Klitzman Law Group, PLLC

Do Annuities in 401(k)s Work for Retirement Income?

“Proposed U.S. legislation would make it easier for employers to offer annuities in 401(k) retirement plans that provide retirees fixed payments for as long as they live.”

The role of annuities in retirement planning is one aspect of the Secure Act that was passed by the House in May and is still awaiting a vote in the Senate. The Secure Act is supposed to make retirement better for communities, as is implied in its name—The Setting Every Community Up for Retirement Enhancement Act. But, says Barron’s “Annuities in 401(k)s Won’t Solve the Retirement Crisis. Here’s Why.”

Annuities are legally allowed in 401(k) plans. However, they are found in only about 10% of the many 401(k) plans offered to employees. Americans hold $8.2 trillion in employer sponsored defined benefit contribution retirement plans (as of the end of March 2019), and $5.7 trillion is in 401(k) accounts.

Employers have been reluctant to offer annuities in retirement plans, mainly because of liability issues. They are concerned that employees might sue their companies, if the insurance company in the plan goes out of business or fails to pay claims, for whatever reason.

The Secure Act provides a “safe harbor” for employers, if something should happen to the annuity company they select. That may be good news for employers, but not such good news for employees.

An immediate annuity turns a lump sum of money into a stream of payments right away, while deferred annuities provide payments at a designated date in the future. The advantage of an annuity is that they offer investors a guarantee of income for the rest of their lives and it removes the risk of market fluctuations. The general consensus about annuities is that they are very expensive, with high commissions and fees that take big bites out of the benefits. It must be said that there are also low-cost annuities.

One concern about the language in the Secure Act is that it is overly broad. It would easily allow an employer to offer high-cost annuities. The provision applies to all annuities. Some are more accessible and better understood by the average consumer. However, there are others that are complex financial instruments, with high costs, which may not be understood by everyone.

The Consumer Federation of America and the Center for Economic Justice are two associations that have sent a letter to the Senate seeking to change some of the language of the bill. They want to see it revise the definition of annuities to include only “simple fixed annuities” and not variable and fixed-indexed annuities that are focused on accumulation. Another point is to add a requirement that employers review the financial well-being of the insurance companies, before choosing to allow their employees to purchase financial products from the companies.

Many people are also watching the provision regarding the change to the ability to stretch IRAs distribution for non-spouse beneficiaries. Some say the best bet right now is to wait and see what the final version of the legislation is, at which point many people will need to review their estate plans for determining the best way to pass assets to the next generation, while minimizing costs and taxes.

Reference: Barron’s (June 28, 2019) “Annuities in 401(k)s Won’t Solve the Retirement Crisis. Here’s Why”

What Do I Need to Know About Hospice Care?

“Hospice care, which strives to relieve the symptoms and suffering caused by a terminal illness, becomes an option when a patient has been given six months or less to live. It means that choosing a hospice for yourself or a loved one is often a choice made under duress.”

Like hospice, palliative care is designed to relieve suffering and empower patients. However, palliative care can be used by any patient with a serious illness—it doesn't require a terminal prognosis to qualify.

Hospice does require a terminal prognosis and is a more intensive service for when an illness has advanced.

AARP’s recent article, “How to Find a Quality Hospice,” explains that hospice care in America is most commonly provided in the patient's home—or in a long-term care facility where the patient already lives. The hospice team will visit frequently.

"The ultimate goal for hospice care is to take in the patient and family, hold their hand and provide all the care they need,” says Jennifer Kennedy, senior director, regulatory and quality, for the National Hospice and Palliative Care Organization. That includes leaving the family with a belief that they did right for their loved one. “We only have one shot to get it right,” she says.

Hospice and palliative care experts recommend, if possible, interviewing several prospective hospices to weigh the type and quality of their services. When you've identified several promising hospices and called to request an informational interview, bring a list of questions to help you determine the type and quality of care your loved one will receive there.

The way in which the hospice responds to the initial inquiry will be important. If they don’t make the patient and family feel nurtured and listened to from the very first call for help, look elsewhere.  Don't feel guilty about beginning your search as early as possible, so you don’t make a decision in a crisis. Here are some questions to ask a hospice:

• Does the medical director make home visits to address complex symptoms?
• How does the hospice respond to patient crises after hours?
• Does the hospice provide all of the levels of care required by the Medicare hospice benefit?
• Is the facility accredited by one of the national organizations that survey hospices on their quality?
• Is the staff individually certified as experts in their field by their recognized professional bodies?
• Do they have a volunteer program and what does it include?

