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AARP Article

Plan Ahead for Continuing Care

Don’t wait to have the talk about living arrangements in your later years

Where will I live when I start to need help with the daily business of living? I don’t want to wait for my children to open “the conversation,” in carefully casual tones. (“Ahem, Mom, we were wondering …”) I want to start that conversation myself. Their input will influence me, but I want the decision to be mine.

As do we all. But we can blunder into decisions simply by doing nothing. Most of us want to “age in place” with occasional side trips to other nice places. That works fine as long as we can take care of ourselves. When we can’t, however, we’ll start depending on someone else. That’s the decision I’m thinking about. Who will be there to help, and what can I do, in advance, to ease the transition? I don’t want to be stubborn about aging in place if it’s going to create caregiving problems for my children (not to mention medical risks for me).

If you don’t have children, or have children you can’t depend on, the question becomes even more important. Kindly neighbors running errands isn’t a permanent solution.

People hoping to stay in their homes should look at the floor plan as if they were already using a walker. You might have to add a bedroom downstairs with a bathroom whose door can accommodate a wheelchair. A pretty front porch will become a trap if there’s nowhere to build a ramp to the sidewalk. If you don’t want to renovate, perhaps you should simplify — sell the house now and buy a condominium in the same community, to stay close to your friends and social activities.

Whether in a house or a condo, you might eventually need caregiving services, if a spouse or child isn’t constantly available. You’ll also need someone you trust to supervise home-care aides — to be sure they’re always doing right by you. Who is that likely to be? This shouldn’t be a snap decision made under duress. The whole family should plan.

Some older people expect to move in with an adult child. If you have a house to sell, consider using the proceeds to put an addition on the child’s home, to provide each of you with some privacy.

Setting an example

My own parents set an example for me. In their 70s and in reasonably good health, they decided to sell their house and move to a lovely apartment in a continuing care retirement community (CCRC). These communities may provide housekeeping, laundry, meals in a common dining room, fitness centers, new friendships, entertainment and activities. They’re also safe places to live. If you start to fail physically, there’s help with bathing, dressing, medications and so on. A skilled-nursing unit cares for the bedridden or those who develop dementia.

CCRCs relieve adult children of the minutiae of parent care, which is a special gift to kids who live far away. They’re also a serious financial commitment. You usually pay an entry fee — the median currently stands at $211,625, according to the National Investment Center for the Seniors Housing & Care Industry in Annapolis, Md. (Half the CCRCs charge more and half charge less.) Median monthly charges run $2,825.

Costs vary

The cost depends on the particular property and type of contract you choose. Some contracts cover all your health and living expenses. Others provide residential services but charge extra for health care. For checklists on how to evaluate CCRCs, go to the AARP Caregiving Resource Center and CARF.org, the website of CARF International, which accredits these communities. On the CARF site, type “financial performance” into the search box to read the organization’s “Consumer Guide to Understanding Financial Performance & Reporting in CCRCs.” There have been some bankruptcies among CCRCs, so get audited reports for your lawyer or accountant to read.

For people who stay in their homes until the last possible minute, the best option might become a residence for assisted living. There, you live as independently as possible but can get help with basic physical needs such as dressing and bathing. Like CCRCs, they usually provide activities and a social life. There might be a nursing-home wing attached. You can find a directory of local facilities at Assisted Living Federation of America.

The key is to plan ahead. What can you afford? What’s a reasonable way to live? Today I’m OK, but tomorrow? I want to be prepared.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

When to Pay Off Your Mortgage

A low-interest home loan may be worth keeping — or not

My husband and I paid off our mortgage years ago. We planned to burn it while toasting our achievement with champagne. But we couldn’t get our bank to produce a burnable piece of paper. It filed a document with the county, releasing its claim on our home, and that was that.

Burn the mortgage? What kind of 1950s world had we been living in?

Today, some financial planners say that homeowners shouldn’t prepay, even if they can. Interest rates are so low, they say, you can get richer by keeping the loan and investing spare money somewhere else. Fixed 30-year mortgage rates average 4.2 percent, at this writing, and the interest is tax-deductible. Five-year adjustable-rate mortgages run around 3.1 percent. Long-term investors in stock-owning mutual funds hope to earn far greater returns.

