Klitzman Law Group, PLLC

Self-Employed Retirement Success Requires Discipline

“A recent study by retirement research company Plansponsor, a division of Connecticut-based Asset International Inc., shows of those surveyed nationwide, only 56% of independent workers were actively saving for retirement, compared with 72% of traditional workers.”

Independent workers have a number of retirement options, from traditional and Roth IRAs to Simplified Employee Pension IRAs and Simple IRAs, according to the Spokane Journal’s article “Self-employed professionals see more retirement flexibility.”

Solo 401(k)s are best for independent workers, as they have a higher contribution limit. Up to $55,000 can be put into a solo 401(k) on an annual basis.

A SEP IRA for business owners works in much the same way as the traditional IRA plan, but has a higher contribution limit per year: $57,000 for 2019. The Roth plan boasts a maximum annual contribution limit of $6,000 for people under the age of 50. For a person over the age of 50, the limit is $7,000.

The concept is the same with a SEP or a traditional IRA for a self-employed person as for an employee: the person contributes pre-tax earnings that reduces her overall taxable income and she gets an upfront tax break. When the money is withdrawn during retirement, it is taxed the same way as regular income. With a Roth, the taxes are paid up front, so the withdrawals are taken tax free.

The nice thing about a SEP is that the person can make contributions up until she files tax returns, so there’s more time to get tax benefits.

A Simple IRA was designed for small businesses, and so it has less paperwork requirements than a regular 401(k).

The biggest mistake self-employed people make is not setting aside enough money to pay their taxes throughout the year. Someone who receives a W-2 doesn’t have to think about paying taxes, but the self-employed person does.

Self-employed people often use a taxable investment account that offers more flexibility and has fewer limitations. A taxable investment account has no IRS-established clauses controlling when money can be withdrawn. There are also no limitations on how much can be contributed and who can contribute money into these types of accounts.

The most important thing for the self-employed person, is to put money away consistently. It doesn’t have to be a big deposit every year, but a small amount of money saved monthly adds up over time.

Reference: Spokane Journal (December 5, 2019) “Self-employed professionals see more retirement flexibility”

Why You Can’t Count on Social Security to Fund Your Entire Retirement

“Millions of seniors today collect Social Security in retirement and use those benefits to help pay their living costs.”

Social Security benefits don’t cover a person’s entire cost of living during retirement. Anyone who is counting solely on Social Security to fund their retirement needs to realize that immediately and take steps to improve their financial picture, says USA Today in the article “Social Security is not the financial lifeline you think it is.”

The average annual Social Security benefit adds up to $17,748. Compare that to your annual working income, and you’ll see how the numbers work—or don’t. That’s barely the minimum wage in most states. Trying to live on that amount alone, might mean a world of change to your lifestyle, including many sacrifices.

Social Security was designed to provide about 40% of most people’s pre-retirement income. Most seniors need at least double that to live comfortably. Even you’ve been able to pay off your mortgage during your working years, chances are you’ll still need a good income to maintain your quality of life. The amount of money saved by not working is pretty minimal. You still need clothing, a car and money for home maintenance, property taxes and utilities. This doesn’t include health care expenses, which will go up if you previously had most of your health care costs covered by your employer.

Here are steps to take now, if your 401(k) or IRA isn’t ready for retirement:

Aggressively cut back on living expenses. No, it won’t be easy or fun, but it may prepare you for some of the changes that will come without an increase in your retirement savings. Downsizing is one way to make up some cash, but there are other changes: stop going out to dinner, get rid of cable services, stop taking big vacations and cancel any monthly expenses you don’t need, like unused gym memberships.

If these cuts and others add up to $500 a month, invest that money in a stock-heavy portfolio that can yield around 7% over the next seven years. You might be able to generate $52,000, if all goes well.

Consider getting a second job. If you can earn around $1,000 a month and save it instead of $500 a month, you may be able to gather $100,000, if the money is invested for seven years and yields a 7% return.

You may need to extend your career, something many Boomers are doing. Working even a few years past the retirement date you had in mind, will give you the time to pad your nest egg, leave your existing savings untouched for longer, and save more. If you add two more years to the seven years in the examples above, you could find yourself with $144,000 for retirement (again, assuming that 7% return).

Social Security is a valuable source of income for seniors, but it is not enough to live on. Confronting that fact sooner and doing something about it, will give you more time to deal with how to save for retirement.

Reference: USA Today (December 4, 2019) “Social Security is not the financial lifeline you think it is”

How to Protect Your Retirement From Spendthrift Parents

“Her elderly mother, who had already drained a modest 401(k) and tapped the family home for a home equity line of credit, wanted Clark and two siblings to subsidize her living expenses.”