 

Reference: AARP (June 27, 2019) “How to Find a Quality Hospice”

What Estate Planning Documents Do I Need, When I’m Diagnosed with a Serious Illness?

“If you or a loved one is living with a chronic disease, such as Parkinson’s, multiple sclerosis, or Alzheimer’s, your estate planning likely should reflect that challenge.”

More than 130 million Americans are living with chronic illness. Forbes’ recent article, “Estate Planning Musts When You Or A Or A Loved One Has A Chronic Illness,” says that if you (or a loved one) are living with a chronic illness, you’ll likely need the same estate planning documents most people should have.

The article discusses these key estate planning documents, along with some suggestions that might help you customize them to your unique challenges because of chronic illness. These documents might need to be altered to better serve your needs or address your challenges. It’s best to get your estate planning documents in place, soon after your diagnosis.

HIPAA Release. The Health Insurance Portability and Accountability Act of 1996 governs the requirements for maintaining the confidentiality of protected or personal health information (PHI). A HIPAA Release lets someone you trust access your protected health information.

Living Will. This is a statement of your health care wishes and can address end of life decisions, as well as many other matters. If you’re living with a chronic illness, there are special considerations you might want to make in having a living will prepared. You might alter the general language to explain your specific disease. The fact that you’re living with disease doesn’t mean you might not face another health issue. Therefore, if you make modifications, set them out as examples of specific changes but retain the broad language that might be more typically used. You can address the disease you have, at what stage and with what anticipated disease course, and how if at all these matters should be reflected. You might wish to also speak to experimental treatments.

Health Care Proxy. This is also known as a medical power of attorney. It is a legal document in which you designate a trusted person to make medical decisions for you, if you’re unable to do so. If your health challenges might result in your becoming incapacitated, you can say that the agent appointed under your health proxy is also to be named as your guardian of the person, should a guardianship proceeding ever happen. Although this may not be binding on the court, it may be persuasive.

Physician Order for Life-Sustaining Treatment (POLST). This is a document that may be included as part of your medical records. A POLST is meant for the end of life medical decisions and may not be as broad as what you might accomplish with a health proxy or living will.

Financial Power of Attorney. This legal document lets you designate a trusted person to handle your legal, tax, and financial matters, if you can’t. There are some unique considerations for those living with chronic illnesses to consider. One is the amount of control that should be given up now or at what stage. Relinquish enough control, so you can be assisted to the degree necessary, but not more than you need at any point in time. Another characteristic for your powers of attorney, is if you should sign a special power that restricts the agent’s authority to certain specified items or sign a general power that provides broad and almost unlimited powers to the agent.

A Revocable Trust. A frequent goal of a revocable trust is to avoid the publicity, costs and difficulties of probate. However, if you or a family member has a chronic illness, using a revocable trust may be a good way to provide for succession of management for your finances.

Reference: Forbes (July 5, 2019) “Estate Planning Musts When You Or A Or A Loved One Has A Chronic Illness”

Why the Secure Act May Make Your Retirement Less Secure

“The Secure Act would upend 20 years of retirement planning and stick it to the middle class.”

Congress can’t wait to get its hands on America’s retirement account assets, says The Wall Street Journal in the article “Congress is Coming for Your IRA.” In May, the House passed the Setting Every Community Up for Retirement Enhancement Act, known as the Secure Act.  It is widely expected to pass the Senate. While its name sounds like it’s looking to help Americans with retirement, some believe that the bill will reduce the value of all retirement savings plans, from IRAs to 401(k)s and Roth IRA.

The problem with the Secure Act is that it eliminates the ability to stretch the IRA, which has been the gold star in the retirement sky since 1999. The stretch IRA allows account owners to leave their retirement accounts to children, grandchildren or other beneficiaries.

Under current rules, those recipients can take only Required Minimum Distributions (RMDs) over the course of their actuarial lifetimes. That means small payouts, small taxes and stretching the IRA over an extended period. Over time, the IRAs can grow through the power of tax-deferred compounding.

