PERSONAL FINANCE. managing assets & expenses in retirement

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1 PERSONAL FINANCE managing assets & expenses in retirement 1

2 our mission To lead and inspire actions that improve financial readiness for the military and local community.

3 table of contents The New Realities Of Retirement: Are You Ready? Seeking Professional Advice & Planning How Prepared Are You For Retirement? Retirement Goals Managing Retirement Assets Social Security & Working In Retirement Protecting Your Assets Estate Planning Basics

4 the new realities of retirement: are you ready? 2

5 Today, retirement is a lot different than just a generation ago. In times past, workers could often count on a pension, Social Security, or personal savings to see them through. Today, however, changes to company benefits and compensation along with new economic and lifestyle realities are forcing people to rethink their retirement plans. In fact, planning directly affects the kind of retirement you ll enjoy if you re able to retire at all. Simply put, you get the retirement you plan and save for. Planning made perfect Planning for retirement involves two key factors: The actions you take. And when you take them. Translation? You re likely to approach retirement quite differently if you re 30 years old than if you re 60. When you re younger, time is on your side. You can develop a plan that grows and protects your assets at a steady pace. However, if retirement is around the corner, you may consider a more aggressive approach to secure your current assets and quickly maximize your investments. Whatever your age, you need a plan, if you want your golden years to be golden. 3

6 seeking professional advice & planning Plan with a professional Planning for your retirement isn t something you should do alone. You ll likely want to involve your family especially your spouse as they will be impacted by your retirement and how you allocate your assets. It s also a good idea to seek professional advice from an attorney and/or a financial planner. A financial planning professional or retirement adviser can help evaluate your financial resources and adjust your plan as needed. Seek the advice of a Certified Financial Planner (CFP ) or a Chartered Retirement Planning Counselor SM (CRPC ) professional. These planners and counselors must pass rigorous tests, meet high standards of professionalism and abide by a strict code of ethics. Certified Financial Planner Board of Standards, Inc., owns the certification marks CFP and CERTIFIED FINANCIAL PLANNER in the U.S. which it awards to individuals who successfully complete CFP Board s initial and ongoing certification requirements. Chartered Retirement Planning Counselor SM is a federally registered service mark of the College for Financial Planning and may not be used without the express written consent of the college. 4

7 how prepared are you for retirement? Hopefully, you ve been preparing for retirement throughout your career. But how ready are you? Answer these questions and see Will my assets last throughout my retirement years? Longer life expectancy means retirement assets need to last longer. Plan living into your 90s. How much income will I need? Assume you will need 80% of your preretirement income. Create a detailed budget distinguishing required income needs versus discretionary spending. Medical expenses are likely to increase as you age and your health insurance benefits may begin to diminish. Long-term care options should be addressed in your plan. What are my income sources? Generally, retirement income comes from personal savings and investments, a company or government pension and Social Security. Ask your employer to fully explain company-provided retirement benefits. Delaying taking Social Security until your full retirement age, or later, will increase your annual benefits. Working in retirement provides extra income but can affect pension benefits and subject Social Security benefits to federal income taxes. 4 What are the financial risks of retirement? Inflation decreases the value of your retirement savings. An online retirement calculator, CFP, CRPC or licensed investment adviser can help you understand inflation s effect. Reduce expenses and increase savings contributions as much as you can before retirement. As retirement nears, savings contributions have less time to recover from market downturns. Review your portfolio annually. Depending on your age at retirement, your asset allocation, and the value of your assets, a reasonable initial withdrawal rate may be no more than 3% to 4% annually. 5

8 Crunch the numbers Establishing and adhering to a retirement spending plan helps you to control expenses and afford the activities you ll want to enjoy in retirement. These are key considerations because, like most retired people, you re likely to be on a fixed income. Use the following worksheet to create your retirement spending plan. Itemize your retirement income from all sources, as well as all of your expenses. Keep track of exactly how much you have in savings and investments. Skip items that do not apply. 6