Mortgage debt has become much more of a worry than it used to be for people in middle and older age. More than half of the households headed by someone age 55 to 64 carried debt secured by their homes in 2010, according to the Federal Reserve’s latest Survey of Consumer Finances. That’s up 45 percent over the past two decades. Among those 65 to 74, almost 41 percent carried home loans — up 87 percent. Monthly payments get harder to make after your paycheck stops.

So what’s the best decision? Use any spare money to reduce your mortgage debt? Or use it to bulk up your savings, in hopes of retiring with more spendable wealth? The best choice depends on your circumstances. Here are some guidelines to help you decide:

If you’re carrying credit card debt, pay that off first. It saves you much more money than prepaying your mortgage, and interest on consumer debt isn’t tax-deductible.

If you’re working, add your extra dollars to tax-favored retirement accounts such as IRAs or 401(k)s. Traditional accounts give you a current tax deduction, with earnings tax-deferred. Roth accounts let you accumulate your gains tax-free. And you can invest that money for long-term growth. Consider mortgage prepayments only after you’ve reached the maximum retirement contribution.

Don’t prepay your mortgage with a lump sum of money taken out of an individual retirement account or 401(k). You’ll owe income taxes on it, if you hold a traditional account. Withdrawing a large amount not only depletes your savings but might even bounce you into a higher tax bracket. You’d also lose the opportunity for those precious retirement savings to grow tax-deferred.

Don’t leave yourself house-rich but cash-poor. At retirement, you want to be certain that you’ll have enough income to cover your monthly bills. It’s nice to be free of a mortgage when your paycheck stops, but not if you’re so squeezed that you worry about having enough money for food and fuel.

If you sell your house for a substantial profit and downsize, consider buying the new place for cash. Provided, of course, that you have enough cash left over to live on comfortably. If needed, you can usually tap this home equity at a later date by getting a reverse mortgage. Reverse mortgages provide current income and don’t have to be repaid until the last surviving homeowner dies or the house is sold.

Once you’ve paid off any consumer debt and funded your retirement account, it can make financial sense to invest extra savings in the market. But only if you’re going to put a substantial amount of that money into stock-owning mutual funds. Historically, stock funds with dividends reinvested have done much better than the 4.5 percent you might be paying on your mortgage loans. You’ll probably come out ahead.

It’s another story, however, if you’re keeping those savings in certificates of deposit, or in high-quality taxable bonds or bond mutual funds. At today’s interest rates, prepaying the mortgage looks like a better deal.

Prepayments on a 4.5 percent loan give you a 4.5 percent return, guaranteed. (The return on any debt repayment always equals the interest rate.) After-tax yields on quality bonds and CDs are lower than 4.5 percent. Bond fund yields are lower, too. If interest rates rise, you can stop your mortgage prepayments and switch back to bonds.

Finally, here’s the one argument in favor of mortgage prepayments that might trump everything else: gaining peace of mind. There’s nothing like owning your own home, free and clear.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

What a Financial Adviser’s Credentials Mean

Not all designations are the same — or a sign of quality

The invitation comes by mail or phone, or maybe via a poster in the community center. You’re invited to a free “financial survival” seminar, run by someone who claims to specialize in retirement issues. Scrumptious lunch will be served. But what kind of expertise do these advisers actually have?

Most likely, they boast an alphabet soup of credentials — something like CEPC (for certified elder planning consultant) or perhaps CSP or ASP (chartered or accredited senior planner). Unfortunately, the vast majority of these designations are primarily marketing tools with little or no training behind them. The adviser might have purchased the title at the price of a weekend workshop. The designation might even be self-awarded. A study last year by the Consumer Financial Protection Bureau found more than 50 senior specialist titles on the market — a few requiring a year or two of hard work, the rest not much more than pieces of paper. “Alphabet soup does not necessarily make a good senior planner,” says Deena Katz, cofounder of the Florida-based wealth management firm Evensky & Katz and associate professor of financial planning at Texas Tech University.

Advisers go for these titles because they project an image of knowledge and impartiality. Often, however, they mark someone peddling a high-commission product who may be misleading you about the costs and risks. Variable and fixed-indexed annuities are the “senior” investments most likely to be mis-sold, according to a 2012 survey of financial planners.

When looking for retirement advice, you don’t need a “senior specialist” at all. You can get the answers you need from a certified financial planner (CFP) who trains in all aspects of financial counsel. Ideally, you want a fee-only CFP, who sells no products and charges only for advice. Another good set of initials is RIA — registered investment adviser.