A parent could die knowing that whatever their children may experience in their lives, they won’t have to worry about their retirement because of the inherited IRA.

Congress wants to change this option. The Secure Act gives non-spouse beneficiaries only ten years to pull out every dime from an IRA. The net effect would be to make more of the IRA subject to higher taxes sooner, as distributions are made in bigger amounts.

Here’s the bottom line: as much as thirty percent more of an IRA will be subject to higher taxes under the Secure Act, than under the current rules.

When the Tax Cuts and Jobs Act expires in 2025, taxes will rise across the board.

As part of the Secure Act, Congress will push back the age at which retirees must take their first RMD from 70 ½ to 72.

This is probably not the deal that Americans had in mind when they started saving money in IRAs, some two decades ago. The best approach for savers was to leave their IRAs to the children or the grandchildren and stretch those payouts over decades.

Under the Secure Act, the IRA owner may still leave the account to a surviving spouse, who’d remain exempt from the ten-year time period. However, the surviving spouse is still paying taxes in a higher tax bracket as a “filing single” taxpayer. That bracket takes a giant leap from 12% to 25% or 24% to 35%, as the mandatory payout ratios increase with age.

For example, a 70-year-old it is 3.7% of the retirement account balance. For a 90-year-old, it is 8.8%.

If a $1 million IRA passes to a high-earning adult, they would have to take payouts annually, adding $100,000 of annual income on top of their salary for a decade. Live in a high-income state tax, and half the annual payout could be consumed by taxes.

For those with college-aged children, watch out. Parents of college age children who inherit IRAs could lose financial aid options. If they decide to postpone taking distributions for four years to avoid the impact on needs-based financial aid, they’ll have to double up on distributions after college to compensate.

In the past, an IRA owner might have established a trust for young beneficiaries. Under the Secure Act, an IRA of $1 million placed in trust for the benefit of an 8-year-old could receive nothing for nine years. Then, at year ten, the entire IRA would have to be paid out. Now, the beneficiary turns 18 and he gets a windfall. With a decade of additional compounding growth, the original IRA could have grown to $2 million or more. If it’s delivered all at once, it’s taxed in the highest bracket.

The bill hasn’t become law yet, but it’s likely that it will. If it does, make an appointment with your estate planning attorney as soon as you can, because your carefully created estate plan may be turned upside down and sideways.

Reference: The Wall Street Journal (July 9, 2019) “Congress is Coming for Your IRA”

 

Will You Return to the Work World in Retirement?

“Perhaps they started saving too late, or they ran into a financial or career setback. That’s one reason why more people are working after they retire.”

Retirement income is often described as a three-legged stool, with money coming from three different sources: retirement savings accounts, other investment accounts and Social Security. However, as reported by the New Hampshire Register in the article “Returning to work after you retire,” often that’s not enough income to provide a comfortable retirement. For some people, work is an enjoyable and fulfilling experience and they see no reason to retire. Others feel their identity is wrapped up in what they do, so they keep working.

A study from the Employee Benefit Research Institute found that almost half of Americans expect to work past age 65. However, that doesn’t always work out for everyone.

Many people become unable to work before they retire, due to illness or an injury. Others lose their job in their early 60s and have problems finding a new position with the same level of salary.

Even if you can work after retiring, there are several factors to consider. If you claim Social Security benefits before reaching Full Retirement Age (FRA) and then return to work, the IRS will deduct money from your Social Security benefits, if you earn above a certain amount. In 2019, that number stands at $17,640. You’ll lose $1 in benefits for every $2 you earn above that threshold, which changes every year, until you reach FRA.

For the year you reach FRA, that threshold takes a leap, to $46,920 in 2019, and then $1 is deducted for every $3 over the threshold, but just for that year. Once you finally do reach FRA, there is no limit to what you may earn.

For some people, retirement is the time to strike out in a new direction. It could be one they have wanted to explore for years but were limited by a need to pay a mortgage, put children through college, etc. For others, working part time is a way to ease into retirement, while still bringing in some income.

If you intend to work again after retirement, start by clarifying exactly why you want to do so. For instance, if you love your profession and would prefer to remain in it, maybe a consulting position with a prior employer would be enough to keep yourself in a field you love, while giving you more leisure time.