9 retirement spending plan worksheet pt.1 INCOME AMOUNT Employment $ Pension (corporate, government) IRAs Simplified Employee Pension Plan (SEP IRAs) Keogh plans Social Security Annuity installments Rental income Bond interest Stock dividends Mutual fund dividends Money market interest Total Monthly Gross Income = $ DEDUCTIONS AMOUNT PLANNED ACTUAL FITW Federal Income Tax Withholding (if applicable) $ $ SITW State Income Tax Withholding (if applicable) FICA Social Security FICA Medicare Other deductions (child support, alimony, etc.) Total Deductions = $ Total Monthly Net Income (total monthly gross income minus total deductions) = $ EXPENSES AMOUNT PLANNED ACTUAL Charitable giving (place of worship, charity, etc.) $ $ Food Rent/Mortgage Property insurance (renters/homeowners) Property taxes (1/12 of total annual expense) 7

10 retirement spending plan worksheet pt.2 EXPENSES (CONTINUED) AMOUNT PLANNED ACTUAL Utilities $ $ Home maintenance/improvements Phone/Mobile phone Internet service provider (ISP) Clothing Laundry/Dry cleaning Health insurance/medical expenses Life insurance Long-term care insurance Vehicle payment Auto insurance Gasoline/Parking/Tolls/Public transportation Vehicle maintenance Travel/Entertainment/Dining out Hobbies (for example, golf or tennis equipment and fees) Club fees/organization dues Credit cards/loans payment TOTAL MONTHLY EXPENSES = $ = $ CALCULATE MONTHLY CASH FLOW AMOUNT PLANNED ACTUAL Total Monthly Net Income $ $ Less Total Monthly Expenses - $ - $ Net Cash Flow (Deficit)* = $ = $ * If your net cash flow is positive, you can save more for emergencies or other financial goals. If negative, you will have to cut expenses or increase income (by taking a second job, for example) to reduce or eliminate debt. 8

11 retirement goals Set goals ASK YOURSELF THE FOLLOWING QUESTIONS: Where will I live throughout retirement? Do I want to be close to family, medical facilities, etc.? Do I want to travel? Where? When? For how long? What hobbies will I pursue? Do they require lessons, special equipment, joining a club or association? How will I stay healthy and active? Establish realistic goals Will I do volunteer work (church, nonprofit organization, etc.)? Do I want to work or start a business? Will I go back to school or learn a new skill? Retirement means different things to different people. For some, it means settling into a lifestyle of leisure in a senior community. For others, it may mean a chance to travel extensively, enjoying activities that weren t possible before retirement. For others, retirement may mean the chance to start a second career. It s important to identify what your goals are for retirement and how you ll afford them. It helps to think about short-term (less than 3 years), intermediate-term (3 to 10 years) and long-term (more than 10 years) goals. Do I expect children or grandchildren to live with me? 9

12 Living arrangements: to own or rent? Many people take great pride in owning their own home. But does it make sense financially in retirement? Here are some things to consider when comparing owning and renting your home: OWN Mortgage payment builds equity, which may be tapped in retirement. Mortgage interest and property taxes are deductible for federal income tax purposes. No monthly mortgage payment if mortgage loan is paid in full. You are responsible for taxes, maintenance. Homeowners insurance is more expensive than renters insurance. Must sell to relocate. RENT Monthly lease provides no investment benefit. No federal income tax benefit, if you continue to itemize. Rent can increase over time. Landlord is generally responsible for taxes, maintenance. Renters insurance is less expensive than homeowners insurance. Relocation is easier. Ask a financial planning professional for specific advice about your situation. 10

13 what will your goals cost? So you ve determined your retirement goals. Now comes the hard part determining if they re financially feasible. Consider the timing of your goals, and allow for inflation, which has been rising 2% to 3% percent annually during the past decade. GOALS -3 Years 10+ Years Time $ Needed Time $ Needed New recreational vehicle 3 years $15,000 Pay home mortgage in full 5 years $25,000 11

