2013 Retirement Resolutions
Why is it each year we make resolutions that we don’t keep? Many resolutions are made on a whim when someone asks what your resolutions are for the New Year. They may be a passing thought to eat right, exercise, save more, pay off debt or finally draft a will. This year, get a handle on those resolutions and develop a realistic, achievable plan that you can keep once and for all.
When entering the retirement stage of life it’s important to have your finances in order. You’ve spent a lifetime preparing for retirement, it’s important to take the time to ensure that your income, your investments and your estate plan are properly organized to allow you to live comfortably during your retirement years. Here at Armstrong Advisory Group we encourage our clients to stay informed about the status of their finances. In preparation for retirement, it’s important to know your finances inside and out and be sure that every aspect is available when needed. Our Retirement Resolutions guide includes everything you need to review in order help you work towards a more comfortable retirement lifestyle.
• Income – Developing an income stream to support your lifestyle
• Social Security – When should you start collecting
• Medicare – Making sense of all the details
• Budgeting -Learning to live within your means
• Investments -Don’t leave that employer plan behind
• Estate Planning – An introduction
• Asset Protection Planning- Don’t impoverish your spouse
• Long Term Care Insurance- Is it right for you?
• Insurance – Do you still need that life insurance?
• Veteran’s Benefits- There may be help for you
Below you will find detailed information that will provide you with an outline of what you need to start thinking about and acting on if you are at or nearing retirement. With life expectancies in the mid-80s and increasing each year, don’t you want to make sure you are prepared to live comfortably for the next 20 to 30 years or more?
Income–Developing an Income Stream to Support Your Lifestyle
It’s important to ensure that you can afford your desired lifestyle during retirement by setting aside sufficient income. Proper retirement planning requires observation, estimation, and calculation. The first step to proper planning is to track your current expenses and consider additional expenses. There are a number of expenses to take into account when determining the exactly how much money you need to save. There are seven types of expenses that generally change during the transition to retirement. Your specific plans and hobbies may cause extraneous expenses.
1. Housing costs tend to change during retirement due to owning your home, purchasing a retirement home, or downsizing.
2. Occupational fees change as well including commuting, dry cleaning, retirement contributions, and income taxes.
3. Health care expenses fluctuate as well depending on your health and eligibility for medicare.
4. Long-term care is a potential retirement cost if you or your spouse require assisted living. This is a potential major expense as assisted living homes are very costly.
5. Entertainment expenses tend to build during retirement from anything from travel to dining out.
6. Family costs depend on the number of family members you are financially responsible for; this tends to decrease during retirement as a relatives age and gain fmancial independence.
7. Gifting is an optional retirement expense if you choose to make monetary gifts to family members or charity.
The next step is to estimate your annual retirement expenses. Begin by determining the percentage of your current annual income that is consumed by current expenses. From this percentage, exclude the expenses that will no longer exist during retirement include additional retirement expenses. Once you have come up with an idea of how much annual income you will need to support your ideal retirement, multiply that value by 1.03. By multiplying by this value, inflation is accounted for. Historically the dollar inflates by an average of 3% each year1 multiplying your projected annual retirement income by 1.03 will keep you on track. Now that you have calculated your annual expenses, it is time to arrange your assets in a way to fund these expenses.
Three Sources of Income:
Your preparation for retirement could provide you with multiple income sources: social security, traditional employer pension income, and your personal savings and investments. Currently, 159 million or 94% of working citizens are covered by Social Securityii. The amount of benefits received depends on when you begin collecting and your job history. The formula used by the government is calculated based on your 35 years of highest earning however this benefit is permanently lowered by 20% to 30% if you begin collecting before the set retirement age. While social security is a source of consistent income, in most cases, additional funds are necessary to maintain a comfortable lifestyle.
The number of traditional employer pension plans diminishes every year. If you are entitled to a pension plan, find out exactly how much income will be provided and whether or not it adjusts with inflation. The most common pension plan format is an annuity that pays out throughout your retirement years. Similar to social security, the benefits are usually reduced if you opt for early retirement.
The third source of retirement income is personal savings. This includes all of the funds you have accumulated throughout your working years: 401k, 403b, 457b, IRA, and investments. You are in complete control of withdrawing from these funds during your retirement years. In order to maximize the value of these funds you must fully understand your funds and your needs. Take into account how long the funds need to last, rates of return and liquidity. Consider reallocating the funds to an annuity, municipal bonds or mutual funds. Find out the maximum and minimum amount you can afford to withdraw each year and which of your funds you should withdraw from first; some funds are more taxable and some have minimum required distribution rate.
Annual Withdrawal Rate
The rate at which your withdraw funds from your portfolio has a large effect on the quality of your retirement. You need to fmd the perfect balance so you enjoy the luxuries of retirement without running out of money. While the rate at which you withdraw your funds is dependent on the time period and lifestyle, for many people, a 4% or 5% annual withdrawal rate is ideal. In other words, your projected annual expenses should make up 4% or 5% of your retirement funds. This annual withdrawal rate may seem low, however, it is necessary to factor in the effect of inflation on your retirement funds. With an average 3% annual inflation rate, the purchasing power of your annual withdrawal will decrease each year.
