Retirement Planning

For many Americans, retirement accounts comprise a substantial portion of their wealth. When planning your estate, it is important to consider the ramifications of tax-deferred retirement accounts, such as 401(k) and 403(b) accounts and traditional IRAs. (Roth IRAs are not tax-deferred accounts and are therefore treated differently). One of the primary goals of any estate plan is to pass your assets to your beneficiaries in a way that enables them to pay the lowest possible tax.

Generally, receiving inherited property is not a transaction that is subject to income tax. However, that is not the case with tax-deferred retirement accounts, which represent income for which the government has not previously collected income tax. Money cannot be kept in an IRA indefinitely; it must be distributed according to federal regulations. The amount that must be distributed annually is known as the required minimum distribution (RMD). If the distributions do not equal the RMD, beneficiaries may be forced to pay a 50% excise tax on the amount that was not distributed as required.

After death, the beneficiaries typically will owe income tax on the amount withdrawn from the decedent’s retirement account. Beneficiaries must take distributions from the account based on the IRS’s life expectancy tables, and these distributions are taxed as ordinary income. If there is more than one beneficiary, the one with the shortest life expectancy is the designated beneficiary for distribution purposes. Proper estate planning techniques should afford the beneficiaries a way to defer this income tax for as long as possible by delaying withdrawals from the tax-deferred retirement account.

The most tax-favorable situation occurs when the decedent’s spouse is the named beneficiary of the account. The spouse is the only person who has the option to roll over the account into his or her own IRA. In doing so, the surviving spouse can defer withdrawals until he or she turns 70 ½; whereas any other beneficiary must start withdrawing money the year after the decedent’s death.

Generally, a revocable trust should not be the primary beneficiary of a tax-deferred retirement account, as this situation normally limits the potential for income tax deferral. However, a trust may be the preferred option under certain circumstances, such as if a life expectancy payout option or spousal rollover are unimportant or unavailable, or when it’s used as a contingent beneficiary designation after the surviving spouse’s death, but this should be discussed in detail with an experienced estate planning attorney. Additionally, there are situations where income tax deferral is not a consideration, such as when an IRA or 401(k) requires a lump-sum distribution upon death, when a beneficiary will liquidate the account upon the decedent’s death for an immediate need, or if the amount is so small that it will not result in a substantial amount of additional income tax.

The bottom line is that this is a complex area of law involving inheritance and tax implications that should be fully considered with the aid of an experienced estate planning lawyer.

Planning for retirement can be tricky business.  When we discuss our clients’ estate plans and assets with them we can’t help touching on retirement plans, so we hear a lot about the worries that go along with preparing for an uncertain future.  There are many variables and unknowns that can crop up between starting out in your 20s or 30s and your eventual retirement at 60 or 70; and there are a lot of myths about retirement which are daunting, discouraging, or just plain misleading.

U.S. News and World Report recently published an article which attempts to address some of these myths and set readers back on the right track to retirement.  We hope that all of our readers are already saving for retirement, but because we know just how important it is to save early and save often we’d like to list some of the myths here for our readers:

#1 You don’t make enough money to save for retirement.

#6 You need to be debt free before you can invest for retirement.

#8 Social Security benefits will be enough to retire on.

#9 You have to retire at age ___.

These are only 4 of the 10 myths covered in the article.  Click on the link above for a full list of commonly-held assumptions about retirement that may be preventing you from making the most of your retirement savings.

At our office we help our clients protect and plan for the future, retirement is often a part of that future.  If you have any questions about how to protect your retirement investments, or how to ensure that they transfer properly to your heirs if anything should happen to you, please call our office.

Baby-boomers are called the sandwich generation—and with good reason.  They were expecting to pay for their own retirement and their children’s college education; but now recession upon recession has toppled their elderly parents’ savings, and Boomers find that they are faced with the prospect of shouldering the financial burden of their parents’ final years as well.  The pressure of providing for so many people at once can quickly become overwhelming, and using one’s own savings or retirement fund can begin to look like an easy solution to immediate financial concerns.

Although it may seem like an easy fix to looming financial debt, don’t give in to the temptation to use your own savings.  Before you give in to fear and drain your retirement, get some professional financial advice.  This special edition recently released in the New York Times shows that it is possible to prepare for what’s coming—both for your parents and yourself.