14 managing retirement assets Growing & securing your assets Asset allocation Your personal savings and investments are likely to make up a significant portion of your retirement. All the more reason to plan for these early and with the help of a financial planning professional. With a professional s help, you ll have a much greater chance of managing your resources carefully and achieving your goals for retirement. Think about retirement in three general segments, which vary according to an individual s health and personal circumstances: Early retirement» Before age 62 As the saying goes, Don t put all your eggs in one basket. This is especially true when it comes to how you allocate your assets in preparation for retirement. Proper asset allocation helps minimize the risk associated with your investments. In short, it s good to diversify your investment portfolio so it will withstand market fluctuations. How you choose to allocate your portfolio in retirement depends on: 1 Your age. Middle retirement» 62 to 70 Late retirement» After age Your personal risk tolerance. How much your retirement spending plan depends on personal savings and investments. 12

15 asset allocation phases So how aggressive or conservative should you be when allocating your assets? This depends on the phase of retirement. Consider the following: PHASE OF RETIREMENT POSSIBLE ASSET ALLOCATION A more aggressive retirement portfolio may be appropriate if: EARLY You expect to spend many years in retirement. You have substantial personal savings and investments. You will not rely on Social Security as a significant source of retirement income. A moderate retirement portfolio may be appropriate if: MIDDLE You retire at your full retirement age, when you are eligible for maximum monthly Social Security payments. You have accumulated moderate savings, possibly through IRAs or 401(k) plans or 403(b) plans. You plan to work during retirement. LATE A conservative retirement portfolio is a good idea when: You are well into retirement. Your retirement income relies heavily on Social Security. This information is not investment advice. Consult a financial planning professional before making investment decisions. For all phases of retirement you should consider securing guaranteed income sources to meet income gaps for basic expenses. 13

16 Which portfolio is right for you? How you allocate your assets directly impacts how well you address your retirement needs and goals. Consider the following characteristics of an aggressive, moderate or conservative portfolio when determining the appropriate asset allocation for your investment portfolio: AGGRESSIVE PORTFOLIO Main goal is to obtain long-term growth of capital. Mainly consists of equities. Portfolio s value may tend to fluctuate widely. For diversification, portfolio may include some fixed income securities. MODERATE PORTFOLIO Goal is to preserve a large portion of the portfolio s total value. Avoid debt Many people take on debt in their later years, not realizing how it may impact their retirement. Here are some things to consider: May choose securities that pay a high level of dividends or interest rate. Willing to take on a higher amount of risk to get some inflation protection. CONSERVATIVE PORTFOLIO Goal is to protect the principal value. Generally allocate a large percentage of the total portfolio to lower risk securities. Some exposure to the stock market may help offset inflation Avoid taking on debt by spending more than your retirement budget allows. If your expenses begin to outpace your income, take steps to reduce them. Cut or reduce discretionary expenses. Reduce your mortgage or living expenses. Consider downsizing to a less expensive home in an area with lower property taxes. Consider earning extra income by going back to work, either full- or part-time. 14

17 Be smart about withdrawals Tax considerations To maximize your assets, it s important to consider the timing and amount of your retirement withdrawals. This will depend on factors such as your age, federal income tax bracket, income needs and portfolio size. A financial planning professional can help you devise a withdrawal strategy to suit your needs. However, financial experts generally recommend following these guidelines: Withdraw less money ideally no more than 4% of your assets annually. Adjust your withdrawal rate annually based on market conditions, your age and your expected life expectancy. Wait as long as possible to withdraw funds from federal income tax-deferred plans. This allows your assets to continue compounding and growing federal income tax free. Consider supplementing your portfolio with an income annuity during retirement. Consider withdrawing assets in the following order: Non IRA accounts (for example, savings accounts, non IRA investments, non-qualified deferred annuities) Tax deferred annuities (non-qualified). Qualified retirement accounts (traditional IRA, annuities, 401(k), TSP, 403(b). Roth IRA. When considering your withdrawals, you ll also want to consider the federal tax implications and how they impact you. Traditional IRA and employer- or government-sponsored 401(k) or 403(b) distributions are generally taxed for federal income tax purposes as ordinary income because they are typically funded with pretax dollars. Withdrawals made before 59½ years of age are subject to federal income tax and a 10% early withdrawal penalty. Those leaving their job the calendar year they turn 55 years of age or later can withdraw from their 401(k) without penalty prior to 59½ years of age. Required minimum distributions from a traditional IRA must begin by April 1 of the year after you turn 70½ years of age and are subject to federal income tax. Failure to take an annual required minimum distribution could result in a 50 percent penalty of that year s required distribution (to the extent you should have, but did not take, the required amount by the deadline). Roth IRA distributions are not subject to federal income tax because they are funded with after-tax dollars and there is no mandatory age for taking distributions during the account owner s lifetime. For more information on federal income tax, visit the Internal Revenue Service (IRS) website at irs.gov 15

