Objective information about financial planning, investments, and retirement plans

A Pre-Retirement Financial Checklist


Are you within a few years of retirement? It’s time to get your financial house in order. We are now almost eight years into a bull market for stocks that has seen the S&P 500 move from 677 at the lows of the financial crises to a recent intraday high of over 2,350. Hopefully these stock market highs have favorably impacted your retirement readiness?

Here are several items to include on your pre-retirement financial checklist.

Review your company benefits  

Your 401(k) plan might be your largest and most significant employee benefit, but there may be others to consider as well. Does your company offer any sort of retiree medical coverage? Are there other benefits that you can continue at reduced group rates?

In the case of your 401(k) you will have choices to make at retirement. You will need to determine if you want to leave it with your soon-to-be-former employer, roll it into an IRA, or take a distribution. The last choice will likely result in a hefty tax bill, so this is generally not a good idea for most folks.

Do you have company stock options that you haven’t exercised? Check the rules here. Speaking of company stock, there are special rules called net unrealized appreciation to consider when dealing with company stock held in your 401(k) plan.

Do you have a pension from your current or former employer?

While a pension is certainly an employee benefit, I feel that it deserves its own section. You might have several decisions to make regarding your pension benefit if you are fortunate enough to be covered by one.

  • Do you take the benefit immediately upon retirement, or wait?
  • If you have the option, do you take the pension as a lump-sum and roll over to an IRA or take it as a monthly annuity?
  • Generally, there will be several annuity payment options to consider, which one is right for your situation?

These decisions should be made in the context of your overall financial situation and your ability to effectively manage a lump sum. Since any lump-sum would be taxable if taken as a distribution, it is usually advisable for you to roll it over into a tax-deferred account such as an IRA. If you have earned a pension benefit from a former employer, be sure to contact your old company to get all the details and to make sure they have your current address and contact information so there are no delays or glitches when you want to start drawing on this pension.

Determine your Social Security benefits and when to take them

While you can start taking Social Security at age 62, there is a significant reduction in your monthly benefit as opposed to waiting until your full retirement age. Further, if you can wait until age 70 your benefit level continues to grow. If you are married the planning should involve both spouses’ benefits. There are several planning opportunities for married couples around when each spouse should claim their benefit.

Review your retirement financial resources 

Over the course of your working life you have likely accumulated a variety of investments and other assets that can be used to fund your retirement which might include:

  • Your 401(k)or similar retirement plan such as a 403(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement

In the years prior to retirement it is a good idea to review all your anticipated assets and retirement resources to determine how they can be best utilized to support your desired retirement lifestyle.

Determine how much you will need to support your retirement lifestyle 

While this might seem intuitive you’d be surprised how many folks within a few years of retirement haven’t done this. Basically, you will want to put together a budget. Will you stay in your home or downsize? What activities will you engage in? What will your basic living expenses be? And so on.

Compare this to the income that your various retirement resources might generate for you and you will have a good idea if you will be able to support your desired lifestyle in retirement. If there is a gap, you still have some time to make adjustments to close that gap.

You will need to do some planning in terms of which financial resources to tap and the sequencing of these withdrawals over the course of your retirement.

This is a very cursory “checklist” for Baby Boomers and others within a few years of retirement. This might be a good point to engage the services of a fee-only financial advisor if you’ve never done a financial plan, or if your plan is out of date. Retirement can be a great time of life, but proper planning is required to help ensure your financial success.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

American’s Attitudes About Their Money


Americans have varying attitudes about their money. The infographic below sheds light on our attitutudes about our finances across various demographic lines including age and income level.

Please take a look and see how your attitudes about your finances compare.

It’s never too late to get started on your financial plan.  Its never to late to move forward and to take the actions needed to get your financial situation on track whether you need to prepare for retirement or beef up your emergency fund.

Please contact me with any questions you may have or with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

personal finance
Source: Masters-in-Accounting.org


Reader Question: Do I Really Need a Financial Advisor?


This question came from a reader who is around 60, works for a major corporation and has retirement assets in neighborhood of $1 million.  He indicated he is looking to either retire or be able to retire in the near future.  His question was in response to my recent request for story ideas and I appreciate this suggestion.  I will address this question largely from the perspective of this person’s situation as this is the type of client I am quite familiar with.

