Thursday, December 02, 2004
Investing in Fixed Income:Bonds
Savings Bonds—What Do To With Them
some of the information has been excerpted from horsesmouth 10/18/99
Did you know $6.5 billion worth of U.S. savings bonds have stopped paying interest and have not been redeemed? Over 55 million people hold $180 billion worth of savings bonds. Are you one of them? Here’s what you need to know to avoid losing money:
Mistake #1: Assuming all bonds are the same. Each bond is a separate investment with individual interest rates, timing issues, values and maturity dates. Most EE bonds pay between 4-6%. Some earn as low as 0%, while there are other bonds earn as high as 15%.
Mistake #2: Redeeming bonds at the wrong time. Saving bonds are scheduled to credit their interest twice a year. If you cash a day early you forfeit 6 months worth of interest. Bonds being randomly redeemed forfeit $150 million in interest per year, and Uncle Sam keeps the money.
Mistake #3: Not recognizing your bonds that have stopped paying interest. Bonds issued in October 1959 or earlier, or those issued between December 1965 through October 1969, have ceased paying interest. Bondholders who are not aware of this are collectively giving the federal government an interest free loan of $300 million a year.
Mistake #4: Inaccurate registration of bonds. It is important to make sure that the owners and beneficiaries listed on the bonds are in line with your succession plans. If not, the bonds might wind up in the hands of someone for who you no longer intend them.
Mistake #5: Not realizing tax implications. Savings bond interest is treated as interest income and not capital gains. Savings bonds are subject to federal tax but exempt from state and local tax.
Want to know what to do and if to cash in savings bonds or convert to H bonds for some additional income? Bring in your bonds and we can review them for you and report on the status of each bond and recommend which options will bring you the most. (Note that H bonds pay a fixed rate of taxable interest at 4% for the first 10 years while saving bonds, known as E bonds, credit their fixed interest rate semi-annually, tax-deferred).
Savings Bonds—What Do To With Them
some of the information has been excerpted from horsesmouth 10/18/99
Did you know $6.5 billion worth of U.S. savings bonds have stopped paying interest and have not been redeemed? Over 55 million people hold $180 billion worth of savings bonds. Are you one of them? Here’s what you need to know to avoid losing money:
Mistake #1: Assuming all bonds are the same. Each bond is a separate investment with individual interest rates, timing issues, values and maturity dates. Most EE bonds pay between 4-6%. Some earn as low as 0%, while there are other bonds earn as high as 15%.
Mistake #2: Redeeming bonds at the wrong time. Saving bonds are scheduled to credit their interest twice a year. If you cash a day early you forfeit 6 months worth of interest. Bonds being randomly redeemed forfeit $150 million in interest per year, and Uncle Sam keeps the money.
Mistake #3: Not recognizing your bonds that have stopped paying interest. Bonds issued in October 1959 or earlier, or those issued between December 1965 through October 1969, have ceased paying interest. Bondholders who are not aware of this are collectively giving the federal government an interest free loan of $300 million a year.
Mistake #4: Inaccurate registration of bonds. It is important to make sure that the owners and beneficiaries listed on the bonds are in line with your succession plans. If not, the bonds might wind up in the hands of someone for who you no longer intend them.
Mistake #5: Not realizing tax implications. Savings bond interest is treated as interest income and not capital gains. Savings bonds are subject to federal tax but exempt from state and local tax.
Want to know what to do and if to cash in savings bonds or convert to H bonds for some additional income? Bring in your bonds and we can review them for you and report on the status of each bond and recommend which options will bring you the most. (Note that H bonds pay a fixed rate of taxable interest at 4% for the first 10 years while saving bonds, known as E bonds, credit their fixed interest rate semi-annually, tax-deferred).
Investing in Fixed Income:Bonds www.legacyannuities.com
Potential Danger When Interest Rates Are Low
If you own bonds or bond funds, you know by now that the prices of fixed income securities move inversely with interest rates. Therefore, it seems that the best time to buy bonds or bond funds is when interest rates are high. Not only do you lock in a high rate, if interest rates subsequently declines, fixed income securities appreciate.
Correspondingly, the worst time to own or buy fixed income securities is when interest rates are low. You get a low rate locked in and if interest rates subsequently rise, you will suffer a decline in value. What solutions are there for fixed income investors?
If you buy individual bonds and hold them to maturity, then fluctuations in interest do not matter, as you will receive the face value of the bond at maturity. Fluctuations are a concern only if you sell bonds prior to maturity and must accept market value. Bond funds however do not have a maturity date so there is no date when you have assurance of recouping your original principal (it will be higher or lower than your original investment). Additionally, many bond fund investors do not realize that there is a trade off in bond funds. Funds that pay lower dividends have higher price stability and vice versa.
Therefore, you should check that your fund managers actively change the term of the bonds in the portfolio, if these price fluctuations are a concern to you. By switching to sorter term bonds during periods of low rates, subsequent fluctuation in the fund share value will be minimized. However, such a fund that acts to protect your principal will need to cut the fund dividend because short-term bonds pay less interest. Some investors flock to funds with the highest dividends (usually payable by investing in longer-term, higher interest bonds), and they soon learn that funds with long-term securities will fluctuate more in value.
Potential Danger When Interest Rates Are Low
If you own bonds or bond funds, you know by now that the prices of fixed income securities move inversely with interest rates. Therefore, it seems that the best time to buy bonds or bond funds is when interest rates are high. Not only do you lock in a high rate, if interest rates subsequently declines, fixed income securities appreciate.
Correspondingly, the worst time to own or buy fixed income securities is when interest rates are low. You get a low rate locked in and if interest rates subsequently rise, you will suffer a decline in value. What solutions are there for fixed income investors?
If you buy individual bonds and hold them to maturity, then fluctuations in interest do not matter, as you will receive the face value of the bond at maturity. Fluctuations are a concern only if you sell bonds prior to maturity and must accept market value. Bond funds however do not have a maturity date so there is no date when you have assurance of recouping your original principal (it will be higher or lower than your original investment). Additionally, many bond fund investors do not realize that there is a trade off in bond funds. Funds that pay lower dividends have higher price stability and vice versa.
Therefore, you should check that your fund managers actively change the term of the bonds in the portfolio, if these price fluctuations are a concern to you. By switching to sorter term bonds during periods of low rates, subsequent fluctuation in the fund share value will be minimized. However, such a fund that acts to protect your principal will need to cut the fund dividend because short-term bonds pay less interest. Some investors flock to funds with the highest dividends (usually payable by investing in longer-term, higher interest bonds), and they soon learn that funds with long-term securities will fluctuate more in value.
Fixed Income Investing:Bonds www.legacyannuities.com
Bonds vs. Bond Funds. Which is Better?
If you want income, you have several choices including the purchase of individual bonds or bond funds. There is a big difference in considering which is best for you.
Individual bonds have three primary advantages:
You get exactly what you want. If you want an AAA 15-year bond, you can buy exactly that. In a bond fund, you cannot control what the fund manager buys.
Secondly, with individual bonds, you get a fixed rate of interest that does not vary. In a bond fund, your income cannot be depended upon and will change.
Last, with individual bonds, the face value is paid at maturity. So you have certainty of what you eventually receive, while with bond funds, your principal has no fixed pay off date.
Why buy bond funds? The funds offer professional management and diversification. Some investors place great value on these features. Additionally, for small investors, bond funds allow small additions or systematic withdrawals that contain principal and interest.
However, Time magazine felt so strongly of the advantages of individual bonds over bond funds, they published an article, “Bond Fund Buyer Beware” (March 2, 1998). In light of the above differences between bonds and bond funds, they made the following comments:
Bonds vs. Bond Funds. Which is Better?
If you want income, you have several choices including the purchase of individual bonds or bond funds. There is a big difference in considering which is best for you.
Individual bonds have three primary advantages:
You get exactly what you want. If you want an AAA 15-year bond, you can buy exactly that. In a bond fund, you cannot control what the fund manager buys.
Secondly, with individual bonds, you get a fixed rate of interest that does not vary. In a bond fund, your income cannot be depended upon and will change.
Last, with individual bonds, the face value is paid at maturity. So you have certainty of what you eventually receive, while with bond funds, your principal has no fixed pay off date.
Why buy bond funds? The funds offer professional management and diversification. Some investors place great value on these features. Additionally, for small investors, bond funds allow small additions or systematic withdrawals that contain principal and interest.
However, Time magazine felt so strongly of the advantages of individual bonds over bond funds, they published an article, “Bond Fund Buyer Beware” (March 2, 1998). In light of the above differences between bonds and bond funds, they made the following comments:
Fixed Income Investing in Bonds? www.legacyannuities.com
Time Magazine Tells the Truth
If you have attended one of my seminars in the last 10 years, you have heard me speak about bonds vs. bond mutual funds. I advise investors to never own bond mutual funds for 3 reasons:
1. Bond funds do not provide the certainty of a fixed income. Individual bonds do. Bond fund dividends fluctuate and can never fluctuate upward.
2. Bond funds do not have a maturity date as do individual bonds. Therefore, return of principal is no assured.
3. Bond funds have management fees, individual bonds do not.
For these reasons, I notice that most experienced, larger investors buy bonds and not bond funds. But very few people have realized this disparity. Fortunately, Time Magazine ran an article on this issue in the March 2, 1998 issue. Here are some excerpts:
"The under-appreciated irony of bond funds is that while they invest in bonds they don't behave like them. They're more like a stock."
"Clearly, investors seeking to preserve capital and earn a fixed-income stream for a set period of time have no business flirting with such a beast. They should go for individual bonds."
"Bond-fund risk is just not well understood."
If you want to avoid a possible disaster and avoid being lulled into a false sense of security, I advise all investors to dump bond funds and get individual bonds. But you'll probably never hear this advice from a stockbroker—the commission on the funds are too high.
Time Magazine Tells the Truth
If you have attended one of my seminars in the last 10 years, you have heard me speak about bonds vs. bond mutual funds. I advise investors to never own bond mutual funds for 3 reasons:
1. Bond funds do not provide the certainty of a fixed income. Individual bonds do. Bond fund dividends fluctuate and can never fluctuate upward.
2. Bond funds do not have a maturity date as do individual bonds. Therefore, return of principal is no assured.
3. Bond funds have management fees, individual bonds do not.
For these reasons, I notice that most experienced, larger investors buy bonds and not bond funds. But very few people have realized this disparity. Fortunately, Time Magazine ran an article on this issue in the March 2, 1998 issue. Here are some excerpts:
"The under-appreciated irony of bond funds is that while they invest in bonds they don't behave like them. They're more like a stock."
"Clearly, investors seeking to preserve capital and earn a fixed-income stream for a set period of time have no business flirting with such a beast. They should go for individual bonds."
"Bond-fund risk is just not well understood."
If you want to avoid a possible disaster and avoid being lulled into a false sense of security, I advise all investors to dump bond funds and get individual bonds. But you'll probably never hear this advice from a stockbroker—the commission on the funds are too high.
Wednesday, December 01, 2004
Retirement Mistakes wwww.legacyannuities.com
Do You Know If You Are Going To Make Any Of The 11 Biggest Retirement Mistakes Many Retirees May Make…That Could Cost You A Fortune And Jeopardize Your Retirement Security?
Because if you're not sure, you aren't alone!
I don't know if you know this or not, but according to the Social Security Administration 96% of Americans are not able to fund a retirement that will last for their lifetime…allowing them to live the lifestyle they wish to live! This is the case for highly compensated people as well as average wage earners.
Pretty scary stuff, when you think about it! Do you know why this is? Well, in our opinion, it's because people simply aren't given the proper knowledge of how to correctly handle their finances when they retire from the company, or when they change jobs! This is true, even though most retirees have accountants, lawyers, stockbrokers, company provided assistance, etc.!
It's frightening when you think about it, but your retirement doesn't leave much room for ANY mistakes. Right? I mean, this IS NOT A DRILL! This is your one shot at retirement, and you…
Cannot Afford To Make ANY Mistakes! Period.
See, do you really know, (and I want you to be honest with yourself), EXACTLY how to make the RIGHT decisions on issues like:
· With the price of the stocks all over the place, how do you decide if you should sell some or wait? If you want to diversify, which shares should you sell? What about the tax consequences? Should you buy traded options to protect the price? How should you handle your company benefits? Do you know how to decide what to do with your stock, and stock options?
· Should you take a lump sum distribution? If so, how? What should you do with it? How much in cash, how much elsewhere? Who should be the new trustee or custodian? Will your retirement distribution money be subject to IRS penalties you've never heard of? Should you receive money now or wait until later?
· Are you protected from traps the IRS has set, as well as from other retirement financial disasters that can actually cause you to lose much more than the IRS ever could take?
· What would happen if someone became ill and needed long term nursing care? Who pays? How much? What if you don’t have enough money? What does the government do?
· Do you know how to avoid having as much as half of your money being grabbed by the tax man?
· Are your assets titled in the absolute, most dangerous way? (Hint- Most retirees make this enormous mistake!) Have you set up a virtually bullet proof asset protection plan?
· What kind of insurance should you now have? Do you keep what you had, or change it? Are you going to be overinsured and waste money on needless coverage? Do you know how to figure out which choices will best suit your family's new situation? And most important…
DO YOU KNOW IF YOU WILL BE LIKELY TO HAVE ENOUGH MONEY, AFTER TAXES, TO LIVE YOUR LIFE THE WAY YOU WISH TO...FOR AS LONG AS YOU LIVE?
Have you analyzed all the options and choices available to you so you can make educated decisions from a fully informed standpoint?
These are just a few of the questions you must have answers to! If you don't... you're likely to be the next victim of the greedy IRS, or to run out of money! If you make even one big mistake... look out! After all, you only retire once, so you cannot afford any mistakes! You must make the right decisions the first time!
These issues demonstrate how retirees are constantly at risk to see their retirement
security and peace of mind diminish, or disappear all together.
The world is a much tougher, and unforgiving place than it was years ago. There are so many things to know. So many rules and regulations. So many pitfalls and traps.
The government wants as much of your retirement nest egg as they can tax their way into! Some retirees will get hit with income taxes they've never even heard of! We've seen you get soaked with tens, or even hundreds of thousands of needless and completely avoidable income taxes! (Yes, even with a CPA "helping".)
Inflation, recession and the crazy markets are always lurking out there, inevitably waiting to gobble up more of your estate. Then there's the kids, or grandchildren, and their demands on your resources.
There's a lot to deal with.
And, let's face it. Who has the time to sit and read every tax law, investment option, insurance issue, and so forth? And, even if you had the time to read all this stuff, would you really understand what it means?
That's why we've prepared this step-by-step, down-to-earth report for you.
We wanted you to have an easy to understand set of facts, that cut right through all the baloney, and tell you the biggest mistakes retirees make...and more importantly, how to avoid them!
You Need To Know How To Avoid The Traps That Are Set For You!
So let's get into these important issues, and see if you're making any (or all) of these mistakes!
1. Listening To The Wrong People!
It never ceases to amaze us how many intelligent people take advice about their retirement from people who are totally unqualified to give you this critical advice!
For example, when we see retirement messes, (which we see virtually every day) and we ask where they got this information that has screwed them up so badly, we inevitably hear things like:
"My brother-in-law told me to do that. He used to be an accountant at Westrand Corporation, you know!"
"I asked the guy who's office was next to mine for all these years. I figured he must know what he's doing, since he's friends with the boss."
"I read an article by June Brant Queen in Newstime, that said all retirees should do..."
And so on. Everyone's got an opinion about what you should do with your retirement. Unfortunately, just because they are your relative, or are involved in some area of finance unrelated to retirement planning, (like the person at the bank who takes applications for checking accounts and CD's) or write articles for national magazines, doesn't mean they know the answers to your retirement problems and questions!
I cannot stress enough how important it is for you to work with a specialist in retirement planning that knows this area backwards and forwards, inside and out! Someone who knows how to integrate and coordinate ALL areas of your complicated financial situation and sort it all out for you!
After all, how many times are you going to retire? Shouldn't you be sure that the advice you're getting is right for you, and not generic, not given in the context of your ENTIRE financial situation…or just plain wrong?
Be sure to find a retirement specialist, just like you would look for a cardiologist if you had a heart problem.
Would you ask your brother-in-law or another executive to analyze your electrocardiogram? If not, why would you ask him to analyze your entire financial situation?
Doesn't that make a lot of sense?
2. Not Understanding The Tax Consequences For Investments, IRA's, Pensions, Etc.!
Another true story. Our clients, Perry and Edie, found out too late that the IRS demands you remove certain amounts out of your IRA once you reach age 70 1/2. (This happened BEFORE they became our clients.) Anyway, they were totally devastated when they were hit with all the penalties and interest when they didn't take money out of their IRA the right way. They had received information from the company's human resources department that was close, but not EXACTLY right. And, when they did what they were told, they got hammered. Over $21,000 in penalties and interest, all because they missed the correct amount required, even though they thought they did it right!
Their story is just one of many problems that retirees run into because of a lack of the proper knowledge about qualified retirement plans.
"Uncle Sam" Is A Relative You Should Give As Little As Possible To!
Other tax issues that retirees frequently get messed up on are:
ü How much should you withdraw from retirement plans?
ü When should you withdraw from the plans?
ü Should you let qualified plan money sit inside the plan, and use other money to live off of?
ü Is living off the income generated by investments one of the worst things you can do?
ü Should you take a withdrawal from your IRA to pay off your car or vacation home, so you'll have lower monthly payments?
ü Should you stop working at a certain time to collect Social Security now?
ü Should you wait to apply for Social Security? Or, should you work part time? And, how does that affect your Social Security payments?
ü What about the taxes on your Social Security income? Are there legal and safe ways to reduce it?
ü What about the taxes on the interest in CD's or other bank accounts? Is there a better way to invest to reduce those taxes? Or, will living off interest, and leaving your capital untouched cause you to lose money because of inflation?
Or,....
I think you get my point.
There are literally dozens and dozens of tax decisions you must make, whether you want to deal with them or not!
Let's think about a simple example here. If you were to save $400 a month in taxes, simply by knowing the laws, and how to legally reduce your taxes, that's $4,800 a year you'd have that you didn't have before!
What could you do with an extra $4,800?
What about saving even more off of your income taxes? We show people how to do it all the time!
Could You Use A Few Hundred (Or A Few Thousand) Dollars
Extra Cash Each Month?
If you want to make sure your income, estate and gift taxes are as low as legally possible, you need to work with a qualified retirement specialist, who can lay out all your options for you...allowing you to make an informed decision, as opposed to an emotional decision!