18 social security & working in retirement THE Bottom LINE Planning for retirement? Don t plan on Social Security alone. 16

19 Social security: it s only part of the puzzle Years ago, many people may have depended almost solely on Social Security benefits to fund their retirements. This is no longer a reality. Planning for your retirement today requires a diversified approach that includes pensions, investments, personal savings, and Social Security. When it comes to Social Security, you are generally eligible if you have been employed or self-employed for at least 10 years. If you have never been employed you may be entitled to as much as one-half of your spouse s benefit amount when you reach full retirement age. Your benefit amount is determined by three factors: Number of years worked. Your total earnings. Age when payments begin. YOU SHOULD ALSO CONSIDER THE FOLLOWING: A portion of your Social Security benefit may be subject to federal and state income tax if your total retirement income from all sources exceeds certain levels. Your benefits may be reduced if you worked for an employer who did not withhold Social Security taxes. For details, contact the Social Security Administration (SSA) at (800) or visit ssa.gov. You may be able to estimate your retirement benefits by using the SSA Retirement Estimator. Visit ssa.gov/estimator for more information. 17

20 When to begin receiving payments. Consider waiting You may begin receiving the full amount of your Social Security retirement benefits at your full retirement age, which the SSA determines based on your year of birth. Whatever your full retirement age, you can choose to receive benefits as early as 62 years of age or as late as 70 years of age. In most cases, the longer you wait, the higher your monthly payment: If you begin payments before your full retirement age, you will receive a permanently reduced monthly amount to take into account the longer period you could receive them. If you delay payments until after your full retirement age, you will receive an increased amount (from 5% to 8%) for each year you wait, up to 70 years of age. If you started receiving Social Security benefits less than 12 months ago and you have changed your mind about when they should start, you may be able to withdraw your Social Security claim and re-apply at a future date. If your request is approved, you must repay all the benefits you and your family received based on your previous application for retirement benefits. Since Social Security makes up a significant part of a retiree s overall income, the decision of when to start receiving Social Security benefits should not be taken lightly. This may be one of the most important retirement decisions you will ever make, and may not be reversible. A visit to the Social Security website at ssa.gov is a good start to help you understand the basics, and to run estimates of your benefits. There are many factors that affect not just you, but your survivors as well, such as: other income sources, marital status, age difference between spouses, available investments, life insurance, etc. To determine your full retirement age, visit ssa.gov/pubs/ retirechart.htm for a detailed full retirement age chart. Ask a financial planning professional or a retirement adviser for specific advice about your situation. To begin receiving Social Security benefits, you should apply for them no more than four months before the date you want payments to begin. HOW TO APPLY WHAT YOU WILL NEED Online at ssa.gov Social Security number (SSN) By phone (800) Birth certificate or proof of U.S. citizenship. In person at your local Social Security office Military discharge papers if you had military service before Previous year s W-2 form or federal income tax return. Other documents may be requested based on your personal situation. 18

