Control Your Retirement Destiny

Chapter 10 – “Health Care”

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 10 of the 2^nd edition of the book titled, “Health Care.”

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

 

Chapter 10 – Podcast Script

Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that provides a step by step plan on what to do as you transition into retirement.

This podcast covers the material in Chapter 10, on managing health care costs in retirement.

If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

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When it comes to health care costs in retirement, the media scares us with big numbers. One common statistic you see is the lump sum cost for health care for a couple age 65 and older.

For example, the Fidelity Retiree Health Care Cost Estimate is frequently quoted by the media. It says an average retired couple, age 65 in 2018, will need approximately $280,000 saved (after taxes) to cover health care expenses in retirement. This sounds scary, but it is almost the same price tag that is quoted as the average cost to raise a child. Most parents don’t have $280,000 sitting in an account when they have a baby, yet they still manage. Health care costs are similar.

Let’s look at these expenses annually instead of as a lump sum. $280,000 over 25 years is $11,200 per year, or $5,600 each. When you think of it this way, it becomes a manageable expense that you can plan for.

However, this expense does not occur evenly, like a car payment. Instead, the expenses vary depending on what phase you are in. The more you understand what to expect, and how the expenses vary, the better of you’ll be.

There are four key areas of planning for health care costs that I’ll cover in this podcast.

First, Medicare, which begins at age 65 for most people.
Second, the gap years, which occur if you retire prior to age 65 and don’t have any employer provided coverage to bridge the gap until age 65.
Third, I’ll talk about one of my favorite savings vehicles, the Health Savings Account.
And the last thing I’ll cover will be long term care costs.

Let’s start with Medicare. If you’ve worked in the U.S. long enough to qualify (which is 10 years or 40 calendar quarters of covered work), then you become eligible for Medicare at age 65. Medicare has four parts; Parts A, B, C and D.

Medicare Part A begins at age 65 and is free. Part A is the foundation of the Medicare program and is often referred to as hospital insurance.

Medicare Part B is next, and it is not free. It covers additional services, some medical supplies and some preventative services. You pay a monthly premium for Part B. The amount is announced annually.

In 2019, the basic Medicare Part B premium is $135 per month. However, this premium is means tested -so if you have a higher income, you may pay more. Those with the highest incomes pay $460 a month instead of the $135. I’ll cover this means testing in more detail in just a few minutes.

Medicare Part D refers to prescription drug coverage that you can add to your basic Medicare Part A and B benefits. As with Medicare Part B, high-income folks pay more. In 2019, the base premium is $33 a month, and the highest income households pay $77 a month.

If you add up what is covered in Parts A, B and D, you’ll find there are gaps in coverage. On average, Medicare covers about 50% of your total health care costs. Most people purchase what is called a Medigap or Medicare Supplement plan, which wraps around Original Medicare and helps cover these gaps.

A few years ago, a second option became available. This is what is sometimes called Medicare Part C or a Medicare Advantage Plan. It is private insurance that provides coverage in a single plan that includes Parts A and B, and may also include Part D. Some Medicare Advantage plans also include extra services like vision, dental, and hearing.

Currently, you must choose between either a Medicare Advantage plan or Original Medicare augmented with a Medicare Supplement policy.

You will start receiving information about Medicare six months before your 65th birthday. Most people enroll as soon as they are eligible. But what do you do if you are still working at age 65 and have insurance through your employer?

Then, it depends on the size of your employer. In general, if your employer has less than 20 employees, Medicare will become your primary insurance, even if you are still working. You will typically enroll in Parts A & B.

If you employer has over 20 employees, Medicare is often the secondary insurance. Usually you enroll in Part A, but may be able to delay Part B. And possibly delay Part D depending on the drug coverage provided.

It’s important go get this right, because if you were supposed to enroll in Medicare, but don’t do it in time, a penalty can apply. The penalty for not enrolling in Part A on time is temporary, but the penalty for not enrolling in Part B can mean you pay a higher Part B premium for the rest of your life.

We encourage people to talk to their current health insurance provider and consult with an independent agent to discuss options as they near age 65.

For those of you who with higher incomes, I am going to spend a few more minutes on the Medicare Part B and D means testing. This premium adjustment for higher income tax filers is called IRMAA or the Income Related Monthly Adjustment Amount. Medicare estimates that IRMAA results in increased premiums for about 5% of the population.

Means testing begins when your modified adjusted gross income exceeds $85,000 for single filers, or $170,000 for married filers. These limits are fixed and do not adjust up with inflation. The final premium amount is determined based on your income; the more income, the higher the premium.

Those with the highest incomes, over $500k for singles or $750k for marrieds, pay $460 a month instead of the $135 base amount.

These IRMAA premiums are determined by looking at your tax return two years prior. If you’re age 65 in 2019, they’ll be looking at your 2017 tax return. But what if your income was much higher two years ago than it is now?