Or, worse, not even knowing you had to make a decision, like Perry and Edie who found out the hard way. Now, you may be thinking, "Well, I know about the required withdrawals and all that. And that's fine". But, what don't you know, that someone else does know?
When it comes to tax planning, there is little room for making mistakes. Don't try to know it all yourself, or depend on others who don't study these things every single day for a living!
Did you know that each and every year, there are thousands and thousands of tax rule changes? Some of them don't affect you, and others do! Last year, in the most complicated, ridiculous tax law we've ever seen passed, they changed over 1,100 Code Sections! Plus, the 1997 tax law alone created things like SEVEN types of capital gains when there used to only be two! In fact, the new law is so complex that you have a great chance of messing up your financial situation by overpaying your taxes without even knowing it! Recent laws have added even more complications and confusion.
The tax law is no place for amateur night. You HAVE to do proper tax planning BEFORE
you make even a single financial decision. Why? Because EVERY FINANCIAL DECISION HAS A GOOD CHANCE OF BEING AFFECTED BY THIS NEW COMPLEX TAX LAW!!
So don't play tax roulette, and hope your numbers hit. Make sure you are as sensible about your tax planning as you are about your health!
3. Choosing The Wrong Pension Option!
Let me illustrate this mistake with a real life example from a client of ours who was an executive at a company.
The client Louis, had retired a few years ago, and his wife, Janet, had not worked outside the home, and had no pension of her own. When Louis left the company, he was given a range of choices of how to handle his pension pay out if he were to die before Janet.
The choices were quite confusing, and they both decided to take the higher payout now, counting on the life insurance Louis had to cover Janet if he died. (With the help of Janet's sister's husband's brother, who used to be an accountant, of course.)
Anyway, Louis died just one year after retirement in a tragic accident. Janet was left with no pension income, but did get Louis' life insurance proceeds.
She Had To Go To Work, Because She Outlived Her Retirement Money!
In a matter of only four years, Janet had to get a job because the amount of insurance money was way too low for her needs. See, what seemed like a fortune to them, isn't really a fortune in dollars and expenses.
What did they do wrong?
They made a critical decision like this from the seat of their pants, without having someone prepare a detailed financial projection of which option would best meet their needs, before making the irrevocable election!
If Louis and Janet had done this, she would be receiving a much higher income, and have the insurance proceeds to boot!
Now, does this mean that all retirees should take the lower pay outs and have the survivor get some sort of a pay out? No, not at all. There is no such thing as any strategy that applies to some or all retirees!
Your situation, is your situation. It is as unique as your fingerprints.
And just like no two fingerprints are alike, no two retirements are alike.
Please promise us you'll not take "canned" advice, particularly when it comes to monumental decisions like choosing a retirement pay out!
4. Misunderstanding What Medicare And Social Security Does And Doesn't Pay For!
We see it all the time.
One spouse telling us how shocked they were that the $4,000 a month nursing home expense for their very ill spouse, isn't covered by Medicare or Social Security.
"But I thought Medicare covered medical expenses!", they exclaim.
The Government Is Not Going To Take Care Of You!
Yes, Medicare does cover medical expenses. But, it only covers certain ones, and only after you have paid a deductible!
Many, many medical expenses aren't covered by Medicare, and are usually picked up by a Medicare Supplement policy, or out of your pocket.
But, those supplements still don't cover extended nursing home care. Not a penny. Zilch. Nada. Zero.
Here again, we have an un-planned for situation that can literally wipe out a family's retirement nest egg, that nine out of ten retirees don't have any clue about!
Warning! (By the way, did you know that in order to qualify for state support from Medicaid, you literally have to spend your net worth almost down to zero first? You have to clean out all of your estate, assets, investments, and so forth until you are worth under $2,000! It's only when you're nearly flat broke that Medicaid kicks in to help you! This is not a solution that we recommend you implement!)
Don't make the mistake of thinking that Medicare or Social Security are going to take care of you. They don't!
Sure, they cover many things, but there are still huge, gigantic gaps that if you don't plan for yourself ahead of time, you'll never have them taken care of!
You must know what the government does help you with, and what they don't help you with!
And, you must have a plan to address the almost unknown areas that could cause your family some real problems! Don't wait until you've been completely wiped out before you figure them out!
5. Getting Caught By The New 20% Withholding Penalty For Lump Sum Distributions!
Are you aware of the tax law that has caught thousands of unwary retirees in its ugly web?
If you are retiring, or transferring a lump sum distribution from a company plan at a later time, and you don't follow the paperwork rules exactly right, you could end up having 20% of your money withheld from your distribution!
And, to make matters even worse, you can end up paying taxes and penalties if you can't make up this 20% difference out of your own pocket!
A Tax Trap To Look Out For!
For example, if you were getting a $200,000 distribution, and you had it go to an IRA, but didn't fill out the paperwork correctly, you could end up having $40,000 withheld from your transfer!
And, if you didn't have the $40 grand lying around to put into the IRA to make up for the withholding, you will be taxed on that $40,000, even though you didn't get the money! (Which could cost you anywhere from $6,000 to as much as $16,000 in taxes depending on your bracket!)
No, we are not making this up. This disaster was passed by Congress to nail unsuspecting retirees with lump sum distributions. Why? Because the government is looking for any way to get their hands on large chunks of money, that's why!
But wait. There's more. If you are under 59 1/2 years old, and this happens to you, you get to pay an extra 10% penalty on top of all the extra taxes! Yes, this is just one tax trap that is waiting to get a lot of retirees where it hurts the most, when they can afford it the least!
How do you avoid this?
Make sure that you get expert help in filling out the paperwork for making your choices of how to receive your lump sum! We cannot tell you how many times we've worked with retirees who thought they had it all figured out right, who did it on their own, or even with "help", and ended up really screwing up big time!
6. Owning Your Assets The Wrong Way!
One of the biggest mistakes we see is retirees who own their assets in ways that subject them to all kinds of unnecessary risks!
For example, the most common way that retirees own their home, investments, bank accounts, etc., is in joint tenancy with rights of survivorship.
While this is a simple way to own assets, in many cases, it could be a huge mistake!!!
Why? Well, some of the reasons are:
ü You could pay way more in estate taxes than necessary! (We have an executive who came in to see us after his parents died, and wanted to know if we could help him save the 45% of his parent's estate being confiscated by the IRS, which of course was hopeless, since it was all after the fact.)
ü If one of you has a liability problem (a car accident, for example) both of you could lose everything!
ü If your marriage goes down the tubes, they can clean out the accounts!
ü If your kids are on the accounts, if they go bankrupt or whatever, YOU could lose YOUR money!
ü Many retirees put their kids on some of their accounts, which later ends up costing gift taxes, and can screw up your family's finances if someone goes into a nursing home.
Joint tenancy is, in many cases, a financial disaster waiting to happen!
(Now, we are not giving you any legal advice, just pointing out some potential problems!)
Some of our clients have Living Trusts they set up before coming in to see us, and think they've protected their estate. Not necessarily true! A Living Trust may help protect assets, but in may cases it does nothing to protect your assets from liability or other problems. In fact, most of the time, they don't even protect your assets from income or estate taxes!
See, many attorneys just listen to your situation and set up your wills, trusts, etc., without analyzing and coordinating all the issues you should consider and just set you up in a simple, but sometimes dangerous way! (For example, would you be surprised to learn that over 75% of our clients find out that the Living trust doesn't cover a large percentage of their assets because things haven't been titled properly…even though the client is "working" with an attorney?)
You have to take a look at the way you own your assets in the context of your whole financial situation, so you don't risk losing everything you've worked for because you've placed your assets in jeopardy!
Asset ownership is a serious yet often overlooked area that can turn into a gigantic mistake!
7. Misunderstanding Or Not Knowing All The Tax And Other Traps That Surround Your Stock Options Like Sharks Circling Their Prey!
While this situation doesn't apply to everyone, if you have either Non-Qualified Options (NQO's) or Incentive Stock Options (ISO's), and you make any mistakes in the decisions that need to be made in dealing with them…you could kill yourself financially, as surely as a bullet would to your heart!
Listen. If you do not understand all the subtleties, fine points and traps involved with managing a portfolio of NQO's or ISO's, you can cost yourself a fortune! For example…
We recently met with a client who, before coming into our office, just paid a little over $1,100,000 in additional and needless taxes… because she did not set up a stock option plan that was integrated and coordinated with her overall financial situation!
See, she had never done a plan to determine how to handle all the decisions that go with stock options like, "Should I exercise some or all or none? If I do exercise, which ones should I do in which
order?" Or, "Should I wait until the stock hits a certain point?" Or, "How will exercising affect my taxes and net worth and retirement plans?" And so on.
For example, did you ever hear of, know about, or set up a plan to protect yourself against a hideous beast of a tax called the "Alternative Minimum Tax (AMT)? Probably not. Did you know that if you exercise and/or sell shares acquired through exercising stock options, and certain conditions exist in your financial situation (most you've never heard about)…that you could end up paying the dreaded AMT, which is a tax that you pay only if it ends up being HIGHER than your regular tax! It's a total nightmare!
You can only imagine the look of horror on retirees faces when they find out that what they thought was a low, or no tax decision actually cost them tens or hundreds(or millions) of dollars in AMT taxes they never heard of, that no one warned them about, or taught them how to coordinate their financial situation so this would never happen!
See, you only pay the AMT if you have set up your finances in certain ways that allow this disaster to occur! And, we can't give you any rules of thumb about it, because the only way to know if this could happen, and more importantly, to PREVENT it from happening…is to literally crunch all the numbers for YOUR specific entire financial situation, and see what the computer tells us. There is NO WAY to estimate or ballpark it. It HAS to be done in the context of your whole situation. It's that complicated. Trust us on this one.
It's plain disgusting! But, as we said, these types of traps are simply unknown or not communicated by the majority of financial advisors.
Please make sure that these sort of unknown penalty taxes don't apply to you!
If you're not sure, then you have no choice but to find out what the deal is BEFORE making any decisions or taking any actions!
8. Thinking "Risk" Just Involves Losing Principle!
Here is a big mistake we deal with almost every day.
In fact, a client that's going to be retiring, said, "We don't want to take any 'risk' with our retirement funds and stock! We want them to be totally safe and free of 'risk'!"
(Have you ever thought about that yourself?)
There's More Risk In "Riskless" Investments Than You May Think!
Let's discuss what the definition of "risk" is, in the first place? If you look it up in the dictionary, you'll see that it is defined as "A chance of encountering a loss or harm, a hazard or danger".
Now, you'll notice it doesn't say. "loss of principle". It just is defined as "loss". This is a major distinction we need to make here. Most retirees think "risk" means that you put your investments somewhere, and the $100,000 you started with is now worth far less than $100,000.
And yes, this is one type of risk...and a real one at that!
But it is only one type of risk. There are others that are just as scary and that can hurt you just as badly as losing principle!
By the way, if I told you that you are actually losing real money in the bank, would you believe me? Would you think I was lying, because CD's are insured by the FDIC? I guess this is the time to
explain what I mean.
If you are making 4% interest on a CD, and you are in the 28% tax bracket, your net, after tax, yield is only 2.88%!
4.00% interest earned
x 28% tax = 1.12% lost to taxes
2.88% net after tax yield.
Now, that would be bad enough, but we cannot forget about our friend, inflation. Yes, they claim inflation has been licked. That it's gone. Why? Because it's been hovering around 3.5 - 4% for the last few years.
Now, that is considered low, low inflation by today's standards.
But, did you know that in the early '70's, when president Nixon instituted price controls, inflation was an incredibly high 4%!
Isn't that interesting?
That in 1972, 4% inflation was considered so high, that the government tried putting price controls in place. Now, when inflation is at the same exact level, 20+ years later, it's considered insignificant by our friends in the Capitol!
How can this be? Could it be that inflation has changed, or is it more likely that the government has changed the way they want us to view and perceive it?
Anyway, how does this supposed "not so bad" inflation affect our CD example?
Losing Money On So-Called "Riskless" Investments Is Very Real!
Well, remember in our example that we're at 2.88% net, after tax yield. Now let's subtract inflation from this yield, to arrive at your true change in value, adjusted for the loss of purchasing power:
2.88% net, after tax yield
less 3.50% inflation
(0.62%) True return
Those brackets, by the way, mean a negative real rate of return! Yes, that means that you have a loss of value, of $62 for each $10,000 you have invested in CD's!
Now, if I asked you to put money in an investment that was guaranteed to lose $62 for each $10,000 you invested, you'd run away from me faster than a deer from a lion. Yet, if you have CD's, then you are doing the exact same thing!
So, what does a retiree do to get a better return, and avoid the higher taxes on their Social Security and other income?
As I said a couple of minutes ago, the real secret is to know what items you can invest in, that are off of the "tax hit list". Things like CD's and bonds get special tax treatment. So special, that they cause the maximum taxes to be paid!
What you need to do is figure out how much monthly income you need, and then build a plan that uses the tax- favored items! This assures that you get the cash flow you need, and avoid wasting money on paying the taxes you don't need... with assets that have some chance to keep up with our inevitable inflation!
See, the risk we're talking about here is the risk of losing purchasing power! This risk is so profound, yet almost totally ignored by most retirees, that is, until it's too late!
Let me tell you a story about a woman, Grandma Liz.
Liz was a very frugal woman. When she retired at age 65 in 1956, she had a Social Security income of $400 a month, plus a pension from her late husband, that paid her $205 a month. And, Liz had $12,000 in the bank.
Now, in 1956, this total of $605 a month income, plus $12,000 in savings was BIG MONEY!
Liz's mortgage payment was $81 a month. And with her car payment of $45 a month, and her other necessities, Liz was living on EASY STREET!
Let's move ahead to 1966. Now, Liz had sold her home, and pocketed $65,000 from the sale, which was all shielded from income tax because of the special once in a lifetime capital gains tax exclusion. (She sold the home because it was too much for her to keep up, at age 75.)
She had that money, plus most of the $12,000 she started retirement with. But her expenses had increased, especially her rent. She was now paying $150 a month in rent, and most of her other expenses had gone up as well due to inflation.
She Ended Up Having To Depend On Her Grandchildren
To Take Care Of Her For The Rest Of Her Life.
Over the next several years, she went through a lot of her nest egg, by helping out her kids and grandkids, paying for down payments, college expenses, and so on.
Now, it's 1982, and Liz is broke. Her rent is $657 a month. Her medical expenses that are not covered by Medicare and insurance are over $200 a month. Her food, clothing, etc. is way up, and she has long since stopped helping the younger folks, because her savings are gone.
If she didn't have so many grandchildren that she had helped, now pitching in to help her, she would have ended up on welfare.
Liz didn't understand how powerful a risk the loss of purchasing power provides. Believe me, this kind of story can break your heart. The only way to assure you won't run out of money is to have a plan that both meets your income needs, and provides the opportunity to keep up with inflation.
Now, no one is suggesting you not keep some money in CD's or other guaranteed programs, because that would be foolish.
But, on the same token, having too much in these type of investments can assure that you have a high risk of running out of money! No one wants to outlive their money. Misunderstanding the risk of the loss of purchasing power is a mistake you do not want to make!
9. Paying For The Wrong Kinds, And Wrong Amounts, Of Insurance!
This area is so messed up for most retirees, that you wouldn't believe it!
For some reason, when people are retired, many of them hang on to old insurance coverage of all types, just because they've had them for a long time, and are resistant to change. I'm not sure why, but it seems to be the case more often than not.
Listen, when you are in retirement, you have little extra room in your budget to waste money on needless coverage, or to be shortchanging yourself on coverage you do need!
Many of our retired clients find they can get more coverage in the areas they do need, and eliminate or reduce coverage on stuff they don't need, and save hundreds or thousands of dollars in the process!
We recently saw a couple in their late 60's, who were paying over $2,100 a year for coverages they didn't need, and had no insurance at all on things that they really should have in place.
By repositioning their insurance portfolio, we showed them what to get and what to get rid of.
The net bottom line is that they have an excellent group of coverage for just about anything that could go wrong, and are saving $123 a month that they are spending to have fun! No one wants you to be insurance poor, but we also don't want you wasting money on things you truly don't need, either!
The only answer is to have someone objectively review your insurance, and find out what's wrong and what's right! If there was one area that is more frequently messed up by retirees than overpaying taxes, overpaying for insurance is definitely it!
Most people we see, have truly bad auto, homeowner, condo, health, long term care, and life policies! All the coverages are bought with all the wrong information, from people who are motivated by all the wrong reasons. I'll bet you without knowing you or ever talking to you that you have more than one type of insurance that is anywhere from kind of bad…all the way to disgustingly bad!
This financial area must be reviewed and coordinated, OBJECTIVELY, with all the rest of your finances!
10. Planning For Your Retirement When You Are Already Retired!
This mistake is one that we see over and over again.
People getting "laid off" from a job they've had for years. Or taking advantage of the "early retirement" program offered so they can shrink their payroll. Or, people taking normal retirement at age 65. Or whatever reason.
We have people coming in here, constantly asking the same question: "Will we have enough money to make it all the way with the same lifestyle?"
This is a big mistake! They have already made all their decisions about options. They have already taken their retirement plans and either had them distributed or receiving monthly payouts.
They have made all their choices, and want us to tell them they're going to be OK.
I've got some sad news.
Many of these people are not going to be OK, because they let the horse out of the barn, and want us to close the door up with the horse still in the barn!
If I'm making any sense to you, you'll see that waiting until you reach a certain age to plan for that same age usually doesn't work.
Think about Grandma Liz. If she had done a better job of planning 40 years ago, she might not have ended up so broke.
We had a client that came to us under these kind of circumstances, and we had the unpleasant job of telling him and his wife that they would be out of money in less than 10 years. Their response was to fire us, because we brought them the bad news. (They chopped off the head of the messenger!) But they were making the same mistake that Grandma Liz made many years ago...only worse!
So, if you're not yet retired, do some detailed planning right NOW! Don't wait until you are retired. Now, if you're already retired, it's never too late to start or update your planning. Which brings us to the most important mistake of all to avoid:
11. Not Doing Consistent, Careful, Ongoing Planning!
Yes, planning is the single, most effective technique to have a safe and secure retirement! It worked during Teddy Roosevelt's days, it worked during Viet Nam, and it works now! See, the reason most of us aren't going to win the retirement game, is that we don't follow this crucial sequence, when it comes to managing our finances:
1) Figure out where you are today.
2) Figure out where you want to be.
3) Get a true understanding of the options you have available to you. (Not from biased sources.)
4) Develop a plan that will provide the right "course" to follow.
5) Make the changes necessary to get the plan going.
6) Watch your progress, and make the proper adjustments to keep the plan "on course".
