Moynihan Lyons PC

Looking at the Reality of Retirement Expenditures

What is the 4% rule and is it really a good plan to follow?

Deciding how much money you need for retirement is never easy and usually depends on your plans for those years. However, it may be helpful to take a look at the various myths that have accumulated over the years, according to The New York Times in “The Myth of Steady Retirement Spending, and Why Reality May Cost Less.”

Sooner or later they learn about the 4% rule, a popular rule that says if you invest in a mix of 40% bonds and 60% stocks, your retirement will be fine if you just spend 4% of your savings every year. Your nest egg will stay intact, and you will be financially fine for three decades. That’s assuming you retire at age 65 with $1 million and you withdraw $40,000 every year until you run out of money at age 95. It also assumes that you’ll supplement your own retirement savings with money from Social Security and any other income sources. If you need any more than that, cut your spending or keep working.

Could it be that simple? No, not really.

The truth is, retirees don’t always spend the same amount of money every single year. Having to keep working for several years after you would have liked to retire, just so you can get to that magic $1 million number may not be necessary for everyone.

Some retirees find that they spend a lot more in the early years of their retirement. They may need to help their own aging parents, or adult children. Others spend big on travel, seeing the world while they still have their health and mobility. However, those expenses usually slow down as we age.

There are different phases of spending in retirement, just as there are different phases of spending in your younger years. Statistics from the Bureau of Labor Statistics confirm this spending decline. The mean spending for households headed by people ages 55 to 64 in 2017 was $65,000. For those between the ages of 65 to 74, spending declined to $55,000. After 75, it dropped to $42,000. That is with housing costs remaining the same and health care costs increasing. The categories of entertainment, transportation, clothing, food and drink all dropped.

A study by Morningstar contends that retirement spending resembles a smile: starting off high, then declining, then increasing towards the end of life. The increases at the end of life are directly related to health care costs. However, generally speaking, retirees in their 70s and 80s tend to spend less.

Whether you follow the 4% rule are not, there are always unexpected costs to be considered in retirement. Your retirement may last more than two or three decades.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: The New York Times (Nov. 29, 2018) “The Myth of Steady Retirement Spending, and Why Reality May Cost Less”

Location Can Make a Big Difference in Retirement

10 states that deserve your consideration, as you look toward your retirement years.

If you are thinking of relocation when planning for retirement, you might give some consideration to the states that are most retirement friendly, especially when it comes to taxes and finances, according to Kiplinger’s Personal Finance in  “10 Most Tax-Friendly States for Retirees, 2018.”

Most of the states listed below exempt at least part of retirement income, like pensions and withdrawals from tax-deferred retirement plans. They also have low property taxes, which matters more now that the Tax Cuts and Jobs Act limits the amount that can be deducted in state and local taxes on federal returns to $10,000 a year.

   10. Georgia. The Peach State’s low tax climate is attracting retirees by the bushel. How’s this sound: Not only is Social Security exempt from state taxes, so is up to $35,000 of most types of retirement income for those age 62-64. For those 65 and older, the exemption is $65,000 per taxpayer, or $130,000 per couple. There’s no state estate tax and no inheritance tax.

   9.  Kentucky. The Bluegrass State’s riding high with an exemption for Social Security taxes, plus up to $31,110 per person for a wide variety of retirement income. There is an additional exclusion for qualified military, civil service and state and local government pensions. Kentucky also has a homestead exemption on the assessed value of a qualifying single-unit property, which is assessed every two years, according to the cost-of-living index.

  8. New Hampshire. The Granite State rocks taxes: there’s no state income tax, no estate or inheritance tax and no taxes on Social Security benefits. There’s also no sales tax. There is a 5% tax on dividend interest, but a $1,200 exemption is available for residents 65 or older.

  7.  Nevada. Hit the tax jackpot in this state. There are no taxes on groceries and the average combined state and local sales tax rate is 8.14%. No state income tax, no estate tax, no inheritance tax. You can cash in your retirement funds—tax free.

  6.  Pennsylvania. The Keystone State exempts most retirement income from state taxes. Social Security benefits, public and private pensions and distributions from 401(k) and IRA plans are tax free. There are often high local income taxes, but they only apply to earned income. However, there is a state inheritance tax, calculated as a percentage of the value of the estate transferred to beneficiaries and there are different rates, depending on the relationship of the heir to the decedent and the decedent’s date of death.

  5.  Florida. The Sunshine State is chock full of retirees who come for the climate and enjoy the state’s tax policies. There are no state income taxes, no estate tax and no inheritance tax. The average combined state and local tax rate is 6.8%.

