What Questions Keep Pre-Retirees Awake at Night?

As we get to the final part of our careers, thoughts of how retirement will look can create mixed emotions. For many, it will be a time to dream about doing those things on their bucket list, such as traveling abroad, learning a hobby, making memories with grandchildren, or pursuing a new business venture.

However, for others, it may be a time of stress and uncertainly because of the extent to which our identity has been tied to our career success and advancement. The routines and structures we’ve followed for years will end, and we face a new reality.

Kiplinger’s recent article entitled “4 Questions That Keep Most Pre-Retirees Awake at Night” explains that for many people coming to this next phase of life, there are four questions that will keep them awake at night. Knowing the answers to these four questions, can give confidence to those who are prepared to make this a smooth transition.

Exactly When Can I Retire? With the traditional pension becoming a thing of the past, the answer may not be so obvious. We also can’t overlook the emotional piece of retirement. Research shows that the happiest people in retirement will be retiring to something, instead of retiring from something. Several pursuits in retirement can bring purpose and meaning to daily life. As you near retirement, consider what pursuits you may enjoy and allow yourself to look forward to getting started.

Will I Have Enough Money? What’s the “magic number” that makes it appropriate to retire? However, more importantly, what is your “magic number.” This may be tied emotionally to a vision you’ve had your entire career, like accumulating $1 million or paying off your mortgage. However, there’s no one-size-fits-all answer to this question. Start by creating a retirement budget and understand what percentage of your monthly expenses can be covered by fixed sources of income, like your Social Security, pension and investments. The closer this percentage is to 100, the better. You should also be certain that you parse out the purpose of your money and specifically dedicate it to things, like creating monthly income, covering future health care costs and growth to outpace inflation. If you do this, you’ll be better able to allocate your portfolio appropriately among various tools, such as savings, investments, annuities and life insurance, etc..

Will My Nest Egg Last Throughout Retirement? A major issue for retirees is having negative returns in their investment portfolio during their early years of retirement. Unlike your working years, when you may have been contributing money to your retirement plan on a regular basis, the opposite may now happen. Monthly withdrawals may be needed to generate needed income. This is referred to as a Sequence of Returns Risk, where the order in which the annual returns hit a portfolio matters significantly. The best way to manage this risk is to avoid taking systematic distributions from a fluctuating account. Earmark a portion of your portfolio to create the monthly income needed to cover fixed expenses that are beyond what your Social Security and your pension will provide. Once you have this, you’re ready to see what combination of investments and insurance tools are right for you.

Will My Family Be OK? If you die, will your spouse be OK and able to carry on? It’s essential to be sure that both spouses are comfortable with the finances and how decisions on investing and retirement have been made. Contact an experienced estate planning attorney if you have not created an estate plan yet.

Reference: Kiplinger (Oct. 29, 2020) “4 Questions That Keep Most Pre-Retirees Awake at Night”

 

How Can We Do Estate Planning in the Pandemic?

We can see the devastating impact the coronavirus has had on families and the country. However, if we let ourselves dwell on only a few areas of our lives that we can control, the pandemic has given us some estate and financial planning opportunities worth evaluating, says The New Hampshire Business Review’s recent article entitled “Estate planning in a crisis.”

Unified Credit. The unified credit against estate and gift tax is still a valuable estate-reduction tool that will probably be phased out. This credit is the amount that a person can pass to others during life or at death, without generating any estate or gift tax. It is currently $11,580,000 per person. Unless it’s extended, on January 1, 2026, this credit will be reduced to about 50% of what it is today (with adjustments for inflation). It may be wise for a married couple to use at least one available unified credit for a current gift. By leveraging a unified credit with advanced planning discount techniques and potentially reduced asset values, it may provide a very valuable “once in a lifetime” opportunity to reduce future estate tax.

Reduced Valuations. For owners of closely-held companies who’d like to pass their business to the next generation, there’s an opportunity to gift all or part of your business now at a value much less than what it would’ve been before the pandemic. A lower valuation is a big plus when trying to transfer a business to the next generation with the minimum gift and estate taxes.

Taking Advantage of Low Interest Rates. Today’s low rates make several advanced estate planning “discount” techniques more attractive. This includes grantor retained annuity trusts, charitable lead annuity trusts, intra-family loans and intentionally defective grantor trusts. The discount element that many of these techniques use, is tied to the government’s § 7520 rate, which is linked to the one-month average of the market yields from marketable obligations, like T-bills with maturities of three to nine years. For many of these, the lower the Sect. 7520 rate, the better the discount the technique provides.