21 Working in retirement There s a growing trend where retired people aren t actually retiring. Many are taking advantage of their newfound freedom to start a second career. Quite often, these careers allow people to explore new opportunities to pursue a new passion, give back to their community, or be involved with an organization in a way that wasn t possible before retirement. What s more, taking on a second career helps retirees to supplement their incomes, gain health insurance, and add to their overall financial stability. Before taking a job, make sure you understand how working affects your retirement income. PENSION PAYMENTS Returning to work can affect your pension, especially if you plan to work for a former employer. Ask your human resources representative or pension plan provider to explain the following: Whether penalties exist for working after receiving payments. How your pension formula is calculated. If it considers final salary, taking a position that pays less than your final one could lower benefits. Whether you can still access pension funds after returning to work. SOCIAL SECURITY BENEFITS Working after you have begun receiving Social Security payments may affect your benefit amount. FEDERAL INCOME TAXES Going back to work may subject your Social Security benefits to federal income taxes. You will have to pay federal income taxes on a portion of your Social Security benefits if your total income from all sources (including wages, employer or government pensions and investments) exceeds the following amounts: FILING STATUS Up to 50% of benefit is taxable if income exceeds Up to 50% of benefit is taxable if income exceeds INDIVIDUAL $25,000 $34,000 MARRIED FILING JOINTLY $32,000 $44,000 Your payments, if begun before full retirement age, will be reduced if your earnings exceed certain limits. Your earnings will not affect your benefits once you reach your full retirement age. You may receive a higher payment based on your new earnings. Although Social Security automatically credits your additional earnings to your lifetime earnings record and recalculates your benefit amount, the difference may not be as large as you think, since your benefits are calculated using your highest 35 earnings years. SOURCE: ssa.gov 19

22 protecting your assets 20

23 Health insurance It s important that you understand your health insurance options before you retire. If you retire before becoming eligible for Medicare and you are not covered by a new employer s health insurance policy, consider continuing health insurance coverage available under two federal laws: The steps you take today to protect your assets will go a long way to ensuring a successful retirement. Insurance, wills, powers of attorney and trusts are important tools for protecting your assets throughout your life. Your needs are likely to change during retirement, so now is an ideal time to review your provisions for your health, family and other personal assets and make adjustments as needed. The Consolidated Omnibus Budget Reconciliation Act (COBRA) Under COBRA, employees may continue group health insurance coverage for themselves up to 18 months and for their families for up to 36 months following retirement or layoff. For more information on COBRA, visit the U.S. Department of Labor website at dol.gov The Health Insurance Portability and Accountability Act (HIPAA) of 1996 Once COBRA ends, HIPAA prevents group health plans from denying you coverage based solely on your health and limits exclusions for pre-existing medical conditions. This law also protects you if your only option is to buy an individual health policy. 21

24 other health insurance options FEDERAL/STATE HEALTH EXCHANGES Under the Affordable Care Act, Americans are now eligible to purchase health insurance plans (or policies) through government-run health insurance marketplaces, also known as federal or state health exchanges. Through these websites, Americans will shop for health insurance policies offered through various health insurance companies. Many of these policies are then subsidized by the federal government based on your and your family s income. Insurers selling plans through the exchanges cannot deny coverage or charge more to people with pre-existing medical conditions, and they must cover treatments for those conditions. Many preventive services also will be covered at no cost. Many people who have coverage through their jobs will likely keep their current policies, but by doing so become ineligible for federal subsidies. With a few exceptions, people who do not have insurance will face a tax penalty, starting in 2014 at $95 or one percent of household income, whichever is greater. HIGH-DEDUCTIBLE HEALTH CARE PLAN A high-deductible health care plan, also known as a consumer-directed health care plan is a choice a consumer makes to maintain a low annual premium with an understanding your medical insurance will not initiate until the deductible is met (often several thousands of dollars). Even when you meet your deductible, you are still likely liable for a co-pay (the fee you pay upfront at the medical facility) before your medical needs are addressed. These types of plans are often coupled with a savings plan such as a health savings account or flexible spending account to allow you to set aside the funds needed to address future deductibles. These types of plans also require proactive management by the consumer to price compare when looking for medical services to prevent overpaying for similar services (for example, understanding the difference between generic and prescription drugs). MEDICARE Medicare is the federal government s health insurance program for individuals 65 years of age or older, some disabled individuals under 65 years of age and individuals of all ages with end-stage renal disease. For more information visit medicare.gov or call Medicare at (800)