For someone who wants to become active in their community, working at a nonprofit organization that serves a cause or a group that you believe in could give you a fulfilling and productive role.

For those who like to travel, consider a new occupation. A teacher who retired early became a stewardess on an airline, because she wanted to visit a daughter who was going to college in Australia.

It’s okay to want to work up to or long past your retirement. A recent television news segment featured a gentleman who was well into his late 90s, who worked four hours a week at a local supermarket, bagging groceries.

Reference: New Haven Register (July 7, 2019) “Returning to work after you retire”

 

Avoiding a Family Feud When Choosing a Power of Attorney

“Deciding who gets the power of attorney is an important step for parents looking to organize their estate and plan for a future without them.”

The challenge in tasking a family member or trusted friend is not just making sure they have the necessary skills, but to navigate family dynamics so that no fights occur says Considerable.com in the article “How to assign power of attorney without sparking a family feud.” Every family situation is different, but in almost all cases, transparency is the best bet.

Start by understanding exactly what is meant by power of attorney, how it functions within the estate plan and how siblings can all be involved to some degree with the family’s decision-making process.

Power of attorney is a term that gives an individual, or sometimes, individuals, the legal authority to act on behalf of someone else. It is usually used when a person, usually a parent or a spouse, is unable to make decisions for themselves because of illness or injury. It must be noted that power of attorney relates to financial and legal decisions. There are methods to address making decisions for another person for their health care or end-of-life decisions, but they are not accomplished by the power of attorney (POA).

It should be noted that there is a distinct difference between power of attorney and executor of the estate. Power of attorney is in effect while the person who has granted the authority is alive, but unable to act on their own behalf. The executor of the estate assumes responsibility for managing the estate through the probate process. While they are two different roles, they are often held by the same person, usually an adult child who is responsible and has good decision-making skills.

There are different types of power of attorney roles. The most common is the general power of attorney, followed by the health care or medical power of attorney. The general power of attorney refers to the person who has the authority to handle financial, business or private affairs. If a parent grants power of attorney to one of their children, that child then has the authority to act on behalf of the parent.

Trouble starts if the relationship between siblings is rocky, or if major decisions are made without discussions with siblings.

It’s not easy for siblings when one of them has been granted the power of attorney. That means they must accept the inherent authority of the chosen sibling to make all decisions for their parent. The sibling with the power of authority will have a smoother path, if they can be sensitive to how this makes the others feel.

“Mom always liked you best,” is not a sentence that should come from a 50-year-old, but often childhood dynamics can reappear during these times.

Remember that the power of attorney is also a fiduciary obligation, meaning that the person who holds it is required to act in the best interest of the parent and not their own. If the relationship between siblings is not good, or there’s no transparency when decisions are made, things can get bumpy.

Here are some tips for parents to bear in mind, when deciding who should be their power of attorney:

• Understand the great power that is being given to another person.
• Make sure the person who is to be named POA, understands the entire range of responsibilities they will have.
• The siblings who have not been named will need to understand and respect the arrangement. They should also be aware of the potential for problems, keeping their eyes open and being watchful without being suspicious.

Some families appoint two siblings as a means of creating a “checks and balances” solution. This can be set up, so the agents need to act jointly, where both agree on an action, or independently, where each has the full authority to act alone. In some cases, this will lessen the chances for jealousy and mistrust, but it can also prolong the decision-making process. It also creates the potential for situations where the family is engaged in a deadlock and important decisions don’t get made.

Parents should discuss these appointments with their estate planning attorney. Their years of experience in navigating family issues and dynamics give the attorneys insights that will be helpful with assigning these important tasks.

Reference: Considerable.com (July 10, 2019) “How to assign power of attorney without sparking a family feud”

 

The Next Wave in Retirement Planning: Digital and Cyber Assets

“The last thing anyone wants to see is all of that hard work negated at the end of their life. I’ve said this a million times but stop putting off your estate planning and deal with it today!”

