A way to help you prepare.
The baby boomers redefined everything they touched, from music to marriage to parenting and even what “old” means – 60 is the new 50! Longer, healthier living, however, can put greater stress on the sustainability of retirement assets.
There is no easy answer to this challenge, but let’s begin by discussing one idea – a bucket approach to building your retirement income plan.
The Bucket Strategy can take two forms.
The Expenses Bucket Strategy: With this approach, you segment your retirement expenses into three buckets:
* Basic Living Expenses – food, rent, utilities, etc.
* Discretionary Expenses – vacations, dining out, etc.
* Legacy Expenses – assets for heirs and charities
This strategy pairs appropriate investments to each bucket. For instance, Social Security might be assigned to the Basic Living Expenses bucket. If this source of income falls short, you might consider whether a fixed annuity can help fill the gap. With this approach, you are attempting to match income sources to essential expenses.
The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
For the Discretionary Expenses bucket, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend. The market value of a bond will fluctuate with changes in interest rates. As rates fall, the value of existing bonds typically drop. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due, plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.
Finally, if you have assets you expect to pass on, you might position some of them in more aggressive investments, such as small-cap stocks and international equity. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.
The Timeframe Bucket Strategy: This approach creates buckets based on different timeframes and assigns investments to each. For example:
* 1 to 5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution, so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
* 6 to 10 Years: This bucket is designed to help replenish the funds in the 1-to-5-Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
* 11 to 20 Years: This bucket may be filled with investments such as large-cap stocks, which offer the potential for growth.
* 21 or More Years: This bucket might include longer-term investments, such as small-cap and international stocks.
Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-to-10-Years bucket, even though it’s not quite time.
A bucket approach to pursue your income needs is not the only way to build an income strategy, but it’s one strategy to consider as you prepare for retirement.
Express your wishes.
Actor Lee Marvin once said, “As soon as people see my face on a movie screen, they [know] two things: first, I’m not going to get the girl, and second, I’ll get a cheap funeral before the picture is over.”
Most people don’t spend too much time thinking about their own funeral, and yet, many of us have a vision about our memorial service or the handling of our remains. A letter of instruction can help you accomplish that goal.
A letter of instruction is not a legal document; it’s a letter written by you that provides additional, more personal information regarding your estate. It can be addressed to whomever you choose, but typically, letters of instruction are directed to the executor, family members, or beneficiaries.
Make a Cheat Sheet. Think of a letter of instruction as a “cheat sheet” to your estate. Here are a few ideas and concepts that may be included:
*The location of important legal documents, such as your will, insurance policies, titles to automobiles, deeds to property, etc.
*A list of financial assets, including savings and checking accounts, stocks, bonds, and retirement accounts. Be sure to include account numbers, PINs, and passwords where applicable.
*A list of pensions or profit-sharing plans, including the location of their explanatory booklets.
*The location of your latest tax return and Social Security statements.
*The location of any safe deposit boxes and their keys.
*Information on your social media accounts and how they can be accessed.
Identify Funeral Wishes. A letter of instruction is also a good place to leave burial or cremation wishes. You should consider giving the location of your cemetery plot deed, if you have one. You may even wish to specify which hymns or speakers you would like included in your memorial service. Although a letter of instruction is not legally binding, your heirs will probably be glad to know how you would like to be remembered. It also may be helpful to leave a list of contact information for people who should be notified in the event of your death.
There is no “best way” to write a letter of instruction. It can be written in your style and reflect your personality, or it can be written to simply convey information. You should decide what type of letter best fits your estate strategy.
Three important factors when it comes to your financial life.
Regardless of how the markets may perform, consider making the following part of your investment philosophy:
Diversification. The saying “don’t put all your eggs in one basket” has real value when it comes to investing. In a bear or bull market, certain asset classes may perform better than others. If your assets are mostly held in one kind of investment (say, mostly in mutual funds or mostly in CDs or money market accounts), you could be hit hard by stock market losses, or alternately, lose out on potential gains that other kinds of investments may be experiencing. There is an opportunity cost as well as risk.
