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Financial Planning for Second Half of Your Life

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Financial Planning for Second Half of Your Life

  1. 1. Financial Planning for the Second Half of Your Life Dr. Barbara O’Neill, CFP®, CFCS, CPFFE Extension Specialist, Rutgers Cooperative Extension oneill@aesop.rutgers.edu
  2. 2. Personal Introduction 2 • FCS professional for 42 years (with RCE-38 years) • CFP® for 32 years and CPFFE since 2012 • Extension Specialist in Financial Resource Management (former county FCS Agent) • Financial educator and author • In the second half of financial life
  3. 3. Age 50 (+/- 5 to 10 Years) • Financial “halftime” or “intermission” • Think about past accomplishments • Think about what you still want to do • New challenges and decisions • Increased interest in “giving something back” to family, community, charities • Many people want to simplify/downsize
  4. 4. No More Excuses !!! • I don’t have enough knowledge • I don’t have enough time • I don’t have enough money • I don’t have anyone to help me • I don’t want to make a mistake
  5. 5. Common Financial Errors of Older Adults: • Changing investment strategy drastically on a specific date (e.g., 65th birthday) • “Forgetting” about effects of inflation – 3.5% inflation will double costs in 20 years • Relying too heavily on financial salespeople • Assuming that estate planning is for “the rich” • Retiring without considering health coverage • Not planning for long-term care expenses • Improper asset withdrawals
  6. 6. Increased Financial Complexity and Major Decisions • When to start Social Security benefits • When to retire: how much money is “enough”? • Where to live in retirement • Taxation of SS and pension benefits; estimated tax payments • Purchase of health insurance • Long-term care planning • Required minimum distributions • Estate planning documents
  7. 7. Research: Low Retirement Confidence • Americans’ confidence in their ability to retire comfortably is low • Only 21% are “very confident” • 54% of workers have savings and investments (excluding home & DB pension) < $25,000 (includes 26% with < $1,000) • 37% of workers expect to retire after age 65; 46% of retirees left the workforce earlier than planned • Less than half (48%) of workers have tried to calculate what they need to save for retirement 2016 Retirement Confidence Survey (RCS): https://www.ebri.org/pdf/surveys/rcs/2016/EBRI_IB_422.Mar16.RCS.pdf
  8. 8. Research: Increased Life Expectancy • More than half of people >45 underestimate how long they will live • Can result in inadequate provision for retirement need3 Reference (Financial Advisor): http://www.fa-mag.com/news/society-of-actuaries- say-people-underestimate-their-life-spans--11480.html • Average life expectancy for man reaching age 65 today: Age 83 • Average life expectancy for woman reaching age 65 today: Age 85 Reference (Social Security): http://www.ssa.gov/planners/lifeexpectancy.htm BEST to use life expectancy calculators with lifestyle questions: http://www.msrs.state.mn.us/info/Age_Cal.htmls http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html
  9. 9. Research: Health Care Costs • Even with Medicare benefits, a 65-year old couple retiring in 2012 will spend at least $240,000 on health care costs during their retirement Reference (Wall Street Journal/Fidelity Investments): http://online.wsj.com/article/SB10001424052702304543904577394543896250220.html • A man needs $187,000 and a woman $213,000 to have a 90% chance of having enough money to cover health care expenses in retirement Reference (EBRI): http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4711
  10. 10. Research: Long-Term Care Needs • Americans spent $207.9 billion in LTC services in 2010 • 12% of Americans turning 65 will spend between $25,000 and $100,000 on LTC expenses and 6% will spend > $100,000 • 7 million LTC policies in force vs. 45 million Medicare enrollees Reference (Journal of Financial Planning): http://www.fpanet.org/journal/SeekingAlternativestoLongTermCareInsurance/ • Assisted living expenses vary considerably across the U.S. • $4,794 per month in New Jersey versus $2,617 in North Dakota Reference (Wall Street Journal/MetLife): http://online.wsj.com/article/SB10001424052970203937004578079184108523 030.html
  11. 11. 15 Key Financial Second Half Issues • Financial basics • Investing decisions & asset allocation • Avoiding financial fraud • Creating a retirement “paycheck” • Required minimum distributions • Tax-planning strategies • Transferring untitled personal property • Communication issues about money • Getting help and hiring advisors • Social Security decisions • Health insurance • Long-term care insurance • Estate planning • Health-wealth connections • Leaving a legacy
  12. 12. 1. Don’t Forget “The Basics” • Net Worth Statement – Summary of assets and debts: http://njaes.rutgers.edu/money/pdfs/networthcalcworksheet.pdf • Specific financial goals – Include a date and cost: http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf • Cash flow statement – Summary of income and expenses • Emergency reserve • Financial Fitness Quiz (Check-up): http://njaes.rutgers.edu/money/ffquiz/
