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
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
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