A few of the senior designations do have rigorous academic work behind them, says Wade Pfau, a professor of retirement income at the American College in Bryn Mawr, Pa., which trains financial professionals. He thinks you can feel comfortable if your adviser’s business card says that he or she is a certified retirement counselor (CRC), retirement income certified professional (RICP) or retirement management analyst (RMA). You’re also good with a chartered advisor for senior living (CASL), whose focus includes broader issues such as health care and estate planning. The College for Financial Planning, which originated the CFP, offers the mark chartered retirement planning counselor (CRPC).

Even these titles, however, are frosting on the cake. You should be fine with a fee-only CFP. Any additional designations just deepen the knowledge that he or she has already acquired.

More than half the states have a law on the books restricting the use of self-serving or misleading senior designations. But the CFPB study found them largely ineffective. Consumers don’t understand the various designations, many of which sound alike. There’s no central information spot, no rating system for designations and little attention paid to the investment claims dished out with lunch.

You can find bare-bones information on many of these credentials, including the mere “paper” ones, on the website of the Financial Industry Regulatory Authority; type “professional designations” into the search box. FINRA doesn’t evaluate their quality but gives you some minimal information.

Here are three things to check:

  • Is the program accredited by a national or regional nonprofit agency? This isn’t a guarantee of expertise but helps you make the first cut. Many “accredited” designations get their rating only from the organization that promotes them.
  • Is genuine academic work required, with many hours of classwork? A designation that you can “earn” in a weekend implies a level of knowledge that the adviser simply doesn’t have.
  • Do the advisers have to pass a real test to get the title? That means an in-person, proctored, closed-book exam of considerable length. It doesn’t count if the adviser takes the test online with reference materials at hand. Many designations require no testing at all.

You probably don’t know it, but salespeople have a contemptuous name for people who attend their free lunches and fail to buy their products. They call you a “plate licker.” I say, lick the plate and run. On the way out, you can award the “adviser” a designation of your own: BS.

(Originally appeared in The AARP Monthly Bulletin.)

AARP Article

Securing Income for Life

A bucket investment strategy may help savings last longer

We all know — or think we know — that the older we get, the more our money should be kept safe. We gradually hold less in stocks and more in bonds.

But is your caution risking your future? Yes, says Michael Kitces, director of research for the Pinnacle Advisory Group in Columbia, Md. On average, we’re living longer and not earning much on quality bonds and bank CDs, he says. If we huddle around investments that cannot grow, the risk rises that we’ll run out of money.

What if we reversed the conventional rule and gradually held more money in stocks, rather than less, after we retired?

When I first heard that idea, I said, “Nuts. High risk.” But as I read the new research, I changed my mind. It’s actually an approach that could make your retirement savings last longer and, potentially, leave more for heirs.

Lower your risk

Think of it as a “three-bucket” strategy, Kitces says.

In one bucket you hold cash to help cover expenses for the current year. That’s grocery money. Keep enough to pay bills not covered by other income, such as Social Security, a pension or part-time work.

In the second bucket, you own short- and intermediate-term bond mutual funds, with dividends reinvested. You gradually add to your bonds during your preretirement and immediate post retirement years. By age 60 or 65, these first two buckets might hold 70 percent of your retirement investments. Every year, you take money from the bond bucket to replenish your cash. If interest rates rise, you’ll be using your dividends to buy higher-rate bonds, which will partly offset your market losses. (Prices of existing bonds fall when interest rates rise.)

The remaining 30 percent of your money goes into the third bucket, invested in mutual funds that own U.S. and international stocks. You don’t expect to touch these stock funds for 10 to 15 years.

As time passes and you sell bond shares to pay your expenses, that bucket shrinks. The percentage of savings that you hold in stocks will gradually rise. You won’t have to sell when the market drops. In fact, your dividends will be buying you more stocks on the cheap. By the time your bond bucket runs low, your bucket of stocks will have grown in value, maybe by a lot. That’s money for your later years.

When withdrawing cash from your bond funds, follow the 4 percent rule for making money last for life. Start with an amount equal to 4 percent a year of all your savings (counting both stocks and bonds) and raise it by the inflation rate in each subsequent year. For example, say you have $100,000 — $70,000 in bonds, $30,000 in stocks. Your first withdrawal would be $4,000, and would rise from there. (If you take more than 4 percent, your savings might run out too soon.)