We come across these situations on a regular basis. I’ll share two of them. The first is a married retired doctor and the second a single veterinarian. In both cases, they are over age 65, and their income is much lower now than it was two years ago.

We suggested each person file for a reconsideration of IRMAA. There are seven reasons you can request a lower IRMAA premium and retirement, or working less hours, is one of those seven reasons.

For our retired married doctor this may save them over $5,000 this year. For the veterinary, perhaps $1,000 - $2,000 in savings.

How do you go about paying your Part B premiums?

If you are not yet receiving Social Security, then you receive a quarterly invoice for your Part B & D premiums. Once you begin Social Security, Part B & D premiums are deducted from your monthly Social Security check.

I’ve now covered the basics on Medicare. Overall, when you go right from employer provided coverage to Medicare, the transition is not too difficult. But what about those of you who plan to retire before age 65?

You need to plan for the gap years.

The gap years occur when you retire before age 65 and have no employer sponsored health coverage. Coverage during this time period can be expensive.

Take the case of Doug and Beth as an example.

Doug worked for a construction firm and had planned on working until age 65. He was forced into retirement a few years early, at 62, when the economy took a dive. His wife, Beth, was about eight years younger, and had no plans to retire in the near future.

With a little rearranging, and through Doug’s use of extended unemployment benefits, their plan absorbed the change. To my surprise, a year later they came in to see if they might find a way for Beth to retire as soon as possible.

Beth explained that her take-home pay was only about $1,400 a month and that if she started her pension at age 55, the pension would be $1,300 per month. “What is the point of continuing to work?” she asked.

On the surface, her logic made sense, until I explained to them the cost of health insurance. Beth was paying only $54 a month for health coverage; her employer was paying the rest of the premium. Once retired, as neither she nor Doug was yet Medicare age, equivalent health insurance for the two of them would run $1,400 a month. When we factored in benefits, Beth’s job was paying her twice what she had thought.

If your employer provides health insurance, it is likely subsidizing the cost, and you may have no idea how expensive it can be if you leave the workforce.

When you leave your employer, you have COBRA coverage available for up to 18 months, so if you retire at 63 and a half, that will get you to Medicare-age. Premiums in the $700 - $1,000 per person per month range are common on COBRA, so plan for this in your budget.

If you are younger, and you’ll need to cover health care without COBRA, you’ll need to buy insurance from the marketplace exchange. Premiums depend on where you are located and what type of plan you choose. There are four plan types; Bronze, Silver, Gold and Platinum.

If you are healthy, the Bronze plan may be your best bet. It offers the lowest monthly premium, but the insurance company pays only 60% of your health care costs. If a health issue shows up, this plan can get expensive quickly. If you have known health issues you can opt for a Platinum plan. You’ll pay a larger monthly premium, but the insurance company then covers 90% of your costs.

In Arizona, where the insurance options for marketplace plans have been limited, I have frequently seen premiums in the $1,000 to $1,400 per month per person range. That means a couple could be spending $30,000 a year on health insurance. To me, this sounds astronomically expensive.

There is a health care tax credit that is designed to help offset these premiums. Eligibility depends on your Modified Adjusted Gross Income (or MAGI). In 2018 singles with MAGI of less than about $48,000, or marrieds with just under $65,000 of MAGI qualified. Although you may instantly think you wouldn’t qualify for this credit, don’t be quick to jump to conclusions.

Health care tax credits are not just for lower net worth households – in many cases qualifying for a tax credit is about planning. Take the case of Jason and Mary. They have over $2 million in financial assets, and a paid off home. They retired in their early 60’s and have a comfortable amount of cash flow coming in, which for them is about $7,000 a month. That is $84,000 a year - but not all of it counts as Modified Adjusted Gross Income. Cash flow does not always equal what shows up on a tax return. With careful planning, we’ve kept them eligible for the health care tax credit for the last three years, saving them almost $20,000 a year in premiums.

We were able keep their Adjusted Gross Income low by making the portfolio tax-efficient and being careful about how much in capital gains we realized each year. In addition, each year, we were able to decide if needed funds should come from a Roth IRA or brokerage accounts to minimize what would show up on their tax return. In these gap years, this kind of planning can really pay off.

We’ve talked about a few cases where covering the gap years was expensive. On the flip side, I have one client who worked for a Fortune 500 company and retired in his late 50s. His employer provided retiree coverage for the gap years, and he pays less than $5,000 a year for he and his wife. Then at 65, they’ll transition on to Medicare. Unfortunately, these plans on rare. If you have one, count yourself lucky.

The important thing about planning for the gap years is making sure you have estimated the cost, and have a plan in place to cover it.

Next, let’s talk about one of my favorite savings vehicles, the Health Savings Account or HSA.

An HSA can be a great tool to use to help you prepare for the gap years.

I love HSAs because when used correctly, you get a deduction when you put the money in, and the funds are tax-free when they come out. This is unheard of! From a tax standpoint, it is one of the best deals out there.

