Financial Planning for the Second Half of Your Life

Dr. Barbara O’Neill, CFP®, CFCS, CPFFEExtension Specialist, Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

Personal Introduction

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• FCS professional for 42 years (with RCE-38 years)

• CFP® for 32 years and CPFFE since 2012

• Extension Specialist in Financial Resource Management (former county FCS Agent)

• Financial educator and author

• In the second half of financial life

Age 50 (+/- 5 to 10 Years)• Financial “halftime” or “intermission”

• Think about past accomplishments

• Think about what you still want to do

• New challenges and decisions

• Increased interest in “giving something back” to family, community, charities

• Many people want to simplify/downsize

No More Excuses !!!

• I don’t have enough knowledge

• I don’t have enough time

• I don’t have enough money

• I don’t have anyone to help me

• I don’t want to make a mistake

Common Financial Errors of Older Adults:

• Changing investment strategy drastically on a specific date (e.g., 65th birthday)

• “Forgetting” about effects of inflation

– 3.5% inflation will double costs in 20 years

• Relying too heavily on financial salespeople

• Assuming that estate planning is for “the rich”

• Retiring without considering health coverage

• Not planning for long-term care expenses

• Improper asset withdrawals

Increased Financial Complexity and Major Decisions

• When to start Social Security benefits

• When to retire: how much money is “enough”?

• Where to live in retirement

• Taxation of SS and pension benefits; estimated tax payments

• Purchase of health insurance

• Long-term care planning

• Required minimum distributions

• Estate planning documents

Research: Low Retirement Confidence• Americans’ confidence in their ability to retire comfortably is low

• Only 21% are “very confident”

• 54% of workers have savings and investments (excluding home & DB pension) < $25,000 (includes 26% with < $1,000)

• 37% of workers expect to retire after age 65; 46% of retirees left the workforce earlier than planned

• Less than half (48%) of workers have tried to calculate what they need to save for retirement

2016 Retirement Confidence Survey (RCS): https://www.ebri.org/pdf/surveys/rcs/2016/EBRI_IB_422.Mar16.RCS.pdf

Research: Increased Life Expectancy• More than half of people >45 underestimate how long they will live

• Can result in inadequate provision for retirement need3

Reference (Financial Advisor): http://www.fa-mag.com/news/society-of-actuaries-say-people-underestimate-their-life-spans--11480.html

• Average life expectancy for man reaching age 65 today: Age 83• Average life expectancy for woman reaching age 65 today: Age 85

Reference (Social Security): http://www.ssa.gov/planners/lifeexpectancy.htm

BEST to use life expectancy calculators with lifestyle questions: http://www.msrs.state.mn.us/info/Age_Cal.htmlshttp://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html

Research: Health Care Costs• Even with Medicare benefits, a 65-year old couple retiring in

2012 will spend at least $240,000 on health care costs during their retirement

Reference (Wall Street Journal/Fidelity Investments): http://online.wsj.com/article/SB10001424052702304543904577394543896250220.html

• A man needs $187,000 and a woman $213,000 to have a 90% chance of having enough money to cover health care expenses in retirement

Reference (EBRI): http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4711

Research: Long-Term Care Needs• Americans spent $207.9 billion in LTC services in 2010

• 12% of Americans turning 65 will spend between $25,000 and $100,000 on LTC expenses and 6% will spend > $100,000

• 7 million LTC policies in force vs. 45 million Medicare enrollees

Reference (Journal of Financial Planning): http://www.fpanet.org/journal/SeekingAlternativestoLongTermCareInsurance/

• Assisted living expenses vary considerably across the U.S.

• $4,794 per month in New Jersey versus $2,617 in North Dakota

Reference (Wall Street Journal/MetLife): http://online.wsj.com/article/SB10001424052970203937004578079184108523030.html

15 Key Financial Second Half Issues • Financial basics

• Investing decisions & asset allocation

• Avoiding financial fraud

• Creating a retirement “paycheck”

• Required minimum distributions

• Tax-planning strategies

• Transferring untitled personal property

• Communication issues about money

• Getting help and hiring advisors

• Social Security decisions

• Health insurance

• Long-term care insurance

• Estate planning

• Health-wealth connections

• Leaving a legacy

1. Don’t Forget “The Basics”• Net Worth Statement

– Summary of assets and debts: http://njaes.rutgers.edu/money/pdfs/networthcalcworksheet.pdf

• Specific financial goals– Include a date and cost:

http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf

• Cash flow statement– Summary of income and expenses

• Emergency reserve• Financial Fitness Quiz (Check-up):

http://njaes.rutgers.edu/money/ffquiz/

Assess Current/Future Insurance Needs• Life insurance

• Disability insurance (if employed)

• Health insurance (e.g., Medigap, work)

• Long-term care insurance

• Property insurance

• Umbrella liability

2. Follow Recommended Investment Strategies• Don’t invest if you don’t understand

• Diversify (different asset classes and types)

• Invest for long term goals: 5+ years

• Have reasonable expectations

• Buy low-cost investments

• Don’t pay attention to market “noise”

