Financial Planning and Resource Guide for Seniors

Transcription

1 Financial Planning and Resource Guide for Seniors Developed By: Robin R. Cooke, J.D., M.P.A. of the Access to Justice Foundation Bluegrass Area Development District Bluegrass Area Agency on Aging and Independent Living 699 Perimeter Drive Lexington, Kentucky (859) Access to Justice Foundation Legal HelpLine for Older Kentuckians Lexington, Kentucky This project is funded, in part, under a contract with the Kentucky Cabinet for Health and Family Services, with funds from the Administration on Aging and the United States Department of Health and Human Services. Please feel free to copy and distribute the information in this handbook for any non-commercial purpose.

2 PUBLICATION DATE: WINTER, 2011 EVERY EFFORT WAS MADE TO MAKE THIS DOCUMENT CURRENT THROUGH WINTER, LAWS, PROGRAMS AND POLICIES CHANGE, YOU SHOULD ALWAYS VERIFY THAT THE INFORMATION IS CURRENT BEFORE PROCEEDING. THE MORE TIME THAT PASSES, THE GREATER THE LIKELIHOOD THAT THE INFORMATION IS OUT OF DATE. ii

3 ACKNOWLEDGEMENTS: This guide would not have been possible without the generous financial support of the Bluegrass Area Development District Area Agency on Aging. Thank you to each and every individual and agency that contributed their time, effort and financial support to the development of this guide, so that senior citizens can be better informed regarding finances and money management. iii

4 Financial Planning and Resource Guide to Programs and Services for Senior Citizens in Kentucky TABLE OF CONTENTS Introductory Pages i-vii Chapter One: Financial Planning 1 How to Begin Financial Planning 1 How to Improve Money Management 2 Certified Financial Planners 3 Key Questions to Ask Certified Financial Planners 3 Your Rights as a Financial Planning Client 4 Seek the Advice of More Than One Financial Planner 5 How to Lodge a Complaint Against a Financial Planner 5 Chapter Two: Financial Exploitation of the Elderly 5 Kentucky Department of Financial Institutions (DFI) 5 Steps to Take Before Investing 5 Common Red Flags of Financial Fraud 6 Steps to Avoid Falling Victim to Financial Fraud 6 Resources to Avoid Falling Victim to Financial Fraud 7 Ten Tips to Protect Your Nestegg 7 What to Do if You Fall Victim to Financial Fraud 8 Chapter Three: Investing Possible Investment Options 9 Asset Allocation 10 iv

5 Rebalancing Your Portfolio 10 Understanding the Designations of Investment Professionals 11 Mutual Funds 11 Life-Cycle Fund 12 Certificates of Deposit 12 Annuities 12 Chapter Four: Getting Your Affairs in Oder 13 Documents All Seniors Should Have in Place 13 Local Legal Services in Your Area 13 Where to Store Important Documents 14 What Exactly is an Important Document 14 or Vital Information? Simplifying Finances 15 Chapter Five: Reverse Mortgages 15 What is a Reverse Mortgage? 15 How does a Reverse Mortgage Work? 15 Is Counseling Available for Reverse Mortgages? 16 What Steps to Take if Considering a Reverse Mortgage? 16 Is the Reverse Mortgage Interest Deductible? 16 Who can Qualify for a Reverse Mortgage? 16 What if You Have Bad Credit with a Low Credit Score? 16 Who Should Consider a Reverse Mortgage? 16 What Happens if I go into a Nursing Home? 16 What Fees are Associated with a Reverse Mortgage? 17 v

6 Who is Responsible for Real Estate Taxes and Homeowner s 17 Insurance? How Much Can I Borrow? 17 What Types of Reverse Mortgage Programs are Available? 17 Where do I go to Obtain a Reverse Mortgage? 17 What are the Drawbacks to a Reverse Mortgage? 18 Chapter Six: Pension Assistance 18 Where to go for Pension Assistance 18 What Type of Assistance is Available 18 Working after Retirement May Affect Your Pension 19 What Happens to Your Pension When Your 19 Former Employer Files for Bankruptcy Chapter Seven: Property Tax Relief 19 What Property Tax Relief is Available to 19 Seniors in Kentucky? The Exemption Amount for 2011 and How does the Homestead Exemption Work? 19 How Much will this Exemption Save a Senior? 19 What are the Eligibility Requirements? 20 How do I Apply for the Homestead Exemption? 20 Can Both Spouses Receive the Homestead Exemption? 20 Can You Claim the Exemption on More Than One Property? 20 Chapter Eight: Partnership for Long-Term Care Programs 20 Methods of Paying for Long-Term Care 20 vi

7 Why Seniors Need Long-Term Care Insurance 20 The Benefits of Long-Term Care Insurance 21 What does Long-Term Care Insurance Cover? 21 How does a Long-Term Care Partnership Work? 21 The Benefit to Participating in the Long-Term 21 Care Partnership How to Become a Part of Kentucky s 21 Long-Term Care Partnership Chapter Nine: Life Insurance Coverage 22 Term Versus Whole Life Insurance Policies 22 Chapter Ten: Key Financial Matters 23 Checking and Savings Accounts 23 Homeowner s Insurance 23 Home Equity Loans 24 Home Improvement 24 Taxes and Tax Preparation 24 Funeral Arrangements 25 Free Financial Assistance Resources 25 Foreclosure 26 Senior Citizens Discounts 26 Monitoring Your Credit 27 Consumer, Financial, Legal and Aging Resources 27 for Kentucky Seniors vii