To establish an HSA, you must have a high deductible plan that is labeled as eligible to use with an HSA.

The basic premise is that you lower your insurance premiums by choosing a high deductible plan. Since you are paying a lower premium you contribute your monthly savings on a tax-deductible basis to the health savings account.

You can use the funds in the HSA any time for eligible medical expenses on a tax-free basis. An eligible or qualified medical expense includes things like:
Co-pays and expenses that apply to your deductible
Dental care
Vision care
Prescriptions
And even over-the-counter medications if prescribed by your doctor
Certain types of medical equipment can also count
Accessing your HSA funds for medical expenses is easy. I have an HSA account that comes with a debit card. When I incur medical expenses, I could use that debit card to pay for these expenses directly from my HSA account with tax-free dollars. Instead, I choose to pay for expenses out-of-pocket so my HSA can accumulate for use in my retirement years.

This works well because the funds grow tax free - by letting it grow you get more tax-free growth to use later.

And, as you probably know, health care expense can occur suddenly and in lumpy amounts. Having a larger HSA balance to draw out of tax free for these lumpy expenses makes a lot of sense.

And, HSA funds can be used to pay premiums under COBRA, premiums for a tax-qualified long-term care insurance policy, and to pay your Medicare Part B & D premiums in retirement.

The only downside to an HSA is that you can’t put more in them. As with an IRA, there is a maximum allowable contribution. In 2019, the maximum contribution a single tax filer can make is $3,500 (plus an additional $1,000 catch-up if you’re age 55 or older). And for a family plan the maximum contribution is $7,000 – or up to $9,000 if you and your spouse are both over age 55.

One key difference between HSAs and IRAs is the early-withdrawal penalty. With an HSA, a 20% penalty tax applies for early withdrawals if they are not used for medical reasons. For HSAs, an early withdrawal is defined as one that occurs before age 65. For IRAs it is a 10% penalty tax for early withdrawals, and an early withdrawal is one that occurs before age 59½.

In conclusion, I call HSAs one of the two superhero retirement accounts. The other is the Roth IRA, which is beyond the scope of what I can cover today.

The last topic for today is long term care.
Long-Term Care

Let me tell you a story about John and Kathy that helps illustrate how long-term care needs work. John and Cathy were in their 70s when they were referred to me by their accountant. They had been married over 50 years, and they brought a smile to my face every time they came in, often still holding hands.

As they reached their early 80s, I will never forget them sitting in my conference room one day, sharing with me their heartfelt thoughts on living and on dying. John was fighting a round of skin cancer, and Cathy had Parkinson’s.

John said, “We’ve had a wonderful life. Our children are grown and doing well. Now, we’re ready to go. Trips to the doctor and medications. Who wants all that? We’re ready to go.”

John had a stroke a year later and passed away quickly.

I went to visit Cathy numerous times and eventually met all their children. She was weak and frail and I honestly didn’t think she’d make it more than a year past John’s passing. But slowly a sparkle returned to her eye, and her strength returned. We would talk over a glass of wine, and I would gain the most marvelous insights from this amazing 84-year-old woman.

Although Cathy’s strength grew and she was healthy and alert, she needed assistance around the home. Her long-term care policy covered in-home care, so she had a helper who came each day from about 10 to 2 to prepare meals, clean, do, laundry, run errands, help Cathy with bathing and so on. Although we think of long-term care needs as being confined to a nursing home, Cathy’s situation is quite common, and in-home care is an important feature offered by most long-term care insurance policies today.

Contrast Cathy’s situation with that of my grandpa. In 2012, I flew to Des Moines, Iowa, for a family reunion put together in honor of my grandpa’s 90th birthday. Grandpa’s short-term memory loss had started to result in things like the stove being left on and forgotten medications. This was my first time to visit him in the care facility the family had located for him.

It was a nice place with spacious, living room–like gathering areas, and Grandpa expressed that he was happy there. There were security codes with a double door system to get in and out, and although I realize they are needed for his protection, it was still odd, almost as if we start in a playpen and one day we end up back in one again.

Grandpa knew who I was, but other parts of his memory were jumbled up a bit. Other than memory loss, though, he was quite healthy. He spent many years in this care facility before passing away. Grandma had passed away many years prior, so all of Grandpa’s income and assets were able to be used to support his care. If Grandpa still had a spouse at home, though, the financial strain of the situation would have been substantial.

You do not know what the future may bring. Will you, like John, go quickly of a stroke, never needing any form of long-term care? Or maybe, like Cathy, you’ll need in-home care? Or will you, like my grandpa, need many years in a full-care facility? And how will such care needs be financed?

If you have no insurance, you spend your own funds and assets and eventually if you run out of assets you go on Medicaid. Each state has its own limits on how much income or assets you or your spouse are allowed to retain before becoming eligible for Medicaid. It’s not much that you’re allowed to keep.

