The Key to Planning for Your Lifestyle in Retirement

After working with retirement clients for nearly 30 years, I have learned many things.  One of the most important lessons I have learned is that we all need to have the answer to one very simple question before we begin the planning process -- “what does it cost for me to live per month”?   As planners we can develop scenarios to help achieve retirement goals, but if we start with the wrong premise, we may be forming strategies to meet the wrong goal. 

Why is it so difficult to come up with a figure for our income needs? The general tendency is to underestimate expenditures and overestimate income. We also think about what we should be spending, not what we do spend.  Not knowing our expenditures comes about because we forget a few things:

• Food, shelter, transportation and clothing are only the beginning of expenses. They are the ones we see each month.
• We need to add insurances, taxes, gifts, car replacements, vacations, travel, family visits, and hobby and entertainment expenses. 
• If you have children, your educational expenses may drop off by the time you retire but you need to determine how much you might need for weddings and launching (yes—getting your darlings out of the parental home)
• If you plan to change your living arrangements, you need to factor in not only the additional cost of making a change but also the change in monthly expenditures related to the move.

There are circumstances that are out of our control, such as the rising cost of health care and insurance, declining markets and inflation.  To guard against these events we need to factor in percentage increases over time and to have a savings cushion of at least six months to help us weather the storm.

When I have gone through this analysis with clients, I often find a dramatic difference between projected income needs and actual income needs.  Can you imagine trying to reach your destination with only half a tank of gas?  It doesn’t work. Using the wrong expenditure figure can ruin the lifestyle you anticipated.

Talk to your financial advisor about tools to help you track your monthly income needs.

What Does a Social Security Raise Mean to You?

You may have heard that the Social Security Administration recently announced a 3.6% cost of living increase for Social Security recipients starting in 2012. This is good news for those receiving Social Security benefits, as the last increase came two years ago (5.8% in 2009).  If you are not yet drawing Social Security, you may be wondering what this raise means for you. 

While a PhD in Social Security benefits might be needed to calculate how, a fact that is less known is that those aged 62 or older who are not receiving benefits just yet also receive benefit of the 3.6% increase.  Essentially, Social Security benefits before age 60 are based on wage increases, but at age 62 they are based on price increases, i.e. the 3.6% cost of living adjustment. 

Other Social Security related changes courtesy of Horsesmouth.com include:

• The maximum taxable wage base rises to $110,100 in 2012, up from $106,800 in 2011.  This means that you do not pay Social Security tax on any wages over $110,100 next year.
• The earnings test before full retirement age rises to $14,640 in 2012, up from $14,160 in 2011.  If you are drawing Social Security before your full retirement age, you can earn $14,640 next year before your Social Security benefits will be reduced.
• The maximum Social Security benefit for a maximum earner retiring in 2012 will be $2,513/month, up from 2,366/month in 2011.

The bottom line is that Social Security benefits can have a meaningful impact during retirement and it is important to maximize those benefits to the extent possible.  Careful analysis based on your particular situation is therefore critical to your financial health.  Consult your financial advisor about maximizing your Social Security benefits.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

The Gift that Keeps on Giving

As the holiday shopping season approaches, many of us struggle to make our gift lists.  This can be a frustrating exercise, particularly when it comes to you adult children and grandchildren.  What can we possibly give them that will be appreciated and not be sitting on the dresser in a week when the next new gadget comes along?  Why not consider a gift that will keep on giving long after your gone?

If your children or grandchild had earned income from employment during 2011, you can contribute up to $5,000 or 100% of their total earnings (whichever is less) in a ROTH IRA in the child’s name.  [Remember that what you put in to the ROTH IRA counts toward the $13,000 annual gift exclusion; $26k if your spouse contributes to the gift].

Why is the ROTH IRA such a great gift?

• It grows tax-free over time.  A $5k contribution to a 16 year-old’s ROTH IRA earning 8% each year will grow to $217,000 by age 65*.  If the child works summers during high school and college and contributes each year, the future balance in the account will likely be significantly larger.
• ROTH IRAs provide tax-free withdrawals after age 59 ½**.
• In some specific situations, the child can pull out contributions (not earnings) free of tax (i.e. for the purchase of a first home).

A Roth IRA can be one of the best gifts you can give…one that will be giving for years to come.

*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.  Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

**Unless certain criteria are met, ROTH IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

Taking IRA Distributions Before You Need Them?

My wife truly enjoys talking to our two dogs – not that she expects them to talk back (I don’t think so at least) – but who doesn’t enjoy seeing their heads turn as if that will really help them understand what she has to say.  I had a client give me a similar look a few years back when I suggested taking money from his IRA even though he didn’t need it for current spending.  (The client was past age 59.5 but younger than age 70.5 so he didn’t have to take a distribution quite yet.) 