Some retirees find that the three main income sources are not enough, in such cases, there are a few alternative options to generate additional funds. If you are capable, working part-time during retirement is a great way to provide you with additional income. Your home is also a great source of income; downsizing or relocating to a less expensive area may be the solution to your income shortage. If these income sources are not sufficient, you may need to postpone your retirement or reassess your retirement living expectations.
1. Track your current expenses
2. Calculate your annual retirement expenses
3. Multiply by 3% to account for inflation
4. Accumulate funds until your projected annual expenses are equal to no more than 4 to 5% of your retirement funds
Social Security–When Should You Start Collecting?
Social Security is commonly perceived as a safety net for most United States citizens. Currently, 51 tnillion Americans are benefiting from the economic assistance that the Federal program has to offer. Benefits are available to some individuals due to certain requirements and socially recognized conditions, such as poverty, old age, disability, and unemployment. These benefits include retirement income, health care for the aged, and disability coverage for entitled workers and their dependents.
Retirement benefits are especially helpful to those who have been employed for a required number of years. Those who are eligible can receive a portion of their retirement benefits when they reach age 62 in the form of a monthly check that’s typically adjusted each year for inflation. The amount received is dependent on the outcome of an earnings test. The size of the benefit will be reduced if too much money is earned during this period. If an individual chooses to wait until they reach age full retirement age, they will be eligible to receive full benefits, which may be a perk to most. Benefits are increased by 8% for each year that claims are delayed, until age 70. If you wait to claim Social Security until you are full retirement age, will you receive the highest payout? Below are tips that may help increase your Social Security benefit.
1) Delay Your Claim. Many assume they should immediately claim Social Security at age 62, while in reality their benefits are being reduced by 25 to 30% by doing so. Likely, there are a handful of helpful claiming strategies that can increase your Social Security income for a lifetime. Instead of being amongst the impulsive majority who begin claiming at 62, delay your claim until age 70 in order to increase your benefit checks by 7 to 8 percent each year. Smaller payments allotted over a longer period of time are given to retirees who sign up at a younger age. On the other hand, those who are patient and delay their claim are granted more insurance by outliving their assets and are also given larger checks for the rest of their lifetime. If you decide to claim immediately at age 62 you may be disappointed to discover that your checks are being reduced.
2) Continue Working. After claiming Social Security it is quite beneficial to continue working as long as you possibly can. Initially, your checks will be reduced but the payouts gradually increase at a later date. For example, in 2010 Social Security beneficiaries are capable of earning up to $14,160 without penalty. Once they reached the earnings cap their checks were reduced by 50 cents for every dollar earned over the limit. Currently the earnings limit increases to $37,680 at full retirement age, and fortunately benefits are only reduced by 33 cents for each dollar earned above the earnings limit. Once an individual reaches retirement age, their earnings are recalculated and they are granted a credit due to their prolonged employment.
3) Life Expectancy. Life expectancy plays an immense role when it comes to Social Security. It is suggested that single men should claim social security at an early age because they have a shorter life expectancy. In opposition, women should delay their claims because they are more likely to live longer than their counterparts. This helpful strategy does not apply to couples. Social security payouts of up to 50 percent are granted to select couples based on his or her own working record. This situation is particularly beneficial when one spouse is unemployed or has earned significantly less than their partner. The low-earning spouses must wait until the “full retirement age” to collect the full 50 percent that they are entitled to. For those born between 1943 and 1954, it is suggested that they wait until age 66 because if they decide to collect before the “full retirement age” their benefits are permanently reduced.
4) Claim & Suspend. Claiming and suspending is a great option for married couples. If the lower earning spouse claitns Social Security at age 62 and the higher earning spouse delays their claitn as long as possible, they can effectively maximize their payouts. Initially, the lower earning spouse will receive smaller payouts based on their own working record. The higher earning spouse continues to work and is readily able to earn delayed retirement credits until age 70. The benefits cannot be received by the lower earning spouse until the higher earning spouse files for retirement benefits. Claiming and suspending maximizes a couples benefits over a life titne, including survivor’s benefits. Both members can have a piece of tnind lmowing that there are higher benefits available when they are needed. Social Security checks will noticeably increase by 7-8 percent until the age of 70 each year that claims are delayed.
5) Claim Twice. Claiming Social Security twice is a smart option for dual earning couples once they reach their full retirement age. In the first instance, one spouse will file and suspend their claitn. The other spouse will claitn a spousal benefit. The collecting spouse is able to continue working after their full retirement age without restrictions on earnings. They are both able to acquire delayed retirement benefits to their own Social Security records. Secondly, they should claitn themselves using their own work records. Due to delayed retirement credits, they will receive a higher monthly benefit. Claiming Social Security twice is especially beneficial to couples who earn equally high income.
6) Include Family. When there are other fatnily members involved in your decision making process, there are strategies to protect them as well. Social Security recipients can protect their fatnily members if they are disabled or have a child under the age of 16. By securing additional Social Security payments, a child is eligible for up to 50 percent of the retiree’s full benefit. The recipient is also able to secure additional payments for their spouse, even if the spouse is under the age of 62 if they are caring for a dependent child. Typically, benefits allotted to the fatnily members are capped at 150 to 180 percent of the deceased’s benefit and anything above this percentage is compromised. They will find that their benefits are reduced but the retiree will not be affected.
If a divorce is in the cards, an ex-spouse is still eligible to obtain Social Security benefits under certain conditions. First and foremost, the marriage must have lasted at least ten years. The divorced spouse also must be over the age of 61. If they happen to remarry, they are not eligible to receive these benefits. Also, the working spouse will not be affected by this change.