Denise Clark was flabbergasted and not without reason. Her mother wanted her children to buy her a brand new car and expensive birthday gifts for extended members of the family. Her mother thought nothing of asking for several hundreds of dollars each month from each of them to maintain her lifestyle. The Clarks are not the only family facing this issue, as reported in “How to Support Your Retired Parents Without Sinking Your Own Retirement Plans” from Money. A study from TD Ameritrade found that 13% of Americans are supporting a parent, including 19% of millennials.

This particular mother may have to find another money tree to shake. Clark doesn’t want to turn over the funds that she has saved over time, by careful budgeting to a parent who has a history of living beyond her means. All of the siblings have worked hard to attain financial security, devoting decades to building healthy nest eggs.

How can this family and others help aging parents, without sacrificing their own retirement or financial security?

Set boundaries, and stick to them. The role reversal of a child setting limits with a parent makes this a challenging set up, but it’s critical for the child to say no. The last thing you want is to go broke helping an elderly parent, and then finding yourself in the same situation with your own children years from now.

Address harmful money habits straight on. Spending as a hobby may be a symptom of depression or boredom. If that’s the situation, discuss it and consider getting the help of a professional counselor.

Don’t give cash directly to the person. If you can help out with small expenses and don’t want the money to be lost, pay a bill for them. The bill will be paid and the money won’t go elsewhere.

Try an approach of collaboration. Ask for their help in figuring out their financial future. Be encouraging, without scolding. If you’ve never talked about money, then be patient. It may take a while for them to accept your input, even if they are all too eager to accept financial gifts.

Check out government support programs. The Medicare Savings Program can help low-income seniors, who also qualify for Medicaid, afford a Medicare prescription plan. HUD runs a number of housing plans, although wait lists are often long.

If housing costs are a problem, look to alternatives. Are they willing to take on a roommate or two? The added rent money and socialization could alleviate some issues, although you have to be careful about who lives with your parent. A “Golden Girls” living situation might work.

Don’t overlook filing for bankruptcy. If their credit card debt, medical bills or underwater mortgage are overwhelming, bankruptcy might be a welcome relief.

Finally, if your own financial situation permits, consider setting up a trust with an estate planning attorney to benefit your aging parents. Inside a revocable living trust, a certain percentage of money or a set dollar amount can be distributed on a controlled basis, with a trustee who can be given the discretion to decide when assets should be distributed. If there are gambling or other abuse problems, restrictions should be built into the trust.

Reference: Money (December 3, 2019) “How to Support Your Retired Parents Without Sinking Your Own Retirement Plans”

Special Needs Planning is a Lifelong Event

“Linda Smyth has spent more than 20 years fighting her way through a complicated maze of paperwork, assessments and denials in the attempt to secure services for her son, who is on the autism spectrum.”

Working to get her son assessed to qualify for support programs, fighting to get benefits and finding therapists became a full-time job, and one that led to enormous costs, even with the family’s having good health insurance. In a recent article “Their Child Has Special Needs. Here’s How They’re Planning for a Lifetime of Assistance” Barron’s explores the life-long journey of caring for a special needs family member.

Smyth’s biggest worry is the same as other parents in her situation: what will happen to her now 23-year old son, when she and her husband are no longer around to support him?

For families with a special needs child, the focus is on the health of the child, but the financial and legal planning to care for someone whose life will likely extend beyond the traditional financial life of the parents is critical.

The estimates of costs are overwhelming. The lifetime cost for a person with autism averages from $1.4 million to $2.4 million, depending on whether the person has an intellectual disability, according to Autism Speaks, an advocacy group. Residential or 24/7 care can easily cost $100,000 a year.

The medical assessment is often the first step to getting benefits, through Medicaid and developmental disability and autism programs. How much and which programs may be covered, depends upon the state. Where you live matters. For parents who are thinking about where to retire, moving to a condo in Florida might be great for lowered costs and taxes, but it could mean a special needs child loses important benefits.

Beneficiary designations must be planned carefully, since a special needs individual may not own more than $2,000 in assets. An inheritance or even a job could disqualify them from accessing programs. One way to avoid this is to open an ABLE account. It’s a state-run savings account that can be funded by the special needs individual or family members with after-tax money up to $15,000 a year, and can be used for housing, education, transportation, and other services. The account’s assets are not included in the benefits calculation as long as the total balance is under $100,000.