You’ve worked hard for decades, saving and planning for retirement. Don’t put it at risk, by delaying having an estate plan created by a qualified estate planning attorney, advises The Press of Atlantic City in the article “Estate planning for your digital and cyber assets.” However, here’s the thing: even when you have a comprehensive estate plan in place, meaning a last will and testament, a power of attorney, a health care power of attorney and the appropriate trusts, you’re not quite done.

That’s because today we have an entirely new type of property that must be dealt with in estate planning. Unlike tangible property that people have been handing down for centuries, this is a relatively new kind of property: digital assets. One of the problems with digital assets is that, unlike paper documents, your family members can’t simply sift through decades of physical records to find out what you own. The online world is endless, and if they don’t know what websites to look at, there’s simply no way that they can find your digital assets.

What is a digital asset? They include such things as:

• Mobile devices, like cell phones, laptops and tablets
• Email accounts—all of them
• Social media profiles including Facebook, Instagram, Twitter, LinkedIn, etc.
• Sites that contain music, photos and other personal information
• Your personal desktop
• Online banking, investment accounts and cybercurrency
• Online gaming accounts
• Online bill paying, like utilities, EZ-Pass and any automatic payments
• Websites or blogs

You’ll want to let your executor know what you want to be done with your digital assets. Some platforms have the ability for you to express your wishes for your digital assets, like Facebook. What do you want to happen to your pages when you are gone? Do you want people to be able to see your pages, or to post on them? Would you want them to be taken down a month after you pass, or left up permanently?

You’ll need to list out all your digital assets, your username and your passwords and provide a directive to specifically state what you want to happen to each website. Yes, it will take time and it may be tedious, but imagine how challenging it will be for your family members to try to track down all your digital assets. Speak with your estate planning attorney as to how to share this information—but don’t put it in a will, because your will becomes a public document if your estate goes through probate (which happens to most wills).

Just as you have taken the time to have an estate plan created, making sure to have a digital assets plan is a gift to your loved ones. With these details taken care of, your family will be able to focus their attention on taking care of each other, dealing with your estate and going through the grief process. You’ll have spared them a lot of additional stress and expenses.

An estate planning attorney will be well worth the investment. You can be confident that your will is going to be prepared in accordance with the laws of your state, and that your family will be protected as you wished.

Reference: The Press of Atlantic City (July 4, 2019) “Estate planning for your digital and cyber 

Are You Sure You’re Financially Prepared for Retirement?

“Experts advise closely evaluating your expenses, sources of income and the potential tax implications that come with different types of income. Your asset allocation—how your portfolio is divvied up among stocks, bonds and cash—also should be reviewed.”

It’s a popular number in financial news: every day, 10,000 Baby Boomers turn 65. That’s not everyone’s retirement year, but it is for many people. When the time to retire finally comes, according to the article “Nearing retirement? This checklist can help you make sure you’re financially prepared” from CNBC, some people are ready. Others are not. Whatever your status, here are some things you need to be sure of before you retire:

How much do you spend? When income is steady, we tend not to think about what we spend. However, when we transition into retirement, a budget is our best friend. If you don’t know what you spend monthly or annually, pre-retirement is the time to start tracking your cost of living. Remember that you may be spending less on work-related items, but more on leisure. If you can get rid of debt before retiring, you’ll also be in a better situation. Not everyone can go into retirement debt-free, but try to minimize as much debt as you can.

The big unknown: health care costs. This is the biggest unknown of retirement. If you are 65, it’s time to sign up for Medicare, which pays for much, but not all, of your health care costs. You’ll need to pay for dental, vision and long-term care costs. If you haven’t already purchased a long-term-care insurance policy, take care of that soon. Medicare does not cover the cost of care for daily living costs, like bathing or dressing.

How much you pay for Medicare depends on your recent income, if you signed up on time, and what additional coverage you select. If you didn’t sign up when you were first eligible, or if you don’t meet an exclusion, or if you have a high income, you’ll pay more.

You can’t get Medicare coverage until you turn 65, so if you retire younger than age 65, you’ll need to secure your own health insurance.

What happens if you retire before you turn 65? A federal law, COBRA, requires employers with at least 20 workers to allow ex-employees, including those who have retired, to remain in the employer-sponsored plan. The catch? The former employees must pay the full cost of the premiums. That can be expensive.

