Money Clinic: Projecting a Happy Retirement

Planning for retirement is a daunting task. Your goal is to project your potential income and expenses to get a rough picture of what your financial situation might look like in retirement.

If retirement is approaching soon, try living for six months or more on your anticipated income to determine whether it is realistic. If it’s not, or your anticipated expenses exceed your income even without a trial run, you may have to reduce expenses or work longer, or both.

Even if the numbers look good, it would be wise to keep building your savings. You might take advantage of catch-up contributions to IRAs and Employer-provided retirement plans, which are available to those who reach age 50 or older by the end of the calendar year. It also makes sense to build a private pension that is tax-favored. One way to do this is to use your tax-savings from those IRA and retirement plans to fund a life insurance policy which can provide an alternate source of tax-favored income as well as other valuable living benefits.

Although with a little thought it may seem obvious, inflation is all too often ignored in retirement planning. In reality, inflation can insidiously erode the value of a fixed-income stream.

For example, at 3% inflation, someone retiring with a fixed annual payment of $100,000 could face a 25% reduction in their standard of living by year 10 and an almost 50% reduction by year 20.

This is not what most investors have in mind. Planning for inflation is critical.

In addition to planning for inflation, you also must be able to mitigate sequence risk by ensuring that investments do not have to be sold at the wrong time.

As you think about your income strategy, also consider ways to help minimize taxes in retirement. Would it be better to tap taxable or tax-deferred accounts first? Would part-time work result in taxable Social Security benefits?

Finally, health care should get special attention as you plan the transition to retirement. As you age, the portion of your budget consumed by health-related costs will likely increase. Although Medicare will cover a portion of your medical costs, you’ll still have deductibles, copayments, and coinsurance. Unless you’re prepared to pay for these costs out of pocket, you may need to purchase a supplemental insurance policy.

In 2015, the Employee Benefit Research Institute reported that the average 65-year-old married couple would need $213,000 in savings to have at least a 75% chance of meeting their insurance premiums and out-of-pocket health care costs in retirement. And that doesn’t include the cost of long-term care, which Medicare does not cover and can vary substantially depending on where you live.

These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories may help the process seem a little less frightening.

It is also unfortunate that financial institutions are always trying to sell you the latest “magic bullet” that will “absolutely need” to be purchased from them to make you successful. Hopefully, you are beginning to realize that there is no such thing.

Remember, a financial decision in any one area of your financial life will inevitably impact other areas of your life. Financial planning should be “process” oriented, not “product” oriented.

The only way to prepare for a happy retirement is to focus on a strategy that incorporates multiple income sources, tax reduction strategies and risk management. You also need to make sure you keep up with inflation and prepare for increasing health care costs.

Your projections may get clearer as you develop a realistic picture of what your retirement will look like, based on your expected resources and expenses. Also, since life circumstances and economic situations constantly change, you need to be flexible enough to make changes along the way.

Lastly, you should copy strategies that the wealthy use with their money and implement those into your overall strategy as well.

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Money Clinic: Financial Education Is Your Best Investment

Amazingly, the single biggest skill that can make or break your financial success isn’t taught in school. You can graduate with a four-year college degree and learn nothing about personal finance or investing.

Doctors and attorneys can open their own practices without any clue how to read a financial statement. Business owners and investors can remain dangerously ignorant of the tax law.

The truth is, financial literacy is the essential skill you must develop if your goal is to build wealth and enjoy financial security. One reason financial education is necessary is to understand the subtle shades of gray hiding behind all the investment half-truths you hear.

We live in a world of complexity and change. The challenges facing consumers in managing their finances are significant, in large part because much of the information that we receive daily – about money and financial products is extremely misleading. Financial institutions spend BILLIONS of dollars each year bombarding the American consumer with financial services marketing.

So many people get overwhelmed by the barrage of financial advertisements and advice of so-called “gurus” that they usually end up buying a mixed bag of financial products that have little or nothing to do to help them achieve greater success.

Aren’t you tired of all the financial and investment experts with their conflicting investment advice? How is a person supposed to learn how to manage money when the supposed experts can’t even agree? It’s enough to make you go bonkers! Who can you trust?

If your investment decisions aren’t based on knowledge, then what are they based on – salesman’s charisma, speaker’s charm, media sound-bites, trust, or blind faith? None of these are a reliable prescription for investor success.

What you can’t get from “so-called” financial experts is the real key to financial security: figuring out which of the many available financial strategies will work for your personal situation. You are a unique individual with your own skills, background, experiences, and outlook on life. You have a risk tolerance unique to you and preferences, time frames, and goals that are different from everyone else’s.

Therefore, your financial success results from a financial plan that capitalizes on that uniqueness. How you retire early and live wealthy is going to be different from everyone else you talk to or associate with.

Instead of letting financial salespeople try to sell you products based on the “so-called” benefits of their products, you must base your decisions on the products that match the purpose of what you are trying to do and the characteristics of your ideal financial plan!

As you raise your financial intelligence, you raise the ceiling on what’s financially possible for you. Your financial intelligence sets the context for your investment success – or lack thereof.

