30.  I’ve heard that if I take my “rollover” money out of my company plan, my employer will withhold 20%?  Is this true?

It is true.  If your company writes you a check for your pension balance, even if you intend to deposit it to an IRA, they must withhold 20%.  Therefore, if you deposit the check to an IRA, you must use funds from other sources (for instance, other savings or borrowing) to make up the withheld amount.  Otherwise, you must pay income taxes on the 20% that is withheld and not rolled over into the IRA.

31.  Is there a way I can avoid having 20% withheld from my rollover?

Yes.  You can arrange to have the funds transferred directly from the pension into an IRA.  In that case, your company writes the check to the custodian of your IRA, not to you, and there is no withholding applied to the account balance.

32. I have a $180,000 IRA rollover and I need $1,500 in monthly income from the IRA.  If I make an average return of 6% on my investment portfolio, how long will my money last?  What if I can increase the return to 8% or even 9%?

Earning 6% interest and withdrawing 10% from the account each year would deplete the principal in approximately 15 years.  At 8% interest, the portfolio would run out in 20 years; at 9% return, in 27 years. 

Obviously a portfolio earning more than the rate of withdrawal will never be depleted and can actually be used to provide increasing income in retirement to offset the rising cost of living.

The above figures are for illustrative purposes only and do not represent the performance of any actual investment.  Actual investment results may vary.

33. What are my biggest financial risks in retirement?

For many retired Americans the largest financial risk is the cost of health care, either in hospital, or long-term care provided in a facility or at home.

A number of insurance companies offer contracts that can reduce these risks, but the cost of the insurance coverage can be very high.  Prior to retirement the risks and the cost of the insurance should be considered within the total financial planning process.

34. Should I keep my life insurance or cash it in?

The primary use of life insurance is the cash benefit it provides to offset the loss of income that an individual’s family would realize in the event of death of the insured person.  This is the reason many people own life insurance.

But what about in retirement?  Ask yourself this question.  Who loses financially as a result of your death?  One very good reason to keep life insurance after your “non-working” years is to compensate for the loss of pension benefits.  Perhaps you cannot rollover your pension account and must take payments for life.  Many retirees choose to take the higher benefit based only on their life (rather than a reduced payment based on joint life payments) and use the extra income to pay for existing or new insurance to make up the lost payments in the event of their death before their spouse’s death.

35. Isn’t life insurance a bad investment?

While many argue that life insurance can be a poor investment, there are some advantages.  Most insurance companies are highly regulated and carefully monitored, and therefore are usually very reliable.

Often the tax advantages are overlooked.  The proceeds of a life insurance policy are normally tax-exempt.  While many other investments are taxed on the difference between the cost and the payoff, the death benefit from life insurance owned by an individual is usually not taxable.  However, “cashing in” a policy can lead to a taxable event.

A Financial Consultant that is knowledgeable about life insurance should be consulted before terminating your life insurance.

36. What about estate planning?

You should review your wills, trusts, and related documents regularly with your attorney.  You may discover that you need to update your estate plan because of changes in your family and/or changes in laws that affect estate planning.  Titling of your accounts is also a very important consideration.

It is sensible to spend a modest sum on good legal advice for this purpose.  If you do not have an attorney, get a referral from a friend or advisor that you trust.  If your attorney does not specialize in estate planning work, he or she may be able to refer you to one who does. 

37.  Are there tax wise ways to transfer wealth to my heirs?

There are several provisions in the current estate tax laws that allow individuals to pass wealth to their survivors without estate taxation.

Each individual can generally leave an unlimited amount of wealth to a surviving spouse without taxation; this is called the “marital exemption.”  To a non-spouse heir each individual may leave an amount that is not subject to estate taxation that depends on the year of death.  Assuming death in 2002 that amount is generally limited to $1,000,000.  This “exemption equivalent” amount rises over the next several years until 2010 when it (based on current law) will be repealed. 

Additionally, anyone can gift an amount ($11,000 in 2002) to any individual and that amount is not subject to gift taxation and would normally not be considered in the taxable estate of that individual at their death.

See your estate and tax advisors for more detailed information on estate planning. 

38. Is there a way to gift more than $11,000 per year to my children?

One method of leveraging gifts is often used by individuals that are concerned about the amount of estate tax their heirs may have to pay.

