Integrity Estate Advisors

Retirement Plans

Retirement planning is something that most people don’t take the time to do. They usually only put as much into a retirement plan as they can afford and hope they hit the lottery. Some max out their options, but max out some wrong choices, like purchasing too much company stock (remember Enron?). Remember what your mother always said, “Don’t put all your eggs into one basket!” It doesn’t matter if your company is the best thing in the world, like the employees of Enron, it is a stock. You wouldn’t put all your money into a stock in Japan, California, or Iowa….don’t do it with your company!

Retirement planning can be accelerated by proper tax planning. Get control of your taxes, and improve your retirement!

Phases of Retirement Planning

Retirement planning has several phases to it. The one most people think about is the Accumulation phase, which is accumulating the assets that will allow you to live the retirement of your choice. Most never achieve the level they hope for because of several reasons. Some of the most common is putting it off, setting wrong priorities, putting money into everything else but your future, and bad investment choices. Starting where you are at is a key factor….never starting is also a key factor…

If you haven’t started, start now! Where ever you are at in your life. A small amount for a cushion is better than nothing. Start now, pay yourself first!

Another part of accumulating assets is protecting them from loss, or accumulation. If you were to become sick or injured, you may not be able to continue to save. Due to the time and value of money, the older money can make a bigger difference than the newer money in retirement planning. Losing the ability to save in the early years can impact retirement substantially. Protecting yourself from this is important.

RULE OF 100. The younger you are, the more risk you can take. You have time to recover from a down market. The older you are, the less risk you should take. We believe in the Rule of 100. Take your age and subtract it from 100. Your answer is the maximum amount you should have at risk in the market (or other risky investments). If you are age 50, 100-50=50, so 50% is the maximum you should have at risk. If you were age 65, 100-65=35, so 35% of your portfolio is the maximum you should have at risk and 65% should be where the principle is guaranteed.

The 2^nd phase of retirement planning is the Transitional phase. This means you are starting to think about retirement, “When can I afford to retire,” or “Can I retire when I planned.” If you have accumulated assets, and are thinking about retirement, it is time to speak with us about transitional planning. Accumulation planning is different than transitional planning. At this phase of your life, you generally don’t have the time to “wait out” a down market to recover. You are generally using your retirement funds to supplement your social security and pension. If you are still positioned in the stock market and it drops….and you are spending money from the retirement funds, it can devastate your future income. It will make recovery very difficult if not almost impossible. Transitional planning consists of deciding what level of income you will require and the amount of risk you are willing to take and what level of risk your portfolio can take to survive a down market.

In the transitional phase of your retirement plan, you should also consider protecting your retirement assets from catastrophic losses if you need to enter a nursing home. At the current costs per day of $175-$185, an extended stay could wipe out your savings.

Example, my friend just moved his mother to a nursing home. It costs them $7500 per month. How long could your retirement hold out without effecting you and your spouses lifestyle. With the Deficit Reduction Act of 2005 (signed on February 8^th at 3:55pm) in effect, the estate preservation strategies we once had have been severely limited. This planning MUST be accomplished earlier now. The look back period has been changed to 5 years from 3 years on gifting. The state recovery laws can require gifts be given back if there is not enough money to pay for the nursing home costs and Medicaid coverage can be disqualified for a period of time. (Average cost per month divided into the amount gifted, ie: gift $65,000 divided by average cost of $6,500/month equals 10 months of ineligibility for Medicaid coverage in a nursing home). They would have to wait for 10 months. We recommend purchasing Long Term Care Insurance to protect the estate at this phase of your life if you haven’t purchased it early. The cost is more affordable now and you may not medically qualify later in life!

The 3^rd phase is Preservation. As you get older, you should take less risk. You may not be able to withstand any losses of principle at this phase of your life. Accumulation should have brought you to retirement, and preservation will keep you there! Very little should be at risk at this stage of your life. You should also be considering how to protect your assets from catastrophic losses due to medical bills, or law suits, if you haven’t done it yet.

The 4^th phase if the Distribution phase. Retirement money or Qualified money has usually not been taxed to this point. When your beneficiary receives your IRA inheritance, it is taxed VERY HEAVY. In general, if someone inherits a $200,000 IRA, they will only receive about $120,000. The total amount is added to their income taxes, which generally can raise them to the top tax bracket, add in Federal and local and you have just taken at least 40% off the top. Then to top it off, if the total estate is worth over $2,000,000 (in 2006) Federal Estate Taxes start at 46%, so realistically, a sizable estate with a large IRA can be devastated and be more than cut in half if not properly planned.

One option for IRA holders is to “STRETCH” the IRA over the lives of up to 2 generations, creating a much larger legacy. For instance, a $200,000 IRA can be stretched and pay out over $5,000,000 to the next two generations! Instead of a one time distribution, your legacy can be remembered every year for the next two generations. There are several other options that are possible to create even a larger legacy, but they are more complicated and need to be discussed one on one with us.

One other important note about distribution planning is the fact that a large sum of money received at one time can cause problems with many people. Look at many of the lottery winners. Their lives were changed…not for the better. They were never taught how to handle a large sum of money. It is said that most inheritances are gone within 6 months. Sometimes it may be better to create an income stream rather than a lump sum. This is a much neglected part of planning, but a major part of our comprehensive plan.

Call us today for a no obligation consultation at: 1-877-419-1040