In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 13 of the 2nd edition of the book titled, “Estate Planning.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 13 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that shows you how to align your finances for a smooth transition into retirement. In this podcast episode I cover the material in Chapter 13, on “Estate Planning.” If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. ----- Even if you have never been to an attorney or drawn up a will or a trust, you have probably still done some type of estate planning- and not even known that’s what you were doing. How could that be? If you have ever opened a bank account or named a beneficiary on a retirement account or life insurance policy, that’s estate planning. It’s a legal document that specifies where your assets go when you pass. For example, if you open an account titled jointly with a spouse, friend or child, when you pass, that account belongs to them. It doesn’t matter what your will says – the titling of that account overrides any other documentation. The same thing occurs with beneficiary designations on retirement accounts. The financial institution must disburse the funds to the beneficiaries you have listed – it doesn’t matter if you have a trust or will that says something else. Many people don’t know this. And it can get you in trouble. I saw this first-hand with George and Faye. George was referred to me shortly after Faye passed away from pancreatic cancer. This was a second marriage and Faye had two children from a previous marriage. When Faye was diagnosed, they had wisely visited an attorney and had a trust drawn up. Faye wanted 1/3 of her assets to go to each of her two children and 1/3 to George, so that is what the trust said. However, nearly all of Faye’s assets were in her company retirement plan. And Faye never changed the beneficiary designation on this plan to the trust. George was named as the beneficiary. Unfortunately, George and Faye thought the trust document would take care of this. They did not realize the trust has no legal authority over her retirement plan unless she took the next step of filing updated beneficiary paperwork. Now, George was in the awkward position of inheriting the entire account. Luckily, George is a good guy, and continues to honor Faye’s wishes by taking withdrawals and then sending the appropriate after-tax amounts to Faye’s children. However, this has unfortunate tax consequences for George, forcing some of his other income into higher tax rates. Overall though, this case has a happy ending because George is doing the right thing. But not everyone would. The type of estate planning error that happened to George and Faye could have been avoided if the estate planning had been coordinated with the financial planning. Many attorneys don’t ask clients for a detailed net worth statement. I’m not sure why. They should and they should look at the types of accounts that someone has so they can make recommendations that will work. An attorney can draft the best documents in the world, but if they don’t make sure the client follows through on all the other paperwork that is needed, those documents can become pretty ineffective. In this podcast, I’m going to cover a few basic things you need to know about estate planning. However, I am not an attorney. Nothing I say should be considered legal advice. Rules vary by state and you will always want to get advice that is specific to your situation. With that in mind, the four topics I want to cover are titling accounts, setting up beneficiary designations, trusts, and I’ll briefly touch on the topic of estate taxes. First, account titling. You have retirement accounts, and pretty much everything else. When I say retirement accounts, I mean IRAs, Roth IRAs, 401ks, 403bs, SEPS, SIMPLE IRAs and any other type of company sponsored retirement account like a pension or deferred compensation plan. Retirement accounts must be in a single person’s name. We are frequently asked by married couples if they can combine their retirement accounts, or title an IRA in a trust. The answer is no. A retirement account must be owned by one individual. The way you specify where your account goes upon your passing is by the beneficiary designation you put on file. With non-retirement accounts you have more choices. Most people open bank accounts in their name or jointly with a spouse or partner. If an account is titled only in your name, upon your death it will need to go through probate. When you add a person to the title or add a beneficiary to the account, then the account can pass directly and avoid the probate process. One of the first things we do when bringing on a new client is review account titling. Many people are not aware that you can add beneficiaries to a non-retirement account. This is accomplished through something called a P.O.D. or T.O.D. registration. P.O.D. stands for payable on death. T.O.D. stands for transfer on death. And some financial institutions have their own term for this type of account. For example, Schwab calls it a DBA or designated beneficiary account. Let’s look at an example. Assume you add your daughter as a joint tenant on your bank account. Your will (or trust) specifies that your money should be split evenly between your children. At death, what happens? Legally that entire bank account belongs to your daughter regardless of what the will (or trust) says. A financial institution must pass assets along according to how the account is registered or titled. There are three key things to know. First, if the account is registered only in your name, and you have a will, then the will controls how the account is disbursed. However, because there is not a direct beneficiary named or another person on the account title, this account will have to go through probate. Second, if you title an account in the name of a trust, then the terms of the trust control how the account is disbursed. Assets and accounts titled in a trust will avoid the probate process. And third, if you add a joint tenant, or some other formal account registration such as tenants in common, transfer on death, or payable on death, then that account registration takes precedence over the will or trust. Let’s say we have Joe and Mary who have two children. They have a jointly titled account, which means if either Joe or Mary passes the account belongs to the survivor. However, if Joe and Mary both pass, the account will have to go through probate. To avoid this they can add their two children as designated beneficiaries to this account, so if both pass, the account goes seamlessly to the children without all the red tape. This type of titling can be accomplished with real estate also. You can file a transfer on death deed or a beneficiary deed for a minimal filing fee. Now, some people prefer to add their children to an account or to the title of their home while they are alive. Please, don’t do this without understanding the potential consequences. When you add another person to the title, that account is now subject to their creditors. If they get in trouble, your assets could be at risk. It could also cause a tax mess. Particularly when it comes to how capital gains taxes work upon death. On a capital asset (such as a home, a stock, or a mutual fund) you have what is called your cost basis; what you paid for the asset. Upon your death, your heirs get what is called a “step-up” in cost basis, which means their cost basis for tax purposes is the value of the asset at your date of death. Let’s look at an example using your home. Assume you bought your house many years ago for $100,000. You’ve done no major improvements so this $100,000 is your cost basis. Today the home is worth $400,000. Upon death, your heirs inherit the house worth $400,000 and immediately sell it. How much do they have to pay in capital gains taxes? Assuming they sell the home for $400,000, they pay no capital gains taxes on the $300,000 of gain because their cost basis was stepped-up to the date of death value. This step-up in cost basis can be voided by titling your property inefficiently. This happens with the common practice of adding an adult child to the title of the house. For example, let’s say after your spouse passes, you add your son to the title of your home. Technically you have gifted him half the value of your home, and instead of the home passing to him at death, he co-owns it with you now. This means he does not get that entire step-up in cost basis upon your death; only the interest attributed to you gets a step-up. Let’s walk through the numbers. Assume the same facts: you paid $100,000 for the home, and upon your death it is worth $400,000, and your son sells it for that amount. Your half of the asset gets a step-up in cost basis, so your share of the house has a basis of $200,000. Your son’s share, however, would have a basis of $50,000 (half your original basis). He now owes tax on $150,000 of gain. At a potential 20% capital gains tax rate, that is $30,000 in taxes owed. This could have been avoided by having the asset transfer to him on death rather than using joint ownership. This example applies to investment accounts such as stock and mutual funds as well as property. This situation can easily be avoided by titling accounts more effectively. What you can do with a property is either set up a beneficiary deed or transfer on death titling. Or if you have a trust, title the property in the trust. This way the house or account remains in your name while you are alive and automatically passes upon your death. If you want one or several of your children to have control of the asset now, with a trust structure you can add them as a co-trustee. This means they could make decisions about the asset, but they would not be an owner of the asset for tax purposes. There can be significant tax and legal implications to how you title accounts. That’s why I call it the hidden form of estate planning that everyone does, but no one knows they are doing it. I understand as you get older you may want a relative to have access to an account to assist with bill paying. What can you do in that situation? Many banks also offer a designated signer account. This designated signer can write checks on the account, but they are not a co-owner. This means their creditors cannot go after the asset. It also means it is easy to remove them if that becomes necessary. The designated signer registration doesn’t spell out what happens to the account upon your death, but it does allow someone other than you to pay bills and write checks on the account while you are alive. Overall there are four things that can be impacted by your account titling. One is taxes. Two is a creditor’s ability to go after the asset. Three is who the asset goes to when you pass. And four is who can make decisions about the asset now. All four of these need to be considered when you add or remove someone to an account title or property deed. The next topic I want to cover is beneficiary designations. Many people name beneficiaries and never update them. This applies to life insurance policies and retirement accounts. There are numerous cases every year where someone gets divorced, passes away and their ex-spouse gets the retirement accounts and life insurance. Any time you get married or divorced, you need to update everything. If you haven’t checked your beneficiaries in awhile, it’s time to do some homework. List all your accounts, how they are titled and who the current beneficiary is. If you need to change a beneficiary, it’s pretty easy. Call the financial institution and fill out a new form. In many cases, you can now do this online. If you are married, this is your first marriage, and there are no children outside of the marriage, then naming beneficiaries can be simple. Ideally your spouse is named as the primary beneficiary on all IRAs and retirement accounts. Assuming your children are functioning adults, they can be named as contingent beneficiaries. The legal concern with this structure is that upon your passing your spouse could remarry, leave everything to their new spouse, and bypass your children. If this is a concern, you may need a more complex structure (a trust) to address this. Consider a more complex structure if you are in a second marriage and have children from previous marriages, have minor children, or have an adult child with dependency issues or special health needs. That brings us to the topic of trusts. A trust is a legal document that provides instructions on how the assets in the trust are to be handled, and by whom they are to be handled. There are three main parties to a trust. There is the grantor, which is the person or people whose property is going into the trust. There is the trustee or trustees, which are the people in control of the trust assets. And there are the beneficiaries – the people who will benefit from or inherit the remaining assets one day. With the most common type of trust, called a revocable living trust, the grantor, trustee, and current beneficiary are the same set of people. For example, let’s say Wally and Sally Sample, the couple we follow in the Control Your Retirement Destiny, set up a revocable living trust. The title of their trust is “The Sample Family Revocable Living Trust, dated August 9, 2018.” The trustees are Wally and Sally, so they can easily sign for and make decisions about any property in the trust while they are alive. They manage accounts titled in the trust the same way they always have. No restrictions apply. They are also the current beneficiaries of the trust, but upon their death, or in the event they are incapacitated, the trust names the successor trustees, people who can then make decisions, and it spells out what is to happen to the property in the trust, who it goes to, and over what time-frame. Let me explain how this comes together with the case of Ellen. Ellen’s husband passed away several years ago and she is now in her 80’s with one daughter, Sara. She always invited her daughter to join our meetings. As the years passed, I could see that Ellen’s cognitive abilities were changing. She asked me to take instructions from Sara; however, legally, I could only take instructions from Ellen. Ellen was the trustee and she was not technically incapacitated, so although the trust named Sara as a successor trustee that provision only became effective if Ellen was seriously incapacitated. I encouraged them to visit their estate planning attorney and add Sara as a co-trustee to Ellen’s trust. They did this and a few years later when Ellen entered an assisted living facility it allowed for Sara to seamlessly continue to manage Ellen’s affairs. One of the key benefits of a trust is that is spells out who is to step in when you can’t make decisions on your own. You can do that through a successor trustee or add a co-trustee. Another benefit of a trust is that the assets that pass via trust avoid the probate process. However, setting up a trust document alone is not enough. Once a trust document is completed, assets must be moved into the trust by changing the account registration and/or property titles. Once you have a trust, instead of your name on an account, it should list the trust as the account owner. It is astonishing to me the number of people who set up a trust, but don’t change their account registrations or property titles. In this situation the trust can become a nearly useless document. It may be sitting there, on the shelf, but if no assets are ever titled in it, what exactly does that document apply to? Not much. There is something called a pour-over will, which can be used to fund a trust after your death, but those assets must now go through probate. And if you are incapacitated, and an account is not titled in your trust, your co-trustee or successor trustee will have difficulty managing that asset. Much easier if you move the appropriate assets into the trust while everyone is healthy. While you are titling assets into your trust should you also name the trust as the beneficiary on your retirement accounts? Only if your attorney advises you to. Retirement accounts have some unique tax characteristics when passed to a spouse or to a real person. A trust is not a person – it’s an entity and sometimes when the trust is the beneficiary of a retirement account it can void some of the tax benefits. There are special trusts, called conduit trusts, that can be set up to avoid this. Overall, having the trust be the beneficiary of a retirement account is complicated. When it’s part of a strategic plan designed by an attorney, it can be good. The last topic I want to cover is estate taxes. In 2019, most people won’t be subject to the federal estate tax. That’s because current law says you can pass along $11.4 million in assets and no estate tax applies at the federal level. If you’re married that means jointly you can pass along $22.8 million. However, 12 states implement a state-level estate tax. And in many of those states the amount that is exempt from this tax is much lower than the federal level. For example, Massachusetts and Oregon have a $1 million exemption amount. In Oregon, amounts over a million are taxed at a rate that can range from 10% – 16%. Then there are states like New York, where they say that you can exclude up to about $5.5 million – however it is what is called a “cliff tax” so if your estate value is too much more than that $5.5 million, then the entire estate will be subject to the estate tax, with rates as high as 16%. Depending on what state you live in, planning techniques that can help reduce state-level estate taxes could be quite applicable to you. I’ve now covered the basics on account titling, beneficiary designations, trusts and estate taxes. And, I must remind you, none of this is legal advice and I am not an attorney. Getting your affairs in order is a great feeling. I think it’s worth it to find a good attorney and do it right. ----- That wraps it up for this podcast on Chapter 13, on “Estate Planning” and for our initial recording of the Control Your Retirement Destiny Podcast, which covers the material in the printed book. We plan to update the material as major changes occur, and we plan on future episodes of the podcast to cover additional topics. You can always get a copy of the book on Amazon in either hard copy or electronic format. And you can always visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.

Control Your Retirement Destiny

Chapter 13 – “Estate Planning"