Makes a lot of sense, doesn't it?
Kind of the same process you go through every day when planning a trip to the mall, or taking the kids to practice, or going on a visit or vacation, etc. Or like you do at your job before making decisions.
Could you imagine how you could get through your daily life, or keep the business alive without following this sequence of events?
Could you imagine how messed up you'd be if you didn't know where you lived, what time your meetings were, didn't know which roads led to the recreation center, didn't know where the meeting was going to be held, and finally, didn't know which room the meeting was in?
I know that sounds stupid, because in our day to day activities, we always know all those things!
But, can you really say the same thing about your money? Do you truly know where you are today? Are you certain you have specific goals of where you want to be financially? Can you say that you know all the choices you have available to you? Have you set up a plan to get where you want to be?
Or, like most of us, are you "winging it" as you go along???
In all the years we've been helping people like you win the game of money, and when studying the characteristics of families who are truly financially independent, we find one common theme.
Not their age, nor occupation, nor sex, nor income, nor any of those things.
No. The one common attribute is that they make a constant effort to plan for their future.
That's it. It may not sound very exotic or romantic. But it's simple, and it works. You know, usually, the most effective things in life, are the most simple and basic. Now, with this ridiculous attack on your future by the government, and the uncertainty of being retired, you need to plan for your own future, more than ever!
Make sense? I hope so. Because this topic is very important to us, and to you.
It's important to us, because we help people plan for a living.
It's important to you, because planning may be the best weapon you'll have to make sure you live the way you want!
Do You Know If You Are Going To Make Any Of The 11 Biggest Retirement Mistakes Many Retirees May Make…That Could Cost You A Fortune And Jeopardize Your Retirement Security?
Because if you're not sure, you aren't alone!
I don't know if you know this or not, but according to the Social Security Administration 96% of Americans are not able to fund a retirement that will last for their lifetime…allowing them to live the lifestyle they wish to live! This is the case for highly compensated people as well as average wage earners.
Pretty scary stuff, when you think about it! Do you know why this is? Well, in our opinion, it's because people simply aren't given the proper knowledge of how to correctly handle their finances when they retire from the company, or when they change jobs! This is true, even though most retirees have accountants, lawyers, stockbrokers, company provided assistance, etc.!
It's frightening when you think about it, but your retirement doesn't leave much room for ANY mistakes. Right? I mean, this IS NOT A DRILL! This is your one shot at retirement, and you…
Cannot Afford To Make ANY Mistakes! Period.
See, do you really know, (and I want you to be honest with yourself), EXACTLY how to make the RIGHT decisions on issues like:
· With the price of the stocks all over the place, how do you decide if you should sell some or wait? If you want to diversify, which shares should you sell? What about the tax consequences? Should you buy traded options to protect the price? How should you handle your company benefits? Do you know how to decide what to do with your stock, and stock options?
· Should you take a lump sum distribution? If so, how? What should you do with it? How much in cash, how much elsewhere? Who should be the new trustee or custodian? Will your retirement distribution money be subject to IRS penalties you've never heard of? Should you receive money now or wait until later?
· Are you protected from traps the IRS has set, as well as from other retirement financial disasters that can actually cause you to lose much more than the IRS ever could take?
· What would happen if someone became ill and needed long term nursing care? Who pays? How much? What if you don’t have enough money? What does the government do?
· Do you know how to avoid having as much as half of your money being grabbed by the tax man?
· Are your assets titled in the absolute, most dangerous way? (Hint- Most retirees make this enormous mistake!) Have you set up a virtually bullet proof asset protection plan?
· What kind of insurance should you now have? Do you keep what you had, or change it? Are you going to be overinsured and waste money on needless coverage? Do you know how to figure out which choices will best suit your family's new situation? And most important…
DO YOU KNOW IF YOU WILL BE LIKELY TO HAVE ENOUGH MONEY, AFTER TAXES, TO LIVE YOUR LIFE THE WAY YOU WISH TO...FOR AS LONG AS YOU LIVE?
Have you analyzed all the options and choices available to you so you can make educated decisions from a fully informed standpoint?
These are just a few of the questions you must have answers to! If you don't... you're likely to be the next victim of the greedy IRS, or to run out of money! If you make even one big mistake... look out! After all, you only retire once, so you cannot afford any mistakes! You must make the right decisions the first time!
These issues demonstrate how retirees are constantly at risk to see their retirement
security and peace of mind diminish, or disappear all together.
The world is a much tougher, and unforgiving place than it was years ago. There are so many things to know. So many rules and regulations. So many pitfalls and traps.
The government wants as much of your retirement nest egg as they can tax their way into! Some retirees will get hit with income taxes they've never even heard of! We've seen you get soaked with tens, or even hundreds of thousands of needless and completely avoidable income taxes! (Yes, even with a CPA "helping".)
Inflation, recession and the crazy markets are always lurking out there, inevitably waiting to gobble up more of your estate. Then there's the kids, or grandchildren, and their demands on your resources.
There's a lot to deal with.
And, let's face it. Who has the time to sit and read every tax law, investment option, insurance issue, and so forth? And, even if you had the time to read all this stuff, would you really understand what it means?
That's why we've prepared this step-by-step, down-to-earth report for you.
We wanted you to have an easy to understand set of facts, that cut right through all the baloney, and tell you the biggest mistakes retirees make...and more importantly, how to avoid them!
You Need To Know How To Avoid The Traps That Are Set For You!
So let's get into these important issues, and see if you're making any (or all) of these mistakes!
1. Listening To The Wrong People!
It never ceases to amaze us how many intelligent people take advice about their retirement from people who are totally unqualified to give you this critical advice!
For example, when we see retirement messes, (which we see virtually every day) and we ask where they got this information that has screwed them up so badly, we inevitably hear things like:
"My brother-in-law told me to do that. He used to be an accountant at Westrand Corporation, you know!"
"I asked the guy who's office was next to mine for all these years. I figured he must know what he's doing, since he's friends with the boss."
"I read an article by June Brant Queen in Newstime, that said all retirees should do..."
And so on. Everyone's got an opinion about what you should do with your retirement. Unfortunately, just because they are your relative, or are involved in some area of finance unrelated to retirement planning, (like the person at the bank who takes applications for checking accounts and CD's) or write articles for national magazines, doesn't mean they know the answers to your retirement problems and questions!
I cannot stress enough how important it is for you to work with a specialist in retirement planning that knows this area backwards and forwards, inside and out! Someone who knows how to integrate and coordinate ALL areas of your complicated financial situation and sort it all out for you!
After all, how many times are you going to retire? Shouldn't you be sure that the advice you're getting is right for you, and not generic, not given in the context of your ENTIRE financial situation…or just plain wrong?
Be sure to find a retirement specialist, just like you would look for a cardiologist if you had a heart problem.
Would you ask your brother-in-law or another executive to analyze your electrocardiogram? If not, why would you ask him to analyze your entire financial situation?
Doesn't that make a lot of sense?
2. Not Understanding The Tax Consequences For Investments, IRA's, Pensions, Etc.!
Another true story. Our clients, Perry and Edie, found out too late that the IRS demands you remove certain amounts out of your IRA once you reach age 70 1/2. (This happened BEFORE they became our clients.) Anyway, they were totally devastated when they were hit with all the penalties and interest when they didn't take money out of their IRA the right way. They had received information from the company's human resources department that was close, but not EXACTLY right. And, when they did what they were told, they got hammered. Over $21,000 in penalties and interest, all because they missed the correct amount required, even though they thought they did it right!
Their story is just one of many problems that retirees run into because of a lack of the proper knowledge about qualified retirement plans.
"Uncle Sam" Is A Relative You Should Give As Little As Possible To!
Other tax issues that retirees frequently get messed up on are:
ü How much should you withdraw from retirement plans?
ü When should you withdraw from the plans?
ü Should you let qualified plan money sit inside the plan, and use other money to live off of?
ü Is living off the income generated by investments one of the worst things you can do?
ü Should you take a withdrawal from your IRA to pay off your car or vacation home, so you'll have lower monthly payments?
ü Should you stop working at a certain time to collect Social Security now?
ü Should you wait to apply for Social Security? Or, should you work part time? And, how does that affect your Social Security payments?
ü What about the taxes on your Social Security income? Are there legal and safe ways to reduce it?
ü What about the taxes on the interest in CD's or other bank accounts? Is there a better way to invest to reduce those taxes? Or, will living off interest, and leaving your capital untouched cause you to lose money because of inflation?
Or,....
I think you get my point.
There are literally dozens and dozens of tax decisions you must make, whether you want to deal with them or not!
Let's think about a simple example here. If you were to save $400 a month in taxes, simply by knowing the laws, and how to legally reduce your taxes, that's $4,800 a year you'd have that you didn't have before!
What could you do with an extra $4,800?
What about saving even more off of your income taxes? We show people how to do it all the time!
Could You Use A Few Hundred (Or A Few Thousand) Dollars
Extra Cash Each Month?
If you want to make sure your income, estate and gift taxes are as low as legally possible, you need to work with a qualified retirement specialist, who can lay out all your options for you...allowing you to make an informed decision, as opposed to an emotional decision!
Or, worse, not even knowing you had to make a decision, like Perry and Edie who found out the hard way. Now, you may be thinking, "Well, I know about the required withdrawals and all that. And that's fine". But, what don't you know, that someone else does know?
When it comes to tax planning, there is little room for making mistakes. Don't try to know it all yourself, or depend on others who don't study these things every single day for a living!
Did you know that each and every year, there are thousands and thousands of tax rule changes? Some of them don't affect you, and others do! Last year, in the most complicated, ridiculous tax law we've ever seen passed, they changed over 1,100 Code Sections! Plus, the 1997 tax law alone created things like SEVEN types of capital gains when there used to only be two! In fact, the new law is so complex that you have a great chance of messing up your financial situation by overpaying your taxes without even knowing it! Recent laws have added even more complications and confusion.
The tax law is no place for amateur night. You HAVE to do proper tax planning BEFORE
you make even a single financial decision. Why? Because EVERY FINANCIAL DECISION HAS A GOOD CHANCE OF BEING AFFECTED BY THIS NEW COMPLEX TAX LAW!!
So don't play tax roulette, and hope your numbers hit. Make sure you are as sensible about your tax planning as you are about your health!
3. Choosing The Wrong Pension Option!
Let me illustrate this mistake with a real life example from a client of ours who was an executive at a company.
The client Louis, had retired a few years ago, and his wife, Janet, had not worked outside the home, and had no pension of her own. When Louis left the company, he was given a range of choices of how to handle his pension pay out if he were to die before Janet.
The choices were quite confusing, and they both decided to take the higher payout now, counting on the life insurance Louis had to cover Janet if he died. (With the help of Janet's sister's husband's brother, who used to be an accountant, of course.)
Anyway, Louis died just one year after retirement in a tragic accident. Janet was left with no pension income, but did get Louis' life insurance proceeds.
She Had To Go To Work, Because She Outlived Her Retirement Money!
In a matter of only four years, Janet had to get a job because the amount of insurance money was way too low for her needs. See, what seemed like a fortune to them, isn't really a fortune in dollars and expenses.
What did they do wrong?
They made a critical decision like this from the seat of their pants, without having someone prepare a detailed financial projection of which option would best meet their needs, before making the irrevocable election!
If Louis and Janet had done this, she would be receiving a much higher income, and have the insurance proceeds to boot!
Now, does this mean that all retirees should take the lower pay outs and have the survivor get some sort of a pay out? No, not at all. There is no such thing as any strategy that applies to some or all retirees!
Your situation, is your situation. It is as unique as your fingerprints.
And just like no two fingerprints are alike, no two retirements are alike.
Please promise us you'll not take "canned" advice, particularly when it comes to monumental decisions like choosing a retirement pay out!
4. Misunderstanding What Medicare And Social Security Does And Doesn't Pay For!
We see it all the time.
One spouse telling us how shocked they were that the $4,000 a month nursing home expense for their very ill spouse, isn't covered by Medicare or Social Security.
"But I thought Medicare covered medical expenses!", they exclaim.
The Government Is Not Going To Take Care Of You!
Yes, Medicare does cover medical expenses. But, it only covers certain ones, and only after you have paid a deductible!
Many, many medical expenses aren't covered by Medicare, and are usually picked up by a Medicare Supplement policy, or out of your pocket.
But, those supplements still don't cover extended nursing home care. Not a penny. Zilch. Nada. Zero.
Here again, we have an un-planned for situation that can literally wipe out a family's retirement nest egg, that nine out of ten retirees don't have any clue about!
Warning! (By the way, did you know that in order to qualify for state support from Medicaid, you literally have to spend your net worth almost down to zero first? You have to clean out all of your estate, assets, investments, and so forth until you are worth under $2,000! It's only when you're nearly flat broke that Medicaid kicks in to help you! This is not a solution that we recommend you implement!)
Don't make the mistake of thinking that Medicare or Social Security are going to take care of you. They don't!
Sure, they cover many things, but there are still huge, gigantic gaps that if you don't plan for yourself ahead of time, you'll never have them taken care of!
You must know what the government does help you with, and what they don't help you with!
And, you must have a plan to address the almost unknown areas that could cause your family some real problems! Don't wait until you've been completely wiped out before you figure them out!
5. Getting Caught By The New 20% Withholding Penalty For Lump Sum Distributions!
Are you aware of the tax law that has caught thousands of unwary retirees in its ugly web?
If you are retiring, or transferring a lump sum distribution from a company plan at a later time, and you don't follow the paperwork rules exactly right, you could end up having 20% of your money withheld from your distribution!
And, to make matters even worse, you can end up paying taxes and penalties if you can't make up this 20% difference out of your own pocket!
A Tax Trap To Look Out For!
For example, if you were getting a $200,000 distribution, and you had it go to an IRA, but didn't fill out the paperwork correctly, you could end up having $40,000 withheld from your transfer!
And, if you didn't have the $40 grand lying around to put into the IRA to make up for the withholding, you will be taxed on that $40,000, even though you didn't get the money! (Which could cost you anywhere from $6,000 to as much as $16,000 in taxes depending on your bracket!)
No, we are not making this up. This disaster was passed by Congress to nail unsuspecting retirees with lump sum distributions. Why? Because the government is looking for any way to get their hands on large chunks of money, that's why!
But wait. There's more. If you are under 59 1/2 years old, and this happens to you, you get to pay an extra 10% penalty on top of all the extra taxes! Yes, this is just one tax trap that is waiting to get a lot of retirees where it hurts the most, when they can afford it the least!
How do you avoid this?
Make sure that you get expert help in filling out the paperwork for making your choices of how to receive your lump sum! We cannot tell you how many times we've worked with retirees who thought they had it all figured out right, who did it on their own, or even with "help", and ended up really screwing up big time!
6. Owning Your Assets The Wrong Way!
One of the biggest mistakes we see is retirees who own their assets in ways that subject them to all kinds of unnecessary risks!
For example, the most common way that retirees own their home, investments, bank accounts, etc., is in joint tenancy with rights of survivorship.
While this is a simple way to own assets, in many cases, it could be a huge mistake!!!
Why? Well, some of the reasons are:
ü You could pay way more in estate taxes than necessary! (We have an executive who came in to see us after his parents died, and wanted to know if we could help him save the 45% of his parent's estate being confiscated by the IRS, which of course was hopeless, since it was all after the fact.)
ü If one of you has a liability problem (a car accident, for example) both of you could lose everything!
ü If your marriage goes down the tubes, they can clean out the accounts!
ü If your kids are on the accounts, if they go bankrupt or whatever, YOU could lose YOUR money!
ü Many retirees put their kids on some of their accounts, which later ends up costing gift taxes, and can screw up your family's finances if someone goes into a nursing home.
Joint tenancy is, in many cases, a financial disaster waiting to happen!
(Now, we are not giving you any legal advice, just pointing out some potential problems!)
Some of our clients have Living Trusts they set up before coming in to see us, and think they've protected their estate. Not necessarily true! A Living Trust may help protect assets, but in may cases it does nothing to protect your assets from liability or other problems. In fact, most of the time, they don't even protect your assets from income or estate taxes!
See, many attorneys just listen to your situation and set up your wills, trusts, etc., without analyzing and coordinating all the issues you should consider and just set you up in a simple, but sometimes dangerous way! (For example, would you be surprised to learn that over 75% of our clients find out that the Living trust doesn't cover a large percentage of their assets because things haven't been titled properly…even though the client is "working" with an attorney?)
You have to take a look at the way you own your assets in the context of your whole financial situation, so you don't risk losing everything you've worked for because you've placed your assets in jeopardy!
Asset ownership is a serious yet often overlooked area that can turn into a gigantic mistake!
7. Misunderstanding Or Not Knowing All The Tax And Other Traps That Surround Your Stock Options Like Sharks Circling Their Prey!
While this situation doesn't apply to everyone, if you have either Non-Qualified Options (NQO's) or Incentive Stock Options (ISO's), and you make any mistakes in the decisions that need to be made in dealing with them…you could kill yourself financially, as surely as a bullet would to your heart!
Listen. If you do not understand all the subtleties, fine points and traps involved with managing a portfolio of NQO's or ISO's, you can cost yourself a fortune! For example…
We recently met with a client who, before coming into our office, just paid a little over $1,100,000 in additional and needless taxes… because she did not set up a stock option plan that was integrated and coordinated with her overall financial situation!
See, she had never done a plan to determine how to handle all the decisions that go with stock options like, "Should I exercise some or all or none? If I do exercise, which ones should I do in which
order?" Or, "Should I wait until the stock hits a certain point?" Or, "How will exercising affect my taxes and net worth and retirement plans?" And so on.
For example, did you ever hear of, know about, or set up a plan to protect yourself against a hideous beast of a tax called the "Alternative Minimum Tax (AMT)? Probably not. Did you know that if you exercise and/or sell shares acquired through exercising stock options, and certain conditions exist in your financial situation (most you've never heard about)…that you could end up paying the dreaded AMT, which is a tax that you pay only if it ends up being HIGHER than your regular tax! It's a total nightmare!
You can only imagine the look of horror on retirees faces when they find out that what they thought was a low, or no tax decision actually cost them tens or hundreds(or millions) of dollars in AMT taxes they never heard of, that no one warned them about, or taught them how to coordinate their financial situation so this would never happen!
See, you only pay the AMT if you have set up your finances in certain ways that allow this disaster to occur! And, we can't give you any rules of thumb about it, because the only way to know if this could happen, and more importantly, to PREVENT it from happening…is to literally crunch all the numbers for YOUR specific entire financial situation, and see what the computer tells us. There is NO WAY to estimate or ballpark it. It HAS to be done in the context of your whole situation. It's that complicated. Trust us on this one.
