different flavors of annuities, individual bonds, separately managed accounts, or professionally managed mutual funds. One other option is the bond ladder.

Like all these options, bond ladders have their advantages and disadvantages, but many investors decide to build a bond ladder because it can help to customize a stream of income and manage some of the risks of changing interest rates.

Interest rate risk is the potential for rising rates to cause the prices of bonds to fall. While many investors can live with rate risk in exchange for the benefits bonds can provide a diversified portfolio, uncertainty about rates can be unnerving, especially for investors who look to bonds to create a stream of income. Bond ladders may help to manage these concerns by creating a predictable stream of income.

"Laddering bonds may be appealing because it may help you to manage interest rate risk, and to make ongoing reinvestment decisions over time, giving you the flexibility to invest in different credit and interest rate environments," says Richard Carter, Fidelity vice president of fixed income products and services.

It's worth noting however, that bond ladders don't completely eliminate rate risk, the price of bonds in the ladder continues to fluctuate as rates change, and an investor will still face periodic reinvestment risk for some portion of the portfolio.

Managing reinvestment risk

Interest payments from the bonds in a ladder can provide scheduled cash flows. In addition, the ladder can help you manage reinvestment risk. What is reinvestment risk? Say you invest in an individual bond. That bond eventually would mature, the issuer would return your principal, and you'd have to purchase a new bond if you wanted to continue generating income or maintain your portfolio's asset allocation mix. But if interest rates and bond yields had decreased in the meantime, you wouldn’t be able to generate as much income as before with the same amount invested in a similar quality bond. That’s a predicament some investors who rely on investment income won't want to find themselves in.

Building a bond ladder has the potential to diversify this reinvestment risk across a number of bonds that mature at different intervals. Imagine that yields fall as one rung in your ladder approaches maturity. If you choose to reinvest, you will have to invest only a fraction of your bond portfolio at the lower rate. Meanwhile, the other bonds in the portfolio will continue generating income at the relatively higher older rates. So the impact of falling rates may be smaller with a ladder than with a bullet strategy that targets a single maturity date or than with an investment in a small number of bonds.

What if yields and interest rates increase? A bond ladder regularly frees up a slice of your portfolio, so you can take advantage of the new, higher rates. If you have all your money invested in a "bullet" strategy, with a single maturity date, you might be able to reinvest at higher yields. But what if your bonds didn't reach maturity while rates are higher? If none of your holdings mature during the time of higher rates—you might miss out.

"A bond ladder gives you a framework in which to balance the reinvestment opportunities of short-term bonds with the potentially higher yields that longer-term bonds typically offer," says Carter.

Having a well-diversified bond ladder does not guarantee that you will avoid a loss, but it can help protect you the way that any diversified portfolio does, by helping to manage the risk of any single investment.

Bond ladder considerations

While building a bond ladder may help you manage interest rate and reinvestment risk to some extent, there are 6 important guidelines to consider to make sure you are diversified and to attempt to protect yourself from undue credit risk.

1. Hold bonds until they reach maturity

It's important that you have enough money set aside to meet your short-term needs and deal with emergencies. You should also have a temperament that will allow you to ride out the ups and downs of the market. That’s because many of the benefits of bond ladders—such as an income plan and managing interest rate and credit risk—are based on the idea that you keep your bonds in your portfolio until they mature. If you sell early—either because you need cash or you change your investment plans—you will be exposed to additional risks, including the risks of loss or decreased yield from your ladder. In fact, if you don't hold bonds to maturity, you may experience similar interest-rate risk as a comparable-duration bond fund. So, if you don't know how long you can hold the bonds, you may want to consider a shorter ladder, or a bond mutual fund.

2. Make sure you have enough money invested to diversify^*

Because bonds are often sold in minimum denominations of $1,000 or $5,000, it can take a substantial investment to achieve diversification. It may make sense to have at least $500,000 in bond investments in your long-term investment mix.

If you are investing in corporate bonds, particularly lower-quality corporate bonds, the number of  issuers needed to diversify a ladder across sectors and issuers becomes even greater.

The table to the right offers some illustration of how many different issuers may be required to help achieve diversification at different credit ratings.

3. Build your ladder with high-credit-quality bonds

Because the purpose of a bond ladder is to provide predictable income over a long period of time, taking excessive amounts of credit risk probably doesn't make sense. So you may want to consider only higher-quality bonds. You can use ratings as a starting point to find those bonds. For instance, select only bonds rated "A" or better. But even ratings have limits; they could change or be outdated, so you should do additional research to ensure you are comfortable investing in a security you are intending to hold for potentially many years.