25 other types of insurance LIFE INSURANCE When considering life insurance in retirement, ask these questions: Will someone (a spouse, children or business partner) experience a financial loss or assume a financial burden upon your death? Have you reduced debt? Do you have adequate savings, investments or pensions to support your spouse or others who depend on you? Would you like to leave a legacy? Most retirees maintain enough coverage to pay for funeral and burial expenses, to cover the cost of a final illness or estate taxes, to make a charitable contribution or to provide money for a spouse, children and grandchildren. HOMEOWNERS INSURANCE Homeowners insurance is designed to protect you from the financial burden you would incur if your home were damaged or destroyed or your possessions stolen. Insuring your home and possessions for the right amount and keeping your policy up to date will ensure that if you have a claim, your settlement will cover your loss. AUTO INSURANCE Make sure you read and understand your policy. Insurance coverage is very specific. Policies are legal contracts containing exceptions, exclusions and limitations. Available coverage and minimum requirements vary by state. LONG-TERM CARE INSURANCE Long-term care insurance can pay for your care if you incur a disabling or chronic condition and become unable to care for yourself. Long-term care insurance is useful for protecting assets and income and staying independent of financial support from others. Although not everyone should have long term care insurance, everyone does need a long term care plan. ASK YOURSELF THE FOLLOWING: Who will take care of me when I can t? Would an extended need for assisted living or nursing home care deplete my assets? Where would I want to be cared for; in my own home, with family, or in an assisted living or nursing home? Like life insurance you are likely to qualify for better rates when you are younger and in better health. The cost for longterm care will vary among facilities and geographic locations. RENTERS INSURANCE Renters insurance can help alleviate the financial burden you would have if your possessions were destroyed or stolen, or if someone were injured on or off your property through your negligence. It is the type of coverage most overlooked by consumers. Do not assume the landlord s insurance will protect your possessions. Landlords usually carry insurance only on the building itself. 23

26 estate planning basics The goals of good estate planning are fairly common, but it is easy to become confused with the numerous methods to achieve these goals. Some simple questions you can always refer to, or to ask your qualified legal counsel, are: 1 If I am incapacitated for whatever reason, will my financial affairs, and medical treatment, continue as normally as possible? * Examples of how you do this: Durable power of attorney (DPOA), health care power of attorney (HCPOA), or revocable living trust. 2 At my death, will my property pass to who I want it to, when I want it to, and under any special circumstances that I may want to control? * Examples of how you do this: Titling of assets, beneficiary designations, will, and/or trusts. 3 Do I have the best plan in place to pass my estate to my heirs while I m alive, or at my death, while minimizing costs, fees, and estate taxes? * Examples of how you do this: Lifetime gifting to family or charity, use of life time exclusion at death, trusts, and life insurance planning. 24

27 WILLS A will is a necessary part of good financial management. If you do not have a will, a state court finalizes your affairs upon your death and charges your estate for the expenses. Your remaining assets are divided among your relatives according to state law. If you are unmarried and have no blood relatives, the state may take your property. POWERS OF ATTORNEY A power of attorney (POA) allows you to give another individual the legal authority to act on your behalf during your lifetime for a purpose you designate, such as paying your bills, managing your personal affairs or handling your finances. You must be of sound mind and not under mental duress to prepare and execute these documents. Unless it is a durable POA, a general POA expires if you become incapacitated. TRUSTS A trust is a legal entity that holds property designated by you, the grantor, for your beneficiaries benefit. Generally, any property of value can be placed in a trust, including cash, stocks, bonds, life insurance policies or proceeds, bank accounts, certificates of deposit (CDs), business or investment income, real estate, retirement fund benefits, jewelry or fine art. Even for those with estates of modest value, a trust can be a powerful and flexible financial planning tool to help you: Ensure your property is transferred according to your wishes and in a confidential manner. (Because a will is probated, it becomes a matter of public record.) Transfer property directly to your heirs without the expense and delay of probate. Have some control of how your heirs use your assets after your death. Manage your affairs if you become disabled. Reduce applicable federal estate taxes. PROBATE Probate is the legal process of proving your will is valid in the state of your legal residence. If you leave a will, your assets will be distributed as you wish after the will goes through probate. Some states allow exceptions, so become familiar with your state s provisions. Probate is a legal record of title transfer for estates containing real estate. It is more efficient than lawsuits for notifying creditors and settling claims when an estate owes debts. In some states, probate can involve long delays and high legal and administrative fees. You should consult an attorney that specializes in trust, estate and probate matters regarding your specific situation. 25

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