Or you can shift some of the financial risk by buying a long-term care insurance policy. From my own observations in working with retirees, it seems most people who can afford long-term care insurance find that having it brings them great peace of mind.

In our planning process, we use the median length of stay of five years in a full care facility and test to see if you have enough assets to cover this expense. For example, at $200 a day, in today’s dollars, a five year stay in a care facility runs bout $365,000. If your plan could sustain this expense, you may not need insurance coverage.

However, the insurance offers other benefits. Those with insurance will often opt for better quality care. It can also make the decision easier on a spouse if they know there are insurance funds to help cover the cost.

We recommend people get quotes, evaluate the risk and make an informed choice on how they want to handle the potential risk of a long-term care expense.

We’ve now covered Medicare, including Parts A, B, C and D, and you’ve learned that higher income families may pay more for their Part B & D premiums. You’ve also learned the Medicare will not cover all your expenses and so you’ll need a Supplement policy or Medicare Advantage plan.

If you’re planning on retiring early, you know you’ll need to budget for the gap years. You’ve also learned about HSA accounts and how they can be used to save for the gap years. And, you have some insight into the various ways long term care expenses can occur, and how you can pay for them.

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Thank you for taking the time to listen today.

Chapter 10 of Control Your Retirement Destiny provides additional examples, and links to many online references that are useful as you are planning for health care costs. Visit amazon.com to get a copy in either electronic or hard copy format.

You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.

 

 

Chapter 11 – “Working Before & During Retirement - Your Human Capital”

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 11 of the 2^nd edition of the book titled, “Working Before & During Retirement - Your Human Capital.”

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

 

Chapter 11 – Podcast Script

Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers the numerous decisions you need to make as you plan for a transition into retirement.

This podcast covers the material in Chapter 11, on your human capital - your ability to earn a living.

If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

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What is the biggest asset you have? Most of you will likely answer your home, or maybe your IRA or 401k account. If you’re a business owner, perhaps it’s your business that comes to mind.

This might be the correct answer, if you are about to retire, but what if you’re still 5 to 10 years away from retirement, or thinking about partial retirement? Your biggest asset could be your ability to earn income.

This is what we call your Human Capital. Traditional financial planning often ignores this important and valuable asset.

On Twitter, one podcaster who goes by the Twitter handle of “@ferventfinance” wrote that “95% of discussions, books, and articles on the topic of finances concentrate on budgeting, investing, and debt repayment. Yet, the one thing that will probably move the needle the most is increasing income.”

People are often surprised when we show them that the value of their future earnings can be in the millions. Even part-time work can be worth a lot.

Take the case of Marian, age 59. She works in IT with a stable job and a $140,000 per year salary that goes up with inflation like clockwork. To maintain affordable health care insurance, she plans to work to her 65th birthday. When you factor in the employer contributions to her retirement plan, and the health care benefits for her and her spouse, her remaining 6.5 years of work are worth a million dollars. Their total financial assets are $1.7 million, and their home equity is about $750,000. Her remaining human capital is a big asset. In percentage terms, it’s about 40% of their total net worth.

You would not be quick to walk away from a million-dollar account. Yet, some people walk away from a job without realizing the value of that asset. Once you walk away, in many careers, it can be difficult to get back in at the same level.

That means you want to give some thought to what retirement really means to you. For example, I have a client who is a CPA, in his mid-50’s, who asked me one day, “Dana, do you have clients who actually retire… and enjoy it?” He loves the business he has built and the challenges that come with growing a business. It’s hard for him to imagine getting up and not going to work each day.

I chuckled when he asked this question. Because, yes, I have many clients who retire and enjoy it. And a few who retire and end up back at work within a year because they found it so unenjoyable. Before you retire, you have to give thought to what makes you tick.

In this podcast episode, I’ll offer two different views on how you might think about, and use, your human capital. There is the “mercenary approach,” and the “thrive approach”. Then I’ll cover a few stories to help you figure out what retirement means to you. And I’ll wrap up with two tips on what to be aware of if you do work part-time in retirement.

I’ll start with the mercenary approach. This is about providing your time to the highest bidder.

I took the phrase “mercenary approach” from the book Die Broke, originally written in 1998 by authors Stephen Pollan and Mark Levine. I believe updated versions of the book are available. I read their original book a long time ago, and their concept stuck with me. In the book they suggest you maximize your career potential by going to wherever you can earn the most. Then you save as much as you can. In their book, if you follow their approach you slowly convert your savings into annuities to provide guaranteed income in retirement that replaces your earned income. I think this approach is interesting, and, no doubt, it may work for some.

It means potentially choosing work that is not fulfilling, in order to focus your human capital efforts to accomplish a maximum return on time invested.

This mercenary-like approach can be combined with an extremely downsized lifestyle to reach retirement far more quickly than you may think. This approach is currently referred to as the “FIRE” movement, F-I-R-E, which stands for Financial Independence Retire Early. Many blogs such as Early Retirement Extreme and Mr. Money Mustache cover this concept.

