Archive for April, 2012
Rising life expectancy means having to pay for a longer retirement. The lack of a pension or frozen benefits translate to fewer, smaller checks from ex-employers. And the days of being able to count on averaging 10 percent annual returns from the stock market are over. All that, makes it even more important for retirees to know just how much they can take out of their portfolios every year without drawing them down too fast.
There isn’t one model that fits all. It depends on individual circumstances, best reviewed with a financial adviser. The classic advice is widely known as the 4 percent rule. If you withdraw no more than 4 percent from your savings the first year of retirement and adjust the amount upward for inflation every year, you can be confident you won’t run out of money during a 30-year retirement.
Before the use of the 4 percent rule became widespread, many people were used to thinking in terms of an average growth rate between six and seven percent on a stock portfolio. Today, while most advisers think the 4 percent rule is valid, we’re in a period of time which may challenge it.
People who retired in 2000 are of the greatest concern. They’re the ones who started and had two major bear markets, which is unprecedented — two big 50 percent drops in the market. A lot of it depends on what happens to stock market returns and inflation over the next five years. The real problem will come about if we get a big boost of inflation (well above its historical average of 3 percent), in that retirees are required to increase their withdrawals. That may make it hard for the 4 percent rule to fly.
For folks retiring today, you probably can’t expect much more than 5 percent a year from U.S. stocks over the next five to seven years. That’s a pretty bad start to your retirement. Bonds also don’t look very good. People retiring today have to be very careful. They may be better off not retiring for a couple of years. The greatest asset you have in an environment like this is a good-paying job, so you’re not dependent on the stock market or the bond market to support you.
Increased life spans are a factor too. If you feel you could live for 40 years in retirement, either because you’re retiring early, or you have an exceptional genetic predisposition, you wouldn’t want to take 4.5 percent, you’d want to take 4.1 or 4.2 percent. If on the other hand you expect a very short retirement — you have bad health — you could think about taking out 6 percent or 7 percent.
For retirees finding their retirement nest egg short of the mark, there are a few other options to consider that might afford some peace of mind. One is to utilize the equity in their home and consider a reverse mortgage. That could take the pressure off their withdrawals. If they can get some money out of their house, they can take less out of their investment portfolio. Another option is to convert a portion of their portfolio to a fixed annuity and get a guaranteed income stream for life.
And the last piece of advice is be conservative in both your living expenses and your investments. Read the entire interview with the inventor of the four percent rule here.
In our current tax environment, “wait and see” planning will most likely end in a “wait and pay more” scenario. Furthermore, estate planners are not likely to know more about what will happen when the current tax code expires at the end of this year than they did 2 years ago. A last-minute deal in a post-election lame duck session of Congress, similar to the one in 2010, is highly unlikely. Here are a few things to keep in mind.
- In 2013 the estate and gift tax exemptions will drop from $5 million per taxpayer in 2012 to $1 million in 2013. People with estates above $3 million should consider making gifts in 2012 in order to reduce future estate taxes when the exemption is lower and the tax rate is higher. Although Congress may increase the exemptions in 2013, there is no assurance that will happen and if it does happen what the exemptions will be.
- The federal dividend rate of 15% will expire at year-end. Anyone holding significant cash in a C-Corporation should consider taking a dividend of the cash out before year-end. If needed, the funds could be loaned back to the C-Corporation.
- The federal capital gain rate increases from 15% to 20% in 2013. If you are anticipating an imminent capital gain transaction, consider completing the transaction before year-end. If a transaction in 2012 has any deferred payments, consider assuming the entire tax burden in 2012, rather than opting to pay taxes as the funds are received.
For more information on this, click here.
The number of Americans age 65 and over has topped 40 million, or 13% of the U.S. population. That’s the most ever, both in sheer numbers as a percentage, and the number will grow rapidly. It’s estimated that the 65-plus population will make up one-fifth of the nation by 2050. Not only is the share of seniors growing, health care advances are pushing the oldest of the old to even longer lifespans.
The fastest-growing age group among seniors is 85 to 94, jumping 30% to 5.1 million the last decade, according to the Census Bureau. The number of centenarians is projected to exceed 600,000 in 2050. That’s good news except for one key factor: Half of those living beyond 85 have Alzheimer’s disease, a condition that devastates one’s quality of life.