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers part 2 of Chapter 12 of the 2nd edition of the book titled, “Whom To Listen Too.” Part 2 covers "Interviewing Advisors and Avoiding Fraud." If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 12 (Part 2) – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. Fee-only means no commissions. I’m also the author of Control Your Retirement Destiny, a book that shows you how to align your finances for a smooth transition into retirement. This podcast is an extension of the material in Chapter 12, on “Whom To Listen To”. I’ll be covering the topics of avoiding fraud and how to interview potential advisors. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. ----- We’ve all heard the saying “if it’s too good to be true….” So why do we fall for fraud, over and over? I think I know the answer. To recognize if something is too good to be true, you must know what truth is in the first place. And when it comes to investing, a lot of people have no idea what is realistic and what is a fantasy. By the end of this podcast, you will not be one of those people. I’ve got several real-life stories to tell – stories about fraud and why people fell for it. You are about to learn what to watch out for. And as a side note – for the personal stories I tell I change names and details for privacy reasons. Although details are changed, the substance of each story is true. Let’s start with the biggest financial scam in U.S. history – what is known as the Bernie Madoff scam – a 65 billion-dollar Ponzi scheme. If you haven’t heard of him, Bernie Madoff was the former chairman of the NASDAQ stock market. Naturally when he started his own investment firm, people trusted him. His scheme came unraveled in December 2008 and many families lost their entire life savings. One of the men credited with bringing down Madoff’s scheme is Harry Markopolos. He tells his story with his co-author Frank Casey in their book called No One Would Listen: A True Financial Thriller. How did Harry Markopolos figure out Madoff’s scheme? Markopolos said, “As we know, markets go up and down, and Madoff’s only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately.” Maybe Markopolos would suspect cheating immediately, but would you? Harry Markopolos was in the investment business. He knew what is and is not possible. But what about the average person who walked into Bernie Madoff’s office and was told that they could consistently earn 12% returns each year? Any one of us in the investment business would walk out and head to the authorities. But the average investor? They think that sounds great and that someone has the magic formula to make it happen. They don’t know that they should suspect cheating immediately. How can you assess what is realistic and whether someone is lying? First, you must understand that safe investments earn low returns. If a proposed investment pays more than a money market fund or more than a one-year CD, than there is risk. If someone doesn’t explain those risks and tries to assure you that your money is completely safe, they aren’t telling the whole story. You also must know that volatility, or ups and downs, are a normal part of investing. If someone tells you it will be a smooth ride with great returns, watch out. Something is not right. Despite the publicity that the Madoff scandal received, Ponzi schemes continue and people continue to fall for them. Most recently, a New York Times article chronicles “The Fall of America’s Money Answers Man” which is the story of Jordan Goodman, a well-known finance guru who has books and radio shows. As Goodman’s work became more popular, he began touting all sorts of investments and was being paid to promote these investments. That is not illegal, as long as it disclosed. But he wasn’t disclosing all these relationships. And, on one of his radio shows in about 2014, Goodman began talking about one particular investment where you could safely earn 6% returns. He was quoted as saying “There’s a way of getting 6 percent and not having to worry about capital loss. It’s very safe.” This investment he was promoting turned out to be a Ponzi scheme. How could you recognize that this was a scam? After all, maybe 6% doesn’t sound like a return that is too good to be true? Well, it’s all relative. In 2006, you could earn 6% in a money market fund, but in 2014, you were earning about zero in a money market fund. And in today’s low interest rate environment, you might earn 2.5%. So, if someone is promising a safe, stable 6% no-risk return, you should be skeptical. And if you do decide to go forward with such an investment, you most certainly would not put in more than 5-10% of your money. As a legitimate investment advisor, my job is to provide people with a realistic set of potential outcomes. What happens when I compete with someone who is lying? It’s hard. I can present all the logic in the world, but when some unscrupulous advisor promises bigger returns with no risk, it is often with a sense of helplessness that all I can do is stand by and watch someone lose money. In 2007 I watched one of my clients get sucked in by this kind lie. He came in for our annual meeting about a month before he was supposed to retire. He told me he wasn’t going to need to withdraw money from his IRA as we had planned. “Why?” I asked, intrigued. He replied that he’d invested $100,000 in a currency-trading program that was paying him $5,000 a month. He showed me the checks he had been receiving.I got a sick feeling in the pit of my stomach. I knew the math didn’t add up. At $5,000 a month, that’s $60,000 a year, on a $100,000 investment. No one can deliver those kinds of returns. But how do you explain this to someone who has checks in their hand? Within six months, the currency trading program he invested in was discovered to be a scam, and the perpetrators were arrested. I wasn’t surprised.After netting out the checks he received, and the tax deduction for the fraud loss, he ended up about $50,000 poorer. Luckily, the rest of his retirement money remained invested with me, in a boring balanced portfolio of no-load index funds, so his overall retirement security wasn’t affected. Another thing scam artists do is appeal to your ego or to your religion – or both. I saw one former client of mine lose $4 million to such a scam. After working together for several years, this client sent me a wonderful email letting me know how much they had appreciated working with me, but that they were moving their funds to a firm that shared the same religious affiliation as they did. This firm also told them they would have access to exclusive investments only available to high net worth individuals. There’s the ego appeal. And, the firm told them it would handle everything: legal work, accounting, and investments. In hindsight, this makes sense. It keeps other expert eyes from questioning what is being done. A few years later, this client came back in to see me with a stack of papers in hand, asking me to help figure out what had happened to their money. I read, and I read some more. I turned white as chalk as I kept reading. Four million dollars—nearly all of their money—was gone. I immediately sent them to see an attorney who specialized in these types of cases. How did this firm scam the client out of 4 million? They got them to sign a series of promissory notes. The notes were supposed to pay 10 – 12% returns and the money was going to be used for real estate development. The client signed the notes, wired the money, got a few interest check payments and that was it. They were told the real estate development floundered. I don’t know what really happened or where the money really went. What I do know is the client’s lifestyle was forever changed. How can you avoid such a scam? Well, legitimate advisors won’t ask you to sign a promissory note. Instead your money is placed with a reputable custodian like Charles Schwab, Fidelity, or T.D. Ameritrade. A custodian reports directly to you. For example, my firm uses Charles Schwab as our primary custodian. We can initiate transactions, but Schwab reports those transactions directly to the client. We have no ability to make up what the account statement says. In the cases we have discussed so far there was no third-party custodian. So the advisor could make up what the statements said and what they were reporting to the client. Con artists are skilled at finding people who are trusting and vulnerable. You may be savvy, but what about your spouse? This is another real-life case of mine. The story of Henrietta, who was referred to me by her CPA after her husband passed. Henrietta and her husband Frank had an impressive collection of original art-work worth millions. Frank passed away when Henrietta was about 78 years old. Frank and Henrietta had a long-term friend from the art world named Sam. Sam reached out to Henrietta after Frank’s death and offered to buy her art collection. Henrietta didn’t seek legal counsel because she’d known Sam for a long time. Why would she need an attorney? She trusted him. They negotiated a purchase price of $3 million to be paid to Henrietta on a schedule of $25,000 a month for the next 10 years. The checks arrived for about two years, then they suddenly stopped. Sam was nowhere to be found. Henrietta was finally able to track him down, at which time he told her he was going through financial difficulties, and that he would send her money as soon as he could. She waited. A few months later he sent one additional payment. Then nothing more. It wasn’t until she hadn’t received a payment for two years that I was able to convince Henrietta to hire an attorney and pursue litigation. She kept telling me that Sam was a friend. She wanted to give him the benefit of the doubt. Henrietta was now 82. Of course, she didn’t want the hassle. Eventually, Henrietta was able to recover about $1.5 million. I don’t believe she would have gotten any of that money back if I hadn’t encouraged her to take action. And I believe the family friend was counting on the fact that Henrietta was older and would just let it go. How can you avoid such a scam? Early in retirement establish solid relationships with accountants, advisors and attorneys that you trust. And if your spouse is not involved in the finances, you still want to make sure they will know who to turn to. The last story I want to tell is a story from my own family. The story of Aunt B, my dad’s aunt. Aunt B, at age 94, was a spirited and intelligent woman. She’d had a fulfilling career as a professor, had never married, and had managed to save a significant amount of money. Over the past few years, her hearing and sight had become impaired, and a medical condition developed which meant Aunt B needed 24-hour-a-day in-home care.Aunt B did not want to use an agency to provide care. She lived in a small town in rural Iowa and wanted local help. She found a group of three young women willing to provide in-home care services. They started coming around to stay with her regularly. My dad had power of attorney over Aunt B’s financial affairs and lived about 15 miles away. The first problem arose when Aunt B decided it would be a great idea to write a $60,000 check to help a local failing business stay afloat. Dad investigated—and overruled. Aunt B was furious. We found out later that the business was owned by the spouse of one of the caregivers. Dad continued to investigate and soon realized that the three caregivers had managed to drain over $300,000 out of Aunt B’s accounts within a matter of months. When Dad tried to explain the situation to Aunt B, she became angry and adamantly defended the actions of her caregivers. Dad brought in the police and an attorney. Despite clear explanations, Aunt B insisted that the caregivers were only going through a “naughty spell,” and that they should be forgiven and rehired. The attorney, who was familiar with these types of cases, explained to us how these situations develop. Homebound people often forge close bonds with their caregivers. The caregiver becomes the eyes, ears, and primary news source for the homebound person and can exert great influence. The caregivers can screen phone calls, mail, and outside information, so their patient is only exposed to the information they want them to see. Aunt B was nearly blind. They would present her with checks to sign which were supposedly for services like lawn care or house cleaning. She would sign the checks, which, in reality, were often made out directly to the caregivers. They also ordered new appliances, tools, and other household items, all delivered to their own homes, not to Aunt B’s. To perpetrate their fraud, they convinced Aunt B that Dad was out to get her money. Each time he stopped by they would tell Aunt B that he was only there to look out for his own future inheritance. They had even talked Aunt B into changing her will to make the primary caregiver the main beneficiary. Luckily that was later remedied. The scam would never have been discovered if Dad didn’t randomly stop in at Aunt B’s, ask questions, and poke around, even when she did not want him to. Unfortunately, because this type of crime is not a violent crime, the care-givers received a sentence that is about equivalent to being on probation. They could easily be back out there, doing the same thing today. We also learned from the attorney general that these care-givers had prior records and likely learned their techniques in prison, as strategies on how to defraud the elderly are passed along among the incarcerated. Someone trained to swoop in can do serious damage in a matter of weeks—then they vanish. How can you avoid a scam like this in your family? Check in on your elderly family members. Get involved. And insist on back-ground checks even if the care-giver is part of your local community or referred by someone you know. Before I wrap up this podcast, I want to cover one more thing - the topic of interviewing advisors. What questions should you ask? I’ve had prospective clients come in with a checklist where it was evident they didn’t know what they were asking. But at least they had done a little homework and arrived with some sort of screening process. In the last podcast, we covered the basics on advisor credentials and compensation. I’d suggest you don’t even meet with an advisor unless they pass your basic screening process – which you can do before you meet with them. So, when I talk about interviewing advisors, I’m not talking about questions such as what credentials do they have. I’m assuming you already screened them and now you’re down to a final round of interviews with those who passed the screening process. So, you’re interviewing, and you need to determine if this person is a good fit for you and your family. There are two questions I think are key. These two questions help you gauge the financial advisor’s communication and planning style. The first of those questions is, “What assumptions do you use when running retirement planning projections?” All financial-planning projections are based on assumptions. There are assumptions about the rate of return, the pace of inflation, taxes, and much more. If an advisor runs a financial plan projecting your investments will grow at 10% a year, you might have a problem. This assumption makes the future look rosy, but it’s probably make-believe. You need realistic projections to make appropriate decisions. You want to find someone who uses a conservative set of assumptions; after all, you’d rather end up with more than what is projected on paper, not less. All assumptions must be adjusted according to your personal circumstances and changes in the general economy. With that in mind, I am going to walk through a short list of what I consider realistic assumptions. For investment returns: Projections using returns in the range of 5–7% a year seems realistic in today’s environment. For inflation: your living expenses should be projected to rise about 3% a year on average, or maybe a little less if you’re already retired and have a higher net worth. Real estate assets such as your home may go up in value about 2–3% a year on average.And tax rates should be customized to you. For example, if you have a large sum of money in retirement accounts, you will pay taxes on that money as it is withdrawn. That puts you in a completely different tax situation than someone who has a large sum of money that is not in retirement accounts. This needs to be considered when running financial-planning projections. There are of course many valid reasons to use assumptions that may vary from my guidelines. Your job as the customer is to ask what the assumptions are and to question things that seem unrealistic. The second question I like is asking the advisor to explain a financial concept to you. You want to work with someone who can talk in language you can understand. If an advisor speaks over your head, or their answer makes no sense and they do not respond well to additional questions, move on. Here are a few concepts you should have learned in this podcast series that you could inquire about. You could ask:What do you think of index funds?Or how do you determine how much of my money should be in stocks versus bonds?Or how do you help me figure out if I should put my money in a Traditional IRA or Roth IRA?And ask how do you account for health care costs in my projections?You want to make sure you understand the answer that is provided. This is a good sign that you’re working with someone who can communicate in a way that you can relate to. To wrap up today, when evaluating investments and advisors, always keep in mind: There no such thing as safe stable no-risk returns that are higher than what you get on current money market funds. Your advisor would never ask you to sign a promissory note.Work with advisors that use large well-known third-party custodians. You should never make deposits to an entity that your advisor controls. And always interview advisors and work with someone who uses conservative assumptions and who takes the time to explain things to you. ----- That wraps it up for this podcast on part two of Chapter 12, on “Whom to Listen To”. Thank you for taking the time to listen. In the Control Your Retirement Destiny book, I provide additional resources that can help you avoid fraud and interview advisors more effectively. You can visit amazon.com to get a copy in either electronic or hard copy format. You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.    

Chapter 12 (Part 2) - “Interviewing Advisors and Avoiding Fraud"

Chapter 12 (Part 1) - "Whom To Listen To"

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 11 of the 2nd edition of the book titled, “Working Before & During Retirement - Your Human Capital.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 11 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers the numerous decisions you need to make as you plan for a transition into retirement. This podcast covers the material in Chapter 11, on your human capital - your ability to earn a living. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. ------------- What is the biggest asset you have? Most of you will likely answer your home, or maybe your IRA or 401k account. If you’re a business owner, perhaps it’s your business that comes to mind. This might be the correct answer, if you are about to retire, but what if you’re still 5 to 10 years away from retirement, or thinking about partial retirement? Your biggest asset could be your ability to earn income. This is what we call your Human Capital. Traditional financial planning often ignores this important and valuable asset. On Twitter, one podcaster who goes by the Twitter handle of “@ferventfinance” wrote that “95% of discussions, books, and articles on the topic of finances concentrate on budgeting, investing, and debt repayment. Yet, the one thing that will probably move the needle the most is increasing income.” People are often surprised when we show them that the value of their future earnings can be in the millions. Even part-time work can be worth a lot. Take the case of Marian, age 59. She works in IT with a stable job and a $140,000 per year salary that goes up with inflation like clockwork. To maintain affordable health care insurance, she plans to work to her 65th birthday. When you factor in the employer contributions to her retirement plan, and the health care benefits for her and her spouse, her remaining 6.5 years of work are worth a million dollars. Their total financial assets are $1.7 million, and their home equity is about $750,000. Her remaining human capital is a big asset. In percentage terms, it’s about 40% of their total net worth. You would not be quick to walk away from a million-dollar account. Yet, some people walk away from a job without realizing the value of that asset. Once you walk away, in many careers, it can be difficult to get back in at the same level. That means you want to give some thought to what retirement really means to you. For example, I have a client who is a CPA, in his mid-50’s, who asked me one day, “Dana, do you have clients who actually retire… and enjoy it?” He loves the business he has built and the challenges that come with growing a business. It’s hard for him to imagine getting up and not going to work each day. I chuckled when he asked this question. Because, yes, I have many clients who retire and enjoy it. And a few who retire and end up back at work within a year because they found it so unenjoyable. Before you retire, you have to give thought to what makes you tick. In this podcast episode, I’ll offer two different views on how you might think about, and use, your human capital. There is the “mercenary approach,” and the “thrive approach”. Then I’ll cover a few stories to help you figure out what retirement means to you. And I’ll wrap up with two tips on what to be aware of if you do work part-time in retirement. I’ll start with the mercenary approach. This is about providing your time to the highest bidder. I took the phrase “mercenary approach” from the book Die Broke, originally written in 1998 by authors Stephen Pollan and Mark Levine. I believe updated versions of the book are available. I read their original book a long time ago, and their concept stuck with me. In the book they suggest you maximize your career potential by going to wherever you can earn the most. Then you save as much as you can. In their book, if you follow their approach you slowly convert your savings into annuities to provide guaranteed income in retirement that replaces your earned income. I think this approach is interesting, and, no doubt, it may work for some. It means potentially choosing work that is not fulfilling, in order to focus your human capital efforts to accomplish a maximum return on time invested. This mercenary-like approach can be combined with an extremely downsized lifestyle to reach retirement far more quickly than you may think. This approach is currently referred to as the “FIRE” movement, F-I-R-E, which stands for Financial Independence Retire Early. Many blogs such as Early Retirement Extreme and Mr. Money Mustache cover this concept. If your goal is to get out of traditional work as quickly as possible, following the FIRE movement makes sense. Financial independence can be achieved in a far shorter time period than you may think, but it requires sacrifice. The advantage is that once you reach financial independence, you then have the freedom to choose what type of work you might want to do—if you want to work at all. Another version of the mercenary approach involves people who take high paying jobs overseas, or high-risk jobs on oil rigs, or in places like Alaska. Some workers choose this as a strategy. They want to make as much as possible as quickly as possible and then later on plan to “settle down” to a more normal life after hitting a specific financial target. Some might take on such a role for a year – others for five to ten years. A more moderate approach is to spend time figuring out what academic programs, credentials, or certifications will help boost your income. Evaluate the financial cost of any program against the potential increase in income you might expect, and make sure you talk to many people in your industry to find out whether they think additional education will actually translate into increased income. I went through this process in considering the CFA (Chartered Financial Analyst) designation. This is a designation held by many investment analysts, mutual fund managers, and institutional money managers. I am interested in the designation even to this day, but it involves a significant time commitment. The industry leaders I spoke with said that for the career path I was choosing, they did not think it was necessary for me. I listened, and instead, I have chosen other designations, such as the Retirement Management Advisor designation, that more directly correlate with the work that I do and the direction of my firm. Overall, when I consider the mercenary approach and the FIRE movement, I respect it, but I don’t personally resonate with it. I prefer the thought of a life well-worked, which for me, means I need work that I thrive on. That takes us to the thrive approach.The thrive approach is about finding work you love.You start by figuring out what makes you tick and what type of work puts you “in the zone”. When you find a niche you thrive in, it changes everything. If you enjoy what you are doing, you are likely to work longer, and it won’t feel like work. How do you find work you love? I’ve done all kinds of things. Career counseling, coaching, and online assessment tools to name a few. I want to share two big breakthroughs that I had. The first was a coaching process called Rediscover Your Mojo designed by executive coach Lisa Stefan-Martin. Lisa is one of my best friends, and she was my roommate for three years. So I had the benefit of daily executive level coaching conversations. Then, I went through her formal Rediscover Your Mojo process while it was in the design stage. At the time, I was frustrated with the direction of my business. I was looking for answers and hoping she could help me find them. To my surprise, what I got out of the process were valuable insights that have profoundly affected the way I operate on a daily basis. Professional coaching changed the way I make decisions. I didn’t get a nice neat “answer” about a career decision; instead I got tuned in to my internal compass. Now, it is far easier for me to find my own answers to tough decisions. I’ve worked with several coaches over my career, and I highly recommend it. My second huge breakthrough occurred in 2010. I stopped trying to be like other people and started being who I was. And a funny thing happened: work no longer felt like work. Instead, each day it felt like I got to go play. Sure, there were tasks that I had to do that I didn’t love. It wasn’t completely Goldilocks. But it was different. I owe the difference to the Kolbe A Index assessment tool. At the time I discovered Kolbe, I was struggling with one of my associates at work. I always had ideas and wanted to figure out how to do things more efficiently. I liked to follow the latest trends in financial planning and test out new software packages. My associate had more of the “if it ain’t broke, don’t fix it” mentality. One day, he said something to me along the lines of, “Why can’t you just be happy and leave well enough alone?” I thought about that for a while and wondered, “Well, why can’t I? Is something wrong with me?” Then I found Kolbe and through their assessment process, I discovered my Natural Advantage was that of an entrepreneur. No, nothing was wrong with me. I am supposed to change things. Instead of fighting myself I went full force ahead into seeing what I could create, and I haven’t stopped since. I love it. Kolbe had such a profound effect on me that, in 2011, I chose to invest in its certification class and become a Kolbe Certified Consultant, simply because I wanted to know more. The more I learned, the more I became convinced that an incredible amount of progress remains to be made in the field of human capital. All employers should strive to build productive work environments. Right now, though, that task is likely something we each have to tackle on our own. If your retirement income plan calls for working until age 70, and you’re currently 50, why wouldn’t you spend some time, and perhaps work with a professional coach, to figure out what type of work you thrive on? In my opinion, 20 years is too long to do work you don’t enjoy. If you’re closer to retirement age but realize that traditional retirement is not for you, you’ll also want to do some soul searching. Brainstorm various ways you can use your upcoming free time in retirement to work on something you’ll find fulfilling. Many in the 55–64 age range choose to start a business. The Kauffman Foundation shows the rate of entrepreneurship for this age group has grown substantially. Starting a business isn’t easy. I’ll attest to that. Yet, if it is work you thrive on, even when it’s hard, it is still fulfilling. Be cautious though about risking your retirement funds on a business. You can risk your time. But maybe not your nest egg. Of course, continuing to work is not always about choice. It is often a matter of necessity. The mother of one of my close friends spent every summer in Alaska working in a dinner theater well into her 70s. In this way, she was able to save enough over the summer to supplement her Social Security throughout the remainder of the year. She had to work, yet, she found a solution that got her out of the Arizona heat in the summer and allowed her to earn enough in a few months’ time so that, for the rest of the year, her time was her own. If you must supplement your income, explore every avenue you can think of. Do you have skills, hobbies, or specialized training that can be used to generate income? Can you teach part-time or turn your craft into a saleable product? A few years ago, over the Fourth of July, I stayed at a bed and breakfast in the mountains. The couple who owned it had recently retired, and this home was their retirement dream. They enjoyed people and entertaining. They wanted a beautiful house with a view, and by turning it into a business they found a way to afford it. The town near their bed and breakfast hosts an annual arts festival. As I walked around talking with the vendors, many were retired, enjoyed traveling and had found a way to support their lifestyle by turning their craft into a source of income, which also enabled them to deduct many of their travel expenses. There are numerous creative ways to use your human capital. Explore them all, just as you would explore options on how to use your financial resources. Another thing I want to cover in this podcast is the concept of what retirement means to you. To illustrate, I’ll share three retirement stories. One for Dr. Barry, one for Mary and one for Ed. Dr. Barry is age 80 and still a practicing physician. He works three days a week, down from four days a week a few years ago. When he and his wife last came in, I asked if he had any thoughts about fully retiring. He said, “I am a doctor. I’ve been a doctor my whole life. When I go to the office, staff members are respectful to me. Students in residency come through, ask me questions, and graciously thank me for my time. Every day it’s Dr. Barry, Dr. Barry. If I retire, who will I be? I’ll be nobody.”Dr. Barry loves—and thrives on—his work. If you are like this, retirement can be an unfulfilling experience. Part-time work can help ease the transition to retirement, both financially and psychologically. On the psychological side, it allows you to slowly figure out what to do with your newfound leisure time. On the financial side, part-time work gets you used to the idea of withdrawing money from savings to live on. I have seen many people who are afraid to retire, even though the numbers say they can afford it. The thought of withdrawing money from savings on a regular basis can be frightening. A gradual transition to retirement can help you get comfortable with it. Contrast Dr. Barry with Mary. Mary and her husband were excellent savers. When Mary reached age 55, her company offered an early retirement package. We ran through the numbers and decided that, from a financial perspective, they would be fine. Mary was excited. A year later, she came in for a review and told me she was busier than ever. She had always been actively involved in her church and she was having a wonderful time volunteering and contributing in ways she never had the time for before.Traditional retirement worked well for Mary. She had activities lined up that she found fulfilling, things she and her husband had planned for years Next, let’s take a look at Ed. Ed sidled up to me at a social event. He wasn’t my client, but we’d known each other for years, and he knew what I did for a living. He looked around to make sure no one was listening. And said, “Dana, I’ve got to tell you. I’m having trouble with this.” I instantly knew what he was talking about. I’d heard he had sold his business and retired a few months prior. I replied, “Yes, a lot of people do. Particularly career-oriented people such as professionals and business owners.” He continued, “It’s only been a few months, and I’m thinking, is this it? I’ve got to find something to do.”We talked for a while. Ed had run a successful business for years. He had carefully planned his exit strategy. He had been busy in his first few months of retirement, but it wasn’t the right kind of busy. It wasn’t satisfying. Ed was used to leading a team, making decisions, and working toward goals. To be happy in retirement, he needed to find a way to continue to use these skills. Retirement is a big life transition. It’s not for everybody. It may not be for you. You will need to figure out what type of retirement will work for you. Like Dr. Barry, do you want to find a way to schedule a gradual transition? If you’re like, Mary can you figure out a way to stay involved with an interest of yours so that you can continue to contribute? If you’re married, what does your spouse want? What will you do with your time in retirement? Do you have activities you are excited about pursuing? These are important questions to answer. The last thing I want to talk about in this podcast is how working in retirement can impact your finances. Overall more income makes your plan look better. But keep in mind, more income also impacts your taxes. Some people take up part-time work in retirement and are surprised by how that impacted the amount of taxes they pay on their Social Security for example. Or, if you began Social Security early, and you are not yet full retirement age, your earnings will be subject to the Social Security earnings limit. Go back and listen to the Chapter 3 podcast if you need to brush up on this topic. In general, as long as you plan ahead, you’ll be fine. And, if you’re taking up self-employment for the first time, make sure you understand how taxes on self-employment income work. You’ll be paying both the employer and employee share of FICA taxes on any net income. Net income amount you make after all eligible business expenses. Most self-employed people need set aside funds each month and make quarterly estimated tax payments. In conclusion, we’ve covered both the “mercenary approach” and the “thrive approach” to how you use your human capital. We also covered several different types of retirement stories so you can begin to think of what type of retirement might work for you. And the last thing we touched on was the need to plan for taxes if you work part-time in retirement. Remember, your human capital is one of your biggest assets. Use it wisely. ------------- Thank you for taking the time to listen today. Visit amazon.com to get a copy Control Your Retirement Destiny in either electronic or hard copy format. You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.  

