HolSetf 06-12-178


Financial Peace for People Over 50


Bambi Holzer

John Wiley & Sons, 2000, 231 pp., ISBN 0-471-32114-1


The author is a retirement specialist, consultant to many pension and profit-sharing plans, and a senior vice president with PaineWebber.  Retirement isn’t simple and she provides advice for making your money last as long as you do.  The book gives you an overview of what you need to know.  It was published in 2000, so some details and numbers are out of date.


The first step is knowing where you stand today.  How much are you worth?  Add up everything you own and subtract everything you owe.  What’s left is your net worth. It is also important to know what you know. (8) 


Gather all your important papers, including: bank statements, stock certificates, retirement account statements, tax returns, safe deposit box information, house deed, insurance policies, contact info for your financial advisors, family tree, current will or trust, powers of attorney, birth certificates, passports, adoption documents, military records, marriage certificate, etc.  (10)


“Gather up your last twelve months’ worth of bank statements, bills, and canceled checks and add up how much you earned and how much you spent.” (11)


“Estimating expenses [for retirement] is not an exact science, but when it comes to knowing your retirement income needs, a guess is better than no clue at all.” (30)


Estimate retirement expenses using today’s dollars.  It’s easier.  But redo your projected retirement expense budget every year and watch the inflation rate and adjust your investments accordingly.  “Inflation is impossible to predict, but it’s deadly to ignore….” (32)


Your retirement budget may include: (p. 32 ff)

«       Housing – prop taxes, insurance, repairs, furnishings, appliances

«       Food – groceries and meals out

«       Transportation – car payments, insurance, gas & oil, repairs, parking, tolls

«       Medical – insurance, bills, prescriptions, glasses, etc.

«       Clothing/Personal – clothes, shoes, cosmetics, hair do’s, dry cleaning

«       Recreation/Travel/Education – hobbies, travel, entertainment, classes, gifts

«       Debt payments – personal loans, credit cards

«       Charity/Support of Relatives

«       Insurance – life, disability, long-term care

«       Income Taxes

«       Savings


“A thousand dollars a month, invested at 10 percent, will grow to $400,000 in fifteen years.” (43) [You can see this was written in 1999! dlm]  Pay close attention to how your savings are invested.  Percentage points add up.


If you invest $1,000/mo. at 6%, it will grow to $69,770 in five years. (45)


“If you work for an employer who offers a 401(k) or 403(b) plan, you can contribute part of your salary to your own retirement account….  …contribute the maximum you’re allowed….” (46)


“Think of your retirement bucket as having two components: the money you put in and the money you get through investment returns.  When you first start filling the bucket, most of the contents will consist primarily of your own contributions.  Later your investment earnings will build up and soon take on a life of their own, generating earnings on top of earnings and growing of their own momentum.” (48)


“Interest income is usually stated as a percentage of the amount invested and is usually an annual rate….”  When investing note whether the interest rate is fixed or can change. (51)


“Dividends are checks you receive when you own shares of stock.  Maybe.” “Unlike interest income…dividends can—and often do—increase.”  “Certain stocks are recognized as dividend-paying stocks…” (51)  The dividend yield is the dollar amount of the dividend per share divided by the price per share. (52)


“Capital gains are what you get when you buy low and sell high.” “But capital gains are a shot in the dark….” (52)


“The Treasury bill rate is the benchmark for risk-free returns.”  “Because they are risk-free, U.S. Treasury bills pay fairly low returns, about the rate of inflation.  “When you’re investing for retirement, you want your investment returns to exceed the rate of inflation by a pretty good margin to cover rising income needs during retirement.  Thus you must move beyond the realm of risk-free investing and consider investments offering the potential for higher returns.” (55)


Historical returns tell you nothing about the future.  And they can be misleading.  (55)


Mutual funds often state their distributions as dividends, even though the investment returns are derived from capital gains.  (57)


“Bond prices are affected by interest rates.” (57)  “Most people buy bonds with the intention of holding them to maturity and therefore need not be concerned with daily price fluctuations.” (58)


Regarding stock prices, keep your eyes on the more distant future and don’t let daily price fluctuations drive you crazy. (58)


“Mutual funds are simply a vehicle for investing in stocks and/or bonds.”  Look at what the fund invests in. (58)  Take any historical data with a grain of salt. (59)


Four steps for managing your investments:

1.      Determine your investor profile.  Explore your goals, time frame, income needs and risk tolerance.  Your goal is probably to have enough assets to generate income for your lifetime. (63)

2.      Develop an asset allocation plan, i.e. decide where to invest, first by category like stocks, bonds, cash, real estate, gold.  Diversify by investing in more than one category. (66)  “Stocks are for growth, bonds are for stability.” (68)  Then move to subcategories.