It's plain disgusting! But, as we said, these types of traps are simply unknown or not communicated by the majority of financial advisors.
Please make sure that these sort of unknown penalty taxes don't apply to you!
If you're not sure, then you have no choice but to find out what the deal is BEFORE making any decisions or taking any actions!
8. Thinking "Risk" Just Involves Losing Principle!
Here is a big mistake we deal with almost every day.
In fact, a client that's going to be retiring, said, "We don't want to take any 'risk' with our retirement funds and stock! We want them to be totally safe and free of 'risk'!"
(Have you ever thought about that yourself?)
There's More Risk In "Riskless" Investments Than You May Think!
Let's discuss what the definition of "risk" is, in the first place? If you look it up in the dictionary, you'll see that it is defined as "A chance of encountering a loss or harm, a hazard or danger".
Now, you'll notice it doesn't say. "loss of principle". It just is defined as "loss". This is a major distinction we need to make here. Most retirees think "risk" means that you put your investments somewhere, and the $100,000 you started with is now worth far less than $100,000.
And yes, this is one type of risk...and a real one at that!
But it is only one type of risk. There are others that are just as scary and that can hurt you just as badly as losing principle!
By the way, if I told you that you are actually losing real money in the bank, would you believe me? Would you think I was lying, because CD's are insured by the FDIC? I guess this is the time to
explain what I mean.
If you are making 4% interest on a CD, and you are in the 28% tax bracket, your net, after tax, yield is only 2.88%!
4.00% interest earned
x 28% tax = 1.12% lost to taxes
2.88% net after tax yield.
Now, that would be bad enough, but we cannot forget about our friend, inflation. Yes, they claim inflation has been licked. That it's gone. Why? Because it's been hovering around 3.5 - 4% for the last few years.
Now, that is considered low, low inflation by today's standards.
But, did you know that in the early '70's, when president Nixon instituted price controls, inflation was an incredibly high 4%!
Isn't that interesting?
That in 1972, 4% inflation was considered so high, that the government tried putting price controls in place. Now, when inflation is at the same exact level, 20+ years later, it's considered insignificant by our friends in the Capitol!
How can this be? Could it be that inflation has changed, or is it more likely that the government has changed the way they want us to view and perceive it?
Anyway, how does this supposed "not so bad" inflation affect our CD example?
Losing Money On So-Called "Riskless" Investments Is Very Real!
Well, remember in our example that we're at 2.88% net, after tax yield. Now let's subtract inflation from this yield, to arrive at your true change in value, adjusted for the loss of purchasing power:
2.88% net, after tax yield
less 3.50% inflation
(0.62%) True return
Those brackets, by the way, mean a negative real rate of return! Yes, that means that you have a loss of value, of $62 for each $10,000 you have invested in CD's!
Now, if I asked you to put money in an investment that was guaranteed to lose $62 for each $10,000 you invested, you'd run away from me faster than a deer from a lion. Yet, if you have CD's, then you are doing the exact same thing!
So, what does a retiree do to get a better return, and avoid the higher taxes on their Social Security and other income?
As I said a couple of minutes ago, the real secret is to know what items you can invest in, that are off of the "tax hit list". Things like CD's and bonds get special tax treatment. So special, that they cause the maximum taxes to be paid!
What you need to do is figure out how much monthly income you need, and then build a plan that uses the tax- favored items! This assures that you get the cash flow you need, and avoid wasting money on paying the taxes you don't need... with assets that have some chance to keep up with our inevitable inflation!
See, the risk we're talking about here is the risk of losing purchasing power! This risk is so profound, yet almost totally ignored by most retirees, that is, until it's too late!
Let me tell you a story about a woman, Grandma Liz.
Liz was a very frugal woman. When she retired at age 65 in 1956, she had a Social Security income of $400 a month, plus a pension from her late husband, that paid her $205 a month. And, Liz had $12,000 in the bank.
Now, in 1956, this total of $605 a month income, plus $12,000 in savings was BIG MONEY!
Liz's mortgage payment was $81 a month. And with her car payment of $45 a month, and her other necessities, Liz was living on EASY STREET!
Let's move ahead to 1966. Now, Liz had sold her home, and pocketed $65,000 from the sale, which was all shielded from income tax because of the special once in a lifetime capital gains tax exclusion. (She sold the home because it was too much for her to keep up, at age 75.)
She had that money, plus most of the $12,000 she started retirement with. But her expenses had increased, especially her rent. She was now paying $150 a month in rent, and most of her other expenses had gone up as well due to inflation.
She Ended Up Having To Depend On Her Grandchildren
To Take Care Of Her For The Rest Of Her Life.
Over the next several years, she went through a lot of her nest egg, by helping out her kids and grandkids, paying for down payments, college expenses, and so on.
Now, it's 1982, and Liz is broke. Her rent is $657 a month. Her medical expenses that are not covered by Medicare and insurance are over $200 a month. Her food, clothing, etc. is way up, and she has long since stopped helping the younger folks, because her savings are gone.
If she didn't have so many grandchildren that she had helped, now pitching in to help her, she would have ended up on welfare.
Liz didn't understand how powerful a risk the loss of purchasing power provides. Believe me, this kind of story can break your heart. The only way to assure you won't run out of money is to have a plan that both meets your income needs, and provides the opportunity to keep up with inflation.
Now, no one is suggesting you not keep some money in CD's or other guaranteed programs, because that would be foolish.
But, on the same token, having too much in these type of investments can assure that you have a high risk of running out of money! No one wants to outlive their money. Misunderstanding the risk of the loss of purchasing power is a mistake you do not want to make!
9. Paying For The Wrong Kinds, And Wrong Amounts, Of Insurance!
This area is so messed up for most retirees, that you wouldn't believe it!
For some reason, when people are retired, many of them hang on to old insurance coverage of all types, just because they've had them for a long time, and are resistant to change. I'm not sure why, but it seems to be the case more often than not.
Listen, when you are in retirement, you have little extra room in your budget to waste money on needless coverage, or to be shortchanging yourself on coverage you do need!
Many of our retired clients find they can get more coverage in the areas they do need, and eliminate or reduce coverage on stuff they don't need, and save hundreds or thousands of dollars in the process!
We recently saw a couple in their late 60's, who were paying over $2,100 a year for coverages they didn't need, and had no insurance at all on things that they really should have in place.
By repositioning their insurance portfolio, we showed them what to get and what to get rid of.
The net bottom line is that they have an excellent group of coverage for just about anything that could go wrong, and are saving $123 a month that they are spending to have fun! No one wants you to be insurance poor, but we also don't want you wasting money on things you truly don't need, either!
The only answer is to have someone objectively review your insurance, and find out what's wrong and what's right! If there was one area that is more frequently messed up by retirees than overpaying taxes, overpaying for insurance is definitely it!
Most people we see, have truly bad auto, homeowner, condo, health, long term care, and life policies! All the coverages are bought with all the wrong information, from people who are motivated by all the wrong reasons. I'll bet you without knowing you or ever talking to you that you have more than one type of insurance that is anywhere from kind of bad…all the way to disgustingly bad!
This financial area must be reviewed and coordinated, OBJECTIVELY, with all the rest of your finances!
10. Planning For Your Retirement When You Are Already Retired!
This mistake is one that we see over and over again.
People getting "laid off" from a job they've had for years. Or taking advantage of the "early retirement" program offered so they can shrink their payroll. Or, people taking normal retirement at age 65. Or whatever reason.
We have people coming in here, constantly asking the same question: "Will we have enough money to make it all the way with the same lifestyle?"
This is a big mistake! They have already made all their decisions about options. They have already taken their retirement plans and either had them distributed or receiving monthly payouts.
They have made all their choices, and want us to tell them they're going to be OK.
I've got some sad news.
Many of these people are not going to be OK, because they let the horse out of the barn, and want us to close the door up with the horse still in the barn!
If I'm making any sense to you, you'll see that waiting until you reach a certain age to plan for that same age usually doesn't work.
Think about Grandma Liz. If she had done a better job of planning 40 years ago, she might not have ended up so broke.
We had a client that came to us under these kind of circumstances, and we had the unpleasant job of telling him and his wife that they would be out of money in less than 10 years. Their response was to fire us, because we brought them the bad news. (They chopped off the head of the messenger!) But they were making the same mistake that Grandma Liz made many years ago...only worse!
So, if you're not yet retired, do some detailed planning right NOW! Don't wait until you are retired. Now, if you're already retired, it's never too late to start or update your planning. Which brings us to the most important mistake of all to avoid:
11. Not Doing Consistent, Careful, Ongoing Planning!
Yes, planning is the single, most effective technique to have a safe and secure retirement! It worked during Teddy Roosevelt's days, it worked during Viet Nam, and it works now! See, the reason most of us aren't going to win the retirement game, is that we don't follow this crucial sequence, when it comes to managing our finances:
1) Figure out where you are today.
2) Figure out where you want to be.
3) Get a true understanding of the options you have available to you. (Not from biased sources.)
4) Develop a plan that will provide the right "course" to follow.
5) Make the changes necessary to get the plan going.
6) Watch your progress, and make the proper adjustments to keep the plan "on course".
Makes a lot of sense, doesn't it?
Kind of the same process you go through every day when planning a trip to the mall, or taking the kids to practice, or going on a visit or vacation, etc. Or like you do at your job before making decisions.
Could you imagine how you could get through your daily life, or keep the business alive without following this sequence of events?
Could you imagine how messed up you'd be if you didn't know where you lived, what time your meetings were, didn't know which roads led to the recreation center, didn't know where the meeting was going to be held, and finally, didn't know which room the meeting was in?
I know that sounds stupid, because in our day to day activities, we always know all those things!
But, can you really say the same thing about your money? Do you truly know where you are today? Are you certain you have specific goals of where you want to be financially? Can you say that you know all the choices you have available to you? Have you set up a plan to get where you want to be?
Or, like most of us, are you "winging it" as you go along???
In all the years we've been helping people like you win the game of money, and when studying the characteristics of families who are truly financially independent, we find one common theme.
Not their age, nor occupation, nor sex, nor income, nor any of those things.
No. The one common attribute is that they make a constant effort to plan for their future.
That's it. It may not sound very exotic or romantic. But it's simple, and it works. You know, usually, the most effective things in life, are the most simple and basic. Now, with this ridiculous attack on your future by the government, and the uncertainty of being retired, you need to plan for your own future, more than ever!
Make sense? I hope so. Because this topic is very important to us, and to you.
It's important to us, because we help people plan for a living.
It's important to you, because planning may be the best weapon you'll have to make sure you live the way you want!
Retirement Mistakes wwww.legacyannuities.com
Do You Know If You Are Going To Make Any Of The 11 Biggest Retirement Mistakes Many Retirees May Make…That Could Cost You A Fortune And Jeopardize Your Retirement Security?
Because if you're not sure, you aren't alone!
I don't know if you know this or not, but according to the Social Security Administration 96% of Americans are not able to fund a retirement that will last for their lifetime…allowing them to live the lifestyle they wish to live! This is the case for highly compensated people as well as average wage earners.
Pretty scary stuff, when you think about it! Do you know why this is? Well, in our opinion, it's because people simply aren't given the proper knowledge of how to correctly handle their finances when they retire from the company, or when they change jobs! This is true, even though most retirees have accountants, lawyers, stockbrokers, company provided assistance, etc.!
It's frightening when you think about it, but your retirement doesn't leave much room for ANY mistakes. Right? I mean, this IS NOT A DRILL! This is your one shot at retirement, and you…
Cannot Afford To Make ANY Mistakes! Period.
See, do you really know, (and I want you to be honest with yourself), EXACTLY how to make the RIGHT decisions on issues like:
· With the price of the stocks all over the place, how do you decide if you should sell some or wait? If you want to diversify, which shares should you sell? What about the tax consequences? Should you buy traded options to protect the price? How should you handle your company benefits? Do you know how to decide what to do with your stock, and stock options?
· Should you take a lump sum distribution? If so, how? What should you do with it? How much in cash, how much elsewhere? Who should be the new trustee or custodian? Will your retirement distribution money be subject to IRS penalties you've never heard of? Should you receive money now or wait until later?
· Are you protected from traps the IRS has set, as well as from other retirement financial disasters that can actually cause you to lose much more than the IRS ever could take?
· What would happen if someone became ill and needed long term nursing care? Who pays? How much? What if you don’t have enough money? What does the government do?
· Do you know how to avoid having as much as half of your money being grabbed by the tax man?
· Are your assets titled in the absolute, most dangerous way? (Hint- Most retirees make this enormous mistake!) Have you set up a virtually bullet proof asset protection plan?
· What kind of insurance should you now have? Do you keep what you had, or change it? Are you going to be overinsured and waste money on needless coverage? Do you know how to figure out which choices will best suit your family's new situation? And most important…
DO YOU KNOW IF YOU WILL BE LIKELY TO HAVE ENOUGH MONEY, AFTER TAXES, TO LIVE YOUR LIFE THE WAY YOU WISH TO...FOR AS LONG AS YOU LIVE?
Have you analyzed all the options and choices available to you so you can make educated decisions from a fully informed standpoint?
These are just a few of the questions you must have answers to! If you don't... you're likely to be the next victim of the greedy IRS, or to run out of money! If you make even one big mistake... look out! After all, you only retire once, so you cannot afford any mistakes! You must make the right decisions the first time!
These issues demonstrate how retirees are constantly at risk to see their retirement
security and peace of mind diminish, or disappear all together.
The world is a much tougher, and unforgiving place than it was years ago. There are so many things to know. So many rules and regulations. So many pitfalls and traps.
The government wants as much of your retirement nest egg as they can tax their way into! Some retirees will get hit with income taxes they've never even heard of! We've seen you get soaked with tens, or even hundreds of thousands of needless and completely avoidable income taxes! (Yes, even with a CPA "helping".)
Inflation, recession and the crazy markets are always lurking out there, inevitably waiting to gobble up more of your estate. Then there's the kids, or grandchildren, and their demands on your resources.
There's a lot to deal with.
And, let's face it. Who has the time to sit and read every tax law, investment option, insurance issue, and so forth? And, even if you had the time to read all this stuff, would you really understand what it means?
That's why we've prepared this step-by-step, down-to-earth report for you.
We wanted you to have an easy to understand set of facts, that cut right through all the baloney, and tell you the biggest mistakes retirees make...and more importantly, how to avoid them!
You Need To Know How To Avoid The Traps That Are Set For You!
So let's get into these important issues, and see if you're making any (or all) of these mistakes!
1. Listening To The Wrong People!
It never ceases to amaze us how many intelligent people take advice about their retirement from people who are totally unqualified to give you this critical advice!
For example, when we see retirement messes, (which we see virtually every day) and we ask where they got this information that has screwed them up so badly, we inevitably hear things like:
"My brother-in-law told me to do that. He used to be an accountant at Westrand Corporation, you know!"
"I asked the guy who's office was next to mine for all these years. I figured he must know what he's doing, since he's friends with the boss."
"I read an article by June Brant Queen in Newstime, that said all retirees should do..."
And so on. Everyone's got an opinion about what you should do with your retirement. Unfortunately, just because they are your relative, or are involved in some area of finance unrelated to retirement planning, (like the person at the bank who takes applications for checking accounts and CD's) or write articles for national magazines, doesn't mean they know the answers to your retirement problems and questions!
I cannot stress enough how important it is for you to work with a specialist in retirement planning that knows this area backwards and forwards, inside and out! Someone who knows how to integrate and coordinate ALL areas of your complicated financial situation and sort it all out for you!
After all, how many times are you going to retire? Shouldn't you be sure that the advice you're getting is right for you, and not generic, not given in the context of your ENTIRE financial situation…or just plain wrong?
Be sure to find a retirement specialist, just like you would look for a cardiologist if you had a heart problem.
Would you ask your brother-in-law or another executive to analyze your electrocardiogram? If not, why would you ask him to analyze your entire financial situation?
Doesn't that make a lot of sense?
2. Not Understanding The Tax Consequences For Investments, IRA's, Pensions, Etc.!
Another true story. Our clients, Perry and Edie, found out too late that the IRS demands you remove certain amounts out of your IRA once you reach age 70 1/2. (This happened BEFORE they became our clients.) Anyway, they were totally devastated when they were hit with all the penalties and interest when they didn't take money out of their IRA the right way. They had received information from the company's human resources department that was close, but not EXACTLY right. And, when they did what they were told, they got hammered. Over $21,000 in penalties and interest, all because they missed the correct amount required, even though they thought they did it right!
Their story is just one of many problems that retirees run into because of a lack of the proper knowledge about qualified retirement plans.
"Uncle Sam" Is A Relative You Should Give As Little As Possible To!
Other tax issues that retirees frequently get messed up on are:
ü How much should you withdraw from retirement plans?
ü When should you withdraw from the plans?
ü Should you let qualified plan money sit inside the plan, and use other money to live off of?
ü Is living off the income generated by investments one of the worst things you can do?
ü Should you take a withdrawal from your IRA to pay off your car or vacation home, so you'll have lower monthly payments?
ü Should you stop working at a certain time to collect Social Security now?
ü Should you wait to apply for Social Security? Or, should you work part time? And, how does that affect your Social Security payments?
ü What about the taxes on your Social Security income? Are there legal and safe ways to reduce it?
ü What about the taxes on the interest in CD's or other bank accounts? Is there a better way to invest to reduce those taxes? Or, will living off interest, and leaving your capital untouched cause you to lose money because of inflation?
Or,....
I think you get my point.
There are literally dozens and dozens of tax decisions you must make, whether you want to deal with them or not!
Let's think about a simple example here. If you were to save $400 a month in taxes, simply by knowing the laws, and how to legally reduce your taxes, that's $4,800 a year you'd have that you didn't have before!
What could you do with an extra $4,800?
What about saving even more off of your income taxes? We show people how to do it all the time!
Could You Use A Few Hundred (Or A Few Thousand) Dollars
Extra Cash Each Month?
If you want to make sure your income, estate and gift taxes are as low as legally possible, you need to work with a qualified retirement specialist, who can lay out all your options for you...allowing you to make an informed decision, as opposed to an emotional decision!
Or, worse, not even knowing you had to make a decision, like Perry and Edie who found out the hard way. Now, you may be thinking, "Well, I know about the required withdrawals and all that. And that's fine". But, what don't you know, that someone else does know?
When it comes to tax planning, there is little room for making mistakes. Don't try to know it all yourself, or depend on others who don't study these things every single day for a living!