Are there other options? You might be able to sign up for a health insurance exchange program (the Affordable Care Act plan), if they are available. There are short-term plans that cover the gap between employment and retirement, if you can qualify. They are mostly available for healthy people with no pre-existing conditions.

Do you have a Social Security strategy? The longer you can delay taking Social Security benefits, the larger your checks will be. Even knowing this, many people start taking benefits as soon as they become eligible, because they need the income. However, if you can wait, your benefits will increase by 6-8% yearly until you reach 70. These days, more people celebrate their 65^th birthday and keep right on working. At least 55% of people ages 60-64 are working part time, as reported by the Bureau of Labor Statistics. People age 65 to 69 are also working—nearly 31%.

What does your retirement income look like? Retirement income comes from a variety of sources and everyone has their own mix. You might have a Roth IRA, or a traditional IRA. If you have a traditional IRA, you’ll have to consider that your withdrawals are going to be taxed as regular income. An IRA of $1 million may leave you with $700,000 in after-tax income, depending upon your tax bracket.

If your investment accounts are healthy and you’ve been investing for decades, you will probably have to pay capital gains taxes on some of the withdrawals.

Lucky enough to have a pension? Fewer and fewer Americans can count on a pension from their employer. However, if you have a pension in place, chances are you must take either a lump-sum payment or receive income over your lifetime. Pull out your paperwork and read it carefully. What will the benefits be for a surviving spouse? Do you have the option to leave the pension to a beneficiary?

Creating a plan for your retirement income in advance will help you avoid some of the common pitfalls, like spending so much in the first five years of retirement that the next decade or two is fraught with financial worries. While you’re at it, start preparing your estate plan with an experienced estate planning attorney.

Reference: CNBC (July 5, 2019) “Nearing retirement? This checklist can help you make sure you’re financially prepared”      

What Do These People Know about Retirement that You Don’t?

“In fact, 18% of both baby boomers and Gen Xers expect to work past age 74, according to Northwestern Mutual's 2019 Planning & Progress Study.”

The idea of retiring early and leading a life of complete leisure does have its appeal. However, not everyone is in a big hurry to say goodbye to their working life. Many people enjoy their work, finding it rewarding, enjoying the social aspect of their job or, they just need the money. It’s hard to argue with some of these positive attributes of working longer, says USA Today in the article “18% of baby boomers and Gen Xers plan to work past age 74. Why you should do the same.”

If you’re convinced that you’re going to stop working as soon as you possibly can, it may be worthwhile to consider a few good reasons to continue going to work. Consider these reasons:

Keep your retirement savings growing. The more money you accumulate in your retirement accounts, the more financial security you’ll have in your later years. However, a large percentage of middle-aged and older workers are woefully behind. How many? Try 17% of all boomers who have less than $5,000 saved for retirement, according to the study referenced above. Retire too early, and you’ll have far fewer options. Working longer will give you more time to save more.

Let your Social Security benefits reach their maximum potential. Another aspect of a smaller retirement nest egg is an increased dependency on Social Security benefits, which were never designed to replace 100% of worker’s incomes. One way to maximize your benefits, is to wait to take your benefits as long as possible, up to age 70. Doing so could allow you to accrue delayed retirement credits that increase benefits by 8% a year.

Say your Social Security benefit at age 67 is $1,500. If you keep working until 70, that monthly benefit will grow to $1,860. If you are the higher earner, your surviving spouse will receive higher benefits.

Stay socially connected and avoid boredom. Did you know that retirees are more likely—by 40%—to be diagnosed with depression? Most of that is a direct result of being bored. Older Americans who don’t work, often struggle to adjust to their new lifestyle. If you don’t have a lot of free cash to spend on travel and activities, you may find yourself bored, restless and isolated.

If your job also serves as a social outlet, you may be better off mentally and financially to extend your working years.

People don’t like the idea of a shorter period of retirement, especially when their family and friends are starting to retire. However, remember that people are living longer these days, and one out of every three people who are 65 right now are expected to live past age 90, while roughly one in seven will live past age 95.

You don’t have to miss out on retirement just because you work a few more years. If your finances and your mental health will benefit from sticking around on the job, it’ll be well worth the effort.

Reference: USA Today (June 29, 2019) “18% of baby boomers and Gen Xers plan to work past age 74. Why you should do the same.”