Chapter 11 – “Working Before & During Retirement - Your Human Capital”

Chapter 10 – “Health Care”

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 9 of the 2nd edition of the book titled, “Real Estate and Mortgages.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 9 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers the vast array of decisions you need to make as you plan for a transition into retirement. This podcast covers the material in Chapter 9, on real estate and mortgages. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. ————— It was about 2010, and I was having a conversation with a woman who I considered to be successful and intelligent. Suddenly she says, “Well, stocks are a much better investment than real estate, right? You’re a financial planner, so isn’t that what you tell your clients?” I was speechless. A good planner plans. Planning encompasses all aspects of one’s financial life, including real estate and mortgages. It would be irresponsible for a financial planner to make a statement such as “stocks are better than real estate.” Many financially independent people that I know accumulated their wealth through real estate. On the flip side, many people I know experienced bankruptcy and foreclosure by stretching their real estate investments TOO FAR. Real estate can be a profitable investment if you know what you are doing, and a disaster if you don’t. When nearing retirement, all aspects of your financial situation need to align toward a common goal: generating a reliable source of cash flow. That means real estate and mortgages need to be evaluated just as carefully as other items on your balance sheet. In this podcast, I’m gonna start by talking about your home and mortgage, and address one of the most common questions, which is, “Should you pay off your mortgage before retirement?” Then we’ll talk about home equity lines of credit and how to use them in retirement. And we’ll move on to discussing investment properties, and the last thing we’ll cover will be reverse mortgages. First, let’s talk about your home. Is it an investment? Meaning is it something you hope to make money on? Or is it a lifestyle choice - something you purchase for comfort and pleasure? Everyone has their own opinion on this. For most people, the answer lies somewhere between these two extremes. I rarely see people buy a personal residence solely because they think they can make money on it. Most of the time other factors like location, the type of neighborhood, and other personal lifestyle preferences have a big impact on a home purchase. Yet, when discussions about retirement start to happen, at that point, people often take a fresh look at their home as an asset. For many of you, a portion of the value of your home will need to become a part of your retirement income plan. If you know this ahead of time, you can put more thought into your next home purchase, how you finance it, and figure out how it fits into your plan. When I talk about fitting a home into your plan, I am not talking only about downsizing. There are other creative ways to think about your home and where you live. For example, you can choose a home that has ample access to public transportation, so you would not need a car on a daily basis. With services like Uber and Lyft, this option can work well today and result in a net savings over the cost of auto ownership. You can make your home as energy-efficient as possible, and make sure it has a garden or other area conducive to growing your own food. Another option is to rent a room in your home, or buy a home that has space that can be converted into a rental. For a large portion of my adult life I had roommates. Financially, it helped cover the mortgage. For me, of even more importance, it provided me with a built-in pet sitter. I’m a dog lover. When I traveled for work or to see family, I never had to kennel my pups. This saved me quite a bit of money over the years. And today, online options like AirBnB or VRBO.com (which stands for “vacation rentals by owner”) allow you to rent out your home, or a room in it, on a temporary basis to travelers. Or maybe you’re thinking about moving once you’re retired. Look for states that are tax-friendly for retirees. A simple Google search on “tax friendly states for retirees” will lead you to a few great articles that show you which states might be best. There are many creative ways your home can contribute to your retirement plan. One of the most common questions about a home is whether you should pay off the mortgage before retirement. When I started in the financial planning business in 1995, we were trained to tell people that they could earn a higher rate of return by investing their money rather than paying extra on the mortgage. I was 23 years old and told people what I was trained to tell them. Today, I don’t agree with that one-size-fits-all type of advice. I think most Americans are better off paying off their mortgage by the time they retire, but, not all. The Center for Retirement Research at Boston College has done research on this topic and has an online paper available titled, “Should You Carry a Mortgage into Retirement?” In this paper, they also conclude that most retirees are more financially secure by paying off the mortgage before retirement. The research paper rejects the argument that households can earn a higher return in stocks or other risky assets. The paper addresses the practical consideration that folks trying to manage their investments for a higher return can make poor investment choices and easily mismanage their money. Cognitive decline is real, and older Americans also fall for scams. This is something to keep in mind. The money in a paid off home is safe. Paying off the home can also be a way to trick yourself into saving more. Let me tell you about how this worked out for Jackie and Bob, who wanted to retire early. Each time they came in to review their plan I would explain to them that they needed to save more in order to make early retirement happen. A year later, they would come back, and their savings had not increased. They had the income to save more, but it wasn’t happening. Finally, I decided to try a different approach. I suggested they make extra payments on their mortgage and told them as soon as their mortgage was paid off, they could retire. Suddenly they began making progress! Seeing the mortgage balance go down was tangible. They could measure their progress toward a goal that they wanted to achieve. Accumulating money in their investment accounts where the value would fluctuate from month to month just didn’t have the same effect for them. Soon their mortgage was paid off, and today, they are happily retired. Now, this worked for Jackie and Bob, because they were already funding their retirement accounts, and still had extra money each month to apply to their mortgage. Are there some groups of people who may NOT want to focus on paying down the mortgage? Yes, there are. There are four scenarios I see where it may NOT make sense to pay off the mortgage.If you are ten years or more away from retirement and trying to decide whether to pay extra on the mortgage or put more in your 401k plan, the right answer for you may be different than the right answer for Jackie and Bob. For many high-income earners, funding extra into a tax-deductible plan like a 401k will result in a better outcome over ten years than paying extra on the mortgage. If you are a high net worth individual, or a business owner who needs to focus on asset protection, then retaining debt may have some advantages in the event that you are sued. For high net worth folks, there is a great book called The Value of Debt, by Tom Anderson, that explains why higher net worth families may want to focus on retaining the right kind of debt rather than pay everything off. If you are a savvy business person, for example, someone who invests in franchises, or private lending, and routinely expect returns higher than 10%, then maybe you don’t want to pay off your mortgage early. If mortgage rates are super low, keeping the mortgage and investing elsewhere may make sense. When I originally wrote Control Your Retirement Destiny in 2012, mortgage rates were in the 2.5 – 3.5% range. I don’t recommend paying off the mortgage when the rate is that low. Once the mortgage rate goes north of 5%, then I think it makes sense to begin looking at ways to pay it down. Now, if you don’t fit in one of these four categories, and you’re listening to this thinking you ought to run out and cash in an IRA to pay off the mortgage – wait! That is not what I am talking about. There are big tax consequences to cashing in an IRA or retirement account. After factoring in taxes, it rarely makes sense to take a big chunk of money out of a retirement account to pay off a mortgage. On the other hand, what if you inherit money that is not an IRA? Or sell a business or other property and have cash? Then, it may make sense to use that cash to pay off the mortgage, or like Jackie and Bob, create a plan to pay extra each month. Next, let’s talk about home equity lines of credit, which we often abbreviate as “H-E-L-O-C” or HELOC. Unexpected expenses will come up in retirement. If you must take a large unplanned withdrawal out of an account, it may mess up your investment plan and your tax plan. For example, say you have matched up your investments so that bonds and CDs mature in each account to match the amount of your anticipated withdrawals. But now you need an extra $25,000 to help an adult child. Where should the money come from? If the growth portion of your portfolio has done well, you may be able to liquidate some of your long-term holdings to meet this extra cash need. But what if the market is down? In addition, what if you only have assets in tax-deferred accounts? An extra withdrawal may be taxed at a higher tax rate and cause you to pay more tax on your Social Security benefits, or may push you into an income bracket where you pay additional Medicare Part B and Part D premiums. A standing home equity line of credit provides liquidity that may come in handy. It can provide a ready source of cash that buys you time to figure out how to fit these unexpected expenses into your plan in a strategic way. Be careful though. A line of credit is not a piggy bank to draw from. I had one retiree who was consistently spending more than we had projected. We discussed the dangers of running out of money if the spending didn’t change. He agreed, and we reduced his portfolio withdrawals. Next time we met, he had accumulated a significant amount of debt on his home equity line. “What happened?” I asked. Instead of taking portfolio withdrawals to fund extra spending, he had tapped into his home equity line. This was like taking money out of the left pocket instead of the right pocket. We had some more tough discussions and eventually got him on track. Home equity lines are best used as a reserve strategy, not an extra source of spending money. When we manage portfolios for client’s we custody accounts at Charles Schwab and through Schwab’s lending relationships are able to get clients set up with lines of credit at competitive rates. There is no financial benefit to us for doing this. It is part of our job as a financial planner to assist our clients with all areas of their plan. We’ve recommended using HELOCs for auto purchases, to fund a down payment for a second property, and for many other unexpected situations that clients encounter. We don’t recommend them for routine discretionary expenses, like vacations. Next, let’s talk about real estate as an investment. For those looking for a steady source of retirement income, rental real estate may look like the right solution. I’ve seen too many people randomly decide the foundation of their retirement plan is going to be a portfolio of rental real estate. With no experience or training, they head out and buy a property. If they’re lucky, it works out. Many aren’t so lucky. Investing in real estate is a profession – if it is not your current profession, be careful about diving in. Whether it’s an apartment building, duplex, residential rental, or commercial property, owning real estate means you pay expenses. You must plan for: • Property taxes• Repairs and upkeep• Advertising and marketing (to get tenants)• And legal costs (particularly, if you have to evict someone and to negotiate leases and set up LLCs)• You also have insurance costs In addition, you wanna plan on accounting fees. Real estate makes your tax return more complicated. I’ve watched many people who liked to do their own taxes change their mind after their first investment property. If your career up until this point has not been related to real estate, please think twice before embarking on a real estate investment. I’ve watched people lose millions in real estate partnerships that they thought were a “sure thing”. I’ve watched people pour thousands into rental income properties that were supposed to generate cash flow and instead turned into giant money pits. In nearly every situation that turned out poorly, the person had no experience and did not go through a rigorous learning curriculum. I’m all for real estate as an investment for those who are going to treat it with the respect that any serious profession deserves. You may have heard that real estate takes deep pockets. There is truth to that saying. You must have enough cash set aside to get through a severe downturn. Those who do are the ones that typically end up having long term success. If you ARE interested in getting into real estate, where do you start your education? You can find seminars all over the place. Some are decent, and some are just going to cost you thousands of dollars for a lot of pretty binders. If I were starting out in real estate, I’d skip the seminars and instead get my hands on all of John T. Reed’s books on real estate investing. Start with How to Get Started in Real Estate Investing. His material is not full of fluff; it provides you with the nuts and bolts of what it really takes to be successful. You can buy his books through his website at johntreed.com. He has over 20 books on real estate investing as well as a web page where he ranks other so-called real estate “gurus”. The last topic to cover today is reverse mortgages. Now wait! Don’t turn off the podcast here. It is amazing how easily people will take out a mortgage, and then as soon as you add the word “reverse” to it, they immediately dismiss the idea. Plain and simple, a reverse mortgage is a mortgage. You borrow money to be able to live in your home. That is how a mortgage works. Do you give up the equity in your home with a reverse mortgage? No. If the value of your home is worth more than the mortgage, you keep that equity when you sell your home, or your heirs inherit it when you pass. What if the reverse mortgage puts your home “underwater” one day, where the home value is less than the mortgage? Can they kick you out and take your other assets? No. Reverse mortgages are non-recourse loans—The bank cannot attach your other assets or those of your heirs. With a reverse mortgage, you own the home, not the bank. Your responsibilities are to pay the taxes and maintain the property. These are the same responsibilities you have with any mortgage. Here are a few key things that make a reverse mortgage attractive in the right situation:You can use a reverse mortgage to pay off an existing mortgage. You can also use it to buy a home – the reverse mortgage becomes a substitute for your down payment. Reverse mortgage income is tax-free.And no minimum credit score is required, and a reverse mortgage does not affect your credit score. With a reverse mortgage, a lender can foreclose on you if you do not pay your property taxes, insurance, and repairs. I frequently see this mentioned as a caution against reverse mortgages. However, if you have a paid off home and don’t pay your property taxes, you can lose your home, so I don’t see this issue as unique to a reverse mortgage. With a reverse mortgage, the lender also has the right to demand repayment if you don’t live in your home for 12 straight months or more. This means if you move in with relatives, or into a care facility, you need to make plans to sell the home if you don’t think you’ll be returning. Why would a planner recommend a reverse mortgage? We think they can be useful to provide cash flow for scenarios, for example, where you would delay Social Security. They can also help manage taxes as the cashflow is tax-free. They can also be used help manage sequence risk, meaning you can set up a reverse mortgage line of credit and tap that instead of selling investments when the stock market is down. When is a reverse mortgage a bad idea? Well, don’t take one out if you plan on moving soon. And, if you are Medicaid eligible – be cautious – you’ll need to see how the income might impact your eligibility. If you tend to overspend, a reverse mortgage might be a bad idea too. You could blow through the money, not pay your taxes, and end up losing the home. And, I don’t recommend reverse mortgages when you have no long-term care insurance. With no insurance, you’ll want to preserve the home equity so it can potentially be used for care needs later in life. We’ve now talked about your home as an asset. We’ve talked about your mortgage, and whether you should pay it off before retirement, and the four scenarios when you should not. We’ve discussed home equity lines of credit, or HELOCs, and how they can be used to cover unplanned expenses in retirement. And we’ve discussed investment property and the fact that investing in real estate IS a profession. The last thing we discussed was reverse mortgages and the fact that they are NOT a bad word. They are simply a financial tool, that in the right situation, can be really valuable. ————— For more information, see Chapter 9 in Control Your Retirement Destiny, I have mortgage calculators, links to reverse mortgage calculators, and a lot of other illustrations that will help with decisions about real estate. Thank you for taking the time to listen today. Visit amazon.com to get a copy of the book in either electronic or hard copy format. You can also visit sensiblemoney.com and see how a staff of experienced retirement planners can help.  

