by Joe Hearn | Nov 15, 2011 | Investing, Medicare, Retirement
As 2011 draws to a close, there are several financial moves that you should consider. Below are 10 steps that could help reduce your tax bill, solidify your investment strategy and ensure that your retirement planning is on track.
Review beneficiary designations
Many accounts, such as Individual Retirement Accounts (IRAs), 401(k)s, annuities, and insurance policies allow you to name a beneficiary who will receive those assets when you die. Many people don’t realize that those designations take precedence over their will, even if the will is more accurate and up to date. Because of this, it is important to review the beneficiary designations on all your accounts annually to make sure that they accurately reflect your wishes. Meet with your financial adviser and estate planning attorney to ensure that your designations not only pass property to the correct people, but also minimize expense and taxes.
Take required minimum distributions
If you turned (or will turn) 70 ½ during 2011 then it’s time to start taking required minimum distributions (RMDs) from IRAs and other tax deferred accounts like your 401(k). RMDs don’t apply to Roth IRAs. Your financial adviser can help you calculate your RMD based on IRS guidelines. You are required to take the distribution by December 31st of each year with one exception. If you turned 70 ½ during 2011 you can delay your distribution until April 1, 2012. If you do that, remember you will need to take two distributions next year—one for 2011 and one for 2012.
IRA charitable exclusion
The government extended the IRA charitable exclusion for 2011. Basically this exclusion allows you to distribute (tax-free) up to $100,000 from your IRA and direct it to a charitable organization. If you are charitably minded and don’t need the income from your distribution, then this could be a good way to avoid the tax bite on your RMD.
Medicare open enrollment
The Medicare open enrollment period is the time each year when those on Medicare can make changes to their existing plans to better suit their needs. If you are on Medicare, then you should review your health and prescription drug plans and decide if you want to stick with them or if you would be better served by switching to another plan. The open enrollment period typically runs from November 15 to December 31, but it has been moved up this year to October 15 through December 7. Visit www.medicare.gov for more information.
Year-end charitable contributions
One way to reduce your tax liability in a given year is to make charitable contributions. If you are considering making charitable contributions prior to year-end, consider using appreciated stock rather than cash. Not only will you benefit from the charitable deduction, but you could also avoid paying the built in capital gains tax on the stock.
Year-end gains and losses
Capital gains and losses can be used to offset each other. If you took profits in some of your investment positions this year, look to see if you have any positions that could be sold for a loss to offset the gain and minimize your taxes. Excess losses can be used to offset up to $3,000 in ordinary income taxes. Losses beyond that can be carried forward indefinitely to offset future gains.
Maximize retirement contributions
For 2011, you can contribute a maximum of $5,000 to your IRA and $16,500 to your 401(k). If you are over 50, you can contribute an additional $1,000 to your IRA and $5,500 to your 401(k) per year. By maximizing your contributions each year, you greatly increase your chances of being able to adequately fund your retirement.
Review your asset allocation
The market upheaval of the last several years and investors’ response to that upheaval has wreaked havoc on many people’s asset allocations. Rather than having a balanced, diversified portfolio, many have sought safety by moving everything to cash or bonds. That could cause serious problems in the future if inflation picks up or the bond market stumbles. To protect your assets and maximize your returns, you should meet with a trusted adviser and make sure the investments you hold are appropriate based on your risk tolerance, goals and time frame.
Review your estate plan
Your estate plan should not be a static document. As your life changes, your planning must change with it. Getting married or divorced would likely change how you want to distribute your property; likewise if there is a death in the family. Each year you should review your documents, including your will, trust, and powers of attorney to make sure that they still reflect your wishes and have the correct people taking charge if you were to die or become incapacitated. Also, if you move to another state when you retire, meet with your attorney to make sure that your documents will be valid in your new state of residence. Make revisions as necessary.
Shred unnecessary paperwork
Much of the paperwork you have can be purged once a year. For example, if your December investment statements summarize the year’s activity, you can shred the statements for the previous 11 months. Likewise, any bills, credit card statements, and receipts that you are not using as supporting documentation for your taxes can go.
According to the IRS, you should keep your tax records for “the period of time during which you can amend your tax return to claim a credit or refund, or that the IRS can assess more tax.” Seven years should do the trick for most tax documents, such as returns and any supporting documentation like cancelled checks, receipts, or credit card statements. Identity theft is on the rise, so always remember to shred documents before discarding them.
As you can see, by taking a few simple steps before year-end you can enter 2012 organized and on a firm financial footing.