7) Survivor Benefits. Full Social Security retirement benefits are rightfully available to widows and widowers beginning at age 60. This strategy is quite beneficial for women because they are typically younger, and live longer lives than their husbands. Husbands are suggested to wait until age 70 to sign up for Social Security in order to ensure that their wives will receive the maximum monthly survivor’s benefits. In special cases, the surviving spouse is entitled to collect as early as age 50 if they are disabled. Dual earning couples can claim 100 percent of the retirement benefits based on their own working records and are still eligible to claim a reduced widow’s benefit at age 60.
8) Minimize Taxation. Many people do not realize that they have to pay Federal income tax on their Social Security retirement benefit. Generally, the more money you make the more you are taxed. By minimizing your taxes, you will still be left with enough money in your savings that will appreciate over time while keeping up with inflation. Funds are also increased to insure that the retiree can meet their daily expenses. There are no cookie cutter solutions; therefore, every situation needs to be evaluated based on individual circumstances.
Benefits are not taxable for those who rely solely on their Social Security income. On the other hand, those who have other sources of income may have to pay Federal and possibly State income tax on part of their benefit if their Social Security retirement benefit exceeds a specific amount. As much as 85% of your Social Security retirement benefit may be taxable if your Modified Adjusted Gross Income plus half of your Social Security benefit is above the following limits:
The following items are included in your Modified Adjusted Gross Income:
• Taxable Pensions
• Other types of taxable income
• Tax-exempt interest income
• Normally excludable income (i.e. Interest from Series EE savings bonds or ‘Patriot’ bonds)
• Foreign earned income of U.S. citizens and residents.
9) Defer Your Income. If you are a retiree living on a fixed income, every penny you have is important. Unfortunately, even for the IRS every penny is important. That is why we see retirees whose income after retirement exceeds the limits prescribed by the IRS end up paying taxes on their Social Security benefit. The good news is that you can reduce the taxes on your Social Security benefit by deferring the income you receive from other sources. For example, many retirees have certificates of deposit that generate interest income. If you aren’t relying on the income, you may be accumulating the interest each year. Even if you aren’t receiving the income, you are paying taxes on it each year and this interest is included in your Modified Adjusted Gross Income for Social Security taxation. If you don’t need the income, consider repurposing the funds into a tax-deferred vehicle such as a fixed annuity. A single-premium annuity provides a fixed rate of return, giving you the peace of mind of knowing how much money you are going to earn. The interest you receive will grow on a tax-deferred basis and is not included in your taxable income until you make a withdrawal. Annuities have advantages and disadvantages. Check with a financial advisor to see if an annuity may be suitable for you.
Annuities have many advantages and many disadvantages. Check with a financial advisor to see if an annuity may be suitable for you.
Advantages of a Fixed Annuity
• Fixed annuity contracts offer compound growth without anxiety about fluctuations in the stock market
• Income taxes are deferred
• Interest rates are generally competitive
• Proceeds paid to a named beneficiary are exempt from probate
• Proceeds may also be exempt from state inheritance taxes
• You may have the right to take 10 percent (or more) of the account value annually without paying surrender charges (but you are subject to the IRS penalty on withdrawals made before age 59%)
• If the owner has a medical need for long-term care in a nursing home, tax-deferred earnings may be withdrawn, subject to state laws
• Switching to another company can be done without incurring any income tax liability (see Section 1035 of the Internal Revenue Code)
• Values may be transferred from a life insurance contract to a tax-deferred annuity through a Section
• You may turn the accumulated account value into a stream of income that you cannot outlive, though the amount you receive may be higher using other payout options
• You may take withdrawals at some future date when your personal income tax bracket may be lower than it is during your peak earning years (subject to penalty and surrender charges)
• Depending on your state, account values may be protected from creditors
Disadvantages of a Fixed Annuity
• The tax-deferred growth will ultimately be taxed, perhaps to a beneficiary in a higher income tax bracket
• There is no step-up in basis at death, and capital gains tax rates are not applicable, so all income is taxed as ordinary income
• Due to possible surrender charges and IRS tax penalties for early withdrawal, the annuity is not considered a liquid asset
• Ownership by a corporation or any other “non-person” subjects the growth to annual income taxes
• Some surrender charges may last for many years
• Some contracts offer a higher rate of interest if you annuitize and a lower rate if you surrender the contract
• In some states, state premium taxes may reduce the amount of value available for future payments
• Annuities are not federally insured
10) Consider a Roth Conversion. If you have a large balance in your Traditional IRA and are taking required minimum distributions, each withdrawal from your Traditional IRA will add to your ordinary income. Talk with an advisor to determine if a series of Roth Conversions over several years would make financial sense for you. By converting your Traditional IRA to a Roth IRA, your annual required minimum distributions will be diminished and future withdrawals from your Roth IRA are not currently included in your Modified Adjusted Gross Income calculations for Social Security taxation.
Medicare–Making Sense of All the Details
Medicare is a federal program that provides health insurance to retired individuals, regardless of their medical condition. Here are some basic facts about Medicare that you should know.
What does Medicare cover?