If your investments are mainly in a 401(k) or individual retirement account, it’s easy to switch between stocks and bonds. If not, you’ll have to consider taxes when you make a change or use new savings to bring the stock or bond bucket to the right size.

What makes this three-bucket strategy low-risk? First, your bonds secure your grocery money for at least 15 years. Second, if the market crashes when you first retire, you have only a modest amount in stocks and can afford to wait for a recovery. (People who sold after the 2008 crash came to regret it.)

Focus on growth

Wyatt Lee, portfolio manager for the mutual fund group T. Rowe Price, agrees that relying on “safe” investments won’t work. “You need a substantial amount of equities to maintain your income for life,” he says. Assuming a 30-year retirement, you’d spend half your money in the first 15 years and half in the second 15 years. The later money should be invested for growth.

Lee takes a more familiar approach — reduce your exposure to stocks as you age. But he starts out high. At age 65, he advises a stock fund allocation of 55 percent. Your 4 percent withdrawals would come from both stocks and bonds. At 75, you’d still have 42 percent in stocks. If a bear market hit just when you retired, you’d take a larger loss than with Kitces’ approach. You’d gain it back but might be more tempted to sell.

Follow Kitces or Lee. Either way, you can’t give up on stocks.

(Originally published by The AARP Monthly Bulletin.)

AARP Article

Make Your Money Last

How much can you safely withdraw from your nest egg each year?

How long can your savings last? That’s a critical question if you’re planning to retire or have already left the full-time workforce. You have Social Security income and perhaps a pension. Maybe you have a part-time job or are collecting rents from a property you own. But sooner or later, you may have to rely on whatever financial nest egg you have accumulated — mutual funds, bank CDs, stocks, bonds and so on. How much can you withdraw each year and still expect your money to last for life?

For financial planners, the gold standard is 4 percent. You can afford to spend 4 percent of your savings in the first year you retire. In each subsequent year, you’d withdraw the same amount that you took in the previous year, plus an increase for inflation. If you stick to that rule and are properly invested, your money should last for at least 30 years and, in most cases, much longer. You should be financially safe.

Why 4 percent?

The 4 percent rule was developed by financial planner Bill Bengen of La Quinta, Calif., more than two decades ago. Looking back, it would have carried retirees successfully through the worst 30-year periods of the 20th century, including those starting in 1929 and 1973 (the year stagflation began). It’s too early to know the 30-year outcome for people who retired in 2000, but Bengen says that the rule is working so far.

The hitch, for many retirees, is in the words “properly invested.” Most withdrawal-rate research is based on the longtime performance of leading U.S. stocks, represented by Standard & Poor’s 500-stock average, and intermediate-term Treasury bonds. It assumes that you keep half your money in each (or in low-cost mutual funds that track those market indexes). If you diversify — 42.5 percent of your money in large stocks, 17.5 percent in small stocks and the rest in bonds — the initial “safe” withdrawal rate rises to 4.5 percent, Bengen says.

Many retirees wouldn’t dream of being that heavily invested in stocks. Some don’t trust stocks at all. You’re limiting your future, however, if you don’t invest at least some of your long-term money for growth. Those who rely entirely on fixed-income investments can safely withdraw no more than 2.5 percent of their savings in the first year plus annual inflation increases, says Wade Pfau, a professor of retirement income at the American College in Bryn Mawr, Pa.

Josh Cohen, head of the institutional defined contribution business at Russell Investments in Seattle, has a different approach. He says you can use the 4 percent withdrawal rate while keeping just 32 percent of your money in stocks with the rest in bonds. After 20 years, you should still have a large enough nest egg to buy an inflation-adjusted annuity that supports you for life.

Prepare to be nimble

But what if a 4 percent withdrawal rate isn’t high enough to pay your bills? If you’re 65 percent invested in stocks, says financial planner Jonathan Guyton of Cornerstone Wealth Advisors in Edina, Minn., you could safely start your withdrawals at 5.5 percent. The key is flexibility. You have to be prepared to cut back if the markets turn bad for several years — say, by refraining from taking inflation increases for a while.

Pfau, by contrast, thinks we might be entering a long period of poor performance for long-term investors, with stocks currently overvalued and interest rates too low. He advises retirees to start withdrawals at 3 percent and raise them only if the markets perform well.

All these calculations, by the way, are pretax. Whatever taxes you owe would be paid out of the withdrawals.

To make these spending rules work, stay the course. That means following the withdrawal plan and taking extra money only if markets go up for several years. If you overspend when you first retire, you should be prepared to cut spending later.

