Building Legacies that Last Estate Planning and Elder Law

So, You Think You Can Retire?

Group of people clapping and smiling with one another

“The most common need of those preparing to step into retirement isn’t what you think: it’s confirmation that all the hard work, discipline and saving was enough.”

People getting ready to retire really want to be reassured that they did a good job and were good stewards of their money, according to Investopedia’s article “Determining If You’re Prepared for Retirement.” They also want confirmation that the retirement assets they’ve built over a lifetime will last for the rest of their lives and that they’ll be able to live in comfort.

Commonly asked questions are:

  • Am I saving enough, or did I save enough?
  • Can I retire, or did I make a mistake and retire too early?
  • Were my investment decisions the right ones?
  • How am I doing, compared to my peers?

The answers to these questions are important, but like so many things in life, there is no “one-size-fits-all” answer. Just because you’ve accumulated six, seven or even eight figure retirement savings, doesn’t mean you’ve “won” the retirement game. In this case, size doesn’t always matter.

One of the key factors to a successful retirement is your income to expense ratio. Can you generate enough income from all sources, without drawing down too much from your portfolio?

If you have a small to non-existent portfolio, but you have a good-sized pension, maybe you don’t need such a big portfolio. If you live very simply, it’s possible that Social Security benefits and modest withdrawals from your investments might take care of your needs.

Remember that just because you have a large portfolio, does not mean you don’t risk running out of money during retirement. If you spend lavishly on first-class vacations, drive luxury cars and live in a house that costs a fortune to run, you can easily get yourself into a tight spot.

Take a long hard look at all sources of income to determine how long your portfolio will last. You should include Social Security, pensions, retirement accounts and any other sources of income. It is important to figure out how much income you’ll need on annual and monthly basis. You’ll then have a better sense of whether you are prepared for retirement.

Don’t forget to prepare an estate plan, unless you have already done so. A will, power of attorney, healthcare directive and other documents will help protect you and your loved ones. You need an estate plan, regardless of the size of your portfolio. A qualified estate planning attorney can help you prepare this part of your retirement.

Resource: Investopedia (July 19, 2018) Determining If You’re Prepared for Retirement”


Women Living Longer but Saving Less

Woman sitting looking out a window

“All working Americans need retirement savings, regardless of gender.  However, the need is particularly strong for women, since they have a tendency to live longer than their male counterparts. Therefore, they’re also more likely to require paid care at some point—since a spouse may not be around to provide care.”

Women have a statistically longer lifespan than men. It’s unsettling to learn that women save about half as much as men for retirement. This disparity could put women in a very bad position, when they are most vulnerable late in their lives, says The Motley Fool in its article “Why Are Women Only Saving Half as Much as Men for Retirement?”

When queried about why they think it is so difficult for women to save for retirement, most woman honestly said they are living from one paycheck to the next, with little to spare for savings. They are also paying back student loans. Men say much the same thing, so why is the average female saver saving so much less for her future?

In a recent Student Loan Hero study, women admit that they don’t know a lot about investment and retirement planning. Women are also more likely to take breaks in their careers to be caregivers, raising children and taking care of aging parents. This reduces their earnings. While some wage equity has been achieved and even made into law, most women do not earn the same as their male counterparts. Therefore, women face special challenges to their retirement savings.

What can be done to address the gap?

  • Start by examining your budget and cutting unnecessary expenses.
  • Make sure to maximize your employer’s 401(k) match.
  • Fight for raises throughout your career. To gain more info on what your position is worth, use websites like Glassdoor’s “Know Your Worth” tool to compare salary data.
  • Consider changing your investment approach. If you have steered clear of stocks over conservative vehicles like bonds, they may be a good way to catch up.

Finally, don’t forget that retirement includes estate planning. Sit down with an experienced estate planning attorney, who can help you prepare the necessary documents to protect you and your family. Make planning for retirement a priority. Your future self will appreciate it!

Reference: The Motley Fool (June 3, 2018) “Why Are Women Only Saving Half as Much as Men for Retirement?”


Roth IRAs Aren’t for Everyone, So Check Your Retirement Income Tax Rate First

Older couple smiling while looking at laptop“Anyone saving for retirement has probably had to decide between saving in a Roth account versus a traditional retirement account.”

If you think your income in retirement will be higher than it is right now, that’s a reason to put retirement savings into a Roth IRA. However,, if you’re already saving for retirement and you expect to maintain the same lifestyle, you’ll want to be sure your retirement income does not exceed your current income, says USA Today in Why more people should probably use pre-tax retirement accounts instead of Roths

It’s all about the tax burden!

Comparing your current income as you are working to your expected retirement income, isn’t exactly apples-to-apples. Instead, you’ll need to include calculations of your tax rates for IRA withdrawals and other taxable accounts. People often pay a lower overall tax rate on withdrawals from traditional retirement accounts than they pay on Roth contributions today–even with a higher retirement income.

To fully understand this, you’ll want to understand the difference between marginal tax rates and effective tax rates. The marginal tax rate is the tax rate on your next dollar of income. For example, people say “I’m in the 22% income bracket”—that’s their marginal tax rate. Then there’s the effective tax rate, which is the total tax bill as a percentage of income. This number is always lower than the marginal tax rate.