Did you know that each and every year, there are thousands and thousands of tax rule changes? Some of them don't affect you, and others do! Last year, in the most complicated, ridiculous tax law we've ever seen passed, they changed over 1,100 Code Sections! Plus, the 1997 tax law alone created things like SEVEN types of capital gains when there used to only be two! In fact, the new law is so complex that you have a great chance of messing up your financial situation by overpaying your taxes without even knowing it! Recent laws have added even more complications and confusion.
The tax law is no place for amateur night. You HAVE to do proper tax planning BEFORE
you make even a single financial decision. Why? Because EVERY FINANCIAL DECISION HAS A GOOD CHANCE OF BEING AFFECTED BY THIS NEW COMPLEX TAX LAW!!
So don't play tax roulette, and hope your numbers hit. Make sure you are as sensible about your tax planning as you are about your health!
3. Choosing The Wrong Pension Option!
Let me illustrate this mistake with a real life example from a client of ours who was an executive at a company.
The client Louis, had retired a few years ago, and his wife, Janet, had not worked outside the home, and had no pension of her own. When Louis left the company, he was given a range of choices of how to handle his pension pay out if he were to die before Janet.
The choices were quite confusing, and they both decided to take the higher payout now, counting on the life insurance Louis had to cover Janet if he died. (With the help of Janet's sister's husband's brother, who used to be an accountant, of course.)
Anyway, Louis died just one year after retirement in a tragic accident. Janet was left with no pension income, but did get Louis' life insurance proceeds.
She Had To Go To Work, Because She Outlived Her Retirement Money!
In a matter of only four years, Janet had to get a job because the amount of insurance money was way too low for her needs. See, what seemed like a fortune to them, isn't really a fortune in dollars and expenses.
What did they do wrong?
They made a critical decision like this from the seat of their pants, without having someone prepare a detailed financial projection of which option would best meet their needs, before making the irrevocable election!
If Louis and Janet had done this, she would be receiving a much higher income, and have the insurance proceeds to boot!
Now, does this mean that all retirees should take the lower pay outs and have the survivor get some sort of a pay out? No, not at all. There is no such thing as any strategy that applies to some or all retirees!
Your situation, is your situation. It is as unique as your fingerprints.
And just like no two fingerprints are alike, no two retirements are alike.
Please promise us you'll not take "canned" advice, particularly when it comes to monumental decisions like choosing a retirement pay out!
4. Misunderstanding What Medicare And Social Security Does And Doesn't Pay For!
We see it all the time.
One spouse telling us how shocked they were that the $4,000 a month nursing home expense for their very ill spouse, isn't covered by Medicare or Social Security.
"But I thought Medicare covered medical expenses!", they exclaim.
The Government Is Not Going To Take Care Of You!
Yes, Medicare does cover medical expenses. But, it only covers certain ones, and only after you have paid a deductible!
Many, many medical expenses aren't covered by Medicare, and are usually picked up by a Medicare Supplement policy, or out of your pocket.
But, those supplements still don't cover extended nursing home care. Not a penny. Zilch. Nada. Zero.
Here again, we have an un-planned for situation that can literally wipe out a family's retirement nest egg, that nine out of ten retirees don't have any clue about!
Warning! (By the way, did you know that in order to qualify for state support from Medicaid, you literally have to spend your net worth almost down to zero first? You have to clean out all of your estate, assets, investments, and so forth until you are worth under $2,000! It's only when you're nearly flat broke that Medicaid kicks in to help you! This is not a solution that we recommend you implement!)
Don't make the mistake of thinking that Medicare or Social Security are going to take care of you. They don't!
Sure, they cover many things, but there are still huge, gigantic gaps that if you don't plan for yourself ahead of time, you'll never have them taken care of!
You must know what the government does help you with, and what they don't help you with!
And, you must have a plan to address the almost unknown areas that could cause your family some real problems! Don't wait until you've been completely wiped out before you figure them out!
5. Getting Caught By The New 20% Withholding Penalty For Lump Sum Distributions!
Are you aware of the tax law that has caught thousands of unwary retirees in its ugly web?
If you are retiring, or transferring a lump sum distribution from a company plan at a later time, and you don't follow the paperwork rules exactly right, you could end up having 20% of your money withheld from your distribution!
And, to make matters even worse, you can end up paying taxes and penalties if you can't make up this 20% difference out of your own pocket!
A Tax Trap To Look Out For!
For example, if you were getting a $200,000 distribution, and you had it go to an IRA, but didn't fill out the paperwork correctly, you could end up having $40,000 withheld from your transfer!
And, if you didn't have the $40 grand lying around to put into the IRA to make up for the withholding, you will be taxed on that $40,000, even though you didn't get the money! (Which could cost you anywhere from $6,000 to as much as $16,000 in taxes depending on your bracket!)
No, we are not making this up. This disaster was passed by Congress to nail unsuspecting retirees with lump sum distributions. Why? Because the government is looking for any way to get their hands on large chunks of money, that's why!
But wait. There's more. If you are under 59 1/2 years old, and this happens to you, you get to pay an extra 10% penalty on top of all the extra taxes! Yes, this is just one tax trap that is waiting to get a lot of retirees where it hurts the most, when they can afford it the least!
How do you avoid this?
Make sure that you get expert help in filling out the paperwork for making your choices of how to receive your lump sum! We cannot tell you how many times we've worked with retirees who thought they had it all figured out right, who did it on their own, or even with "help", and ended up really screwing up big time!
6. Owning Your Assets The Wrong Way!
One of the biggest mistakes we see is retirees who own their assets in ways that subject them to all kinds of unnecessary risks!
For example, the most common way that retirees own their home, investments, bank accounts, etc., is in joint tenancy with rights of survivorship.
While this is a simple way to own assets, in many cases, it could be a huge mistake!!!
Why? Well, some of the reasons are:
ü You could pay way more in estate taxes than necessary! (We have an executive who came in to see us after his parents died, and wanted to know if we could help him save the 45% of his parent's estate being confiscated by the IRS, which of course was hopeless, since it was all after the fact.)
ü If one of you has a liability problem (a car accident, for example) both of you could lose everything!
ü If your marriage goes down the tubes, they can clean out the accounts!
ü If your kids are on the accounts, if they go bankrupt or whatever, YOU could lose YOUR money!
ü Many retirees put their kids on some of their accounts, which later ends up costing gift taxes, and can screw up your family's finances if someone goes into a nursing home.
Joint tenancy is, in many cases, a financial disaster waiting to happen!
(Now, we are not giving you any legal advice, just pointing out some potential problems!)
Some of our clients have Living Trusts they set up before coming in to see us, and think they've protected their estate. Not necessarily true! A Living Trust may help protect assets, but in may cases it does nothing to protect your assets from liability or other problems. In fact, most of the time, they don't even protect your assets from income or estate taxes!
See, many attorneys just listen to your situation and set up your wills, trusts, etc., without analyzing and coordinating all the issues you should consider and just set you up in a simple, but sometimes dangerous way! (For example, would you be surprised to learn that over 75% of our clients find out that the Living trust doesn't cover a large percentage of their assets because things haven't been titled properly…even though the client is "working" with an attorney?)
You have to take a look at the way you own your assets in the context of your whole financial situation, so you don't risk losing everything you've worked for because you've placed your assets in jeopardy!
Asset ownership is a serious yet often overlooked area that can turn into a gigantic mistake!
7. Misunderstanding Or Not Knowing All The Tax And Other Traps That Surround Your Stock Options Like Sharks Circling Their Prey!
While this situation doesn't apply to everyone, if you have either Non-Qualified Options (NQO's) or Incentive Stock Options (ISO's), and you make any mistakes in the decisions that need to be made in dealing with them…you could kill yourself financially, as surely as a bullet would to your heart!
Listen. If you do not understand all the subtleties, fine points and traps involved with managing a portfolio of NQO's or ISO's, you can cost yourself a fortune! For example…
We recently met with a client who, before coming into our office, just paid a little over $1,100,000 in additional and needless taxes… because she did not set up a stock option plan that was integrated and coordinated with her overall financial situation!
See, she had never done a plan to determine how to handle all the decisions that go with stock options like, "Should I exercise some or all or none? If I do exercise, which ones should I do in which
order?" Or, "Should I wait until the stock hits a certain point?" Or, "How will exercising affect my taxes and net worth and retirement plans?" And so on.
For example, did you ever hear of, know about, or set up a plan to protect yourself against a hideous beast of a tax called the "Alternative Minimum Tax (AMT)? Probably not. Did you know that if you exercise and/or sell shares acquired through exercising stock options, and certain conditions exist in
Do You Know If You Are Going To Make Any Of The 11 Biggest Retirement Mistakes Many Retirees May Make…That Could Cost You A Fortune And Jeopardize Your Retirement Security?
Because if you're not sure, you aren't alone!
I don't know if you know this or not, but according to the Social Security Administration 96% of Americans are not able to fund a retirement that will last for their lifetime…allowing them to live the lifestyle they wish to live! This is the case for highly compensated people as well as average wage earners.
Pretty scary stuff, when you think about it! Do you know why this is? Well, in our opinion, it's because people simply aren't given the proper knowledge of how to correctly handle their finances when they retire from the company, or when they change jobs! This is true, even though most retirees have accountants, lawyers, stockbrokers, company provided assistance, etc.!
It's frightening when you think about it, but your retirement doesn't leave much room for ANY mistakes. Right? I mean, this IS NOT A DRILL! This is your one shot at retirement, and you…
Cannot Afford To Make ANY Mistakes! Period.
See, do you really know, (and I want you to be honest with yourself), EXACTLY how to make the RIGHT decisions on issues like:
· With the price of the stocks all over the place, how do you decide if you should sell some or wait? If you want to diversify, which shares should you sell? What about the tax consequences? Should you buy traded options to protect the price? How should you handle your company benefits? Do you know how to decide what to do with your stock, and stock options?
· Should you take a lump sum distribution? If so, how? What should you do with it? How much in cash, how much elsewhere? Who should be the new trustee or custodian? Will your retirement distribution money be subject to IRS penalties you've never heard of? Should you receive money now or wait until later?
· Are you protected from traps the IRS has set, as well as from other retirement financial disasters that can actually cause you to lose much more than the IRS ever could take?
· What would happen if someone became ill and needed long term nursing care? Who pays? How much? What if you don’t have enough money? What does the government do?
· Do you know how to avoid having as much as half of your money being grabbed by the tax man?
· Are your assets titled in the absolute, most dangerous way? (Hint- Most retirees make this enormous mistake!) Have you set up a virtually bullet proof asset protection plan?
· What kind of insurance should you now have? Do you keep what you had, or change it? Are you going to be overinsured and waste money on needless coverage? Do you know how to figure out which choices will best suit your family's new situation? And most important…
DO YOU KNOW IF YOU WILL BE LIKELY TO HAVE ENOUGH MONEY, AFTER TAXES, TO LIVE YOUR LIFE THE WAY YOU WISH TO...FOR AS LONG AS YOU LIVE?
Have you analyzed all the options and choices available to you so you can make educated decisions from a fully informed standpoint?
These are just a few of the questions you must have answers to! If you don't... you're likely to be the next victim of the greedy IRS, or to run out of money! If you make even one big mistake... look out! After all, you only retire once, so you cannot afford any mistakes! You must make the right decisions the first time!
These issues demonstrate how retirees are constantly at risk to see their retirement
security and peace of mind diminish, or disappear all together.
The world is a much tougher, and unforgiving place than it was years ago. There are so many things to know. So many rules and regulations. So many pitfalls and traps.
The government wants as much of your retirement nest egg as they can tax their way into! Some retirees will get hit with income taxes they've never even heard of! We've seen you get soaked with tens, or even hundreds of thousands of needless and completely avoidable income taxes! (Yes, even with a CPA "helping".)
Inflation, recession and the crazy markets are always lurking out there, inevitably waiting to gobble up more of your estate. Then there's the kids, or grandchildren, and their demands on your resources.
There's a lot to deal with.
And, let's face it. Who has the time to sit and read every tax law, investment option, insurance issue, and so forth? And, even if you had the time to read all this stuff, would you really understand what it means?
That's why we've prepared this step-by-step, down-to-earth report for you.
We wanted you to have an easy to understand set of facts, that cut right through all the baloney, and tell you the biggest mistakes retirees make...and more importantly, how to avoid them!
You Need To Know How To Avoid The Traps That Are Set For You!
So let's get into these important issues, and see if you're making any (or all) of these mistakes!
1. Listening To The Wrong People!
It never ceases to amaze us how many intelligent people take advice about their retirement from people who are totally unqualified to give you this critical advice!
For example, when we see retirement messes, (which we see virtually every day) and we ask where they got this information that has screwed them up so badly, we inevitably hear things like:
"My brother-in-law told me to do that. He used to be an accountant at Westrand Corporation, you know!"
"I asked the guy who's office was next to mine for all these years. I figured he must know what he's doing, since he's friends with the boss."
"I read an article by June Brant Queen in Newstime, that said all retirees should do..."
And so on. Everyone's got an opinion about what you should do with your retirement. Unfortunately, just because they are your relative, or are involved in some area of finance unrelated to retirement planning, (like the person at the bank who takes applications for checking accounts and CD's) or write articles for national magazines, doesn't mean they know the answers to your retirement problems and questions!
I cannot stress enough how important it is for you to work with a specialist in retirement planning that knows this area backwards and forwards, inside and out! Someone who knows how to integrate and coordinate ALL areas of your complicated financial situation and sort it all out for you!
After all, how many times are you going to retire? Shouldn't you be sure that the advice you're getting is right for you, and not generic, not given in the context of your ENTIRE financial situation…or just plain wrong?
Be sure to find a retirement specialist, just like you would look for a cardiologist if you had a heart problem.
Would you ask your brother-in-law or another executive to analyze your electrocardiogram? If not, why would you ask him to analyze your entire financial situation?
Doesn't that make a lot of sense?
2. Not Understanding The Tax Consequences For Investments, IRA's, Pensions, Etc.!
Another true story. Our clients, Perry and Edie, found out too late that the IRS demands you remove certain amounts out of your IRA once you reach age 70 1/2. (This happened BEFORE they became our clients.) Anyway, they were totally devastated when they were hit with all the penalties and interest when they didn't take money out of their IRA the right way. They had received information from the company's human resources department that was close, but not EXACTLY right. And, when they did what they were told, they got hammered. Over $21,000 in penalties and interest, all because they missed the correct amount required, even though they thought they did it right!
Their story is just one of many problems that retirees run into because of a lack of the proper knowledge about qualified retirement plans.
"Uncle Sam" Is A Relative You Should Give As Little As Possible To!
Other tax issues that retirees frequently get messed up on are:
ü How much should you withdraw from retirement plans?
ü When should you withdraw from the plans?
ü Should you let qualified plan money sit inside the plan, and use other money to live off of?
ü Is living off the income generated by investments one of the worst things you can do?
ü Should you take a withdrawal from your IRA to pay off your car or vacation home, so you'll have lower monthly payments?
ü Should you stop working at a certain time to collect Social Security now?
ü Should you wait to apply for Social Security? Or, should you work part time? And, how does that affect your Social Security payments?
ü What about the taxes on your Social Security income? Are there legal and safe ways to reduce it?
ü What about the taxes on the interest in CD's or other bank accounts? Is there a better way to invest to reduce those taxes? Or, will living off interest, and leaving your capital untouched cause you to lose money because of inflation?
Or,....
I think you get my point.
There are literally dozens and dozens of tax decisions you must make, whether you want to deal with them or not!
Let's think about a simple example here. If you were to save $400 a month in taxes, simply by knowing the laws, and how to legally reduce your taxes, that's $4,800 a year you'd have that you didn't have before!
What could you do with an extra $4,800?
What about saving even more off of your income taxes? We show people how to do it all the time!
Could You Use A Few Hundred (Or A Few Thousand) Dollars
Extra Cash Each Month?
If you want to make sure your income, estate and gift taxes are as low as legally possible, you need to work with a qualified retirement specialist, who can lay out all your options for you...allowing you to make an informed decision, as opposed to an emotional decision!
Or, worse, not even knowing you had to make a decision, like Perry and Edie who found out the hard way. Now, you may be thinking, "Well, I know about the required withdrawals and all that. And that's fine". But, what don't you know, that someone else does know?
When it comes to tax planning, there is little room for making mistakes. Don't try to know it all yourself, or depend on others who don't study these things every single day for a living!
Did you know that each and every year, there are thousands and thousands of tax rule changes? Some of them don't affect you, and others do! Last year, in the most complicated, ridiculous tax law we've ever seen passed, they changed over 1,100 Code Sections! Plus, the 1997 tax law alone created things like SEVEN types of capital gains when there used to only be two! In fact, the new law is so complex that you have a great chance of messing up your financial situation by overpaying your taxes without even knowing it! Recent laws have added even more complications and confusion.
The tax law is no place for amateur night. You HAVE to do proper tax planning BEFORE
you make even a single financial decision. Why? Because EVERY FINANCIAL DECISION HAS A GOOD CHANCE OF BEING AFFECTED BY THIS NEW COMPLEX TAX LAW!!
So don't play tax roulette, and hope your numbers hit. Make sure you are as sensible about your tax planning as you are about your health!
3. Choosing The Wrong Pension Option!
Let me illustrate this mistake with a real life example from a client of ours who was an executive at a company.
The client Louis, had retired a few years ago, and his wife, Janet, had not worked outside the home, and had no pension of her own. When Louis left the company, he was given a range of choices of how to handle his pension pay out if he were to die before Janet.
The choices were quite confusing, and they both decided to take the higher payout now, counting on the life insurance Louis had to cover Janet if he died. (With the help of Janet's sister's husband's brother, who used to be an accountant, of course.)
Anyway, Louis died just one year after retirement in a tragic accident. Janet was left with no pension income, but did get Louis' life insurance proceeds.
She Had To Go To Work, Because She Outlived Her Retirement Money!
In a matter of only four years, Janet had to get a job because the amount of insurance money was way too low for her needs. See, what seemed like a fortune to them, isn't really a fortune in dollars and expenses.
What did they do wrong?
They made a critical decision like this from the seat of their pants, without having someone prepare a detailed financial projection of which option would best meet their needs, before making the irrevocable election!
If Louis and Janet had done this, she would be receiving a much higher income, and have the insurance proceeds to boot!
Now, does this mean that all retirees should take the lower pay outs and have the survivor get some sort of a pay out? No, not at all. There is no such thing as any strategy that applies to some or all retirees!
Your situation, is your situation. It is as unique as your fingerprints.
And just like no two fingerprints are alike, no two retirements are alike.
Please promise us you'll not take "canned" advice, particularly when it comes to monumental decisions like choosing a retirement pay out!
