Who will you be when you retire? Retirement is about having control of your time. Maybe retirement means earning money doing something you love, at a pace that is comfortable for you. Maybe it is helping a charitable organization or volunteering your time for activities you care about. Spending time with family and friends and sprinkling in some travel appeals to many. Whatever you aspire to be in the next phase of life, a sound financial plan for getting there will help ensure your ability to choose. There are some key pieces of the puzzle that will help ensure retirement success. The earlier you start building a retirement nest egg, the easier it will be.
I have identified five primary preparation stages for planning your retirement. In the last newsletter, we looked at preparing for retirement in the “Early Retirement” stage of your adult life. In this stage, we are enjoying the fruits of our labor.
This quarter, we are addressing the “Late Retirement Stage.”
Late Retirement Stage
The “Late Retirement Stage” is the closing time of life. Financial stability is more about control of our time and experiences than it is about how much is in the bank. During this final stage, the most complicated change can be the loss of this control.
Having a sound financial plan in place to prepare for this time of life is of the utmost importance. Having choices regarding your long-term living conditions and care is what financial security means at this stage. Family members will often take over finances at this time. It is important to make sure a professional is available for consultation and management.
Estate Planning. At this stage estate planning is vital. A fresh review of estate plan documents is warranted. Meeting with an estate-planning attorney to make sure your affairs are in order is an important way to take the burden off your loved ones. A good estate plan will take care of financial considerations as well as put health care directives in order.
For 2018, the estate and gift tax exemption is $5.6 million per individual. That means an individual can leave $5.6 million to heirs and pay no federal estate or gift tax. If your assets are below this level, it does not mean meeting with an estate-planning attorney is a bad idea. Health care directives and special wishes can be written to ease the burden for you and your family.
Insurance. An inventory of insurance policies is important at this stage.
• Life Insurance. Take stock of any life insurance that is available. Make sure beneficiary data is up to date.
• Long-Term Care Insurance. Become very knowledgeable about the requirements for your long-term care insurance to be activated. Activating this policy as soon as possible to maximize benefits may be a good strategy to mitigate the risk of dying early.
Saving and IncomeFor Heirs. Savings accounts remain a valuable income source. Determining how and when to tap into savings accounts for retirement income is a key benefit of a financial advisor. Taxes and fees can significantly alter the actual cash flow from different accounts. A CPA will be instrumental in calculating the exact tax implications for each situation. Being aware of tax implications for heirs regarding these accounts is important. Special trusts may be in order to maximize the estate process.• Life Insurance. Life insurance is typically received by heirs’ tax free, regardless of the estate tax limit.
• Tax-Deferred Savings. Tax-deferred savings, such as Individual Retirement Accounts, are inherited tax free. However, the mandatory withdrawal requirements will be required regardless of the heir’s age. Additionally, any money withdrawn from the IRA is subject to the heir’s income tax rate.
• Taxable Investment Accounts. Taxable investment accounts may be subject to federal estate tax if total assets exceed the estate tax limit threshold ($5.6 million per individual in 2018). However, a major benefit of inheriting taxable investments at any asset level is a step-up in basis. This means that the purchase price of an asset is adjusted to the price at the day of death. This can be very beneficial for heirs receiving stock or other assets that were purchased by their predecessors at a much lower price. In this case, heirs may be able to liquidate assets with little to no tax implications.
Medicaid. Medicaid may be an option for some investors. A good estate planning attorney can review potential options for special trusts to pass assets on to future generations while maximizing Medicaid benefits. Please review this carefully, as some penalties may be involved. This may not be an attractive option for someone who is interested in maintaining control of their living conditions, as many features may be stipulated by Medicaid. For elderly people who have exhausted assets, Medicaid is a valuable tool for getting the necessary health care.
Schenkelberg Investments is here to help you put the pieces together. Please call or email to discuss options 402.658.2152, jj@schenkelberg.investments.