• Balance risk and reward– All investments have some type of risk

Ownership Versus LoanershipInvestments

• Ownership Investments:– Variable Annuities

– Stocks

– Real Estate

– REITs

– Growth mutual funds

• Loanership Investments:– Fixed Annuities

– Corporate Bonds

– Government Bonds

– Ginny Maes

– Money Market Mutual Funds

– CDs

– U.S. Savings Bonds

3. Avoid Investment Fraud2011 AARP Study: 4 Behaviors that increase seniors’ risk of being a fraud victim:

1. Attending “free lunch” seminars

2. Entering drawings and contests for free prizes

3. Reading and accepting junk mail offers

4. Sitting through sales pitches

References: http://assets.aarp.org/rgcenter/econ/fraud-victims-11.pdf

http://www.givemebackmycredit.com/blog/2011/06/aarps-fraud-study-key-behaviors-that-make-seniors-more-likely-to-fall-victim-to-scams.html

4. Create a Retirement “Paycheck”

• Try to simulate regular income stream– Annual cash withdrawals (1/12 per month)

– Automated monthly fund withdrawals

– “Laddered” bonds or CDs

– Post-retirement employment• Earnings limit under FRA: $15,720 (2016)

• Keep tax-deferred investments and Roth IRAs growing as long as possible

Withdrawal Rate Consensus

• Between 4% and 4.5% of principal, if 50% + stock

– $4,000 a year if $100,000 saved ($333 per month)

• Lower (e.g., 3%) if conservative investor

• Consider hiring certified financial planner for 2-3 hours (go prepared with net worth and budget)

• Do a Monte Carlo analysis for probability of not outliving money

You Need $300,000 Saved for Every $1,000 of Monthly Income

$300,000 x .04 = $12,000 ÷ 12 = $1,000 of monthly income

$600,000 for $2,000 per month

$900,000 for $3,000 per month

$1.2 million for $4,000 per month

$1.5 million for $5,000 per month

Retirement “Paycheck” Need-to-Knows

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• Possible income sources include:

Social Security, defined benefit pension plan, defined contribution plan (e.g., 401(k) and 403(b) plans), individual retirement accounts (IRAs), annuities, taxable account investments, post-retirement earnings, home sale proceeds, rental real estate, reverse mortgage

• When making withdrawals, generally tap taxable and tax-free investments first, then tax-deferred employer plans and traditional IRAs (must start RMDs at age 70 ½), and then Roth IRAs)

Suggested Investment Strategy for Seniors

• Set aside enough $$$ to pay uncovered excess expenses for 3-5 years in a money market fund or short-term CD

– (e.g., $30k income - $15k from SS and pension = $15k uncovered expenses x 3-5 years = $45k to $75k in cash assets)

• Remainder grows in stock & bond funds. Sell stock shares periodically and add to cash assets

• If stock market tumbles -- hang tough. Tap cash and bonds and dividends first.

5. Take Required Minimum Distributions

• Applies to distributions from:– Traditional IRAs (Roth IRAs are tax-free)– 401(k)s, 403(b)s, 457 plans, SEPs, TSP

• Must begin distributions by April 1 of year following year one turns 70 1/2– 70th birthday: 1/3/16; Age 70 1/2: 7/3/16– Begin distributions by 4/1/17 (two 2017 payouts if delay)

• Employer plans: can delay to April 1 of year after one retires

How Much to Take Out• Required Minimum Distribution (RMD)=

– Balance on Dec. 31 of prior year /Life expectancy (use factor in IRS uniform distribution table)

– See http://njaes.rutgers.edu/money/ira-table.asp– Uniform table automatically recalculates life

expectancy (1.9 years if you live to 115!)– Separate table if spouse > 10 years younger (joint life

expectancy)• Failure to take RMD: Tax penalty of 50% of the required

distribution (must match or exceed RMD)• Plan custodian will report numbers to IRS

6. Practice Tax Avoidance (Minimization)• Tax-deferred investments

– Employer salary reduction plans

– IRAs

– Annuities (look for low expense providers)

• Age 50+ catch-up contribution

• LT capital gain on investment profits

• Good financial records

• Tax preparer for a “good template”

7. Consider Untitled Property Transfers• “Who gets grandma’s yellow pie plate?”

– http://www.extension.umn.edu/family/financial-security/who-gets-grandmas-pie-plate/

• Consider interests of family members– Examples: coin collection, antique car

• Make a written list of property and heirs• Share list with family and executor• Consider lifetime gifting of property• Annual gift tax exclusion: $14k per donee (2016)• Can transfer unlimited amount of property (or cash) to

charity without gift/estate tax liability

8. Communicate With Others• Ask executor, contingent executor, PoA, etc. to serve

• Prepare/share a “financial notebook”

• Share location of key documents

• Discuss burial wishes with family

• Discuss living will issues with proxy

• Prepare letter of last instructions

• Discuss/list personal property bequests

9. Get Help When Needed• CPA or CFP when receiving lump sum distribution

• Financial planners:– 888-FEE-ONLY or www.napfa.org (NAPFA)