Estate Planning. Now is the time to contact an experienced estate planning attorney to get your affairs organized

Bargain Price Transfers. The reduced value of stock portfolios and other assets, like real estate, may give you a chance to give at reduced value. Gifting at today’s lower values does present an opportunity to efficiently transfer assets from your estate, and also preserve estate tax credits and exclusions.

 

Reference: New Hampshire Business Review (May 21, 2020) “Estate planning in a crisis”

 

Are You One of the Many Headed toward Financial Disaster?

You may be saving for retirement, paying down debt or simply budgeting for your everyday expenses. Whatever your goal is, it’s critical to have a plan in place. Some planning now can go a long way in making sure your finances are as healthy as possible. Without any type of plan, you’re just blindly throwing your money around and hoping for the best.

Motley Fool’s recent article entitled “A Whopping Number of Older Adults May Be Headed Toward a Financial Disaster” says that millions of older adults are making a critical mistake as they plan for the future. If they don’t make any changes soon, it could be extremely expensive.

More than one-third (34%) of baby boomers admit that they haven’t conducted any financial planning whatsoever in the last two years, according to the National Association of Personal Financial Advisors. Therefore, they haven’t planned for retirement, managed a budget, set any goals, reviewed their investments, considered their insurance needs, or done any tax or estate planning. It’s not just baby boomers who aren’t planning. Almost a quarter (24%) of Gen Xers also say they haven’t done any financial planning over the past two years. The generations most likely to have thought about the future are the millennial generation and Gen Z — only 16% and 15%, respectively, said that they haven’t done any recent financial planning.

While all of us should be thinking about our future plans, it’s even more essential for older Americans to focus on their finances. If you’re close to retirement age and haven’t reviewed your investments or thought about your retirement plan recently, you’ll have a hard time knowing if you’re on track. The longer you wait to know if you’re off track, the more difficult it’ll be to make changes and to catch up.

Baby boomers should have plans in place, in case the worst happens. Review your insurance and make an estate plan to be certain that your family is protected if something happens to you. Look at your plans regularly to make sure everything is up to date.

The first part of creating a financial plan is to set goals, like preparing for retirement, paying down your debt, or creating an emergency fund. Next, examine your money situation to find extra cash to put toward those goals. Begin monitoring your spending to get a good idea of just where your money is going every month. It’s a lot harder to stay on a budget and save more, if you don’t know how much you’re spending. Once you get into the habit of tracking your spending, it’ll be easier to discover parts of your budget to cut back. You can start reallocating that money toward your financial goals.

You should also remember that you’ll need to review your plan regularly to make adjustments when needed. This is especially vital when saving for retirement, because there many factors to consider as you’re saving. At least once a year, check that your retirement savings goal is still accurate, and decide whether your current savings are on track to reach that goal. Take a look at your investments to see if your asset allocation is still aligned with your risk tolerance.

Reference: Motley Fool (Feb. 8, 2020) “A Whopping Number of Older Adults May Be Headed Toward a Financial Disaster”

Is Life Insurance a Good Idea for My Estate Plan?

The complexity of many types of life insurance make it hard to know if you’re getting good advice.  Around 57% of adults in the U.S. own a life insurance policy, according to a joint study by LIMRA, a trade group, and Life Happens, a nonprofit insurance advocate. CNBC’s recent article entitled “Why some life insurance could prove risky for consumers” goes on to state that the sales standards governing how agents and brokers can recommend certain types of life insurance to consumers are not strict.

There are some types of life insurance that aren’t necessarily mind-boggling. For example, term insurance is pretty clear. This type of policy covers buyers for a certain period of time, such as 10 or 20 years, for an annual fee that’s locked in and which the purchaser knows at the time of sale.

However, permanent life insurance — also called as cash-value insurance — is more complicated. With permanent life insurance, a buyer is meant to keep the insurance policy, such as whole life and universal life, until death rather than for a set term. This type of insurance also has a side investment account that earns interest and dividends. The account is designed to cover annual premiums and other insurance costs, which typically increase each year with age. But in the event that an investment account underperforms expectations or insurance charges increase more than expected, a purchaser may have to pay more money to cover a shortfall or risk losing the coverage altogether.  Remember that a policy that may look fairly inexpensive today, may not be the case later in life.

It’s also important to note that state life insurance regulations frequently don’t require insurance agents to fully disclose the risks to the public. Of course, insurance companies promised that they’ll disclose the risks to buyers in the contracts they sign. However, the fine print can be more than 100 pages long.