Do I really need a financial advisor? 

Do I really need a financial advisor? The only answer of course is that it depends.  There are many factors to consider.  Let’s take a look at a few of them.

How comfortable are you managing your own investments and financial planning issues? 

This is one of the main factors to consider.  The reader raised the point that the typical fees for ongoing advice on a portfolio of his size would likely be $8,000-$10,000 per year and wondered if the fee is worth it.

Certainly there is the issue of managing his portfolio.  It sounds like he has a significant 401(k) plan balance.  This will involve a decision whether to leave that money at his soon to be former employer or roll it to an IRA.  Beyond this decision is the issue of managing his investments on an ongoing basis.  And taking it a step further the fee level mentioned previously should include ongoing comprehensive financial planning advice not just investment advice.

Since it is likely that his 401(k) contains company stock (based upon who he works for) he has the option of electing the Net Unrealized Appreciation (NUA) treatment of this stock as opposed to rolling the dollars over to an IRA. This is a tactic that can save a lot in taxes but is a bit complex.

Can you be objective in making financial decisions? 

The value of having someone look at your finances with a detached third-party perspective is valuable.  During the 2008-09 stock market down turn did you panic and sell some or all of your stock holdings at or near the bottom of the market?  Perhaps a financial advisor could have talked you off of the ledge.

I’ve seen many investors who could not take a loss on an investment and move on.  They want to at least break-even.  Sometimes taking a loss and redeploying that money elsewhere is the better decision for your portfolio.

Can you sell your winners when needed and rebalance your portfolio back to your target allocation when needed?

Do you enjoy managing your own investments and finances?

This is important.  If don’t enjoy doing this yourself will you spend the time needed not only to monitor your investments but also to stay current with the knowledge needed to do this effectively?

In the case of this reader I suggested he consider whether this is something that he wanted to be doing in retirement.

What happens if you die or become incapacitated?

This is an issue for anyone.  Often in this age bracket a client who is married may have a spouse who is not comfortable managing the family finances.  If the client who is interested and capable in this area dies or becomes incapacitated who will help the spouse who is now thrust into this unwanted role?

Not an all or nothing decision

Certainly if you are comfortable (and capable) of being your own financial advisor at retirement or any stage of life you should do it.  This is not an irreversible decision nor is there anything that says you can’t get help as needed.

For example you might hire a financial planner to help you do a financial plan and an overall review of your situation.  You might then do most of the day to day work and engage their services for a periodic review.  There are also financial planners who work on an hourly as needed basis for specific issues.

Whatever decision that you do make, try to be as objective as possible.  Have you done a good job with this in the past?  Will the benefits of the advice outweigh the fees involved?  Are you capable of doing this? 

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Reverse Mortgages – The Basics


Senator Thompson in Iowa.

 This is a guest post by Gary Foreman, of The Dollar Stretcher.com one of the oldest and best all-purpose financial blogs.  I don’t know about you but I find those reverse mortgage commercials featuring Fred Thompson to be nauseating and annoying.  Gary provides some objective information for those who might be considering this route.

With approximately 10,000 Baby Boomers reaching retirement age every day, it’s not surprising that more people are asking questions about reverse mortgages.  The concept of a reverse mortgage seems complicated at first. But if you break it down into it’s individual pieces it’s not that hard to understand.

Comparing a reverse mortgage to a traditional mortgage

With a traditional mortgage the lending institution gives you a large sum of money at closing that you use to buy the house from the seller. Generally you’ll make monthly payments to the lender to repay the loan. Hopefully someday you’ll have the mortgage paid off and own the house free and clear.

With a reverse mortgage you’re borrowing against the value of your home. Just like a traditional mortgage. Naturally you need to own your home outright or have significant equity.

Most reverse mortgage borrowers choose to take a monthly check from the lender although there are other options. So instead of repaying the mortgage, each month the amount they owe increases.

Beyond the basics

There are a number of requirements to qualify for a reverse mortgage.

  • The borrower must be 62 or older.
  • The home must be your principal residence.
  • Your home must meet all FHA property standards.

Besides these requirements, there are a few other facts about reverse mortgages that you’ll want to know.