  4.  Mississippi. The Magnolia state’s tax policies are in full flower, with no state income tax on Social Security benefits, IRA and 401(k) plan withdrawals, income from public and private pensions and other types of qualified retirement income. Starting in 2019, the first $1,000 of taxable income is except from the 3% rate, and by 2022, the first $5,000 will be except.

  3.  South Dakota. No state income tax, no estate tax and no inheritance tax make the Mount Rushmore state a friendly place for retirees. Social Security benefits and other retirement income enjoys a tax-free ride. Sales taxes are low, but most everything is taxed, including groceries, non-prescription drugs and many services. South Dakota started collecting tax from out-of-state retailers late this year.

  2.  Wyoming. Abundant tax revenue from oil and mineral rights makes Wyoming one of the lowest taxed states in the nation. There’s no income tax, sales taxes are low and the median property tax on the median home value of $199,000, is $1,223, the ninth-lowest in the country.

  1.  Alaska. Okay, we know that not many readers are packing up to move to this rugged state. However, if you did, you’d enjoy no state income tax, so everything from Social Security benefits to retirement account withdrawals to investment gains are tax free. There’s no state sales tax, and in Anchorage and Fairbanks, there are no local sales taxes. Once you’ve established residency for at least a year, you get a dividend check from the state’s oil wealth savings accounts.

Reference: Kiplinger’s Personal Finance (Nov. 29, 2018) “10 Most Tax-Friendly States for Retirees, 2018”

Deadly Sins Can Weaken Your Retirement Plans

Many have faced these sins, so it might be a good idea to check them out before they can surface.

You may have every intention in the world of planning and financing your retirement. However, it is possible that you will run up against some of the common deadly sins that have been known to block other people from reaching their goals, according to The Reader’s Digest in “The 7 Deadly Sins of Retirement Planning.”

Look at these and see if you recognize any potential problems that could be your stumbling block.

Pride. Sometimes we think retirement planning should be simple, and when it gets complicated, our knee-jerk reaction is to be prideful and refuse to allow anyone to help us. If you’re not a professional retirement planner, how will you know what to watch out for? You won’t. A mistake could make the difference between a heavenly retirement and one that is delayed or never arrives. Swallow that pride about the difficulties of building a portfolio or investment strategy and be open to getting help.

Envy. If you spend 30 years trying to keep up with the Jones’ extravagant spending, who knows if you’ll ever be able to retire? Just because a neighbor, friend or relative spends on new luxury cars, or sends their kids to pricey private schools, doesn’t mean you need to do that, unless you can afford to—all while saving for retirement. Live below your means and save for the future.

Wrath. This is a dangerous emotion. If you’re angry about a situation at work, for instance, and you leave without good financial planning, you could put your retirement savings at risk. It often takes longer than you think to find a new job. Leaving voluntarily makes you ineligible for unemployment benefits. Paying for COBRA insurance is usually a lot more expensive than an employee group benefit plan. Hate your job/boss/co-workers? Wait until you have a new job lined up before leaving.

Greed. Chasing investment trends or listening to your brother-in-law’s latest get-rich quick scheme rarely leads to success. A professional advisor with a long-term plan will almost always yield a better return.

Sloth. Lazy about retirement planning? You have to do the planning, the savings, track your expenses and keep an eye on your money and your taxes. Have you made the effort to have a will, power of attorney and health care directive made for you and your spouse with an estate planning attorney? A missed step could doom your retirement and create a crisis for your family.

Gluttony. This is kind of like greed’s younger, sloppier cousin. Are you being greedy about making money, to the detriment of any other goals? A goal-oriented investment plan will serve you better.

Lust. Are you yearning for a billionaire’s lifestyle, with an income that is more middle class? Leave the lust for the jets, diamonds and furs behind and focus instead on a realistic plan.

Reference: The Reader’s Digest (Nov. 2018) “The 7 Deadly Sins of Retirement Planning”

Your Will Is Not the Only ‘Must-Have’ in Estate Planning

A will is a good place to start. However, it is best to create a complete protection.

So, you have a will. Is that the end of your estate planning? Not by a long shot because a will is only one tool that is needed to create an estate plan that protects you and your loved ones, according to the Augusta Free Press in “5 estate planning must-haves.”