If your goal is to get out of traditional work as quickly as possible, following the FIRE movement makes sense. Financial independence can be achieved in a far shorter time period than you may think, but it requires sacrifice. The advantage is that once you reach financial independence, you then have the freedom to choose what type of work you might want to do—if you want to work at all.

Another version of the mercenary approach involves people who take high paying jobs overseas, or high-risk jobs on oil rigs, or in places like Alaska. Some workers choose this as a strategy. They want to make as much as possible as quickly as possible and then later on plan to “settle down” to a more normal life after hitting a specific financial target. Some might take on such a role for a year – others for five to ten years.

A more moderate approach is to spend time figuring out what academic programs, credentials, or certifications will help boost your income. Evaluate the financial cost of any program against the potential increase in income you might expect, and make sure you talk to many people in your industry to find out whether they think additional education will actually translate into increased income.

I went through this process in considering the CFA (Chartered Financial Analyst) designation. This is a designation held by many investment analysts, mutual fund managers, and institutional money managers. I am interested in the designation even to this day, but it involves a significant time commitment. The industry leaders I spoke with said that for the career path I was choosing, they did not think it was necessary for me. I listened, and instead, I have chosen other designations, such as the Retirement Management Advisor designation, that more directly correlate with the work that I do and the direction of my firm.

Overall, when I consider the mercenary approach and the FIRE movement, I respect it, but I don’t personally resonate with it. I prefer the thought of a life well-worked, which for me, means I need work that I thrive on. That takes us to the thrive approach.
The thrive approach is about finding work you love.
You start by figuring out what makes you tick and what type of work puts you “in the zone”. When you find a niche you thrive in, it changes everything. If you enjoy what you are doing, you are likely to work longer, and it won’t feel like work.

How do you find work you love? I’ve done all kinds of things. Career counseling, coaching, and online assessment tools to name a few. I want to share two big breakthroughs that I had.

The first was a coaching process called Rediscover Your Mojo designed by executive coach Lisa Stefan-Martin.

Lisa is one of my best friends, and she was my roommate for three years. So I had the benefit of daily executive level coaching conversations. Then, I went through her formal Rediscover Your Mojo process while it was in the design stage. At the time, I was frustrated with the direction of my business. I was looking for answers and hoping she could help me find them. To my surprise, what I got out of the process were valuable insights that have profoundly affected the way I operate on a daily basis. Professional coaching changed the way I make decisions. I didn’t get a nice neat “answer” about a career decision; instead I got tuned in to my internal compass. Now, it is far easier for me to find my own answers to tough decisions. I’ve worked with several coaches over my career, and I highly recommend it.

My second huge breakthrough occurred in 2010. I stopped trying to be like other people and started being who I was. And a funny thing happened: work no longer felt like work. Instead, each day it felt like I got to go play. Sure, there were tasks that I had to do that I didn’t love. It wasn’t completely Goldilocks. But it was different.

I owe the difference to the Kolbe A Index assessment tool. At the time I discovered Kolbe, I was struggling with one of my associates at work. I always had ideas and wanted to figure out how to do things more efficiently. I liked to follow the latest trends in financial planning and test out new software packages. My associate had more of the “if it ain’t broke, don’t fix it” mentality. One day, he said something to me along the lines of, “Why can’t you just be happy and leave well enough alone?” I thought about that for a while and wondered, “Well, why can’t I? Is something wrong with me?” Then I found Kolbe and through their assessment process, I discovered my Natural Advantage was that of an entrepreneur. No, nothing was wrong with me. I am supposed to change things. Instead of fighting myself I went full force ahead into seeing what I could create, and I haven’t stopped since. I love it.

Kolbe had such a profound effect on me that, in 2011, I chose to invest in its certification class and become a Kolbe Certified Consultant, simply because I wanted to know more. The more I learned, the more I became convinced that an incredible amount of progress remains to be made in the field of human capital. All employers should strive to build productive work environments. Right now, though, that task is likely something we each have to tackle on our own.

If your retirement income plan calls for working until age 70, and you’re currently 50, why wouldn’t you spend some time, and perhaps work with a professional coach, to figure out what type of work you thrive on? In my opinion, 20 years is too long to do work you don’t enjoy.

If you’re closer to retirement age but realize that traditional retirement is not for you, you’ll also want to do some soul searching. Brainstorm various ways you can use your upcoming free time in retirement to work on something you’ll find fulfilling.

Many in the 55–64 age range choose to start a business. The Kauffman Foundation shows the rate of entrepreneurship for this age group has grown substantially.

Starting a business isn’t easy. I’ll attest to that. Yet, if it is work you thrive on, even when it’s hard, it is still fulfilling. Be cautious though about risking your retirement funds on a business. You can risk your time. But maybe not your nest egg.