Conversely, if you sell when the market falls and miss the upturn, you’re way behind. You’ll have to begin again with the money you have left. You’re also off the charts if you own individual stocks or funds that don’t keep up with the market average. The simpler your investments, the more reliable your spending plan will be.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

How to Financially Protect Your Spouse

When faced with decisions about pension benefits, shortsighted choices now can cause harm in the future

I had lunch recently with a friend whose husband, a teacher, retired five years ago. “We made a big mistake with his company pension,” she told me. “We took the wrong one.”

Pensions come in two versions — a larger check that covers only the lifetime of the person who earned it, and a smaller check that also covers the lifetime of his or her spouse. They chose the larger check to give themselves more money to spend. Now, they both wish they’d taken the version that covered her, too. The prospect of losing his pension income if he dies first has left her a little scared.

Unfortunately, that’s a common story — and not only for pension decisions. Caring partners each want the other to be financially protected, if left alone. But sometimes they make shortsighted choices or accidentally cut a spouse out of money that he or she needs by failing to submit the right paperwork. Here are four things couples should think about that can save a spouse from financial harm:

Leave a larger income

When will you start taking Social Security? A relative of mine, who retired (with pension) at 60 and now has a different and well-paying job, intended to take his Social Security at 62. When I heard that, I yelped. His wife has savings and a pension of her own, and they don’t need extra money now. If he waits until 66 to collect, his Social Security check will be 33 percent larger (plus inflation adjustments) than if he starts at 62. It will be a fat 76 percent higher if he waits until 70.

Money Matters

It’s common to say, “I’ll take Social Security at 62 so that, if I die early, I won’t have lost income that I should have had.” That could be a two-way mistake. First, if you’re healthy, you’ll probably live longer than you expect. By waiting to file for Social Security, you’re storing up extra income for your retirement’s later years. Second, married people shouldn’t think only of their incomes today. If the husband, say, was the main breadwinner, the longer he waits before collecting, the larger the income he’ll leave to his surviving spouse, if he dies first.

Check your individual retirement account beneficiary

Whoever you name on your IRA’s beneficiary form will get the money, whether it’s fair or not. Say that you divorced and remarried, named your new spouse as your heir in your will, but forgot to take your ex’s name off the IRA form. Your ex will get the money, even if the divorce decree said otherwise. You should clean up all your beneficiary forms when you divorce or marry, to avoid accidentally disinheriting a spouse.

Have the power of “I do”

Who will inherit the savings in your 401(k) or similar plans? Here, spouses have super-protection. When you marry, your spouse is entitled to every penny in your 401(k), from the moment you both say “I do.” That’s federal law. The beneficiary form is irrelevant, and so is your will. If you want a different outcome — for example, to leave part or all of your 401(k) to children of a previous marriage — you can ask your spouse to waive his or her rights. The waiver has to be in writing, notarized or witnessed by a plan representative, and filed with your plan.

This can’t be done in advance of the wedding — only a spouse can waive these rights. If you have a prenuptial agreement, it should include a promise to sign. And get thee to a notary right after the honeymoon or even before. In my personal case, there was a notary at the ceremony. My lovely husband signed even before the music struck up.

Guarantee lifetime benefits from a variable annuity

These annuities combine an investment with a guaranteed lifetime income. But the income normally lasts only for the buyer’s lifetime and ends if he or she dies. Any spousal benefits might cover only the annuity’s current investment value or a death payout, says annuity expert Kevin Loffredi, a vice president of investment research firm Morningstar. If you want the annuity to cover both lives, you generally have to pay more or accept a lower income guarantee. Couples often don’t realize that their annuity cuts out the survivor, says Mark Cortazzo of annuityreview.com, which evaluates variable annuities. Some salespeople also have no idea. If you venture into one of these complex contracts, think “spouse first.”

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Divorce after 50 Will Cost You Money

As gray divorce surges, more 50+ people prepare for a leaner life

Families and friends are often shocked when long marriages — including long, bad marriages — fall apart. You endured each other for 30, even 50, years, so why give up now?

I’d say it’s for all the reasons that younger people divorce. The partners bore each other, harbor grudges, seek a different kind of life or fall in love with someone else. Being surprised at gray divorce strikes me as a form of ageism — as if one or the other of a couple (perhaps both) are somehow too old for disappointment, folly or hope.

