Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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Odds of Surviving Critical Illness Dramatically Increase

Odds of Surviving Critical Illness Dramatically Increase

With advances in medical treatment and technology, many people now survive critical illnesses that would have been fatal in the past.  As a result of this increased life expectancy senior Americans have the opportunity to watch grandkids grow into adulthood and start families of their own.  Enjoying some great grandkids is a real possibility.

Some unhappy news; many retirees will at some point become critically ill as the following statistics demonstrate.  The need for planning in order to avoid becoming destitute is more important than ever.

Cancer:

  • Men have a slightly less than 1 in 2 lifetime risk of developing some form of cancer. For women, the lifetime risk is a little more than 1 in 3.
  • Between 2002 and 2008, the 5-year relative survival rate for all cancers was 68%, up from 49% in 1975 – 1977.
  • It is estimated that over 1.6 million new cancer cases were diagnosed in 2013.

(Source: Cancer Facts and Figures 2013; American Cancer Society)

Heart Disease:

  • An estimated 80 million Americans have one or more types of heart disease.
  • Each year, an American will suffer a heart attack about every 34 seconds.
  • The lifetime risk for cardiovascular disease at age 40 is 2 in 3 for men and more than 1 in 2 for women.
  • It is estimated that the total costs of cardiovascular diseases in the U.S. was over $448 billion in 2008.

(Source: Heart Disease Facts, Centers for Disease Control and Prevention, July 2013)

Stroke:

  • Someone in the United States has a stroke every 40 seconds.
  • Stroke is a leading cause of serious, long-term disability in the U.S.
  • It is estimated that Americans paid about $38.6 billion in 2010 for stroke-related medical costs and lost productivity.

(Source: Stroke Fact Sheet, Centers for Disease Control and Prevention, July 2013)

Will you have sufficient funds available to pay for:

  • Any insurance co-payments and deductibles;
  • Alterations to your home and/or automobile to meet any special needs;
  • Out-of-town transportation and lodging for medical treatment;
  • Treatments not covered by traditional health insurance; and/or
  • Shorter-term home health care during your recuperation?

Surviving critical illnesses increase our life expectancies, we will live longer than ever before.  At the same time, fortunately annuity ownership is rising  An annuity is the only guaranteed financial  hedge against longevity.  More than ever a retiree’s goal should be lifetime income not just income for 20-30 years.

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Confirmed; Annuity Owners More Confident To Retire

 

The following IRI survey comes as no surprise to retirement income planners who witnessed their annuity client’s relief and security while they heard stories of large losses from their friends and associates in the aftermath of 2008’s financial meltdown.   Not only did these clients not lose any money or income; they experienced strong growth as the market indexes slowly recovered.

Insured Retirement Institute survey, by IALC

According to a recent survey by the Insured Retirement Institute (IRI)  of Americans aged 50-66, a majority (53%) of annuity owners are extremely or very confident that they will have adequate income in retirement, compared to less than a third (31%) of non-annuity owners who say the same.

And not only are these consumers more confident, they are also satisfied with their annuity purchases. A recent LIMRA study found that 83% of fixed indexed annuity buyers reported being satisfied with their annuities and five in six would recommend annuities to others.

So what’s driving people to buy fixed annuities, in particular? Certainly the 2008 crash taught consumers that their foundations are not as sturdy as they once thought. So in order to regain a sense of stability they are looking for sources that provide some minimum guaranteed income. In fact, when asked about the intended uses for indexed annuities in another recent LIMRA survey, respondents’ top three responses involved retirement planning, including supplementing Social Security or pension income, accumulating assets for retirement, and receiving guaranteed lifetime income.

For help you may ask questions in the comments

Or click here to contact me privately: Tim Barton Chartered Financial Consultant

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Winners of $1.4 Billion Lotto: What now? How to get your money?

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Once the initial euphoria wears down and you are “Snoopy Danced” out.  Sorry I have no idea how long that takes.  The moment will come when you have to make some decisions about how to receive your lottery winnings.