Note: I first published this article at www.fpanet.org and the Omaha World Herald.
by Joe Hearn | Sep 30, 2011 | Retirement
Just in case you missed something, below is a quick summary of the articles I published at Intentional Retirement during September. There are plenty more on the way for October, so stay tuned.
Thanks for reading!
Joe
by Joe Hearn | Sep 13, 2011 | Estate Planning, Insurance, Retirement
Quick Summary: Key documents everyone needs to successfully navigate retirement.
When planning for retirement, most people focus on saving, and rightly so. Having enough money to fund your retirement dreams is a key element to any plan. Often overlooked, however, is the importance of obtaining and organizing important documents. Here are ten essential documents you will need to successfully navigate retirement.
Pension paperwork
Defined benefit pensions have become less common over the years, but there are still many people covered by them. If you have a pension at work, the details of the plan will be spelled out in the plan’s Summary Plan Description. In addition, you should receive an Individual Benefit Statement that details the specific benefits that you have earned and are eligible for. Make sure to review those documents as you approach retirement so that both you and your spouse have a good understanding of how much income you can expect from the plan and what will happen to that income if the primary pension holder dies. Make sure to contact your employee benefit’s department with questions or concerns. Also, the Department of Health and Human Services offers help and advice to pension holders through its Pension Counseling and Information Program. Visit www.aoa.gov for more information.
Beneficiary designation forms
Many accounts, such as Individual Retirement Accounts (IRAs), 401(k)s, annuities, and insurance policies allow you to name a beneficiary who will receive those assets when you die. Many people don’t realize that those designations take precedence over their will, even if the will is more accurate and up to date. Because of this, it is important to review the beneficiary designations on all your accounts (as well as those of your aging parents if you are helping them with their finances) prior to retiring to make sure that they accurately reflect your wishes. Meet with your financial adviser and estate planning attorney to ensure that your designations not only pass property to the correct people, but also minimize expense and taxes.
Documents needed when applying for Social Security
The Social Security Administration will need you to provide certain documents when filing for retirement or survivor benefits. Documents they may request include your Social Security card, a certified copy of your birth certificate, proof of citizenship if you were not born in the U.S., military discharge papers, a copy of your marriage license or divorce papers, and a copy of your W-2 form (or self-employment tax return) for last year. Having these documents readily available will help speed the process along.
Investment paperwork
Most people’s assets are divided into many different types of accounts. Some may be tax-deferred, others may not. Some might have restrictions or requirements on withdrawals. Some, like annuities, might give you different options for turning the account into a guaranteed income stream. When transitioning into retirement, it is important to have current copies of your account statements as well as options or restrictions associated with each account so you can craft a distribution strategy that meets your needs while minimizing expense, hassle and taxes.
Health care paperwork
Your health benefits during retirement will likely come from multiple sources. Those could include a former employer, Medicare, Medicaid, a Medicare supplement policy, or a long-term care policy. Be sure to retain benefit summaries, contact information, and policies associated with each. If you have not filed for Social Security benefits by age 65, you will need to apply for Medicare. You can do this up to three months prior to your 65th birthday. When applying, you will likely need to provide them with the same documents mentioned earlier for Social Security applicants.
Home inventory
Many house fires or burglaries occur when the homeowner is away. When you retire, you will likely spend more time traveling or at a second home than you did during your working years. Because of that, it is important to inventory the contents of your home (either make a list or do a quick video walk through) so that you can more easily make insurance claims and rebuild your life if the unexpected happens.
Insurance policies
Many retirees have life insurance policies in order to replace income in the event of a death, as a vehicle to build cash value, or for estate planning purposes. Make sure to have current copies of your policies as well as contact information for the insurance company so you can easily access cash value during life or so that your heirs can easily claim benefits if something happens to you.
Will/Trust
Most people need a will, regardless of the size of their estate, to control the passing of property at death. Another tool to accomplish this while at the same time avoiding probate is a Revocable Living Trust. As you enter retirement, you should meet with your attorney to put a plan in place that passes your property to the correct people, designates the correct people to take charge, and minimizes expense, hassle and taxes.
Durable power of attorney for finance and health care
A durable power of attorney for finance is a simple and inexpensive legal document that authorizes a person you have chosen to step in and manage your day-to-day financial decisions if you become incapacitated. Everyone needs this document to provide for the ongoing management of their financial affairs if they cannot make decisions for themselves.
Similar to the power of attorney for finance, the health care power of attorney is a legal document that authorizes a person you have chosen to step in and make health care decisions for you if you become incapacitated and can no longer speak for yourself. You can also include a health care directive which provides written instructions to your agent that communicate your wishes regarding the withholding or withdrawal of certain life support equipment or medical procedures.