8 Financial Planning and Resource Guide for Seniors The agencies and organizations listed within this handbook provide financial information and/or services to senior citizens in Kentucky. Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child s education or planning for retirement. Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. A comprehensive financial plan has many parts. A financial planner can help guide you through the process of putting together your plan. The biggest mistake when financial planning for retirement is underestimating life expectancy. The odds of living to a ripe old age are higher than you think. Many people tend to be pessimistic about their life expectancy, do not prepare a sufficient nest egg and consequently have a flawed retirement strategy. This can be avoided by looking at an accurate life expectancy table and planning one s retirement finances so that your money has a chance of outlasting you. The number of people with Alzheimer s will increase by 50 percent over the next 20 years. If you develop Alzheimer s, quality of life for you and your family will depend on how well you prepare now. Most people put off important conversations and planning until it is too late. Although it may be unpleasant to think about losing your mental abilities and most people also find it unpleasant to discuss their finances with others. As a result, people fail to plan. A little focus and preparation now, however, will allow you and your family to focus on the more important things in life in the future. How to Begin Financial Planning Chapter One: Financial Planning 1. Establish goals you need to know where you want to go before you decide how to get there. 2. Gather data Get a realistic picture of where you are financially. List everything you owe, which are your liabilities and the value of everything you own, which is your assets and track your monthly income and expenses. Make an inventory of your current insurance, debt, employment, taxes and estate planning. 3. Obtain adequate insurance - Adequate insurance prevents financial catastrophes. Make certain you have sufficient auto, renters, homeowners, liability, health, disability and life insurance. Always go with a reputable, financially sound company. 1

9 4. Pay off debt - Having a lot of debt puts you at financial risk. If you are spending more than you earn, start using a budget to plug spending leaks. Make paying off credit cards a top priority. If debt is overwhelming, get help from a non-profit organization such as the National Foundation for Credit Counseling at 801 Roeder Road, Suite 900, Silver Springs, MD or 5. Maximize Tax Breaks - Ask your tax preparer or certified public accountant (CPA) to make certain you are receiving all the tax credits and deductions due to you. 6. Obtain legal documents - For estate planning, every adult should have the four basic documents: a last will and testament, durable power of attorney, medical power of attorney, and a living will. 7. Develop an investment plan - Analyze and evaluate your financial status. Develop a plan to accomplish your saving, investing, retirement and other goals. Implement the plan. Maintain a diversified investment portfolio. Monitor the plan and make necessary adjustments on, at least, an annual basis. How to Improve Money Management 1. Start a household budget. Every penny counts when you are no longer employed fulltime so make a budget for daily expenses such as housing, heath care and utility bills and stick to it. 2. It s never too late to find a financial planner. Meet with a financial planner and start taking money management seriously. The best way to protect a modest fixed income is to have a comprehensive financial plan in place. 3. Take care of yourself. Become health conscious. An ounce of prevention really is worth a pound of cure. Have regular medical check ups and get flu shots every year. 4. Do not ease up on paying your debt. Now is not the time to stop aggressively paying bills. Credit card debt affects seniors as much as college students and young professionals. The number of seniors filing for bankruptcy is on the rise. 5. Stop giving handouts to family and friends. Do not give until you literally have nothing left. You cannot allow family members to take advantage of you and leave you broke. 6. Apply for Social Security. It is still up for debate as to when you should apply for Social Security age 62 or age 65. The longer you wait to apply, the higher your monthly benefit will be, but you will collect Social Security for three years less time. 7. Do not postpone estate planning. Ensure that all your last wishes are legally documented. Obtain a will, durable power of attorney, medical power of attorney and living will. Contact your local Legal Services office to obtain these documents. Legal 2

10 Services employs attorneys whose practice is limited to assisting individuals age 60 and older for free under the Older Americans Act. Certified Financial Planners A Certified Financial Planner (CFP) is a financial planning professional who has gone through rigorous education and testing and has pledged to conduct himself or herself in an ethical manner that puts your interests first. CFP professionals know how to ask important questions about your goals, steer you away from financial hazards and suggest strategies for reaching your goals that you may not have considered. For a list of CFP professionals in your area, go to or call Interview at least three financial professionals to find the right one for you. Make sure you ask and understand how they are paid by fees, commission, salary, or a combination. Key Questions to Ask Certified Financial Planners Your first meeting with a financial planner should be a free consultation. It is a chance for you to ask questions about credentials and get a feeling for his or her style of communication. Ask the following questions: 1. What experience do they have? 2. What are their qualifications? 3. What licenses do they hold? 4. Are they a registered financial advisor? 5. What services do they offer? 6. What is their approach to financial planning? 7. Will they be the only person working with you? 8. How will you pay for their services? 9. How much do they typically charge? 10. Do they receive additional compensation or financial incentives for selling particular products? 11. Could anyone besides you benefit from their recommendations? 12. Do they have an affiliation with a broker/dealer? 3