  13. 13. Assess Current/Future Insurance Needs • Life insurance • Disability insurance (if employed) • Health insurance (e.g., Medigap, work) • Long-term care insurance • Property insurance • Umbrella liability
  14. 14. 2. Follow Recommended Investment Strategies • Don’t invest if you don’t understand • Diversify (different asset classes and types) • Invest for long term goals: 5+ years • Have reasonable expectations • Buy low-cost investments • Don’t pay attention to market “noise” • Balance risk and reward – All investments have some type of risk
  15. 15. Ownership Versus Loanership Investments • Ownership Investments: – Variable Annuities – Stocks – Real Estate – REITs – Growth mutual funds • Loanership Investments: – Fixed Annuities – Corporate Bonds – Government Bonds – Ginny Maes – Money Market Mutual Funds – CDs – U.S. Savings Bonds
  16. 16. Later Life Investing Need-to-Knows 16 • Historically, stocks have provided the highest return of any asset class over the long term • The trade-off is a higher chance of loss – Risk-Reward Relationship (pyramid graphic) • May want to gradually ramp-down stock % of portfolio asset allocation during retirement – Guideline: 110 –age = Percentage in stock • Rebalance portfolio regularly
  17. 17. More Later Life Investing Need-to-Knows 17 • Maximize catch-up contributions if age 50+ – + $6,000 ($24,000 total)- employer plans – + 1,000 ($6,500 total)- IRAs • Maximize employer plan matched savings • Assess your investment risk tolerance – See www.rce.rutgers.edu/money/riskquiz/ • Must complete plan rollovers in 60 days
  18. 18. Later Life Investing Action Steps 18 • Consider hiring a professional adviser – See www.fpanet.org, www.cfp-board.org, and www.napfa.org for names of local advisers • Consolidate scattered retirement plans for easier minimum distribution calculations • Absent health issues, plan on living at least to early 90s • Take advantage of all savings opportunities before retirement
  19. 19. 3. Avoid Investment Fraud 2011 AARP Study: 4 Behaviors that increase seniors’ risk of being a fraud victim: 1. Attending “free lunch” seminars 2. Entering drawings and contests for free prizes 3. Reading and accepting junk mail offers 4. Sitting through sales pitches References: http://assets.aarp.org/rgcenter/econ/fraud-victims-11.pdf http://www.givemebackmycredit.com/blog/2011/06/aarps-fraud-study-key- behaviors-that-make-seniors-more-likely-to-fall-victim-to-scams.html
  20. 20. 4. Create a Retirement “Paycheck” • Try to simulate regular income stream – Annual cash withdrawals (1/12 per month) – Automated monthly fund withdrawals – “Laddered” bonds or CDs – Post-retirement employment • Earnings limit under FRA: $15,720 (2016) • Keep tax-deferred investments and Roth IRAs growing as long as possible
  21. 21. How Much Money Can You Take Out? • Draft budget before you start spending • Keep an eye on inflation • Two key factors determine how long savings will last: –Your withdrawal rate –The rate of return on your investments
  22. 22. Withdrawal Rate Consensus • Between 4% and 4.5% of principal, if 50% + stock – $4,000 a year if $100,000 saved ($333 per month) • Lower (e.g., 3%) if conservative investor • Consider hiring certified financial planner for 2-3 hours (go prepared with net worth and budget) • Do a Monte Carlo analysis for probability of not outliving money
  23. 23. You Need $300,000 Saved for Every $1,000 of Monthly Income $300,000 x .04 = $12,000 ÷ 12 = $1,000 of monthly income $600,000 for $2,000 per month $900,000 for $3,000 per month $1.2 million for $4,000 per month $1.5 million for $5,000 per month
  24. 24. Retirement “Paycheck” Need-to-Knows 24 • Possible income sources include: Social Security, defined benefit pension plan, defined contribution plan (e.g., 401(k) and 403(b) plans), individual retirement accounts (IRAs), annuities, taxable account investments, post-retirement earnings, home sale proceeds, rental real estate, reverse mortgage • When making withdrawals, generally tap taxable and tax-free investments first, then tax-deferred employer plans and traditional IRAs (must start RMDs at age 70 ½), and then Roth IRAs)
  25. 25. Retirement “Paycheck”- More Need-to-Knows 25 • Long-term capital gain rates if assets held > 1 year – 0% (10% and 15% tax brackets); 15% (25%, 28%, 33%, and 35% tax brackets); 20% (39.6% tax bracket) • Mandatory withdrawals required at age 70½ • No withdrawal penalty after age 59½ • Roth IRA withdrawals are tax free after age 59½ and if account is open at least 5 years
  26. 26. Suggested Investment Strategy for Seniors • Set aside enough $$$ to pay uncovered excess expenses for 3-5 years in a money market fund or short-term CD – (e.g., $30k income - $15k from SS and pension = $15k uncovered expenses x 3-5 years = $45k to $75k in cash assets) • Remainder grows in stock & bond funds. Sell stock shares periodically and add to cash assets • If stock market tumbles -- hang tough. Tap cash and bonds and dividends first.