Of course, continuing to work is not always about choice. It is often a matter of necessity. The mother of one of my close friends spent every summer in Alaska working in a dinner theater well into her 70s. In this way, she was able to save enough over the summer to supplement her Social Security throughout the remainder of the year. She had to work, yet, she found a solution that got her out of the Arizona heat in the summer and allowed her to earn enough in a few months’ time so that, for the rest of the year, her time was her own.

If you must supplement your income, explore every avenue you can think of. Do you have skills, hobbies, or specialized training that can be used to generate income? Can you teach part-time or turn your craft into a saleable product?

A few years ago, over the Fourth of July, I stayed at a bed and breakfast in the mountains. The couple who owned it had recently retired, and this home was their retirement dream. They enjoyed people and entertaining. They wanted a beautiful house with a view, and by turning it into a business they found a way to afford it.

The town near their bed and breakfast hosts an annual arts festival. As I walked around talking with the vendors, many were retired, enjoyed traveling and had found a way to support their lifestyle by turning their craft into a source of income, which also enabled them to deduct many of their travel expenses.

There are numerous creative ways to use your human capital. Explore them all, just as you would explore options on how to use your financial resources.

Another thing I want to cover in this podcast is the concept of what retirement means to you. To illustrate, I’ll share three retirement stories. One for Dr. Barry, one for Mary and one for Ed.

Dr. Barry is age 80 and still a practicing physician. He works three days a week, down from four days a week a few years ago. When he and his wife last came in, I asked if he had any thoughts about fully retiring.

He said, “I am a doctor. I’ve been a doctor my whole life. When I go to the office, staff members are respectful to me. Students in residency come through, ask me questions, and graciously thank me for my time. Every day it’s Dr. Barry, Dr. Barry. If I retire, who will I be? I’ll be nobody.”
Dr. Barry loves—and thrives on—his work. If you are like this, retirement can be an unfulfilling experience.

Part-time work can help ease the transition to retirement, both financially and psychologically. On the psychological side, it allows you to slowly figure out what to do with your newfound leisure time.

On the financial side, part-time work gets you used to the idea of withdrawing money from savings to live on. I have seen many people who are afraid to retire, even though the numbers say they can afford it. The thought of withdrawing money from savings on a regular basis can be frightening. A gradual transition to retirement can help you get comfortable with it.

Contrast Dr. Barry with Mary. Mary and her husband were excellent savers. When Mary reached age 55, her company offered an early retirement package. We ran through the numbers and decided that, from a financial perspective, they would be fine. Mary was excited. A year later, she came in for a review and told me she was busier than ever. She had always been actively involved in her church and she was having a wonderful time volunteering and contributing in ways she never had the time for before.
Traditional retirement worked well for Mary. She had activities lined up that she found fulfilling, things she and her husband had planned for years

Next, let’s take a look at Ed. Ed sidled up to me at a social event. He wasn’t my client, but we’d known each other for years, and he knew what I did for a living. He looked around to make sure no one was listening. And said, “Dana, I’ve got to tell you. I’m having trouble with this.” I instantly knew what he was talking about. I’d heard he had sold his business and retired a few months prior.

I replied, “Yes, a lot of people do. Particularly career-oriented people such as professionals and business owners.”

He continued, “It’s only been a few months, and I’m thinking, is this it? I’ve got to find something to do.”
We talked for a while. Ed had run a successful business for years. He had carefully planned his exit strategy. He had been busy in his first few months of retirement, but it wasn’t the right kind of busy. It wasn’t satisfying.

Ed was used to leading a team, making decisions, and working toward goals. To be happy in retirement, he needed to find a way to continue to use these skills.

Retirement is a big life transition. It’s not for everybody. It may not be for you.

You will need to figure out what type of retirement will work for you. Like Dr. Barry, do you want to find a way to schedule a gradual transition? If you’re like, Mary can you figure out a way to stay involved with an interest of yours so that you can continue to contribute?

If you’re married, what does your spouse want? What will you do with your time in retirement? Do you have activities you are excited about pursuing? These are important questions to answer.

The last thing I want to talk about in this podcast is how working in retirement can impact your finances.

Overall more income makes your plan look better. But keep in mind, more income also impacts your taxes. Some people take up part-time work in retirement and are surprised by how that impacted the amount of taxes they pay on their Social Security for example. Or, if you began Social Security early, and you are not yet full retirement age, your earnings will be subject to the Social Security earnings limit. Go back and listen to the Chapter 3 podcast if you need to brush up on this topic. In general, as long as you plan ahead, you’ll be fine.

And, if you’re taking up self-employment for the first time, make sure you understand how taxes on self-employment income work. You’ll be paying both the employer and employee share of FICA taxes on any net income. Net income amount you make after all eligible business expenses. Most self-employed people need set aside funds each month and make quarterly estimated tax payments.

In conclusion, we’ve covered both the “mercenary approach” and the “thrive approach” to how you use your human capital. We also covered several different types of retirement stories so you can begin to think of what type of retirement might work for you. And the last thing we touched on was the need to plan for taxes if you work part-time in retirement. Remember, your human capital is one of your biggest assets. Use it wisely.