While, like my dogs, he didn’t say anything his look suggested that he was thinking “why would I take a distribution that I don’t need and accelerate income taxes?”  His head started to turn straight again when I illustrated that he might want to maximize the lower tax brackets.  A married couple filing jointly can have taxable income up to $69,000 in 2011 and still remain in the 15% marginal income tax bracket (remember taxable income is adjusted gross income minus exemptions and deductions). For this client, they could take out roughly $25,000 from their IRA and still be within the 15% marginal bracket.  While no one knows what income tax rates will be for sure in the future –locking in a 15% rate seemed attractive. 

2011 IRS Tax Brackets

To find out if accelerating IRA distributions is the right move for you, work with your financial planner and tax preparer to run “what if” scenarios.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Timothy W. Wyman, CFP®, JD, and Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.

The Best Gift You Can Give Your Family

What is the best gift you can give to your family?  Is it college education for a grandchild?  Is it a paid family vacation for your children and their families?

Gifting to family members may be an important piece of your financial legacy plan.   You may desire to gift to family members during your lifetime – when the financial support is needed or when you can observe the enjoyment of the gift. 

The BEST gift, as it turns out, is for you to plan ahead for yourself.  Your ability to ensure that you can fund your own financial independence and any future long-term care needs can provide more of an economic (an emotional) benefit to your family than a gift now.

• According to a recent MetLife study, Americans who take time off work to care for their aging parents are losing an estimated $3 trillion dollars in wages, pensions and Social Security benefits.
• A 2010 study by Fidelity Investment Research found that a 65 year-old couple that plans to live into their 90’s spends $250,000 to cover health care expenses, including Medicare premiums, co-pays, coinsurance and some home care costs.  Note:  This does NOT include chronic conditions or long term care costs.  

Before significant gifting is done, it is important to do a realistic assessment of your ability to fund your own retirement and long-term care needs.   Make sure that the proper documents and financial tools are in place to fund your needs now and later. Take the first step now and schedule a time to meet with your financial planner to discuss long term care planning.

The Best Tool for Retirement Readiness

If you're like most Americans, you're dreaming of the day of retirement.  When you can set your own schedule and do all the things you couldn't do when you were working.  But will you be financially ready when  the time comes?

A recent study (July, 2011) by Brightwork Partners concluded that individuals who receive professional advice are much more likely to be prepared for retirement, no matter what their income level might be.  The survey polled 3,290 workers aged 18 to 65 and assigned a “lifetime income score” projecting the percentage of current income each person could expect in retirement , including investments, Social Security and other sources.  Those using advisors, not surprisingly, scored higher than those who didn’t.   The gap between the two, however, was significant: the median lifetime income score for those using an advisor was 82%, versus 61% for those who did not have a paid advisor, with the gap being most significant at higher income levels.   A major conclusion from the study is that retirement readiness is mostly about a person’s set of practices (behaviors), use of available tools (knowledge and skills), and partnerships (professional relationships). 

October is Financial Planning Month -- now is the time to take action to plan for your retirement readiness.  If you don't currently work with a planner, go to the Financial Planning Assocation website (www.fpanet.org) to use their free planner search tool to find a Certified Financial Planner™ in your area.

Don’t Let Your Beneficiary Designations Surprise You

For many people, retirement accounts such as an IRAs, 401ks, or 403(b)s are their largest assets.  And while many spend considerable time thinking about wills and trusts in determining where their hard earned assets will go, many, unfortunately, are too cavalier in addressing their IRA, 401k or 403(b) beneficiary designations.    

A beneficiary form is called a “will substitute” because a will does not speak to your qualified retirement assets. This means that the beneficiary form determines who will receive your assets in these plans.  It is important to coordinate beneficiary forms with your overall estate and income tax planning to ensure that those you want to benefit from those assets receive them.  

In working with a new client recently, let’s call them Mike and Carol, we discovered (much to their surprise) that their beneficiary forms were inconsistent with their living trusts.  Mike and Carol had recently amended their Trusts to provide half to each other and half to their children from previous marriages at their deaths.  Upon review of their IRA beneficiary forms, we discovered that their forms still listed each other as primary beneficiary and, therefore, their desire to split the assets would not occur.  Fortunately, Mike and Carol were able to update their beneficiary forms and now their planning is consistent with their goals.   

Beneficiary designation forms are free to complete or change, and they are just as important as your wills or trusts. 

Review your beneficiary designations today, and leave any surprises for your next birthday!