  27. 27. 5. Take Required Minimum Distributions • Applies to distributions from: – Traditional IRAs (Roth IRAs are tax-free) – 401(k)s, 403(b)s, 457 plans, SEPs, TSP • Must begin distributions by April 1 of year following year one turns 70 1/2 – 70th birthday: 1/3/16; Age 70 1/2: 7/3/16 – Begin distributions by 4/1/17 (two 2017 payouts if delay) • Employer plans: can delay to April 1 of year after one retires
  28. 28. How Much to Take Out • Required Minimum Distribution (RMD)= – Balance on Dec. 31 of prior year /Life expectancy (use factor in IRS uniform distribution table) – See http://njaes.rutgers.edu/money/ira-table.asp – Uniform table automatically recalculates life expectancy (1.9 years if you live to 115!) – Separate table if spouse > 10 years younger (joint life expectancy) • Failure to take RMD: Tax penalty of 50% of the required distribution (must match or exceed RMD) • Plan custodian will report numbers to IRS
  29. 29. 6. Practice Tax Avoidance (Minimization) • Tax-deferred investments – Employer salary reduction plans – IRAs – Annuities (look for low expense providers) • Age 50+ catch-up contribution • LT capital gain on investment profits • Good financial records • Tax preparer for a “good template”
  30. 30. 7. Consider Untitled Property Transfers • “Who gets grandma’s yellow pie plate?” – http://www.extension.umn.edu/family/financial- security/who-gets-grandmas-pie-plate/ • Consider interests of family members – Examples: coin collection, antique car • Make a written list of property and heirs • Share list with family and executor • Consider lifetime gifting of property • Annual gift tax exclusion: $14k per donee (2016) • Can transfer unlimited amount of property (or cash) to charity without gift/estate tax liability
  31. 31. 8. Communicate With Others • Ask executor, contingent executor, PoA, etc. to serve • Prepare/share a “financial notebook” • Share location of key documents • Discuss burial wishes with family • Discuss living will issues with proxy • Prepare letter of last instructions • Discuss/list personal property bequests
  32. 32. 9. Get Help When Needed • CPA or CFP when receiving lump sum distribution • Financial planners: – 888-FEE-ONLY or www.napfa.org (NAPFA) – 800-282-PLAN or www.fpanet.org (FPA) – 888-CFP-MARK or www.cfp-board.org (CFP® Board) – http://garrettplanningnetwork.com/ (Garrett Network) • Go prepared to reduce time and fees – Bring financial statements, list of goals, questions
  33. 33. 10. Understand Social Security 33 • Reduced SS benefits available at age 62 • Full SS benefits at Full Retirement Age (FRA) – Age 66 if born between 1943-1954 – Age 67 if born in 1960 or later • Must be “fully insured” with 40 quarters of coverage (a quarter = $1,260 in 2016) • There is no earnings limit after FRA • Before FRA, $1 of benefits withheld for every $2 over earnings limit ($15,720 in 2016)
  34. 34. Social Security Need-to-Knows 34 • It is usually wise to postpone SS benefits if: – You have substantial earnings – You are in good health – You do not need the money for current living expenses • Contact SS about 3 months before retiring (online) • See www.ssa.gov for general SS information • See http://www.ssa.gov/myaccount/ for SS benefit estimate
  35. 35. Social Security Action Steps • Download benefit estimate annually and review for accuracy: http://www.ssa.gov/myaccount/ • Estimate/calculate percentage of retirement income coming from Social Security (if retired) • Do a Ballpark Estimate retirement calculation (if working) See http://www.choosetosave.org/ballpark/ • Factor Social Security into divorce plans – Must be married 10 years to qualify on ex-spouse’s record • Go Direct (direct deposit of SS benefit check) 35
  36. 36. 11. Understand Senior Health Insurance 36 • Medicare covers people age 65+ • Medicare has 4 parts: A, B, C, and D • Many beneficiaries buy Medigap policies • Retiree health benefits are increasingly scarce • Early retirees must cover health insurance “gaps” (e.g., between a job and Medicare) • COBRA can extend group benefits for 18 mos. • See http://www.medicare.gov/
  37. 37. Health Insurance Action Steps • Apply for Medicare within 3 months of age +/- age 65 • Pay attention to 60-day COBRA deadlines • Safeguard health insurance documents • Inquire about employer retiree benefits, if any • Contact SHIP (State Health Insurance Assistance Program) for assistance with purchasing state-licensed Medigap (Medicare supplement) policies • www.shiptalk.org
  38. 38. 12. Understand Long Term Care Insurance 38 • Potential cost of LTC is a big financial risk • Nearly half of Americans will need LTC at some point in their lives • LTC covers a wide range of services – Nursing home, assisted living, in-home care • Best time to buy LTC insurance is generally age 55 to 60 • Adult children help pay premiums?