Chapter 9 – "Real Estate and Mortgages"

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 8 of the 2nd edition of the book titled, “Annuities.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 8 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers all the decisions you need to make to align your finances for a transition into retirement. This podcast covers the material in Chapter 8, on annuities. Are annuities a bad investment? Or a good one? You’re about to find out. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. ————— There is a lot of conflicting information on annuities. Are they a good investment? A bad one? Are they even an investment at all? The answer depends on what article you happen to be reading at the time you are asking the question. If we boil it down to the basics, an annuity is a contract with an insurance company. The insurance company provides you a set of guarantees. You place your money with them in return for those guarantees. That makes the purchase of an annuity quite a bit different than investing in a stock, where there is no contract and certainly no guarantees. The key to understanding annuities is understanding what the guarantees are, and how they work. That may sound easy; however, there are many types of annuities, and they are not all alike. Let’s start by breaking annuities down into four main categories. An annuity can either be immediate or deferred. And it can be fixed or variable. As we cover each of these four categories, we’ll also discuss a few sub categories like equity-index annuities, and variable annuities with guaranteed income riders. We’re going to start with an immediate annuity. Picture a jar of cookies that represents your money, or a portion of it. Now, imagine you hand the insurance company this jar full of cookies. Starting immediately, they hand you back a cookie each year. If the jar becomes empty, they promise to keep handing you cookies anyway, for as many years as you need them. In return, you agree that once you hand them the jar, you can’t reach in anymore. If one year you want three cookies, you’ll have to get them from somewhere else. No matter how long you live, and no matter how much of your other money you spend early in retirement, you’ll still get a cookie each year. Annuities were designed for this purpose – to make sure you don’t run out of money and to make sure you have income over a potentially very long life. This is what annuities are really good at. When people start comparing annuities to other types of investments and discussing rates of return, they are missing the point. You buy an annuity to provide guaranteed income for life. A mutual fund does not provide guaranteed income for life – so comparing those two options side by side doesn’t make any sense. If you want a portion of your income guaranteed for life, look at an annuity. That’s what they are made for. With an immediate annuity, the income begins right away, and the payout is fixed. This type of annuity is good at two things: 1) protecting you from outliving your money, and 2) protecting you from overspending risk, as you can’t dip into the cookie jar. What if you don’t need the income immediately, but you still want to know you will have guaranteed income in retirement? That’s where a deferred annuity comes in. With a deferred annuity, you put a lump sum into an annuity contract, and the insurance company guarantees a specific payout that begins at a set time in the future. There are many types of deferred annuities. One version, offered inside of retirement plans, is called a “QLAC” or Q-L-A-C which stands for Qualified Longevity Annuity Contract. With a QLAC the maximum amount you can buy is $125,000 and the income is typically contracted to begin at age 80 or 85. Why would you want a product that isn’t going to pay out until your 80’s? Some people like the idea that they could spend everything else they have between now and age 80 or 85, with the security of knowing a guaranteed income will begin at that age. A more common type of deferred annuity is one that is purchased in your 50’s, with the income designed to begin at age 65 or 70. For example, if you are age 55 today and your investments have been doing well, one option is to carve off a lump sum to buy a deferred annuity that will guarantee a monthly income ten years down the road. A portion of your savings must be converted into a stream of cash flow that you can use in retirement, and a deferred annuity does this conversion for you. When discussing annuities, one objection I hear is that people are afraid that they will hand over their cookie jar, pass away, and essentially have given their money right to the insurance company without getting anything back. There are death benefit features that prevent this. One death benefit option is called an installment refund, where any money not paid out to you comes back to your estate. Another way to make sure your principal is paid out is to use a life annuity with a minimum term-certain payout. This means that the annuity is guaranteed to payout for your life, but if you pass early, it must continue to pay for a set time, such as ten years. Keep in mind, every additional guarantee that is provided has a cost. An immediate annuity with no death benefit will usually provide the most guaranteed income per dollar. Why? Because it is simple to administer and the cost to the insurance company is low. As soon as you add death benefit guarantees and deferral periods, the cost to administer the contract increases. The way that cost shows up, is you get slightly less income per dollar than what you might get with a simpler, less complex contract. We’ve covered the basics on immediate and deferred annuities. Next, we’re going to discuss fixed and variable annuities. With a fixed annuity, the insurance company guarantees the interest rate you’ll earn, and the interest accumulates tax-deferred – meaning you won’t get a 1099 tax form each year. You don’t pay taxes until you take the money out. Any interest withdrawn prior to age 59½ is subject to the 10% early-withdrawal penalty tax in addition to regular income taxes. Think of a fixed annuity as a CD, or Certificate of Deposit, but it is tucked inside a tax-deferred wrapper. Instead of the bank guaranteeing your interest rate, the insurance company is providing the guarantee. The interest-rate guarantee typically runs for about one to ten years, at which point you can continue the annuity at whatever rate is then offered, or you can exchange it for a different type of annuity, or (like a CD) you can cash it in and decide to invest the funds elsewhere. If you cash it in, you will owe taxes on the accumulated tax-deferred interest. Fixed annuities are best compared to other safe investments like CDs, agency bonds, or municipal bonds. One thing to watch out for are fixed annuities that lure you in with a high initial rate, but the blended interest rate over the life of the contract may end up being quite low. Look for “yield to surrender” to determine what the rate would be over the life of the annuity. Fixed annuities can also come in many sub-categories. An equity-index annuity, for example, is a form of a fixed annuity. With an equity-index annuity, the insurance company offers a minimum guaranteed return with the potential for additional returns by using a formula that ties the increases in your annuity account to a stock market index. For example, assume you buy an equity-indexed annuity that is tied to the S&P 500 Index. It might allow you to participate in 80% of any increases in the stock market index as measured from January 1 to December 31 each year, with a 10% maximum return in any one year, and a 3% minimum return. Equity-index annuities can sound like the best of both worlds, a minimum return and the ability to earn more?! Watch out though - the participation rate, 80% in the example I just used, and the cap, which was a maximum of 10% return in my example, both limit the upside return potential. When factoring this in, research studies have shown that over various five-year time periods, equity-index annuities can be expected to deliver results much like five-year CDs. This is not a bad thing – just something to be aware of. As long as you understand you are buying something more like a CD and less like an investment in the stock market, these can be solid contracts. Many of these equity index annuities also offer a feature called a guaranteed income rider. This type of rider is an extra guarantee that you purchase which spells out the amount of future cash flow that the insurance contract will payout starting at a specific age. The last type of annuity I want to cover in this podcast is a variable annuity. First, let’s take a step back. Various federal and state licenses are required to sell insurance and investment products. It requires an insurance license to sell an annuity. The fixed annuities we have discussed, both immediate and deferred or equity-index, only require an insurance license. To sell a variable annuity, the agent must also carry a securities license, as a variable annuity has a component that is invested in market-based investments. To put this in perspective, the planners at my firm, Sensible Money, can give advice on how an annuity fits into your plan, and what type might work for you, but they cannot collect a commission from the sale of a product, so no insurance or securities licenses are required. Instead, we require designations such as a Certified Financial Planner and Retirement Management Advisor, which signify a specific type of education. A license signifies that you are legally allowed to collect a commission for the sale of a certain type of product. I discuss this topic in Chapter 12, “Whom to Listen To”. Ok, back to variable annuities. With a variable annuity, you choose a selection of investments within the insurance contract. These investments function like mutual funds, although they are not called mutual funds. Within an annuity they are called separate accounts. Variable annuities also come with optional death benefit features which guarantee what will be paid to your beneficiaries upon your death. And they offer living benefit features that guarantee how much you can withdraw each year without running out of money. Each of these features has a cost. There are five categories of fees in a variable annuity. There are: Mortality and expense charges Administrative expenses There are investment expense ratios Surrender charges if you cash in the contract early And there are additional costs to the death benefit and living benefit riders When you add all this up, it is not uncommon for me to see variable annuities with total fees of 3 – 4% a year. I get really frustrated when I see these products sold as the Swiss Army Knife of investments, as if they do everything… I’ve seen people make it sound like you can’t lose with this product. In reality, what can happen is the fees are so high that the investments can’t grow fast enough to recoup the fees, and you are forced to rely on the minimum guarantees offered by the insurance company. Let me explain with an example. Many variable annuities offer a feature called a guaranteed lifetime income rider or guaranteed withdrawal benefit. Too many people who buy these products think this is a guaranteed investment return. It’s not. Think of it like this. Picture two wallets. In Wallet 1, is the money you put into the variable annuity. It grows based on the performance of the investments you choose, and fees come out of it. When you take a withdrawal, it reduces the amount in Wallet 1, just as if you took a withdrawal from your bank account. Wallet 2 is an enhanced image of Wallet 1. Think of it like a holograph. It’s not real money. It’s an accounting entry that the insurance company uses to calculate the amount of guaranteed income you can later withdraw. The advantage to Wallet 2 is that even if Wallet 1 becomes empty, because the investments do not do well, you can continue to receive the guaranteed income amount specified in the calculations based on Wallet 2. If Wallet 1, the real money, does grow fast enough, you’ll be able to draw out more than the guaranteed amount. But, if the investments in Wallet 1 do not do well, or, if the fees are so high that they can’t do well, then you can always rely on the guaranteed income provided based on Wallet 2. There is nothing wrong with this structure; however, Wallet 2 is not real money. You can’t cash in the annuity and take what is in Wallet 2. With Wallet 2, you can only get the minimum amount of withdrawal each year. I have met many people who bought this type of product and did not realize that Wallet 2 was an accounting entry. They thought it was a guarantee of the principal amount of money they would have. Many feel betrayed when they find out how the product actually works. If you already have such a product, what should you do? Well, don’t do anything until you have a plan. As planners, we do an analysis on products before making any decisions. In some cases, products that are several years old offer valuable guarantees that can’t be purchased any more. When I come across these cases I recommend the person keep the product. In other cases, the best use of the product is to turn on the guaranteed income stream and use the features provided by Wallet 2. And in some cases, if there are no more surrender charges, it makes sense to exit out of the contract and put the funds into something with lower fees. In conclusion, when you look at all the bells and whistles that you can add onto a variable annuity, it makes them one of the most complex consumer financial products I have ever come across. From what I see, many of the representatives who sell these products don’t understand them. They often misrepresent the product simply because they don’t know any better. My biggest frustration with annuities is they are frequently recommended without any analysis on how they fit in with the client’s holistic plan. What do I mean by holistic plan? Let me give you an example. In 2007, I worked with a client who had IRA accounts that I managed. One of their parents passed, and they received an inheritance of about $200,000. About the same time, they met an annuity agent. This agent recommended they put the $200,000 of inherited money into an equity-index annuity. They never discussed it with me and told me after the fact. They still remember the horrified look on my face when they told me. I was horrified because it was hard for me to grasp why they would not have asked me to do an analysis before making the decision. These products have incredibly large surrender charges, so once it is purchased, there is not an easy way out. There was nothing wrong with the product. However, from a tax perspective, it would have been better if they used $200,000 of IRA money to buy the equity-index annuity, and then we would have invested the $200,000 of inherited funds in a portfolio of investments that would qualify for long term capital gain and qualified dividend tax rates. The overall outcome would have been the same amount of guaranteed income. But, based on their tax situation, by owning the annuity in the IRA it would have significantly reduced their tax bill over their lifetime. Holistic planning would have saved them money. In conclusion, annuities are not good or bad investments. They are simply one of many tools available to help you plan out your retirement income, and they are best evaluated as part of a plan. ————— Thank you for taking the time to listen today. Chapter 8 of the book Control Your Retirement Destiny has additional content that covers various types of annuities in more detail. Visit amazon.com to get a copy in either electronic or hard copy format. You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.

Chapter 8 – “Annuities”

In this episode, podcast host and author of “Control Your Retirement Destiny” Dana Anspach covers additional content from Chapter 7 of the 2nd edition of the book on “Pensions.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 7.5 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers all the decisions you need to make as you plan for a transition into retirement. This podcast covers a small part of the material in Chapter 7 on “Pensions.” We realize that, today, not everyone has pensions, but for those of you who do, you have some very important decisions to make. Let’s take a look at some of those decisions, and the errors you really must avoid.————— If you have a pension, count yourself lucky. This is a powerful benefit plan. There are many decisions that you have to make, and I want to talk about three of them today: Whether to take your plan as a lump sum or annuity.What age you should begin your pension.What survivor option to choose. Let’s look at the biggest mistakes people make in each of these areas. First, should you take your pension as a lump sum? Not all pensions offer this choice. Some require you take it out in the form of life-long monthly payments, which is referred to as taking the annuity option. Many pensions also give you the option of a one-time lump sum payment. Which is best for you? There is no way to know for sure without doing a mathematical analysis. You calculate what the monthly payments are worth based on your life expectancy and you compare that to the lump sum. In the majority of cases I see, and I’ve seen a lot of them, the monthly payment option is best. Why does it work that way? There are a lot of risks you take on when taking the lump sum. What if the portfolio earns less? What if someone cons you out of some of the money? What if you live longer than you expected? The pension plan handles these risks for you and there is a company called the Pension Benefit Guaranty Corporation that insures most pension benefits. When you take the lump sum, these risks are not covered. Many people take the lump sum, make poor investment choices, and run out of money. If they had taken the annuity choice, they would have had income for life. What if you meet an investment person that says they can earn you a much higher rate of return if you take the lump sum? Be skeptical. Be very, very skeptical. If you are tempted to believe them, go back and listen to Chapter 5, the podcast on “Investing”, and specifically, the section on “The Big Investment Lie”. Also consider their motives. Do they have a financial incentive to get you to take the lump sum? Hmmmm. You’ll also need to decide what age to take your pension. If you retire at 55, do you start the pension right away, or wait until age 60 or 65 to take it? This is another scenario that requires analysis. I’ve seen pensions where there was absolutely no benefit to waiting until a later age. And, I’ve seen pensions where it paid off to wait until age 65 to take benefits and in the meantime withdraw funds from other accounts. Another key decision you’ll make is what survivor option to choose. If you’re single, it’s likely you’ll choose the life-only option, which means the pension pays out as long as you are alive. You can often combine this with a ten year term certain option. This means if you were to pass before ten years had gone by, the payments would continue to a beneficiary until the full ten year term was reached. If married, it gets a bit more complicated. You can choose an option that pays 100% of the benefit to your partner when you pass, or 75%, or 50%, or none. The more the pension has to pay out to a survivor, the lower the starting monthly benefit will be. Sadly enough, I’ve seen spouses who are solely focused on getting the most monthly income, so they choose a life-only pension option. They pass a few years later, leaving their partner with little monthly income. If you’re married, talk through your pension options. Think about your joint life expectancy. If you each have a pension of about the same amount, then having each of you choose the life-only option could make a lot of sense. But if only one of you has a pension, most of the time you’ll want to make a choices that continue an income for a long-lived partner. When it comes to pensions, you are making irrevocable decisions. Once the decision is made, you can’t change your mind. In the printed version of Chapter 7 of Control Your Retirement Destiny, I provide several examples of pension decisions, with spreadsheets, and a complete analysis. I’d encourage you to walk through these examples, or consider hiring expert help before you make a decision on a pension plan. ————— Thank you for taking the time to listen today. If you like what you heard, go to amazon.com to get a copy of Control Your Retirement Destiny in either electronic or hard copy format. You can also visit sensiblemoney.com to see how a staff of expert retirement planners can help.

Chapter 7.5 – “Pensions”