Medicare coverage consists of two main parts: Medicare Part A (hospital insurance) and Medicare Part B (medical insurance). A third part, Medicare Part C (Medicare Advantage), is a program that allows you to choose among several types of health-care plans. A fourth part, Medicare Part D, offers prescription drug coverage that can help you handle the rising costs of prescriptions.
Medicare Part A (hospital insurance)
Generally known as hospital insurance, Part A covers services associated with inpatient hospital care. These are the costs associated with an overnight stay in a hospital, skilled nursing facility, or psychiatric hospital, including charges for the hospital room, meals, and nursing services. Part A also covers hospice care and home health care.
Medicare Part B (medical insurance)
Generally known as medical insurance, Part B covers other medical care. Physician care–whether you received it as an inpatient at a hospital, as an outpatient at a hospital or other health-care facility, or at a doctor’s office–is covered under Part B. Laboratory tests, physical therapy or rehabilitation services, and ambulance service are also covered. Medicare Part B also covers 100 percent of the cost of many preventative services and an annual wellness visit.
Medicare Part C (Medicare Advantage)
The 1997 Balanced Budget Act expanded the kinds of private health-care plans that may offer Medicare benefits to include managed care plans and private fee-for-service plans. Medicare Part C programs are in addition to the fee for-service options available under Medicare Parts A and B. Medicare Part C programs vary, but generally provide all Medicare-covered benefits. Many also offer extra benefits, including prescription drug coverage, and coverage for additional days in the hospital.
Medicare Part D (prescription drug coverage)
All Medicare beneficiaries are eligible to join a Medicare prescription drug plan offered by private companies or insurers that have been approved by Medicare. Although these plans vary in price and benefits, they all cover a broad number of brand name and generic drugs available at local pharmacies or through the mail. Medicare prescription drug coverage is voluntary, but if you decide to join a plan, keep in mind that some plans cover more drugs or offer a wider selection of pharmacies (for a higher premium) than others. You can get information and help with comparing plans on the Medicare website, www.medicare.gov, or by calling a Medicare counselor at 1-800-Medicare.
What is not covered by Medicare Parts A and B?
• Your Part B premium
• Deductibles, coinsurance, or co-payments that apply
• Most prescription drugs
• Dental care
• Hearing aids
• Eye care
• Custodial care at home or in a nursing home
Medicare Part C may cover some of these expenses, or you can purchase a supplemental Medigap insurance policy that will help cover what Medicare does not.
Are you eligible for Medicare?
Most people age 65 or older who are citizens or permanent residents of the United States are eligible for Medicare Part A (hospital insurance) without paying a monthly premium. You are eligible at age 65 if:
• You receive or are eligible to receive Social Security or Railroad Retirement Board benefits based on your own work record or on someone else’s work record (as a spouse, divorced spouse, widow, widower, divorced widow, divorced widower, or parent), or
• You or your spouse worked long enough in a government job where Medicare taxes were paid
In addition, if you are under age 65, you can get Part A without paying a monthly premium if you have received Social Security or Railroad Retirement Board disability benefits for 24 months, or if you are on kidney dialysis or are a kidney transplant patient.
Even if you’re not eligible for free Part A coverage, you may still be able to purchase it by paying a premium. Call the Social Security Administration (SSA) at (800) 772-1213 for more information. The Part A premium is $248 per month for people who have 30-39 quarters of Medicare-covered employment. The Part A premium is $450 per month for people who are not otherwise eligible for premium-free hospital insurance and have less than 30 quarters of Medicare-covered employment.
Although Medicare Part B (medical insurance) is optional, most people sign up for it. If you want to join a Medicare managed care plan or a Medicare private fee-for-service plan, you’ll need to enroll in both Parts A and B. And Medicare Part B is never free–you’ll pay a monthly premium for it, even if you are eligible for premium-free Medicare Part A.
How much does Medicare cost?
Medicare deductible amounts and premiums change annually. Here’s what you’ll pay for Medicare in 2011:
Note: Your monthly Medicare Part B premium will be $115.40 if you are a new enrollee or did not have the Social Security Administration withhold your premium in 2010. You will pay an even higher premium if you file an individual income tax return and your annual modified adjusted gross income is more than $85,000, or if you file a joint income tax return and your annual modified adjusted gross income is more than $170,000, as follows:
For more information, visit www.medicare.gov.
Since Medicare doesn’t cover every type of medical care, and you’ll have to pay deductibles and coinsurance, you may want to buy a Medicare supplemental insurance (Medigap) policy.
Who administers the Medicare program?
The Centers for Medicare & Medicaid Services (formerly known as the Health Care Financing Administration), a division of the U.S. Department of Health and Human Services, has overall responsibility for administering the Medicare program and sets standards and policies. But it’s the SSA that processes Medicare applications and answers questions about eligibility.
However, as a beneficiary, you deal mostly with the private insurance companies that actually handle the claims on the local level for individuals with Medicare coverage. Insurance companies that handle Medicare Part A claims are known as Medicare intermediaries, and insurance companies that handle Part B claims are known as Medicare carriers. Managed care plans handle Part C claims. Although the same private insurance company may handle both Part A and Part B claims, Part A and Part B are very different in regard to administration (e.g., different deductibles and co-payment requirements). There is virtually no overlap; it is as if you have two separate health insurance policies.
How do you sign up for Medicare?