Whatever the reason, older couples are definitely doing it. The divorce rate among people 50 and older doubled between 1990 and 2010, at a time when the rate for the general population was pretty flat. As an age group, they accounted for roughly 25 percent of all 2010 divorces, according to a study by Susan Brown and I-Fen Lin of the National Center for Family & Marriage Research at Bowling Green State University in Ohio.

A greater willingness to end unhappy marriages suggests that older couples today have more financial resources to fall back on. People usually have to see a way forward financially, no matter how slim, before splitting up. Women, in particular, are more apt to have paychecks and 401(k)s.

How the property is divided depends on state law and your personal negotiation. The starting place, after long marriages, is half the money for each. You can roll your share of your ex’s individual retirement account into an IRA of your own, tax-free. The same is true of a 401(k) or similar plan. If there’s a traditional pension, you can choose a lump sum or a portion of each monthly lifetime payment when your ex retires. Attorney Maria Cognetti, president of the American Academy of Matrimonial Lawyers with a practice in Camp Hill, Pa., advises dependent spouses to take the monthly payments if they don’t know much about investing. The lump sum might not last as long as they thought.

If the amount of property is modest, dependent spouses, usually wives, will probably get alimony. Cognetti advises women to try to settle their claim in negotiation, even if it’s for a little less money than they want. That provides certainty. You don’t know what a judge will decide in court.

When estimating your budget as a single person, take a deep dive into your Social Security options. If the marriage lasted at least 10 years, you can collect on your ex’s account. Spousal benefits can be claimed as early as age 62, provided that your ex has filed for benefits, too. If not, you can claim if your spouse is eligible for benefits and you’ve been divorced for at least two years, says Robin Brewton of SocialSecuritySolutions.com. Note that filing at 62 locks you into a lower check. You’d do better by waiting until your full retirement age, probably 66. If your ex dies, you can collect survivor’s benefits.

However you slice it, life will likely be financially leaner for you both. That’s divorce’s bottom line — at any age.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Is an Annuity Right for You?

The challenge: Making your money last for life

Here’s the single most important question for people who are planning for — or already into — their retirement years: How are you going to make your money last for life? With good health and good cheer, you’re likely to be among the half of your age group that dances past your official life-expectancy age.

Social Security lasts for life, and so does an employer pension. If you don’t have a pension, annuities can serve as a pension substitute. Increasingly, financial planners are paying attention to this option as a way of ensuring that their clients don’t run out of money.

Annuities are sold by insurance companies. Some come with bells and whistles that aren’t worth their price. The safest policies are “immediate pay” annuities, in which you put up a sum of money and your insurer starts paying you a certain percentage of that for life. The payments can also cover the lifetimes of you and a beneficiary, such as your partner or spouse.

Choosing the right type of annuity

These pension substitutes come in three main varieties. An “immediate fixed” annuity provides a fixed number of dollars per month. An “immediate variable” annuity, invested in a mix of stock and bond mutual funds, pays you a fixed percentage of the portfolio’s value, which will rise and fall. An “inflation-linked” annuity adjusts your payments for inflation every year (you can also pick a fixed annual adjustment, such as 2 or 3 percent).

You generally get the largest initial payout from the immediate fixed annuity. The others might start smaller but can increase your payouts over time.

What has always bothered people about annuities is what I call the sucker factor. If you put $100,000 into the plan today and die next year, you’ll think (from the grave) that you were a sucker because the insurance company retained the money you didn’t receive.

Escaping the sucker factor

But it’s this very sucker factor that makes annuities so attractive. Because some people will die early, the insurer can afford to pay you more per month than you could prudently draw out of personal investments.

For example, take a 65-year-old woman who has $100,000 in savings. If she puts half of it into stock mutual funds and half into bond funds, and withdraws the traditional 4 percent in the first year, she’ll get $333 a month. If she raises that amount by inflation each year, the money could last for 30 years (but with no guarantee).

If she puts $100,000 into a Principal Life Insurance Co. inflation-adjusted annuity, she’ll start higher — with $379 a month (at this writing), plus guaranteed lifetime inflation protection. The fixed-payment annuity gives her $531. If she dies after just a few years, “So what?” says Miami financial planner Harold Evensky. “The annuity served its purpose. It paid her more than she could take from systematic withdrawals from savings and insured her in case she lived too long.”

