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CHAPTER 1
PRETIREMENT NOW — WHAT DOES IT ALL MEAN?
"Begin with the end in mind."
— Stephen R. Covey
PREtirement means being PREpared for the future!
When Sue and Bob, a couple I counseled, recently turned age 65, they went to get their pensions, only to discover their funds had disappeared with the downturn of the market. Despite having lost almost everything in the market, their broker still wanted them to invest their last remaining IRA funds in the stock market (no doubt without explaining the risk). When they questioned this strategy, the broker became defensive. They tried to contact him to ask him specific questions, but he never returned their calls.
Without their pensions, Bob and Sue are facing a very uncertain future. They will probably be eating peanut butter and jelly sandwiches in their golden years and working some part-time jobs. They didn't PREpare for the unexpected.
Don't be caught unaware as Bob and Sue were. This chapter will introduce you to the most common financial situations that will arise at various stages of your life. But first, to get you started, I want you to consider the following questions:
1. Are you ready to handle an unexpected financial crisis?
2. Do you have a will and have you taken steps to protect your assets so they will be distributed according to your wishes?
3. What does Social Security really cover?
4. Have you invested money according to your age and risk tolerance so that you will have a financially secure retirement?
If you haven't spent time managing your finances, making these decisions can seem overwhelming. But the fact is that you will end up paying perhaps a significant sum of money unnecessarily if you don't begin to address these issues now. It's not just that you could lose money by choosing the wrong investment vehicles. You could be paying costly premiums on an insurance policy that doesn't provide the coverage you need or want. By starting now to keep your finances in order, you will be protecting yourself and your family for the future. Don't put it off. Whether you're investing for retirement, setting aside an emergency fund for the unexpected or estate planning, PREpare: be proactive and start today!
A number of documents will help you get started. I give my PREtirement clients comprehensive forms to organize documents, to compile data that goes into revocable living trusts, and to make a step-by-step checklist for actions they need to take following the death of a loved one. Yes, I have given these valuable documents to you, too, in the Appendix. Please remember, though, that these forms are for general use in many situations and may not cover your specific circumstances. If you have any questions or think you want to change the forms significantly, that is probably a sign that you should consult with an estate planning professional.
Responding to Our Biggest Challenges
Challenge 1: Being Part of the Sandwich Generation
What is the Sandwich Generation? It's a relatively new phrase, but one now included in the latest editions of Oxford English Dictionary and Webster's Collegiate Dictionary. It's the demanding time when people are coping simultaneously with their growing children and their aging parents, while thinking about their own retirement. Deciding which has the highest priority can tear a marriage — or an individual — apart.
An estimated 25 percent of the American population is classified as the Sandwich Generation, meaning they are parenting their own children and taking care of their parents at the same time. Some estimates show that nearly two-thirds of the baby boomer generation will be taking care of an elderly parent in the next ten years. As the Sandwich Generation grows, the need to understand aging dynamics and family relationships increases dramatically.
It's not easy to become elderly or a parent to your parent(s). After all, society believes adults should be able to take care of themselves. But as more people live well into their 80s and 90s with their families dispersed across the country, everyone will be involved in some way in elder care — if not today, then tomorrow.
You may take some comfort in knowing that you are not alone. You now have a new role on the stage of life, for which you can never rehearse. Currently, the typical American Sandwich Generation caregiver is in her mid-40s, married, employed and caring for her family and an elderly parent, usually her mother. But, more and more men are finding themselves in a caregiving role. Many are in rural areas, with very limited access to such resources as senior centers, or even Meals on Wheels. Many of these couples face major stress in their finances, emotions, and relationships. What happens to a couple's dreams for slowing down, with a secure retirement and a chance to travel?
Any parent knows that taming an active two-year-old can be a full-time job. But caring for an elderly parent as well can be overwhelming. Mrs. S. was not only taking care of her grandchildren, she was also caring for her mother, a formerly active 75-year-old who had been harmed by toxic side effects of a prescription drug and now needed full-time care. Mrs. S. was so busy that her husband moved out. She had never imagined such problems! With her daughter having to work two jobs to provide for her family, there was no end in sight. Then we talked and helped her find a way to improve the family situation in the short term.
We were able to roll her IRA, which had lost 40 percent in the market, into an equity index annuity with income. That way she was able to have more income and be able to help her daughter. Among other suggestions, I told her whom to contact so her mom could go to the senior center where they have an elder day care program. Now her mom can hang out with other seniors and play bingo at no cost while Mrs. S. works.