And the cost of care keeps rising, so if proper planning is not put in place, seniors will inevitably run out of money. Adult children often mistakenly believe that Medicare and other retiree benefits will pay for their parents’ care. In fact, only long-term health insurance will cover custodial care.
The complications of inheritance only intensify when the children must care for an aging parent. If the estate is not clearly divided in a will, for instance, children who took care of aging parents often feel that they should inherit more than the siblings who did little — either by choice or because of geographic considerations, according to estate lawyers. And often, the children who do care for them are tempted to dip into their parents’ savings before they die because they figure it’s coming to them eventually.
Self-interest works both ways. Often, aging parents dangle the prospect of an inheritance to make sure their children will care for them in their later years. Yet most parents distribute assets equally between children and most don’t like to play favorites, even if one child did more for them.
Tangled family trees
Family feuds over inheritance are as old as the Bible (Jacob tricked his twin brother Esau out of his birthright and their father’s blessing.), and they can multiply in blended families. There are ex-wives and ex-husbands, children and stepchildren, parents and stepparents.
More than half of all first marriages end in divorce and about 75% of divorced people will marry again, according to the National Step family Resource Center. About 65% of these unions will include children from previous marriages. More than 40% of American adults have at least one step-relative, according to a Pew Research center study earlier this year.
Boomers who started families later in life are feeling the pressure. They are dealing with children’s college bills while Mom is 87 and needs care.
Paula Goldie, 57, is a typical Baby Boomer who celebrated her 50th by taking up scuba diving. She plans to learn the rumba for her 60th. Goldie’s married and has a 40-year-old stepdaughter, a 25-year-old daughter and 20-year-old granddaughter. Her mother died 16 years ago, but her father, 82, remarried. His wife, 67, has four adult children.
Goldie is a court clerk in the Portland, Oregon area who is inheriting something she’s not even sure she wants. Her father’s house which is 1,000 miles away in Southern California will be left to her. The problem is that her dad has a reverse mortgage, and he wants his wife to stay in the house after he dies. Goldie wants to respect her father’s wishes but worries that she will be stuck spending money to allow his widow to live there for free.
If his wife stays in the house, “she would have to pay taxes, but her name is not on the house,” Goldie says. “Her children have already looked at the furniture in the house and said, ‘Gee, I would like that.’ … The house is pretty much going to be a wreck. If he passes, I still have to deal with it.”
As much as she wishes she didn’t have to, Goldie sees taking care of the house as her duty and something her late mother would have wanted. In the meantime, she has yet to draw up her own will.
Putting it off is “one of the things so many of us Baby Boomers are facing,” she says. “Death in the family brings out the best or the worst in people. There’s no gray area.”
What to do?
There are no foolproof solutions to the wills problem, but talking about these issues when parents are still alive can help. Good planning is also crucial. Family fights are not just about money. Often people fight over tangible personal property because of the memories they bring up. A good way to handle this in your estate plan is to let your children take what they want and if more than one child wants certain items, draw numbers from a hat and take turns choosing these.
These days boomers’ children are often getting their inheritance in advance – by help for education, help buying their first business and their first house. Disputes happen because often one child feels that they’re getting the shorter end of the bargain.
To read the entire click here.
Those committed to helping boomers wade through Medicare regulations are bracing themselves for an expected surge this year with the possibility of confusion because of numerous coverage options and the sheer size of a generation affected.
Used to having choices and all with different needs, baby boomers are expected to redefine the graying of America, some believing they must continue to work because of economic circumstances, others because they simply want to.
Many boomers who sign up for Medicare when they turn 65 continue to work either part time or full-time.
But Medicare is a patchwork of options and programs. Learning the A,B.C’s of Medicare can be difficult. There’s A (hospitalization), B (medical expenses), C (Medicare Advantage option) and D (prescription plans) of Medicare, as well as supplemental health insurances and the ins and outs of premiums, deductibles and co-pays.
There there are potential penalties for failing to sign up for Medicare right away after turning 65. For each year a person delays in enrollment, there is a 10 percent premium penalty for not signing up for Medicare Part B (medical expenses) if you don’t have other credible coverage through an employer or your spouse’s employer.
Another penalty can occur after seven months for those who don’t sign up for Part D (prescription coverage) right away.
There’s been a consistent increase in the number of people wanting to know While those already on Social Security should be signed up for Medicare automatically at age 65, it is still wise to contact the Social Security office or sign up online at www.ssa.gov.