Asset allocation strategies are used in portfolio management. A financial professional can ask you about your goals, tolerance for risk, and assign percentages of your assets to different classes of investments. This diversification is designed to suit your preferred investment style and your objectives.
Patience. Impatient investors obsess on the day-to-day doings of the stock market. Have you ever heard of “stock picking” or “market timing”? How about “day trading”? These are all attempts to exploit short-term fluctuations in value. These investing methods might seem fun and exciting if you like to micromanage, but they could add stress and anxiety to your life, and they may be a poor alternative to a long-range investment strategy built around your life goals.
Consistency. Most people invest a little at a time, within their budget, and with regularity. They invest $50 or $100 or more per month in their 401(k) and similar investments through payroll deduction or automatic withdrawal. They are investing on “autopilot” to help themselves build wealth for retirement and for long-range goals. Investing regularly (and earlier in life) helps you to take advantage of the power of compounding as well.
If you don’t have a long-range investment strategy, talk to a qualified financial professional today.
The hows and whys of charity in America.
According to Giving USA 2018, Americans gave an estimated $410.02 billion to charity in 2017. That’s the first time that the amount has totaled more that $400 billion in the history of the report.
Americans give to charity for two main reasons: to support a cause or organization they care about or to leave a legacy through their support.
When giving to charitable organizations, some people elect to support through cash donations. Others, however, understand that supporting an organization may generate tax benefits. They may opt to follow techniques that can maximize both the gift and the potential tax benefit. Here’s a quick review of a few charitable choices:
Remember, the information in this article is not a replacement for real-life advice. It may not be used for the purpose of avoiding any federal tax penalties. Make sure to consult your tax, legal, or accounting professional before modifying your charitable giving strategy.
Direct gifts are just that: contributions made directly to charitable organizations. Direct gifts may be deductible from income taxes depending on your individual situation.
Charitable gift annuities are not related to annuities offered by insurance companies. Under this arrangement, the donor gives money, securities, or real estate, and in return, the charitable organization agrees to pay the donor a fixed income. Upon the death of the donor, the assets pass to the charitable organization. Charitable gift annuities enable donors to receive consistent income and potentially manage taxes.
Pooled-income funds pool contributions from various donors into a fund, which is invested by the charitable organization. Income from the fund is distributed to the donors according to their share of the fund. Pooled-income funds enable donors to receive income, potentially manage taxes, and make a future gift to charity.
Gifts in trust enable donors to contribute to a charity and leave assets to beneficiaries. Generally, these irrevocable trusts take one of two forms. With a charitable remainder trust, the donor can receive lifetime income from the assets in the trust, which then pass to the charity when the donor dies; in the case of a charitable lead trust, the charity receives the income from the assets in the trust, which then pass to the donor’s beneficiaries when the donor dies.
Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.
Donor-advised funds are funds administered by a charity to which a donor can make irrevocable contributions. This gift may have tax considerations, which is another benefit. The donor also can recommend that the fund make distributions to qualified charitable organizations.
Some people are comfortable with their current gifting strategies. Others, however, may want a more advanced strategy that can maximize their gift and generate potential tax benefits. A financial professional can help you assess which approach may work best for you.
Not all gifts are taxable.
I’d like for you to meet my friend, Hugh. He’s a retired film stuntman who, after a long career, is enjoying his retirement. Some of what he’s enjoying about his retirement is sharing part of his accumulated wealth with his family, specifically his wife and two sons. Like many Americans, Hugh likes to make sure that, when he’s sharing that wealth, he isn’t giving the I.R.S. any overtime.
Hugh knows about the gift tax and knows how to make those gifts without running headlong into a taxable situation. This is Hugh’s responsibility because the I.R.S. puts the onus on the giver. If the gift is a taxable event and Hugh doesn’t pay up, then the responsibility falls to the beneficiaries after he passes in the form of estate taxes. These rules are in place so that Hugh can’t simply, say, give his entire fortune to his sons before he dies.
