AgingOptions Life Plan: Finance

“Will I have enough assets in order to not run out of money before I run out of life?” is top of mind for all of us in the final third of our lives. In answering this, preservation, positioning and passing of accumulated wealth goes beyond traditional estate planning. It calls for all affected family members to be participants in a model that integrates health, housing and elder law considerations.

Are you ready to retire?

Are you ready to retire?  Every individual is different and the time to retire for one person is most likely the time for another to buckle down.  I’ve recently read two articles about early retirement.  I’m going to include their links but first I wanted to say two things.  Not everyone wants to retire even if they can afford to do so.  To be truly happy in life you need a sense of purpose and if your sense of purpose involves going to work every day, you shouldn’t give it up just because you can afford to do so.  There are a lot of stories about people who die in the first year of retirement, that’s why Dan Buetner says, “You know the two most dangerous years in your life are the year you’re born, because of infant mortality, and the year you retire.”  The second thing I want to point out is that many Americans shouldn’t retire because they have too little money to do so safely, there are also those Americans that have miraculously come out ahead financially and need to consider whether staying in the rat race is healthy for them.  I read a study once that said that people spend more time planning their vacations than they spend planning their retirement.  Don’t be one of them.  Proper planning will allow retirement to be something to enhance your life.  Improper planning or more likely lack of planning at all will put you in a cage you’ll be hard pressed to get out of.

The two people whose links I am going to include both decided to retire in their 50s.  That’s pretty early but the Google exec probably didn’t have to look too closely at his finances to determine that he was okay to take a break (I did notice that he plans to leave the door open for other opportunities) and he mentions other pursuits he’s ready to take on that aren’t work related so he’s obviously not just jumping into it.  He also makes it clear that he didn’t decide last week that he is sick of working and tossed in his resignation.  Instead he spent time considering what he would gain from taking his break and how that break in his schedule would incorporate something other than watching the boob tube for endless amounts of time.

The second individual experienced an unexpected opportunity.  He wasn’t in the same position as Patrick Pichette and had to spend some serious time analyzing whether an early retirement was a good option for him.  He eventually decided to partially retire by becoming a consultant but his approach to retirement involved being realistic about his financial and medical health.  His story is here.

There are plenty of stories of 50-somethings and even 40-somethings managing to put away enough money to retire.  Inevitably, those stories involve those same people continuing with work but on their own terms.  For some, that means working from home, for others it means cutting back the number of hours they put into work.  Many have made real sacrifices to reach a point that they can do those things.  That’s the power of compound interest.  However, those people decided very early in the working life that their goal was to retire.  Then they put everything they had into making that goal work for them.  If you didn’t do that, likely you’ll have to wait until later in your life to retire.  Like me.

If you’re wondering what all goes into planning for retirement, a good beginning is to attend a free LifePlanning seminar.

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5 dos and 5 don’ts of financial planning

If you’re in your 50s, retirement is on the horizon.  Here are some important financial planning decisions you need to avoid.

  1. Don’t dip into retirement.  With the average employee having seven careers in a lifetime, there’s a possibility that you’ll experience seven or more temptations to cash out an IRA rather than roll it over.  Read here to find out why multiple IRAs may create an unexpected burden.  Then there are college tuition fees, children who want to buy homes, grandchildren’s needs and the list of financial pressures can pile up.  That cache of money you’ve been slowing (hopefully piling up) can be tempting.  Resist the urge.  Hitting up retirement accounts at this point in your life comes with hefty fees and can substantially hurt future security.
  2. Don’t underestimate retirement health costs.  Even without ending up in a nursing home, the typical retiree couple pays $276,000 in medical expenses during their combined retirement years.  Here’s a quick calculator to help you get a rough idea of potential costs.  A recent article covered how something as minor as choosing to retire at 62 can potentially cost you $18,000 extra in the three years between 62 and 65 (when most folks qualify for Medicare).
  3. Don’t jump into retirement too early If you’re not financially ready or if you’re not mentally prepared, remember that there are no requirement dates for retirement.  Rethink what retirement means to you.  Some people love their work and keep working all their lives.  Choosing to retire when doing so will seem a loss can be detrimental to your health.  Choosing to do before you are financially ready can be a hardship you’ll never recover from.  Delaying has another potential upside in that remaining in the workforce can allow your Social Security benefits to continue to grow.
  4. Don’t go into retirement with debt.  Someone on a fixed income will be hard pressed to pay for mortgages or other high debt and if you have to take larger chunks of your retirement savings to pay for it, you’ll pay higher taxes (a double ding).  One bad health incident can topple the whole house of cards.  Putnam Investments found that retirees who returned to work had on average just 47 percent equity in their homes.
  5. Don’t rely on factors outside your control.  Inflation, growth in the market, company pension plans, appreciating home loans are all things you can’t do a thing about.  Make a plan to help you deflect the costs of when these things don’t go your way and review your plan and potential costs on a regular basis.

