Retirement Income Blog

One aspect of retirement planning is protecting the assets you have accumulated.  Estate planningis also about protecting the assets you have accumulated but comes at the issue of asset protection from a different aspect. For example, in retirement planning, one is concerned with asset allocation–the idea of spreading your money among different asset classes so that a decline in one class is offset by an increase in another class.  In estate planning, you protect your assets by forming trusts which can protect assets from estate taxes and claims of creditors.  When retirement & estate planning are coordinated, they become a powerful combination of tools to create and preserve wealth.

However, sometimes, the goals of retirement planning and estate planning compete. When its time to retire, one often has the choice to leave their funds in their employer’s 401k (some companies allow retirees to leave their account with the company) or rollover their funds to an IRA.  Is this an issue of retirement or estate planning?  From a retirement planning perspective, one may have more investment choices in the IRA and thus do the rollover.  From an asset protection standpoint, one’s funds are protected from creditors by ERISA.  Such protection is not automatic once the funds are rolled over into an IRA as creditor protection of IRAs is a state law (note that we are addressing non bankruptcy creditor protection here).  In this case, retirement & estate planning objectives may be in competition–we want the rollover for investment flexibility and we want to keep funds in the 401k for ERISA protection.

Another example where retirement & estate planning compete impacts the trade-off of capital gains and estate taxes.  If, for example, you own real estate that you don’t want to see because of high capital gains tax, you are making a retirement or financial planning decision that saves tax on the gain (currently 15% federal).  However, if the asset remains in your estate when you pass, depending on the estate tax laws in effect currently for estates in excess of $2 million, your heirs will pay 45% tax on the entire asset value.  So do you sell the asset now, pay the capital gains tax, gain liquidity which can be distributed from your estate before you pass or do you leave the real estate in your estate, avoid the capital gains tax yet expose the property to estate tax?

Another example of interdependence of retirement & estate planning the naming of beneficiaries on your IRA.  One may consider this a retirement planning issue involving the proper management of your IRA.  However, it is also an estate planning issue as it involves the distribution of your estate, potentially how much estate tax is paid on your estate (e.g. IRA funds left to charitable beneficiaries are exempt from estate taxes) and also estate liquidity.  Whether one spends more of their IRA funds and less of their non-IRA funds impacts how much of each type of asset remains in ther estate and thus we see that retirement & estate planning are again intertwined.

Last, consider the issue that faces most baby boomers coming up on retirement.  Most will learn a word which is unfamiliar to them–annuitization.  This is the process of converting an asset into an income stream.  While baby boomers parents have left many of them substantial assets, many baby boomers will not be able to leave an estate to their heirs as the boomers will need to annuitize their assets in order to produce a sufficient retirement income.  This is the ultimate competition of retirement and estate planning goals.  Time to get out the retirement planning calculator and consult you estate planner.

Post provided by Javelin Marketing

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You’ve decided to retire now. You know how much you’re due from social security and any pension too. Then there’s the lump sum from your defined contribution plan at work. What retirement planning tips can help you make the most of your lump sum?

In most cases, you want to do a direct rollover of the lump sum into a new IRA.  This’ll prevent paying any tax, keeps your earnings growing tax-deferred, and preserves protection of the funds from creditor claims (rollover funds kept segregated get better creditor protection than your contributory IRA–this is a little known retirement planning tip).

Another retirement planning tip on investing your rollover–don’t commit these rolled over funds to any particular investment until you determent how much of it you’ll need each year. Put it in a money market account until you decide. When considering specific investment options look closely at the fund fees; they can eat away at your compound return benefits.  You won’t get the straight story from anyone on mutual fund fees so please read John Bogle’s book–Bogle on Mutual Funds.

Here’s a retirement planning tip if you know you want top spend some of the money right away–you may be able to get at it tax free.  Before you roll over your lum sum to an IRA, ask your comopany plan administrator is any of the funds were contributed post-tax.  If so, this means you have already paid tax on some money which can be removed–BEFORE–you do a rollover. 

Here’s another retirement planning tip–if any of our plan is invested in shares of your company, you may be able to save income tax by using the special Net Unrealized Appreciation Rules.  Ask your retirement advisor or tax counsel.  This special rule allows you to convert ordinary income (taxed at up to 35%) to capital gains income (currently 15%).

Another retirement planning tip about your investment allocation–at age 65, your life expectancy is 18 years so 40% of your lump sum needs to go into growth-type investments to beat out inflation. You’ll diversify your holding to include growth as well as income-producing investments. And be sure you maintain some of it in the money market account for emergencies.

Retirement planning tip about withdrawals form your lump sum–if you want its income but don’t want to deplete your money, you should consider annual withdrawals of just 3% to 4% per year. Of course, you must make the IRS’s minimum required distributions after turning 70½. If you do have funds outside a tax-deferred plan, it’s more tax beneficial to use those up first so that your tax-deferred funds can keep growing at the higher compound rate that tax-deferring allows.

If you’re worried about assuring yourself –and your spouse – a lifetime income beyond what social security (and any pension) is giving you, you might consider using all or a portion of your IRA to purchase an immediate annuity. This can ensure a lifetime income that- is either fixed or variable according to your choice–a good retirement planning tip for those who need more cash flow. Check monthly payments with the immediate annuity calculator.

Our final retirement planning tip–since there’s a good chance that you may need long term care in the future, you may want to purchase a long term care insurance policy now. It can be expensive – so purchase it as early as possible. Direct costs of long term care can devastate your savings.

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Following are the most common financial errors in retirement planning. These are not necessarily in order of priority.

Placing too much in fixed income

The Trinity Study in 1998 showed, as many studies have since, that you need to have 50%+ of our portfolio invested in equities (or other growth assets). Failure to do so insures that your assets will not keep pace with an increasing cost of living. Closely related to this retirement planning problem is our next problem of short term investing.

Investing in short term securities

As people age, they allow their emotional insecurity to dictate their investment decisions. Most people would be better off having an investment manager to take the emotions out of their investing and guide them in their financial planning for retirement. Specifically, there is a tendency with age to worry about one’s mortality and develop a short term retirement strategy with investments. As many seniors have said, “I don’t buy green bananas anymore”. This myopic thinking results in the purchase of six-month CDs and excessive amounts in money market funds and other low yielding investments. Because these investments have low returns, there is an increased risk of needing to use up investment capital for financial sustenance.

Underestimating how long you will live

The odds of living to a ripe old age are high; higher than you think. For example, someone at age 75 has a 12% chance of living to age 95. Many people tend to be pessimistic about their life expectancy, don’t prepare a sufficient nest egg and consequently, have a flawed retirement strategy. This can be avoided by looking at an accurate life expectancy table and planning one’s retirement finances so that your money has a 90%+ chance of outlasting you.

Failure to cover the most significant financial risks

Health care (traditional health insurance) and long term care insurance (for when you are unable to care for yourself) are the two largest potential costs of older ages. You cannot be unprotected or you could face a fast bankruptcy. To omit planning for these contingencies is a huge error in retirement strategy.

Failing to get professional assistance if you’re not qualified

While some people are mathematically oriented, stay abreast of financial issues and investment matters, others do not. If you don’t, then please get financial help to plan and implement your retirement strategy. This help could be anything from visiting a financial planner for 2 hours annually to have them review your portfolio to delegating your entire portfolio for professional management (typical cost is 1% annually).

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