– 800-282-PLAN or www.fpanet.org (FPA)

– 888-CFP-MARK or www.cfp-board.org (CFP® Board)

– http://garrettplanningnetwork.com/ (Garrett Network)

• Go prepared to reduce time and fees– Bring financial statements, list of goals, questions

10. Understand Social Security

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• Reduced SS benefits available at age 62

• Full SS benefits at Full Retirement Age (FRA)

– Age 66 if born between 1943-1954

– Age 67 if born in 1960 or later

• Must be “fully insured” with 40 quarters of coverage (a quarter = $1,260 in 2016)

• There is no earnings limit after FRA

• Before FRA, $1 of benefits withheld for every $2 over earnings limit ($15,720 in 2016)

Social Security Need-to-Knows

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• It is usually wise to postpone SS benefits if:

– You have substantial earnings

– You are in good health

– You do not need the money for current living expenses

• Contact SS about 3 months before retiring (online)

• See www.ssa.gov for general SS information

• See http://www.ssa.gov/myaccount/ for SS benefit estimate

11. Understand Senior Health Insurance

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• Medicare covers people age 65+

• Medicare has 4 parts: A, B, C, and D

• Many beneficiaries buy Medigap policies

• Retiree health benefits are increasingly scarce

• Early retirees must cover health insurance “gaps” (e.g., between a job and Medicare)

• COBRA can extend group benefits for 18 mos.

• See http://www.medicare.gov/

Health Insurance Action Steps• Apply for Medicare within 3 months of age +/- age 65

• Pay attention to 60-day COBRA deadlines

• Safeguard health insurance documents

• Inquire about employer retiree benefits, if any

• Contact SHIP (State Health Insurance Assistance Program) for assistance with purchasing state-licensed Medigap (Medicare supplement) policies

• www.shiptalk.org

12. Understand Long Term Care Insurance

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• Potential cost of LTC is a big financial risk• Nearly half of Americans will need LTC at some

point in their lives• LTC covers a wide range of services

– Nursing home, assisted living, in-home care

• Best time to buy LTC insurance is generally age 55 to 60

• Adult children help pay premiums?

Key LTC Insurance Policy Features• Amount of daily coverage

• Length of coverage (e.g., 3 years, 5 years)

• Types of benefits provided (e.g., home health care)

• Elimination (waiting) period (e.g., 3 months, 6 months)

• Number of activities of daily living or ADLs required to trigger benefits (e.g., bathing, toileting)

• Method of making an inflation adjustment, if any

Resource: Financing Long-Term Care (eXtension): http://www.extension.umn.edu/family/financial-security/resources/

LTC Insurance Action Steps

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• Contact SHIP for assistance with purchasing LTC policies from licensed state providers

• Explore LTC options, including:

– LTC insurance

– “Self-insurance”

– Annuitized income sources (e.g., DB pension)

– Continuing Care Retirement Communities

13. Solidify Estate Planning

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• Spelling out your wishes (e.g., property transfers) is a gift that you give to others

• Dying intestate (without a will) may result in unnecessary hassles and expenses

• Three recommended documents:– Will for bequests to people and charities and to name

executor(s) and guardian(s)– Living will for health care decisions with a designated health

care representative– Durable power of attorney to handle financial affairs while

you are alive

14. Appreciate Health-Wealth Linkages• The “price” of good health is the need for more wealth: Good health raises

(NOT lowers) a person’s lifetime care costs

• Center for Retirement Research (CRR) projections of remaining lifetime health care costs of couples who reached indicated ages in 2009:

Age Healthy Unhealthy65 $260,000 $220,00070 $266,000 $241,00075 $265,000 $236,00080 $259,000 $220,00085 $244,000 $202,000

• More years of out-of-pocket medical bills and an increased risk of chronic disease (e.g., diabetes) and need for LTC

Reference (CRR, Boston College): http://money.usnews.com/money/blogs/the-best-life/2010/05/12/good-health-raises-lifetime-care-costs

Take Care of Yourself!

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“The greatest wealth is health”Virgil

See www.njaes.rutgers.edu/sshw for information about health and wealth connections

15. Leave a Legacy- Give Something BackMany ways to “leave a legacy”

– Children and grandchildren

– Creative works (art, books, music)

– Volunteer time helping others

– Charitable gifting• Outright gifts of cash, property, securities

• Charitable trusts (see an attorney)

• Testamentary gifts via one’s will (less than 6% of Americans leave money to charities when they die; 20% of those who die with wills)

Helpful Online Resources

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• Rutgers Cooperative Extension

– www.njaes.rutgers.edu/money

– www.investing.rutgers.edu

• Social Security Administration

– www.ssa.gov

• State Health Insurance Assistance Program (SHIP)

– www.shiptalk.org

• Planning for a Secure Retirement (Purdue)

– www.ces.purdue.edu/retirement

Questions? Comments? Experiences?

Be healthy, wealthy, and happy!