For every dollar you add to a traditional retirement account, you’re reducing your taxable income and saving on taxes at the marginal tax rate. Every dollar saved in a Roth IRA account is effectively taxed at your marginal tax rate. You could have chosen to save it in a traditional IRA, but you chose the Roth.

Here’s an example: a single person who earns $60,000 annually is in the 22% tax bracket, after taking the $12,000 standard deduction. That single person will have to have an income of $195,105 in retirementto reach a 22% effective tax rate on a traditional IRA withdrawal.

It works better for someone in the 12% income bracket. A man who earns $50,700 annually is right at the top of that 12% bracket, after taking the same standard deduction. He’d have to withdraw $52,605 from a traditional IRA in retirement for it to be worth having a Roth IRA.

This decision requires making correct calculations about how much you intend to spend in retirement. You may not expect your retirement expenses to be higher than your current living expenses, but if you travel a lot or have high health care costs, you may find yourself spending more.

Reference: USA Today (July 8, 2018) Why more people should probably use pre-tax retirement accounts instead of Roths


The Disappearance of Pensions

MP900439295[1]Most American workers are no longer offered a pension by their employers. That leaves many wondering if they will ever have enough money to retire.

Pension plans have a long history in the U.S.  However, they did not become standard until the middle of the 20th century.

Labor unions advocated for pensions and companies agreed to offer them to their employees.

Even non-union employees benefited from this, as employers made pensions a standard part of their benefit packages.

In the 1970s, employers began wondering how they were going to be able to pay for everything they had promised their employees. The life expectancy of Americans was rising and that threw pension plans' actuarial tables off.

 As a result, many companies did away with pension plans for their employees and switched to 401(k) plans as the Washington Post discusses in "'I hope I can quit working in a few years': A preview of the U.S. without pensions."

401(k)s were supposed to make it easier for people to retire.

The idea was that employees could have their own investment account. They could put their money into the accounts and many employers matched the amount put in.

The system was entirely voluntary. That is where the problem came in.

Over the years, most people have not put nearly enough into their accounts. As a result, they do not have enough money to retire.

That leaves many elderly people now working long after they had hoped to leave the workforce, because Social Security does not provide enough money to live on.

Reference: Washington Post (Dec. 23, 2017) "'I hope I can quit working in a few years': A preview of the U.S. without pensions."


Beneficiary Planning

Large Mixed Race FamilyWho you make the beneficiaries of your retirement accounts, can have major implications for your estate.

When you first signed up for a retirement account, you might not have thought about all the details that were presented to you. This is especially true, if you were given retirement account forms along with a large stack of other papers by a human resources person when you started a new job.

One of the items you would have filled out on the forms was an account beneficiary.  If you were to pass away, this beneficiary would then receive the assets in the account.

At the time, you might not have thought too deeply about who you designated as that beneficiary. However, it is important that you do think about it when you are making your estate plans, as Morningstar pointed out in “Do’s and Don’ts for Beneficiary Designations.”

There are actually many things to consider when naming beneficiaries on retirement accounts.

For example, different beneficiaries are treated differently for tax purposes and in how they can use the account.

Another thing to consider is your designated beneficiary, who will receive the account automatically and has no obligation to share with other people, even if you tell them they should. Therefore, if you have three children and name only one of them as a beneficiary, then you might not want to split the rest of your assets evenly between all three children.

The best thing to do is to talk to your estate planning attorney about your beneficiary designations and let the attorney help you determine the best options for them, as part of your overall estate plan.

Reference: Morningstar (July 23, 2017) “Do’s and Don’ts for Beneficiary Designations.”

Fiduciary Rule Confusion

MP900289434[2]The new fiduciary rule for financial advisers has caused a lot of confusion about what is and is not allowed with retirement accounts.

On June 9, a controversial new Department of Labor rule went into effect. The rule seems simple enough. Financial advisors who give investment advice to consumers about their retirement accounts, must act as fiduciaries of those consumers.

At least for attorneys, that is a very simple idea to understand.

Nevertheless, for consumers and their advisors the new rule has caused a lot of confusion, as the Washington Post details in “A new conflict-of-interest rule for retirement savers is causing a lot of confusion.”

The easiest way to understand what the new rule means, is that advisors have to act in the best interests of the people they are advising. Investment advice must be based on the best thing for the saver, not the advisor.

Therefore, if an advisor would earn a higher fee from suggesting one investment rather than another, he, or she cannot advise the saver on that basis. If the investment that pays the least to the advisor is better for the consumer, then that is the investment that must be recommended.

Many advisors are taking advantage of the new rule to make changes to how they manage retirement accounts.

The confusion surrounding the rule has given them the opportunity to make changes customers may not like and place the blame for them on the new rule.

If you are not sure if a change your advisor is making is really required by the new rule or if you should look for a different advisor, ask an estate planning attorney.

Reference: Washington Post (June 19, 2017) “A new conflict-of-interest rule for retirement savers is causing a lot of confusion.”


