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Financial Planning for the Second Half of Your Life
Dr. Barbara O’Neill, CFP®, CFCS, CPFFEExtension Specialist, Rutgers Cooperative Extension
Personal Introduction
2
• 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
20
• 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
34
• 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!
37
“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