Weighing benefits and risks

If you can manage payments that change, consider an immediate variable annuity, says annuities expert Moshe Milevsky of York University in Toronto. You choose the percentage of the total portfolio that you’ll want paid out, in monthly amounts. Starting with a lower percentage sets you up for higher payments in the future, as long-term stock values grow. “The potential upside seems to compensate for the downside risk,” he says.

Milwaukee financial planner Paula Hogan encourages clients to consider inflation-protected annuities, to preserve their lifetime purchasing power. But don’t annuitize all your money, she warns. You need ready cash for unexpected expenses, such as health costs. If you’re living on Social Security plus modest savings, annuities may not be for you. They’re best suited to people who use them as the safe part of their investment mix, with the rest of their money invested for long-term growth.

Financial planner Michael Kitces of Columbia, Md., has a smart idea for people who’d rather keep their cash and take systematic 4 percent withdrawals adjusted for inflation. Split your savings evenly between stock funds and bond funds, and take the withdrawals mostly from bonds for the first 10 years. The value of your equities should more than beat your gains from inflation-adjusted annuities, his research shows. Of course, there’s no guarantee. If you live well into your 90s, Kitces says, the annuities will win.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Giving Money to Your Grandchildren

Tips for protecting your financial stability as you help others

Let’s hear it for grandparents! Financial planners tell me that, increasingly, you’re stepping up to help your grandchildren, especially with higher education expenses.

“There’s more of this going on than in the past, because more of the parents are hurting financially,” says Westwood, N.J., planner Tom Orecchio. Also, “Grandparents have a soft spot for giving to grandkids,” says Columbus, Ohio, planner Gary Vawter, “all the more so if the parents need less.”

Before you start writing checks, however, be sure that you have enough saved for yourself — to get through a business downturn or cover the potential cost of long-term care. God forbid you should have to ask for the money back.

You risk spending too much by making fixed, future promises, such as “$5,000 a year for each grandchild for college.” That might become an albatross around your neck in your older age. Instead, stay flexible, says planner Courtney Weber of Cincinnati. Your family should understand that one year’s gift may be larger or smaller than the gift the year before, or may not come at all.

Charitable Giving

One approach is to vary your generosity by the size of your investment portfolio, Vawter says. Establish the floor amount you feel that you need for your own security and make gifts only in years that your nest egg is worth more than that. Alternatively, you might help with specific bills, such as braces or medical expenses not covered by insurance. If you pay the doctors directly, it won’t affect the annual amount you can give that same grandchild, gift-tax-free ($14,000 in 2013; $28,000 for married couples filing jointly).

Tax-favored 529 plans for college — a common grandparent choice for young children — are flexible, too. Make an initial contribution to open the plan (as little as $5 to $15, but you’ll probably want to start with more), then add money as you can afford it. The plan is invested in mutual funds. There’s usually a state tax credit or deduction for your contributions. The funds can grow tax-free if used for higher education, as planned. If the parents live in another state, and start a 529 for the same child there, they might get a tax credit or deduction, too.

What’s more, 529s hold a unique place on the shelf of estate-planning tricks for people with substantial wealth. Any money you put into these plans is out of your estate, so it escapes the estate tax. But if you find that you’re low on cash, you can take the money back, subject only to a 10 percent penalty on the money your contribution earned.

All the states except Wyoming have 529s. To see what they offer and how good they are, go to savingforcollege.com. If there’s no state tax deduction, or a low one, consider a low-cost plan from another state. Buy a “direct-sold plan” online, rather than a plan sold by a commission-based financial adviser. The states charge higher 529 program fees for adviser-sold plans, the advisers themselves put you into more expensive, actively managed mutual funds, and there may be sales commissions. A high total expense fee would be 1.5 percent a year and up. The lowest-cost plans that accept residents from other states — Virginia, New York, California and Ohio — mostly come in under 0.25 percent.

If you don’t want to limit your giving to education, or don’t care about tax breaks, you might simply set up a separate account marked “grandchildren,” says planner George Middleton of Vancouver, Wash. You maintain control of the money and can dole it out at will.

Your grandchild can use 529 money for tuition and fees at any accredited school in the country, including community colleges, trade schools and professional schools. All 529 plans permit students to attend selected colleges abroad. If he or she decides not to start, or finish, school, or need all the money, you can transfer what’s left in the plan to another family member, tax-free.

