Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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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.

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What is Trust?

What is Trust?

The word “trust” is applied to all types of relationships, both personal and business, to indicate that one person has confidence in another person.

For our purposes, a trust is a legal device for the management of property. Through a trust, one person (the “grantor” or “trustor”) transfers the legal title of property to another person (the “trustee“), who then manages the property in a specified manner for the benefit of a third person (the “trust beneficiary“). A separation of the legal and beneficial interests in the property is a common denominator of all trusts.

In other words, the legal rights of property ownership and control rest with the trustee, who then has the responsibility of managing the property as directed by the grantor in the trust document for the ultimate benefit of the trust beneficiary.

A trust can be a living trust, which takes effect during the lifetime of the grantor, or it can be a testamentary trust, which is created by the will and does not become operative until death.

Also, a trust can be a revocable trust, meaning that the grantor retains the right to terminate the trust during lifetime and recover the trust assets, or it can be an irrevocable trust; one that the grantor cannot change or discontinue the trust or recover assets transferred from the trust.

Trusts are used: 

  • To provide management of assets for the benefit of minor children, assuring the grantor that children will benefit from trust assets.  They will not have control of the trust assets until the child is at least age of maturity.
  • To manage assets for the benefit of a disabled child, without disqualifying the child from receiving government benefits.
  • To provide for the grantor’s children from a previous marriage.
  • As an alternative to a will (a “revocable living trust”).
  • To reduce estate taxes and, possibly, income taxes.
  • To provide for a surviving spouse during his/her lifetime, with the remaining trust assets passing to the grantor’s other named beneficiaries at the surviving spouse’s death.

Trusts are complex legal documents and are not appropriate in all situations. Before establishing a trust, you should seek qualified legal advice.

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Avoiding 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:

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.

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.

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.

Life Insurance

  • Unless payable to the estate, life insurance proceeds are rarely subject to the probate process.

Lifetime Giving

  • Gifts given during life avoid the probate process, even if made shortly before death.

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.
  • 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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Difficult Pension Benefit Decision

At retirement, if you have a pension, you have to make a difficult decision that could negatively impact your future financial security and that of your spouse.  Most people with company pension plans give this decision little thought and simply select the first payout option listed on their pension estimate; Joint and Equal Survivor Option.

For example, assume your maximum lifetime pension benefit is $2,000 monthly.

With the joint and equal survivor option, you’ll receive a significantly lower lifetime pension payment. Your surviving spouse, however, will continue to receive 100% of your pension benefit if you die first.

  • For as long as you live, you receive 75% of $2,000 the maximum life income option benefit.  Your benefit is reduced to $1,500 per month, for life.
  • If you die first, your spouse will receive a lifetime monthly pension benefit equal to 100% of your benefit, or $1,500 per month.
  • If your spouse dies first you will continue to receive $1500 per month.  There is generally no going back to the maximum $2,000 benefit. 

Second choice is  – Joint and One-Half Survivor Option:

If you elect the joint and one-half survivor option, you’ll receive a lower lifetime pension payment. On the other hand, if you die first, your surviving spouse will continue to receive a lifetime pension benefit equal to 50% of your pension benefit prior to your death. For example:

  • For as long as you live, you receive a monthly pension benefit of $1,700 or about 85% of the maximum life income option benefit.
  • If you die first, your spouse will receive a lifetime monthly pension benefit equal to 50% of your benefit, or $850 per month.
  • If your spouse dies first, however, your monthly pension benefit remains at $1,700.

Next choice is – Life Income Option:

If you receive your pension benefit under the life income option, you receive the maximum lifetime pension payment. If you die first however, your surviving spouse receives nothing after your death. For example

  • For as long as you live, you receive a monthly pension benefit of $2,000.
  • If you die first, however, your spouse will receive a monthly pension benefit of $0.
  • If your spouse dies first, your monthly pension benefit remains unchanged at $2,000.