Insurance agents are also typically permitted to recommend life insurance that will pay them a higher commission, rather than suggesting a policy that may be just as good but pay the agent less or no commission. While not every life insurance agent is misleading the public, the regulations aren’t in the buyer’s favor, say consumer advocates. Each state regulates many different aspects of life insurance, like advertising, disclosure, licensing and unfair trade practices.

State insurance regulators say that there were over 4,000 individual cases of wrongdoing by life insurers or insurance agents in 2019, according to data from the National Association of Insurance Commissioners. That’s compared with the nearly 138 million life insurance policies owned by Americans as of year-end 2018, according to ACLI.

As a reminder, you should only buy insurance policies that you understand. Be sure to ask about and be aware of risks, like potential increases in future premiums and other elements of a life insurance policy that could be changed. You should also consult with an experienced estate planning attorney to be sure that the amount of life insurance you’re considering fits into your overall financial and estate plan.

Reference: CNBC (January 19, 2020) “Why some life insurance could prove risky for consumers”

 

How Do I Incorporate My Business into My Estate Planning?

When people think about estate planning, many just think about their personal property and their children’s future. If you have a successful business, you may want to think about having it continue after you retire or pass away.

Forbes’ recent article entitled “Why Business Owners Should Think About Estate Planning Sooner Than Later” says that many business owners believe that estate planning and getting their affairs in order happens when they’re older. While that’s true for the most part, it’s only because that’s the stage of life when many people begin pondering their mortality and worrying about what will happen next or what will happen when they’re gone. The day-to-day concerns and running of a business is also more than enough to worry about, let alone adding one’s mortality to the worry list at the earlier stages in your life.

Business continuity is the biggest concern for entrepreneurs. This can be a touchy subject, both personally and professionally, so it’s better to have this addressed while you’re in charge rather than leaving the company’s future in the hands of others who are emotionally invested in you or in your work. One option is to create a living trust and will to put in place parameters that a trustee can carry out. With these names and decisions in place, you’ll avoid a lot of stress and conflict for those you leave behind.

Let them be upset with you, rather than with each other. This will give them a higher probability of working things out amicably at your death. The smart move is to create a business succession plan that names successor trustees to be in charge of operating the business, if you become incapacitated or die.

A power of attorney document will nominate a fiduciary agent to act on your behalf, if you become incapacitated, but you should also ask your estate planning attorney about creating a trust to provide for the seamless transition of your business at your death to your successor trustees. The transfer of the company to your trust will avoid the hassle of probate and will ensure that your business assets are passed on to your chosen beneficiaries. Timely planning will also preserve your business assets, as advanced tax planning strategies might be implemented to establish specific trusts to minimize the estate tax.

Estate planning may not be on tomorrow’s to do list for young entrepreneurs and business owners. Nonetheless, it’s vital to plan for all that life may bring.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

Why Should I Pair my Business Succession and Estate Planning?

A successful business exit plan can accomplish three important objectives for a business owner: (i) financial security, because the business sale or transfer provides income that the owner and owner’s family will need after the owner’s exit; (ii) the right person where the business owner names his or her successor; and (iii) income-tax minimization.

Likewise, a successful estate plan achieves three important personal goals: (i) financial security for the decedent’s heirs; (ii) the decedent (not the state) chooses who receives his or her estate assets; and (iii) estate-tax minimization.

Business owners will realize that the two processes have the same goals, therefore, they can leverage their time and money and develop their exit plans into the design of their estate plans. The Phoenix Business Journal’s recent article “Which comes first for Arizona business owners: estate planning or exit planning?” explains that considering exit and estate planning together, lets a business owner ask questions to bring their entire picture into focus. Here are some questions to consider:

  1. If a business owner doesn’t leave her business on the planned business exit date, how will she provide her family with the same income stream they would’ve enjoyed if she had?
  2. How can a business owner be certain that her business retains its previously determined value?
  3. Regardless of whether an owner’s exit plan involves transferring part of the business to her children, does her estate plan reflect and implement her wishes, if she doesn’t survive?
  4. If an owner dies before leaving the business, can she be certain that her family will still get the full value of the business?

Another goal of the exit planning process is to protect assets from creditors during an owner’s lifetime and to minimize tax consequences upon a transfer of ownership.

Because planning exits from both business and life are based on the same premises, it can be relatively easy to develop a consistent outcome. There isn’t only one correct answer to the “estate or exit planning” question. A business owner must act on both fronts, since a failure to act in either case creates ongoing issues for owners and for their businesses and families. Consider speaking with an experienced estate planning attorney to discuss your exit planning.

Reference: Phoenix Business Journal (October 8, 2019) “Which comes first for Arizona business owners: estate planning or exit planning?”