4. Misunderstanding What Medicare And Social Security Does And Doesn't Pay For!
We see it all the time.
One spouse telling us how shocked they were that the $4,000 a month nursing home expense for their very ill spouse, isn't covered by Medicare or Social Security.
"But I thought Medicare covered medical expenses!", they exclaim.
The Government Is Not Going To Take Care Of You!
Yes, Medicare does cover medical expenses. But, it only covers certain ones, and only after you have paid a deductible!
Many, many medical expenses aren't covered by Medicare, and are usually picked up by a Medicare Supplement policy, or out of your pocket.
But, those supplements still don't cover extended nursing home care. Not a penny. Zilch. Nada. Zero.
Here again, we have an un-planned for situation that can literally wipe out a family's retirement nest egg, that nine out of ten retirees don't have any clue about!
Warning! (By the way, did you know that in order to qualify for state support from Medicaid, you literally have to spend your net worth almost down to zero first? You have to clean out all of your estate, assets, investments, and so forth until you are worth under $2,000! It's only when you're nearly flat broke that Medicaid kicks in to help you! This is not a solution that we recommend you implement!)
Don't make the mistake of thinking that Medicare or Social Security are going to take care of you. They don't!
Sure, they cover many things, but there are still huge, gigantic gaps that if you don't plan for yourself ahead of time, you'll never have them taken care of!
You must know what the government does help you with, and what they don't help you with!
And, you must have a plan to address the almost unknown areas that could cause your family some real problems! Don't wait until you've been completely wiped out before you figure them out!
5. Getting Caught By The New 20% Withholding Penalty For Lump Sum Distributions!
Are you aware of the tax law that has caught thousands of unwary retirees in its ugly web?
If you are retiring, or transferring a lump sum distribution from a company plan at a later time, and you don't follow the paperwork rules exactly right, you could end up having 20% of your money withheld from your distribution!
And, to make matters even worse, you can end up paying taxes and penalties if you can't make up this 20% difference out of your own pocket!
A Tax Trap To Look Out For!
For example, if you were getting a $200,000 distribution, and you had it go to an IRA, but didn't fill out the paperwork correctly, you could end up having $40,000 withheld from your transfer!
And, if you didn't have the $40 grand lying around to put into the IRA to make up for the withholding, you will be taxed on that $40,000, even though you didn't get the money! (Which could cost you anywhere from $6,000 to as much as $16,000 in taxes depending on your bracket!)
No, we are not making this up. This disaster was passed by Congress to nail unsuspecting retirees with lump sum distributions. Why? Because the government is looking for any way to get their hands on large chunks of money, that's why!
But wait. There's more. If you are under 59 1/2 years old, and this happens to you, you get to pay an extra 10% penalty on top of all the extra taxes! Yes, this is just one tax trap that is waiting to get a lot of retirees where it hurts the most, when they can afford it the least!
How do you avoid this?
Make sure that you get expert help in filling out the paperwork for making your choices of how to receive your lump sum! We cannot tell you how many times we've worked with retirees who thought they had it all figured out right, who did it on their own, or even with "help", and ended up really screwing up big time!
6. Owning Your Assets The Wrong Way!
One of the biggest mistakes we see is retirees who own their assets in ways that subject them to all kinds of unnecessary risks!
For example, the most common way that retirees own their home, investments, bank accounts, etc., is in joint tenancy with rights of survivorship.
While this is a simple way to own assets, in many cases, it could be a huge mistake!!!
Why? Well, some of the reasons are:
ü You could pay way more in estate taxes than necessary! (We have an executive who came in to see us after his parents died, and wanted to know if we could help him save the 45% of his parent's estate being confiscated by the IRS, which of course was hopeless, since it was all after the fact.)
ü If one of you has a liability problem (a car accident, for example) both of you could lose everything!
ü If your marriage goes down the tubes, they can clean out the accounts!
ü If your kids are on the accounts, if they go bankrupt or whatever, YOU could lose YOUR money!
ü Many retirees put their kids on some of their accounts, which later ends up costing gift taxes, and can screw up your family's finances if someone goes into a nursing home.
Joint tenancy is, in many cases, a financial disaster waiting to happen!
(Now, we are not giving you any legal advice, just pointing out some potential problems!)
Some of our clients have Living Trusts they set up before coming in to see us, and think they've protected their estate. Not necessarily true! A Living Trust may help protect assets, but in may cases it does nothing to protect your assets from liability or other problems. In fact, most of the time, they don't even protect your assets from income or estate taxes!
See, many attorneys just listen to your situation and set up your wills, trusts, etc., without analyzing and coordinating all the issues you should consider and just set you up in a simple, but sometimes dangerous way! (For example, would you be surprised to learn that over 75% of our clients find out that the Living trust doesn't cover a large percentage of their assets because things haven't been titled properly…even though the client is "working" with an attorney?)
You have to take a look at the way you own your assets in the context of your whole financial situation, so you don't risk losing everything you've worked for because you've placed your assets in jeopardy!
Asset ownership is a serious yet often overlooked area that can turn into a gigantic mistake!
7. Misunderstanding Or Not Knowing All The Tax And Other Traps That Surround Your Stock Options Like Sharks Circling Their Prey!
While this situation doesn't apply to everyone, if you have either Non-Qualified Options (NQO's) or Incentive Stock Options (ISO's), and you make any mistakes in the decisions that need to be made in dealing with them…you could kill yourself financially, as surely as a bullet would to your heart!
Listen. If you do not understand all the subtleties, fine points and traps involved with managing a portfolio of NQO's or ISO's, you can cost yourself a fortune! For example…
We recently met with a client who, before coming into our office, just paid a little over $1,100,000 in additional and needless taxes… because she did not set up a stock option plan that was integrated and coordinated with her overall financial situation!
See, she had never done a plan to determine how to handle all the decisions that go with stock options like, "Should I exercise some or all or none? If I do exercise, which ones should I do in which
order?" Or, "Should I wait until the stock hits a certain point?" Or, "How will exercising affect my taxes and net worth and retirement plans?" And so on.
For example, did you ever hear of, know about, or set up a plan to protect yourself against a hideous beast of a tax called the "Alternative Minimum Tax (AMT)? Probably not. Did you know that if you exercise and/or sell shares acquired through exercising stock options, and certain conditions exist in
How too pick an Insurance/Financial Planner www.legacyannuities.com
1. Ask for 5 references. 3 references should be current clients, and 2 references should be other professionals like an accountant or banker. There are three reasons for the professional references. First, any person in business should have at least 3 satisfied clients they can provide you with, therefore, client references alone may not be enough.
Secondly, if a planner cannot produce 2 other professionals that will attest to his ability as a financial planner, he may not be respected by his peers. And last, outside professionals in the community see all kinds of things, and will usually be aware of what kind of advice is available, and what kind of quality is provided by different folks.
2. Call the references you receive. Many people ask for references, but never use them! Call all 5 people. You can never learn too much about the person you are considering using for your major financial decisions. Take the few minutes to talk to these people. It will be worth it!
3. Ask if they charge fees for their service. No one works for free! If they are not charging fees, they must be making money from the sale of products. If they are making 100% of their income from product sales, they must sell enough to make up for the people who did not buy. If there is a price to be paid, it must be paid by either the planner or you. Which one do you think it will be?
4. If they do not charge fees, ask them how you can be sure that the advice they will provide is in your best interests. Make them tell you how they analyze a situation, and what process they go through to arrive at recommendations.
What you want to hear, is that they first find out how you feel about your money anThen, they will get a detailed understanding of your income, assets, debts, company benefits, etc. Finally, they will work up an action plan that addresses all of your concerns, and gives you choices. Choices of the different ways your concerns can be handled, with the pros and cons of each choice.
Then, and only then, will you be able to choose for yourself which way to go.
This process allows you the ability to make decisions from an educated basis, instead of from salesmanship. There is nothing wrong with being sold financial products, as long as they fit your needs, and not those of the salespeople!
5. Ask if they sell products as well as provide financial planning advice. If the planner says "yes", this should not be taken as a negative response. However, you should recognize the potential conflict of interest that exists. Although I have known several financial planners and advisors that did not let the conflict of interest influence their recommendations, those planners were a small minority. Therefore, extra caution should be exercised if the planner also sells the products he recommends.
You must ask the planner if he has any special incentives or reasons to sell you the things he is proposing. If the motivation is to get you what you need, that is fine! If you sense from the answer that there is some hidden reason, you need to move carefully.
6. If the planner sells products, ask if the products can be obtained if no plan is prepared. Buying financial products without a plan, is like having surgery without an exam. Call me crazy, but I sure wouldn't want a doctor to operate on me until he knew what was wrong with me. A doctor who performs surgery without an exam would be an idiot!
The same holds true for a financial planner who sells product without an analysis. If you take away the planning process, you are left with nothing more than a product salesman. Do not let yourself be deceived!
Now, a plan may be many things. It can be a short one pager, all the way up to a thick set of charts and graphs. And, one is not necessarily better than the other. It just depends on how detailed your needs are. Even if the written plan is short, the interview process must not be.
Garbage In: Garbage Out!
The best planning we have seen is not due to the actual written area, but because of the depth of the interview. The planner must ask about all your issues. Not just the ones he can make money on. For example, they should ask about your taxes, education funding, home financing, company benefits, insurance, estate planning, retirement goals, investments, etc.
A good planner knows how to get to know you, your goals, and your fears. If you truly feel he truly understands your emotions, as well as your finances, then you are with a real planner!
7. If the planner sells products, tell the planner you would be more comfortable implementing their strategies with someone else. Note whether the planner starts to squirm at the thought of you buying elsewhere.
If the planner tries to convince you that no one can implement their strategies as well as
he/she can, tell the planner that you will consider that fact after the plan is completed. If they have faith d finances.
in their own ability, the relationship will most likely continue. Otherwise, you have probably taken the first step towards being told that you are not a suitable client for their service.
8. If there is a fee, do not pay more than 50% of the fee in advance. Although a retainer is often requested, most professionals do not require 100% of their fee in advance. Paying the balance upon completion of the plan, assures you that the job will be finished to your satisfaction.
9. Ask about the planner's financial background. As a rule of thumb, if you have significant wealth, consider only planners that have been providing financial services for at least 5 to 10 years. (Or whatever time period you choose.) Although there may be some very good planners with less experience, why take the chance. I was once an inexperienced planner, and when I was, I got my experience working with people who were also just starting out. Select an advisor that has more financial experience than you do.
10. Receive a 100% guarantee of unconditional satisfaction. If they are so sure they can help you, they should back up that promise with an iron-clad guarantee. The benefits you receive must exceed the cost of the planning.
You are the only person that can determine the amount of help you have received. And, the benefit received can not be determined until the plan has been completed. There should be no question in your mind that you have received more benefit than cost. If not, then the fee should be adjusted. If the planner thinks he/she can provide sufficient benefit to you to justify the cost, let them say so in writing.
11. Ask them how they keep up on the constantly changing financial environment. Do they get research from their parent company? Do they attend workshops or go to classes? Are they studying for an advanced degree? Do they subscribe to financial publications other than general media? (Reading trade journals, as opposed to "Newsweek" or "The Wall Street Journal.")
Let me assure you this is an important question. there is no way on Earth anyone can be
excellent at planning unless they are excellent at obtaining up to date, accurate information!
12. Ask to see the financial strength of the companies they recommend. Not just a simple "rating," but some details about their assets, and how their debt load is set up. Ask how the company invests their own money. Do they buy US Government bonds, for example, or risky real estate?
Remember that most of the companies and banks that went under in the last few years, were loaded up with huge debts, and bad investments in junk bonds, real estate and the like. While there is nothing wrong with some debt, and some higher risk investments, THEY MUST BE REASONABLE!
Just like your mom told you, too much of a good thing is usually bad!
And, also like your mom told you, look before you leap!
13. Ask the planner how many clients they have, and how many new ones they take on. It is impossible for anyone to handle thousands of clients with a high level of personal service. Make sure you feel you will be getting excellent service and advice, and won't be just a number, in a too busy planners schedule.
And, it's true that every planner can handle a different client load. It depends on their personality, staff, resources, outside professionals, etc. Be sure to find out how they get things done, and how fast
they can respond to your needs.
Which leads to another question:
14. Which outside professionals do they bring in on cases, and when do they bring them in?
No one person can know everything about money. It is impossible. Therefore, a good planner will have one or more outside professionals they work with, such as attorneys, accountants, pension experts, mortgage brokers, and so on.
A planner who says that he "handles everything" is fine. Just make sure that he brings in outside advisors when the need arises. (And believe me, it arises every day!)
Anyone who does not have relationships with these other folks, is not going to be able to get you the best answers in a timely fashion. Someone who works with these specialists, will always know when they are in over their head in an area, and get you the right help. This is the mark of a smart planner.
We know that these are sometimes hard questions to ask, because you may feel you are going to be insulting the person.
DON'T HESITATE TO ASK THESE QUESTIONS, EVEN IF IT FEELS
UNCOMFORTABLE!
We are talking about your money here.
Being shy has no place in this process. If you feel too embarrassed to ask the questions
yourself, have a trusted friend or relative ask for you. Whatever way you get this quizzing done, just be sure to GET THE QUESTIONS ASKED AND ANSWERED!!
Why am I so insistent about this? Because getting the right help is so important! For example, did you know the government tells us that:
94% OF ALL AMERICANS WILL NOT BE ABLE TO RETIRE ON THE SAME STANDARD OF LIVING THEY HAD BEFORE THEY RETIRED! (Source- Social Security Administration)
Why is this the case? Possibly because most people spend more time planning their vacations and evenings out, then they do planning their family finances!
Vacations, for example, are planned very carefully.
When will you leave. What do you need to do before you go. What will you bring with. How will you get to the airport. What will you do when you get there. How you will get to the hotel and around town. Where you will eat. And so on.
Are you that detailed with you personal finances? Be honest now. Do you really take the time to
1. Ask for 5 references. 3 references should be current clients, and 2 references should be other professionals like an accountant or banker. There are three reasons for the professional references. First, any person in business should have at least 3 satisfied clients they can provide you with, therefore, client references alone may not be enough.
Secondly, if a planner cannot produce 2 other professionals that will attest to his ability as a financial planner, he may not be respected by his peers. And last, outside professionals in the community see all kinds of things, and will usually be aware of what kind of advice is available, and what kind of quality is provided by different folks.
2. Call the references you receive. Many people ask for references, but never use them! Call all 5 people. You can never learn too much about the person you are considering using for your major financial decisions. Take the few minutes to talk to these people. It will be worth it!
3. Ask if they charge fees for their service. No one works for free! If they are not charging fees, they must be making money from the sale of products. If they are making 100% of their income from product sales, they must sell enough to make up for the people who did not buy. If there is a price to be paid, it must be paid by either the planner or you. Which one do you think it will be?
4. If they do not charge fees, ask them how you can be sure that the advice they will provide is in your best interests. Make them tell you how they analyze a situation, and what process they go through to arrive at recommendations.
What you want to hear, is that they first find out how you feel about your money anThen, they will get a detailed understanding of your income, assets, debts, company benefits, etc. Finally, they will work up an action plan that addresses all of your concerns, and gives you choices. Choices of the different ways your concerns can be handled, with the pros and cons of each choice.
Then, and only then, will you be able to choose for yourself which way to go.
This process allows you the ability to make decisions from an educated basis, instead of from salesmanship. There is nothing wrong with being sold financial products, as long as they fit your needs, and not those of the salespeople!
5. Ask if they sell products as well as provide financial planning advice. If the planner says "yes", this should not be taken as a negative response. However, you should recognize the potential conflict of interest that exists. Although I have known several financial planners and advisors that did not let the conflict of interest influence their recommendations, those planners were a small minority. Therefore, extra caution should be exercised if the planner also sells the products he recommends.
You must ask the planner if he has any special incentives or reasons to sell you the things he is proposing. If the motivation is to get you what you need, that is fine! If you sense from the answer that there is some hidden reason, you need to move carefully.
6. If the planner sells products, ask if the products can be obtained if no plan is prepared. Buying financial products without a plan, is like having surgery without an exam. Call me crazy, but I sure wouldn't want a doctor to operate on me until he knew what was wrong with me. A doctor who performs surgery without an exam would be an idiot!
The same holds true for a financial planner who sells product without an analysis. If you take away the planning process, you are left with nothing more than a product salesman. Do not let yourself be deceived!
Now, a plan may be many things. It can be a short one pager, all the way up to a thick set of charts and graphs. And, one is not necessarily better than the other. It just depends on how detailed your needs are. Even if the written plan is short, the interview process must not be.
Garbage In: Garbage Out!
The best planning we have seen is not due to the actual written area, but because of the depth of the interview. The planner must ask about all your issues. Not just the ones he can make money on. For example, they should ask about your taxes, education funding, home financing, company benefits, insurance, estate planning, retirement goals, investments, etc.
A good planner knows how to get to know you, your goals, and your fears. If you truly feel he truly understands your emotions, as well as your finances, then you are with a real planner!
7. If the planner sells products, tell the planner you would be more comfortable implementing their strategies with someone else. Note whether the planner starts to squirm at the thought of you buying elsewhere.
If the planner tries to convince you that no one can implement their strategies as well as
he/she can, tell the planner that you will consider that fact after the plan is completed. If they have faith d finances.
in their own ability, the relationship will most likely continue. Otherwise, you have probably taken the first step towards being told that you are not a suitable client for their service.
8. If there is a fee, do not pay more than 50% of the fee in advance. Although a retainer is often requested, most professionals do not require 100% of their fee in advance. Paying the balance upon completion of the plan, assures you that the job will be finished to your satisfaction.
9. Ask about the planner's financial background. As a rule of thumb, if you have significant wealth, consider only planners that have been providing financial services for at least 5 to 10 years. (Or whatever time period you choose.) Although there may be some very good planners with less experience, why take the chance. I was once an inexperienced planner, and when I was, I got my experience working with people who were also just starting out. Select an advisor that has more financial experience than you do.
10. Receive a 100% guarantee of unconditional satisfaction. If they are so sure they can help you, they should back up that promise with an iron-clad guarantee. The benefits you receive must exceed the cost of the planning.
You are the only person that can determine the amount of help you have received. And, the benefit received can not be determined until the plan has been completed. There should be no question in your mind that you have received more benefit than cost. If not, then the fee should be adjusted. If the planner thinks he/she can provide sufficient benefit to you to justify the cost, let them say so in writing.
11. Ask them how they keep up on the constantly changing financial environment. Do they get research from their parent company? Do they attend workshops or go to classes? Are they studying for an advanced degree? Do they subscribe to financial publications other than general media? (Reading trade journals, as opposed to "Newsweek" or "The Wall Street Journal.")