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Thank you for taking the time to listen today. Visit amazon.com to get a copy Control Your Retirement Destiny in either electronic or hard copy format.

You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.

 

Chapter 12 (Part 1) - "Whom To Listen To"

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers part 1 of Chapter 12 of the 2^nd edition of the book titled, “Whom To Listen Too.”

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

 

Chapter 12 (Part 1) – Podcast Script

Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that covers the numerous decisions you need to make as you plan for a transition into retirement.

This podcast covers the material in Chapter 12, on “Whom To Listen To”. Meaning, when you need financial advice, who can you turn to?

If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

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Not everyone needs a financial advisor, but certainly everyone needs reliable financial advice. So where do you find it? That’s what I cover in this episode.

There are three main places to find advice – the media, the product manufacturers, and the 250,000 to 350,000 people out there who go by the label “financial advisor.” I’m going to cover all three.

First, the media.

Early in my career in the mid 90’s, I had an experience that made me realize the impact of the media.

A client called up one day, quite excited, and said, “Do you have municipal bonds?”

“Yes,” I replied. “Why do you ask?”

“Well,” she said, “they told me I need municipal bonds.”

I was a bit confused, as I was her financial advisor, so I apprehensively said, “Do you mind telling me who ‘they’ are?”

“Oh,” she said, “you know—the people on TV.”

Municipal bonds provide interest that in most cases is free from federal taxes, and if the bond is issued by the state you live in, it may be free of state taxes too. That means municipal bonds can be a good choice for investors in high tax brackets who have investment money that is not inside retirement accounts.

This client however, was in a low tax bracket and most of her money was inside her IRA. The TV host didn’t provide specifics—only an overview of municipal bonds and the fact that they paid tax-free interest. This woman heard “tax-free” and thought it must be something she should pursue.

The media doesn’t know you. I don’t know you either.

I get inquiries from strangers on a regular basis asking for advice. Most of the journalists and other media personalities I know experience the same thing. Someone emails us a few pieces of data and wants to know what to do. It’s hard, because we want to help. But we don’t want to guess.

To feel comfortable giving financial advice, most of the time I need to do a thorough financial projection. To do it right, I need to know everything about someone’s financial life. Once I see the entire picture, I can answer a question about the particular puzzle piece someone is asking about.

Today, the media encompasses both traditional venues, such as TV, radio and magazines, as well as numerous online mediums, like blogs and podcasts. In all forms of media, there are pay-to-play articles, spotlights and links.

There is nothing wrong with the pay-to-play model, as long as it is disclosed. As a consumer, you just need to be aware that many things you see, such as certain top advisor lists, are put together because someone paid to be on the list. Many product endorsements in blogs are there because the blogger gets affiliate revenue, or advertising revenue.

The other challenge with media advice is that, by nature, it is designed to be mainstream broad content. For eight years, I worked to write articles that fit within a 600-800 word count requirement. For most financial topics, you can’t cover all the rules in 600-800 words. Then I would receive emails from people letting me know which items I missed.

For example, I can write about the topic of Roth IRAs and generically say that most people are better off funding after-tax Roth IRAs or 401ks instead of pre-tax IRAs, and as I write that I can instantly think of numerous exceptions.

Media advice is not personal. That means you should think of it as education – but not as advice. For it to be good advice, it must be personal. By all means, use the media, books, podcasts, articles and shows as a great resource to learn from. But don’t forget that the person producing that content doesn’t know you.

Next, I want to discuss the industry of financial advice. There is a big difference between a product and advice, and as a consumer, you need to be able to identify which is which.

In 1995, at age 23, I started my career as a financial advisor. I studied for 60 days and passed an exam. I was granted a Series 6 securities license. I didn’t know much, and I didn’t know that I didn’t know much—but I was a financial advisor. This Series 6 license granted me the right to sell mutual funds. That meant I could legally collect a commission on sales. I went to work.

I was lucky enough to have a mentor who taught me to make a financial plan for each client and then recommend products based on the results of the plan. But, I worked for a product company. My job was to sell their proprietary mutual funds and insurance products and I was paid based on what I sold.

What if a client wanted advice on their 401(k) plan offered by their employer? I wasn’t supposed to provide that type of advice because it was outside the scope of the company’s offerings and outside the scope of the errors and commissions insurance. What is someone had tax questions? I was supposed to tell them to go talk to their tax advisor.

As I learned more about the industry, I decided I wanted to be independent. I wanted to be able to recommend any product that fit the client’s needs. And I wanted to be able to answer questions on all aspects of their finances.

Today, 25 years later, many financial advisors are still not independent. They carry an insurance license or securities license and are paid primarily to sell the products their company authorizes them to sell.

What do I mean by product? I mean mutual funds, exchange-traded funds, mortgages, annuities and other insurance products. A company must produce it, make sure it complies with current laws, and then have a distribution channel to market the product.

