Retirement planning is something that most people don’t take the time to do. They usually only put as much money and time into a retirement plan as they can “afford” (if at all) and hope they hit the lottery. Some max out their options, but max out some wrong choices, like purchasing too much company stock (remember Enron?). Remember what your mother always said, “Don’t put all your eggs into one basket!” It doesn’t matter if your company is the best thing in the world, like the employees of Enron did.
Retirement planning can be accelerated by proper tax planning. Get control of your taxes, and improve your retirement!
Phases of Retirement Planning
Retirement planning has several phases to it. The one most people think about is the Accumulation phase, which is accumulating the assets that will hopefully allow you to live the retirement of your choice. Most never achieve the level they hope for because of several reasons. Some of the most common reasons is putting it off and starting late, setting wrong priorities, putting money into everything else but your future, and bad investment choices. Starting where you are at is a key factor….never starting is also a key factor…
If you haven’t started, start now! Where ever you are at in your life. A small amount for a cushion is better than nothing. Start now, pay yourself first! “The OLD money makes the Bigger Money!” (Time and Value of money)
Another part of accumulating assets is protecting them from loss. If you were to become sick or injured, you may not be able to continue to save. Due to the time and value of money, the older money can make a bigger difference than the newer money in retirement planning. Losing the ability to save in the early years can impact retirement substantially. Protecting yourself from this is important.
Disability Insurance can protect your nest egg from being depleted if you become sick or injured by paying you an income (up to ~65% of working income) while disabled.
Life Insurance can protect your family if you or your spouse were to die prematurely. Life Insurance can make sure your promises to your family come true…even if you aren’t around to put your children through college, or keeping a roof over their heads and maintaining their lifestyle and retirement needs.
RULE OF 100. The younger you are, the more risk you can take. You have time to recover from a down market. The older you are, the less risk you should take. We believe in the Rule of 100. Take your age and subtract it from 100. Your answer is the MAXIMUM amount you should have at risk in the market (or other risky investments). If you are age 50, 100 – 50 = 50, so 50% is the maximum you should have at risk. If you were age 65, 100 – 65 = 35, so 35% of your portfolio is the maximum you should have at risk and 65% should be where the principle is guaranteed. These are only guidlines…
The 2nd phase of retirement planning is the Transitional phase. This means you are starting to think about retirement, “When can I afford to retire,” or “Can I retire when I planned.” If you have accumulated assets, and are thinking about retirement, it is time to speak with us about transitional planning. Accumulation planning is different than Transitional Planning. At this phase of your life, you generally don’t have the time to “wait out” a down market to recover. You will generally be using your retirement funds to supplement your social security and pension in retirement. If you are still positioned in the stock market and it drops….and you are spending money from the retirement funds, it can devastate your future income. It will make recovery very difficult if not almost impossible. Transitional planning consists of deciding what level of income you will require and the amount of risk you are willing to take and what level of risk your portfolio size can take to survive a down market. (the latter being most important)
In the transitional phase of your retirement plan, you should also consider protecting your retirement assets from catastrophic losses if you need to enter a nursing home. At the current costs per day of $250 (What we see in W. Pa), an extended stay could wipe out your savings.
Example, my friend just moved his mother to a nursing home. It costs them $7500 per month. How long could your retirement hold out without effecting you and your spouses lifestyle. With the Deficit Reduction Act of 2005 (signed on February 8th, 2006 at 3:55pm) in effect, the estate preservation strategies we once had have been severely limited. This planning MUST be accomplished earlier now. The look back period has been changed to 5 years from 3 years on gifting. The state recovery laws can require gifts be given back if there is not enough money to pay for the nursing home costs. Medicaid coverage can be disqualified for a period of time. (Average cost per month divided into the amount gifted, ie: gift $80,000 divided by average cost of $8,000/month equals 10 months of ineligibility for Medicaid coverage in a skilled nursing home). They would have to wait for 10 months for Medicaid to cover the costs. We recommend purchasing Long Term Care Insurance to protect the estate at this phase of your life if you haven’t purchased it earlier. The cost is more affordable now and you may not medically qualify later in life! There are also hybrid life insurance policies that have Long Term Care benefits payable from the higher death benefit amount…but also return of premium, which means that you have access to the amount you funded the policy with in case of an emergency. This option has become very popular…along with asset protection planning to protect your next egg for your spouse or for more options if care is needed in the future.
Proper planning in the transition phase can allow you to know, without a doubt (financiall), when you want to retire and what amounts you will have to fund your retirement, without worrying about a market crash delaying your retirement plans, as many have experienced in the past market crashes!
The 3rd phase is Preservation. (sometimes called decumulation) As you get older, you should take less risk. You may not be able to withstand any losses of principle at this phase of your life. Accumulation should have brought you to retirement, and preservation will keep you there! Very little should be at risk at this stage of your life. You should also be considering how to protect your assets from catastrophic losses due to medical bills, or law suits, if you haven’t done it yet.
Today, we have some great options to create retirement income you cannot outlive. You can start the income when needed and stop it if you don’t need it for a while.
If you are, say, 5 or 10 years from retirement, you can be guaranteed an increase in values of 4% – 8% per year, on the money you want to use for retirement income. This accumulation can provide a guaranteed income you cannot out live!!!
The 4th phase if the Distribution phase when you pass. Retirement money or Qualified money has usually not been taxed to this point, except for what you spend during retirement. This is the phase that passes what ever is left to your intended beneficiaries.
When your beneficiary receives your IRA inheritance, it is taxed VERY HEAVILY. In general, if someone inherits a $200,000 IRA, they will only receive about $120,000 on average. The total amount is added to their income taxes, which generally can raise them to the top tax bracket, add in Federal and local income taxes and you have just taken at least 40% off the top. Then to top it off, if the total estate is worth over $5,2500,000 (in 2013) Federal Estate Taxes at 40%, so realistically, a sizable estate with a large IRA can be devastated and be more than cut in half if not properly planned. Inherited IRA’s can lose as much as 80% if not planned properly vs. creating a quadrulpled legacy if proper planning is done! Don’t forget the Pennsylvania Inheritance taxes of 4.5%, 12% or 15%, depending on the beneficiary designated!
One option for IRA holders is to “STRETCH” the IRA over the lives of up to 2 generations, creating a much larger legacy. For instance, a $200,000 IRA can be stretched and pay out up to $5,000,000 to the next two generations! Instead of a one time distribution, your legacy can be remembered every year for the next two generations. Longer with special planning. There are several other options that are possible to create even a larger legacy, but they are more complicated and need to be discussed one on one with us.
One other important note about distribution planning is the fact that a large sum of money received at one time can cause problems with many people. Look at many of the lottery winners. Their lives were changed…not for the better. They were never taught how to handle a large sum of money. It is said that most inheritances are gone within 6 months. Sometimes it may be better to create an income stream rather than a lump sum. This is a much neglected part of planning, but a major part of our comprehensive plan.
A recommended book to read is, “Splitting Heirs” by Ron Blu
Call us today for a no cost, no obligation consultation at: 724-837-3553