  39. 39. Key LTC Insurance Policy Features • Amount of daily coverage • Length of coverage (e.g., 3 years, 5 years) • Types of benefits provided (e.g., home health care) • Elimination (waiting) period (e.g., 3 months, 6 months) • Number of activities of daily living or ADLs required to trigger benefits (e.g., bathing, toileting) • Method of making an inflation adjustment, if any Resource: Financing Long-Term Care (eXtension): http://www.extension.umn.edu/family/financial- security/resources/
  40. 40. LTC Insurance Action Steps 40 • Contact SHIP for assistance with purchasing LTC policies from licensed state providers • Explore LTC options, including: – LTC insurance – “Self-insurance” – Annuitized income sources (e.g., DB pension) – Continuing Care Retirement Communities
  41. 41. 13. Solidify Estate Planning 41 • Spelling out your wishes (e.g., property transfers) is a gift that you give to others • Dying intestate (without a will) may result in unnecessary hassles and expenses • Three recommended documents: – Will for bequests to people and charities and to name executor(s) and guardian(s) – Living will for health care decisions with a designated health care representative – Durable power of attorney to handle financial affairs while you are alive
  42. 42. Estate Planning Need-to-Knows 42 • The principal goal of estate planning is to make sure that assets are distributed as you desire with the least amount of taxes • Permanent $5 million inflation-adjusted federal gift and estate tax exclusion as of 1/13 tax law • Beneficiary and contingent beneficiary designations should be reviewed periodically • See http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf – Wills and trusts – Life insurance policies – Retirement accounts – U.S. savings bonds
  43. 43. Estate Planning Action Steps 43 • Keep property information in one place • Let trusted persons know where estate planning documents are kept • Worksheet: A Record of Important Family Papers http://njaes.rutgers.edu/money/pdfs/importantpapers.pdf • See an attorney to draft or revise estate planning documents • Revise documents as life events require
  44. 44. 14. Appreciate Health-Wealth Linkages • The “price” of good health is the need for more wealth: Good health raises (NOT lowers) a person’s lifetime care costs • Center for Retirement Research (CRR) projections of remaining lifetime health care costs of couples who reached indicated ages in 2009: Age Healthy Unhealthy 65 $260,000 $220,000 70 $266,000 $241,000 75 $265,000 $236,000 80 $259,000 $220,000 85 $244,000 $202,000 • More years of out-of-pocket medical bills and an increased risk of chronic disease (e.g., diabetes) and need for LTC Reference (CRR, Boston College): http://money.usnews.com/money/blogs/the-best-life/2010/05/12/good-health-raises- lifetime-care-costs
  45. 45. Take Care of Yourself! 45 “The greatest wealth is health” Virgil See www.njaes.rutgers.edu/sshw for information about health and wealth connections
  46. 46. 15. Leave a Legacy- Give Something Back Many ways to “leave a legacy” – Children and grandchildren – Creative works (art, books, music) – Volunteer time helping others – Charitable gifting • Outright gifts of cash, property, securities • Charitable trusts (see an attorney) • Testamentary gifts via one’s will (less than 6% of Americans leave money to charities when they die; 20% of those who die with wills)
  47. 47. Helpful Online Resources 47 • Rutgers Cooperative Extension – www.njaes.rutgers.edu/money – www.investing.rutgers.edu • Social Security Administration – www.ssa.gov • State Health Insurance Assistance Program (SHIP) – www.shiptalk.org • Planning for a Secure Retirement (Purdue) – www.ces.purdue.edu/retirement
  48. 48. Questions? Comments? Experiences? Be healthy, wealthy, and happy!

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