Ourfirst recommendation is to discuss your situation with a trusted financial advisor.  After that, one of the primary suggestions offered in the Times is to talk to your parents about their situation.  It may not be easy; be prepared for your initial advances to be met with resistance.  Aging parents often worry that they will lose control of their own finances, or that giving decision-making capacity to one child will lead to anger or hurt feelings among their other children.  Instead of gearing up for a fight, the article mentions a few ways to gently lead into the conversation (including talking about family philanthropic projects.)

Another discussion you won’t want to skip is one about Long-Term Care Insurance.  This article by Ron Leiber discusses different kinds of insurance, whether or not you’ll need it (you will), and how to pay for it. 

The world of “old age” is changing.  People are living longer, experiencing more long-term health issues, and without the same ability to rely on government “entitlement” programs as their predecessors. Serious discussion and serious planning are essential to surviving the challenges of the “new” old age. 

As the average life-span increases—and the cost of medical care along with it—more and more people are beginning to see the need for long-term care insurance.  Simply having a retirement plan isn’t enough anymore. Saving for retirement now means not only saving for your living expenses, it means preparing and saving for your health care expenses as well; expenses which will most likely include major medical procedures, eventual in-home care, and perhaps even long-term nursing care.

The idea of long-term care insurance is no longer a new and strange one, but it’s still not a concept most people feel completely comfortable with. What kind of long-term care insurance should you be looking at?  Can you get coverage for your entire life? (Probably not.) What types of care and services will be covered? (Each policy will vary.) Can you get a policy that goes into effect right away, or is there a waiting period? (There is often a waiting period.)

Not all long-term care policies are created equal.  The U.S. News and World Report recently published an article advising 7 things to look at when choosing a long-term care policy. Some of the things you’ll want to pay attention to include the benefit amount, the benefit period, which services are covered, and inflation protection, just to name a few.

Choosing a long-term care policy is an important step, and not one to be taken blindly.  If you are confused about long-term care policies, or unsure of which one may be right for you, don’t hesitate to ask the advice of a professional. Insurance agents, financial advisors and estate planners may all be able to help answer your questions or point you in the right direction.  

In spite of all the advice you see out there to start saving early for your eventual retirement, we’re realistic.  We know that many people—either out of choice, neglect or necessity—put off saving for their retirement, only to find themselves up against a wall of anxiety when they realize that retirement isn’t very far away.  However, according to Carla Fried of CBS Money Watch, it may not be as bad as you think. In fact, according to Fried, “he who hesitates can in fact win at retirement.”

The article suggests that due to the recent economic downturn many people are choosing to put off their retirement until they feel more secure... a feeling that may never materialize.  But that hesitation can serve a purpose: It provides the opportunity to take a good look at your finances and your choices, “take a deep breath and make some smart tweaks to your plan [so] you can still pull off a successful retirement.”

These are some of the tweaks Fried recommends:

Put Off Your Retirement Date.  At best you give yourself a few more years to bulk up your savings account, at worst you’ve eased some of the pressure on the savings you already have.

Consider Downsizing Your Home.Moving into a more economical home not only gives you some breathing room on the monthly mortgage once you retire, but you may be able to put some of the proceeds from the sale into your savings.

And there’s one more that isn’t included in the article, but that you won’t want to overlook:

Talk to Your Attorney About Estate Planning.  You may not expect it, but estate planning includes thinking about health care, long-term care, and how to work with the departments of Social Security and Medicaid instead of against them. Making a plan before you retire can relieve a lot of stress.

You have a longer life expectancy than a man, different ideas about what constitutes risk, often work for a different pay-scale... and if you’re a woman, you likely need a different kind of retirement plan as well.

You may think that the financial advisor recommended by your husband/father/brother will suit you just fine, but this new article in the Wall Street Journal suggests that what works financially for men doesn’t always work for women—and this includes old-school financial advisors. According to the article, when women start seriously planning for retirement, “many find that the financial-services industry is an obstacle, not an ally. In a recent Boston Consulting Group survey of women investors, respondents said they routinely feel underserved by the financial-services industry, with more than 70% expressing dissatisfaction with the service they're getting. Among the complaints: disrespectful advisers, narrower investment choices based on the assumption that women can't handle risks and patronizing pitches.”