Any individual who is receiving Social Security benefits will automatically be enrolled in Medicare Parts A and B at age 65 when he or she becomes eligible. If you are not receiving Social Security benefits before age 65, you will be automatically enrolled when you apply for benefits at age 65. But if you decide to delay retirement until after age 65, remember to enroll in Medicare Parts A and B at age 65 anyway, because your enrollment won’t be automatic. If you’re going to be automatically enrolled in Medicare, you’ll receive an initial enrollment package by mail from the SSA, usually three months before your 65th birthday.
Of course, even if you sign up for Part A, you don’t have to enroll in Part B, or you can decide to delay enrolling. But first, carefully read the information contained in your initial enrollment package. It explains the consequences of not enrolling at age 65 (e.g., you may have to pay a higher premium later) and will help you learn more about the Medicare program.
For more information about enrolling in Medicare, call the SSA at (800) 772-1213.
Budgeting–Learning to Live Within Your Means
Do you ever wonder where your money goes each month? Does it seem like you’re never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.
Examine your financial goals
Before you establish a budget, you should examine your fmancial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child’s college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.
Identify your current monthly income and expenses
To develop a budget that is appropriate for your lifestyle, you’ll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.
Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You’ll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you’re not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.
Evaluate your budget
Once you’ve added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you’re on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you’ll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don’t worry! All it will take is some determination and a litde self-discipline, and you’ll eventually get it right.
Monitor your budget
You’ll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don’t have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).
Tips to help you stay on track
• Involve the entire family: Agree on a budget up front and meet regularly to check your progress
• Stay disciplined: Try to make budgeting a part of your daily routine
• Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays)
• Find a budgeting system that fits your needs (e.g., budgeting software)
• Distinguish between expenses that are “wants” (e.g., designer shoes) and expenses that are “needs” (e.g., groceries)
• Build rewards into your budget (e.g., eat out every other week)
• Avoid using credit cards to pay for everyday expenses: It may seem like you’re spending less, but your credit card debt will continue to increase
Take a test drive
Challenge yourself to stay within your budget before you retire. For six months, live like you are already retired. We don’t mean to say you should be golfing every day but rather set aside any income that you receive that will be more than what you’ll receive in retirement. Of course you’ll have to make adjustments for work related expenses such as gasoline, etc. You may find that you have no problems living within your new means, or you may find that you’ll need to sharpen your pencil and start spending less. If spending isn’t the issue and the lack of income is, you may be faced with the hard decision of postponing your retirement until you are in better financial shape. Either way, it’s easier to adjust your spending habits before you retire rather than finding out when it’s too late.
Investment–Don’t Leave Your Employer Plan Behind
The majority of retirees have accumulated a number of compensation plans from their different occupations over the years. Remember that as long as the funds remain in the 401k, they grow tax-deferred; as a rule of thumb, always try to avoid taxation and penalties of any kind when transferring your funds. There are a number of options to consider before taking action with these accounts.
1. Lump Sum Distribution
This option involves removing all of the funds from the 401k within one taxable year. While this is a very tempting option as it gives you complete control of the funds, allowing you to put them toward expenses of your choice, it is not recommended. Lump Sum Distributions are subject to a great deal of taxation and penalty. Firstly, it greatly increases your income for that year, potentially pushing you to a higher income tax bracket. Aside from federal and state income tax penalties, in some states, the withdrawal is also subject to a 10% premature distribution tax if you are under the age of 59 %. On top of all of these taxes, the funds will no longer grow tax-deferred.
2. Leave the funds in their current holdings
Simply doing nothing and leaving the accumulated fund with the previous employer allows the funds to continue to grow tax-deferred as they would if you still held the previous job. Essentially, nothing changes. This option however is not always available; some employers may only allow 401k plans if the employee contributed at least $5,000. If you are satisfied with the investment format of the 401k investments and the employer will allow you to continue growing your assets in that location, this may be a suitable option.
3. Rollover your 401k
Rolling over a 401k is an option that offers simplicity and convenience, it allows all accumulated 401k plans to be saved in one location. The funds can be rolled into either a Traditional or Roth IRA. These two types of IRAs are structured very similarly; both offer taxation safe place to store your retirement funds, however, specific guidelines are applied. The major differences between Traditional IRAs and Roth IRAs are outlined in the following table:
There are two ways in which a 401k can be rolled into an IRA: direct or indirect. A direct rollover works just the way it sounds; funds are rolled directly from the old 401k to the IRA of your choice. It is a simple, stress-free process that allows your funds to continue to grow tax deferred.
A rollover is considered indirect when the employer of the old 401k plan writes a check to the employee and the employee then reinvest the money into an IRA. The pitfall to this option is that the assets are taxable while in the possession of the employee. A total of 20% of the assets will be withheld for federal income
tax; therefore, you must match this 20% with outside funds because if the entire amount is not rolled over then the portion that remains will be taxable at 10% as federal income tax and an additional 10% premature distribution penalty if under the age of 59 % . If the entire fund is not transferred to the IRA within 60 days, the 10% tax applies to the entire amount.
Before committing to an IRA, there are some restrictions to take into consideration:
• Not all employers allow 401k plans to be rolled.
• If funds are removed from a retirement plan (401k or IRA) before age 59 %, the removed portion is subject to a 10% is tax for premature distribution penalty.
• There is a maximum annual contribution of either $5,000 or 100% of your salary; and $6,000 for people over the age of 50.