In this episode, podcast host and author of “Control Your Retirement Destiny” Dana Anspach covers Chapter 7 of the 2nd edition of the book titled, “Company Benefits.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 7 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers all the decisions you need to make as you plan for a transition into retirement. This podcast covers the material in Chapter 7, on company benefits. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. Or, if you are looking for a customized financial plan, visit sensiblemoney.com to see how we can help. Let’s take a look at company benefits, and how you make the most of them. ————— Company benefits used to be simple. Our grandparents, and in some cases our parents, worked for the same company for 25 or 30 years and retired with a gold watch and a pension. Today, instead of pensions, most people have 401(k) plans. Now, you must decide how to invest your money, and when to take it out. In addition, you may have deferred compensation plans, stock options and various insurance benefits – ALL of which require you to make decisions. Company benefits are far more complex than they used to be. There are too many benefit programs out there to cover them all. Today we’re going to focus on the most common benefit option – the 401(k) plan. The goal is to show you how to use this type of retirement plan in a way that BENEFITS you the most. There are four key things I want to cover:The creditor protection rules that apply to your 401(k).The age-related rules that impact when you can access your money and how it is taxed.How to pick investments in your 401(k).What to consider when you are deciding whether you should leave your funds in your 401(k) plan, or roll them over to an IRA. First, creditor rules. Your 401(k) assets cannot be touched by your creditors, even in the event of bankruptcy. Hopefully, you’ll never need these rules. But, let me share with you a few real-life situations and how these rules apply. Suppose you get a great business idea. You are 100% sure it will work out – but in order to get it going you need a little cash. “Hey,” you think, “I’ll just borrow it out of my 401(k) plan.” Or, maybe cash in the 401(k) account. Bad idea. If your business does not work out, your 401(k) money is gone. Instead of using 401(k) money for a start-up business, use credit cards, or a bank loan. If you use a bank loan, and your business doesn’t work out, the worst case is that you file for bankruptcy—your 401(k) assets would then remain protected and still available for your retirement. Another situation that many people found themselves facing in 2008 and 2009 was a job loss. After losing their job, they, of course, didn’t want to lose their home, so many cashed in their 401(k)s to continue making their mortgage payments. Unfortunately, many used up all their retirement funds and then lost their home anyway. Making objective decisions about one’s home can be difficult, but as difficult as it may be, you need to look at the long-term consequences of any financial decision. In a job loss situation, you may spend a substantial amount of retirement money trying to keep a home that you end up losing. One lady I spoke with said, “The stupidest thing I ever did was cash out my 401(k) plan to try to keep that house.” Your 401(k) money is for retirement. That’s it. Don’t use it for any other purpose—particularly if you are in financial trouble. Using your 401(k) money before retirement voids a valuable form of protection that is available to you. You know why pensions worked out so well for prior generations? Because they COULD NOT use them before retirement. You need to treat your 401(k) plan the same way. ————— Next, let’s talk about some of the odd age-related rules that apply to 401(k) plan withdrawals. While you continue to work for a company, most of the time you can’t withdraw money from that 401(k) plan. Some plans offer hardship withdrawals, some offer loans and sometimes there is something available called an in-service withdrawal if you are age 59 ½ or older – but most of the time while you are still working there – you can’t access the funds. But let’s say you change employers and now have money in a 401(k) plan from some place you previously worked. Then what can you do? Usually you have a few options:You can leave it there.You can roll it over to an IRA and there are no taxes when this is done correctly.You can roll it to a new 401(k) plan and there are no taxes when this is done right either.You can withdraw it and pay taxes and possibly penalties. Let’s talk about option 4, withdrawing it. That’s where the age-related rules come in. When you withdraw money from a 401(k) plan you are taxed on it. If you take money out of a 401(k) plan before you reach the age of 59 ½, in addition to regular taxes, a 10% early withdrawal penalty tax also applies. Here’s what many people don’t know. There’s an odd rule about the age of 55. Let’s say you leave your employer AFTER you reach the age of 55, but before age 59 ½. Even though you are not 59 ½ yet, you can now access the money in that old 401(k) plan without paying the early withdrawal penalty tax. This early access rule DOES NOT apply if you roll the funds to an IRA or to a new plan. It also DOES NOT apply if you leave that employer BEFORE you reach the age of 55. Here’s what you need to remember. If you leave an employer after you attain age 55, but before age 59 ½, don’t automatically move the funds to an IRA or to a new employer plan. If you want to preserve your ability to access the funds penalty-free, you’ll leave the funds, or at least a portion of them, in your prior plan. And, if you’re a public safety employee – this early access rule kicks in at age 50 instead of age 55! In general, a public safety employee includes firefighters, police, emergency medical service employees, as well as air traffic controllers and customs and border protection officers. The IRS has a comprehensive list that you can check to see if you qualify for this definition. When you move past the early-access age of 50 or 55, the next important age is 59 ½. Once you attain age 59 ½, the penalty tax on withdrawals goes away. Regular income taxes, however, still apply. And, keep in mind, a rollover or transfer, where you move money from one plan to another, or from a 401(k) to an IRA, does not trigger taxes. I talk to many people who think if they withdraw funds from a plan at all – even in the form of a rollover – that they will have to pay taxes and possibly penalties. A rollover or transfer is a special rule in the IRS code that allows you to move money from one retirement plan to another WITHOUT triggering the taxes or penalties. The last critical age is 70 ½. At this age the IRS requires you to begin withdrawing money from 401(k)s, from IRAs, and from other types of retirement plans. There is a formula you must use each year to calculate the required withdrawal. This formula uses your year-end balance, along with the divisor that is based on your age. Here’s an example: Lynn is retired and reaches age 70½. Her IRA balance on Dec 31st for the previous year is exactly $350,000. Based on her age, the divisor Lynn must use is 27.4. She takes the year-end balance of $350,000 and divides it by 27.4 to calculate the $12,773.72 that she must take out. When she takes it out she will pay taxes on that amount. The distribution period decreases every subsequent year. For example, when Lynn is 88 years old, she will divide her retirement account balance by 12.7 to determine how much she must withdraw. If her account balance is still $350,000 that would be $27,559 that she must take out. You can always withdraw more than the required amount, but if you withdraw less, you could be subject to a 50% excise tax on the amount you did not withdraw in time. Yikes – 50% is a hefty tax. You want to make sure you take your required distributions (RMD). One thing to keep in mind - with a required distribution the money has to come out of the IRA account, but that doesn’t mean you have to spend it. One option is you can distribute investments, shares of a mutual fund or a stock, for example, and just move them out of your IRA account, into your brokerage account. Since the money came out of the IRA, it satisfies the RMD, but the funds remain invested. Another option is to make a charitable distribution. There’s something called a Qualified Charitable Distribution or QCD. You can distribute funds right from your IRA to a charity. There are some tax benefits to this, and it’s beyond the scope of this podcast for me to go into all the details, but if you don’t need the money from your IRA, it’s something you might want to look into. But what do you do if you are still working at 70 ½? Well, if you are not a 5% owner of the company you work for, you may be able to delay your required minimum distributions from your current employer plan until April 1st of the year after you retire. In this situation you are still required to take distributions from other retirement plans, just not from the one from your current employer. Next, let’s talk about how to make better investment decisions in your 401(k). If you are like a lot of people, you collect investment accounts over time. Maybe a 401(k) at one place, but then you leave that employer and leave the 401(k) plan there. You might open an IRA a few years later while you’re self-employed. Then start another 401(k) at a new employer a few years after that. And if you’re married, your spouse may also have their own collection. Rarely is this collection of investments aligned toward a common goal. Instead, most people tend to pick investments in a rather random way. Some look at what has recently had the highest performance and pick that. Other people go with something that sounds familiar. Some ask a co-worker. And, some are more thoughtful and do a little bit of research. Even if you are the research type, do you look at your investment portfolio as a household, or do you look at each individual account on its own? Suppose, for example, that your 401(k) plan offers a great low-cost S&P 500 index fund, while your spouse’s 401(k) plan offers only high cost growth funds, but also has a safe option called a stable value fund? Or if your single, maybe it’s that you have one set of funds available in a 401(k) and other choices in your IRA. If you are investing as a household, rather than balance each account, you might load up on the S&P fund in one account, while using more of the stable value fund in the other account. Although each account is not balanced, as a household, it creates a structure that may result in a better long-term outcome. If married, age differences also come into play. What if one half is ten years younger? It may make sense for the younger partner to have a more aggressive allocation, as it is the older of the two who will be the first to have to start taking required distributions. Whether single or married when you look at your investments at a household level, you can make choices that can lower the overall fees you pay, better align the investments to a specific outcome, and you can take advantage of options that may be available inside of one account but not in another. The last thing to talk about regarding 401(k)s is what to do when you leave your employer? Do you leave the funds there, or roll them to an IRA account or to a new plan? Most of the time, I think moving the funds is the best choice; however, first, let’s talk about three situations where moving the funds may NOT be the right thing to do. First, as we already discussed, if you leave your employer after you turned age 55 but before age 59½, if you move your 401(k) plan before age 59½ this will void your ability to access funds penalty-free. If you won’t need the money during that time, this won’t be relevant. But if there’s a chance you might need to take withdrawals, you may want to wait until age 59½ before you proceed with the rollover. Second, if your 401(k) plan offers a unique fixed income or guaranteed account option, that might warrant keeping funds in the plan. For example, some plans offer something called a guaranteed insurance contract (GIC) that pays an attractive fixed rate of return. Other plans, such as the options in the public education system through TIAA-CREF, offer a fixed account that usually pays a competitive rate. Some 401(k) plans offer stable value funds. All of these investment options are not easily replicated outside of the plan. If your plan offers these types of options, think twice before you roll it over. Third, don’t move funds out of an old 401(k) if you don’t know where to move the funds and don’t feel capable of making this decision right now. For example, maybe your 401(k) plan had something called a target date fund. The “target date” is a calendar year, and you pick a fund with a year that is closest to the year you think you might retire. So, if you will reach age 65 in the year 2035, you would pick a Target Date fund with the year closest to 2035. This type of fund automatically invests for you and makes changes to the investments as you get closer to the target year. For those who don’t know what else to do, I think these can be GREAT choices. So, if you don’t want to go through the process of finding a financial planner, and don’t want to do your own research, leaving the funds in a place where they can easily remain invested in a Target Date fund can be better than trying to guess about picking new investments - and it is much better than making a rushed decision and hiring the wrong kind of person to help. What if none of these three situations apply to you? Then my view is that rolling the old 401(k) to an IRA or to a new plan makes sense. Here’s why: First, it is a lot easier to keep track of. When it comes to address changes and beneficiary changes, you now have one less place where you have to do paperwork. Second, it is much easier to invest. When your accounts are scattered across old plans, next thing you know you get a notice from one plan or another that they are changing the 401(k) provider, or switching out one fund option for another. Each time this happens you have to realign your investment allocation. When you consolidate accounts, this process is easier to manage.Third, in an IRA, you have choices that are not available inside 401(k) plans, such as CDs and individual bonds. If you are building a customized portfolio designed to help your money last as long as possible, having this broader set of choices may help you build a better plan. And now, you are in control of the investments – so if your employer changes fund companies it won’t impact you. One thing to watch out for with rollovers - from the time the funds leave one plan, they must be deposited to another qualified account within a 60-day time frame. The paperwork must be done right to avoid the taxes – so take your time and read the fine print when doing rollovers or transfers. We’ve now touched on the basics of 401(k) plans. We’ve talked about the creditor protection rules that apply to 401(k)s, the age related rules, what to think about when choosing investments, and we’ve looked at how rollovers work and when it does and does not make sense to do them. ————————— Thank you for taking the time to listen today. The printed version of Chapter 7 of Control Your Retirement Destiny has additional content that covers numerous types of stock option plans and deferred compensation plans as wells a pension plans. Visit amazon.com to get a copy in either electronic or hard copy format. You can also visit sensiblemoney.com, to see how a staff of expert retirement planners can help.    

Chapter 7 – “Company Benefits”

In this episode, podcast host and author of “Control Your Retirement Destiny” Dana Anspach covers Chapter 6 of the 2nd edition of the book titled, “Life and Disability Insurance.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 6 – Podcast Script Hi, I’m Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers all the decisions you need to make as you plan for a transition into retirement. The book has incredibly thoughtful 5-stars reviews on Amazon. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. Or, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. This podcast covers the material in Chapter 6, on life and disability insurance. Both types of insurance can protect you and your family against risks that can derail your retirement security. Today, I’ll be teaching you how to assess your insurance needs, and how those needs change over time. Let’s get started. ————— As a financial planner, I think of financial products as tools… perhaps in the same way a carpenter might view his or her own toolbox. You look at the job, you look at the tools, and you figure out which ones will help you most effectively do the job. Insurance is a financial tool. Unfortunately, many of us have an instant adverse reaction when we think about insurance, or even hear the word. I believe this happens because most of the time our experience with insurance is associated with either a salesperson trying to get us to buy more, or a benefit selection page where we feel like we are just guessing as to which options to pick. Overall, we don’t have very many positive experiences with insurance. That means you have to do a bit of a mental shift to begin thinking about it as a tool. For example, what if you begin thinking of insurance like a seat belt? Then, you view it as a safety feature. Hopefully you never need it, but, if you do, you’ll be glad you got in the habit of buckling in. Of course, it’s a bit more complicated than that - because the type of insurance you need changes as you age and as your financial situation evolves. Overall, though, both seat belts and insurance are there to protect you against a risk – a risk that you hope never materializes. Let’s discuss how to think about this type of risk. Any conversation about insurance should start by assessing your exposure to a financial hardship, as insurance is all about shifting risk. When you buy insurance, you choose to pay a known premium so that if a devastating event happens, the insurance company bears the bulk of the financial burden. Not all risks are equal. Take the common example of your home burning down. Although unlikely to happen, if it does burn down, the consequences are severe. Therefore, if you own a home, you carry homeowner’s insurance. You choose to pay a reasonable premium to minimize the financial impact of such an event. Contrast that with death. There is no argument that death is a high-probability event. There is no question of “if” it will happen – it’s only a matter of when. The severity of the financial impact, however, depends on where in your life cycle it occurs, and who is financially dependent on you at the time. If you’re young, and have a spouse and children, your premature death is likely to cause a big financial hardship for your family. But, if you are retired, and either single, or your spouse will have the same income and resources regardless of your death, then the financial impact of your death is minimal. Thus, in your younger years, particularly if you have dependents, death is a low probability but high severity event. In retirement, it changes, and becomes a high probability and low severity situation. When we apply this to your need for life insurance, it means when you are younger and still have many high-earning years ahead of you, you need a pretty large amount of life insurance. You buy it to replace the future income you would have earned. Once retired, you don’t have any more future earned income to replace. If you’ve done a decent job of saving, there is likely not a need for life insurance any more. Now, am I saying that no retiree ever needs life insurance? No. It’s not that easy. There are cases where you do continue to need life insurance, and there are cases where you may already own a policy that you bought when you were younger – and it may not make financial sense to cancel it. To understand where you fit in this framework, let’s look at two things. First, I’ll briefly review the two main types of life insurance. Then we’ll look at cases where you may want to keep life insurance even in retirement. Life insurance is sold in two main categories – either term insurance, or permanent insurance. Term insurance works much like car insurance. You pay and if an accident happens, the policy pays out. There is no cash value to your policy with term insurance. If you don’t need the insurance any more, you stop paying the premium, and the policy expires. This type of life insurance allows you to buy a fairly large death benefit for a low cost. It’s a great choice for most people when they are younger and need to protect their family. The terms usually last 20 to 30 years – which means in most cases you pay the same premium for a long time with the intention that you will let the policy expire at the end of the term. Permanent life insurance has two components – an insurance component and a cash value piece. You pay a higher premium and part of that premium is used to buy the insurance – the other portion is deposited into a savings or investment account which is handled by the insurance company. Permanent life insurance comes in many variations such as whole life, universal life, and variable universal life. These types of policies can be useful for high-income earners, business owners, and in other situations where it appears you’ll need a life insurance policy in place for your entire life. So, let’s take a look at five cases where life insurance may be needed for your entire life, or at least well into your retirement years. One such case I came across was a couple whom I’ll call Matt and Tina. Matt was a high-income earner and Tina, who was 28 years younger, stayed at home to care for their three-year-old daughter. Their retirement assets need to last not just for 30 years - but because of the age gap, assets may need to last 60 years or longer. Rather than try to save that much, it was more cost effective for Matt to maintain a whole life policy of about $2 million. That policy is what will make their financial plan work through Matt and Tina’s joint life expectancy. In another case, a woman I’ll call Pat came in and already owned seven whole life insurance policies issued by NorthWestern Mutual. Her father had been a life insurance agent which is how she accumulated so many of them. The policies were in great shape and it made no sense to cancel them. Instead, we were able to change how the policy dividends were used. With most whole life policies, you have choices as to how to use the dividends – for example you can use them to buy more insurance, to reduce your premium, or to accumulate more cash value. In Pat’s case, her dividends were set to buy more insurance; however, she didn’t need more insurance. Instead, she needed to reduce her monthly expenses. We reset the dividends to reduce her premium. This change saved her $3,000 a year. Small business owners are another group who may need to carry life insurance into their later years. If you own an interest in a small business, you usually want to enter into an agreement with a partner who will buy your share of the business upon your death. This type of buy-sell agreement is usually funded with life insurance. Another group that will likely want to maintain a life insurance policy are those with large estates – in this case the insurance helps pay taxes upon your death. Life insurance used to be sold to lots of people to pay estate taxes, but laws have changed, and today estate taxes apply only to individuals with estates in excess of about $5 million, or married couples with estates larger than $10 million. If you fall in that category, you may need to maintain life insurance to provide liquidity for taxes and other expenses that your estate will incur when you pass. The last group who may want to maintain a policy are those who did not save much and are living on Social Security or a small pension. People in this situation may not have much in assets, but they have monthly income. And they don’t want their children or other family to have to pay their final expenses, and so they maintain a small policy to help cover those costs at their death. We’ve talked about five situations where it makes sense to maintain life insurance. What if none of these situations apply to you and you WON’T need insurance in retirement, but you own a policy already? The first thing to do is identify the point in time where the need for life insurance really goes away. If possible you maintain the policy until it is no longer needed. For example, if you are married and one spouse is waiting until age 70 to begin Social Security, then it may make sense to keep any existing life policies in place on that spouse until they reach the age of 70. Your options also depend on the type of insurance you own. If you have life insurance through your employer, in most cases it goes away when you retire so you may not be able to maintain it. Or, perhaps you bought a 30-year term policy at age 45. Even though you may not need insurance past age 70, if the cost is low you may decide to keep it to age 75, which is when the 30-year term comes to an end. Or, if you own a policy that has cash value, you may have the option of converting it to a monthly income annuity, instead of cashing it in. Or in some cases, the policy is paid-up and earning an attractive return, so you might keep it as a viable safe investment choice. If you decide to cash in a policy that has cash value, watch out! There can be tax consequences. You have to look at that and determine if it will generate a chunk of taxable income. If it will, you might decide to terminate the policy in a year where your tax rate is low. In general, before canceling a policy, make sure you have considered your options. Canceling a policy is not something you want to do on a whim as it cannot easily be replaced. Now, let’s shift the discussion from life insurance to disability insurance. Where would you put disability on the probability and severity risk map? Do you think it is a high or low probability event? And what about the severity of it? I figure that unless I sustain brain damage, I can pretty much do what I do for a living. I could lose a limb, an eye, or become paralyzed, and still I would be able to write and think and help people sort through complex financial decisions. Overall, I figure the probability that I will become disabled is pretty low. Reality and statistics, however, tell me the probability is higher than I might think. Here are a few facts about disability: Prior to age 60, you have a higher probability of disability than death.Women are at greater risk for disability than men.And, risk varies by occupation. Now, what about severity? Even though I am a firm believer that I have a low probability of becoming disabled, if it were to happen, the severity is high. I have been single most of my life, and there is not a second source of income to rely on. Knowing that, I maintain a disability policy that would replace 60% of my income if something should happen. Will I always maintain this policy? No. When I reach my 60’s I should be at a place where I have saved enough that my investment income can replace my earned income. At that point, even though I might still be working, I would no longer need to maintain disability insurance. In conclusion, as you near retirement, both the probability and financial severity of a disability go down. The closer you get to retirement, the more important it is to review your existing coverage and make sure it is still needed. And, as we have discussed, needs change over time. Which means your financial planning process should include a periodic insurance review – perhaps you review policies every three years if nothing has changed, and more frequently if you are near retirement. ————— Thank you for taking the time to listen today. Chapter 6 of Control Your Retirement Destiny has additional content which can help you evaluate your insurance needs. Visit amazon.com to get a copy in either electronic or hard copy format. Or, visit us at sensiblemoney.com to see how we can help you create a plan to transition into retirement.