Exemptions for family and friends. It would be different for Hugh’s wife, Barbara. The unlimited marital deduction means that gifts that Hugh gives to Barbara (or vice versa) never incur the gift tax. There’s one exception, though. Maybe Barbara is a non-U.S. citizen. If so, there’s a limit to what Hugh can offer her, up to $155,000 per year. (This is the limit for 2019; it’s pegged to inflation.)
The gift limit for other people is $15,000 and it applies to both cash and noncash gifts. So, if Hugh buys his older son Tony a $15,000 motorcycle, it’s the same as writing a $15,000 check to his younger son, Jerry, or gifting $15,000 in stock. Spouses have their own separate gift limit, as well; Barbara could also write Jerry a $15,000 check from the account she shares with Hugh.
Education and healthcare. The gift tax doesn’t apply to funds for education or healthcare. So, if Tony breaks his leg riding that motorcycle, Hugh can write a check to the hospital. If Jerry goes back to college to become a chiropodist, Hugh can write a tuition check to the college. This only works if Hugh is writing the check to the institution directly; if he’s writing the check to the beneficiaries (i.e. Tony and Jerry), he might incur the gift tax.
The Lifetime Gift Tax Exemption. What if Hugh were to go over the limit? The lifetime gift tax exemption would go into effect, and the rest would be reported as part of the lifetime exemption via Form 709 come next April. Unlike the annual exemption, the lifetime exemption is cumulative for Hugh. Currently, that lifetime exemption is $11.4 million.
Being a stuntman and an active extreme sportsman, Hugh is concerned about his estate strategy. Were he to borrow Tony’s motorcycle and attempt to jump the Snake River Canyon, what would happen if he didn’t make it across? If that unfortunate event occurred in 2019, and he gave $9 million over his lifetime, and his estate and all of that giving totaled more than $2.4 million, the estate may owe a federal tax and possibly a state estate tax. Barbara would have her own $11.4 million lifetime exemption, however, and since she is the spouse, estate taxes may not apply.
Any wise stuntman will tell you, “leave this to the experts.” Talk to a trusted financial professional about your own plans for giving.
How can you make things easier on them later in life?
Worldwide, the number of people aged 60 and older is growing. By 2050, this demographic will be more than twice as large as it was in 2015.¹
Some of these seniors could face a financial test. Will they be able to look after their investments or financial matters at age 80 or 90 with the same level of scrutiny they exercised earlier in life?
Your parents may be facing such a challenge. If you sense that they are not quite up to it, then a conversation about financial issues could be in order.
If you need to have this kind of talk with your parents, it is best to proceed gently, while acknowledging some potential risks that may heighten if the status quo persists.
Start by talking about your own financial matters or investments. Ask your parents for their thoughts on this-or-that topic – an upcoming car purchase, a type of insurance coverage or investment, or their approach to saving or investing when they were your age. Start this conversation while you do something else together, something relaxed or pleasurable. A one-on-one conversation is best, with an informal tone. A formal discussion involving multiple family members might come across like some kind of financial intervention and may not be appreciated.
Alternately, if you have made or updated a will or created a power of attorney, you can talk about your decision to do so and ask your parent if they have either of these items. That could lead to a conversation about family wealth or eldercare.
Helpful and gentle suggestions can follow. If your parents are neglecting to open account statements, you can offer help monitor their accounts by asking to register with the bank or investment custodian, so that you may receive copies of these documents. If you sense bills are past due, you can suggest setting up automated payments, referencing how useful they have been in your own financial life.
There can be resistance to such suggestions, of course. One possible way to counter that resistance is by expressing how much you care about their financial well-being, their wishes, and their quality of life. How would they feel, for example, if a financial error or oversight they made resulted in more income tax or a decline in the value of their accounts?
By treating your parent with love and respect and communicating openly, you can let them know that you are ready to provide the help needed during this time of life.
Your financial future is up to you and no one else.
What will be your future? You know that solid retirement strategy takes your time horizon, an often unpredictable factor, into consideration. Your thinking must include an awareness of how long you must save for and what sort of expenditures may be ahead.
The most recent findings from the Centers for Disease Control and Prevention indicate that the average American male lives to age 76, while a female may live to 81. The numbers also take the quality of life into account, putting male and female Americans at “full health” for 67 and 70 years, respectively.