11 13. Do they insist on managing client assets, or are they willing to give advice to clients who wish to maintain control over their own brokerage accounts? 14. Have they ever been publically disciplined for any unlawful or unethical actions in their professional career? 15. Do they have a client representation agreement? Your Rights as a Financial Planning Client 1. You have the right to a planner who has integrity. When you know that your planner takes his or her professional obligations seriously, and places principles above personal gain, you can develop the type of partnership that is crucial to the success of any professional relationship. 2. You have the right to objective advice. Your needs and goals should be at the heart of all recommendations made by your financial planner. Your planner should use his or her experience and judgment to carefully consider your situation and provide the advice that best suits your goals. 3. You have a right to a planner that is competent. Your planner should have the appropriate knowledge to correctly advise you. Have they attained the designations of a Certified Financial Planner or Chartered Financial Consultant or Certified Public Accountant or Personal Financial Specialist? Your planner should complete continuing education courses as part of his or her ongoing commitment to competency. 4. You have the right to be treated fairly. Your planner should clearly state what services are to be provided and at what price. The planner should also explain the risks associated with each financial recommendation and any potential conflicts of interest. For example, does the planner gain personally or financially from your purchase of a particular product or from the outcome of a suggested strategy? 5. You have the right to privacy. Your planner should keep your personal and financial information in confidence. Your information should only be shared to conduct business on your behalf, at your consent or when ordered to do so by a court. 6. You have a right to a planner who is professional. Your planner should not provide investment advice or stock brokerage services unless he or she is properly qualified and licensed to do so as required by state or federal law. If your situation requires expertise that your planner does not possess, he or she should suggest other professionals who may assist you. 7. You have a right to a planner who is diligent. A diligent planner reasonably investigates the products or services he or she recommends. A diligent planner also closely supervises any staff working with you. 4

12 Seek the Advice of More Than One Financial Planner No matter how effective your advisor or plan is, getting a second opinion will never hurt. Different advisors have different opinions and areas of expertise, such as taxes or mutual funds. Therefore, having a different set of eyes review your situation may provide insights that you would otherwise miss. How to Lodge a Complaint Against a Financial Planner To lodge a complaint against a financial planner contact one of the following entities: Certified Financial Planner Board of Standards, Inc. at ; North American Securities Administrators Association at or ww.nasaa.org; National Association of Insurance Commissioners at or Financial Industry Regulatory Authority at or Securities and Exchange Commission at or or The Office of Investor Education and Advocacy, 100 F Street, N.E., Washington, DC Chapter Two: Financial Exploitation of the Elderly Financial exploitation of the elderly refers to the illegal or improper use of an older person s funds, property, or assets by a trusted person or entity. Fraud refers to a situation in which the legal or ethical management of financial resources does not take place. Fraud is usually due to deliberate decisions rather than unintentional mishandling. Kentucky Department of Financial Institutions (DFI) Investing in your future is important at any age. The DFI works to keep your money safe by registering and examining brokerage firms, investment advisers and agents and the securities they offer. DFI also takes complaints and investigates suspected wrong-doing on the part of the financial industry. Steps to Take Before Investing to Avoid Costly Mistakes 1. Before investing, find out if the product and the person selling it are licensed and registered with DFI, and see if there have been any complaints or orders filed. 5

13 2. Check broker registrations online through the Financial Institutions Regulatory Authority (FINRA) Broker Check website or call Check investment advisors online through the Securities and Exchange Commission (SEC) Public Disclosure Database. 4. Check investment offerings through the SEC s EDGAR Database or call DFI at Check the Department of Labor s Employee Benefits Security Administration. Common Red Flags of Financial Fraud 1. Special guarantees. 2. Promises of no risk. 3. Offers for a limited time only. 4. Offers for you only. 5. Pressure by salesperson to give an immediate response. 6. Requirements for an advance payment or cash only accepted. 7. Promises to get you the paperwork later. 8. The company representative cannot be reached if you have a question. 9. The offer sounds too good to be true. Steps to Avoid Falling Victim to Financial Fraud 1. Take your time. 2. Do your homework before signing any contract. 3. Read the fine print. 4. Check out the source. Be skeptical of unsolicited calls. 5. Have a plan to get off the phone. 6. Have a buddy or someone to help you get out of the situation where you feel pressured. 6