1—Wills and Trusts. Your will directs the distribution of your assets. Without a will, the court will determine who gets your possessions, real property and any other assets, following the laws of your state. Depending on your situation, you and your heirs may benefit from setting up trusts to protect your assets from the probate process, maintain your privacy and possibly avoid some taxes. Keep in mind that if the will or trust is not created properly or doesn’t follow your state’s laws, it could be challenged or deemed invalid. Work with an experienced estate planning attorney to protect your family.

2—Beneficiaries. Many of your accounts—bank accounts, investment accounts, retirement accounts, insurance policies—may already have a named beneficiary, who will inherit the account upon your death. However, if you have not updated those names recently, you may find the wrong person inheriting your assets. Once that occurs, there is no legal means of transferring the assets to another person. If there is no contingent beneficiary, the court may make that decision.

3—Letter of Intent. It must be said that this is not a legally binding document. However, the information it could provide to your loved ones might be very helpful as they move through the process of settling your estate. It can explain why you structured your asset distribution the way you did, why you would want a given family heirloom passed to a specific family member, or what you would like to have happen at your funeral. If you are not able to discuss these matters in a face-to-face conversation with your loved ones, this is a useful alternative.

4—Power of Attorney. Planning for incapacity is an important part of estate planning. If you become incapacitated, you’ll need to have already given someone the power to manage your financial affairs. If you do not have a power of attorney, your family will need to turn to the court system, which will create delays and added stress. You’ll also want to have a healthcare power of attorney in place.

5—Legal Advice. Estate planning laws are governed by your state of residence. Your best option is to make an appointment with a local estate planning attorney to learn whether there are any other documents and plans you need to put into place. Some law firms provide a means of documenting assets to ensure that, at the time of death, your family is not embarking on a scavenger hunt to identify assets. In certain states, you can assign a funeral representative to make sure your funeral, burial or cremation and memorial service wishes are carried out. Your attorney will know what you and your family need.

Reference: Augusta Free Press (Nov. 27, 2018) “5 estate planning must-haves”

Include Fun in Your Retirement

Think ahead about what you are going to enjoy during the retirement years.

Many people are very good at planning for retirement. However, they sometimes forget to include the change of lifestyle that comes without a work schedule, according to Next Avenue in “How to Keep Retirement From Being A Drag.”

Most people plan for the financial and legal aspects of retirement: how much they need to save, how much of a bite inflation will take, the cost of healthcare, long-term healthcare, etc. But, what about fun?

Work is where many people get their sense of purpose and their identity. Talk to any working parent who steps out of their career trajectory for a few years. It’s a similar shift, except there is no smiling cooing baby to keep you busy. If you don’t have projects, meetings, or deadlines, or the community of the workplace, what defines you?

This sense of being adrift occurs to people regardless of their income level and may be even more intense for successful people who are used to running a business, commandeering a company or managing a busy desk.

Here are some suggestions for making sure your life during retirement is enjoyable and has purpose and meaning.

Set your alarm and have a reason to get up every day. After you’ve taken the big trip, spent time with your grandchildren and organized your closets, what’s next? It’s time for you now, time to do things that you’ve always wanted to but for reasons of time, could not. That might mean taking up a sport, expanding a hobby, becoming an active volunteer or returning to school to explore a subject you love?

Consider yourself to be on a fixed salary. The transition from paycheck to drawing down savings can be unnerving. You’re sitting on a huge pile of money—but it must last two or even three decades. Create a post-retirement budget before you retire and don’t forget to include healthcare, taxes and potential emergencies. Also consider which assets to draw from and in what order. Do you use your 401(k) funds first, or start with cash? Avoid this retirement rookie mistake: taking out too much cash in the initial stage of retirement.

Talk with your partner and family. Will you both retire at the same time? If one is still working and the other is not, how will you divide up chores? If your work schedules meant you didn’t see each other for more than a few minutes during the week, spending 24/7 together is a big change. Do you expect to spend all your time together, or will there be some “me” time? Will your children expect you to babysit on a regular basis?

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances, including your retirement years.

Reference: Next Avenue (Nov. 29, 2018) “How to Keep Retirement From Being A Drag”

Snowbirds May Want to Consider a Checklist

Heading to a warm climate is a good idea but perhaps it is best to consider legal issues before leaving.

If you are a retiree who heads south after the holidays, it might be wise to create a checklist of at least four personal legal business items, according to LimaOhio.com in “Extra checklist before heading south for the winter.”

First, make sure that your general/financial power of attorney and healthcare power of attorney documents have been updated. Does your family have copies of these documents? Or do they have 24/7 access through a portal from your estate planning law firm?