If you plan on moving to a different state when you retire, meet with your attorney to make sure that your will, trust, and powers of attorney will be valid in your new state of residence and make any necessary revisions.
Tax returns
In many ways life becomes easier after you retire. Unfortunately, this is not the case with your taxes. In fact, because your employer is no longer automatically withholding from your paycheck, tracking and paying your taxes may become more complicated. To make matters worse, different states tax income and spending differently. Will you owe tax on Social Security? How about pension and annuity income? How much should you withhold from IRA distributions? The short answer is “It depends.”
Because of this you should work closely with a trusted tax adviser and then maintain your tax returns and supporting documents for seven years. The IRS can look back three years for basic errors and six if you underestimated income by more than 25 percent.
As you can see, obtaining, understanding, and organizing your key documents will not only help you to make informed decisions, but will also facilitate a smooth transition into a rewarding and meaningful retirement.
As always, thanks for reading! Can you do me a quick favor? Help me spread the ideas at Intentional Retirement by forwarding this email to a friend or family member who you think would benefit from it.
Joe
by Joe Hearn | Jul 25, 2011 | Retirement
If you look around, almost everything you see—from planets to people—is made to work as part of a system. Take the human body for example. It has the skeletal, nervous, circulatory, muscular, and digestive systems, just to name a few. All of those separate systems are brought together to form the incredibly complex human body. If your circulatory system quit working or your skeletal system suddenly disappeared, your body couldn’t function. Each part plays an important role.
What does this have to do with retirement? Quite a bit actually. The typical retirement has a lot of moving parts; things like your finances, health, family, and housing to name a few. Those parts work together in a complex system. If one of those areas isn’t functioning properly, it creates problems.
If your finances are a mess, will that impact your retirement? Absolutely. How about your health? Yes again. Ditto for things like your relationships with friends and family. Just like a broken transmission will affect how your car runs, problems with these areas will impact how your retirement runs. So here’s my point:
If you want your retirement to function properly, you need to be system thinker.
You need to put effort and thought into every key area of retirement if you want the overall system to function well. What are some of those key areas?
Money—If I ask you when you want to retire, your answer should be a dollar amount, not a year. Retirement is about independence, not simply age, and money is critical to independence. You should know exactly how much you need to save in order to fund the type of retirement you want. That means creating a detailed retirement budget and knowing how big your nest egg needs to be to spin off the needed cash. A common rule of thumb is that your savings should be twenty-five times larger than the income you want it to produce.
Pursuits—Money is important, but only as a facilitator. You need it, but you also need to have plans for it. I’ve written a lot about this idea in my books and elsewhere on the site, but it bears repeating: Before you retire, you should have very specific plans for what you want to do. In the near future I’ll be doing a post on creating the ultimate bucket list. Stay tuned. In the meantime, you can read this and this to get some ideas on making the most of your time.
Family and Friends—You need to be on the same page with your spouse before you retire. Here’s a handy checklist to guide your conversation. Also, don’t forget your kids. They’re probably grown and out on their own, but the plans you make will likely impact how often you’re able to see them (and your grandkids). The same is true of your friends. Keep that in mind.
Location—Are you planning on moving or staying put during retirement? That decision will affect almost every area of your life. Here’s an article with things to keep in mind.
Distribution Strategy—Transitioning from accumulation to distribution can be tricky. Taking too much, too soon from the wrong account or in the wrong markets could be the difference between retirement bliss and retirement blunder. For your system to function properly, you need a well thought out, sustainable distribution strategy.
Your health—Since 1950, the average retirement age has decreased by about five years and the average life expectancy has increased by more than a decade. If you want to take advantage of those extra years, it’s a good idea to take care of yourself. Nothing spoils your dreams faster than a heart attack.
Insurance—You’ll likely need hundreds of thousands of dollars (in addition to Medicare) to cover your health care costs during retirement. Make sure you have appropriate health insurance and long-term care insurance in place to help offset those costs.
Social Security—There are no “one-size-fits-all” answers when it comes to understanding Social Security benefits and how best to incorporate them into your overall retirement strategy. Work closely with your spouse, adviser, and local Social Security office to determine how best to claim your benefits. You can also pick up a copy of The Bell Lap (where I discuss the topic extensively) or visit the Start Here page where I’ll post ongoing articles about Social Security.
As you can see, all of these areas come together to form a complex system during your retirement years. Handle each area properly and the system will function well. Handle them poorly and you can expect problems.
After looking at the list, is there an area you need to focus on? Let me know if there’s anything I can do to help.