Challenge 2: Dealing with an Unexpected Catastrophic Illness and Long Term Care
My 20-year-old niece was a straight-A student, star of her class, attending Boston University on scholarship. A perfect beauty in great health, she was an up-and-coming theater star. One day during vacation, she fell into a coma for no apparent reason. I'll never forget seeing her in the hospital bed, surrounded by her friends singing and holding her hand. It's one of those situations that you cannot imagine until it actually happens to you. There were so many conflicting emotions, so much uncertainty about whether she would ever wake up. It was so hard on everyone to feel so helpless.
And then, in the midst of all that emotion, the practical questions arise: What if she stays in a coma? Who will take care of her? How would her parents be able to care for her if they need to work full-time? How much would health insurance pay — if anything — to cover a convalescent stay? Sadly, my niece died shortly after becoming ill and her parents didn't have to deal with these issues. But how would you PREpare for this kind of situation?
Another client, age 39, was running on a treadmill when his iPod slipped off the machine. He reached down and fell, hitting his head and sustaining a brain injury that has left him incapacitated. His wife works full-time; they have three kids and a mortgage. His insurance doesn't cover the kind of care he needs.
In addition to all the emotions and the financial worries, you need to consider the legal issues when someone is unable to voice their preferences for care. Remember the case of 26-year-old Terri Schiavo of Florida. She certainly didn't anticipate slipping into a coma in 1990 and then having her husband and parents fight over her medical care and her ultimate wishes for the next 15 years.
Planning for medical emergencies is a must for everyone and should include the signing of two important legal documents: a living will and an advance medical directive. Make sure that your directive includes language that satisfies the federal HIPPA (Health Information Privacy and Portability Act) law or your medical records cannot be released to the people you want to make health care decisions for you when you cannot. If you are out of the country on business and your spouse is at home trying to sell the house, or if you are in an accident and expected to fully recover but will be in the hospital for a while, then you will also need a durable power of attorney to allow your spouse or another person of your choice to manage your finances and sign legal documents on your behalf.
And what about long term care? Today, 20 percent of people under age 65 and 70 percent of seniors over age 65 in the U.S. will end up using convalescent care, home health care, custodial care, intermediate care or respite care. Given the statistics, nursing home residency could well be in your own future. And it's unlikely that Medicare or Medicaid will cover these costs. That's why two-thirds of married people and one-half of single people will end up in bankruptcy within 13 weeks of entering a nursing home. Monthly costs average $6,000 to $15,000 without including medical expenses and drugs. With only 10 percent of people over age 65 in the U.S. today having long term care insurance, it's not uncommon for people to go into bankruptcy as they help care for their elderly parents. You may find that you're drawing on your savings, retirement plans, home equity line of credit or credit cards.
If you're young and healthy, you probably can't imagine that you would ever need long term care. Even if your parents are older, you may not want to envision them in less than perfect health. But sticking your head in the sand on this subject is just foolish.
Obviously, you need to do serious — and advance — planning, knowing that you'll be responsible for most of your long term care expenses. To protect your assets when dealing with medical "spend-down," your options include long term care (LTC) insurance, which pays some or all costs of nursing home care for those who qualify, modified endowment life insurance, which is payable to the insured if he or she is still living on the policy's maturity date, or government-funded Medicaid planning, which pays for medical care for low-income individuals. These and other long term care preparations are discussed in more detail in chapter 3.
One of my clients, Frank, was 92 years old. He was in great shape and had just driven from California to Montana where he fixed up and resold mobile homes. He also took care of a neighbor who had dementia. When his wife, Betty, got Alzheimer's, he took care of her for as long as he could until he couldn't lift her anymore. He now visits her in a nursing home every day, but she doesn't recognize him.
One day, he said, "Kris, I was never told Medicare won't cover all your convalescent care in a nursing home and at home." But it doesn't, and Frank learned that through firsthand experience. He's forced to pay for Betty's care by spending down their estate. It took them years of careful saving and "doing without" to end up with enough money to see them through their final years together. Or so they thought. With all the expenses they have to cover for Betty's care, their painstakingly built retirement fund will be depleted in a year.
Frank thought he'd give some of his money away so Betty could get on Medicaid, but there's a five-year "look-back" period. So he'd have to wait for another five years before applying for Medicaid or face misdemeanor charges. That's yet another reason why it's important to do your PREtirement planning now!