14 7. Don t trust testimonials. Resources to Avoid Falling Victim to Financial Fraud DFI and AARP have produced a video summarizing the information presented at Senior Scam Jam events in Kentucky. Copies of the video, Buyer Beware: Avoiding Financial Scams, are limited, but are being made available for free. Request a free copy from DFI at or from AARP at DFI conducts Senior Scam Jams presentations on: Mail Fraud; Home Improvement Fraud; Predatory Lending; Investment Fraud and Identity Theft throughout Kentucky each year. Investopedia offers a dictionary, stock simulator, calculators, articles and more so that the average investor can become more educated and savvy ( Ten Tips to Protect Your Nestegg 1. Do not be a courtesy victim. Con artists will not hesitate to exploit your good manners. Save your good manners for friends and family members, not strangers. 2. Check out strangers touting strange deals. Say no to any investment professional who presses you to make an immediate decision, giving you no opportunity to check out the salesperson, firm or investment opportunity. 3. Always stay in charge of your money. Beware of anyone who suggests investing your money into something you do not understand or who urges that you leave everything in his or her hands. 4. Do not judge a book by its cover. Successful con artists look and sound extremely professional and have the ability to make even the flimsiest investment deal sound as safe and sound as putting your money in the bank. 5. Beware of salespeople who prey on your fears. Con artists know that we worry about either outliving our savings or seeing all of our financial resources vanish overnight as the result of a catastrophic event, such as a costly hospitalization. Fear can cloud your good judgment. 6. Do not make a tragedy worse with rash financial decisions. The death or hospitalization of a spouse has many sad consequences financial fraud should not be one of them. Con artists say that their ideal victim is an elderly widow. If you find yourself suddenly in charge of your own finances, get the facts before making any decisions. Local libraries and universities may offer classes and information on investing. Talk to friends, family, trade organizations, and state or provincial securities regulators for advice on locating a financial professional and checking their background. An insurance settlement may help with expenses but it also makes you 7

15 an ideal target for fraud. Arm yourself with information and your confidence will send con men running. 7. Monitor your investments and ask tough questions. Do not compound the mistake of trusting an unscrupulous investment professional or outright con artist by failing to keep an eye on progress of your investment. Insist on regular written reports. Look for signs of excessive or unauthorized trading of your funds. Do not let a false sense of friendship or trust keep you from demanding a routine statement of your accounts. 8. Look for trouble retrieving your principal or cashing out profits. If a stock broker, financial planner, or other individual with whom you have invested stalls you when you want to pull out your principal or profits, you have uncovered someone who wants to cheat you. Some investments have certain periods when you cannot withdraw your funds, but you must be made aware of theses kinds of restrictions before you invest. 9. Do not be embarrassed or afraid to report investment fraud. Con artists know that you might hesitate to report that you have been victimized in financial schemes out of embarrassment or fear. Con artists prey on these sensitivities and count on these fears preventing or delaying the point at which authorities are notified of a scam. Every day that you delay reporting fraud or abuse is one more day that the con artist is spending your money and finding new victims. 10. Beware of reload scams. If you already the victim of an investment scam, do not compound the damage by letting con artists reload and take a second bite of your assets. Con artists know you have a finite amount of money. Faced with a loss of funds, some seniors who have been victimized once will go along with another scheme in which the con artists promise to make good on the original funds that were lost and possibly even generate new returns beyond those originally promised. Though the desire to make up lost financial ground is understandable, all too often the result is that you lose whatever savings you had left in the wake of the initial scam. What to Do if You Fall Victim to Financial Fraud Do not be embarrassed. You are not the only one. Immediately report it to the police and Better Business Bureau as well as tell your family and friends. By talking about it, it saves someone else from becoming a victim. To Check Out Investments or Report Investment Fraud or To Check a Lender or Report Predatory Lending: Kentucky Department of Financial Institutions Division of Securities 1025 Capital Center Drive, Suite 200 Frankfort, KY (502)

16 To Report Fraud or Obtain Assistance with Consumer Complaints Involving Products and Services: Kentucky Office of the Attorney General Office of Consumer Protection 1024 Capital Center Drive, Suite 200 Frankfort, KY , option 3 Identity theft The Kentucky Office of the Attorney general; offers a downloadable identity theft victim kit, tips for victims and information for businesses. To Report Mail Theft, Mail Fraud or Wire Fraud: United States Postal Inspection Service To Check Out Insurance Products, File a Complaint Relating to Insurance or Report Insurance Fraud: Kentucky Department of Insurance PO Box 517 Frankfort, KY To Check Out a Company or a Charity or to File A Complaint, Contact the Better Business Bureau in Your Local Area at Possible Investment Options Chapter Three: Investing 101 The three major classes of assets are stocks, bonds and cash alternatives. Although past performance is no guarantee of future results, stocks have historically provided a higher average rate of return than other investments, including bonds and cash alternatives. However, stocks are more volatile than bonds or cash alternatives. Investing in stocks is usually more appropriate when your investment goals are long-term. Bonds do not provide an opportunity for growth like stocks. They are sensitive to interest rate changes. When interest rates rise, bond values fall. When interest rates fall, bond values rise. Because bonds offer fixed interest payments at regular intervals, they may be appropriate if you want regular income from your investments. 9