Some law firms provide laminated cards for clients to give to family and friends that gives the holders of the cards access to these powers, while clients are out of town. Others are starting to use encrypted thumb drives, so that clients have documents wherever they go. Make sure you have these documents and that the people who will need them, either have them or can get them in a moment’s notice.

Second, review your living will with your estate planning attorney. Update them if changes need to be made and get copies to your children and/or friends.

Third, make sure that your last will and testament is updated. Have you had any big changes in your life since the last time it was reviewed? Marriages, deaths, divorces, births and adoptions are the typical “trigger” events that signal a need for review. Who will have that document? If your estate planning attorney maintains original copies for clients, then make sure to have another original on your person or safely secured with a loved one.

Lastly, and this takes a little time but is well worth doing, create a list of all your assets. Make sure they are properly titled for your situation. Should you have all your bank accounts become Payable on Death to your spouse? When was the last time you checked your beneficiary designations? Chances are good there are beneficiary designations on your bank, investment, and retirement accounts and on your life insurance policies. Wherever you have a beneficiary designation, you should also have a contingency beneficiary.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include a trip in a southerly direction.

Reference: LimaOhio.com (Oct. 13, 2018) “Extra checklist before heading south for the winter”

Enjoy Being on Hold? Call Social Security

However, the long wait may be reduced, as the agency attempts to work on backlog.

For many years, if you wanted to get an answer from the Social Security Administration you had to have a lot of patience but that problem is likely to have some relief, according to The New York Times in “Have a Social Security Question? Please Hold.”

Part of the problem in recent years, has been an eight-year reduction in the agency’s operating budget. Congress has reduced the agency’s budget 9% in inflation-adjusted terms since 2010. This is happening at the same time that the number of Americans receiving benefits from Social Security is on the rise—by 17%, according to Social Security Administration data.

The good news is that the agency’s budget is now increasing, and it hopes to start decreasing the backlogs. It is hard at work modernizing the agency’s use of technology, addressing customer service needs and enhancing online options for the public.

Congress finally started to reverse the downward funding trend in March. Lawmakers ignored the administration’s request for a small increase in fiscal 2018 and instead, raised the administrative budget by 4.6%—$480 million. In September, Congress ignored the administration’s request for a $400 million cut and instead, gave Social Security a $40 million increase.

That means that in fiscal 2019, the agency’s operating budget will be $11.1 billion.

This government agency touches the lives of millions of Americans and its ability to function efficiently is extremely important to people of all ages. In fiscal 2019, the Social Security Administration projects payments of $1.1 trillion to about 69 million recipients of disability benefits, Supplemental Security, Income and Social Security retirement benefits.

As for calls from Americans with questions, Social Security reports that it will serve about 43 million visitors at the remaining field offices and handle as many as 75 million calls to the toll-free telephone line.

As the nation ages, those numbers are only going to increase. Over the coming decades, the agency expects the number of beneficiaries to soar by 45%.

The backlog in appeals cases for Social Security Disability Insurance has grown in the years that the agency’s budget was being cut. The average time to wait for a hearing decision on an appeal in fiscal 2018 was 591 days. That was 39% longer than in 2010, although a slight decrease from 2017.

Reference: The New York Times (Nov. 21, 2018) “Have a Social Security Question? Please Hold”

Widows Face Multiple Challenges Including Finances

There are many difficulties facing women, if their spouse passes away and finances is high on the list.

 Very few women are in charge of their financial lives as married women, so if they are widowed they can find themselves facing an uphill battle to stabilize. Among those challenges they may be facing is becoming knowledgeable about the family finances, according to Press & Guide in “Financial planning can help ease impact, stress of widowhood, study shows.”

The article is based on a Merrill Lynch and Age Wave study revealing that only 14% of 3,300 respondents were making financial decisions on their own, before their spouses passed away.

Widows are tackling major challenges in the days and weeks after the loss of a loved one. That includes everything from funeral costs, mortgage or rent payments, other costs of running a household and for many, medical costs. With nearly half of those in the study reporting a household income drop of 50% or more after the death of a spouse, that is an enormous burden to take on during a time of great grief and upheaval.

The women are also facing the tasks of juggling Social Security, pensions, life insurance and making sure that their late spouse’s retirement accounts are all correctly transferred into their names.

There is often a lack of preparation for this situation. Many are simply not prepared for how complicated it is to deal with the loss of a spouse.