Everyone seems to assume the winner or winners, (yes brace yourself you are likely going to have share the jackpot with other winners) will take the jackpot as a lump sum.  The biggest winner of all is government at all levels.  Each state involved gets a cut of the ticket sales and the state or states where the jackpot winners live get to tax the jackpot.  Yesterday State Senator Tim Carpenter (D) WI put out a press release about his plans for spending the estimated $65,790,000 tax windfall if a Wisconsin resident won the $1.4 billion.   This windfall of state income tax pales in comparison to federal tax take at 39.6% ($343,728,000).

If the winner is a Wisconsin resident who decides to take the estimated lump sum payout $868,000,000 they would realize a net after tax payment of $458 million ($458,482,000.)  This is only 33% of the $1.4 Billion.  That’s right if a winner takes the jackpot in a lump sum they only get a check for 33% of the winnings.  Of course that is still a life changing amount of money.

Almost all financial advisors, lawyers, accountants, bankers and other investment advisors tell the winner to take the lump sum because they will quickly make back the annuity reduction and tax bite.  A client with $458 million is big in the financial and legal industry.  Inside they are referred to as whales or elephants.  So it’s hard for many advisors to tell this potential client to take the larger $1.4 Billion as an annuity payment over 30 years.

Annual annuity payment is about $46.7 million ($46,666,666) State and federal tax each year is $22,049,999 this nets the winner $24.6 million ($24,616,667) after taxes each year for 30 years.  That is a seriously nice income payment which would leave a substantial amount to invest each year after all the celebratory spending.  Best of all the winner will receive a total $738,500,000 compared to $$458 million net lump sum.

Advantages of annuity payments

  • Minimize taxes
  • Guarantees $24.6 million income for 30 years
  • No investment risk, all investments come with the risk of loss.
  • Helps prevent fraud
  • Spend thrift tendencies will not wipe out winnings in one year

One of the biggest arguments against an annuity is “your money is tied up.”  Wrong. Not these days.  There are investor groups who buy annuities.  They compete against each other because an annuity income is valuable.  If a winner changes their mind later and wants a lump sum for whatever reason they can sell the annuity payments to the highest bidder.  In the current economic conditions this would net the winner about 15-20% more than taking the lump sum payment immediately from the Powerball lottery.

A winner has 180 days to claim the Powerball before their ticket expires. Winner has  60 days from the date of their ticket claim to chose the lump sum.  Then the annuity payment  is mandatory and there is no  changing that from the lottery.  Historically only a handful of winners take the annuity option leaving a pile of cash on the table.  If many of these had waited 61 days they could have sold their annuity and had more money in their account.

How to stay anonymous:

Good luck with that.  These days it’s impossible to keep secrets.  Thanks to the internet and other technology  society gets more and more transparent everyday. So even in the handful of states have laws to allow jackpot winners to stay anonymous they’ll be found out.  Most states require winners to go public.

Changing your name to claim the prize and then changing back again will not work.   All states forbid changing a name when fraud is intended.  If a state requires disclosure of  the winner and they change their name… Sure looks like a fraud.  No reason to go there. Many states require name changes be published in the local newspapers for a period of time. Where are newspapers published these days? Online.

No hope of anonymity so it’s best to make plans to deal with your rock stardom should fate see fit to pick you. And that will be the topic of a future post.

 

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2015 and 2016 Federal Income Tax Rate Tables for Individuals

Welcome to Tax Year  2016.  To prepare for the upcoming tax preparation season download these handy PDF Federal Income Tax Rate Tables for Individuals.
2016 Federal Income Tax Rates for Individuals
2016 Federal Tax Digest

The 2016 Tax Digest Includes:

  • Income tax rates, deductions, credits.
  • Kiddie tax, child tax credit
  • E education deductions and credits
  • Social Security/Medicare
  • Retirement Plan Contribution/Benefit Limits
2015 Federal Income Tax Rates for Individuals
2015 Federal Tax Digest

The 2015 Tax Digest Includes:

  • Income tax rates, deductions, credits.
  • Kiddie tax, child tax credit
  • E education deductions and credits
  • Social Security/Medicare
  • Retirement Plan Contribution/Benefit Limits

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What Is the Marital Deduction?