17 Cash Alternatives offer a lower potential for growth, but are the least volatile. They are subject to inflation risk, the chance that returns will not outpace rising prices. They provide easier access to funds than longer-term investments and may be appropriate for investment goals that are short term. Asset Allocation Asset Allocation is not about picking individual securities nor is it about diversification, which is the practice of spreading money among different investments to reduce risk. Instead, asset allocation focuses on broad categories of investments. Mixing them together in the right proportion to match your financial goals, the amount of time you have to invest and your tolerance for risk. All investments are not alike, so you can balance risk and return in your portfolio by spreading your investment dollars among different types of assets, such as stocks, bonds, and cash alternatives. If you diversify by owning a variety of assets, a downturn in a single holding won t necessarily spell disaster for your entire portfolio. Ideally, a decline in one type of asset will be balanced out by a gain in another, though diversification cannot guarantee a profit or eliminate the possibility of market loss. Not only can you diversify across asset classes by purchasing stocks, bonds and cash alternatives, you can also diversify within a single asset class. For example, when investing in stocks, you can choose to invest in large companies that tend to be less risky than small companies. In vestment possibilities are limitless, your objective is always the same: to diversify by choosing complimentary investments that balance risk and reward within your portfolio. Rebalancing Your Portfolio When building a portfolio, you can use worksheets or interactive tools that help identify your investment objectives, your risk tolerance level, and your investment time horizon. Once you have chosen your initial allocation, revisit your portfolio at least once a year or more if markets are experiencing greater short-term fluctuations or there have been significant changes in your life. Do this to rebalance your portfolio because with market fluctuations, your portfolio may no longer reflect the initial allocation balance you chose. It may need to be rebalanced to match your current investment goals, risk tolerance or redesign it so that it better suits your current needs. By rebalancing (bringing your portfolio back to your original asset allocation mix) you ensure that your portfolio does not overemphasize one or more asset categories and you ll return your portfolio to a comfortable level of risk. There are basically three different ways you can rebalance your portfolio: 1. You can sell off investments from over-weighed asset categories and use the proceeds to purchase investment for under weighted asset categories. 2. You can purchase new investments for under weighed asset categories. 10

18 3. If you are making continuous contributions to the portfolio, you can alter your contributions so that more investments go to underweighted asset categories until your portfolio is back into balance. Before you rebalance your portfolio, you should consider whether the method of rebalancing you decide to use will trigger transaction fees or tax consequences. Your financial professional or tax advisor can help you identify ways that you can minimize these potential costs. Understanding the Designations of Investment Professionals Understanding Investment Professional Designations on FINRA website provides the education and experience requirements for many professional designations. You can also find out whether the granting organization for the particular designation requires continuing education, offers a public disciplinary or investor complaint process, or provides a way to check the status of a financial professional. Neither FINRA nor the SEC endorses any professional designation. If your financial professional or his or her firm goes out of business or declares bankruptcy, you might not be able to recover your money even if an arbitrator or court rules in your favor. Ask questions and take notes. Do not be intimidated. There are no dumb questions. A good financial professional knows that an educated client is an asset, not a liability. They would rather answer your questions before you invest, than confront your anger and confusion later. Many brokerage houses make their research available for free to customers through the Internet. There are three general groups that investment advisors and professionals fall into: stockbrokers, professional money managers, and financial planners. Stockbrokers work for brokerage houses. Their level of knowledge and skill is highly variable. They generally work on commission. If you are working with a stock broker, consider to the extent possible, whether the broker seems to have you best interests at heart and listens well to your goals and objectives. Ask friends, family and coworkers if they can recommend brokers whom they have used and worked well with. Make certain they have the requisite skill and knowledge. Ask for references and check with the Securities and Exchange Commission for any customer complaints or disciplinary actions that may have been brought against the broker. A professional money manger designs an investment portfolio tailored to the client s investment objectives. Fees are usually based on a sliding scale as a percent of assets under management the more in the account, the less percentage you are charged. Management fees and expenses can vary widely among managers and all fees and charges should be fully disclosed. 11

19 Mutual Funds Mutual Funds are established by a company that pools money from many investors and invests the money in stocks, bonds, and other financial instruments. Mutual funds make it easy for investors to own a small portion of many investments. If you invest in narrowly focused mutual funds, you may need to invest in more than one mutual fund to get the diversification you seek. As you add on more investments to your portfolio, you ll likely pay additional fees and expenses, which will, in turn, lower your investment returns. So consider these costs when deciding the best way to diversify your portfolio. Life-Cycle Fund A lifecycle fund is a diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its target date. A lifecycle fund investor picks a fund with the right target date based on his or her particular investment goal. The managers of the fund then make all decisions about asset allocation, diversification, and rebalancing. It s easy to identify a lifecycle fund because its name will likely refer to its target date. For example, you might see lifecycle funds with names like Portfolio 2015, Retirement Fund 2030, or Target Certificates of Deposit Investors searching for relatively low-risk investments often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $250,000. CDs work like this: When you purchase a CD, you invest a fixed sum of money for a fixed period of time six months, one year, five years, or more- and in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD at maturity, you receive the money you invested plus any accrued interest. If you redeem your CD before it matures, you may have to pay an early withdrawal penalty or forfeit a portion of the interest you earned. At one time, most CDs paid a fixed interest rate until they matured. Today, investors may choose among variable rate CDs, long-term CDs and CDs with special features in the event the owner dies. Some long term, high yield CDs have call features, meaning that the issuing bank may choose to terminate or call- the CD after only one year or some fixed period of time. Only the issuing bank may call, not the investor. 12