Just as there are some key areas to avoid, there are also some key financial decisions to do.  Here are some important steps to take now.

  1. Do defer paying income tax on more of your retirement savings.  Older workers can tuck away more money into both traditional IRA and Roth IRA accounts than their younger counterparts–$24,000 in 2015.
  2. Do take the time to consider the pros and cons of a Reverse Mortgage.  Despite how many people look at them, reverse mortgages don’t eliminate your housing expenses in retirement.  Property taxes, homeowner’s insurance premiums and maintenance costs will continue to accrue.  Falling behind on any of those will put you in default with the mortgage company. Read our white paper on reverse mortgages.
  3. Do set realistic goals.  By now you should have a retirement account you’ve been adding steadily to.  How much money is enough money to retire?  As a nation, we are on track to saving enough to be forced to live on 55 percent of our current income at retirement.  Most people don’t find that retirement costs them less money and some actually see their expenses increase according to Fidelity Research.  You can calculate your projected income by estimating your Social Security benefits and using a retirement calculator to see if you are saving enough.  Then review your projected expenses.  A financial dashboard can give you a picture of your current saving and spending rates and help you determine whether you are on track for retirement.
  4. Do review your estate planning documents.  Make sure your legal paperwork is in order.  That means Wills, Powers of Attorney, Living Will, and possibly trusts.  These things aren’t age-related, meaning you probably needed them clear back when you were 20 and invincible.
  5. Do decide whether or not it makes financial sense to purchase a Long-Term Care insurance policy Doing so will depend upon many factors.  It’s important to have a good understanding of those factors.  You should have a solid understanding of what you can and cannot expect a policy to cover and whether or not you can live with premium increases or without coverage.

Finally, hire an expert.  Sometimes you really need the voice of experience to help you set goals and get your plan on track. Retirement is a long term financial opportunity.  The challenge is in recognizing that it’s at the tail end of retirement when you’ll know whether or not you’ve done an adequate job of planning.  The point of spending time working on it now, when you can make adjustments and corrections is to avoid burdening your children or loved ones later.  Financial planning is just one part of the aging process.  In addition, retirement planning should include planning around opportunities related to housing, health, legal and family.  Make sure you cover all of your bases when planning your retirement.

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Steps to take after receiving a large lump sum payment

Winning the lottery doesn’t make the top 10 sources of retirement income, yet it’s often a major part of many people’s retirement plans.  The top ten list by the way goes something like this:

  1. Retirement savings accounts
  2. Home equity
  3. Pension plans
  4. Social Security
  5. Certificates of Deposit
  6. Stocks and mutual funds
  7. Retirement jobs
  8. Annuities or insurance plans
  9. Inheritance
  10. Rent and royalties

Still, winning the lottery has something in common with several of the items on that list and a few extras such as severance packages, bonuses, life insurance payoffs, or money from selling a business, real estate or stock options.  What all of those have in common with the lottery is the sudden influx of seemingly large amounts of cash.  So while, you probably don’t need tips on what to do should you win the lottery (with odds of 1 in 200 million the odds are against you), you just might need some pointers about what to do about those others.

It’s tempting when you get a lump of cash to take the entire family on a family vacation or put grandchildren through college but the very first thing you should do before you touch so much as a penny is to hire a professional.  There’s a reason why 70 percent of all people who do win the lottery have spent everything in their first five years after winning.  That reason is that they don’t have the big picture idea of what having a lump sum means tax-wise, relationship-wise, or future-wise.  One article notes that anytime you receive unexpected money, you’ll receive the money with one hand and a tax form with the other.  A financial expert can prevent you from owing more money down the line than what you actually received.  Just as importantly, a financial expert can help you determine how to keep as much of your new wealth as is allowed.

There can be unexpected costs to sudden upswings in your financial picture.  For instance, people who had health insurance thanks to a stipend from the Marketplace or they received benefits such as housing allowances, student loans, scholarships or government benefits may be surprised to suddenly have to deal with complications due to those benefits.  Those areas may not be covered adequately by software or financial apps.

Some experts suggest that the next step is to deposit the amount into an insured bank account.  The point here is to put it somewhere safe.  Bank accounts won’t provide much earning during this time but you are trying to give yourself a little breathing room.  Even if you have won the lottery, you’d probably want to just get over the all-over tingly feeling before trying to make any major monetary decision (such as quitting your job or buying a house in the Bahamas).  How much more important will it be to get over your grief or sense of loss if the money comes instead from an inheritance, insurance plan or severance package?  Taking time to deal with your emotions first can prevent you from making mistakes that will cost you money in the form of higher taxes or costly mistakes.

