By The Editors
In an effort to create engaging content on financial issues that are relevant to you, our engaged reader, we have reached out to some experts. The kind of experts who live in Western North Carolina and understand the people in their communities. Especially the kind of experts who know how to explain things in a way that can be understood by the rest of us. For our first installment of this Capital at Play series, published in the June issue and titled “Young Money,” we looked at questions relevant to our younger readership. In this second article, we ask a few questions that are of particular interest to our older and more experienced audience, particularly those who are at or nearing retirement age. If 70 is the new 50, are you prepared for the future? The intelligent responses we received and have printed below might come in useful one day soon.
Capital at Play: How do I know if I am properly prepared for my retirement?
Heather: By accounting for your total estimated expenses during retirement, you can then work backwards into a minimum income (also known as an income floor) that will be necessary to maintain your lifestyle during retirement. By piecing together known various sources of income (social security, pension, income from 401k/IRA assets, investment/rental income), you can know with some certainty what your guaranteed income will be. You should work with a financial professional to determine if your assets will be enough to provide for your projected minimum income necessary during retirement, set realistic goals and expectations about your income during retirement, and plan around how to reach your financial goals. Once your income floor is established, the remainder of assets can be used to cover other financial goals, such as additional disposable income to provide for travel, hobbies, charitable gifting, or legacy planning.
Katherine: It will depend on your age until retirement, but here are some factors to take into account. What age will you retire? Are you retiring full or part-time? What age will you start taking Social Security? The longer you wait, the more they will pay you when you do start. Know your income and outflows. Healthcare is a potentially huge expense. What long term care plans have you made? Some people will pay out of the pocket, while others get LTC insurance to mitigate this expense.
Thomas: On what plane? Financial—have a realistic budget, a conservative return expectation, a comprehensive plan, and a safety net. And assume longer life than you dare. Well-being—be sure you really want to retire; have a long-term plan of things you want to be engaged in; have an honest discussion (with spouse) about how you want to be cared for in the later years; and incorporate that in financial plan.
What are the best ways to be saving at the age of 60? 70? 80?
Thomas: The best ways are the same at any age. (1) Analyze where you’ve spent your money over the last year or two. (2) Determine which expenses are controllable, in that they can be eliminated altogether (i.e., a membership that is no longer important) or can be reduced (i.e., a cable TV service). (3) Outline a list of adjustments and calculate the savings. (4) Track your own progress and evaluate the impact of any impulse purchases before you commit the money.
Katherine: The #1 fear is, “Can I retire?” The #2 fear is, “Will I outlive my money?” Prepare with a financial planner to know your budget, income goals, and results to assuage your fears. You’re in your 60s—when are you going to start Social Security? The longer you wait, the more Social Security will pay you when you start. In your 70s—you might downsize to a smaller home or move to a retirement community. Does this change anything with your budget or estate plan? In your 80s—expect someone in the couple to die or become incapacitated. Have you prepared to pay for the long-term care eventuality?
How can I plan properly for my business succession prior to retirement?
Katherine: The first step is to objectively value your business. You want to ensure a fair price for your life’s work. Are you the founder? Don’t underestimate how emotional it will be to let your “baby” go. Consider a buy/sell agreement so everyone understands how the business succession will happen.
Heather: Business succession can be very complicated and have a lot of moving pieces (business valuation, taxability of the sale of a business, liability for the prior and new owners, etc.). The best strategy is to work with a financial professional that can look at all aspects of succession and coordinate with other professionals (for example: real estate attorney, CPA, commercial lender) that can work as a team in the years prior to and during the business owner’s retirement.
Thomas: Start early, before you think seriously about retirement. Decide whether your employees are capable of stepping in, both financially and from a management standpoint. If they are, consider adopting an Employee Stock Ownership Plan or other means of transferring ownership to the employees (either select employees, or all). If they are not capable of running the business, your primary objective is to maximize your realization in dollars, or maximizing the odds that your business model is sustained over the long term. Engage your trusted advisors—lawyer, CPA, and wealth advisor—in these deliberations and seek out information about how transactions are typically done in your industry.
Heather A. Banks
First Bank Wealth Management
Invest Financial Corporation
Boys, Arnold & Company
What is a good financial strategy for transferring wealth from boomers to Gen-Xers?