The study reports that couples who plan for this situation, have their level of worry cut in half. Only 38% of the widows in the study who had conducted financial planning, worried about not being able to support themselves immediately after the death of their spouse. That compares to 64% of widows who had not planned at all.

Widowers, men whose wives have passed, face unique challenges. If their wives pass first, they may be faced with taking on their own caregiving. Statistically, women outlive men, so the widowers have to adjust to losing a caregiver. There may be new financial costs they would not have had to bear, if their wives were still alive.

The first step: meet with an estate planning attorney. Make sure that a will and power of attorney are created, along with any other necessary planning documents. Both spouses should be familiar with all accounts, and both names should be on the accounts and all deeds. Don’t forget to organize all important papers in a file drawer at home or in a safe deposit box. Know where everything is and how to access it.

Reference: Press & Guide (Nov. 19, 2018) “Financial planning can help ease impact, stress of widowhood, study shows”

Disorganized Digital Assets? Your Heirs May Face Some Problems

Your heirs may find themselves at the mercy of thieves if assets are not protected.

Your heirs may find themselves facing some problems that are difficult to solve, if your digital assets are not organized, according to the White Mountain Independent in “Is your ‘digital estate’ in order?” Among the problems, is the chance of hackers trying to obtain your assets.

Here is a list of your personal accounts that may be online:

• Financial accounts: banking, brokerage, bill-paying utilities;
• Virtual property: credit card points, frequent flyer miles, cryptocurrency;
• Business accounts: eBay, Amazon, Etsy; stock photo accounts;
• Email accounts: Gmail, Outlook, Yahoo;
• Social network: Facebook, Twitter, LinkedIn, Instagram; and
• Online digital storage: Dropbox, Google Drive, iCloud.

Those are many assets to protect. Where do you start?

First, create an inventory. Use the categories above or create your own. However, you should make it organized.

Document your wishes for how you want your digital assets to be managed. If you don’t specify this, you may be leaving a wide-open arena for long legal battles. Your heirs and beneficiaries may never gain access to them. Hackers might go after them and use your identity. Your heirs may also have to engage in an expensive and protracted battle with a social media giant with costs eating into their inheritance.

Name a digital executor in your will. This is a relatively new area, but you can name a person to be your digital executor. Not all states recognize this position, so you’ll want to speak with a local estate planning attorney to find out what the laws are in your state.

You will also need to go through all of your online accounts and learn what each platform requires, in the instance of the account owner’s death.

Review your plans, especially as you add new digital assets.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances, including your digital accounts.

Reference: White Mountain Independent (Oct. 26, 2018) “Is your ‘digital estate’ in order?”

IRS Proposal: No Clawback on Huge Gifts

IRS proposed ruling means wealthy can pass on considerable wealth tax free to next generations.

The IRS has issued a proposal on the new tax laws that clears up any concern of a retroactive tax on lifetime gifts that can include millions of dollars, according to Forbes’ in “IRS Hands The Rich Certainty On Trump Estate Tax Sweetener: No Clawback On Huge Gifts.”

The Treasury has confirmed that this is a “use it or lose it” situation. This is important not only to avoid the 40% gift and estate tax, but also the 40% generation skipping transfer tax exception. It preserves the $11 million-plus exemption, not only for children but also for grandchildren and several generations to come.

Before the new tax laws—in 2017—the estate and gift tax exemption were a mere $5.49 million. It’s taken a giant leap: $11.4 million per individual and a whopping $22.8 million for married couples for 2019.

The Tax Cuts and Jobs Act (TCJA) doubled the $5 million base to $10 million through the end of 2025. Estate planning attorneys have encouraged clients to make huge lifetime gifts, by using that extra $5 million exemption.

The concern was that if you read the entire law, word-for-word, based on the tax computations, you’d get a nasty surprise. Legally, the question was whether the increased exemption was a “loan” to the taxpayer until 2025, when exemptions return to prior levels, or if it was permanently gifted.

Let’s say you made a $9 million gift in 2018, but you died in 2026 after the exemption levels reverted to $5 million. Your heirs would be in for an unpleasant tax surprise, owing taxes on that extra $4 million gift.

However, the new rules from the IRS now say that the full $9 million is tax exempt—forever.

Congress spotted the problem and gave the IRS authority in the TCJA to solve the problem administratively, which is exactly what the IRS has done.

A hearing is scheduled in March 2019 to review the IRS plan.

Reference: Forbes (Nov. 21, 2018) “IRS Hands The Rich Certainty On Trump Estate Tax Sweetener: No Clawback On Huge Gifts”