After a reasonable cooling off period and a good solid financial plan, you’ll likely need to pay off debt, establish an emergency fund and if you aren’t already retired, fully fund your retirement account.  Be careful of blindly following someone else’s lead.  That expert you hired should be able to explain your plan to you in a way that you can understand before you ever sign off on anything.

Finally, if you received money from an inheritance or as a result of a life insurance policy, consider using the money to honor the memory of the person who left you the money.

However you receive a windfall, if you receive a substantial amount of money that causes you to take a figurative breath, start off by taking time to think about your priorities and hire someone to help you achieve those the right way.


Roth IRAs versus traditional IRAs

The primary difference between Roth IRAs and traditional IRAs is the point at which your investment is taxed.  Contributions to a Roth IRA are not tax-deductible and withdrawals are generally tax-free.  The benefit to Roth IRAs is that there are fewer restrictions and requirements.  For inheritance purposes, passing a traditional IRA to your children means passing the tax ramifications off to them as well.  Once someone has transferred that money out of a traditional IRA to a Roth IRA, their children can inherit their Roth IRA without any tax consequences.

Beginning in 2010, people with money in traditional IRAs could roll that money into Roth IRAs.  Investors then had to wait for five years to withdraw earnings tax-free.  The five-year period begins January 1st of the year investors made their first contribution.  Once an investor reaches 59 ½ and has kept funds in the account for five years, he or she can withdraw from the account tax-free.  That five-year period for those initial investors has ended.

One of the biggest benefit of the Roth IRA is that unlike traditional IRAs, there are no required minimum distributions.  RMDs can force an investor into another tax bracket but Roth IRAs are friendly to inheritance.  Those investors who don’t need to take distributions from their Roth can leave it untouched and distribute it tax-free to children or grand-children over many years or conversely if they need to gift it in order as part of a Medicaid spend down they can do so without taking a big tax hit.  Inherited Roth IRAs require beneficiaries to take annual distributions during their lifetimes based on the oldest beneficiary’s life expectancy.  There are many benefits of a Roth IRA over a traditional IRA, if you would like to hear more about how conversion of a Roth IRA can help you avoid becoming a burden and help to preserve your assets, come to a free seminar.

Please see this article from the Wall Street Journal.

Guarding against identity theft starts with protecting your Social Security Number

The other day I purchased a shirt from a big box store.  As I stood in line waiting to check out, the woman ahead of me asked to use her reward card even though she didn’t have it on her person.  “Sure,” said the sales clerk.  “Just give me your Social Security number.”  I flinched but without stopping, the customer rattled off her Social Security number as if she was rattling off directions to the nearest McDonalds.  As the clerk entered her Social Security number I couldn’t help but think about all the data breaches some very big name companies (with presumably big security companies protecting their data) have recently experienced that cost millions of people their personal data.  What many people don’t understand is that while having your credit card stolen is a major downer, having your Social Security number stolen is worse.

Identity thieves make a pittance (per incident) for credit card data or bank account information mainly because those accounts are easy to change and take little time to fix.  However, thieves with medical information have a treasure trove because it contains one valuable piece of information—your Social Security number.

The Social Security Administration says that identity theft is one of the fastest growing crimes in America.  Your nine-digit Social Security number allows thieves to access credit to open credit cards  That would be problem enough but a growing number of people have run into problems with tax returns because thieves have filed a return under someone else’s name in order to get their refund.  Another way that a Social Security number can be misused is if someone uses someone else’s Social Security number to get a job.  When that person’s employer reports income earned to the IRS using someone else’s Social Security number it looks as if that person did not report all their income on their tax return.

A stolen Social Security number provides thieves with valuable, permanent data that is as valuable decades from now as it is today.  That’s why it shouldn’t be used as a personal pin number.  Retail stores shouldn’t be using your number to access rewards cards.  Perhaps not as obvious, neither should doctor’s offices.

It’s not just your Social Security number that’s valuable.  According to the Medical Identity Fraud Alliance, nearly twice as many Americans have had their medical information stolen since their first study five years ago.  The effect on victims can be devastating, both financially and medically–financially because it takes the victim’s money to correct and deal with the resulting problems.  Sixty-five percent of medical identity victims had to pay an average of $13,500 and over 200 hours to resolve the crime according to a study by the Ponemon Institute.  However, medically, victims also suffer from misdiagnosis, mistreatment and delayed healthcare according to the 2014 Fifth Annual Study on Medical Identity Theft.  Finally, the theft often negatively effects their reputation, costing 3 percent of victims to lose their employment, 19 percent to miss career opportunities and nearly 90 percent experienced embarrassment over the release of sensitive personal health conditions.  Yet, doctor’s offices and insurance companies don’t do nearly enough (some do nothing) to protect clients from thieves.

The Federal Trade Commission offers information on detecting, correcting, protecting and checking medical information.

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