  • How much money you can borrow will depend on your age, the equity in your home and the current interest rate.
  • The interest charged on the loan is variable, not fixed.
  • The lender will charge you an origination fee that will be included in the amount that you owe.
  • After you move from your home, the loan becomes due.
  • Any equity left after the loan is repaid goes to you or to your heirs.
  • The money you receive is a loan and generally not considered as ‘income’ for tax or Social Security purposes.

Advantages and disadvantages of a reverse mortgage

First, the positives.

You have flexibility in how much and how often you receive money. You can choose a fixed monthly payment, a line of credit, a lump sum or a combination.

You will never owe more than your home is worth. So when you finally move out and sell the home you won’t need to bring money to the closing table.

You still own the home. The title stays in your name(s), just like with a traditional mortgage.

You don’t repay the loan until the last surviving borrower dies, sells the home or moves out. If you need to move into a nursing home, you’ll have 12 months before the loan becomes due.

The income shouldn’t affect your current Social Security or Medicare benefits, though you should consult with the Social Security folks or your financial advisor.

Unlike other mortgages there aren’t any income requirements.

But, there are some negatives to consider before you apply for a reverse mortgage.

You’ll be charged origination fees and closing costs. There can also be ‘servicing fees’ during the life of the loan. They’ll be included in the amount you’ll owe when you pay off the mortgage. Often these fees are quite high.

Income from the reverse mortgage may affect your eligibility for Medicaid. Contact a CPA or Medicaid planner for details.

The amount you owe will steadily increase over time, even if you choose a single lump-sum payout.

Most reverse mortgages have variable interest rates. So the amount you owe could increase significantly if inflation returns and interest rates rise from our current low rates.

Unlike traditional mortgages, you generally can’t deduct interest paid on your federal income taxes until you sell the home.  I suggest consulting your tax advisor here.

Unless you’re prepared to repay the mortgage from home sale proceeds, you’ll be trapped in your home. No moving to a retirement community or condo.

You won’t be able to give or sell your home to a child without repaying the mortgage.

You’ll still need to pay insurance and taxes on your home. The typical responsibilities of a homeowner remain.

A few final cautions

You should also consider alternatives to a reverse mortgage. There may be other sources of income that are a better fit for your needs. This is especially true if you don’t require an additional regular monthly income stream.

Before you take out a reverse mortgage on your home make sure that you understand it thoroughly. There are some aspects that are a little unusual. Take your time. Don’t be rushed into a decision.

Remember, too, that people will be making money on your mortgage. And, sometimes unscrupulous people push financial products that aren’t well suited to the situation. So tread cautiously.

But, in the right situation, a reverse mortgage can be a viable solution for Baby Boomers and seniors looking for some extra retirement income.

For additional facts regarding reverse mortgages visit the HUD website.

Gary Foreman is a former financial planner who founded  The Dollar Stretcher.com website and newsletters.  The site features thousands of articles on how to save your valuable time and money including other articles on reverse mortgages.

Please contact me at 847-506-9827 for a complimentary 30-minute retirement planning consultation and to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Photo credit:  Wikipedia

Enhanced by Zemanta

4 Reasons to Accept Your Company’s Buyout Offer


4 Reasons to Accept Your Company’s Buyout Offer

Many companies offer employees a buyout package to encourage them to leave the company.  This is generally done to encourage voluntary departures when the organization is looking to reduce headcount.  These offers can cover employers across all levels of experience, but are often structured as early retirement packages geared to older workers.  Over the years I’ve been asked by Baby Boomer clients and friends whether they should accept this offer from their company.  Almost without exception I’ve encouraged these folks to take the money and run.  Here are 4 reasons to accept your company’s buyout offer.

There’s a target on your back 

If your company has identified you as somebody who might be a good candidate for a buyout offer this generally means you are on their list.  In my experience I’ve invariably seen folks who have turned down the first offer finding themselves out of a job within a year or so.

The first offer is likely as good as it’s going to get 

A number of years ago a friend called me to discuss a buyout offer he had received from his employer, Motorola.  Given his age and the favorable terms of the buyout offer I strongly encourage him to take the package.  He ended up not taking the offer and stayed with the company for a bit over a year afterwards.  Sadly he was let go and the financial terms of his separation were not nearly as favorable as they would have been had he taken the initial buyout.