Let me assure you this is an important question. there is no way on Earth anyone can be
excellent at planning unless they are excellent at obtaining up to date, accurate information!
12. Ask to see the financial strength of the companies they recommend. Not just a simple "rating," but some details about their assets, and how their debt load is set up. Ask how the company invests their own money. Do they buy US Government bonds, for example, or risky real estate?
Remember that most of the companies and banks that went under in the last few years, were loaded up with huge debts, and bad investments in junk bonds, real estate and the like. While there is nothing wrong with some debt, and some higher risk investments, THEY MUST BE REASONABLE!
Just like your mom told you, too much of a good thing is usually bad!
And, also like your mom told you, look before you leap!
13. Ask the planner how many clients they have, and how many new ones they take on. It is impossible for anyone to handle thousands of clients with a high level of personal service. Make sure you feel you will be getting excellent service and advice, and won't be just a number, in a too busy planners schedule.
And, it's true that every planner can handle a different client load. It depends on their personality, staff, resources, outside professionals, etc. Be sure to find out how they get things done, and how fast
they can respond to your needs.
Which leads to another question:
14. Which outside professionals do they bring in on cases, and when do they bring them in?
No one person can know everything about money. It is impossible. Therefore, a good planner will have one or more outside professionals they work with, such as attorneys, accountants, pension experts, mortgage brokers, and so on.
A planner who says that he "handles everything" is fine. Just make sure that he brings in outside advisors when the need arises. (And believe me, it arises every day!)
Anyone who does not have relationships with these other folks, is not going to be able to get you the best answers in a timely fashion. Someone who works with these specialists, will always know when they are in over their head in an area, and get you the right help. This is the mark of a smart planner.
We know that these are sometimes hard questions to ask, because you may feel you are going to be insulting the person.
DON'T HESITATE TO ASK THESE QUESTIONS, EVEN IF IT FEELS
UNCOMFORTABLE!
We are talking about your money here.
Being shy has no place in this process. If you feel too embarrassed to ask the questions
yourself, have a trusted friend or relative ask for you. Whatever way you get this quizzing done, just be sure to GET THE QUESTIONS ASKED AND ANSWERED!!
Why am I so insistent about this? Because getting the right help is so important! For example, did you know the government tells us that:
94% OF ALL AMERICANS WILL NOT BE ABLE TO RETIRE ON THE SAME STANDARD OF LIVING THEY HAD BEFORE THEY RETIRED! (Source- Social Security Administration)
Why is this the case? Possibly because most people spend more time planning their vacations and evenings out, then they do planning their family finances!
Vacations, for example, are planned very carefully.
When will you leave. What do you need to do before you go. What will you bring with. How will you get to the airport. What will you do when you get there. How you will get to the hotel and around town. Where you will eat. And so on.
Are you that detailed with you personal finances? Be honest now. Do you really take the time to
Estate Planning www.legacyannuities.com
" How You Can Save Thousands Of Dollars Using Living Trusts! Discover The Little Known Secrets Your Accountant And Attorney Will Never Tell You!"
How To Avoid Making The 6 Biggest Mistakes When Setting Up A Living Trust!
Let me ask you a question:
Do you really know what a living trust is? Do you really know what it does, and doesn't do?
If you're not sure, then keep listening, so you will finally know the Truth About Living Trusts!
See, there are all kinds of myths about how Living Trusts work, and what they can do for people.
Now, let me start off by telling you that Living Trusts, when set up properly, can be one of the best financial tools available! Notice that the key here, is that they must be set up correctly.
If you establish a trust arrangement, and it hasn't been done properly, it may be worse than having no trust at all!
If you discover that your trust arrangement isn't exactly right, you are fortunate in that most cases, the problems are easily fixed. If you haven't yet set up anything, then this report will provide you with the information you'll need to use as a guideline to make sure you have things done the way you want!
Before we get into all the details, I'd like to share a brief story with you, which will illustrate the points we'll be talking about in a few minutes. Bill and Sarah's story will highlight the need to understand how to use Living Trusts properly.
*******
Bill and Sarah had been married for 47 years. They met in college, when Bill was a senior, and Sarah was a sophomore. They got married as soon as Bill graduated, when he took a job as an entry level clerk in the accounting department of a giant manufacturing company.
Sarah finished college with a degree in Political Science. She was going to start law school, but decided to wait after they had their had their first baby girl, Jamie. Then, they had a son, Jerry, which delayed Sarah going to law school for several more years.
As time went by, Bill kept moving up in the financial end of the company. By the time the kids were in high school, he had moved up to first vice-president of accounting, and was making big money. His insurance benefits, and his retirement package were outstanding.
(Now, remember that this was the era when working for a large company actually meant something. Not like today, when job security is an illusion, at best.)
Anyway, after Jerry got old enough to go to Jr. High, Sarah did finally go to law school. She spent four years studying, and passed the bar the first time she took it. She then got a position with the State's Attorney's office as an assistant prosecutor. After a while, she started her own firm with an associate from the State's Attorney's office.
Now, you'd have to say that they are a very fortunate couple. They raised a great family, had emotionally and financially rewarding jobs, and a secure retirement. You could say they lived the American dream, could you not?
Now, as with any family, the last financial detail they got around to taking care of was the managing of their estate.
It's understandable how people don't want to prepare for their death. Let's face it, this is not a fun topic to discuss or address.
But, as morbid as it is, it must be discussed and addressed.
Basically, they had drawn up wills years and years ago, and had not done anything more definite since.
When Bill and Sarah both decided to retire, they realized they needed to really get their estate in order.
They called their attorney and accountant that they had used for, gosh, decades, to meet with them to discuss what they should be doing.
They met with the attorney first, and later with the accountant. (As you'll see in a minute, this was their first big mistake.)
The attorney suggested a Living Trust, combined with a will, and some testamentary trusts that would help with estate taxes down the road.
The accountant agreed that strategy was sound, and they moved ahead to get the documents signed and in place.
That was about four years ago, next month. Bill and Sarah were sure that things were taken care of. They felt the Living Trust would assure their assets would be distributed without the expense and delays of probate, and that the other wills and trusts would save big money on estate taxes.
Then, the tragedy occurred just last month. Bill and Sarah were coming home from the golf course, and were crossing the intersection that leads from the country club to the main road. A truck delivering beer to the bar, was going too fast, skidded on the slippery pavement, and crushed their car.
They were both killed instantly.
Of course, the kids and the grandchildren, and Bill's sister, and Sarah's two brothers were in a state of shock. And, as is normal, the grieving was deep and profound. There's no point in going into all of that. We all know how the family's tragic loss affected everyone emotionally.
Then there was the next disaster. The estate.
See, Bill and Sarah had used their family advisors to help them set all this up. But, they did not coordinate the tax and legal issues, and also made all kinds of assumptions that were, well, plain wrong.
Remember when I said that the fact of them meeting with the CPA separately from the attorney was a big mistake? See, the CPA assumed the attorney had addressed some critical tax issues, and the attorneys had assumed the CPA had addressed some legal issues, and well, the results of this lack of communication were simply devastating.
For example, the kids ended up having to wait almost 17 months to receive the distributions from the estate.
The legal and accounting fees ended up being over $97,000!
The estate and income taxes cost the family over $235,000!
Plus, certain wishes Bill and Sarah had, were not carried out, because the documents weren't set up to do those things.
What a mess.
I know that everyone was trying to do the right things. But, trying, and succeeding, are two very different things!
*******
Is this story so unusual? Unfortunately, the answer is no.
See, handling an estate is one of the most complex transactions you'll ever have to deal with. First of all, there is almost always a very sad emotional burden to have to deal with. And second, there is the fact that the laws and tax rules are basically a nightmare to understand and coordinate.
Our next discussion has to be the explanation of what a Living Trust is, what it is supposed to do. Then we'll move into the problems that we see so often with these trusts.
First of all, let's define a "Living Trust". A Living Trust is a document that allows you to change the ownership of certain assets to the trust. In effect, you change the owner of a stock or bond, for example, from you as an individual, to the trust as the new owner.
You're basically switching the title from personal ownership, to ownership by a trust, with you serving as trustee, in most cases. (Your spouse can serve as co-trustee as well.)
The reason these trusts are called "Living", is that they are set up to hold your assets while you are alive. This is different than a "Testamentary" trust, which only kicks in upon death.
They are also totally revocable. That means that you, as trustee, can decide to cancel the trust, or switch things around, any way you choose, without any problems.
You might be wondering why someone would transfer the ownership of their assets to a trust. Why would someone go through all this trouble, if the whole deal can be changed any time?
Well, the answer is simple in concept, yet sometimes very difficult in practice.
See, when you own an asset personally, or in joint tenancy, and you pass away, that asset becomes part of your "probate" estate. This means that the ultimate disposition of your assets is supervised by a judge. The system is designed to assure that the wishes of the deceased have been carried out properly, and that no one has messed around with those wishes.
Probate, being a public forum, has some unpleasant side effects that go with this noble effort of protecting a family's wishes:
1. The executor of the estate has to file your will at the courthouse, where it becomes public information that everyone, and anyone, can see. Some people do not like the world knowing their financial affairs.
2. The usual costs associated with probate can run anywhere from 3% to as high as 10% of the estate! These fees are usually paid to lawyers and court costs. Some people do not like wasting this much money.
3. Creditors are notified to make claims against the estate, estate tax returns have to be prepared and filed, any questions or problems with the disposition of the assets must be resolved, etc., etc. This process can take as little as nine months after the death, and is frequently much longer. Some people don't like making their family suffer through all these endless delays, especially if there is a business involved, or whatever.
So you can see that while probate has good intentions from the public's point of view, it is not very desirable for most of us. The solution? A Living Trust.
See, when you transfer your assets to the trust as the owner, here are the benefits that can be seen:
1. At the death, the trust property will either be distributed to the family, or held in trust for them, based on however the parents wanted things to be handled. All these distributions are done without any court supervision!
2. If you should become mentally or physically unable to manage your affairs, the successor trustee will take over the management responsibilities. The new trustee will not have to obtain probate court approval, or be subject to court supervision!
3. The arrangement can be amended or canceled anytime. This is not a permanent arrangement that can't be switched later on!
What the trust does, is provide for the management of your assets in the event of a lifetime disability, and substitutes for a "will" at death.
The biggest benefit of these trusts is that there are no court proceedings, expenses or delays! One time, for example, one of our clients passed away, and her entire estate of over $750,000 was distributed to all nine children and grandchildren in less than 30 days, with only $2,000 in legal fees!
Now that's all the good news. Now you can see why so many people are interested in these trusts.
But, it's time for us to look at some specific mistakes that people make when setting up their estates, particularly with Living Trusts. While these problems are the most common, they are by no means, the only ones that can come up and bite you. We just wanted to cover the most frequent problems we see on a regular basis.
1. Establishing a Living Trust, and have it do little or nothing to eliminate the probate process! This is the most common mistake I see. And, it is a huge one!
Remember that the main benefit of a Living Trust is to avoid the expenses, publicity, and delays of court supervised probate. Now, if you set up a Living Trust, and you either forget, or just don't get around to transferring some or all of the assets; those assets left out of the trust end up going through probate anyway!
Yes, I've seen people spend big money to set up a sophisticated trust arrangement, and then either pass away or become disabled before transferring assets into the trust. So what they've done, is in essence, waste a lot of time and money, without a penny of financial benefit to their family.
You cannot do this. If you bother to set this type of arrangement, please make sure to have the right people get the assets out of your name, into the name of the trust! (By the way, this transferring process needs to be guided by competent professionals!)
2. Thinking a Living Trust will save you income and estate taxes. I can't tell you how many times people come into the office and want to discuss Living Trusts, thinking they will save either income or estate taxes.
Listen. A Living Trust cannot save you one nickel in either of the two worst taxes in the world, income and estate taxes. Many people are under a major misconception that these trusts can save taxes. This simply isn't so.
There are many, many ways to save income and estate taxes with other types of set-ups. We have two other FREE reports that explain how to save thousands of dollars of income and estate taxes. I'll give you the name of those reports, and a 24 hour recorded message line to order them for FREE, at the end of this report!
So, please understand, that Living Trusts are NOT to be used as a tax planning tool!
3. The fact that a Living Trust speeds up the distribution process, is always better than going through probate!
Not always! Sometimes, there are advantages to going through probate.
We had one client who owed a lot of money. A lot of money. When she passed away, the Living Trust distributed the assets, and almost nothing went through probate. Well, under certain laws, the trust assets were still open to creditors attack, far after the estate would have been closed if it had gone through probate. So, in this case, believe it or not, this family would have been better off having the assets in the name of their mom.
Now, keep in mind, that this situation is not as uncommon as you might think. There is almost no way for you to be able to know which way to go with this sort of thing, without proper legal counsel!
4. Naming the wrong beneficiaries that are tied into the trust. Most people name their family members as beneficiaries of a trust arrangement. But, most people also have other assets, particularly retirement plans, that also have named beneficiaries.
One time last year, we got a referral from a client. This lady's husband had died, and named their Living Trust as the beneficiary of his IRA. (Which was very sizable!) Anyway, they thought that the IRA distributions that are required after age 70 1/2, would be spread out over the wife's expected lifespan.
But, they had a rude awakening when they got a notice that she had to pay $63,456 in taxes, immediately upon his death. See, there is a little known trap that makes the full IRA value taxable, when the Living Trust is named as a beneficiary. There was nothing we could do for her, because he had already passed away.
But, if you have such a beneficiary designation, you better check with a professional who can tell you how to adjust what you're doing to eliminate this horrible tax trap! DO NOT TRY TO FIX THIS YOURSELF!
5. Having a Living Trust replaces a need for a will. This is another very common, and very wrong way to think about Living Trusts!
You must have what is known as a "Pour-Over" will set up in conjunction with your trust. What this will does, is two-fold. First, it handles any assets whose titles haven't been transferred to the trust. So, if you forgot to transfer the title on a stock or whatever, it would end up being distributed through the probate process.
Also, some assets don't have a "title". Like a piece of jewelry, or a painting, etc. Personal belongings that are left to family members, pretty much have to be subject to probate, and must be included in the Pour-Over will.
The Living Trust is an additional estate planning tool, not a replacement for a will!
6. Having assets in joint tenancy eliminates the need for a Living Trust. This final misconception is a biggie.
Let's look at a real simple asset like a CD. (Although we don't think people should own too many of these, but we won't get into that now. At the end of this report, we'll give you some information on a FREE report we have on how to beat today's miserably low CD rates.)
If you own a CD in both names, as joint tenants, with the rights of survivorship, (JTWROS) you may not think you need the trust. After all, the asset will be immediately retitled into the sole name of the surviving spouse, so why bother with a trust?
While it's true that the asset will not go through probate when it's set up in JTWROS. This may be the worst way to own any asset. Not because of probate, but because of estate taxes!
See, when you own assets in JTWROS, you will completely forfeit the marital deduction on that asset. This can cause enormous additional estate taxes.
For example, one of our client's mom passed away a few months ago. Our client, her son, had no involvement with his mom's money. Well, it turned out that his folks had all their money in CD's, (first big mistake) and all of it was JTWROS. Because they had blown the marital deduction on the second spouses death, their kids had to pay just over $184,000 in estate taxes that were totally unnecessary.
If they had made a few simple changes to their planning, none of those taxes would have been paid.
Is that sad, or what?
There is another benefit to avoiding JTWROS, and putting the assets into a trust. If, for some reason, you become physically or mentally impaired, and can no longer manage your affairs, the trust will have provisions for who and how the assets will be managed.
No court appearances. No hassles.
So, in the last example, if my client's mom had become incapacitated before she got sick, she could have named her son in the trust to manage her affairs for her. He wouldn't have had to hire lawyers to apply for conservatorship, and so on.
If the CD's are held in joint tenancy, then none of these protection and tax savings opportunities exist! (Just one more reason not to have too many CD's in personal ownership!)
As you can see, a Living Trust, when used properly, is one of the best planning tools around. But, and this is the big but, they must be set up very carefully.
If you think that you might be a candidate to establish a Living Trust, or you have one and you aren't sure if it is being used to its fullest advantage, I've got a suggestion for you.
Think about all the advantages of correctly setting up a trust. Think about things like:
They are very inexpensive to set up and to manage!
They can eliminate the publicity of probate!
They can speed up the distribution of your assets by several light years!
They can save you literally thousands of dollars in legal fees and court costs!
They can provide for the simplest way to transfer the management of your assets in the event of a disability!
If used in conjunction with other types of trusts, they can save thousands and thousands of dollars in taxes! (Not by themselves, mind you, but as part of a coordinated financial plan!)
Yes, A Living Trust has no comparable tool when it comes to the benefits obtained, with total flexibility and control!
Now, in our opinion, setting up a trust arrangement, cannot be viewed in a vacuum, by itself.
There are so many aspects to establishing trusts that must be addressed at the same time.
Things like tax reduction, retirement planning, overall estate planning, education funding, charitable giving, investment analysis and planning, and so on.
In other words, setting up a trust outside the context of a sound financial plan, is like building a room, without a house to go with it!
See, we are firm believers in the fact that financial planning is the best kept secret to attaining permanent financial security!
Yes, the real secret to success is:
Planning!
Yes, planning is the single, most effective technique to get what you want out of your financial life!
It worked during Teddy Roosevelt's days, it worked during Viet Nam, and it works now!
See, the reason most of us aren't going to achieve real financial security, is that we don't follow this crucial sequence, when it comes to managing our finances:
Figure out where you are today.
Figure out where you want to be.
Get a true understanding of the options you have available to you. (Not from biased sources.)
Develop a plan that will provide the right "course" to follow.
Make the changes necessary to get the plan going.
Watch your progress, and make the proper adjustments to keep the plan "on course".
Makes a lot of sense, doesn't it?
Kind of the same process you go through every day when planning a trip to the mall, or taking the kids to practice, or going on a visit or vacation, etc.
Could you imagine how you could get through your daily life without following this sequence of events?
Could you imagine how messed up you'd be if you didn't know where you lived, what time practice was, didn't know which roads led to the practice field, didn't know where the practice was going to be held, and finally, didn't know which team your kid was on?
I know that sounds stupid, because in our day to day activities, we always know all those things!
But, can you really say the same thing about your money?
Do you truly know where you are today? Are you certain you have specific goals of where you want to be financially? Can you say that you know all the choices you have available to you?
Have you set up a plan to get where you want to be?
Or, like most of us, are you winging it as you go along???
In all the years we've been helping people win the game of money, and when studying the characteristics of families who are truly financially independent, we find one common theme.