At retirement, you will have to decide how your pension benefit will be paid out for the rest of your life:

  • If you elect to receive the maximum retirement check each month for as long as you live, with the condition that upon your death, your spouse gets nothing.
  • If you elect to receive a reduced retirement check each month, with the condition that upon your death, your spouse will continue to receive an income.
  • This pension decision is permanent.
  • The decision you make will determine the amount of pension income you receive for the rest of your life.
  • The decision is generally irreversible.
  • In making this decision, many people unknowingly purchase the largest death benefit (life insurance) they will ever buy and one over which they have no control.

How Can Retirement Income Protection Help Solve the Pension Benefit Dilemma?

Federal law allows a pension plan participant to waive the “joint and survivor” annuity payout requirement, with the written consent of his or her spouse.  This means that, with your spouse’s consent, you can elect to receive the MAXIMUM life income annuity payout at your retirement.

  • However, what happens to your surviving spouse’s income and lifestyle if you should die first?

The solution, you maintain sufficient life insurance to replace the pension income lost at your death, assuring that your spouse will have an adequate source of income after your death.  This is a death benefit you control and if your spouse predeceases you the life insurance can be surrendered paying you back part or all of your premiums;  Depending on when death occurred.

In making this important decision, you should evaluate the risks associated with retirement income protection funded with life insurance:

  • Your income after retirement must be sufficient to ensure that the life insurance policy premiums can be paid and coverage stay in force for your lifetime. Otherwise, your spouse may be without sufficient income after your death.
  • If your pension plan provides cost-of-living adjustments, will upward adjustments in the amount of life insurance be needed to replace lost cost-of-living adjustments after your death?
  • Does your company pension plan continue health insurance benefits to a surviving spouse and, if so, will it do so if you elect the life income option?

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An Income Annuity Solution

How Can an Income Annuity Protect Against the
Risk of Living Too Long?

The purpose of an annuity is to protect against the financial risk of living too long…the risk of outliving retirement income…by providing an income guaranteed* for life.

In fact, an annuity is the ONLY financial vehicle that can systematically liquidate a sum of money in such a way that income can be guaranteed for as long as you live!

Here’s How an Income Annuity Works:

The annuity owner pays a single premium to an insurance company.

  • Beginning immediately or shortly after the single premium is paid, the insurance company pays the owner/ annuitant an income guaranteed to continue for as long as the annuitant is alive. There are other payout options also available.
  • With a cash refund provision the insurance company pays any remaining funds to the designated beneficiary after the annuitant’s death.

Seeking a secure life long retirement income?  Click the video box to left of this post.

 

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Roth IRA Enhancement

The Roth IRA may be one of the most under used retirement income strategies.  Due to the deductibility of other retirement saving plans like Traditional IRAs and the 401(k); Roth IRAs are usually just an afterthought. After all who does not want to pay as little income tax as possible?  It seems a very simple rational decision. Initially a Roth has no effect on the amount of income tax due because the taxpayer receives no immediate tax deduction.   

Today one of the most relevant retirement/tax planning question is –

Do you think tax rates are headed down, stay the same or will they go up in the future? 

Clearly if you feel tax rates are going rise at some point then the decision is to pay a smaller tax now or a bigger tax on a larger sum later.  A Roth IRA is worth serious consideration, especially if you consider an enhancement by utilizing available lifetime income options.  

The new generations of annuities offered today either have income options built in or offer the option to purchase a guaranteed lifetime income rider. Using either of these options the annuity owner has the ability to start lifetime income at a specified age. 

If retirement planning is being done correctly income points are identified.  These are points in time when a retiree needs to start an income stream.  

To help understand the magnitude of the enhanced Roth advantage let’s use a simple example.  A future retiree is currently 49, they start contributing to a Roth annuity with lifetime income available as early as age 59 ½. The Roth’s income benefit base has grown to $100,000 with an annual tax free lifetime payout of 5% available ($5,000).  Whether or not they actually plan to retire at this early date they should start the lifetime income payout.  Why?  Because the income is for life, the earlier it is started the greater chance they will live long enough to get into company money.  In other words they would receive all of their money, interest earned and then they receive company money for as long as they live.  If cost of living increases are built onto our $5,000 yearly income example so much the better.   