This isn’t just a case of emotional discomfort; it also hits women in the pocket-book, where it’s likely to hurt the most. “A recent survey by financial-services company MassMutual found that women's retirement accounts were, on average, just two-thirds the size of men's.”

Not all of this can be blamed on financial advisors though. Women have a dangerous (if generous) tendency to put their spouses and families first, with little thought for their own financial security until it’s too late. In addition, married women often count on their husband’s retirement plan to take care of the both of them—only to find that his plan works for his life expectancy, leaving her without a plan when he’s no longer around.

What can women do?  The first thing each woman should do is have is her own retirement account, and contribute to it each month.  Make sure your financial advisor recognizes your unique needs and listens to your hopes and concerns.  You can plan with your partner for golden years spent together, but it’s your responsibility to save for yourself.

When it comes to family matters, women are often the head (and sometimes the sole member) of the planning committee.  Vacations, dinner parties, school activities and celebrations... many of these wouldn’t happen at all if the women of the family didn’t take the lead.  Estate Planning tends to be no different: Many first phone calls, appointments, and attendance at estate planning or elder law seminars are initiated by women.  However, studies suggest that this tendency in women to plan ahead may not apply to financial planning.

A recent article from CBS news suggests that although women are actively involved in family and household finances, they are less likely to be involved in long-term financial decisions. According to the article, although many women “know how to spend and get by on a short term basis... they have a time getting a grip on their long term saving and planning." Of course this is a generalization, and won’t apply to everyone; but considering the importance of the topic, it is definitely a worthwhile subject for discussion.

Here are a few statistics to consider that impact women and their long-term financial decisions:

• Older women (65+) outnumber older men by 22.4 million to 16.5 million. (Administration on Aging)
• Poverty rates are higher among older women than older men by 20.4 to 13.1. (U.S. Census Bureau)
• The median weekly earnings of full-time wage-earning women is $657, or 80 percent of men’s $819. (U.S. Dept. of Labor)
• Not to mention that on average, it is the woman of the family who will end up putting her career on hold for caregiving duties at various times in her life (either to care for young children or aging parents.)

Put all of this together and it means that women need to take control of their finances, not the other way around!  Luckily, this may not be as difficult as you think. The CBS news article mentioned above has some suggestions on how to take charge of your finances; but beyond that, planning your estate can be a huge step toward planning for your financial future as well, because any estate planning includes taking stock of of your financial assets—including savings accounts, retirement assets, individually owned assets as well as those owned jointly by a married couple.

We encourage women (and their families) to let their estate planning contribute to their financial future—it’s not just about how your assets will be distributed after your death, but also what steps you’d like to take to preserve those assets during your lifetime.

Do you feel comfortable with your retirement plan?  If you’re a small business owner the answer to that question is probably no.  In fact, according to this report by Jules H. Lichtenstein, Office of Advocacy, US Small Business Administration, “Retirement account ownership, contribution, and participation rates for all business owners are low” and that “Having a micro-business with fewer than 10 employees reduces the probability of an owner having a 401(k)/Thrift plan from 17.4 percent to 10 percent!”

This is a concerning statistic.  Why is it that so many small business owners skimp on their own retirement?  It can’t be lack of knowledge, because most of them have enough financial savvy to keep their businesses doing well.  And it isn’t likely that the reason is lack of awareness, as most small business owners are well aware of the need for a substantial plan for the future.

Perhaps the reason is that small business owners feel the best investment in their future is to invest in themselves.  Where an employee in a large corporation is likely to take any investment income and put it in stocks or savings, a small business owner is more likely to turn around and put that money back into growing her own company. Perhaps small business owners feel that they have limited options when it comes to retirement—after all, they don’t have a large corporation offering to match their retirement contribution.  However, according to this article in the Motley Fool, small business owners actually may have more options than employees in large corporations.

“Several retirement plan options exist for small-business owners. They vary in how much money can be contributed, whether employees other than the owners may participate, what (if any) contributions the employer must make on behalf of employees, what deadlines there are for creating and putting money into the plan, and how hard it is to run the plan. Among the options small businesses commonly use are SIMPLE IRAs, SEP IRAs, profit-sharing plans, SIMPLE 401(k) plans, and single-participant 401(k) plans.”

So… are small business owners unaware of their many options for retirement planning, or are they merely more willing to live on the edge?