By gifting cash each year to an irrevocable trust (or directly to heirs) that purchases life insurance on the life of the donor, gifts can be multiplied.  While life insurance owned by an individual is considered part of that individual’s estate, life insurance that is owned by an irrevocable trust is (subject to meeting certain requirements) not included in the deceased’s estate.  Therefore at the death of the donor the beneficiary/heirs receive the proceeds income tax free and estate tax free, effectively increasing the value of the annual gifts.

39. I already own life insurance; can I gift this insurance to my children or a life insurance trust?

An insurance policy can be gifted to a trust or heirs, but the donor must survive that transfer by three years or it will be included in the value of the donor’s estate.  New purchases of life insurance by a trust or children on the life of a parent or donor may not be subject to this three year rule.

40. I’m concerned about the change that retirement will bring to my daily routine.  What can I do
to prepare myself for this change?

Carefully consider what you will do with your time, who you will see, and what is important to you.  Make a weekly schedule of activities and events that you intend to pursue in retirement.  Talk things over with your spouse and family and get involved in retirement activities prior to actually retiring.

Consider a “dress rehearsal” by taking a two-week vacation at home and pretending you have retired.  Many pre-retirees have found this to be a practical way to find out if they are ready (or not) to retire.

41.  The idea of not working makes me uncertain about my (our) financial future.  How can I know that the resources I have accumulated will help me meet my needs for the rest of my life?

This is the purpose of financial planning for retirement.  Remarkably, many individuals work for up to forty years accumulating wealth, then spend only a minimal amount of time analyzing and projecting their income at retirement.

Because of the number of retirees today, many Financial Consultants focus on retirement planning.

Additionally many software programs are available at little or no charge.

42. I hear and read about people that do their own investing at lower cost than those that use Financial Consultants.  Why should I pay more to invest?

Some individuals should take the “do it yourself” approach.  Others should not.

Ask yourself these questions:

1. Am I knowledgeable about the investment markets?

2. Can I do my own financial planning?

3. Do I have the extra time that I want to commit to these tasks?

4. Will I enjoy handling my own investments and planning?

5. Is the potential savings worth the potential risks of making a mistake?

If you are answering “yes” to these questions, you might want to take your retirement planning into your own hands.  Answers of “no” may suggest that you should use the services of a professional advisor to assist you with these important tasks.

43. Assuming I decide to work with a Financial Consultant, how can I get started?  How can I find someone to help me with my retirement and investment planning?

An experienced advisor that you like, trust and already know is the first way you might consider dealing with this issue. 

Next ask friends and other advisors for a recommendation based on their experience.

Also consider attending retirement planning seminars.  It’s likely that you will pick up at least one useful idea and in the process you might make contact with a Financial Consultant who can assist you in planning your retirement and continue to work with you for many years.

44. What does it cost to work with a Financial Consultant?

At most major investments firms, Financial Consultants are compensated by commissions and in some cases, on an annual percentage of the amount invested in other “fee-based” investment accounts.

Your total charges will vary based on your needs and the services required to meet your objectives.  Be wary of advisors who avoid answering questions on this subject.  Also, be sure to ask for a description of what services will be provided for the fees and charges you expect to pay.

45. Is there a way that I can simplify my investing during retirement?

Many investors, over the course of their working years develop numerous investment accounts at banks, brokerages, mutual fund companies, etc.  If you can select one investment firm or advisor that meets your needs and you are comfortable working with, it is possible and actually quite easy to consolidate your investment holdings.

Many investment firms can transfer your existing investments into your account(s) at that firm, greatly simplifying your situation, your tax preparation, your future estate distribution, not to mention making things much easier for your Financial Consultant to properly advise you.

46. What are the biggest mistakes retirees make?

Unfortunately, some retirees just don’t have a financial plan, which can lead to over-spending or under-spending as a result.

Ironically, many newly retired workers are too conservative.  Our experience has been that some retirees should spend more money in the first few years of retirement and enjoy their health and high energy.  They also have a backlog of “to-dos” that they have been wanting to experience like travel, cruise, etc.  Often we find that, unless prompted to start enjoying life, some retirees settle into an attitude of “we have to save the money for later.”

The above summary/prices/quotes/statistics have been obtained from sources we believe to be reliable, but we cannot guarantee accuracy or completeness.  Past performance is no guarantee of future results.

Will You Run Out of Money
Before You Run Out of Time?

In the chart below, the figures show how many years it will take for your principal and earnings to become fully depleted if you spend more money than your portfolio is actually earning.

Years until All Capital Is Depleted

* = Capital will never be depleted at this combination of return and withdrawal.

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