Chapter 6 – “Life and Disability Insurance”

In this episode, podcast host and author of “Control Your Retirement Destiny” covers Chapter 5 of the 2nd edition of the book titled, “Investing.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 5 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of "Control Your Retirement Destiny," a book that covers all the decisions you need to make as you plan for a transition into retirement. The book has outstanding 5-stars reviews on Amazon. If you like what you hear today, go to Amazon and search for "Control Your Retirement Destiny." Or, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. In this podcast, I’ll be covering the material in Chapter 5 on investing. We’ll continue the case study of Wally and Sally, and look at how the plan we created for them in Chapters 2 through 4 becomes the blueprint for how they should invest. Let’s get started. ————— When I meet someone new, almost without fail, the conversation goes something like this. They ask, “What do you do for a living?” “I’m a financial advisor,” I say, or “I own and run a financial planning firm.” From there the typical reply is along the lines of, “Oh, what do you think of the markets right now? What should I be buying? What are your thoughts on Apple stock? What will happen if so and so wins the next election? What should I be investing in?” “You should be investing in a good financial planner,” is what goes through my mind. Investing is like a prescription. It’s what you do after you’ve gone through a thorough exam and diagnosis. This where I think most of the financial services industry gets it wrong. Take a thirty-year-old as an example. They are investing in their 401k. They are nervous about losing money. They either fill out an online risk questionnaire or meet with a financial advisor - and this is supposedly the exam part. They express their concern about losing money if the market goes down. Then the diagnosis part. The computer model or advisor recommends they invest in a balanced fund that maintains an allocation of about 60% stocks and 40% bonds. This is not a terrible recommendation - but to me - it seems like a recommendation made for all the wrong reasons. At age 30, under normal circumstances, the earliest you can withdraw from your 401k is age 59 1/2 - about thirty years in the future. You would think the primary goal would be the investment mix that maximizes the potential for return over a thirty-year time horizon. Yet, almost the entire financial services industry focuses instead on minimizing the downside risk, or volatility, that you might experience in any one year. Why? It makes no sense to me. Why would I structure my investments to reduce short term volatility for an account I’m not going to touch for thirty years? Contrast this with someone who is age 65 and about to retire. One popular rule of thumb says take 100 minus your age and that is what you should have in bonds. I’ve also heard a version of this rule that says take 110 minus your age. Following this type of rule, you come out with a 65 - 75% allocation to stocks and a 25-35% allocation to bonds. In many cases, it is the same recommendation made to the thirty-year-old. Is this recommendation aligned to your goals? It might be. But in many cases it still doesn’t add up. For example, suppose in your plan you are drawing out of a taxable brokerage account first - then your IRA when you reach age 70, then your spouse’s IRA, and he or she is five years younger than you. Suppose you also each have a Roth IRA, but you don’t plan on touching that account at all. Should all of these accounts be invested with the same risk profile, with about 60% in stocks and 40% in bonds? In my mind that makes no sense at all, yet that is the type of investment recommendation most often given. What does make sense to me is to assign each account a job description and invest that account according to the job it needs to do. That means if your spouse is age 60 and won’t be touching their IRA until age 70, which is ten years away, that account can be invested differently than the account you’ll be drawing out of next year. To make better investing choices that are more aligned to your goals, there are a few key things to know. Here are the ones we’ll be covering in this podcast. How to measure risk - And the two most important questions you can ask before making any investment. Something called “The Big Investment Lie” - and why we are so prone to believing it. The importance of tracking results relative to your plan. We’ll start with measuring risk. There are two questions I’d love to hear everyone ask before making an investment. The first question is “Can I lose any money?” If you are retiring next year, and will need to withdraw $50,000 to help cover your living expenses, when it comes to HOW that $50,000 is invested you want the answer to the question “Can I lose any money?” to be NO. In most cases, if it is money you need to use in the next five years, you want it invested safely. On a scale of 1 to 5, I think of this as a Level 1 risk. A Level 1 Risk represents a safe investment. it may not earn much interest. But you also know it won’t go down in value. The next question to ask is “Can I lose all my money?” This question is more difficult to answer. What if you bought 100 shares of a stock? Can you lose all your money? Yes. Many great publicly traded companies have gone bust over the years. I call this a LEVEL 5 RISK. I recommend most retirees avoid taking Level 5 risks. Now, what about a Level 4 risk? This one is trickier. Let’s look at an example. Suppose I told you of an investment that for over 90 years has an average return of 10% a year? Sounds good, doesn’t it. You invest $100,000. A year later it is worth $60,000. You sell it, fearful you’ll incur more losses. You call me a liar, and decide investing doesn’t work. From that day forward, you keep your money in the bank, where it safely earns a few percent a year. Now, instead, suppose I describe an investment that gives you the potential to earn more than double what bank savings accounts are paying. I explain to you that this investment is not something you should use if you need your money in the next few years. I also tell you that in any single year, this investment could be down as much as 40%, or, up as much as 40%. I also explain that your results can vary widely depending on how the next 20 years turns out. I show you that in the past, during the worst 20 years this investment earned a return about the same as safe investments, and over the best 20 years, it earned returns much, much higher. You are now taking a calculated risk with the expectation of volatility. You invest $100,000. A year later it is worth $60,000. You don’t like it, but you knew this could happen and you’re in it for the long term. You hang on, and by the end of ten years it is worth $191,000. Both scenarios reflect the same investment - an investment in an S&P 500 Index Fund. The difference in the results are due to investor behavior - not due to the investment. The S&P 500 measures the performance of the stocks of 500 of the largest companies in the U.S. When you own an S&P 500 Index fund, you own a little piece of each of the 500 stocks. Can you lose all your money in this investment? Hypothetically, yes. All 500 companies would have to go bankrupt at once for this to happen. If that happens, I believe the world as we know it has ended, and we’ve got much worse problems on our hand than how much is in our 401k account. With a risk level 4 investment, like an index fund, you know you’ll experience ups and downs. The primary factor in how well you do, will be your behavior - how you use this investment. When used with reasonable expectations, level 4 investments usually help you achieve your goals. ---- In the earlier chapters of the book we began following a couple, Wally and Sally, who were planning their retirement. Let’s see how this concept of risk levels and aligning investments to a goal works for Wally and Sally. After projecting several potential withdrawal plans, Wally and Sally could see that drawing funds out of their non-retirement account in their first four years of retirement would be the most tax-efficient choice. As they will need these funds soon, they invest this account, about $250,000, all in safe investments. Next, their plan has them withdrawing from Wally’s retirement accounts starting in about year five of retirement. When they get to year five, they don’t want to be concerned about the market being down – instead they want to know the first five full years of planned withdrawals from this account are safe. Those withdrawal amounts add up to $105,000. The total account value is $365,000. They invest the $105,000, or 29% of the account, in safe choices. The remaining 71% of the account is invested to growth, or Risk Level 4 choices. They don’t plan to touch Sally’s retirement account for at least six years. But when they get out to year seven, where they will need to use it, they want her first three years of withdrawals in safe choices, which amounts to $90,000. Her account size is $546,000, so her allocation is 16% to safe choices, and 84% to growth. Notice each account is invested differently, depending on the job it must do. When you look at their entire household, they now enter retirement with the first 8 years of withdrawals 100% covered by safe investments. Their household allocation is 38% to safe choices and 62% to growth. They have the comfort of knowing the growth portion has eight years to work for them - and that during that 8 years when it has good years they will take the gains and move them to safe options. And when it has bad years, which they expect, they will leave it alone and give it time to recover. They are able to do this because their withdrawals are coming from the portion of their accounts invested in low risk choices. This is how you create a job description for an account and align the investment choices to the particular plan for that account. Now, Wally and Sally have a bit more learning to do when it comes to the growth portion of their account. They need to make sure they don’t fall for The Big Investment Lie. The Big Investment Lie is the title of a book written by Michael Edesess. As he introduces the book, he shares a story about his first job at an investment firm. Here’s what he says, “With my new Ph.D. in pure mathematics in hand from Northwestern University, I reported to work at Becker in July 1971. Immediately after starting, my bosses gave me books to read on stock market theories. I was the only mathematician with a Ph.D. in the firm, so I quickly became chief theoretician. I was assigned to work with a young assistant professor at the University of Chicago named Myron Scholes (later to become famous for the Black-Scholes option pricing model). I was sent to conferences on quantitative finance, where I rubbed elbows and sat on panels with future Nobel Prize winners. But within a few short months I realized something was askew. The academic findings were clear and undeniable, but the firm—and the whole industry—paid no real attention to them. The evidence showed that professional investors could not beat market averages. Professional investors couldn’t even predict stock prices better than the nearest taxicab driver.” When I read this book of Michael’s, luckily, I already knew that it was not possible for anyone, professional investor or novice, to predict stock prices or consistently pick winning stocks. My frustration, and what Michael Edesses calls The Big investment Lie, is the ongoing belief that so much of the public continues to hold – which is that some person, some firm, or some software program, can beat the stock market or spot stock winners. “Well”, you might be thinking, “if I’m not hiring an investment professional to pick stocks or beat the market, what am I hiring them for?” If you’re hiring the right kind of professional, you’re hiring them to make a realistic financial projection for you, help you take the steps needed to make that projection become a reality, and they’re going to use a disciplined time-tested Investment process - and stick with it even when times are tough. A disciplined time-tested investment process that holds up under scrutiny usually uses a form of what is called “passive” investing for the growth part of the portfolio. What does “passive” mean? It means you are not choosing mutual funds or investment advisors that are trying to pick stocks or trying to beat the market. An S&P 500 Index fund, for example, is a passive type of investing. This kind of fund owns the 500 stocks listed in the S&P 500 index. It isn’t trying to pick the best of those 500. It simply wants to capture the collective returns of all 500 stocks packaged together. Contrast that with an actively managed large-cap fund, which might be trying to pick the best 200 stocks out of the 500 listed on the S&P. The actively managed fund has much higher expenses - as it must pay an entire team of people to do research in an attempt to identify the best 200 stocks. The data shows that overwhelmingly, these active funds are not successful at earning an after-fee return higher than what you would get if you simply bought the index fund. Another part of The Big Investment Lie has to do with a belief in market timing. A belief that there is an expert who can successfully move your money out of the market before the next downturn, and then invest it back in at the bottom. A great book on this subject is Future Babble - Why Expert Predictions Are Next to Worthless by Dan Gardner. One of the points that Gardner makes is that predictions get attention - and if an expert succeeds at a prediction - they can make page one of the news. If they fail, no one pays attention... so why not throw a lot of predictions out there until one sticks? When it comes to The Big Investment Lie, I have one final thing to say. I’ve been delivering personal financial advice since 1995. Every scam or bad investment I’ve ever seen someone make was because they fell for some version of The Big Investment Lie. Someone told them a tall tale - and they believed it. Don’t let this happen to you. Develop a set of reasonable expectations and invest in a boring systematic way. You may not get rich quick, but you also won’t go broke overnight. And that’s pretty important as you near retirement. The last thing I want to cover in this podcast is the importance of tracking your results. And knowing what to track against. What do you think you should track against? Does it make sense to track your results against the S&P 500 Index which is so widely reported on by the media? That is what a lot of people do. I’m not sure why. Is the Index customized to the financial goals of your household? No. Imagine if you were training for a sport. Would you set your performance standards against a nationally followed average? Or would it make more sense to measure your athletic performance against your fitness goals and take into account your age, personal experience, level of fitness and health considerations? I’d venture most of us would prefer a customized approach. A customized approach makes sense for your finances too. The way to make a customized benchmark for your finances it to first make a financial projection of your income, expenses, taxes and account values. Wally and Sally did this and they now have a clear picture of how much should be remaining in each account at the end of every year from now throughout life expectancy. Their financial projections use the assumption that investments earn 5% a year on average. How did they come to use a 5% return? They looked at a lot of historical data on how stocks and bonds have performed over the past. They wanted to be conservative - which meant they did not want to use a rate of return assumption that only reflects average to good times. Instead, they wanted to use something that was reflective of the worst 1/3 of historical times. Their research led them to feel quite comfortable that if their household allocation remained at about 60% in growth investments, after all fees, a 5% rate of return was a realistic assumption to use. Using this 5% return projection, they can see after taking their needed withdrawal, how much should be left in each account. Each year, they compare what they have to what their projection says should be remaining. They are now measuring against their path - against their goals. We use this same way of measuring in our financial planning process at Sensible Money. In addition, we create a secondary projection called a Critical Path. Critical Path is a trademarked term used by our investment partner, a firm called Asset Dedication. We do the planning and send Asset Dedication the financial projection for each client. In turn Asset Dedication sends us back the Critical Path - which is the minimum amount of financial assets that need to be remaining each year for the plan to work throughout the client’s projected lifetime. The Critical Path is even more conservative than the standard projection using 5% returns. In Chapter 5, you can see an example of what Wally and Sally’s Critical Path looks like. Once you have a customized projection, you use it to make decisions along the way. When our client are ahead of their Critical Path, that is our signal to sell some of the gains and buy more bonds. When clients get significantly ahead of their path, we begin conversations around gifting, or spending a little extra on things that really matter to them. Using a personal projection is far better than measuring against a benchmark like the S&P because it tells you how well you are doing compared to your goals. It also takes the focus away from month-by-month or even year-to-year performance - and instead, looks at where you are positioned relative to your lifetime goals. It also allows you to make appropriate adjustments along the way. If you need to spend more during any one year, if you are following a plan that adheres you to a 4% withdrawal, you may be reluctant to take any additional funds out. Yet that might be fine and have little impact on your lifetime plan. By using a personal projection, instead of an arbitrary benchmark, decisions can be customized to you. To summarize, you’ve now learned the two most important questions to ask before investing. They are “Can I lose any money,” and “Can I lose all my money?” You’ve also learned about the all-too-human tendency to believe in The Big Investment Lie - the belief that there is an expert out there that can accurately predict upcoming market moves. Steer clear of any such too-good-to-be-true claims. And, you’ve learned why it makes sense to measure results against a personalized financial projection instead of a benchmark. With a personal projection you always know how well you are doing relative to your goals. ----- Thank you for taking the time to listen today. Chapter 5 of "Control Your Retirement Destiny" has additional content which covers several other investment types and it includes great examples of Wally and Sally’s Critical Path projection. Visit amazon.com to get a copy in either electronic or hard copy format. Or visit us at sensiblemoney.com to see how we can help you plan your transition into retirement.

Chapter 5 – "Investing"

