Financial Planning for the Second Half of Your Life

Financial Planning

for the Second Half

of Your Life

Dr. Barbara O’Neill, CFP®

Rutgers Cooperative Extension

[email protected]

Your Questions?

3

Personal Introduction

Rutgers professor for 37 years

CFP® for 30 years

Extension Specialist in Financial Resource

Management with Rutgers Cooperative Extension

Financial educator and author

In the second half of my financial life

Age 50 (+/- 5 to 10 Years)

Financial “halftime” or “intermission”

Think about past accomplishments

Think about what one still wants to do

New challenges and decisions

Increased interest in “giving something back” to others

Many people want to simplify/downsize

Key Financial Issues: Second

Half of Life Financial basics

Reducing financial risks

Investing decisions & asset allocation

Creating retirement “paycheck”

Minimum required distributions

Tax-planning strategies

Transferring untitled personal property

Getting help and hiring advisors

Leaving a legacy

Communication issues about money

Common Financial Errors Changing investment strategy drastically on a specific date (e.g., age 60)

“Forgetting” about effects of inflation

3.5% inflation will double costs in 20 years

Relying too heavily on financial salespeople

Assuming that estate planning is for “the rich”

Retiring without considering health coverage

Not planning for long-term care expenses

Improper asset withdrawals

1. Don’t Forget “The Basics” Cash flow statement

Summary of income and expenses

Net worth Statement

Summary of assets and debts

Specific financial goals

Include a date and cost

Emergency reserve

Financial Fitness Quiz (Check-up): http://njaes.rutgers.edu/money/ffquiz/

2. Assess Current and Future

Insurance Needs Life insurance

Disability insurance (if employed)

Health insurance (e.g., Medigap, work)

Long-term care insurance

Amount and length of coverage

Elimination (waiting) period

Age at purchase and health status

Umbrella liability

3. Follow Recommended

Investment Strategies Don’t invest if you don’t understand

Diversify (different assets and types)

Invest for long term goals: 5+ years

Have reasonable expectations

Buy low-cost investments

Don’t pay attention to market “noise”

Balance risk and reward

All investments have some type of risk

Ownership Versus Loanership

Ownership

Investments:

Variable Annuities

Stocks

Real Estate

REITs

Growth mutual funds

Loanership

Investments:

Fixed Annuities

Corporate Bonds

Government Bonds

Ginny Maes

Money Market Funds

CDs

U.S. Savings Bonds

4. Create a Retirement “Paycheck”

Try to simulate regular income stream

Annual cash withdrawals (1/12 per month)

Automated monthly fund withdrawals

“Laddered” bonds or CDs

Post-retirement employment

Earnings limit under FRA: $15,720 (2015)

Keep tax-deferred investments and Roth

IRAs growing as long as possible

How Much Can You Take Out?

Draft budget before you start spending

Keep an eye on inflation

Two key factors determine how long savings will last:

Your withdrawal rate

The rate of return on your investments

Withdrawal Rate Consensus

Between 4% and 4.5% of portfolio, if 50% + in stock

Lower (e.g., 3%) if conservative investor

Consider hiring certified financial planner for 2-3

hours of time (go prepared)

Consider “packaged” services from investment

companies (e.g., T. Rowe Price, Vanguard, etc.)

Try a Monte Carlo analysis (asset longevity projection)

Set aside enough $$ to pay uncovered excess

expenses for 3-5 years in money market fund.

(e.g., $30k income - $15k from SS and pension = $15k x 3-

5 years or $45k to $75k in cash assets)

Remainder grows in stock and bond funds. Sell

shares every year and add to MMF.

If stock market tumbles -- hang tough. Tap bonds

and take capital gains and dividends first.

Suggested Investment

Strategy for Seniors

5. Take Minimum Required

Distributions Applies to distributions from:

Traditional IRAs (Roth IRAs are tax-free)

401(k)s, 403(b)s or TSAs, SEPs

Must begin distributions by April 1 of year following year one turns 70 1/2

70th birthday: 1/13/15; Age 70½: 7/13/15

Begin distributions by 4/1/16 (2 payouts in 2016)

Employer plans: can delay to April 1 of year after one retires (the “still working exception”)

How Much to Take Out Required Minimum Distribution (RMD)=

Balance on Dec. 31 of prior year /Life expectancy (use factor in uniform table)

Failure to take RMD: 50% of required distribution (must match or exceed RMD)

Plan custodian will report numbers

Uniform table automatically recalculates life expectancy

Separate table if spouse > 10 years younger (joint life expectancy)

Resource: http://njaes.rutgers.edu/money/ira-table.asp

6. Practice Tax Avoidance: Legal

Strategies to Reduce Taxes Tax-deferred investments

Employer salary reduction plans

IRAs

Annuities (look for low expense providers)

Age 50+ catch-up contribution

Long-term capital gain on investment profits

Good financial records

Tax preparer for a “good template”

7. Consider Untitled Property

Transfers “Who Gets Grandma’s Yellow Pie Plate?”

http://www.extension.umn.edu/family/personal-finance/who-gets-grandmas-yellow-pie-plate/

Consider interests of family members

Examples: coin collection, antique car

Make a written list of property and heirs

Share list with family and executor

Consider lifetime gifting of property

Annual gift tax exclusion: $14,000 per donee (2015)

Can transfer unlimited amount of property to charity without tax liability

8. Get Help When Needed

CPA when receiving lump sum distribution

Financial planners:

888-FEE-ONLY or www.napfa.org

800-282-PLAN or www.fpanet.org

888-CFP-MARK or www.cfp-board.org

Go prepared to reduce time and fees

Bring financial statements, list of goals

9. Leave a Legacy and Give

Something Back Many ways to “leave a legacy”

Children and grandchildren

Creative works (art, books, music)

Volunteer time helping others

Charitable gifting

Outright gifts of cash, property, securities

Charitable trusts (see an attorney)

Testamentary gifts via one’s will (less than 6% of Americans include charities in estate plans)

10. Communicate,

Communicate, Communicate Ask executor, contingent executor, etc.

Prepare/share a “financial notebook”

Prepare a digital assets inventory: http://njaes.rutgers.edu/money/pdfs/Digital-Assets-Worksheet.pdf

Discuss burial wishes with family

Discuss living will issues with proxy

Prepare letter of last instructions

Discuss/list personal property bequests

22

Helpful Resources

Rutgers Cooperative Extension www.njaes.rutgers.edu/money

http://njaes.rutgers.edu/money/ffquiz/

www.investing.rutgers.edu

Social Security Administration 1-800-772-1213 or www.socialsecurity.gov

http://www.socialsecurity.gov/myaccount/

State Health Insurance Assistance Program

www.shiptalk.org (SHIP)

23

Another Helpful Resource

http://njaes.rutgers.edu/money/pdfs/older-adults-money-advice.pdf

Questions? Comments?

Experiences?