A Happy Retirement Takes Planning

two people on a bench“Forget finances, you’ll never be ready to retire, unless you’ve thought through exactly what you want your next chapter to be like.”

In the past, people usually retired when they reached 65. They stayed near their family homes and died after just a couple of years. We now see retirement very differently.

Some folks are now working well into their 70s or even 80s at their current job or at a new position. Some seniors continue to work full time, and others work part-time, with time for vacation trips and leisure activities in their routine. Some people remark that they’re busier now, than when they worked full time.

Kiplinger’s recent article, entitled “The Emotional Side of Retirement Planning,” explains that the majority of people who are happily retired, spent a lot of time thinking and planning for it.

People in their 60s should be thinking about retirement. While most have started to make plans, others have trouble formulating a strategy. Nevertheless, everyone wants to know whether they can afford to retire. The answer is usually “that depends.” It depends on the answers to some questions like the following:

  • What do you see yourself doing your first week of retirement and how does that feel?
  • If you’re married, how does your spouse feel about retiring?
  • Do you think you’ll stay in your home or downsize?
  • Do you want to live in warm weather or a cooler climate?
  • How’s your health?
  • Do you want to leave a legacy for your family or spend your money now?

Figure out what your retirement looks like. Before you consider whether you can afford to retire, check where you are both psychologically and emotionally. If you’re not ready mentally, then boatloads of money won’t make you 100% happy in retirement. It’s not unusual for people these days to spend 15-20 years in retirement.

The Stages of Retirement

Many people first think of retirement like it’s a long vacation. Some return to school and take fun courses, change professions or find new hobbies and interests. Many new retirees do more traveling or get involved with church or charities. But after the novelty of retirement declines, many people gravitate to a slower and more settled lifestyle.

Physical health may start to decline, and at some point, many aren’t able to live on their own and require assistance. Some try to stay in their homes with help, some go to assisted-living facilities and others enter nursing homes. Everyone has a distinct set of circumstances, and decisions must be made on an individual basis. Available finances impact how, when and where someone retires. With more resources, there will be more options. However, every potential retiree needs to have a well-thought-out plan in place that makes sense for them financially and emotionally. Speak with an elder law attorney about creating your game plan.

Reference: Kiplinger (May 2017) “The Emotional Side of Retirement Planning”


Locating Old Retirement Accounts

Bigstock-Young-man-holding-a-trash-bin--26453660[1]People with old pensions and retirement accounts often have difficulty locating them. It can be more difficult for estate administrators who need to locate the old accounts. Some help might be on the way.

When pension plans first became a popular benefit in the U.S. it was normal for people to stay employed by the same company throughout almost their entire working life. This held true when employers began switching from traditional pensions to 401(k) accounts. However, that is no longer the case for many working Americans.

People today change employers frequently.

That often means they have old retirement accounts setup at previous places of employment. If someone is not diligent in transferring those accounts when they change jobs, the old accounts can become forgotten or lost. That can make it difficult to later find those accounts when needed, such as when retiring or administering an estate.

This problem was discussed in a Wills, Trusts & Estates Prof Blog article titled "How to Find Your Lost 401(k)."

Currently the U.S. Pension Benefit Guaranty Corp. has a database of traditional pension plans that allows people to find any lost accounts. The agency would like to make that database easier to search and would like to expand it to include defined-contribution pensions and 401(k) accounts.

However, for now, inclusion of 401(k) accounts would be voluntary and there are other companies attempting to corner the market. A bill is in Congress that would make it mandatory to create a nationwide searchable database.

If you have old retirement accounts you cannot locate, you might want to contact your representative in Congress to urge passage of the bill.

Reference: Wills, Trusts & Estates Prof Blog (Sept. 20, 2016) "How to Find Your Lost 401(k)."

Saving Social Security with More Taxes

fortune cookiesIf no changes are made, then eventually the Social Security trust fund will run out of money. One of the commonly proposed solutions is to increase the amount that the wealthy pay in taxes. But will it work?

Because of America’s changing demographics and aging population, it is expected that the Social Security trust fund will be depleted by 2034 if current trends continue. That does not mean Social Security will cease to exist, but the benefits given to seniors would have to be reduced to meet the program’s income. Politicians have proposed several different solutions to this expected problem. Recently, Trust Advisor looked at one of them in “Can Taxing The Wealthy Save Social Security?

The reviewed proposal is a simple one: raise taxes. Currently, any income an individual makes that exceeds $118,500 is not subject to the payroll taxes that fund Social Security. Politicians have proposed eliminating that cap and taxing all income. According to the findings of the article, the proposal would not solve the entire problem, but it would reduce the expected shortage by 88%. However, that number has been disputed. If different assumptions are made, then different results can be produced concerning the effectiveness of the plan.

Something will have to be done about Social Security, and it is likely that many different solutions will be offered in the coming years. It will be important to continue to assess whether the proposals could be effective or whether they are merely being made for political reasons.

Reference: Trust Advisor (July 14, 2016) “Can Taxing The Wealthy Save Social Security?