20 Annuities Annuities in their simplest form insure you against a long life that outlives your assets. Fixed or immediate annuities provide guaranteed lifetime income. Deferred or variable annuities are asset accumulation products that sometimes have high expenses. With a fixed annuity there is no surrender charge and you immediately get a stream of income. Make certain you are dealing with a reputable, financially strong insurance company. Check your state insurance commissioner s website and ask for as consumer guidebook. Chapter Four: Steps for Getting Your Affairs in Order Documents All Seniors Should Have in Place Everyone needs the following documents: Durable power of attorney to make financial decisions and pay bills; Medical power of attorney to make health care decisions; Living will to make life-support decisions; and Last Will and Testament. Local Legal Services in Your Area Kentucky has four regional civil Legal Aid programs throughout the state. Each program employs attorneys who represent Kentucky residents age 60 and older without regard to asset or income eligibility requirements. The four programs are as follows: Appalachian Research & Defense Fund at or or Legal Aid of the Bluegrass at or or Western Kentucky Legal Aid at or or and Legal Aid Society at or or The Legal HelpLine for Older Kentuckians is operated through the Access to Justice Foundation. The HelpLine provides callers age 60 and older with answers to legal and non-legal questions. Callers may also be referred to the Legal Aid program or other service agency in their area. The toll free number is The HelpLine is in operation from 9 a.m. until 5 p.m. (EST) Monday through Friday. The Kentucky Attorney General s Office, Capitol Suite 118, 700 Capitol Avenue, Frankfort, KY or (502) or offers a free Living Will Packet. 13

21 U.S. Living Will Registry offers free state-by-state living will forms for download at The American Bar Association s (ABA) Aging Tool Kit offers a ten step process for making end-of-life decisions with worksheets, suggestions, and links. Contact the ABA at American Bar Association, 321 North Clark Street, Chicago, ILL or or Where to Store Important Documents Put your important papers and copies of legal documents in one place. You could set up a file, put everything in a desk or dresser drawer, or just list the information and location of papers in a notebook. If your papers are in a safe deposit box, keep copies in a file at home as well and make certain someone other than you is listed on the box and can gain entry if needed. Tell a trusted family member or friend where you put all your important papers. You do not have to tell them your affairs, just the location of your papers in case of an emergency. Tell your lawyer the location if there is no family member or friend you trust. Appoint a health care surrogate, medical power of attorney and durable power of attorney. Give consent in advance for your doctor or lawyer to talk with your caregiver as needed. This can help resolve a health insurance claim or bill. You can give your permission in advance to Medicare, a credit card company, your bank or your doctor as well. You may need to sign and return a form. What Exactly is an Important Document or Vital Information? The following are important papers that you should keep in a safe, secure place and notify trusted family members or friends of their whereabouts. Full legal name Social Security number Medicare information Legal residence Insurance information (life, health, long-term care, home, car) with policy numbers and agent s names and contact information. Bank name, location and checking and savings account numbers Location of safe deposit box and key Location of last will and testament, durable power of attorney, medical power of attorney and living will Financial records for 401(k) information, IRA accounts, pensions and annuities Mortgage and debts how and when paid Copy of most recent tax return 14

22 List of all stocks, bonds, real property and stock broker s name and contact information Doctors names and contact information Medications taken regularly Medication allergies, medical conditions and procedures Attorney, financial advisor and accountant and clergy contact information Deeds, car title/registration and boat title Property tax records Apartment lease Date and place of birth Names and addresses of spouse and children Birth and death certificates Certificates of marriage, divorce, citizenship and adoption Employers and dates of employment Education and military records Memberships in groups and awards received Divorce decree Organ donation documents Simplifying Finances 1. Have just one or two bank accounts. 2 Have all of your investment accounts at one brokerage firm. 4. Maintain a rainy day fund with 3-6 months of emergency money set aside. What Is a Reverse Mortgage? Chapter Five: Reverse Mortgages A reverse mortgage or Home Equity Conversion Mortgage (HECM) is a program that enables you to convert a part of your home s equity into tax-free income. Repayment is due when the property is no longer your primary residence. Reverse mortgages provide a means for senior citizens to access the equity in their home. It is called a reverse mortgage because unlike a traditional mortgage, the principal balance of the loan gets larger over time rather than smaller. No matter how high your loan balance grows you never owe more than the home s market value when the loan is repaid. How Does a Reverse Mortgage Work? Instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. Payments can be made in a lump sum, monthly, periodic advances through a line of credit or any combination of the three. The money received through a reverse mortgage does not need to be paid back as long as the owner continues to live in 15