Estate Planning–Don’t Pay Uncle Sam More Than You Have To
Estate planning is a necessary step in planning for retirement to ensure that the remainder of your assets are transferred to your heirs rather than the state. Depending on the amount of money remaining and the manner in which it is distributed, the assets may be taxed. Federal estate taxes are applied to assets that skip a generation in the transfer; in 2010, these taxes were eliminated but will be reinstated in 2011 with a $1 million exemption and a top rate of 45%. Gift taxes are currently at $1 million lifetime exemption and a 35% top rate; the top rate will increase to 45% in 2011.
The future of the federal estate tax is unpredictable. Although every situation is different, historical trends lead us to believe that estates under $1 million will be relatively unaffected and estates over $3.5 million should begin planning now. Any estates between these two values should take caution and be flexible with their plans.
Last Minute Plan of Action for Elderly or Ill
1. Write or update will.
2. Consider opening a revocable trust over which you have durable power of attorney and a health-care directive.
3. Inform your family of your wishes.
4. Make copies of important documents so your family can locate them.
Plan of Action for Advanced Estate Planning
1. Seek out the professionals you need: Accountant, Attorney, financial Planning Professional, Tax Advisor, Insurance Professional, and of course a Trustee.
2. Research and Plan: Assets/Liabilities, Insurance Plan, Charitable Plan, Health-Care Proxies, Trusts, Beneficiaries, Goals, Power of Attorneys, and Wills.
3. Oversee: Ensure that your plan accommodates your current and future needs.
4. Consult: Review recommendations from the professionals you selected.
5. Adjust: Sign documents, purchase insurance, make changes.
6. Update: Review your plan annually to make sure it is up to date.
The Advantages of Trusts
Trusts are used to transfer property to a trustee to manage according to specified terms to benefit the recipient. Trusts have benefits that other asset holdings do not; they offer minimal federal estate taxes for wealthy married individuals, provide management assistance for heirs, avoid court costs, avoid administrative probate costs, help distribute income to family, distribute assets to intended beneficiaries, minimize income taxes during transfer, and other specific advantages.
Review your Estate Plan
A key aspect to successful estate planning is staying up to date. Any sort of changes in your lifestyle, laws, and/or the economy may result in the need to adjust your plan. As a general rule, large estates should be reviewed annually, small estates should be reviewed every 5 years and if your estate has changed by more than 20% in the last 2 years. Review may also be necessary upon economic changes, employment changes, family changes (death, birth, divorce…), insurance changes, business interest changes, major transactions, and the death of a trustee, executor or guardian.
Asset Protection Planning–Don’t Impoverish Your Spouse
You’re beginning to accumulate substantial wealth, but you worry about protecting it from future potential creditors. Whether your concern is for your personal assets or your business, various tools exist to keep your property safe from tax collectors, accident victims, health-care providers, credit card issuers, business creditors, and creditors of others.
To insulate your property from such claims, you’ll have to evaluate each tool in terms of your own situation. You may decide that insurance and a Declaration of Homestead may be sufficient protection for your home because your exposure to a claim is low. For high exposure, you may want to create a business entity or an offshore trust to shield your assets. Remember, no asset protection tool is guaranteed to work, and you may have to adjust your asset protection strategies as your situation or the laws change.
Liability insurance is your first and best line of defense
Liability insurance is at the top of any plan for asset protection. You should consider purchasing or increasing umbrella coverage on your homeowners policy. For business-related liability, purchase or increase your liability coverage under your business insurance policy. Generally, the cost of the premiums for this type of coverage is minimal compared to what you might be required to pay under a court judgment should you ever be sued.
A Declaration of Homestead protects the family residence
Your primary residence may be your most significant asset. State law determines the creditor and judgment protection afforded a residence by way of a Declaration of Homestead, which varies greatly from state to state. For example, a state may provide a complete exemption for a residence (i.e., its entire value), a limited exemption (e.g., up to $100,000), or an exemption under certain circumstances (e.g., a judgment for medical bills). A Declaration of Homestead is easy to file. You pay a small fee, fill out a simple form, and file it at the registry where your deed is recorded. This just in: On December 16, 2010 Governor Deval Patrick signed into legislation new Homestead regulations. Effective 90 days from December 16’h, residents if Massachusetts will have an automatic Homestead if$125,000. You can increase this exemption to $500,000 f?y filing a Homestead Declaration at your registry if deeds.
Dividing assets between spouses can limit exposure to potential liability
Perhaps you work in an occupation or business that exposes you to greater potential liability than your spouse’s job does. If so, it may be a good idea to divide assets between you so that you keep only the income and assets from your job, while your spouse takes sole ownership of your investments and other valuable assets. Generally, your creditors can reach only those assets that are in your name.
Business entities can provide two types of protection–shielding your personal assets from your business creditors and shielding business assets from your personal creditors.
Consider using a corporation, limited partnership, or limited liability company (LLC) to operate the business. Such business entities shield the personal assets of the shareholders, limited partners, or LLC members from liabilities that arise from the business. The liability of these owners will be limited to the assets of the business.