In this episode, podcast host and author of “Control Your Retirement Destiny” covers Chapter 4 of the 2nd edition of the book titled, “Taxes.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 4 – Podcast Script Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny which was initially published in 2013. A 2nd edition was published in 2016, and now, I am working on the 3rd edition. Why a 3rd edition? Well, the tax laws changed - and we want to update Chapter 4, which covers taxes. This podcast covers the material in Chapter 4, and I’ll be discussing both the old tax rules and the new tax rules. We’ll continue to follow the case study of Wally and Sally based on the 2nd edition of the book. The book has incredible 5-stars reviews on Amazon. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. You won’t be disappointed. And if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. Ok, let’s get started. In this podcast, I’ll be covering the highlights from Chapter 4 on the topic of “Taxes.” ----- There are very few people I know who enjoy doing their taxes. That includes me. I have actually never done my own tax return. To me, it is worth it to pay someone else to handle this task. Yet, I know a tremendous amount about personal tax rules. So why wouldn’t I do my own tax return? Well, a tax return is a historical account of what happened. Once it is time to file your return, there is nothing you can do to change the outcome. I prefer to use my tax knowledge to figure out how to pay less in taxes. And, to help other people pay less. To me, that is one of the most rewarding parts of my work. To pay less in taxes, you have to plan ahead. How far ahead? The more you want to save, the farther ahead you’ll plan. Think of tax planning in three levels. Level 1 is pretty basic. For example, assume you turn your tax documents in to your tax preparer, and he or she let’s you know you could fund an IRA for the previous year, and thus reduce your tax bill.  That wasn’t really planning ahead, but you did learn a step you could take to reduce current year taxes. But is this really the right step to take to lower your taxes in the long run? Not for everyone. Some people are better off funding a Roth IRA instead of a Traditional Deductible IRA. With a Roth, you make after-tax contributions and from that point on, the money grows tax-free. The Roth IRA has several unique advantages for retirees when they enter the phase where they are regularly withdrawing money. For example, Roth withdrawals do not count in the formula that determines how much of your Social Security is taxable. And Roth IRAs do not have what are called Required Minimum Distributions, which begin at age 70 ½ and require you to take out specified amount each year. These unique advantages of Roth IRAs are often missed by traditional tax preparers. The reality of Level 1 planning is that many tax preparers are so focused on what you can do to reduce this year’s tax bill, that the advice they are giving, with the best of intentions, may not be advice that is ideal for you. Next, we have Level 2 tax planning. You must tackle Level 2 planning in the fall, and run a tax projection. The bummer part of doing this is that you have to gather estimates for every item that will be on your upcoming tax return. We do this for most of our clients each year – and I’ll admit, it’s a lot of work. What do we learn from all this work? We can determine what actions need to be taken before the year is over so that people can save money. There are three items we routinely look for. 1) The opportunity to convert a portion of an IRA to a Roth IRA, 2) the ability to realize capital gains if they will fall into the zero percent tax rate, and 3) the ability to realize capital losses that can be used to offset ordinary income. If you aren’t sure what these things mean, keep listening. I promise, I’ll explain most of them in more detail. With Level 2 tax planning you mock up your tax return, and then see what it would look like if you were to take action before the year is over. One of the most memorable results I have from a tax projection was when we told a client that could sell a significant amount of Apple stock and realize $60,000 of capital gains and pay no tax. They were shocked. How were they able to do this? They had just retired, and their taxable income was going to be quite low for the year. When your taxable income is low, any capital gains you realize are likely to fall into what is called the “zero percent tax rate” – which means you can realize those gains and pay no tax. If they had waited even one more year – their taxable income would not have been as low – and they would have paid taxes on the gain at a 15% tax rate, or $9,000 in tax. Planning ahead saved them $9,000. Pretty cool. Then, we have Level 3 tax planning. With level 3 planning, you plan many years ahead. This type of planning can have a big impact on people who are near retirement. Why? Between the age of 55 and 70 there are a lot of moving parts. Retirement usually happens in this age range, which results in a change in taxable income. And various other types of income start– such as Social Security, pensions, deferred compensation payouts and IRA withdrawals – and they often all start at different times. If married, spouses may have different retirement dates and different years where each of their Social Security begins. With all these moving parts, your tax return can look entirely different from year to year – and lots of opportunities exist – if you’re on the lookout for them. In Chapter 4, we follow the case of Wally and Sally. I show you what Level 3 Tax Planning looks like by going through three potential retirement income plans for Wally and Sally. All three plans are designed so that their lifestyle spending is identical. The difference in the three plans is when they begin Social Security, and how they withdraw from various accounts. These changes impact how much in taxes they pay in each scenario. Let’s see how their three scenarios look using the old tax rates. Then we’ll summarize how it might change under the new 2018 rules. In the 2nd Edition of the book, I describe Wally and Sally’s three retirement income plans as Option A, B, and C. With Option A, Wally and Sally take their Social Security early, and at the same time withdraw from their non-retirement accounts. They know at age 70 ½ that by law they are required to begin taking distributions from retirement accounts and they plan to wait and tap IRAs only when these mandatory distributions begin. Their cumulative taxes over a 29-year projected lifetime add up to $452,000. With Option B, they use their suggested Social Security claiming plan, which has them filing a few years later, and they use the same withdrawal order as Option A. Which means they spend non-retirement savings first, while waiting until required distributions begin. Their cumulative taxes total to $487,000. With Option C, they use their suggested Social Security claiming plan while converting IRA assets to a Roth IRA during low tax years, and they withdraw from IRAs before their required distributions begin. Their cumulative taxes add up to only  $424,000. That’s a $63,000 difference in taxes paid – depending on how they structure their income plan. There is also a big difference in how much money they have left after 29 years. When looking at the estimated after-tax value of accounts, with Option A they have  $816,000 left. With Option B, in 29 years, they have $930,000. And with Option C - $1,153,000. That’s $337,000 more.   Now, if I have any economists listening, they will realize that $337,000 sounds like a lot – but that is $337,000 twenty-nine years in the future. You must discount that back to today’s dollars to do a fair comparison. Assuming a 3% inflation rate, in today’s dollars that is worth $143,000. That’s still a decent chunk of money you get to keep by planning ahead. How does this type of planning work? In the early years in retirement, Wally and Sally will be in a lower tax rate. Later in retirement, a higher tax rate will kick in because of their IRA withdrawals. With Option C, they use this to work to their benefit. They withdraw money from their IRA on purpose when their tax rates are low. They are able to put some of it in a Roth IRA where it grows tax-free. This is called a Roth conversion. The result is that later in retirement their Required IRA distributions are lower, and they have less income taxed at the higher rates. What does a similar case study look like under the new 2018 tax laws? I’m working on that right now for the third edition of the book. Starting in 2018, tax rates are lower than they were in 2017 – but they are set to go back to higher rates in the year 2026. This makes planning a bit of a challenge. I ran similar Wally and Sally scenarios using 2018 tax laws, and assuming those rules stay in place and do not revert back to old rates. Under this scenario, Wally and Sally can still save up to $48,000 in federal taxes by building a tax smart withdrawal plan that delays Social Security while withdrawing from IRAs and using Roth conversions. There is up to a $350,000 difference in after-tax assets at the end of their plan. Which is equivalent to $148,000 in today’s dollars. And, if in fact tax laws do revert, the tax planning will save Wally and Sally even more. Under old tax rules, or new ones, there is plenty of money to be found with good planning. Hopefully, I’ve convinced you that tax planning can save you money. Although I can’t cover all the rules in this podcast, with our remaining  time I will discuss tax planning triggers that you want to be on the look out for. Then, we’ll talk about a few specific parts of the tax code and how to use these parts to make better planning decisions. First, tax planning triggers. If you have the same salary, the same mortgage, and the same number of dependents this year as you did last year, most likely your tax return this year will look much like it did last year. Where big opportunities show up is when things start to change. I call these items “Triggers.” When a Trigger occurs, it might be a great year to focus extra effort on your tax planning. For example, you change jobs, or you have a year where you are only employed half the year, or you retire. During those years, you are likely to be in a lower tax bracket than you were the year before. Changing jobs, a period of unemployment, and retirement are three major Trigger events. A few others are a change in your number of dependents, a move to a different state, paying off a mortgage, or taking on a new mortgage. Selling a property or investments should also trigger a fresh look at your taxes, as you may have larger capital gains to report in years where these sales occur. Changes in income are likely to have a bigger impact than changes in deductions. To understand why, let’s quickly review how tax rates work. Income is reported on the first page of a 1040 tax return. Although income is reported here, not all of it is taxable. Many line items on your tax form have a column for the full amount of the income, and then a separate entry where you put the taxable portion. You use this income to determine what is called your Total Income on line 22 of the first page of a 1040. Then you get to adjust this income down by what are called “above the line” deductions. Some common ones are contributions to a Health Savings Account or to an IRA. The result is called your AGI, or Adjusted Gross Income, and it is shown on line 37 of a standard 1040 tax form. Next, in 2017 you get to reduce your AGI by taking either the Standard Deduction, or Itemized Deductions. This is one area where things changed between 2017 and 2018. Let’ start with 2017 rules. In 2017, each person got to reduce their AGI by a personal exemption amount of $4,050 and a standard deduction of $6,350. If you were age 65 or older you also got a slightly larger standard deduction. Let’s say you’re married and not yet 65. In 2017, your total standard deduction was $12,700. You would compare this to your itemized deductions, which included things like mortgage interest, state taxes paid, health care expenses up to a limit, and charitable contributions. If your total itemized deductions were more than the standard deduction then you got to use the larger number. In this example I’m using, as long as your itemized deductions were more than $12,700, you would use the itemized. Then you also got to reduce your income by your personal exemptions. In 2017, for a single person, age 65, when you added up your standard deductions and exemptions, without any itemizing, your AGI would be reduced by about almost $12,000 to get to what is called your Taxable Income. For a married couple both age 65, your AGI would be reduced by just over $23,000 to determine your taxable income. In 2018 – it’s different. Now, there is not a personal exemption. Instead, the standard deduction is much larger – at $12,000 each, or a total of $24,000 if married. And, you still get a little more if you’re age 65 or older. In 2018, as a single not yet age 65, you must have more than $12,000 of deductions before you cross the threshold to be able to itemize. For married couples is must be more than $24,000 (If over 65, those numbers change to $13,600 for singles and $26,600 for marrieds.) What all of this means is that many more people will use the standard deduction now instead of itemizing. In addition, what is eligible to be itemized has changed! In 2017, you could deduct state and local taxes, like property taxes and state income taxes paid, with no cap on how much could be deducted. In 2018, you can use a maximum of $10,000 of these types of deductions. This has the biggest impact on folks who live in areas with high property taxes and high state income taxes. There are a few other changes to itemized deductions too, but I can’t go into all of them. The bottom line is that you start with Total Income, then take Above the Line deductions to get to your AGI, then you reduce that by your Standard or Itemized Deductions to get to Taxable Income. Great, you have taxable income. Now what? Now, that income flows into the tax tables. And naturally, that isn’t simple either. Tax rates are tiered. This is something that I find many people do not understand – because under a Tiered system, not all income is taxed at the same rate. In 2018, the rates are 10%, 12%, 22%, 24%, 32% and 35% - these are all slightly less than they were in 2017. To understand how it works, let’s talk through an example of a single person who has Taxable Income of $80,000 (remember, that’s what is left after all their deductions). In 2018, the first $9,525 of that income is taxed at the 10% rate, the next $29,174 is taxed at 12%, and the next $31,775 is taxed at 22%. What if this person were trying to decide if they should contribute more to their 401(k) - and they could either make a deductible contribution to the plan, or an after-tax Roth contribution? Which is better? If they contribute $10,000 it will reduce the taxes they are paying at the 22% rate – which means a $10,000 deduction equals $2,200 saved in taxes. That sounds great! But tax laws are set to revert to the old rates in 2026. What if their retirement projection shows that their income later in retirement will be taxed at the 28% rate. Does it make sense to take a deduction now at 22% - then pay taxes on that same money later when you withdraw it at a 28% rate?  Probably not. This is just one example of how Level 3 Tax Planning can help you make better decisions. In addition to looking at the cut off levels between tax rates, you must also consider that all income is not treated the same under the tax code. I think of retirement income in three buckets. There is your: Ordinary income bucket Your Qualified Dividends and LT Cap Gains bucket And then you have Social Security. Ordinary income includes income you earn, interest income, IRA or 401(k) withdrawals, most types of pension income and many other things. This type of income is subject to the ordinary income tax rates that we just went over. Next you have Qualified Dividends and LT Cap gains. Long term capital gains means a gain from the sale of an investment which you owned for at least one year. These two types of income have their own special tax rates which are lower than ordinary income tax rates. The three tiers are 0%, 15% and 20%. Did I say “zero percent”? Yes, I did. There is actually a tax bracket where if your taxable income is less than $38,600 for singles, or $77,200 for married, then your qualified dividends and capital gains are not taxed. There are ways to strategize and intentionally create a tax year where your income will be low so that you can realize capital gains at a lower tax rate. How does all this work together? Well, we have a client that has a $4.5 million taxable portfolio. By taxable, I mean the investments are not inside IRAs or other retirement accounts. In 2017, their Taxable Income was $210,000. How much do you think they paid in taxes? At least 12% right? After all, in 2017 that was the lowest tax rate. At 12% they would pay just over $25,000 in federal taxes. And that would be a pretty good deal. They only paid about $14,000 in federal taxes in 2017. How can this be? A large portion of their income fell into the 0% and 15% capital gain and qualified dividend tax rates. When you structure a portfolio correctly, with taxes in mind, you can create a really great tax efficient outcome. The third type of income we’ll talk about is Social Security. The good news is 15% of the Social Security income you receive is always tax-free. Whoohoo! The bad news, is some people will pay taxes, at the ordinary income tax rate, on up to 85% of their benefits. It is all determined by a formula. If you have no income other than Social Security, you’ll pay no taxes on your benefits. As other types of income begin to flow into the formula, it changes the portion of your benefits subject to taxation. With the right type of planning, many retirees can receive more in benefits, and pay less taxes on what they get. You must engage in Level 3 Tax Planning to spot these opportunities. We’ve now discussed the old and new tax rates, and how the standard deduction has changed. We talked about the special tax rates that apply to qualified dividends and long-term capital gains. We also briefly reviewed how your Social Security benefits are taxed. And, looked at Wally and Sally, and saw a first-hand example of how planning resulted in a better outcome. There are many more items I cover in the tax chapter. There is simply not enough time to cover them all in a single podcast. You can find additional tax-related content on the SensibleMoney.com website in the Learn section. Or to develop a customized tax plan visit us at Sensible Money.com to see how we can help.

Chapter 4 – "Taxes"

In this episode, podcast host and author of “Control Your Retirement Destiny” covers Chapter 3 of the 2nd edition of the book titled, “Social Security.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 3 – Podcast Script Hi, this is Dana Anspach, the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of the books Control Your Retirement Destiny and Social Security Sense. CYRD was initially published in 2013, and the 2nd edition came out in 2016. Why a 2nd edition? Well in Nov. 2015, some of the Social Security laws changed. The 2nd edition incorporates all these changes. The good news is that in this podcast, where we cover Chapter 3 on Social Security, everything we’ll talk about uses current rules. And, even better news, the book has incredible 5-stars reviews on Amazon. If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And if you are looking for a customized plan, visit sensiblemoney.com to see how we can help. Ok, let’s get started. In this podcast, I’ll be covering the highlights from Chapter 3 on the topic of “Social Security.” ---- I never set out to be an expert on Social Security. So how did it happen? From 2008 to 2017, I wrote an online advice column called MoneyOver55. My most popular topic was Social Security. I had so much content online on this topic that email questions came pouring in, not only from consumers but also from other financial professionals. To this day, many of my colleagues call or email me with Social Security questions. While I was working on revising this chapter for the 2nd Edition of this book, I received one of those calls. It was from a friend of mine, a financial planner in Colorado. She had a client, whom we’ll call Diane. Diane is a widow. Her husband, Paul, had passed away at 57. Diane is now age 62. She is no longer working - but she had worked for most of her life. Here’s how SS works for Diane. She is eligible for either her own Social Security retirement benefit, or a survivor benefit, which will be based on her deceased husband Paul’s work record. Diane wasn’t exactly sure how it all worked, but she heard that she could collect a survivor benefit as early as age 60. Naturally, at 60 she went to the Social Security office to learn more. They told her she could collect this survivor benefit now, but that she would get more if she waited until age 62. Technically this was true. Just before her 62nd birthday she went back to her local Social Security office. They told her now that she was 62 she could collect her own retirement benefit amount, which would be $1,791 a month. But they also said if she waited until 66 she could collect a widow benefit based on Paul’s Social Security, which would be $2,706 per month.  (This higher widow benefit is based on the amount Paul would have received if he had lived and filed at his age 66). Technically this information they provided to her was also true. So, what was the problem with this information given to Diane? If Diane decides not to do anything and to wait and claim a widow benefit at her age 66, she will forfeit up to $200,0000 that she can get over her lifetime.  This $200,000 is measured in today’s dollars. $200,000! How can she get so much more? There are claiming strategies that the workers at the local Social Security office were not aware of. It’s not their fault. It takes years to understand all the claiming choices available - and this is not what your Social Security office worker is trained to do. So what can Diane do to get $200,000 more? Well, normally when you file for Social Security benefits you are deemed to be filing for all benefits you are eligible for. Diane is eligible for her own retirement benefit or a survivor benefit. It makes sense that the Social Security office will check and see which one will pay her more if she files right now. But, widows and widowers have a very special option – they can file something that I call a restricted application. This means they can CHOOSE to apply for only one benefit type – either their own or the survivor benefit – and that preserves their option to later switch to the other benefit type. “Whoa,” you might be thinking. This sounds complicated. It is. Let’s put some numbers to it. At age 60, if Diane would have filed for her survivor benefit she would have gotten $1,767 per month. She didn’t because they told her she could get more by waiting until age 62. At 62, she can get $2,025 per month as a survivor benefit. When she files, if she restricts her application to only that benefit type, her own retirement benefit remains untouched. Now, she collects $2,025 per month, her survivor benefit amount, plus inflation adjustments, all the way to age 70. At age 70, she files for her own benefit which by then, will be $3,674 per month. Now let me clarify. She doesn’t get both her survivor benefit and her retirement benefit at the same time. At age 70, when she begins to receive her $3,674 monthly retirement benefit, her survivor benefit stops. And why is her own benefit so much at age 70? Because you get a lot more per month if you wait until age 70 to start benefits. In her case, it works well, because while she is waiting until she is able to collect on the survivor benefit. Following a claiming plan puts a lot more money in Diane’s pocket over her retirement years. This is just one example of how knowing the rules can increase your retirement income. The rules we just talked through, that apply to Diane’s situation apply to all widows and widowers. In this podcast we’re going to cover more rules for survivors. In addition, we’ll cover the following: something called your Full Retirement Age, a special rule that applies to government workers, rules for ex-spouses, what happens if you continue working while receiving benefits, and last, we’ll look at how Social Security benefits are taxed. And believe it or not, we’re going to cover it all in about 15 – 20 minutes. We’ll start by looking at survivor benefits. In the last podcast on Chapter 2, we introduced a couple, Wally and Sally, whom we follow throughout the book. Wally and Sally have a few Social Security choices that they were not aware of. In version one of their retirement plan, they planned to retire at ages 65 and 63, and each planned to start their own Social Security retirement benefits right away. Can they do better? Yes. Wally and Sally are making a classic mistake in how they look at Social Security. They are each looking at their own benefits independently of each other. They do not understand how survivor benefits work. Because so many married couples don’t understand how survivor benefits work, many older widowed Americans have a monthly income much lower than it could have been. We don’t want that to happen to Wally and Sally. And I don’t want that to happen to you either. Here’s what Wally and Sally need to know. When one of them passes, the survivor continues to receive the larger of either benefit amount. So if Wally passes, and his monthly check was bigger than Sally’s, then Sally can continue to get Wally’s check and her check stops. You don’t receive a survivor benefit in addition to your own benefit. For married couples, this can be very powerful. If you file for benefits early, at age 62, you get a reduced monthly amount for life. This means a reduced survivor benefit also. If you wait and file for benefits at age 70, you get a much larger monthly amount. This larger amount is now  the survivor benefit for either spouse. Wait, you might say, “I can’t afford to wait until age 70.” That’s what Wally and Sally thought. Wally and Sally didn’t know that they could save money in taxes and get more Social Security if they took money out of their IRA starting at age 65 while having Wally wait until age 70 to begin his Social Security retirement benefit. By doing this, the survivor benefit at Wally’s age 85 is projected to be $48,000 a year. If Wally starts his benefits at age 65, as he originally planned, the survivor benefit at age 85 is only $34,000 a year.  That’s a big difference. And, in the meantime, they don’t have to scrape by! They can withdraw a little extra from their IRA – because later they’ll have a larger Social Security benefit later, and need a little less from the IRA later. How much of a difference does this make for Wally and Sally? In the case study in the 2nd Edition of the book, if Wally and Sally each claim benefits the year they retire, over 20 years they estimate they’ll receive about one million four hundred and seventy-five thousand in total Social Security benefits. What happens if they follow a special claiming plan? They get one million seven hundred and thirty-six thousand over that same 29 years. That’s $260,000 more total dollars from Social Security over their projected lifetimes. Granted, that’s $260,000 stretched out over almost thirty years. To be mathematically correct, we must translate that number into today’s dollars. This is a concept called “Present Value”. A dollar twenty years from now is not worth as much as a dollar today – so present value is a math formula that translates dollars in the future back to what they would be worth today. In today’s dollars, following a delayed Social Security plan is worth over $100,000 to Wally and Sally. Wally and Sally’s case, and Diane’s that we went over earlier, are just two examples of how a smart plan can help you get more out of Social Security. There are many rules to consider. And, in November 2015, some of the rules changed. For example, if either you or your spouse, were born on or before January 1, 1954, you need to take a close look at your ability to use something called a restricted application for spousal benefits.  The Wally example in the 2nd edition of the book was born March 15, 1952, so this special rule applies to him – and while he delays his own retirement benefits he is actually able to collect a spousal benefit! Pretty cool. For the 3rd edition of CYRD, which I am currently working on, Wally will be born two years later, and the new case study will reflect an updated plan for people that are not eligible for this type of restricted application. Now let’s move on and talk about Full Retirement Age. Many Social Security rules hinge around this magic age. And it varies based on your date of birth. For those born January 2, 1943, to January 1, 1954, your Full Retirement Age is 66. If you’re born outside that range, you can look up a Full Retirement Age chart on the Social Security.gov website, or find it in either my Control Your Retirement Destiny or Social Security Sense books. There are many reasons why Full Retirement Age is so important. If you start benefits before Full Retirement Age, your benefit amount is reduced. If you start benefits after Full Retirement Age you get an increase that is called a delayed retirement credit. If you were born on or before 1/1/1954 Full Retirement Age also impacts your ability to file a restricted application. If you are born before 1954 and divorced and want to file for a spousal benefit on your ex-spouse’s earnings record, while preserving your ability to later file for your own retirement benefit, then you should not file until you reach your Full Retirement Age. Full Retirement Age also impacts your ability to work and receive you Social Security benefits. For example, if you start your benefits before Full Retirement Age, you will be subject to something called the earnings limit. That means if you earn too much money, some of your Social Security benefits must be paid back. What is too much? In 2018, the earnings limit is $17,040 per year or $1,420 per month. This limit is indexed to inflation so it usually increases each year. There is also a special rule, and a much larger earnings limit that applies during the calendar year that you attain Full Retirement Age. The good news - Once you reach Full Retirement Age, you can earn any amount and collect your Social Security. Yippee! Another rule I must cover is a rule that impacts many teachers, law enforcement officers, firefighters, postal workers, and other folks who may work for a government agency. If you work for an agency that has its own pension system AND you do not contribute to Social Security, you are unlikely to get the amount of benefits that show up on your statement. For those of you in this situation, the technical terms for the rules that apply to you are the Windfall Elimination Provision, and the Government Pension Offset. Since you don’t pay into the Social Security system there are special rules in place to prevent what is called double-dipping. However, many people have worked at jobs where they did pay into Social Security, and then worked for an agency where they don’t pay in. This is fine. The problem is when this situation occurs, the numbers you see on your Social Security statement are probably not accurate. Too many people in this situation see the numbers on their statement and naturally assume they’ll receive that plus their pension. If you have years of work under a system where you didn’t pay in to Social Security, don’t count on what you see on your Social Security statement. Now, on to ex-spouse’s. A few minutes ago, I mentioned the ability to file for a spousal benefit based on an ex-spouse’s work record. Here’s how it works. If you have a marriage that was at least 10 years in length, both spousal and survivor benefits are available based on your ex’s work record. This does not reduce the benefit they receive. And, if your ex has remarried, it does not impact their new spouse’s ability to get spousal or survivor benefits. Crazy huh? You know what this means? If someone was married 5 times for 10 years each, they could have 5 ex’s all collecting a spousal benefit. These spousal benefits are usually most applicable to you if you didn’t work much, or if you were born 1/1/1954 or earlier. The last topic to cover in this podcast episode is how Social Security benefits are taxed.   Here’s how it works - If Social Security is your only source of income, you pay NO taxes on it. That sounds great. Except, if you’re like most people, you’d prefer to have other income in addition to Social Security. If you have other sources of income, up to 85% of your benefits may become subject to federal income taxes. I say up to 85% because, well, we’re talking about the IRS here, and it’s not simple. Your income flows into a formula – and the formula spits out the portion of your benefits that will be taxed. Because of how it all works, with smart planning, many middle income retirees with savings of less than $1M, may be able to pay a lot less in taxes by drawing out of their IRA first, and waiting until age 70 to begin Social Security. We’ve now covered widow and survivor benefits, your Full Retirement Age, the earnings limit, what to watch out for if your work for an entity where you don’t pay into SS, rules for ex-spouses and we’ve briefly looked at how benefits are taxed. Please, don’t take anything I’ve said as personal advice. The rules are complex and the right choice for you depends on a lot of factors. Hopefully, you’ve learned there may be more to look into before making an off the cuff decision. In the Chapter 4 podcast, we dive deeper into taxes, and look at how Wally and Sally can reduce their tax bill in retirement. ----- Thanks for joining me for this podcast summarizing Chapter 3 of Control Your Retirement Destiny. To learn more, get a copy of the book on Amazon, or to work with a professional retirement planner to put together your own customized plan, visit us at SensibleMoney.com.