3.      Choose specific investments.  You can buy a selection of mutual funds instead of individual stocks and bonds.  (71)

4.      Monitor and manage your portfolio.  Check it often enough to keep tabs on it (like quarterly).  Do a complete analysis annually.  See how much you are ahead or behind.  Compare your returns to anticipated returns. (72)


Watch the taxes.  Identify which investments are taxable (Retirement accounts are not taxable until the money is withdrawn.).  Determine your tax bracket.  If you are 28% or higher, look for tax-saving investment strategies such as tax-deferred annuities, municipal bonds, tax-advantaged mutual funds, or postpone capital gains by not selling. (73-4)


“In general, it’s wise to draw from regular taxable accounts first and leave IRAs and other retirement plans alone so you can let tax-deferred earnings grow as long as possible.” (79)


“One way is to liquidate enough stocks and bonds to provide three to five years’ worth of income and place the proceeds in a money market fund.  Then you write yourself a check every month, or whenever you need funds.”  Or set up a systematic withdrawal plan. (79-80)


It may be advantageous to delay drawing Social Security.  The later you wait, the more your check will be, up to age 70.  For those born in 1942, the rate increases by 7.5% per year. (91)  You should still sign up for Medicare three months prior to age 65.  (91-2)


Up to age 70, if you earn more than the earnings limitation, Social Security will reduce your benefits by a dollar for each $1.00 or $2.00 (depending on your age) that you earn over the limit.  Between ages 65 and 69 you can earn up to $15,500 (in 1999) with no cut in benefits. (92) 


Do you take your pension in a lump sum or as a regular check in the form of an annuity?  If you take it in a lump sum, into an IRA roll-over account, you have control of the money; with a little more risk you can invest it at a better rate than an annuity; if you change your mind you can buy an annuity.  A retirement annuity usually doesn’t have cost of living adjustments.  It pays as long as you live and that can be advantageous if you outlive the actuary predictions, but if you die early, the payments stop and your heirs get none of it (unless it is a joint-and-survivor annuity).  (106-07)


Annuities are good investment vehicles for older people, providing tax-deferred compounding.  But annuitizing, a form of annuity that converts your capital into a life-long income stream, requires you to give up all your money in exchange for the promise of lifetime income.  Bambi doesn’t like that. (108)


“The easiest way to put off paying taxes on your lump-sum distribution is not to ever get your hands on it, but rather let it pass right over your head into an IRA rollover account.” (109)  Get the account set up in advance so you can tell your company where to send the check. (111)  Use a trusted institution to serve as your IRA custodian. 


Think about how you will invest the assets.  Open a self-directed IRA account at a brokerage firm.  You can buy individual stocks and bonds and choose from many mutual funds and move your money around all you want.  (112)


“Getting your hands on your money is never a problem with an IRA.”  “It’s the tax (and possible penalty) consequences of that little transaction that you need to be concerned about.  After the custodian issues you a check, it will report the disbursement to the IRS.  The IRS will then be watching for it on your tax return.” (113) “If you are between the ages of 59 1/2 and 70 1/2, there are no restrictions on taking money out of your IRA.”  “When you reach age 70 1/2, you have to start paying taxes by withdrawing a specified minimum amount from your IRA each year and declaring that income on your tax return.” The penalty is significant if you don’t so make sure you do. (115) 


“On January 1 of the year you turn 70 ½, you need to start thinking about taking your first minimum mandatory distribution.  You actually have until April 1 of the following year…before you have to take the money out of the account.”  But you want to take it before Dec 31 or you will end up taking two taxable distributions in one year.  (116)  Figuring out how much you have to take out is complicated – but you have to find out.  It is quite important whom you name as beneficiary because age factors into it (119)


Change the beneficiary whenever it is appropriate because of death, divorce, birth, etc. (122)