23 the house. The loan is due for repayment when the last borrower permanently moves out, dies, or sells the property. A reverse mortgage can be a means to give seniors money for medical insurance, home repair as well as monthly income needs. Is Counseling Available for Reverse Mortgages? The Federal Housing Authority Home Equity Conversion Mortgage requires independent counseling before any services like appraisal, title, flood certificate can be ordered. Counselors are approved by Department of Housing and Urban Development (HUD) and provide counseling regarding the various programs and their options. Upon completion of this counseling requirement, the borrower may proceed with the reverse mortgage if they so desire. What Steps to Take if Considering a Reverse Mortgage? If you are considering a reverse mortgage, you should do the following: contact a reverse mortgage lender, meet with an independent counselor, and decide which of the programs might be best for you. Is Reverse Mortgage Interest Deductible? Interest on a reverse mortgage is tax deductible at the time of full loan repayment, which is anticipated to be upon the home s sale. Who Can Qualify for a Reverse Mortgage? Anyone over the age of 62 who owns a home and has adequate equity in the home can qualify for a reverse mortgage. Existing mortgage(s) will be paid off. Any needed repairs and maintenance will be made to the home. What if I Have Bad Credit with a Low Credit Score? FICO credit scores are not considered and credit history is irrelevant. Who Should Consider a Reverse Mortgage? Reverse mortgages work best in situations where homeowners wish to stay in their homes until they die. If you are approaching retirement and are unable to sell your home, a reverse mortgage may be an option for you. What Happens if I go into a Nursing Home? Seniors can reside in a nursing home for up to a year before the reverse mortgage is due. 16

24 What Fees are Associated with a Reverse Mortgage? There are no standard fees. Fees will vary depending upon the lender, the third party vendors used by the lender, and type of loan selected. The fees can be rolled into the loan and financed. Borrowers can expect to pay for: mortgage insurance premiums that pay for a loss to the lender if your home is worth less than the amount owed at the end of your loan; the monthly lender fees charged for disbursing monthly payments to the borrower; loan points or application fees; and normal closing costs such as mortgage recording fees, escrow or closing agent fees and title policy. On average, about 6% of the home s equity will go toward covering the cost of the loan. Who is Responsible for Real Estate Taxes and Homeowner s Insurance? Borrowers still have to pay real estate taxes and home owners insurance each year when they come due. How Much Can I Borrow? The amount of the loan depends upon the amount of equity remaining in the house after paying off existing mortgages, the borrower s age, and the type of loan program selected. The current appraised value of the home counts as well as current interest rates. What Types of Reverse Mortgage Programs are Available? Some lenders offer fixed interest rate mortgages, but most only offer adjustable rate mortgages where the interest can adjust monthly or annually. Lenders do charge a margin which varies by lender. The margin when added to the index rate equals the interest rate. Interest rates are typically capped, meaning the rate can be increased to a maximum rate and no higher. Caps range from 5 to 6 percent on an annual adjusting rate and from percent on a monthly adjustable rate. Where do I go to Obtain a Reverse Mortgage? Many mortgage brokers and major lending institutions offer reverse mortgage products. The national Reserve Mortgage Lenders Association publishes a list, by state, of approved lenders who originate reverse mortgages. The Department of Housing and Urban Development also publishes a list of approved HUD lenders. Remember to check the box that limits the search to lenders who have completed a HECM loan within the past twelve months. The website, is a consumer s guide to reverse mortgages from a nonprofit with no ties to the mortgage industry. It also links to the AARP calculator for 17

25 choosing such policies. The website, has a similar calculator and search tool to find local lenders, with links to their websites. What are the Drawbacks to a Reverse Mortgage? It can limit your ability to move in the future because you will need to repay the reverse mortgage from the sale proceeds. In addition, if you are unable to afford or qualify for a refinanced mortgage when the term of the reverse mortgage is up, you may be forced to sell your home. A reverse mortgage also lowers the value of your estate because it reduces the equity you have built up in your house. This is a disadvantage if you are planning to leave your house as an inheritance for your family. The borrower needs to realize that there will not be a house to leave their children. It will be left to the bank instead. Heirs will have to sell the house or find the money to settle the loan if they should want to keep it. The house must be properly maintained. There is an annual certification that the borrower is still living in the house and that the taxes and home owner s insurance are being paid. Where to go for Pension Assistance Chapter Six: Pension Assistance The Pension Rights Center is the country s only consumer organization dedicated solely to protecting and promoting the retirement security of American workers, retirees and their families. Kentucky is covered by the Mid-America Pension Rights Project. The toll free number is (866) The website is What Type of Assistance is Available The pension counseling projects will provide assistance free of charge to anyone with a pension question or problem, regardless of age, income, or value of the claim. Pension counselors can assist with retirement income plans offered by both private and government employers, including traditional defined benefit pension plans, cash balance and other hybrid pension plans, 401(k) plans, 403(b) plans and 457 plans, money purchase and other profit-sharing plans. Counselors can answer questions regarding complicated pension laws and how they affect your retirement; obtaining and explaining retirement plan forms and documents; correcting miscalculations and claiming retirement benefits that have been denied; tracking down benefits from past employers; and providing referrals to lawyers, actuaries and other pension professionals as appropriate. 18