Chapter 3 - “Social Security”

In this episode, podcast host and author of “Control Your Retirement Destiny” covers Chapter 2 of the 2nd edition of the book titled, “Starting with the Planning Basics.” If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon. Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.   Chapter 2 – Podcast Script Hi, this is Dana Anspach, founder and CEO of Sensible Money, a fee-only financial planning firm that specializes in helping people plan for retirement, and author of Control Your Retirement Destiny. In our previous episode, we discussed highlights from Chapter 1 on the topic of “Why It’s Different Over 50.” In this podcast, I’ll be covering the highlights from Chapter 2 of Control Your Retirement Destiny, titled, “Starting With the Planning Basics.” Before we get into Chapter 2 content, a brief history on the publishing and reception we’ve gotten with the book. Control Your Retirement Destiny was initially published in 2013, out of my passion for helping people navigate their way through retirement and to combat the popular retirement rules of thumb in the media that are hurting people more than helping them. Naturally, I was nervous when it was released. Will people like it? Will it help them? I’m honored at response I’ve received and the feedback on the book – it has incredible 5-stars reviews on Amazon. And it is often the reason clients initially seek us out for assistance. Before we get going, just a reminder that if you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. You won’t be disappointed. And if you are looking for a customized plan that fits your specific retirement needs, visit sensiblemoney.com to see how we can help. Let’s get started. ---- In this Chapter you learn how to use a set of basic schedules to build a financial plan. I’ll be explaining these schedules, but first, a story to illustrate why the basics are so important. I was lucky enough to grow up with a dad who taught me the value of not only smart financial decisions, but also of health and fitness. In my mind, there’s a lot of correlation between the two. As a family, we went to the gym together. To this day, when I visit my parents in Des Moines, Iowa, we still all go to the gym together. This habit of working out has served me well. I don’t have to think about it, it’s just what I do. For me, it’s the same with managing my finances. I’ve made it a habit to track what I spend and to save regularly. I don’t have to think about it, it’s just what I do. Currently I work out at a gym called LA Fitness. They have a slogan that pops up on their TV screens throughout the gym, and a women’s voice exclaims it aloud. This slogan reminds me of how important this chapter is. She says, “What gets measured, gets improved.” I hear this woman’s voice echo in my head all the time… “What gets measured, gets improved.” Whether it be the calories you’re consuming, the number of days a week you work out, or the amount of money you spend, when you measure, things improve. The first time I really experienced how measuring could impact my finances was about a year out of college. I downloaded Quicken, a program that tracks your spending by vendor and category. “Holy cow,” was what I thought, as I realized I was spending $400 a month on what I called the “Walmart and Target” category. Now, that may not seem like much if you are running a household with many family members. But for me, just married, a year out of school, living in a 700 square foot apartment, it was a lot. I started to pay attention to my behavior. Let’s say I needed something basic, like a bottle of Windex. I’d go to WalMart, and come out with $100 worth of items. Most of the time they were decorative knick-knacks that we certainly didn’t need. How was I going to fix this spending leak I wondered? I decided to experiment and only visit these stores once a month. Amazingly enough, I still only spent $100 each time I went. By only going once a month, there was instantly about $300 more a month in the budget – and we still always had what we needed. By measuring, I became aware of what was happening. Then I was able step back and experiment with ways to improve the outcome. Somehow, like so many things that work well in life, what did I do? … I stopped measuring. Several years later, after going through a period of low income and no measuring, I found myself $25,000 in credit card debt and with no savings. I hated opening my credit card statements. It was painful. I would mentally beat myself up. I was working at a CPA firm at the time, and one day one of the managing partners announced he was retiring – at a very young age. “How did he do that?” I wondered. He stopped by my office a few days later, and I was able to find out the answer. He said, “Dana five years ago, I had a negative net worth. I earned an attractive salary, but I realized I wasn’t doing anything with this money but spending it.” “How did you change things?” I asked. He said he had this realization that he was in a hole - and he was determined to dig his way out. He started by regularly measuring his net worth. There was that word again “measuring!” Each month he’d record his debt balances. He quickly paid off his debt. Then, he started looking for investment opportunities. He was lucky enough to catch the real estate market on an upswing and in five years his net worth went from negative to over $10 million. I get that it’s not realistic to think we can all go from negative to $10 million in five years. But we can all make progress. His story inspired me to get my butt in gear. I went home that day and tallied up all my debt balances. Each month, as painful as it was, I tracked the balances and payments. At times it seemed the balances only inched down. I didn’t get out of debt quickly, but I never gave up. Today, there is no credit card debt, and in place of tracking debt, I track my net worth. Tracking your net worth is a simple process of recording total account balances and asset values as of the same date each year, such as at year-end, or at the end of each calendar quarter. Measuring both your spending and your net worth are the starting points for getting a handle on your entire household financial situation. When it comes to planning a transition into retirement, measuring is more important than ever. In Chapter 2, of the 2nd Edition of Control Your Retirement Destiny I cover the 5 basic schedules you can use to measure, and you can see examples of each schedule. These five schedules are a spending plan, a personal balance sheet, an income timeline, an expense timeline, and a deposit/withdrawal timeline. In Chapter 2, we begin to follow a couple, Wally and Sally. Wally and Sally are in their early 60’s and starting to plan their transition into retirement. Let’s take a look at how Wally and Sally use these 5 basic schedules to see if they can afford to retire. Note – for the sake of this podcast, I am rounding all numbers so they won’t match exactly what you see in the schedules in the book. First, they start with a spending plan. A spending plan is an assessment of where your money goes. I prefer the term “spending plan” instead of budget, because a budget sounds so restrictive! A spending plan sounds flexible – and actually it is. By laying out a plan you can make sure you are spending money on things that are most important to you. To build their spending plan, Wally and Sally print an entire year’s worth of checking account statements and credit card statements. They use these to come up with a total of what they spent last year. They categorize everything into both fixed and variable expenses. When all is said and done, their total comes to $62,000, or just over $5,000 a month. This $62,000 does not include taxes or any items that come directly out of their paychecks. But it does include everything else, from property taxes and insurance to groceries and cell phone bills. Wally and Sally recently paid off their home, so last year with $5,000 a month, and no house payment, they felt comfortable. They figure if they can spend about that same amount each year in retirement, then they’ll be comfortable. But they aren’t sure how to figure out if they have enough saved. Wally and Sally’s next step is to make a personal balance sheet. A personal balance sheet helps you assess what you have to work with. Once you list all your assets and accounts, you can organize them into categories. This helps you see which accounts are available for the purpose of retirement, and which are not. For example, if you have a savings account where you put money for upcoming travel, that asset is not available for retirement income. Wally and Sally list all their major assets, and subtract out any debt. When they add everything up they have a net worth of $1.5 Million. Their home, worth $300,000 is included in that total. They realize they don’t want to sell the house, so they take that asset back off their balance sheet so they can see only the amount of savings and investments that are available to fund their retirement. That ends up being about $1.2 million. With $1.2 million of savings and investments, do Wally and Sally have enough to spend $62,000 a year in retirement? In order to answer that, Wally and Sally have three more schedules to complete. This last set of schedules are formatted as a series of timelines. I call them an income timeline, an expense timeline, and a deposit/withdrawal timeline. Let’s briefly go over each of these three timelines and how Wally and Sally use them to lay out version one of their retirement income plan. We’ll start with the Income Timeline. Really, I should call this a fixed income timeline. In planning, the purpose of the income timeline is to layout all the guaranteed sources of income. This does not include dividends or interest – as those numbers vary and are not guaranteed. It does include pensions, Social Security, deferred compensation payouts, and guaranteed annuity income. The only source of fixed income that Wally and Sally have is Social Security. Wally and Sally both worked most of their life and plan to work one more year. Once retired, they each plan to start Social Security early, at ages 65 and 63. Note - This isn’t necessarily the best thing for them to do – but this is version one of their plan. So first, we’ll look at what they originally planned to do. Then, in subsequent chapters, we’ll look at how they can do things differently to improve their retirement. Wally’s birthday is in March and Sally’s in February. This means if they file for benefits to begin on their birthday during the first year they are retired they won’t get 12 Social Security checks each. Wally will get 10 months’ worth and Sally 11 months’ worth. When they add all this up, they estimate the first year they are retired they’ll receive about $38,000 of Social Security. The second year, when they both get checks all year long, they’ll get about $45,000. They open up a spreadsheet and put a calendar year in the top of each column. In year one of retirement they input $38,000 of Social Security, and in year 2, $45,000. They also know Social Security goes up each year with inflation, so starting in year 3 of retirement, in their spreadsheet timeline they increase their estimated Social Security by 2% a year. They figure inflation might be a little more than that, but they want to be conservative and so they assume that their benefits only go up by 2%. Wally and Sally project their Income Timeline for 29 years, which stretches it to Sally’s age 90. Out of curiosity, they add up all the Social Security they estimate they’ll get over that 29 years. They are surprised to see it adds up to just over one million four hundred and seventy-five thousand. That number is important, because in Chapter 3, we’re going to show them how they can get even more. Right now, we’ll assume that is all they have to work with. What they need next is an Expense Timeline. When you build an Expense Timeline, you start with what you spend now. Then you project how it will change over time. Why can’t you just take your current spending, and use that? Well, some expenses go away. A mortgage is a good example. If it will be paid off in ten years, then in the expense timeline, the expense shows up for the first ten years, then drops off in year eleven. Other expenses may need to be added in. If your current vehicle is paid off, at some point, you’ll need another one. This expense needs to go in your timeline, as either a lump sum purchase, or a car payment that starts in approximately the year you when you think you’ll next be buying a car. Health care spending is another item that may change as you near retirement. If you are currently covered by employer provided health care, but will have to pay your own premiums once retired, then be sure to add a line item for this expense in the year where it will begin. The spending timeline is important because it becomes the basis for the lifestyle you want to have in retirement. This is about creating a plan that lets you live comfortably for the rest of your life. To do that, “comfortable” has to have a number. Your spending timeline helps you figure out what that number will be. Wally and Sally start with what they spend now, which is about $62,000 a year. They also know they need to consider inflation. So they assume these expenses will go up by 3% a year. Remember, they want to be conservative – so they are intentionally assuming their living expense go up by 3% a year while their Social Security only goes up by 2% a year. For living expenses, that means with inflation the first year they are retired they estimate they’ll need $64,000, and then in the second year $66,000, and so on. Next, they realize they will be paying their own health insurance once retired. They add an estimated $12,000 a year for that. Now, as things stand today, $12,000 a year may not be enough to cover health care premiums for both of them. Wally and Sally realize that later when they start doing more research. But again, this is version one of their plan. They also realize they need to estimate taxes in retirement. Not knowing where to start, they ask their CPA to come up with an estimate. Their CPA tells them if they have $40,000 a year in Social Security, $5,000 a year in investment income, and $30,000 a year in IRA withdrawals, they will pay $8,000 in federal taxes and $1,500 in state taxes. After adding in health care premiums and taxes, Wally and Sally calculate they’ll need a total of $85,000 their first year in retirement. With inflation, this goes to $88,000 in year two, $91,000 in year 3, and so on. Wally and Sally project their Expense Timeline for 29 years, which as I mentioned, takes it out to Sally’s age 90. Again, out of curiosity, they tally up all their expenses, including taxes, health care, and inflation, over 29 years. It adds up to just over $3.9 million. Yikes, they think… “We’ll have to work forever.” Luckily for them, that turns out NOT to be true. Their planning is not yet done. Next, they need a Deposit and Withdrawal Timeline. A deposit and withdrawal timeline shows you the difference between what is coming in on your Income Timeline, and what is going out on your Expense Timeline. Wally and Sally compare their income timeline to their expense timeline on a year-by-year basis. Here’s how it works. Once retired, the first year they have $38,000 of Social Security and $85,000 of expenses, that means they’ll need to withdraw $47,000 from savings and investments. In year two, they’ll have $45,000 of Social Security and $88,000 of expenses, leaving $43,000 to come from investments. Over 29 years, to cover all their expenses and keep up with inflation, their timeline shows they need to withdraw $2.4 million. Once again, they feel discouraged, as Wally and Sally only have $1.2 million saved right now. What are Wally and Sally forgetting? They are forgetting that their savings and investments will earn something. Sure, if they hide their savings and investments under the mattress, and it earns nothing, it is true, they would need $2.4 million in the bank right now for it to last 29 years. But if their investments earn 4% a year, they only need $1.2 million saved now to support all the withdrawals they need for 29 years. If their investments earn 5% a year, they need just over $1 million saved. Is a 4$ or 5% rate of return realistic? The short answer is yes, it can be realistic if you follow a specific investment plan. I provide all the details on this in Chapter 5 on investing. Is there anything else Wally and Sally are forgetting? Yes, there is. As I mentioned, health care expenses are likely to be higher than what they have projected in the first year or two of retirement when they are not yet age 65. At age 65, Medicare begins. Once both are on Medicare, they will still pay for a supplemental health plan, but it will not cost as much as it did before they were on Medicare. Basically, health care is likely to cost more than they had planned on for the first two years, then less in the following 27 years. When they factor in these changes to their timelines, their projected lifetime spending goes down from $3.9 million to $3.7 million. As Wally and Sally begin to talk more about retirement they realize what they’d really love to do is travel in their first five years of retirement while they feel they will be in their healthy and active years. They start to wonder if they could afford an extra $10,000 a year on travel, just for their first five years of retirement. What do you think? Is funding their travel realistic? The answer becomes clear in Chapters 3 & 4. In conclusion, using a set of basic schedules, Wally and Sally now have a 30,000 foot view of their potential retirement plan. It looks realistic to them, but they know they are not experts. Now that they have a basic set of schedules in place, they also know they can begin to look at alternate solutions. They decide to start reading every article about retirement they can find. Wally finds one about Social Security that makes him realize there might be a better way than their original plan. Social Security and how Wally and Sally can use it to improve their plan, is the topic of Chapter 3. Thanks for joining me for Chapter 2 of Control Your Retirement Destiny. To learn more, get a copy of the book on Amazon, or to work with a professional retirement planner to put together your own customized plan, visit us at SensibleMoney.com

Chapter 2 - "Starting with the Planning Basics"

Chapter 1 - "Why It's Different Over 50"

A step-by-step guide on how to align finances to support a comfortable retirement lifestyle.

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Control Your Retirement Destiny

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