You can contribute $2,000 a year to an IRA as long as you have at least that much earned income. (122) [Has that changed since 1999? dlm]  “Contribute to a regular IRA if you think your tax bracket will go down.” “Contribute to a Roth IRA if you think your tax bracket will go up…”  (In a Roth IRA, you forego the tax deduction at the beginning but get tax free withdrawals later on.) (123)


Your tax bill could be higher after you retire if your income goes up and you have fewer deductions. (150)


Tax Free Income you don’t need to report includes gifts and inheritances, and life insurance proceeds received after a death. (153)  Income that may be taxable includes Social Security benefits, state and local income tax refunds.  (154) 


“Contributions to IRAs and retirement plans are ‘expenses’ you pay to yourself.  In other words, you get to deduct them from your income for tax purposes, but the money is really yours to keep.” (155)


“Your marginal tax rate—also referred to as your tax bracket—is the most helpful piece of information you can have when doing tax planning.  It tells you what percentage of your last dollar of income will be paid out in taxes.  This, in turn, allows you to evaluate the wisdom of various financial strategies.  For example, let’s say you are married, file a joint return, and your taxable income during retirement is $30,000.  That puts you in the 15 percent tax bracket.” (157)


“Social Security benefits are normally not taxable, unless your combined income is over a certain amount.”  Combined income…is the sum of your adjusted gross income plus any nontaxable interest income (such as interest from municipal bonds) plus one-half of your Social Security benefits.” (160)


“The important thing to remember about capital gains is not just that you pay less tax if you hold the asset at least a year but that you are not taxed at all until you sell it.” (162)  “Interest and dividends are taxed at your regular income tax rate.” (162) 


“The biggest advantage to buying long-term care insurance is the obvious: It may prevent you from having to drain the family assets if you or a spouse or a parent ends up spending years in a nursing home….  The biggest drawback is that you could run out of coverage, end up draining your assets, and have to go on Medicaid anyway—after paying thousands of dollars in premiums to the insurance premium.”  “We recommend that you open family dialogue about it, gather information on long-term care policies (from the big, financially strong insurance companies only!), and give the matter serious consideration.” (174-75)


“The thing that has the most dramatic impact on the cost of [auto] insurance is the value of your car.  Drive an old clunker and you’ll pay next to nothing in insurance.  (Be sure to cancel the collision and comprehensive; they’re not worth it on an old car.)” (180)


“Design your own Personal Price Index…so you can keep track of your own inflation.”  “Start a notebook that lists the prices you are accustomed to paying for things.”  “Log everything you buy, or a representative sampling…such as groceries, electricity, car insurance, meals out….”  When goods go up, your notebook will show you.  Otherwise you may not notice.  Keep track of all your expenditures and categorize them.  At the end of each year add them up in each category.  The first year will be your baseline index.  Compare each year.  Watch the changes.  Keep aware of the balance of expenses and income year by year. (189)


Re Health.  “But a big part of retirement planning is contemplating the worst so you can prepare for it and put it behind you.” (195)


Issues to consider regarding your funeral: Buried or cremated? What kind of casket?  Formal service or informal? In church or elsewhere?  Who will conduct the service?  Music?  Donations to a charity in lieu of flowers? (203)


“Assets that are not part of your estate are not taxed, so the more you can get rid of before you die, the less tax your heirs will have to pay.” (206)  “By giving property away during your lifetime, you can make darn sure that the person you want to get it gets it.” (210)


“You can…give away $10,000 a year [I think it is higher now. dlm] to as many people as you wish—your spouse can do the same for a total of $20,000 a year—without any gift or estate tax liability.  Annual $10,000 gift-giving is a popular estate planning strategy among wealthy people….” (210)


The family.  “When you lay everything out on the table, you have an opportunity to resolve questions and concerns that had been lying just below the surface and which, if not addressed, really could strain family relations.”  “The keys to merging family and money are honesty and love.  When you talk about finances with family members, do it in a loving way and make it clear that your motives are unselfish.” (219)


“And start talking to your grandchildren about finances.  Teach them how to handle money, and share some of the lessons you’ve learned about saving, investing, and smart spending.”  (219) [And giving! dlm]


“Make a list of everything you have and where it is.  Keep the list in a safe place and tell at least one person in your family where the list can be found should you be found…”  Include who’s in charge, information about wills and trusts, assets and liabilities, important instructions. (220)


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