Conversely, corporations, limited partnerships, and LLCs provide some protection from the personal creditors of a shareholder, limited partner, or member. In a corporation, a creditor of an individual owner is able to place a lien on, and eventually acquire, the shares of the debtor/ shareholder, but would not have any rights greater than the rights conferred by the shares. In limited partnerships or LLCs, under most state laws, a creditor of a partner or member is entitled to obtain only a charging order with respect to the partner or member’s interest. The charging order gives the creditor the right to receive any distributions with respect to the interest. In all respects, the creditor is treated as a mere assignee and is not entitled to exercise any voting rights or other rights that the partner or member possessed.
Certain trusts can preserve trust assets from claims
People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and become the owner of your property. Once given away, these assets are no longer yours and are not available to satisfy claims against you. To properly establish an asset protection trust, you must not keep any interest in the trust assets or control over the trust.
Trusts can also protect trust assets from potential creditors of the beneficiaries of the trust. The extent to which a beneficiary’s creditors can reach trust property depends on how much access the beneficiary has to the trust property. The more access the beneficiary has to the trust property, the more access the beneficiary’s creditors will have. Thus, the terms of the trust are critical.
There are many types of asset protection trusts, each having its own benefits and drawbacks. These trusts include:
• Spendthrift trusts
• Discretionary trusts
• Support trusts
• Blend trusts
• Personal trusts
• Self-settled trusts
Since certain claims can pierce domestic protective trusts (e.g., claims by a spouse or child for support and state or federal claims), you can bolster your protection by placing the trust in a foreign jurisdiction. Offshore or foreign trusts are established under, or made subject to, the laws of another country (e.g., the Bahamas, the Cayman Islands, Bermuda, Belize, Jersey, Liechtenstein, and the Cook Islands) that does not generally honor judgments made in the United States.
A word about fraudulent transfers
The court will ignore transfers to an asset protection trust if:
• A creditor’s claim arose before you made the transfer
• You made the transfer with the intent to defraud a creditor
• You incurred debts without a reasonable expectation of paying them
Long-Term Care Insurance–Is It Right For You?
Long Term Care Insurance (LTCI) provides funding to people who can no longer care for themselves. LTCI covers three types of services that Medicare and other health insurance plans do not: skilled care, intermediate care, and custodial care. Skilled care applies to specific medical treatment, ordered by a physician, performed by skilled
medical personnel for a medical condition. Intermediate care is provided by nurses under the supervision of a physician. Custodial care includes assistance with daily living activities (bathing, eating, dressing…); this type of work is provided someone with or without professional medical skills, under the supervision of a physician.
LTCI and Medicaid
It can be helpful to have a LTCI plan when applying for Medicaid. Applying for Medicaid includes a review of your assets that are legally available to you. As a tactic to receive the best possible Medicaid plan, applicants often shelter their assets in gifts, irrevocable trusts, and life estates which results in less control over the assets. Investing in a LTCI plan allows you to remain in control of your assets for longer and protects your home from imposition and lien during the Medicaid process.
The government considers any transfer of assets for less than market value through gifts or irrevocable trusts as a way to qualify for Medicaid and results in ineligibility for as long as 60 months. LTCI will cover nursing home costs during this period of ineligibility. Once this period is over, Medicaid should approve the application and cover any further nursing home costs.
LTCI is recommended for people who want to safeguard their assets for their family, and/or foresee the need for long-term care or Medicaid. However, it is important to keep in mind the fees and consider whether or not you can afford the premium as your salary decreases in the future.
• Subsidizes nursing home bills
• Allows you to shelter assets from the state
• Allows you to maintain control over your assets
• Premiums may be deductible for income purposes
• May be too expensive for people of modest means
• As with any investment, risk is involved
Easy 3-step process to LTCI
1. Research: Compare policies and the financial security of providers.
2. Read: Make sure you understand the features of the policy you choose and ensure that it meets your needs.
3. Consult: Ask a Medicaid law attorney to review your policy; laws are always changing, it is important to have a professional to ensure that your policy is up to date.
Taxability and Deductibility
LTCI benefits received for personal injury or siclmess are not subject to income tax. Depending on your policy, a portion of the premium may be tax deductible. All or part of a tax-qualified long-term care insurance plan may be deductible if listed as a medical expense for federal income tax purposes. As of 2009, the total of your medical expenses must exceed 7.5% of your adjusted gross income to qualify for a tax deduction.
Insurance Needs in Retirement–Do You Still Need LIfe Insurance?
Your goals and priorities will probably change as you plan to retire. Along with them, your insurance needs may change as well. Retirement is typically a good time to review the different parts of your insurance program and make any changes that might be needed.
Stay well with good health insurance
After you retire, you’ll probably focus more on your health than ever before. Staying healthy is your goal, and that may require more visits to the doctor for preventive tests and routine checkups. There’s also a chance that your health will decline as you grow older, increasing your need for costly prescription drugs and medical treatments. All of this can add up to substantial medical bills after you’ve left the workforce (and probably lost your employer’s health benefits). You need health insurance that meets both your needs and your budget.
Fortunately, you’ll get some help from Uncle Sam. You typically become eligible for Medicare coverage at the same time you become eligible for Social Security retirement benefits. Premium-free Medicare Part A covers inpatient hospital care, while Medicare Part B (for which you’ll pay a premium) covers physician care, laboratory tests, physical therapy, and other medical expenses. But don’t expect Medicare to cover everything after you retire. For instance, you’ll have to pay a large deductible and make co-payments for certain types of care. Medicare prescription drug coverage is only available through a managed care plan (a Medicare Advantage plan), or through a Medicare prescription drug plan offered by a private company or insurer (premiums apply).