Your return on investment should improve as you learn how to invest more consistently and control losses when the inevitable mistakes occur. That translates into more dollars in your pocket and greater financial security.

A little-known fact about financial intelligence is it grows and compounds just like money. The effect is multiplicative – not additive. Each new tidbit of information connects to all the other knowledge which multiplies. It doesn’t just add up, but it grows geometrically by multiplying.

The sooner you seek investor education, the sooner you can begin reaping the rewards. The longer you enjoy financial literacy, the more value you will get from it. Every year it compounds profits in your portfolio.

So, what should you do now? The answer is simple: commit to growing your financial literacy with a process of continual improvement by beginning to learn today.

Here’s a great way to start: MoneyRX: Your Prescription For Financial Success (Kindle Edition)

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Money Clinic: Protecting Your Home from Medicaid Recovery

According to the Omnibus Budget Reconciliation Act of 1993 (OBRA-93), the state has the right to take back whatever it paid for the care of a Medicaid applicant. And because you have to be “broke” to qualify for Medicaid, usually the only property of substantial value that a person on Medicaid is likely to own when they die is their own home. When OBRA-93 was passed, each state established an Estate Recovery Unit (ERU) to go out and find what assets they can take back from those that received Medicaid benefits.

After both the community spouse and the ill spouse die, the state’s estate recovery unit has the authority to take just about any property that the Medicaid recipient had their name on. In most cases, that means going back to the house.

For example, if Dominic dies before Rachel after living in a nursing home for two years and Medicaid has paid the nursing home $3,000 per month, the state will have paid $72,000 for Dominic’s care ($3,000 per month times 24 months). If the family home where Rachel lives is worth $100,000, the state would have a claim for the first $72,000 that comes from the sale of the house.

So, the house is protected while Rachel is alive. However, when she passes, the state may force the sale of the house. Whatever’s left over after Medicaid is paid back ($100,000 minus the $72,000 taken out to repay Medicaid) would go to their estate.

One of the most efficient ways to protect the home is to transfer the deed into a Medicaid Asset Protection Trust. With a Medicaid Asset Protection Trust (MAPT), you can remain in your home and it is protected and does not count towards your Medicaid asset total. You would have to assign someone other than you or your spouse to act as trustee for the trust.

However, when using this strategy, you must beware of the five-year rule. Medicaid closely examines all transfers of assets in the five years prior to a person applying for Medicaid. This is referred to as Medicaid’s “lookback” provisions. If Medicaid determines that you conducted a non-exempt transfer, you can be penalized and not allowed to qualify for Medicaid for a certain number of years.

The rules governing Medicaid are complex and by violating the rules, you can disqualify yourself from the program. It is very important that you speak to a qualified professional with experience in Estate Planning and hire an experienced elder law attorney to draft the correct documents. These attorneys understand all the Medicaid rules, can help you protect your assets legally, and provide you important financial planning advice.

It is expected that 70% of people turning 65 will need long-term care at some point in their lives and that many of these people will require care from a long-term care facility or nursing home. It is never too early to begin planning for how you will pay for care, protect your assets and qualify for Medicaid.

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Money Clinic: Thinking about Retiring Soon?

You can see it on the horizon. Never-ending days of rest and relaxation. No more pressure or stress.

Well, maybe.

If you don’t want to worry about money after you retire, you need to act well in advance of exiting the workforce.

Because you’re going to be on a fixed income after you retire and debt servicing can take a big chunk out of that fixed income, you should try to retire your debts before you retire from your job. The easiest way to get started is to pay off your credit cards, especially since the interest on this type of debt is not deductible for tax purposes.

Next, evaluate each of your expenses and determine if any of them can be eliminated or reduced. To help arrive at anticipated spending needs, begin with an assessment of household living expenses today, both fixed and discretionary. If you’re saving on an ongoing basis but expect that to cease in retirement, you’ll obviously want to adjust your cash-flow needs downward to account for the subtraction.

Once the paychecks stop coming, the bills are still going to continue to arrive. When you need a new car, a new hot water heater, or some expensive dental work, you don’t want to have to worry about how you’re going to pay for it. And you don’t want to take a big chunk out of your nest egg to cover these costs. The best thing to do is plan for those unexpected expenses.

An emergency fund provides instant liquidity for dealing with unexpected expenses without having to tap into assets that could create taxable events – like retirement funds or taxable brokerage accounts. It also helps you avoid accumulating bad liabilities like credit card debt.

Without a doubt, you will also need to make plans for healthcare coverage, if for no other reason than the fact that it’s expensive. Not only have healthcare costs outstripped the general inflation rate, but they also tend to trend up through retirees’ own life cycles. Evaluate your health and try to take care of any outstanding medical issues while you’re still covered by your employer’s healthcare coverage.

Just as you have to plan your finances, you also need to plan for the social and mental aspects of retirement. You might want to go back to school to study art or get a degree that you’ve always wanted. You can volunteer for a local charity. You can even work part-time. Sometimes, a part-time job can provide healthcare coverage in addition to income and opportunities to get out of the house and socialize.

It is also vitally important that you gain an understanding of how to maximize Social Security. Social Security is difficult to grasp. Deciding how and when to claim benefits are crucial decisions especially when spouses are involved.