What do these numbers tell us? Women live longer, for one. Based on your age and the age of your spouse, you can make estimates; you may live longer or less, but averages offer us a window that can be used to plot that retirement strategy. One reality unnoticed in these numbers is that some women may live on their own for many years; if a woman has spent many years as part of a household, living alone shifts the responsibility from two people to one, removing any extra income their partner or spouse contributed.
According to the Social Security Administration, single women aged 65 and up (including both the unmarried and the widowed) rely on Social Security payments for 45% of their total income. This compares to 33% for single men of a similar age and 28% for the married couples in that bracket.
What does that come to in dollars and cents, per year? The most recent tally, based on a 2018 fact sheet, is $13,891. (Men: $17,663.) These are today’s numbers, but they underscore the importance for a retirement strategy that looks at your specific needs and goals – an approach that considers your future health expenses, your day-to-day expenses, as well as the things you want to do for enjoyment in retirement (travel, pastimes, family experiences, and more).
How do you create a strategy that can adapt to life's events? While your future may be unknown, working closely with your advisor may help you to create an approach that's based on your unique goals, risk tolerance and take into account your ever-changing time horizon. Follow up by meeting with a financial professional who can help you put a strategy into action.
Supporting family can put a crimp in your strategy.
Families are one of the great joys in life, and part of the love you show to your family is making sure that their basic needs are met. While that’s only to be expected from birth through the high school years, many households are helping their offspring well into their twenties and beyond.
However, you may have concerns that your adult children have come to depend on you too much. On the other hand, you may have given more than you planned, to the point where you are dipping into your retirement savings. If that’s the case, you might want to think about how involved you want to be in your children’s financial needs.
How common is this? An April 2019 Bankrate.com survey of 2,500 Americans indicated 51% of respondents saying that they helped adult children, aged 18 and up, either “somewhat” or “a lot” – specifically drawing from their retirement savings.
While every household has their reasons to help their adult children, it’s important to keep your retirement strategy on track. It’s not only a matter of replacing the money that you are taking out of retirement accounts or investments, but you’re also losing time. The growth that may occur with investments or compound interest is a phenomenon that happens over decades. In that situation, you can replace the money you took out, but you can’t replace its potential.
Communication is a good first step. Beyond your own interest, there’s also the young adult in your life to consider. Helping solve a short-term financial problem is one thing, but you also want to offer them an advantage that may help them face a future money squeeze on their own.
It’s also helpful to keep in mind that not all the expenses young adults are incurring are wasteful. CBS News reports that student loan payments may be $400 per month, describing the amount as “typical.” When you factor in rent, utilities, and basic personal expenses, that underlines why the habit of careful budgeting can be so crucial for someone just joining the workforce.
For that reason, financial education can also be a great gift. There are numerous resources that can help with learning how to budget: books, classes, apps, and more. If you aren’t sure what would work best for the young adult in your life, you can ask your trusted financial advisor for some tips. The skills and knowledge needed to handle money is not instinctual; helping your adult children learn how to better control their financial lives may offer them the confidence to succeed and navigate rough money issues without you, in time.
Will your accumulated assets be threatened by them?
All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again?
Often, families fall prey to serious money blunders. Classic mistakes are made; changing times are not recognized.
Procrastination. This is not just a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.
As a hypothetical example, say there is a multimillionaire named Alan. The named beneficiary of Alan’s six-figure savings account is no longer alive. While Alan knows about this financial flaw, knowledge is one thing, but action is another. He realizes he should name another beneficiary, but he never gets around to it. His schedule is busy, and updating that beneficiary form is inconvenient.
Sadly, procrastination wins out in the end, and as the account lacks a payable-on-death (POD) beneficiary, those assets end up subject to probate. Then, Alan’s heirs find out about other lingering financial matters that should have been taken care of regarding his IRA, his real estate holdings, and more.
Minimal or absent estate planning. Every year, there are multimillionaires who die without leaving any instructions for the distribution of their wealth – not just rock stars and actors, but also small business owners and entrepreneurs. According to a recent Caring.com survey, 58% of Americans have no estate planning in place, not even a basic will.