The marital deduction (I.R.C. Sections 2056 and 2523) eliminates both the federal estate and gift tax on transfers of property between spouses, in effect treating them as one economic unit.  The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer.  However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse.

The 2010 Tax Relief Act, however, provided for “portability” of the maximum estate tax unified credit between spouses if death occurred in 2011 or 2012.  The American Taxpayer Relief Act of 2012 subsequently made the portability provision permanent.  This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a deceased spouse (the equivalent of $5,000,000 as adjusted for inflation; $5,450,000 in 2016).  As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million (as adjusted for inflation) from the federal estate and gift tax without use of marital deduction planning techniques.  Property transferred to the surviving spouse in excess of the combined unified credit equivalent will be subject to estate tax in the estate of the surviving spouse.

If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount available for use by the surviving spouse is equal to the lesser of $5 million ($5,450,000 in 2016 as adjusted for inflation) or the unused exclusion of the last deceased spouse.

What Requirements Apply to the Marital Deduction?

To qualify for the marital deduction, the decedent must have been married and either a citizen or resident of the U.S. at the time of death.

In addition, the property interest:

  1. Must be included in the decedent’s gross estate,
  2. Must pass from the decedent to his or her surviving spouse
  3. Cannot represent a terminable interest (property ownership that ends upon a specified event or after a predetermined period of time).

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Paying the Estate Tax Bill

The federal government will not accept a percentage of your estate as payment for your estate tax bill. Instead, your estate tax bill must be paid in cash, and it must be paid within nine months after your death.

If your estate is subject to the federal estate tax, there are FOUR ways to provide your estate with the cash needed to pay your estate tax bill:

1. 100% METHOD

You could accumulate enough cash in your estate to pay your estate tax bill outright. Rarely, however, does a successful person accumulate such large sums of cash. Instead, the reason for financial success is usually due to the investment of cash in appreciating assets, rather than accumulating it in a bank.

2. 100% PLUS METHOD

Your estate could borrow the cash needed to pay your estate tax bill. This, however, only defers the problem, since the money will then have to be repaid with interest.

3. ASSET LIQUIDATION METHOD

Your estate could liquidate sufficient assets to pay your estate tax bill. This choice may make sense if your estate owns considerable assets that can be readily sold for a gain following your death. Keep in mind, however, that if a forced liquidation is necessary, it may bring only a small fraction of the true value of your assets. In addition, sales expenses are bound to be incurred.

4. DISCOUNT METHOD

Assuming you qualify, you can arrange now to pay your estate tax bill with life insurance dollars. For every dollar your estate needs, you can give an insurance company from approximately one to seven cents a year, depending on your age and health. No matter how long you live, it is unlikely you will ever give the insurance company more than 100 cents on the dollar. In addition, the life insurance policy can frequently be structured to accommodate your unique premium payment requirements.

 

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Medical Annuities Pay More

You are wondering what to do after your doctor explains you have a serious medical condition.  Not only is the thought of living out your remaining time, perhaps a bit impaired disturbing,  you and your spouse are wondering how to make your money last.  With the possibility of a future filled with increased medical bills and current yields at record lows,  you fear your savings are going to have to be drawn down to the point of depletion.

A possible solution is the medically underwritten annuity.  When applying for a medical annuity you provide your medical records to the insurance company who will then review them to determine your actuarial age.

After determining  the actuarial age it is compared to your chronological age and if  actuarial age is greater the annuity’s monthly income is increased accordingly.  This adjustment can be done jointly  even if your spouse’s health is good.

It has always been important and more so in this low interest rate environment to make sure a retiree’s savings lasts the rest of their and their spouse’s life.  The effort put into getting quotes on a medical annuity can bring a welcome peace of mind making it time well spent

On the positive side; medical science continues to advance at a fast pace so the initial prognosis could  in the end, turn out to be wrong, in which case you get to enjoy good health and a higher than normal lifetime income stream.