Besides, even if still working, who wouldn’t appreciate some additional tax free income every year after age 59 ½?

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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Freedom Horse and Retirement

The horse (Mariska) in this video has been dubbed “Houdini Horse”. What’s not like about a horse or anyone else’s desire for freedom?

The lust for freedom is a natural yearning programmed right into the core of our DNA. Over time life experiences such as raising a family and career may have dulled this desire. However, I don’t think the desire to be free and do what you want on your own schedule ever goes away.

When I am asked “What is number one motivation to retire?” The soon to be retirees I work with express a desire to get off the treadmill, stop producing for someone else, travel when they want or to simply reassert control of their daily schedule. Everyone who works has a vision of their perfect retirement which almost always includes maximum personal freedom.

Apparently Mariska A.K.A. Houdini Horse not only wants personal freedom she wants freedom for all her companion horses as well.

The market crashes and low interest rates during the last decade have put serious crimps in many retirees’ personal retirement freedom. Some have had to work part time jobs others have had to cut back their spending in order to keep the household budget balanced, crimps to retirement freedom.

Unfortunately many financial planners are still using outdated retirement income models from the 90’s and because these models do not work in the “new normal” they are exposing their client’s retirement freedom to unnecessary risk. As I have written in several posts it does not have to be this way. The tools are available to help retirees maintain retirement freedom.

Comment below or privately Contact Tim Barton

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Who Has More Retirement Confidence?

Insured Retirement Institute (IRI) recently surveyed retirees between the ages of 50-66 and found 53% who own annuities are extremely or very confident their retirement income will be enough and will stay secure throughout their retirements.  Interestingly of those who do not own annuities only 31% are confident about their retirement income.

Posted on September 4, 2012 by IALC

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.

Note the annuities being discussed are fixed annuities which guarantee principal, interest and income. A variable annuity fluctuates with the equities in which it is invested and as a result provides no guarantees. A variable annuity should not be confused with a fixed annuity.

For help you may ask questions in the comments or contact me privately here: Tim Barton Chartered Financial Consultant

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My Retirement Budget is Being Squeezed: How does part time work affect Social Security Benefits?

Low yields on retirement savings and increasing costs are causing some retirees to consider part time or temporary work to make ends meet. 

If they work what happens to their Social Security benefit? 

Does it pay to work?

Continuing to work after you begin receiving Social Security retirement benefits may reduce the amount of those benefits ultimately available to support your retirement standard of living in two ways:

  1. Your earned income (wages and self-employment income) may cause your Social Security benefits to be subject to income tax. If your Social Security benefits are not currently exposed to income tax, you should evaluate whether your earned income will put you over the tax-free base amount of Social Security retirement benefits ($25,000 if single; $32,000 if married filing jointly).
  2. If you are between the ages of 62 and your full retirement age (age 66 in 2012), your 2012 Social Security benefits are reduced $1 for each $2 of your earned income in excess of the 2012 exempt amount of $14,640. The exempt amount is adjusted each year for inflation.

If you are receiving Social Security benefits and you have reached your full retirement age, there is no retirement earnings test for people who have reached their Social Security full retirement age (age 66 for people born between 1943 and 1954). Here’s how it works: 

  • In the year in which you reach full retirement age, $1 in benefits will be deducted for each $3 you earn above a specific annual limit ($38,880 in 2012), but only counting earnings before the month in which you reach the full benefit retirement age. 
  • Starting with the month in which you reach full retirement age (age 66 for people born between 1943 and 1954), you will receive the full Social Security retirement benefit to which you are entitled, without regard for or limit on your earnings.

Also keep in mind some annuity payments do not count as taxable income allowing a retiree who is receiving these payments to earn more in wages before triggering any of the Social Security earning limits.

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

Tim Barton  Chartered Financial Consultant