Anyone reliant on a will alone risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need a greater degree of estate planning. If they want to endow charities or give grandkids a nice start in life, the same applies. Business ownership calls for coordinated estate planning and succession planning.
A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, and perhaps, generations. Without it, heirs may have to deal with probate and a painful opportunity cost – the lost potential for tax-advantaged growth and compounding of those assets.
The lack of a “family office.” Decades ago, the wealthiest American households included offices: a staff of handpicked financial professionals who worked within a mansion, supervising a family’s entire financial life. While traditional “family offices” have disappeared, the concept is as relevant as ever. Today, select wealth management firms emulate this model: in an ongoing relationship distinguished by personal and responsive service, they consult families about investments, provide reports, and assist in decision-making. If your financial picture has become far too complex to address on your own, this could be a wise choice for your family.
Technological flaws. Hackers can hijack email and social media accounts and send phony messages to banks, brokerages, and financial advisors to authorize asset transfers. Social media can help you build your business, but it can also expose you to identity thieves seeking to steal both digital and tangible assets.
Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that, and they may be only one or two degrees separated from you.
No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least, read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately explained.
No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make decisions in private, and it may be years before heirs learn about those decisions or fully understand them. When heirs do become decision-makers, it is usually upon the death of the elders.
Horizontal decision-making can help multiple generations commit to the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.
You may plan to reduce these risks to family wealth (and others) in collaboration with financial and legal professionals. It is never too early to begin.
Delegating responsibilities to others may lead to problems down the road.
When you are putting together a household, it isn’t unusual to delegate responsibilities. One spouse or partner may take on the laundry, while another takes on the shopping. You might also decide which one of you vacuums and which one of you dusts. This is a perfectly fine way to divvy up household tasks and chores.
One household task it’s valuable for both partners to take part in, however, is your shared financial life. It’s important, regardless of your level of wealth or stage of life. Counting on one spouse or partner to handle all financial decisions can create a gap for the other partner. Should the one in charge of the money separate, become severely disabled, or pass away, that may leave the other partner in a bind. A situation like that is probably difficult enough without adding additional stress.
A study conducted in April 2018 surveyed 1,662 American couples, covering households where one partner has primary budgeting responsibility as well as couples where the responsibility is shared evenly. For the latter, 87% of respondents indicated that they were “confident” in taking full responsibility, should it become necessary. For the former, only 52% of those partners who were not actively involved indicated that same confidence.
Begin the conversation. If you are the partner who isn’t steering the household finances, ask yourself why. It may be that you have preconceived notions about how difficult it might be to educate yourself to make informed decisions. Maybe you know how to do it, but you would simply rather not be bothered. It’s also possible that you recognize that your spouse or partner has a particular expertise in these matters and doesn’t need your help.
Regardless of the reason, it’s probably a good idea that you should at least be able to hop into the driver’s seat, should misfortune strike your household. In that unfortunate circumstance, you should feel confident that whatever the reason or the duration, you won’t have any unnecessary concerns about managing your household’s finances.
For example, what if you have insurance that covers extended care, in case of a severe injury that causes your spouse or partner to be away from work for an indefinite period? How will you be certain that the claim is made? Who will make sure the bills get paid? The job will fall to you.
Getting involved. The good news is that through communication, regular conversations, and a little effort, you can probably learn what you need to know in order to help yourself in these situations. Part of this, too, may be meeting and getting to know the financial professional who works for your household.
If it’s your first time, start simple. You may find worksheets helpful in guiding you on how to plan out a monthly household budget. There’s software that may help, but a budget doesn’t need to involve anything more than pen and paper, if you prefer. You’ll find several worksheets available online. You will also want to talk with your spouse or partner about the monthly budget they use, as it will likely be helpful if you are both on the same page – perhaps, literally.
The more knowledge you have, the more confident you can become. Starting the conversation is just the first step. It may take you some time to become comfortable in taking a greater role in the decision-making, but when you do, you may feel more confident if the responsibility ever falls solely to you.