Katherine: Are you transferring a business, real estate, or cash? Team with your estate lawyer, your CPA, and your financial planner to create a holistic strategy. Depending on the type of wealth you want to transfer and when, there are several estate planning vehicles and financial tool combinations to help accomplish the wealth transfer goal you want to achieve, and minimize the tax consequences on the estate and heirs. Please consult your legal or tax professional for guidance on your particular situation.
Thomas: Beyond annual gifting of the permitted $14,000 times two (if you and your spouse both gift), an effective mechanism is your ability to pay educational and medical expenses directly to the providers without those payments being treated as gifts. If one has multiple grandchildren, these payments can grow to a significant amount over time. Health insurance premiums qualify. Gifts into 529 College Tuition Plans do qualify as gifts and are counted against the annual exclusion. The advantage of this type of wealth transfer is that it avoids the possibility of the money being squandered.
Heather: Trusts intentionally control the distribution of assets to younger generations, but because of the potential tax implications of a trust, you should consult with an accountant, attorney, and financial advisor before establishing a trust for the specific purpose of intergenerational gifting. Outside of trusts, there are several financial products that provide the ability to transfer assets to a younger generation, while still maintaining some control over the assets, even after death. Annuities and life insurance policies are two of these types of products. However, the rules affecting the taxability of these products at the time they transfer must be considered. Your financial professional and accountant should be consulted before making any decisions.
What major changes, if any, are projected for Social Security in the next 5-10 years?
Thomas: One has to assume that there will be pressure to extend the age at which payments begin. It is a simple way to improve the sustainability of the social security funds, consistent with the longer life expectancies of men and women.
heather: While no major future changes to Social Security have been announced at this time, at some point in the future it is inevitable that something must change in order to maintain the sustainability of the program. In the coming years, more than likely we will see the minimum age requirement and full retirement age for Social Security increase. In addition, only the first $118,500 (adjusted annually for inflation) of income for an individual is currently taxed for OASDI/Social Security. We may see this program limit increase or the limit be removed completely.
When is the latest I should purchase life insurance, and how do I know what type of life insurance is best for me?
Katherine: The latest you should buy life insurance is the day before you die. But seriously, depending on your goals, life insurance is a financial tool you would use to pay for estate taxes, final expenses, debt, home mortgage, or other needs. Clients need life insurance if there is a spouse or children who will need to replace lost income. It allows the tax-free cash and time for the surviving spouse to grieve and get back on his or her feet without you.
Heather: The answer to this question is really dependent upon the purpose behind the purchase of life insurance. For many younger families, life insurance is purchased to replace the potential future income of one of the spouses, provide for children, and pay off outstanding debts in the event of one spouse’s demise. Life insurance may be purchased by those later in life as a tool for legacy planning or supplementing retirement income tax-free. Determining the type of life insurance is also dependent upon the individual’s intended purpose behind the purchase. Your financial professional can answer the specifics of this question based upon your individual circumstances and financial goals.
Thomas: These are questions that can only be answered in the context of one’s own particular circumstances and philosophy/objectives. Therefore, I recommend that you explore this with an independent financial planner who does not sell insurance to clarify your needs prior to entering the market and evaluating products.
What should same-sex couples know about investing together, insurance beneficiary naming, and state/federal tax filings?
Heather: Now that same-sex marriages are recognized as a legal union, financial planning for same-sex couples is really no different than planning for heterosexual couples. If the couple is not legally married, but intends for their assets to pass to their partner in the event of their death, it is vital that all accounts be titled properly. For instance, setting up a joint account as “joint tenants with the right of survivorship” provides that should something happen to one of them, the other will continue on with the account as it is established. TOD, or transfer on death, should be established on individual accounts so that assets can pass directly to the beneficiary designated without having to pass through probate first.
My spouse fell unexpectedly ill and we were not prepared for the medical expenses. Where do we begin?
Thomas: (1) At your budget, for ways to reduce expenses outside of healthcare; (2) At cash values of life insurance policies, which you may be able to borrow; (3) At equity position in your home, with an eye toward re-financing with a higher loan amount; and (4) At the possibility of adding greater health insurance coverage—a long shot.
If you have any questions you’d like to hear answered in such a column, please email us at firstname.lastname@example.org.
The original column is below. Click to open in fullscreen…