How do bond ratings work?

Two of the major independent credit rating services are Moody's and Standard & Poor's. They research the financial health of each bond issuer (including issuers of municipal bonds) and assign ratings to the bonds being offered. A bond's rating helps you assess that bond's credit quality compared with other bonds.

The bonds in a ladder are intended to be held until maturity, so price declines caused by rating downgrades generally won't affect the income stream, though it will impact the underlying value of the ladder. Higher-quality bonds offer another advantage as well: These investments typically come with lower transaction costs, which can help manage the expenses associated with this strategy.

4. Avoid the highest-yielding bonds at any given credit rating

You may feel tempted to choose the highest-yielding bonds for whatever credit rating or maturity you have chosen, figuring they represent a bargain—more yield for the same amount of risk.

Resist that temptation. You need to understand why a bond is offering a higher yield. An unusually high yield relative to similar bonds is often an indication that the market is anticipating a downgrade or perceives that bond to have more risk than the others and therefore has traded the bond’s price down (thereby increasing its yield). That can happen in advance of an official downgrade and may be too risky for your ladder. One potential exception is that in the municipal bond market, buyers often pay a premium for the most familiar issuers, meaning that higher yields may be available from smaller issuers.

5. Keep callable bonds out of your ladder

Part of the beauty of a bond ladder is the scheduled cash flow; you know when the bonds will mature and you know how much you will need to reinvest. But when a bond is called prior to maturity, its interest payments cease and the principal is returned as of the call date—altering both your cash flow schedule and the schedule of principal coming due. You may want to select bonds that can’t be called away early.

6. Think about time and frequency

Another important feature of a bond ladder is the total length of time the ladder will cover and the number of rungs, or how often the bonds in the ladder are scheduled to mature, returning your principal. A ladder with more rungs will require a larger investment but will provide a greater range of maturities, and if you choose to reinvest, this means you will have more opportunities to gain exposure to future interest rate environments.

A case study: building a bond ladder

To see how you can build a ladder using Fidelity's Bond Ladder Tool, let's take a hypothetical case in which Matt wants to invest $100,000 to produce a stream of income for about 10 years. Matt decides to start with his investment amount—though the tool would have let him target a level of income as well. He sets his timeline and asks for a ladder with 9 rungs of about $11,000 each. Then he chooses bond types. In order to be broadly diversified, the rungs each contain a range of bonds and FDIC-insured CDs at different credit rating levels, but all of them are at least investment grade.

Matt elects the option to have the tool suggest bonds for each rung. So on the next screen, the tool suggests a bond for each rung of the ladder and shows a summary of the ladder, including the expected yield and annual interest payments. (Note: The screenshot below is incomplete and only shows 2 of the rungs.)

Another view lets Matt review the schedule of when to expect interest payments and the return of principal—providing a view into the cash flow he could expect if he chooses to purchase the suggested bond ladder.

Matt's expected cash flows appear to decrease over time, as successive rungs of bonds mature, but he may be able to extend that income by reinvesting the returned principal each time one of the bonds matures.

4 reasons to contribute to an IRA

Saving in an IRA comes with tax benefits that can help you grow your money.

Fidelity Viewpoints

Key takeaways

• Give your money a chance to grow.
• Get tax benefits.
• The earlier you start contributing, the more opportunity you have to build wealth.

It can pay to save in an IRA when you're trying to accumulate enough money for retirement. There are tax benefits, and your money has a chance to grow. The deadline for a 2018 traditional or Roth IRA contribution is the same as the 2018 tax-filing deadline—April 15, 2019. Residents of Massachusetts and Maine have until April 17, 2019 because of local holidays. Time is running out to contribute for the 2018 tax year.

Why an IRA? An IRA is one of several tax-advantaged options for saving. If you have a retirement plan at work, an IRA could offer another tax-advantaged place to save.

If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense.

Read Viewpoints on Fidelity.com: No 401(k)? How to save for retirement.

Here are some reasons to make a contribution now

1. Put your money to work

Eligible taxpayers can contribute up to $5,500 per year to a traditional or Roth IRA, or $6,500 if they have reached age 50, for 2018 (assuming they have earned income at least equal to their contribution). It's a significant amount of money—think about how much it could grow over time. For 2019 the limits increase to $6,000 and $7,000 for those age 50 and over.