Finally, retirement savings should be at the top of your priority list. Questions you should be asking yourself include the following: How much do you have saved? Do you have enough? Do you need to save more? Are your investments allocated properly? What are your options?

Traditionally, retirees have been encouraged to follow the 4 percent rule when taking retirement distributions but its continuing relevance has been questioned due the expansion of life expectancies. This rule dictates withdrawing 4 percent of your portfolio in the first year of retirement, then making subsequent annual withdrawals on an inflation-adjusted basis.

However, the ideal withdrawal rate is discovering what you can spend, based on all the variables that would deliver the highest probability of not running out of money during your life expectancy.

Rules of thumb for income-replacement ratios abound, with planners and financial firms urging retirees to shoot for replacing between 70% and 85% of their working incomes. Retirement planning experts arrive at those percentages by reducing gross income by taxes, insurance premiums and retirement contributions.

These charlatans want you to live on less than 100% of your pre-retirement income.

Who in the world wants to earn less money in retirement?

Your withdrawal rate may also hinge on the types of investments you own outside of stocks and bonds. If you have multiple sources of income, like a pension or cash value life insurance, you might be able to swing a 4 percent withdrawal rate.

No matter what, an ongoing saving and investment plan needs to be fine-tuned and monitored to help a you achieve an important financial life benchmark such as creating an inflation-adjusted income stream that could certainly continue throughout a 30-year retirement period.

While it is customary for financial professionals, depending on individual circumstances, to recommend reducing portfolio equity exposure as a retirement date approaches and increase the allocation to conservative selections like fixed income (bonds) cash and ultra-short duration bond holdings earmarked as reserve for withdrawals – there is recent research that shows portfolios that begin with a 20-40% allocation to stocks and increase to 60-80% generally increase the success of retirement income sustainability and reduce the impact of shortfalls compared to static rebalanced asset allocations.

Prospective and new retirees can tempt fate by maintaining an aggressive portfolio stance. However, keep in mind, once distributions begin, investments must be closely monitored and a sell discipline enforced. Stocks should be trimmed into market strength to keep the cash bucket full and avoid a forced liquidation of investments through periods of market weakness. An unfortunate series of portfolio returns during the first half of retirement can result in a fast, unrecoverable depletion of wealth in the second half. To stay on track and remain confident in a plan to boost equity exposure, check your portfolio withdrawal rate at least every two years.

Retirement planning should be a life-long process. It should not be thought of as a crash-course event.

The most successful retirees have plotted a course for retirement over many years. They have created diversified portfolios as well as multiple sources of income.

Just as important, they have created fulfilling use of their time.

In the end, it’s never all about the money. I’m quite sure that I’ve never seen a U-Haul follow a hearse.

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Money Clinic: How to Choose the Right Money Coach

Whether you call him a coach, advisor or consigliere – choosing the right person to help you with your money decisions can be one of the deciding factors in reaching your financial goals.

While most people like other people that make them “feel good”, having the right coach that can help move you from your own comfort zone can usually be more rewarding over the long term. Since only 1% of Americans are considered wealthy, you might be better served working with someone can help push you ahead of the pack instead of just making you feel good!

I understand that most people want to do business with people they know, like and trust but in the financial services business, that just isn’t enough anymore.

Don’t believe that just because someone works for a financial institution that they have your best interests at heart. If someone isn’t helping you implement the strategies of the wealthiest 1%, you need to fire them.

Unfortunately, it is very difficult for consumers to identify a financial coach who has demonstrated the competency to provide integrated financial planning services. Most advisors don’t get paid unless they sell you something. They use projections and allocation models as sales tools. They are also getting pressured by the institution they work for to sell you something.

Projections, models and questionnaires are worthless because the world changes constantly. Also, these projections fail to take into the account the impact of your decisions in relation to all your financial assets and the various circumstances that will invariably impact your financial life.

It is the function of an excellent coach to know the rules of the money game. And perhaps the greatest of all money truths is that the primary determinant of real-life returns isn’t investment “performance” but investor “behavior”. The critical variable isn’t what your funds do – it’s what you do. In other words, it is far better to understand your own behavior than the behavior of investments which may or may not be hyped at any particular moment in time.

A good financial coach should help bring clarity to your money decisions. Simply ask him, “what would a billionaire do in this situation?”

You are asking him to share ideas and strategies that the mega-wealthy do with their money, not push some financial institution ideology on you. Sometimes, you just need organization and are weak on planning skills. This is where a good coach can help you come up with ways to simplify the process so you can stay focused on achieving your goals.

If you are not applying strategies and tactics that the wealthy use with their money, your results are going to be mediocre at best. Fatal at worst.

Therefore, the best advisor you can have is the guy who implements a system based on the fundamentals that make people wealthy. He deploys tactics that wealthy people use. He motivates you by keeping things simple and helps you see the big picture. He makes sure all your assets are working together efficiently. And, perhaps most importantly, he keeps you from making drastic mistakes.

Maybe you will eventually know, like and trust your financial coach. But, it better be after you are well on your way to financial success. Not a minute before.

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