Personal Wealth Law News

An organization called the Economic Policy Institute, which is tied to the American labor movement, has sponsored several papers dealing with improvement to the strength of the Social Security system. Building on Social Security’s Success, by Virginia P. Reno, Guaranteed Retirement Accounts, by Teresa Ghilarducci, and Protecting Social Security’s Beneficiaries, by Nancy J. Altman, deal with various techniques to ensure that Social Security will be available for us and our children. Whether the particular proposals made are the correct answer to ensuring the future of Social Security, the three papers make two important points: first, that Social Security has been for many years an essential safety net for older Americans, permitting them to live dignified lives in retirement; and, second, that very minor changes in funding methods can have a significant effect on the future solvency of Social Security. This issue has been dealt with in the past, and can be faced in the future without undue hardship. It’s clear that Social Security is not irretrievably broken and in need of replacement. What is needed is an intelligent conversation about changes that can be made to ensure the system’s long term health. The papers can be accessed at www.epi.org. 

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We have frequently heard people explain their plan to accumulate retirement assets as follows: I’m putting all of my money into my home. Real estate is appreciating much faster than ordinary investments. When I retire, I’ll sell my large home for a huge profit, move to a smaller, less expensive home, and live on the difference. This probably worked for a few people, but, in most cases, people who sold their large homes bought a smaller home that ended up costing them as much or more. Further, by making one asset the basis for retirement saving, they violated an important rule of investing: diversification. Now, we see why diversification is important and using your home as your principal investment asset is a mistake. Home prices have stopped rising in most areas of the country, and we have seen significant declines in real estate values. And there is no reason to think this will not continue for some time in the future. So the rate of return on residential real estate will be negligible or negative for the next several years. If those are the years in which you plan to retire, you’ll face a serious problem.

The fact is, just watching your home appreciate was too easy a way of building a retirement nest egg, and, like most things that are too easy, it usually doesn’t work.    

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An interesting column, dealing with ethics in everyday situations, appears each Sunday in the New York Times magazine. This week’s (November 11, 2007) edition includes a story about two children with different circumstances in life. One has done reasonably well financially, while the other has chosen a career path that has necessitated continuing financial assistance from parents. The more affluent child asks if this should be mentioned to the parents while they do their estate planning, with a view to “evening out” for the financial assistance provided during life. That is, should children be treated equally even if they don’t have equal financial success in life? The suggestion made by the column writer is to mention it, but don’t insist. What parents do with their wealth is their own business. Some choose the path of equality; others take into account different life circumstances of their children. No decision is wrong. It’s important, though, that parents make a decision and then explain it to their children.

 Since this is November 11, it’s important to remember that our ability to enjoy our lives and the opportunities we have to help our children are the result of the sacrifices made by veterans. Thanks to all of them.

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There are many mistakes that people make in plannning their estates, but we have a candidate for the all-time worst mistake. It doesn’t involve federal estate tax planning or the appropriate beneficiaries for retirement benefits. It’s this simple: the failure to decide what to do with your estate and to tell family members what you want. We have seen an increasing number of family disputes that arose because parents left vague instructions as to the disposition of personal property and other assets. Rather than sit down with children and tell them what should happen after they are gone, too many parents say “I’ll be gone; let the kids worry about it.” This is a terrible attitude, because it so frequently leads to squabbles about what parents wanted, and even who was the favorite. Parents would avoid much expense and heartache for their children if they left detailed instructions and then told their children about those instructions, long before the parents became unable, for whatever reason, to express their wishes.

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In a previous post, we described the new rules that permit beneficiaries of death benefits from qualified retirement plans to roll them over to IRAs, a technique that was formerly available only to spouses. One problem with this technique was that the sponsor of the plan had to permit such rollovers. After much criticism, the IRS has now reversed its position and announced that non-spouse rollovers, while remaining optional for 2007, will be mandatory in 2008 and later years.

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