Sweetened terms and incentives 

Every situation is different, but I’ve seen buyout offers that included such incentives as extended medical coverage, years of service added to a pension calculation, and additional severance pay over and above what an employee would have been entitled to based upon their years of service.  Additional incentives might include training and job search help.  In many cases these buyouts can be incentives for older workers to take early retirement and the incentives are geared to areas like the ability to receive early pension payments.

This could be a great opportunity

While most people don’t like the idea of losing their job, a generous buyout might be a great opportunity for you.  If you will continue to work and you are able to find a new job quickly the buyout could serve as a nice financial bonus for you.  This situation might also serve as an opportunity to start your own business.  If you were looking to retire in the near future this could be just the opportunity you were looking for.  I’ve had more than one client over the years joyously accept their company’s early retirement incentive.

In analyzing whether to take the buyout you should at a minimum consider the following:

  • Your current financial situation, what impact will this have on my overall financial plan and my goals such as retirement and sending my kids to college?
  • What you might do next:  Retirement, self-employment, look for another job
  • If you will stay in the workforce what are your employment prospects?
  • Health insurance options.
  • How good are the incentives being offered?  Can you or should you try to negotiate a better package?

Corporate buyouts and early retirement packages are clearly here to stay.  If you are a corporate employee, especially one in the Baby Boomer or the Gen X age range, you should give some thought to what you would do if this situation were to present itself.

Were you offered a buyout or early retirement package? Do you need some help evaluating it? Do you need an independent opinion on your investments and where you stand in terms of retirement? Check out my Financial Review/Second Opinion for Individuals service. 

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit: Wikipedia

Retirement Planning: 8 Conservative Assumptions to Consider


Social Security Poster: old man

According to the folks at PBS Frontline, retirement is a gamble at best.  One way to increase your odds of success is to use conservative assumptions.  As a financial advisor I generally use conservative assumptions in all aspects of client financial planning.

If you’re concerned about running out of money during retirement, you need to be realistic and conservative with your assumptions. Here are 8 conservative assumptions for you to consider:

Assume you will need 100 percent of your current income in retirement  

Many rules of thumb suggest you’ll need between 70 and 100 percent of your pre-retirement income in retirement, but plan on at least 100 percent to be safe. Today’s retirees are active, they want to travel, pursue hobbies, and live a generally active lifestyle.  This costs money.  Even though you will likely slow down a bit as you age, medical costs later in retirement will likely rise and may replace what you were spending on activities and travel earlier in retirement.

Add extra years to your life expectancy  

We are all living longer with advances in medicine and the like.  Many factors come into play here including the history of longevity in your family.

Reduce your estimates of Social Security benefits  

The youngest of the Baby Boomers can likely count on Social Security as we know it but I’m guessing that those younger than 50 may see reduced benefits.  In the interest of being conservative, I suggest that you take your current estimate from Social Security and reduce it by say 25%.  If things work out better that’s great, if not then you’ve planned and saved accordingly.

Cut back on your living expenses now  

This not only frees up money to set aside for your retirement, but it helps you adjust to a potentially lower standard of living in retirement.

Be conservative with your investment expectations

We are four plus years into a stock rally and the stock market is at record levels.  For investors nearing retirement it is a good idea to adjust your portfolio and expectations regarding investment returns accordingly. 

Rethink early retirement  

Saving enough to last from age 65 to age 85 or 90 is a difficult task. Trying to retire at age 55 or 60 is just not practical for most individuals, unless you’re willing to significantly change your lifestyle. Working a few more years can go a long way in helping fund your retirement. Those years are typically your highest earning years, so hopefully you’ll be able to save significant sums during that period. Also, every year you work is one year you don’t have to support yourself with your retirement savings.

Consider working during retirement 

Especially during the early years of retirement, you should consider having at least a part-time job. Even modest earnings can help significantly with current retirement expenses help delay the need to withdraw money from your retirement accounts at least to some extent.  Additionally this can be a great way to transition to “full retirement” especially for those retiring early.

Take conservative withdrawals from your retirement accounts  

Don’t plan on taking out more than 3 to 4 percent of your balance annually.  The “four percent rule” is a handy rule of thumb, but it is just that.  Everyone’s situation is different.  It is best to start with a detailed retirement expense budget and then determine what your investments and other sources of income can support.