Challenge 3: Families and Money
If you are young and in love and don't think that you need to plan for retirement before marriage, think again. For example, many circumstances warrant the consideration of a prenuptial agreement, including being involved in a family-owned business, owning your own business, having a substantial 401(k) or other retirement plan, inheriting assets from your family, owning a residence that will be used as the marital home, or marrying someone who has already accumulated a large amount of debt. A prenuptial agreement can protect what assets you currently have or significant assets that you expect to inherit, and can also protect your assets from the debts your partner acquired before marriage.
If you have minor children, estate planning is a necessity, not just for financial reasons. You will need to name a Guardian to take care of your children (more about this in Chapter 2). Without a plan in place, if both you and the other parent of your children die while the children are still minors, then the children will become wards of the court until a judge can decide with whom the children should live until they become adults. Without a plan in place, control of the minor's inheritance will be taken over by a court-supervised Guardian or Conservator whose fees will be paid for out of the inheritance. Then, depending on the laws of the state where the minor lives, when the child reaches the age of 18 or 21, whatever guardianship funds may remain will be turned over to the young adult, with no guidance, supervision, or accountability. They may be fine — or it may be a disaster. Through proper PREparation, you can make advance decisions that you feel are best in your particular circumstances and write documents that will allow you to express those decisions and preferences.
Challenge 4: Social Security and Taxes
President Franklin Delano Roosevelt set up Social Security in 1935 to help Americans have an income or pension after age 65. While FDR probably didn't intend to have older people taxed on their earnings in their senior years, that's essentially what happens today. Therefore, you should consider some of the following strategies to reduce your taxes.
Giving can reduce taxes. Gifts in any amount between spouses are tax-free. Gifts are never taxed to the donor. Current gift tax laws also permit gifts of $13,000 per year, per individual, to any number of recipients with no tax consequences. Also, any direct payment of medical and education expenses on behalf of another escapes taxation. Making gifts now can reduce the size of your estate and potentially reduce estate taxes upon your death. If the gifts are to charitable institutions, such gifts can also reduce your income taxes in amounts that vary, depending on your income.
Shift your income into tax-exempt securities. You can put money into municipal bonds, for example.
Consider the tax consequences of working or not working. I know that I've said that you may not have enough money saved to live comfortably, especially if you have larger than anticipated medical bills. But you need to consider carefully whether working will end up costing you more money than not working because you'd end up paying taxes and potentially becoming ineligible for certain benefits.
Challenge 5: Estate Planning Decisions and How They Affect Your Family and Friends
What did Heath Ledger, Marilyn Monroe, Michael Jackson, John Wayne, Jacqueline Kennedy Onassis, Princess Diana, and Anna Nicole Smith have in common? They all had lousy wills. Because of this, their deaths left not just emotional turmoil for their friends and families, but also financial uncertainty, legal battles, and expensive, long term, court-ordered supervision of the estates, which drained the assets away from the people whom they wanted to benefit.
These are famous people with lots of money. But no matter your net worth, it's important to have a basic estate plan in place. Such a plan ensures that your family's financial goals are met after you die. This is essential if you have young children or elderly parents whom you support.
Did you know that, without a living trust, your financial legacy could end up in probate, with your estate's assets being controlled and eventually eaten up by lawyers and court fees? On the other hand, with proper planning, you could have a document that ensures your estate passes to your heirs without delays or time- and money-consuming probate. You can name someone you trust to take care of your estate so you know everything you worked to accumulate will transfer at death according to your wishes.
You should take steps to ensure that someone you trust will be able to take care of your personal, health and financial decisions if you are unable to do so. In the absence of any formal estate planning, the court will decide who will take care of you and your financial affairs, and might appoint someone you would not have chosen.
If your financial life is simple and straightforward, you may feel comfortable creating your estate plan by yourself. If you have multiple bank and investment accounts, real estate investments, or a nontraditional family situation, you may well want to consult with a lawyer.
Before you meet with an attorney to draft a will, consider the following.
Taking inventory of your assets is a good place to start. Your assets include your bank and other investment accounts (such as money market or mutual funds), retirement savings, insurance policies, and real estate or business interests. Ask yourself three questions: (1) Whom do you want to inherit your assets? (2) Whom do you want handling your financial affairs if you're ever incapacitated? (3) Whom do you want making medical decisions for you if you become unable to make them for yourself?
(Continues…)
Excerpted from "Ready for Pretirement"
by .
Copyright © 2012 Kris Miller.
Excerpted by permission of Morgan James Publishing.
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