Posts Tagged ‘investment’

Book Review: “Can I Retire?”

Can I Retire?: How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or LessReview by: Gerardo Olivarez, Jr., Esq., of Tampa, Florida

Book by: Mike Piper

I found this book to be one that I could easily give to a client. The author provided a basic background of retirement planning. The material is not overwhelming for the average reader. The subject of retirement planning focuses on retirement living expenses. This allows the reader to assess his/her current individual situation. By doing so, the reader is not frightened by complex terminology and complicated mathematical calculations. The author creates a reading environment that challenges the reader to think. Thinking about his/her own future lead to some very important questions.

The book is divided in three parts. The first is titled, “How Much Money Will I Need to Retire?”. The second is, “Retirement Portfolio Management”. And, finally the third is, “Tax Planning in Retirement”. The first part is quite simple. It looks at the basic question of how much money does the reader think he/she needs to retire. Although the question appears simple enough the answer is a bit more complicated. The reader needs to review their expenses in retirement. A basic rule is to look at all the expenses that one has for an entire year. This will capture once a year expenses such as property taxes. Once expenses are calculated they also need to be adjusted for inflation. The author uses individual examples to illustrate his points. This allows the casual reader to review real-world examples that might be very similar to his/her situation. The issue of Social Security, pensions, and other incomes are discussed as sources of income for a retiree. Now specific planning strategies are not discussed because it is beyond the scope of the book. Although, there are multiple references listed that can assist someone that wishes to find more information on strategies. The Chapters end with a synopsis of the learning points listed as bullets. This allows for the reader to reinforce what he/she just read.

Part Two of the book describes multiple savings vehicles such as 401Ks, IRAs, Index funds, ETF, active funds, stocks, and bonds. The advantages and disadvantages of using Index funds vs actively-managed funds are quite good. The reader is given the basics on what each one is and how they work. The focus is on the expense ratio of owning one or the other. I found the factors explained for rolling over an IRA to be helpful. A client will be asking more questions than there are answers in this book. This is good! A client will be able to seek out more information. This books sets up a blueprint to establish a plan. An individual plan will help everyone achieve their goals. The area of Asset Allocation is a valuable area because it helps the reader look at multiple sources of income bases on his/her timeline. The author describes three types of “buckets”. These buckets represent short-time or a “spending bucket”, mid-range or “intermediate bucket” and “long-term bucket”. The first is a spending bucket which can consist of money market accounts, saving accounts, etc. The need to have enough funds to cover a two year period of living expenses is critical. The intermediate bucket will have T-bills and short-term Treasury ETFs or Index Funds. This should be enough cash to cover a three year period of expenses. Finally, the rest of your portfolio should be allocated in stocks and bonds. The percentage ratio should be conservative to preserve wealth. This bucket should hold the bulk of your assets. As you use up your spending bucket you will use the assets in your other two buckets to replenish. This system will allow the retiree to move assets while minimizing the tax implications. Based on the size of the portfolio the author recommends a financial planner be consulted in establishing the individual buckets.

This brings me to Part Three. This area covers tax planning. A retiree will need to know how to maintain enough assets in his/her retirement portfolio while considering the tax implications. Again, the author is only providing an overview. Individual planning is recommended with the aid of a qualified tax planner. However, the book does a good job of explaining tax-shelter bonds and Treasury Inflation-Protected Securities (TIPS). It also discusses Foreign Tax Credits that may affect some retirees. All of this is informative and can provide a retiree a sound foundation to engage his/her financial advisor.

In closing, I found that this book does an effective job in setting the financial landscape to retiring. It by no means answers all of the specific questions that a particular retiree may have. This might not be appropriate for a more sophisticated client that has an established long-term plan with a sizeable estate. However this book does make it clear that everyone needs a plan to retire. A plan is just the first step, but it is by far the most important step to a successful future. I would recommend this book to anyone that is just starting to consider his/her retirement.

How Should Special Needs Trust Funds Be Invested?

Here’s a question that comes up frequently in our practice: how should the funds held in a special needs trust be invested?

The answer should be obvious: a good investment plan for a special needs trust — just like a good investment plan for an individual — should consider the amount available to invest, the beneficiary’s likely needs in the short and long term, the cost of maintaining the investments and other factors affecting the beneficiary’s quality of life. All of that is part of the process of figuring out the trust’s (and the beneficiary’s) tolerance for risk. That, in turn, leads to an appropriate asset allocation — an estimate of what portion of the trust should be held in stocks, what portion in bonds or other fixed income investments, and what portion in other kinds of holdings.

Does all that sound confusing and complicated? It isn’t, really, but one way to get the proper allocation and investment portfolio is to trust the decision to qualified professionals. One would think a bank trust officer would be a good resource for this job. One might be less certain about a judge’s qualifications for the job — at least without looking at the judge’s professional training and background.

What happens when a judge orders a bank trust department to liquidate all its investments and hold an entire special needs trust in federally-insured certificates of deposit because of recent market swings? Well, you can read about a recent Washington State case in the weekly newsletter of our friends at the Hook Law Center, a Virginia law firm.

How to Leave Your IRA to a Trust — And Why You Might

Last week we wrote about how you can go about leaving your IRA (or 401(k), 403(b), etc.) to a child with a disability. In passing we mentioned that the discussion about how to leave your IRA to any trust could wait for another day. Today is that day. Let’s tackle this as a Q&A session (or, if you prefer, we can call it a FAQ list).