Another option is a special needs trust, which can shelter assets. Grandparents who want to leave money to special needs children leave it in a special needs trust. The same holds for life insurance policies that pay out on the death of the parents for the special needs child. Just be careful about over-funding the trust too early, as money that goes in cannot be withdrawn for other purposes. The beneficiary of the trust after the special needs child dies, does not get a step-up in basis for taxes.

Talk with an elder lawyer about planning for the special needs child. You’ll also need to have a health care proxy, a power of attorney, a HIPAA release form and a last will and testament. The estate planning elder law attorney with experience helping special needs families may also know of important resources in your community, which can be invaluable to the qualify of life for you and your child.

Reference: Barron’s (November 29, 2019) “Their Child Has Special Needs. Here’s How They’re Planning for a Lifetime of Assistance”

Holiday Gatherings Often Reveal Changes in Aging Family Members

“It’s a common occurrence. Far flung family members return home to visit elderly relatives for the holidays. Upon arrival, they notice that things seem … off.

A look in the refrigerator finds expired foods and an elderly relative is asking the same questions repeatedly. The same person who would never let you walk into the house with your shoes on now, is living in a mess. The children agree, Mom or Dad can’t live on their own anymore. It’s time to look into other options.

One of the biggest questions, according to the Cherokee Tribune & Ledger-News’ article is “How to pay for long-term care.”

The first question involves the types of facilities. There are many different options but the distinctions between them are often misunderstood. Assisted living facilities provide lodging, meals, assistance with eating, bathing, toileting, dressing, medication management and transportation. However, a skilled nursing facility adds more comprehensive health care services. There’s also the personal care home, which provides assisted-living type accommodations, but on a smaller scale.

The next question is how to pay for the residential care of an elderly family. This weighs heavily on the family. That elderly person is often the one who did the caregiving for so many years. The reversal of roles can also be emotionally difficult.

There are a few different ways people pay for care for an elderly family member.

Long-term care insurance, or LTC insurance. Few elderly people have the insurance to cover their residential facility stay, but some do. Ask if such a policy exists, or go through the piles of paperwork to see if there is such a policy. It will be worth the search.

Veteran’s benefits. If your loved one or their spouse served during certain times of war, is over 65 or is disabled and received an honorable discharge, he or she may be entitled to certain programs that pay for care through the Department of Veterans Affairs.

Private pay. If your loved one has financial accounts or other assets, they may need to pay the cost of their residential facility from these assets. If they don’t have assets, the family may wish to contribute to their care.

Another route is to apply for Medicaid. An elder law attorney in their state of residence will be able to help the individual and their family navigate the Medicaid application, explore if there are any options to preserving assets like the family home, and help with the necessary legal strategy and documents that need to be prepared.

Meet with an elder law estate planning attorney to learn what the steps are to help your elderly loved one enjoy their quality of life, as they move into this next phase of their life.

Reference: Cherokee Tribune & Ledger-News (November 30, 2019) “How to pay for longterm care.”

Now That I’ve Finally Retired, How Do I Manage My Retirement Funds?

“If you’re just stuffing dollars into a 401(k), you have a retirement account, but don’t have a retirement plan.”

A retirement plan is not just funding your retirement, but figuring out how to manage your funds while you are working and when at long last you finally do retire, says the article “What do I do with my retirement plan when I retire?” from the Shreveport Times. You need a retirement plan while you are working to know how funds will be spent, which will impact how you should be saving and investing.

There are four strategic functions of money in retirement. If you know what they are, you’ll be able to do a better job of saving.

When you stop working, your income from work does too. Unless you are one of the few Americans retiring with a pension, it will be up to you to translate retirement assets into retirement income. Your first thought might be simply to start with taking out just a little bit, and live on that as best you can. Nope, that’s not a plan. The first question is: what’s is enough to live on, and the second—how long will it last?

Until those questions are answered, the other three can’t even begin to be addressed. Retirement income planning is something that many people do with professionals, because it’s not easy. This is the difficult place, where life planning and money planning meet. How long will you live? No one knows. How long will your assets be able to produce the income you need? Hard to know one without knowing the other. However, there are still ways to plan, so you can enjoy your retirement.

What’s your level of liquidity? These are things that you own that are not cash but can be turned into cash. Money in a checking account? 100% liquid. Funds in investment accounts are fairly liquid, but not as much as cash. Real estate is not liquid, unless you are in a booming market. What about any small business that you own? Probably not as liquid as you think.

There’s also something called “technical liquidity” and “practical liquidity.” Let’s say you are taking all of the interest and dividend interest from your investments but decide you need $50,000. What happens if you take that $50,000 from your investments? The interest and dividends that were being created by that sum are no longer being generated.

