The Cat Who Was Wronged

We’ve discussed pet trusts before, but here is a tale guaranteed to make your fur stand on end, if you’re a cat. An older woman in a nursing home wanted to ensure that her cat was well taken care of after she was gone, so she planned to set up a $450,000 trust fund for its benefit. Not Leona Helmsley money, but probably sufficient. Some “friends” offered to care for the cat, and are now accused of having used that relationship to loot the funds that were to be used for Purdy Cat, as it was called. The lesson here is to be careful to whom you entrust funds to care for your animals. The safest course is to have the funds held by someone other than the caregiver. It also provides evidence of the serious problem of elder financial abuse that we see occurring in the aging population.

Assuring Pension Income

A widely observed theme when talking about retirement is the disappearance of assured sources of income, in the form of defined benefit pension plans.  Many corporations have terminated their pension plans, which remain the norm only in government service and unionized industries. Whether or not that was a good idea, the financial aspects of retirement have changed irrevocably. Most people who participate in retirement plans now do so through 401(k) plans, which offer no assurance of a level of income in retirement. Now, many are asking if it’s possible to replicate the defined benefit pension plans and their guaranteed level of income through the purchase of annuities. This has, not surprisingly, been a theme for people who sell annuities; but it’s also a topic discussed extensively at federal government agencies concerned with retirement. It’s certainly worth considering, but as with every other financial product, it’s important to know what you’re buying: what are the terms, guarantees, etc. One of the knocks against annuities in the past has been the high level of fees associated with them. Like life insurance, the subject of annuities is a complex one, and I would be concerned about buying an annuity without independent advice or at least some very extensive explanation. For people without a high level of financial acumen, this argues for consulting a financial planner whose compensation is not dependent on the purchase of a product. So, annuities are worth some inquiry, but either the buyer or an independent financial planner needs to understand what’s being bought.

Another Example of Lessr Known but Valuable Social Security Benefit

One of my partners discussed this technique with me and others, went ahead with it, and it works!  This is what he did: he and his wife have both reached age 66.  He’s going to continue to work and will likely delay receipt of his Social Security benefits until age 70.  He filed for Social Security benefits and then asked that his benefits be suspended; that is, not paid to him now.  Then, his wife filed to receive spousal benefits, about one half of the benefit he would have received if he had not suspended his benefits.  Now, his wife will receive that benefit and can also wait until a later date to begin receiving her own benefits.  Husband and wife met with Social Security representatives to review the transaction, it was found to be correct, and payments will begin shortly.  This is a good example of the importance of checking various types of government and non-government programs to see what options exist.

IRS Announcement of Change in IRA Rollover Rules

In Announcement 2014-15, the Internal Revenue Service restated its position on the number of IRA rollovers permitted in a single year. The U.S. Tax Court, in Bobrow v. Comissioner, T.C. Memo 2014-21, reviewed the statutory rule that only one IRA rollover is permitted in a single twelve month period, deciding that all IRAs of an individual are aggregated in determining if that rule has been broken. This was a surprise to many, because the IRS publication on IRAs, Publication 590, states that the rule is applied on an IRA by IRA basis. Because of this change in position, the Announcement stated that the IRS would not apply the new interpretation of the rule to rollovers involving an IRA distribution occurring before January 1, 2015. These rules do not apply to direct custodian to custodian IRA transfers, because they are not considered rollovers.

Cat Food or Cruises for Retirement

This is the title of an article on the website Pensionriskmatters, emphasizing the need to start saving for retirement early in your career. It’s hyperbole, but the article cites several websites worth a visit: The International Foundation for Employee Benefit Plans includes educational materials on its website, one titled “Your Retirement Picture”. You can get a link to a Smart Money Retirement Calculator, although, as I’ve said before, these are general tools and not a substitute for individual planning. You might also check MyMoney.Gov, which is a US government website on financial matters; and the Jump$tart Coalition for Personal Financial Literacy.

On the same topic, the Employee Benefit Research Institute has conducted a survey on the savings accumulated by retirees. The survey is not classified by age of retirees, and its conclusions are based on the people who responded to the survey, but it’s interesting anyway: as of 2014, 29% of respondents had less than $1,000 in savings (not counting the value of defined benefit plans), while 17% had $250,000 or more. Those who participated in a retirement plan were definitely skewed toward the upper end of amounts accumulated, which illustrates an important but basic point: participating in programs where you automatically put money aside for retirement gives a definite advantage over developing that discipline outside of a retirement plan. Or, as I tell partners in my firm, if you aren’t saving the maximum through our 401(k) plan, you’re saving nothing outside the plan.