You may ask questions in the comments or contact me privately:

Tim Barton

Chartered Financial Consultant

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7 Methods to Avoid Probate

Probate is simply the Latin word for prove, which means that the estate probate process is the process by which your will is brought before a court to prove that it is a valid will. The courts charged with this responsibility are generally known as probate courts, which may actually supervise the administration or settlement of your estate.

Supervision of the estate settlement process by the probate court can result in additional expense, unwanted publicity and delays of a year or more before heirs receive their inheritance. The publicity, delays and cost of probate motivate many people to explore ways in which to avoid or minimize the impact of probating a will, including:

  1. State Statute If specific requirements are met, many states have made provision for certain estates to be administered without the supervision of the probate court, resulting in less cost and a speedier distribution to heirs.
  2. Form of Property Ownership The joint tenancy form of holding title to property allows ownership to pass automatically to the surviving joint tenant, who is normally the surviving spouse.
  3. Transfer on Death Many states have enacted Transfer on Death statutes that allow a person to name a successor owner at death on the property title certificate for certain types of property, including real estate, savings accounts and securities.
  4. Life Insurance Unless payable to the estate, life insurance proceeds are rarely subject to the probate process.
  5. Lifetime Giving Gifts given during life avoid the probate process, even if made shortly before death.
  6. Trusts A “Totten” trust, which is a bank savings account held in trust for a named individual, can be used to pass estate assets at death outside of the probate process.
  7. A revocable living trust, created during the estate owner’s lifetime, can be an effective way to avoid the expense and delay of probate, while retaining the estate owner’s control of his or her assets prior to death.

Proper planning may serve to minimize the impact of the probate process on your estate and heirs.

Any potential method of avoiding probate, however, should be evaluated in terms of its income and/or estate tax consequences, as well as its potential impact on the estate owner’s overall estate planning goals and objectives.

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Probate Process for Your Estate

Probate is simply the Latin word for prove, which means that the estate probate process is the process by which your will is brought before a court to prove that it is a valid will. The courts charged with this responsibility are generally known as probate courts, which may actually supervise the administration or settlement of your estate.

The probate process is governed by state statutes that are intended to accomplish three primary objectives:

  1. To preserve estate assets.
  2. To protect the rights of creditors in the payment of their claims before the estate is distributed to the heirs.
  3. To assure that the heirs receive their inheritance in accordance with the terms of the estate owner’s will.

Once the estate’s personal representative (executor or administrator if the estate owner died without naming a personal representative) is approved by the probate court and posts any bond that is required, the probate process generally proceeds as follows:

  • The personal representative must “prove up” the will — prove that it is a valid will signed by the estate owner who was competent and not under duress or influence at the time of signing.
  • Notice must be given by the personal representative to all creditors to make prompt claim for any money owned to them by the estate.
  • The personal representative must prepare and file an inventory and appraisal of estate assets.
  •  The personal representative must manage and liquidate estate assets as appropriate to pay all debts, fees and taxes owed by the estate.
  • Finally, the remaining estate must be distributed to the heirs in accordance with the estate owner’s will (or the state laws of intestacy if there was no will).

It is not uncommon for the probate process to require a year or more and considerable expense before the estate is finally settled.

Proper planning, however, can serve to minimize the impact of the probate process on your estate and heirs.

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Remember Retirement When You Change Jobs

 

WHEN YOU CHANGE JOBS

You May Have an Important Decision to Make…

What to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan. Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets remain available to contribute to a financially-secure retirement.

Take the Funds:

You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency. Consider:

  • A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
  • You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
  • Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
  • The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.

Leave the Funds:

You can leave the funds in your previous employer’s retirement plan, where they will continue to grow on a tax-deferred basis. If you’re satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)

Roll the Funds Over:

You can take the funds from the plan and roll them over, either to your new employer’s retirement plan (assuming the plan accepts rollovers) or to a traditional IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.

Why Taking a Lump-Sum Distribution May Be a Bad Idea:

While a lump-sum distribution can be tempting, it can also cost you thousands of dollars in taxes, penalties and lost growth opportunities…money that will not be available for future use in retirement.