Photo by Joe Plocki. Used under Creative Commons License.
by Joe Hearn | Jun 20, 2011 | Insurance
For many people in retirement, their greatest fear is ending up in a nursing home. Being able to live independently or, barring that, getting into a quality facility of his or her choice is an important end goal. Unfortunately, this type of care does not come cheap.
According to the 2011 Genworth Cost of Care Survey, the median annual cost of a private room at an assisted living facility in the U.S. is $39,135. That same private room at a nursing home averages almost $78,000 per year. Because these costs are expected to continue rising in the years to come, it is important to have a plan to protect yourself against this potential shock to your retirement budget.
Covering the costs of long-term care
There are four primary ways to pay for long-term care: Medicare, Medicaid, paying the costs yourself, or purchasing a long-term care insurance policy. Many people assume that Medicare is the answer, but it only covers long-term care expenses under very limited circumstances. Medicaid will help pay, but it is a needs based program that essentially requires you to be both sick and poor in order to be eligible for assistance. It is often a last resort for someone who needs care, but has exhausted his or her personal resources.
Because Medicare and Medicaid are not great options, it is important to have alternative plans to cover the costs. Some may have the resources to self insure. For others, it may make sense to purchase a long-term care insurance policy.
How does long-term care work?
In general, a long-term care policy pays a specific dollar amount for each day of care that is covered by the policy. Covered services can include home health care, respite care, adult day care, care in an assisted living facility, or nursing home care. The policy is usually triggered when you need help performing the normal activities of daily living, such as bathing, eating, or dressing.
Roberta Hahn of Tigard, Oregon arranged for her mom Helen to get help when she began to struggle with these daily tasks. “Mom lived independently as long as she could,” Hahn said. “Physically she just got to the point where she couldn’t take care of herself anymore. Because I work I wasn’t able to give her the kind of care she needed, so it was a relief when we were able to get her into a great facility not far from my home. Thankfully, she has a long-term care policy that has helped to cover much of the cost.”
There are nearly 10 million Americans who, like Ms. Hahn, need help with these daily tasks. As life expectancies rise, that number is expected to grow. In fact, the President’s Council of Economic Advisors estimates that 70 percent of people who reach the age of 65 will need some form of long-term care before they die.
Is a policy right for you?
Policies like Ms. Hahn’s can be expensive and they’re not for everyone. If you can’t afford the premiums, don’t have significant assets to protect, or have Social Security as your only source of income, you will probably want to think twice before purchasing long-term care insurance. If, however, you want to preserve assets for heirs and can afford the premiums, a policy can be a wise investment.
Other common reasons people have for purchasing a policy are to have peace of mind, to avoid being a burden on friends or family, to be able to get into their choice of facilities and to be cared for at home as long as possible.
What to look for in a policy?
If you decide that long-term insurance might make sense for your situation, there are several things you will want to consider when purchasing a policy. Does the policy you are considering exclude certain pre-existing conditions? Is there an elimination period after you enter a facility before benefits will begin to be paid? Do benefits cap out at a certain level? Does the policy cover a broad spectrum of services from home care to assisted living and nursing home care?
Because medical costs are rising rapidly, it is also important to have a policy that offers inflation protection. You may be able to purchase one day in a nursing home in your area now for about $200, but the same day might cost you $325 ten years from now. To make sure you have adequate coverage, investigate the cost of care in your area. Then look for a policy that will cover those costs and that will compound 5 percent annually to account for inflation.
To help compare policies you are considering, be sure to ask the company for their outline of coverage, which will highlight a policy’s features, provisions, and benefits.
Also be sure to investigate: Is the insurance company offering the policy reputable and financially strong? All of the major insurers are rated by A.M. Best, Moody’s, and Standard & Poors. Check those company’s websites for the most current ratings.
When and how to apply
Qualifying for long-term care insurance becomes more difficult as you age. Because of that, the average purchase age is 57. According to the American Association for Long-Term Care Insurance, about half of those waiting until age 70 will be declined due to health reasons. A trusted insurance or investment adviser can help you evaluate your options and apply for a policy that is right for you.
Also, some employers have begun offering long-term care as part of their employee-benefits packages, so check with your human resources department to see what is available. Premiums are typically lower in employer plans, but they usually offer fewer benefits as well. Be sure to evaluate your options carefully.
As you can see, there are many different things to consider before purchasing long-term care insurance. Deciding which option is best can be complicated, but having good information and wise council will usually help the proper solutions come into focus.
I originally published this article at www.fpanet.org. It also appeared in the Omaha World Herald.
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