A Roundup of Retirement Plan News

A couple of interesting discussions in recent retirement planning literature:

  • The 100 largest public pension systems managed a record 3.19 trillion dollars at the end of December, 2013, boosted by strong stock market returns. In addition to numerous planning ideas to curb the growing cost of public pensions, careful investment strategies are helping to resolve this funding shortfall. Unlike some hysterical commentators, I don’t believe there’s a crisis. There’s a problem, that needs to be addressed and not kicked down the road.
  • On a similar note, an article in a publication issued by State Street Global Advisors measures the effectivess of retirement systems and an index of happiness in the US and numerous foreign countries. The most effective retirement system was found to be that of Denmark, which was also the happiest nation (not melancholy, Hamlet notwithstanding). The survey found a correlation between the effectiveness of retirement systems and happiness, which comes as no surprise.
  • An article in the same online publication warns retirees about too conservative and too aggressive investment of retirement assets. Those who are too conservative are taking a long term risk to avoid short term declines; while those who are too aggresive run the risk of market declines wiping out their assets early in the retirement years.
  • Are target date funds the answer? An article in asks: can you set it and forget it? (a reference to that rotisserie advertised on TV for many years). The answer, of course, is no. All target date funds are not created equal. They can have different glide paths, which is the rate at which asset allocations become more conservative over time. The Department of Labor’s Employee Benefits Security Administration issued  a “TDF Tips Sheet” in February 2013, which you can access through the EBSA website:

ABA Webinar on Retirement Offers Helpful Advice

I watched and heard a webinar presented by several groups within the American Bar Association today, dealing with the topics of estate planning, financial planning, after-retirement careers and selling a practice. The webinar was free and if you’re an ABA member, you should be able to access the replay of the webinar. Here’s an interesting calculation that was quoted during the webinar, from a financial writer. It concerns how you can determine if you have enough assets or are saving enough for a comfortable retirement. Multiply your age by your annual income and divide by ten. That should be your net worth. If your actual net worth is lower, you should be saving more. It’s a number, but I’m skeptical of calculations that treat everyone’s situation as if it were the same. Are you helping aged parents? Are your children still in need of help, or does any of them have special needs? What is the cost of living where you plan to live in retirement? Can you continue to earn a modest income in retirement? Nevertheless, I find it interesting to do calculations like the one quoted, if only to serve as a starting point for more serious planning. But the advice remains the same: save more, spend less. To that, I would add, have as much fun as you can within those constraints.

More opinions about Roth IRAs

An article on the website The Motley Fool offers three reasons to use or convert to a Roth IRA.

The first is the ability to get the money whenever you want, without taxes or penalties. But that’s a terrible reason: to be able to spend your retirement money whenever you want. Maybe it shouldn’t be sow easy to raid the cookie jar.

The second: there are no required minimum distributions during the owner’s lifetime. That’s true, but it’s of value only for those people who will not need the IRA money during their retirement years. Most of us will, so the need to take out a minimum each year isn’t that much of a burden, especially when compared to the upfront tax cost of conversion.

Third: you can leave your heirs a tax-free inheritance. Also true, but is that a reason to convert to a Roth IRA and pay taxes now? As the writer suggests, not if your heirs will be in a lower tax bracket than the IRA owner. How can anyone possibly know that?

Deciding whether conversion to a Roth IRA makes sense is a decision unique to every individual. If you believe you will never need a chunk of your traditional IRA money during retirement, conversion to a Roth IRA might make sense. But it’s a decision to make after considering many things about the owner, the owner’s spouse and the owner’s children and grandchildren. You can’t make decisions based on generalized articles you read or talking heads on television. And, as if you didn’t know it, avoid taking tax advice from people who make money dependent on your choice.

More advice on a quality retirement

There do seem to be an abundance of articles on retirement issues these days. As usual, credit the needs and demands of the early baby boomers.

An article in the ABA Journal offers advice from the Chair of the National Association of Personal Financial Advisors: set goals for your financial independence; pay off debt; achieve a good credit rating; live within your means; resist the temptation to splurge; save more; floss daily. (I added the last one.)

An other article in the same journal offers advice applicable at various ages on the road to retirement: set up an emergency fund, 3 to 12 months’ living expenses; pay off debts as quickly as you can; save for retirement all through your career; keep track of your level of savings; take advantage of permitted catch-up contributions to qualified plans; when you’re retired, stay on budget if you can; make sure you consider disability and long term care insurance; learn about Medicare benefits; finally, and maybe most important, decide what you’re going to do when you retire- work part-time, refocus to another kind of work, develop avocations, or play golf all day.

Keys to early retirement

A recent article in Market Watch lists seven things to do if you want to retire early:

1. assess your current financial situation
2. keep track of your spending.
3. save more
4. invest wisely
5. resist the pressure to plan big ticket spending
6. live simply
7. don’t get sidetracked by pressure to keep up with others or losing sight of your retirement goals

Actually, there are just two things to do to retire early, or to retire comfortably, even if it’s beyond early:

1. save more
2. spend less

Easy to say, but if you keep in mind that those rules are the key to retirement well-being, you can achieve your goals.