Can I name a trust as beneficiary of my IRA?
Yes. That was easy.

Are the rules the same for 401(k), 403(b) and other retirement accounts?
Generally, yes. If you have more esoteric retirement accounts, talk to someone to make sure you are doing the right thing. What the heck — talk to an expert in any case. Our purpose here is just to give you some background and introduce the language and issues, not to give you direct legal advice.

Before you tell me how to do it, why would I want to name a trust as beneficiary of my IRA?
There are several reasons you might:

  • If you have a child who is a spendthrift, or married to a spendthrift, or who is involved in tax issues or legal proceedings, you might want the retirement account to be protected against creditors.
  • If you worry that your child might get divorced and want to keep your retirement account out of the divorce calculations and proceedings, a trust might help protect the account (and, for that matter, other assets you are considering leaving to that child).
  • You might just want to delay the withdrawal of your retirement account as long as possible. Of course, you could name your child as beneficiary and trust him or her to withdraw the money as slowly as is permissible. With a trust you can help assure that “stretch-out” of the IRA.

Why is my banker/broker/accountant telling me I can’t name a trust as beneficiary?
That used to be the rule, and lots of professionals are not yet caught up. There are also a couple of special rules that apply when you name a trust as beneficiary — though they are not at all hard to comply with, so it’s not clear why advisers get hung up on those rules. Finally, even though the rules permit naming a trust as beneficiary they do not require all account custodians to go along — so your broker might be telling you that, while the rules permit naming a trust, your account can not take advantage of those rules.

If I want to name a trust as beneficiary, what must I do?
There are a handful of requirements. The important ones: give the IRA custodian a copy of the trust (that, by the way, can be taken care of later — but you can do it now if you want), name only one income beneficiary for the trust, and make sure your beneficiary designation comports with the trust set-up and your larger plans. That probably means you should get competent professional assistance, but that’s usually a good idea for your estate planning anyway.

Are there bad things that happen if I name a trust as beneficiary?
Yes, but not very bad. Depending on the ages of all the beneficiaries and potential beneficiaries, you might have shortened the stretch-out time to a period less than the life expectancy of the primary beneficiary.

Uh, could you please repeat that — in English?
Of course. Let’s use an illustration.

Suppose you have three children: Abigail, Ben and Candy. You are OK with Abbie and Ben getting their shares of your IRA in their names — you trust them to make sound judgments about how quickly to withdraw the money, and you don’t want to bother with a trust for them. Candy is a different story. The details of that story don’t matter: you just want to put Abigail in charge of deciding whether to withdraw more than the minimum amount each year from Candy’s share of the IRA.

You can name a trust for the benefit of Candy as beneficiary of 1/3 of your IRA (naming Abbey and Ben as the other two beneficiaries outright). But what will happen if Candy dies before the IRA is closed out?

As it happens, Candy does not have children. You decide to have the trust say that upon Candy’s death the remaining trust interest in “her” share of your IRA will go to Abigail and Ben. Abigail is ten years older than Candy. That all means that Candy will have to make her IRA withdrawals using Abigail’s age and life expectancy.

But wait. Candy does have children?
Well, why didn’t you say so? That makes it even easier. You can have the trust provide that if Candy dies before the last IRA withdrawal her children become the beneficiaries of the trust (and, indirectly, the IRA). As before, we use the oldest potential beneficiary as the determining age — and we are going to assume for the sake of this piece that Candy is older than all of her children. No effect on Candy’s withdrawal rate. But note that if Candy does die, her children will still have to withdraw from the IRA at Candy’s rate, not their own.

What about estate taxes?
Now you’re talking about a whole different kettle of fish (or something). As you know, the estate tax situation is in flux right now, and some states have their own estate tax rules. That makes it very hard to generalize, and unnecessarily complicates this discussion. Suffice it to say that your IRA will be part of your estate for estate tax purposes, and just because there is income tax due on it does not mean that there won’t also be an estate tax liability attached to it. But if your entire estate is worth less than $1 million, you probably are not going to care very much. Stay tuned for a new number to be inserted in that sentence sometime before the end of 2010.

That sounds pretty simple. Could you please make it more complicated?
We’d be happy to, but it’s not required. We could give you information about what lawyers call “conduit” trusts and “accumulation” trusts. We could explain why you can’t have the money go to a charity upon Candy’s death. We could even try to give you some better names for your imaginary children (while still adhering to the A, B and C convention). But for most of our clients, those complications are unnecessary.

The bottom line: it is not that hard to name a trust as beneficiary of your IRA, 401(k) or other qualified retirement plan. You just need to review the rules, and understand why you might want to do such a thing.

It is also permissible to consider all that, try to get the rules straight, and then decide not to bother. One thing that we don’t want to allow you to do, though: ignore the issue, prepare a will that seems to handle all of your assets, and then have an IRA beneficiary designation that doesn’t agree with the rest of your estate plan, imposes an undue burden on your children and beneficiaries, or fails to address your child’s disability, money problems or legal or financial situation.

We hope this has helped demystify a subject that lawyers and accountants often seem to enjoy complicating. Your life, however, tends to be complicated. Please get good legal, financial and investment advice before you decide what you should do.

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