The best retirement planning strategy is to have a financial plan in place. Monitor your retirement accumulation progress against the plan’s benchmark and make adjustments as needed in areas such as the amount you are saving, your investment allocation, and the lifestyle that your resources will support.  Always be conservative in your planning, it’s much better to have more than you planned on than to hit age 80 and realize that you are out of money.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Wikipedia

Enhanced by Zemanta

Protecting Your Savings from the Cost of a Long-Term Care Illness


Nursing Home

This is a guest post by Dagmar M. Pollex, J.D, an estate planning attorney based in Quincy, MA.  

The topic of protecting one’s savings from the cost of a long-term care situation is a key retirement planning issue for Baby Boomers approaching retirement and those already in retirement.  Additionally it is a major concern for those with aging parents as well.

Today, the risk of losing your life savings to a long term care illness looms as the largest threat to your future security. That’s why one of the biggest questions and concerns many people have about their lifetime financial security is what would happen if they suffer a long term disabling illness, such as Parkinson’s disease or Alzheimer’s.

The reason for this concern is clear. The cost of long term care varies according to where you live. Last year private room nursing home rates jumped 3.8 percent to a nationwide average of $90,520. In some parts of the country like Massachusetts and New York, the average cost is $120,000.00 to $150,000.00 a year – and increasing rapidly.

Long-Term Care Insurance

Medicare does not cover this cost so without long term care insurance, it wouldn’t take long for most families to lose all of their hard-earned life savings. If you are in your 60’s and in reasonably good health, it’s a wise idea to consult with a long term care insurance specialist. A long term care advisor can show you a variety of options tailored to your budget. But what if you can’t get long term care insurance because of a medical condition? What if your income and savings, especially after retirement, just won’t be enough to afford complete coverage?

First of all, don’t assume you need to purchase lifetime coverage. Even three to five years of coverage has provided important value to many of my clients.  To fill in the gap if insurance is not enough or if it’s just not obtainable, there is an increasingly popular asset planning technique for middle-class families today. With people living much longer these days comes the growing concern that some of the later years will eat up a lifetime of savings.

If you can’t get long term care insurance or can’t afford it or even if you have just a few years of coverage, this type of planning can protect assets from the worst case scenario of needing long term nursing home care for a substantial period of time.

Using a Trust

Planning ahead by using an irrevocable trust to preserve some of your assets helps you avoid the devastating loss of your life savings to a catastrophic illness. This type of trust which I call a Long Term Care Asset Protection Trust is also sometimes called a Medicaid Trust or an Income Only Irrevocable Trust.

The use of this kind of planning has increased in the last few years, especially since changes federal Medicaid law enacted in 2006 eliminated last minute planning opportunities. As a result, people who want preserve assets now need to plan before the need for care arises.

Many people have heard about this kind of planning but want to know more about how it works, when it should be used and the practical differences between an irrevocable asset protection trust and a revocable trust.

The Long Term Care Asset Protection Trust is a legal planning tool that is designed to protect some or all of your assets in case there is a need for an extended period of long term care in the future.

As the name implies, these trusts are irrevocable and require you to give up a certain degree of control over the assets transferred to the trust.  In exchange for protecting your assets from the astronomical cost of nursing home care, Long Term Care Asset Protection Trusts have some conditions attached to the use of the assets in the trust.

Under the terms of these trusts, the transferor (“grantor”) can receive all of the income produced by the assets in the trust for the grantor’s lifetime.  So by using a Long Term Care Asset Protection Trust, you can still reserve some control and retain some interest in the transferred assets – advantages that are not available when transfers are made outright to individuals.

You receive the income from the trust assets, but not the principal.  If you transfer your home to the trust, you can continue to live there.

Because Long Term Care Asset Protection Trusts are irrevocable, the grantor cannot revoke the trust and reacquire the assets; therefore, the assets are protected for long term care Medicaid eligibility purposes.

Long Term Care Asset Protection Trusts can be written to provide income tax advantages, and to allow the grantor some flexibility to change his or her beneficiaries. The trusts can also be drafted to allow the trust assets to obtain a “step-up” in value so your beneficiaries will not have to pay additional capital gains tax.

Dagmar’s is an estate planning attorney based in Quincy, MA.  Follow her on Twitter. 

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Photo credit:  Flickr

Enhanced by Zemanta