Not their age, or occupation, or sex, or income, or any of those things.
No. The one common attribute is that they make a constant effort to plan for their future.
That's it.
It may not sound very exotic or romantic.
But it's simple, and it works.
You know, usually, the most effective things in life, are the most simple and basic. These days, with our goofy government, you need to plan for your own future, more than ever!
Make sense?
I hope so. Because this topic is very important to us, and to you.
It's important to us, because we help people plan for a living.
It's important to you, because planning may be the best weapon you'll have to make sure you live the way you want! And if you are interested in setting up, or revising a Living Trust program, you better make sure that you are getting the entire picture reviewed.
Just having someone look at part of your financial life may end up being a huge mistake. Remember Bill and Sarah? Remember how an uncoordinated process cost their family a fortune in needless expenses and taxes? Remember the people who had the trust, but didn't use it properly?
I could go on, but the point is that a planning specialist like myself can give you the proper guidance and direction you cannot get from traditional advisors like accountants and attorneys.
They are looking at a narrow, tunnel-like vision of your finances.
I am looking at everything, both financial and emotional! It's the only way to go, as far as I'm concerned!
So where do you go from here?
Well, we have two ways of introducing planning into people's lives. Both are easy, and both require no pressure or any "sales" garbage.
Another way to look at this, is that a doctor cannot help a patient until he or she does a diagnosis to see what is wrong. And then prescribe treatments based on that diagnosis. So the patient can have a "map" or a plan on how to get well.
" How You Can Save Thousands Of Dollars Using Living Trusts! Discover The Little Known Secrets Your Accountant And Attorney Will Never Tell You!"
How To Avoid Making The 6 Biggest Mistakes When Setting Up A Living Trust!
Let me ask you a question:
Do you really know what a living trust is? Do you really know what it does, and doesn't do?
If you're not sure, then keep listening, so you will finally know the Truth About Living Trusts!
See, there are all kinds of myths about how Living Trusts work, and what they can do for people.
Now, let me start off by telling you that Living Trusts, when set up properly, can be one of the best financial tools available! Notice that the key here, is that they must be set up correctly.
If you establish a trust arrangement, and it hasn't been done properly, it may be worse than having no trust at all!
If you discover that your trust arrangement isn't exactly right, you are fortunate in that most cases, the problems are easily fixed. If you haven't yet set up anything, then this report will provide you with the information you'll need to use as a guideline to make sure you have things done the way you want!
Before we get into all the details, I'd like to share a brief story with you, which will illustrate the points we'll be talking about in a few minutes. Bill and Sarah's story will highlight the need to understand how to use Living Trusts properly.
*******
Bill and Sarah had been married for 47 years. They met in college, when Bill was a senior, and Sarah was a sophomore. They got married as soon as Bill graduated, when he took a job as an entry level clerk in the accounting department of a giant manufacturing company.
Sarah finished college with a degree in Political Science. She was going to start law school, but decided to wait after they had their had their first baby girl, Jamie. Then, they had a son, Jerry, which delayed Sarah going to law school for several more years.
As time went by, Bill kept moving up in the financial end of the company. By the time the kids were in high school, he had moved up to first vice-president of accounting, and was making big money. His insurance benefits, and his retirement package were outstanding.
(Now, remember that this was the era when working for a large company actually meant something. Not like today, when job security is an illusion, at best.)
Anyway, after Jerry got old enough to go to Jr. High, Sarah did finally go to law school. She spent four years studying, and passed the bar the first time she took it. She then got a position with the State's Attorney's office as an assistant prosecutor. After a while, she started her own firm with an associate from the State's Attorney's office.
Now, you'd have to say that they are a very fortunate couple. They raised a great family, had emotionally and financially rewarding jobs, and a secure retirement. You could say they lived the American dream, could you not?
Now, as with any family, the last financial detail they got around to taking care of was the managing of their estate.
It's understandable how people don't want to prepare for their death. Let's face it, this is not a fun topic to discuss or address.
But, as morbid as it is, it must be discussed and addressed.
Basically, they had drawn up wills years and years ago, and had not done anything more definite since.
When Bill and Sarah both decided to retire, they realized they needed to really get their estate in order.
They called their attorney and accountant that they had used for, gosh, decades, to meet with them to discuss what they should be doing.
They met with the attorney first, and later with the accountant. (As you'll see in a minute, this was their first big mistake.)
The attorney suggested a Living Trust, combined with a will, and some testamentary trusts that would help with estate taxes down the road.
The accountant agreed that strategy was sound, and they moved ahead to get the documents signed and in place.
That was about four years ago, next month. Bill and Sarah were sure that things were taken care of. They felt the Living Trust would assure their assets would be distributed without the expense and delays of probate, and that the other wills and trusts would save big money on estate taxes.
Then, the tragedy occurred just last month. Bill and Sarah were coming home from the golf course, and were crossing the intersection that leads from the country club to the main road. A truck delivering beer to the bar, was going too fast, skidded on the slippery pavement, and crushed their car.
They were both killed instantly.
Of course, the kids and the grandchildren, and Bill's sister, and Sarah's two brothers were in a state of shock. And, as is normal, the grieving was deep and profound. There's no point in going into all of that. We all know how the family's tragic loss affected everyone emotionally.
Then there was the next disaster. The estate.
See, Bill and Sarah had used their family advisors to help them set all this up. But, they did not coordinate the tax and legal issues, and also made all kinds of assumptions that were, well, plain wrong.
Remember when I said that the fact of them meeting with the CPA separately from the attorney was a big mistake? See, the CPA assumed the attorney had addressed some critical tax issues, and the attorneys had assumed the CPA had addressed some legal issues, and well, the results of this lack of communication were simply devastating.
For example, the kids ended up having to wait almost 17 months to receive the distributions from the estate.
The legal and accounting fees ended up being over $97,000!
The estate and income taxes cost the family over $235,000!
Plus, certain wishes Bill and Sarah had, were not carried out, because the documents weren't set up to do those things.
What a mess.
I know that everyone was trying to do the right things. But, trying, and succeeding, are two very different things!
*******
Is this story so unusual? Unfortunately, the answer is no.
See, handling an estate is one of the most complex transactions you'll ever have to deal with. First of all, there is almost always a very sad emotional burden to have to deal with. And second, there is the fact that the laws and tax rules are basically a nightmare to understand and coordinate.
Our next discussion has to be the explanation of what a Living Trust is, what it is supposed to do. Then we'll move into the problems that we see so often with these trusts.
First of all, let's define a "Living Trust". A Living Trust is a document that allows you to change the ownership of certain assets to the trust. In effect, you change the owner of a stock or bond, for example, from you as an individual, to the trust as the new owner.
You're basically switching the title from personal ownership, to ownership by a trust, with you serving as trustee, in most cases. (Your spouse can serve as co-trustee as well.)
The reason these trusts are called "Living", is that they are set up to hold your assets while you are alive. This is different than a "Testamentary" trust, which only kicks in upon death.
They are also totally revocable. That means that you, as trustee, can decide to cancel the trust, or switch things around, any way you choose, without any problems.
You might be wondering why someone would transfer the ownership of their assets to a trust. Why would someone go through all this trouble, if the whole deal can be changed any time?
Well, the answer is simple in concept, yet sometimes very difficult in practice.
See, when you own an asset personally, or in joint tenancy, and you pass away, that asset becomes part of your "probate" estate. This means that the ultimate disposition of your assets is supervised by a judge. The system is designed to assure that the wishes of the deceased have been carried out properly, and that no one has messed around with those wishes.
Probate, being a public forum, has some unpleasant side effects that go with this noble effort of protecting a family's wishes:
1. The executor of the estate has to file your will at the courthouse, where it becomes public information that everyone, and anyone, can see. Some people do not like the world knowing their financial affairs.
2. The usual costs associated with probate can run anywhere from 3% to as high as 10% of the estate! These fees are usually paid to lawyers and court costs. Some people do not like wasting this much money.
3. Creditors are notified to make claims against the estate, estate tax returns have to be prepared and filed, any questions or problems with the disposition of the assets must be resolved, etc., etc. This process can take as little as nine months after the death, and is frequently much longer. Some people don't like making their family suffer through all these endless delays, especially if there is a business involved, or whatever.
So you can see that while probate has good intentions from the public's point of view, it is not very desirable for most of us. The solution? A Living Trust.
See, when you transfer your assets to the trust as the owner, here are the benefits that can be seen:
1. At the death, the trust property will either be distributed to the family, or held in trust for them, based on however the parents wanted things to be handled. All these distributions are done without any court supervision!
2. If you should become mentally or physically unable to manage your affairs, the successor trustee will take over the management responsibilities. The new trustee will not have to obtain probate court approval, or be subject to court supervision!
3. The arrangement can be amended or canceled anytime. This is not a permanent arrangement that can't be switched later on!
What the trust does, is provide for the management of your assets in the event of a lifetime disability, and substitutes for a "will" at death.
The biggest benefit of these trusts is that there are no court proceedings, expenses or delays! One time, for example, one of our clients passed away, and her entire estate of over $750,000 was distributed to all nine children and grandchildren in less than 30 days, with only $2,000 in legal fees!
Now that's all the good news. Now you can see why so many people are interested in these trusts.
But, it's time for us to look at some specific mistakes that people make when setting up their estates, particularly with Living Trusts. While these problems are the most common, they are by no means, the only ones that can come up and bite you. We just wanted to cover the most frequent problems we see on a regular basis.
1. Establishing a Living Trust, and have it do little or nothing to eliminate the probate process! This is the most common mistake I see. And, it is a huge one!
Remember that the main benefit of a Living Trust is to avoid the expenses, publicity, and delays of court supervised probate. Now, if you set up a Living Trust, and you either forget, or just don't get around to transferring some or all of the assets; those assets left out of the trust end up going through probate anyway!
Yes, I've seen people spend big money to set up a sophisticated trust arrangement, and then either pass away or become disabled before transferring assets into the trust. So what they've done, is in essence, waste a lot of time and money, without a penny of financial benefit to their family.
You cannot do this. If you bother to set this type of arrangement, please make sure to have the right people get the assets out of your name, into the name of the trust! (By the way, this transferring process needs to be guided by competent professionals!)
2. Thinking a Living Trust will save you income and estate taxes. I can't tell you how many times people come into the office and want to discuss Living Trusts, thinking they will save either income or estate taxes.
Listen. A Living Trust cannot save you one nickel in either of the two worst taxes in the world, income and estate taxes. Many people are under a major misconception that these trusts can save taxes. This simply isn't so.
There are many, many ways to save income and estate taxes with other types of set-ups. We have two other FREE reports that explain how to save thousands of dollars of income and estate taxes. I'll give you the name of those reports, and a 24 hour recorded message line to order them for FREE, at the end of this report!
So, please understand, that Living Trusts are NOT to be used as a tax planning tool!
3. The fact that a Living Trust speeds up the distribution process, is always better than going through probate!
Not always! Sometimes, there are advantages to going through probate.
We had one client who owed a lot of money. A lot of money. When she passed away, the Living Trust distributed the assets, and almost nothing went through probate. Well, under certain laws, the trust assets were still open to creditors attack, far after the estate would have been closed if it had gone through probate. So, in this case, believe it or not, this family would have been better off having the assets in the name of their mom.
Now, keep in mind, that this situation is not as uncommon as you might think. There is almost no way for you to be able to know which way to go with this sort of thing, without proper legal counsel!
4. Naming the wrong beneficiaries that are tied into the trust. Most people name their family members as beneficiaries of a trust arrangement. But, most people also have other assets, particularly retirement plans, that also have named beneficiaries.
One time last year, we got a referral from a client. This lady's husband had died, and named their Living Trust as the beneficiary of his IRA. (Which was very sizable!) Anyway, they thought that the IRA distributions that are required after age 70 1/2, would be spread out over the wife's expected lifespan.
But, they had a rude awakening when they got a notice that she had to pay $63,456 in taxes, immediately upon his death. See, there is a little known trap that makes the full IRA value taxable, when the Living Trust is named as a beneficiary. There was nothing we could do for her, because he had already passed away.
But, if you have such a beneficiary designation, you better check with a professional who can tell you how to adjust what you're doing to eliminate this horrible tax trap! DO NOT TRY TO FIX THIS YOURSELF!
5. Having a Living Trust replaces a need for a will. This is another very common, and very wrong way to think about Living Trusts!
You must have what is known as a "Pour-Over" will set up in conjunction with your trust. What this will does, is two-fold. First, it handles any assets whose titles haven't been transferred to the trust. So, if you forgot to transfer the title on a stock or whatever, it would end up being distributed through the probate process.
Also, some assets don't have a "title". Like a piece of jewelry, or a painting, etc. Personal belongings that are left to family members, pretty much have to be subject to probate, and must be included in the Pour-Over will.
The Living Trust is an additional estate planning tool, not a replacement for a will!
6. Having assets in joint tenancy eliminates the need for a Living Trust. This final misconception is a biggie.
Let's look at a real simple asset like a CD. (Although we don't think people should own too many of these, but we won't get into that now. At the end of this report, we'll give you some information on a FREE report we have on how to beat today's miserably low CD rates.)
If you own a CD in both names, as joint tenants, with the rights of survivorship, (JTWROS) you may not think you need the trust. After all, the asset will be immediately retitled into the sole name of the surviving spouse, so why bother with a trust?
While it's true that the asset will not go through probate when it's set up in JTWROS. This may be the worst way to own any asset. Not because of probate, but because of estate taxes!
See, when you own assets in JTWROS, you will completely forfeit the marital deduction on that asset. This can cause enormous additional estate taxes.
For example, one of our client's mom passed away a few months ago. Our client, her son, had no involvement with his mom's money. Well, it turned out that his folks had all their money in CD's, (first big mistake) and all of it was JTWROS. Because they had blown the marital deduction on the second spouses death, their kids had to pay just over $184,000 in estate taxes that were totally unnecessary.
If they had made a few simple changes to their planning, none of those taxes would have been paid.
Is that sad, or what?
There is another benefit to avoiding JTWROS, and putting the assets into a trust. If, for some reason, you become physically or mentally impaired, and can no longer manage your affairs, the trust will have provisions for who and how the assets will be managed.
No court appearances. No hassles.
So, in the last example, if my client's mom had become incapacitated before she got sick, she could have named her son in the trust to manage her affairs for her. He wouldn't have had to hire lawyers to apply for conservatorship, and so on.
If the CD's are held in joint tenancy, then none of these protection and tax savings opportunities exist! (Just one more reason not to have too many CD's in personal ownership!)
As you can see, a Living Trust, when used properly, is one of the best planning tools around. But, and this is the big but, they must be set up very carefully.
If you think that you might be a candidate to establish a Living Trust, or you have one and you aren't sure if it is being used to its fullest advantage, I've got a suggestion for you.
Think about all the advantages of correctly setting up a trust. Think about things like:
They are very inexpensive to set up and to manage!
They can eliminate the publicity of probate!
They can speed up the distribution of your assets by several light years!
They can save you literally thousands of dollars in legal fees and court costs!
They can provide for the simplest way to transfer the management of your assets in the event of a disability!
If used in conjunction with other types of trusts, they can save thousands and thousands of dollars in taxes! (Not by themselves, mind you, but as part of a coordinated financial plan!)
Yes, A Living Trust has no comparable tool when it comes to the benefits obtained, with total flexibility and control!
Now, in our opinion, setting up a trust arrangement, cannot be viewed in a vacuum, by itself.
There are so many aspects to establishing trusts that must be addressed at the same time.
Things like tax reduction, retirement planning, overall estate planning, education funding, charitable giving, investment analysis and planning, and so on.
In other words, setting up a trust outside the context of a sound financial plan, is like building a room, without a house to go with it!
See, we are firm believers in the fact that financial planning is the best kept secret to attaining permanent financial security!
Yes, the real secret to success is:
Planning!
Yes, planning is the single, most effective technique to get what you want out of your financial life!
It worked during Teddy Roosevelt's days, it worked during Viet Nam, and it works now!
See, the reason most of us aren't going to achieve real financial security, is that we don't follow this crucial sequence, when it comes to managing our finances:
Figure out where you are today.
Figure out where you want to be.
Get a true understanding of the options you have available to you. (Not from biased sources.)
Develop a plan that will provide the right "course" to follow.
Make the changes necessary to get the plan going.
Watch your progress, and make the proper adjustments to keep the plan "on course".
Makes a lot of sense, doesn't it?
Kind of the same process you go through every day when planning a trip to the mall, or taking the kids to practice, or going on a visit or vacation, etc.
Could you imagine how you could get through your daily life without following this sequence of events?
Could you imagine how messed up you'd be if you didn't know where you lived, what time practice was, didn't know which roads led to the practice field, didn't know where the practice was going to be held, and finally, didn't know which team your kid was on?
I know that sounds stupid, because in our day to day activities, we always know all those things!
But, can you really say the same thing about your money?
Do you truly know where you are today? Are you certain you have specific goals of where you want to be financially? Can you say that you know all the choices you have available to you?
Have you set up a plan to get where you want to be?
Or, like most of us, are you winging it as you go along???
In all the years we've been helping people win the game of money, and when studying the characteristics of families who are truly financially independent, we find one common theme.
Not their age, or occupation, or sex, or income, or any of those things.
No. The one common attribute is that they make a constant effort to plan for their future.
That's it.
It may not sound very exotic or romantic.
But it's simple, and it works.
You know, usually, the most effective things in life, are the most simple and basic. These days, with our goofy government, you need to plan for your own future, more than ever!
Make sense?
I hope so. Because this topic is very important to us, and to you.
It's important to us, because we help people plan for a living.
It's important to you, because planning may be the best weapon you'll have to make sure you live the way you want! And if you are interested in setting up, or revising a Living Trust program, you better make sure that you are getting the entire picture reviewed.
Just having someone look at part of your financial life may end up being a huge mistake. Remember Bill and Sarah? Remember how an uncoordinated process cost their family a fortune in needless expenses and taxes? Remember the people who had the trust, but didn't use it properly?
I could go on, but the point is that a planning specialist like myself can give you the proper guidance and direction you cannot get from traditional advisors like accountants and attorneys.
They are looking at a narrow, tunnel-like vision of your finances.
I am looking at everything, both financial and emotional! It's the only way to go, as far as I'm concerned!
So where do you go from here?
Well, we have two ways of introducing planning into people's lives. Both are easy, and both require no pressure or any "sales" garbage.
Another way to look at this, is that a doctor cannot help a patient until he or she does a diagnosis to see what is wrong. And then prescribe treatments based on that diagnosis. So the patient can have a "map" or a plan on how to get well.
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