26 Working After Retirement May Affect Your Pension Unless you plan to return to work with your former employer, your pension benefit won t be affected you can work, receive salary from your new employer, and also receive your pension benefit from your former employer. However, if you are considering taking another job, even part-time-with your former employer, check with the plan administrator because some plans require that your pension benefit be suspended if you retire and then return to work for the same employer. What Happens to Your Pension When Your Former Employer Files for Bankruptcy Generally, your pension assets should not be at risk when a business declares bankruptcy, because the Employee Retirement Income Security Act of 1974 (ERISA) requires that the promised pension benefits be adequately funded and that pension monies be kept separate from an employer s business assets and held in a trust or invested in an insurance contract. Therefore, if an employer files for bankruptcy, the retirement funds should be secure from the company s creditors. In addition, plan administrators must comply with ERISA provisions that prohibit the mismanagement and abuse of plan assets. Chapter Seven: Property Tax Relief What Property Tax Relief is Available to Seniors in Kentucky? The Homestead Exemption through the local Property Valuation Administration (PVA) provides Kentucky seniors with tax relief. The amount of the homestead exemption is adjusted every two years in accordance with Kentucky law. The Exemption Amount for 2011 and 2012 The Kentucky Department of Revenue has reviewed and adjusted the Homestead Exemption for 2011 and The amount was raised from $33,700 to $34,000. How Does the Homestead Exemption Work? For homeowners receiving the exemption, this means that the taxable value for your property will be assessed at fair market value, less the exemption amount of $34,000. For example, a $100,000 residence that qualifies for the exemption would have a taxable value of ($100,000 - $34,000) $66,000. How Much Will this Exemption Save a Senior? Depending on where the property is located and the local tax rates, it saves a homeowner from $300-$325 per year in school, local, and where applicable, special taxing districts. 19

27 What are the Eligibility Requirements? To qualify for the Homestead Exemption, a person must be at least 65 years old during the tax period or have been classified as totally disabled by any public or private retirement system. The property must also be owned, occupied, and maintained by the tax payer as a personal residence on the January 1 assessment date. How to Apply for the Homestead Exemption? An application can be made at the local Property Valuation Administrator Office of the county where the property is located. Disabled persons less than 65 years old must make an application on an annual basis. Can Both Spouses Receive the Homestead Exemption? There is only one exemption permitted per property whether the homeowner is married or not. Even if both spouses are 65 and live with a disabled child, the exemption is not additive only one exemption is granted and not two or three. Can You Claim the Exemption on More Than One Property? If the homeowner owns more than one property, the exemption is only applicable to one of the two properties. Chapter Eight: Partnership for Long-Term Care Programs Methods of Payment for Long-Term Care Ways to pay for long-term care needs include paying for it out of your savings (self pay); insuring through long-term care insurance; spending down assets; relying on Medicaid; and relying on family and friends. Why Seniors Need Long-Term Care Insurance The cost of long-term care is high today and continues to rise. However, the cost to selfinsure is more expensive than most people imagine. Many people base their decision of whether or not to purchase long-term care insurance on their perception of whether or not they believe they will ever need long-term care. In reality, purchasing long-term care insurance should be one of the key elements in any well-defined financial plan one that has at its core a strategy of comprehensive risk management. 20

28 The Benefits of Long-Term Care Insurance The problem with pay as you go long-term care self insurance is that individuals often need care sooner than they think they will and will not have saved enough money to pay for the care they will require. As a result, personal assets are quickly depleted. When long-term care insurance is purchased, an instant and accessible pool of money is created from which the costs of long-term care are instantly drawn, thus protecting core financial assets. It is similar to how life insurance creates an instant estate upon your death. What Does Long-Term Care Insurance Cover? Long-term care insurance provides protection and funds to pay for private nursing home or assisted living facilities. Almost all policies will pay at least a portion of home care services as well, with some long-term care insurance policies paying unskilled caretakers, including relatives who might assist in caring for elderly patients while the patient remains in the comfort of his or her home. The fact of the matter is that long-term care insurance is a good deal when you compare the cost of premiums paid against potential benefits. The reason is that sooner or later most of us will require long-term care and the cost of the premiums paid is nearly always less than the costs of long-term care. How Does a Long-Term Care Partnership Work? In Kentucky, if you participate in the state s Partnership for Long-Term Care, for every dollar your long-term care insurance policy pays out in benefits, a dollar of personal assets can be protected (discarded during the Medicaid eligibility review) if the individual chooses to apply for Medicaid. The amount of the dollar-for-dollar asset protection/disregard is calculated based on the amount of benefits paid by the long-term care insurance company on the policy holder s behalf. It is not necessarily equal to the amount of the premiums paid or the maximum benefit. The Benefit to Participating in the Long-Term Care Partnership Benefits include a dollar-for-dollar asset protection as a way to qualify for Medicaid without spending your life savings. Amounts equal to the benefits received under the long-term care partnership policy will be exempt from Medicaid estate recovery. This benefit is not available with non-partnership policies. Inflation protection options adjust the policy s benefits to keep up with the rising cost of long-term care. How to Become a Part of Kentucky s Long-Term Care Partnership Professionally trained agents are the only ones who can offer Partnership Policies. To participate in the Partnership, you must buy a long-term care insurance policy that 21