Consider this: If you're age 35 and invest $5,500, the maximum annual contribution in 2018, that 1 contribution could grow to $82,360 after 40 years. If you’re age 50 or older, you can contribute $6,500, which could grow to about $17,900 in 15 years.¹ (We used a 7% long-term compounded annual hypothetical rate of return and assumed the money stays invested the entire time.)

The age you start investing in an IRA matters: It's never too late, but earlier is better. That’s because time is an important factor when it comes to compound growth. Compounding is what happens when an investment earns a return, and then the gains on the initial investment are reinvested and begin to earn returns of their own. The chart below shows just that. Even if you start saving early and then stop after 10 years, you may still have more money than if you started later and contributed the same amount each year for many more years.

2. You don't have to wait until you have the full contribution

The $5,500 IRA contribution limit is a significant sum of money, particularly for young people trying to save for the first time.

The good news is that you don't have to put the full $5,500 into the account all at once. You can automate your IRA contributions and have money deposited to your IRA weekly, biweekly, or monthly—or on whatever schedule works for you.

Making many small contributions to the account may be easier than doing one big one.

3. Get a tax break

IRAs offer some appealing tax advantages. There are 2 types of IRAs, the traditional and the Roth, and they each have distinct tax advantages and eligibility rules.

Contributions to a traditional IRA may be tax-deductible for the year the contribution is made. Your income does not affect how much you can contribute to a traditional IRA—up to the annual contribution limit. But the deductibility of that contribution is based on income limits. If neither you nor your spouse are eligible to participate in a workplace savings plan like a 401(k) or 403(b), then you can deduct the full contribution amount, no matter what your income is. But if one or both of you do have access to one of those types of retirement plans, then deductibility is phased out at higher incomes.² Earnings on the investments in your account can grow tax-deferred. Taxes are then paid when withdrawals are taken from the account—typically in retirement. Just remember that you can defer but not escape taxes with a traditional IRA: Starting at age 70½, required minimum withdrawals become mandatory, and these are taxable (except for the part—if any—of those distributions that consist of non deductible contributions).

On the other hand, you make contributions to a Roth IRA with after-tax money, so there are no tax deductions allowed on your income taxes. Contributions to a Roth IRA are subject to income limits.³ Earnings can grow tax-free, and, in retirement, qualified withdrawals from a Roth IRA are also tax-free. Plus, there are no mandatory withdrawals during the lifetime of the original owner.⁴

As long as you are eligible, you can contribute to either a traditional or a Roth IRA, or both. However, your total annual contribution amount across all IRA accounts is still $5,500 (or $6,500 if age 50 or older).

What's the right choice for you? For many people, the answer comes down to this question: Do you think you'll be better off paying taxes now or later? If, like many young people, you think your tax rate is lower now than it will be in retirement, a Roth IRA may make sense.

Need help deciding? Read Viewpoints on Fidelity.com: Traditional or Roth IRA, or both?

4. You may think you can't have an IRA, but make sure

There are some common myths about IRAs—especially about who can and who can't contribute.

Myth: I need to have a job to contribute to an IRA.

Reality: Not necessarily. A spouse with no earned income can contribute to a spousal Roth or traditional IRA as long as their spouse has earned income. Note, however, that all other IRA limits and rules still apply.

Myth: I have a 401(k) or a 403(b) at work, so I cannot have an IRA.

Reality: You can, with some caveats—as mentioned earlier. For instance, if you or your spouse contributes to a retirement plan—like a 401(k) or 403(b)—at work, your traditional IRA contribution may not be deductible, depending on your modified adjusted gross income (MAGI).² But you can still make a nondeductible, after-tax contribution and reap the potential rewards of tax-deferred growth within the account. You can contribute to a Roth IRA, whether or not you have contributed to your workplace retirement account, as long as you meet the income eligibility requirements.³

Myth: Children cannot have an IRA.

Reality: An adult can open a custodial Roth IRA (also known as a Roth IRA for Kids) for a child under the age of 18 who has earned income, including earnings from typical kid jobs such as babysitting or mowing lawns, as long as this income is reported to the IRS.⁵

An adult needs to open and maintain control of the account. When the child reaches the age of majority, which varies by state, the account's ownership switches from the parent over to them.

Make a contribution

Your situation dictates your choices. But one thing applies to all: the power of contributing early. Pick your IRA and get your contribution in and invested as soon as possible to take advantage of the tax-free compounding power of IRAs.