If you’ve been making regular year-end gifts to your adult children, they might not take kindly to your switching some of that money to the grandchildren. Your children might rely on those gifts to pay their property taxes, rather than saving in advance, says Houston planner Larry Maddox. That goes to my point about maintaining flexibility. It doesn’t sit well for children to depend on your generosity for their style of life.

More grandparents are also leaving money directly to grandchildren in their wills, if they think the parents are living above their means. In Kansas, the thinking goes like this, says planner Randy Clayton of Topeka: “I want to be sure that my grandchild can get an education. If I leave all the money to my kids, I’m not sure my grandchildren will get anything, because the kids will spend it all.” Besides, adds Middleton, mischievously, “Grandchildren are young and lovable with no apparent flaws — yet.”

Consult your financial or tax adviser for advice regarding your personal situation.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Is a Roth IRA Right for You?

Tax-free income and flexibility make this a secure and sensible retirement savings plan

With income taxes rising, the Roth individual retirement account is looking better and better. It not only offers tax-free income in the future, it gives you more flexibility than any other kind of retirement account, including traditional IRAs.

Like so many savings plans, Roths work best when you start them young. Happily, “young,” by my age scale, includes working people in their early 50s. Older working people should consider them, too.

Both Roths and traditional IRAs are basically savings accounts with good tax breaks, which makes them an excellent place to stash cash for your retirement. You can sock away up to $5,500 in an IRA this year — $6,500 if you’re 50 or older.

You can make the full annual contribution up to a certain income level. For traditional IRAs, that’s currently $59,000 for singles and $95,000 for marrieds. For Roths, it’s better — $112,000 for singles and $178,000 for marrieds. After that, the allowed contributions gradually decrease to zero.

Here’s what Roths offer compared with traditional IRAs:

1. Easy access to your money, at any age.

You’re allowed to withdraw your personal contributions whenever you want, without paying taxes or penalties. If you put $1,000 into a Roth on Monday and suddenly need some cash on Tuesday, you can take that $1,000 right out again. So your Roth can be both a retirement account and a ready savings account. Traditional IRAs don’t allow free withdrawals.

2. Retirement income, tax-free.

There’s no tax deduction for the money you put into a Roth. Instead, the money you earn on your investments comes tax-free when you retire. To get this tax break, you generally have to hold the Roth for at least five years and be older than 59-1/2. If you’re in a high tax bracket and expect to drop to a lower one when you retire, you might prefer the traditional IRA. In a traditional plan, your contribution is deductible on your current tax return. On the other hand, you might be in a high bracket when you retire, especially after age 70-1/2 — the age when people who hold traditional IRAs begin mandatory withdrawals. Future tax rates are a guessing game. They’re one factor, but not the only one, that enters into the Roth decision.

3. Tax-free wealth for your heirs.

Roth accounts are terrific for people who expect to leave at least some of their IRA savings to their heirs. People who inherit traditional IRAs owe income taxes on the money. Roth IRAs come income tax-free and could grow, tax-free, for two or three generations.

4. Opportunity to increase your wealth at older ages.

You don’t have to make withdrawals from a Roth. Traditional IRAs force you to start withdrawals at 70-1/2. If you work past 70-1/2, you can continue contributing to a Roth but not to a traditional IRA.

5. Potential savings on future Social Security taxes and Medicare premiums.

You owe income taxes on part of your Social Security benefits if you’re single with an adjusted income of at least $25,000, or married with $32,000. Your “income” includes withdrawals from a traditional IRA, which — at 70-1/2 — could be large. Money withdrawn from a Roth, however, is exempt from this calculation, which holds future taxes down. Roth withdrawals also are exempt from the calculation that charges wealthy people higher premiums for Medicare. In this context, “wealthy” means adjusted incomes over $85,000 for singles and over $170,000 for married couples.

6. Larger annual contributions.

If Roths are offered within a company 401(k) plan, you can contribute up to $17,500 this year and $23,000 at 50 and older.

7. An option to roll over any amount of money from a traditional IRA or 401(k) into a Roth.

You might not want to do this because you’ll owe income taxes on the amount transferred. But James Lange of the Lange Financial Group says the switch makes sense if you think your tax rate will be about the same or higher when you retire and you can pay the tax with non-IRA funds. Paying with IRA funds would deplete your “tax-favored” savings. So you might consider rolling over a modest amount each year.

8. A great gift for kids.

If your children or grandchildren can’t afford to contribute to a retirement plan, you can start a Roth for them.

(Originally published in The AARP Monthly Bulletin.)