Contingencies are the big unexpected costs. The biggest one faced by retirees is long-term care. People underestimate this cost all the time. It’s not just the cost of a nursing home, although that is a huge cost. What about health that declines slowly, over an extended period of time? There will be caregivers who need to be paid, and care services. That can reach $10,000 a month easily in most states.

Legacies are another consideration. If you want to leave behind something for your heirs, or want to fund a cause or service that you are passionate about, will you build that into your retirement funds or your estate plan?

Reference: Shreveport Times (November 30, 2019) “What do I do with my retirement plan when I retire?”

Can My Estate Plan Include Illiquid Assets, Like Real Property and Ownership Interests?

“No good estate plan can afford to ignore the other assets, the ones called ‘illiquid.’ That category includes anything that can’t readily be converted to cash, in a regulated market with readily determined prices.”

Many people are focused on their traditional assets that generate monthly statements, like bank and investment accounts, stocks and mutual funds. However, those assets, which are called “liquid” because they can be readily converted to cash, are often less than half of their entire portfolio. Wilmington Biz advises readers not to ignore their illiquid accounts in the article “Don’t Overlook Those Harder-To-Sell Assets When Making An Estate Plan.”

First, let’s see what assets fall into the illiquid category. Commonly, they include:

• Real estate, collectibles, artwork, cars, livestock, mineral rights and timber, as well as
• Financial instruments that don’t have a ready market: hedge funds, options, stock in non-public corporations and some types of debt securities.

The biggest consequences of leaving these assets out of an estate plan isn’t felt, until after the owner dies. First, estate taxes must be paid which are levied on the value of all inheritable assets transferable to heirs. Those taxes are due in a matter of months. However, if a good chunk of those assets are illiquid, they may need to be sold in a hurry to raise the cash needed to pay the taxes or debts of the estate.

That presents a real problem for heirs.

Many illiquid assets can’t be sold, or have to be sold below their market value, if they have to be sold within a tight nine-month window or a reasonable estate administration time frame. If the decedent owned real estate in a region were prices are in a slump, the sale price will be lower than if there were enough assets to pay the taxes and wait for prices to return to normal or even become robust.

A will often divides the estate in a way that has nothing to do with the actual value of the assets. Let’s say three children are left a third of an estate, two-thirds of which are real estate and one-third of which is cash or liquid assets. The real estate may need to be sold, if the heirs don’t want to own an undivided interest in the real estate property together.

Here’s a more common situation: If the amount of cash needed to settle the estate is far less than the actual value of an illiquid asset, but the only way to get cash is to sell the asset, something that might have been hoped to be passed on to the next generation may be lost. That includes family farms, a family business or an heirloom.

Careful planning with an experienced estate planning attorney well in advance can avoid this and similar situations, where illiquid assets are concerned. It may mean setting up and funding a trust or using life insurance. An estate planning lawyer will be able to guide the family through the process to protect assets, but it must be done well in advance of the person’s death.

Reference: Wilmington Biz (November 27, 2019) “Don’t Overlook Those Harder-To-Sell Assets When Making An Estate Plan”

 

Microsoft’s Co-Founder Paul Allen’s Billions Estate

“Paul Allen intended to give away the majority of the $20 billion-plus fortune he accumulated as Microsoft co-founder, technology investor, real estate magnate and NFL and NBA team owner.”

It’s been a little more than a year since billionaire Paul Allen’s passing, but the course he charted to give away his fortune remains a private secret, described as a complicated work in progress by the Seattle Times in the article that asks and answers the question “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated.”

There’s been some recent chatter that Jeff Bezos, founder of Amazon, was interested in buying an NFL team, and possibly the Seattle Seahawks. This has sparked renewed curiosity about what has happened to the Allen empire.

Paul Allen was a philanthropist and interested in many different endeavors, from sports to fine art, pop culture and nonprofits, real estate investing and science. What will be kept within the family, what will be sold and what shape will the promised philanthropy take?

The answer to the question of when all of this might happen, is perhaps the only clear answer: not yet, and maybe not for a while. Experts say that it can take years for such a vast empire to be unwound. His estate includes businesses, investments, properties, world-class fine art and other valuable assets.  Giving away what might be as much as $10 billion or more, is not something to be done quickly.

As to who is in charge, that is Jody Allen, trustee, sister, and along with her family, the sole heir. A biography on the website of Vulcan, the business that Paul and his sister Jody co-founded, says that she has the responsibility for preserving and implementing his vision for generations to come. Jody’s intentions are unknown, outside of a tight and protective inner circle.

A Vulcan spokesperson said that the company is committed to tackling the world’s toughest problems, but nothing more.