To supplement Medicare, you may want to purchase a Medigap policy. These policies are specifically designed to fill the holes in Medicare’s coverage. Though Medigap policies are sold by private insurance companies, they’re regulated by the federal government. There are 12 standard Medigap plans, but not all of them are offered in every state. All of these plans provide certain core benefits, and all but one offer combinations of additional benefits. Be sure to look at both cost and benefits when choosing a plan.
What if you’re retiring early and won’t be eligible for Medicare for a number of years? If you’re lucky, your employer may give you a retirement package that includes health benefits at least until Medicare kicks in. If not, you may be able to continue your employer’s coverage at your own expense through COBRA. But this is only a short-term solution, because COBRA coverage typically lasts only 18 months. Another option is to buy an individual policy, though you may not be insurable if you’re in poor health. Even if you are insurable, the coverage may be very expensive.
If you’re married, you want to make sure that your spouse will have enough money when you die. You may also have children and other heirs you want to take care of. Life insurance can be one way to accomplish these goals, but several questions arise as you near retirement. Should you keep that existing policy in place? If so, should you change the coverage amount? What if you don’t have any life insurance because you lost your group coverage at work (though some employers let you keep the coverage at your own expense)? Should you go out and buy some? The answers depend largely on your particular circumstances.
Your life insurance needs may not be as great during retirement because your financial picture may have improved. When you’re working and raising a family, the loss of your job income could be devastating. You often need life insurance to replace that income, meet your outstanding debts (e.g., your mortgage, car loans, credit cards), and fund your kids’ college education in case something happens to you. But after you retire, there’s usually no significant job income to protect. Plus, your kids may be grown and most of your debts paid off. You may even be financially secure enough to provide for your loved ones without insurance. It may make sense to go without life insurance in these cases, especially if you have term life insurance and your premium has increased dramatically. But what if you still have financial obligations and few assets of your own? Or what if you’re looking for a way to pay your estate tax bill? Then you may want to keep your coverage in force (or buy coverage, if you have none). If you need life insurance but not as much as you have now, you can always lower your coverage amount. It’s best to talk to a professional before making any decisions. He or she can help you weigh your needs against the cost of coverage.
Take a look at your auto and homeowners policies
If you stay in your home after you retire, your homeowners insurance needs may not change much. But you should still review your liability coverage to make sure it’s sufficient to protect your assets.
If you’re liable for an accident on or off your premises, claims against you for medical bills and other expenses can be substantial. For additional protection, you might consider buying an umbrella liability policy. It’s also a good idea to review the coverage you have on your home itself and the property inside it. Finally, if you plan to buy a second home, find out if your insurer will cover both homes and give you a discount on your premium. Auto insurance raises some similar issues. Review your policy to make sure your coverage limits are high enough in each area. Again, having the right amount of liability coverage is especially important–you don’t want your assets to be put at risk if you cause an auto accident that injures other people or damages property. Weigh your need for any coverages that are optional in your state. Finally, look into ways to save on your premium now that you’re retired (e.g., discounts for low annual mileage or senior driving courses).
Veterans’ Benefits–There May Be Help For You
After spending many working years serving our country in war, many veterans are left with fmancial difficulties. What the majority of veterans do not know is that aid is available. The Veterans Aid and Attendance Council (yAAC) works to provide health care for U.S. war veterans and educate the public about the benefits available to veterans. Under the Improved Pension Benefits of the Veterans Health Adtninistrationili, certain veterans are eligible for a pension plan. There are specific eligibility standards for veterans under the age of 65; however, any wartime veteran with limited income, age 65 or older, who served for at least 90 days, is by law, entided to a pension plan.
Pension plans are distributed according to the income limits described in table 1. Income includes any income of the spouse and eligible children including earnings, disability and retirement payments, interest and dividends, and net income.
Family Income Limits:
Table 1: Benefit Qualification Limitsiv
The benefits provided by VAAC are distributed based on your income and the income limit of your particular living situation as described in table 1. VAAC provides families with incomes below the limits described in table 1 with the amount of money needed to reach the limit. The program also provides death pensions to unremarried spouses of veterans as well as unmarried children(under 18 or under 23 and in school) of veterans. All benefits are distributed evenly over 12 months to provide families with enough money to reach the annual income limit.
How to Apply:
To apply for the Veteran’s Pension Plan, simply fill out the VA Form 21-526 application which can be submitted through the mail or online at http://vabenefits.vba.va.gov/vonapp. Along with the application, submit all available dependency records and medical evidence.
i “Purchasing Power of Money in the United States from 1774 to 2000”. <measuringworth.com>
ii “Social Security Basic Facts.” SocialSecuri!J 011ii11e – The Official Website if the U.S. SocialSecuriry Admitristratio11. 5 Aug. 2009. Web. 27 July 2010. <http://www.ssa.gov/pressoffice/basicfact.htm>.
iii “Benefits Index, Compensation and Pension (U.S. Department of Veterans Affairs).” Redirect to Bemjits Home Page. Web. 16 July 2010. <http://www.vba.va.gov/bln/21/benefits/>.
iv “Veterans Benefits.” Vetera11s Aid a!tdAttmda11ce Cou tcil. Web. 28 July 2010. <http://veteransaid.org/id3.html>.
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