The expectations are great, based in part on the long and varied record of philanthropy from Jody and Paul Allen. He gave away $2 billion during this lifetime to business, scientific, and cultural entities.

One of the main channels for philanthropy is the Paul G. Allen Family Foundation, which has given away at least $575 million. At the end of 2018, the foundation had assets worth more than $931 million and made more than $48 million in contributions.

Vulcan, the company, and the family foundation will continue to exist for many years, putting their stamp on science, the arts, environmental causes and educational programs.

Reference: Seattle Times (November 26, 2019) “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated”

 

Tips for Choosing a Fiduciary

“Being a fiduciary is a time-intensive and intellectually challenging task to put upon an individual.”

One of the important tasks in creating a complete estate plan is selecting people (or financial institutions) to represent you, in case of incapacity or death. Most people think of naming an executor, but there are many more roles, advises the article “What to consider when appointing a fiduciary?” from The Ledger.

Here are the most common roles that an estate planning attorney will ask you to select:

• Executor or personal representative, who is named in your will and appointed by the court to administer your estate.
• Agent-in-fact (under a durable power of attorney) who manages your financial affairs while you are living, if you are unable to do so.
• Health care surrogate who makes health care decisions on your behalf while you are living, if you are incapacitated.
• Trustee of a trust document; administers the trust that you have created.
• Guardian: a person who makes health care and financial decisions on your behalf, if the court determines that other roles, like health care surrogate or agent-in-fact, are not sufficient.
• Guardian for minor children: person(s) who make decisions for your children, if you are not able to because of death or a loss of capacity before the children reach adulthood.

The individuals or financial institutions who take on financial roles are considered fiduciaries; that is, they have a legal duty to put your well-being first. Their responsibilities may include applying for government benefits, managing and invest your assets and income, deciding where you will live and working with your attorneys, financial advisors and accountants.

Many people name their spouse or eldest child to take on these roles. However, that’s not the only option. A few questions to consider before making this important decision include:

• Does this person have the experience, skill and maturity to manage my financial affairs?
• Does this person have the time to serve as a fiduciary?
• Would this person make the same health care decisions that I would make?
• Can this person make a difficult decision for my health care?
• Does this person live near enough to arrive quickly, if necessary?
• How old is this person, and will they be living when I may need them?
• What kind of response will my family have to this person being named?
• Are my assets substantial enough to require a financial institution or accountant to manage?

These are just a few of the questions to consider when choosing fiduciaries or health care agents in your estate plan. Speak with your estate planning attorney to help determine the best decision for you and your family.

Reference: The Ledger (Oct. 16, 2019) “What to consider when appointing a fiduciary?”

 

Spare Yourself These Retirement Expense Surprises

“’Stealth expenses,’ as one retiree described them to me, are waiting behind any number of corners in retirement.”

Learning about the common financial surprises that occur during retirement is an excellent way to try to protect nest eggs, says the article “The Expenses People Often Forget When They Plan for Retirement” from The Wall Street Journal.

A study by the Society of Actuaries found that one in five retirees and one in four widows experienced four or more financial shocks during retirement. That’s a lot of surprises for people living on fixed incomes. The good news is that the study also revealed that many older adults who experienced a stealth surprise appear to have bounced back.

Retirees are resilient, and most are good about making adjustments to their budgets to overcome their surprises. However, being prepared for these financial shocks is even better. Here are some of the more common hidden costs of retirement:

Replacement costs for big ticket items. A new furnace, a new car, or a new roof are all expenses that come up when you’re working. They don’t stop because of retirement. Many retirees underestimate their longevity and overestimate big ticket items that need replacement.

Relatives in need. This pinch can come from older parents or relatives and younger family members who find themselves in a financial crisis. An adult child who loses their job or goes through a divorce or a grandchild who needs help with tuition are some of the typical examples. Can your nest egg sustain their needs, or do you need to say no? Can other family members help?

Required distributions and taxes. Most people know that they will need to start taking withdrawals from tax-deferred accounts upon reaching 70½, but they don’t often understand the larger picture. The distribution may push the couple into a higher tax bracket, and increase Medicaid Part B premiums, which are tied to annual income.

It’s not possible to anticipate every single surprise cost that will come up during retirement. However, there are a few things that can be done. First, try to avoid any major expenditures during the first five years of retirement. That’s when nest eggs are most vulnerable to bear markets. Next, while you are saving for retirement or making budgets, include money for home repairs and upkeep.

Reference: The Wall Street Journal (Oct. 17, 2019) “The Expenses People Often Forget When They Plan for Retirement”