Some companies market directly to the public. Vanguard, who’s flagship product is mutual funds, comes to mind when I think of this type of distribution channel. Other companies market both to the public and through a network of advisors. Fidelity and Charles Schwab are two examples of companies who have their own products, and who distribute their products directly to the retail public as well as through a network of advisors.

Then you have insurance products, which are generally marketed through a network of either captive or independent agents, or through brokers who also carry an insurance license.

As an independent advisor, I receive solicitations almost daily from product manufacturers. I find many of them offensive. For example, although it has been almost 15 years since I have carried an insurance license, I routinely receive email offers explaining how I can make $50,000 or more in commissions next month by putting clients in the latest annuity offering. It is hard for me to believe that that the advisors out there who respond to these offers have their clients’ best interest in mind.

In addition to products such as mutual funds and mortgages, you have service packages to choose from. For example, there are now online firms called RoboAdvisors who offer a platform where the investments are selected and managed for you for a fee. This service package is for investment advice. I like these service packages and I think they are better than product-oriented sales people. Yet, investment advice should not to be confused with holistic financial planning. A service that manages a portfolio for you is not the same as a financial planner who looks at your household finances and gives advice on all aspects of your balance sheet.

Many financial advisors—and the media—place far too much emphasis on product selection and investment advice and far too little emphasis on financial planning.

Think of it this way; you would probably find it odd if you went to the doctor, told them your symptoms, and without any examination they began to write you a prescription. This situation happens regularly with the delivery of financial advice.

I hear war stories from consumers who come in to interview us. They tell me about advisors who began the conversation by touting their investment prowess, or talking about a variable annuity that can somehow both grow and protect your money at the same time. These advisors start off by talking about products instead of starting with a household view of the client’s finances.

Financial planning is about how much you save, what types of accounts you contribute to, how you track your expenses and net worth, and how to set yourself up for success no matter what happens with the economy or the stock market. There is not a product out there that can solve a financial planning problem.

Just as you can’t take a drug that overcomes the effect of a lifestyle of no exercise and unhealthy eating, you can’t find a magic investment answer to a habit of not planning and not updating your plan on a regular basis.

Your key take-away is do not confuse a product recommendation with advice. If you can recognize the difference, you’ll be well on your way to being able to know who to pay attention to, and who to ignore.

That brings us to the last topic, which is do you need a financial advisor, and if so, how do you find the right one for you?

I am clearly biased when it comes to this topic. I am a financial advisor, and I own a firm that delivers financial advisory services. Thus, I would like to share someone else’s thoughts on this question.

I’m fan of the online advice website Oblivious Investor (www.obliviousinvestor.com), written by Mike Piper. Mike also has a series of short cliff-note like books on various financial topics.

In his book titled Can I Retire?, Mike states that “… most investors do not need a financial advisor if they’re willing to take the time to learn all the ins and outs.” But he adds that “as an investor gets closer to retirement the usefulness of an advisor increases dramatically.”

I agree with this. Not everyone needs an advisor. If they are willing to learn all the ins and outs. Yet, as you near retirement you have a series of permanent and often irreversible decisions to make. Most people can benefit from expert advice at this phase. Smart advice can provide results that are measurable in dollars and priceless in terms of how comfortable you feel as you transition into retirement.

So, where do you find the right advisor? I’m going to walk you through the main criteria to consider. I’ll cover how advisors are licensed and regulated, how they are compensated, and what credentials to look for.

First, regulations. There are two organizations that regulate the financial advice industry. One is FINRA, which is an abbreviation for the Financial Industry Regulatory Authority. When you carry a securities license you are regulated by FINRA. A securities license legally allows you to collect a commission from a transaction. I started my career with oversight from this organization.

Then there is the SEC which stands for the Securities and Exchange Commission. When you are an investment advisor who charges a fee for advice – a fee that is not dependent on the sale of a specific product, and you have over $100 million of assets that you manage, then you are regulated by the SEC. If you are a smaller firm with less than $100 million then you are regulated by your state securities commission instead of the SEC.

You can be regulated by both FINRA and the SEC. In technical language this is referred to as a “hybrid advisor”. In my mid-career years, I worked at a CPA firm and we carried securities licenses, insurance licenses and were able to charge a fee for investment advice. We were regulated by FINRA, our states’ insurance office, and our state’s securities division.

Now my firm is only regulated by the SEC. We carry no securities or insurance licenses. We cannot be compensated from the sale of a product. We fall under the rules of the Investment Advisor Act of 1940, which means as a matter of law, we have a fiduciary duty to our clients. As it stands today in 2019, the majority of advisors are still not fiduciaries.

I advise people to seek financial advice from someone who is a fiduciary and will acknowledge that they have a legal duty to provide advice in their client’s best interest. The simplest way to find advisors that meet this standard is to find advisors who are regulated by the SEC or their state, but not by FINRA. You can also visit an organization called NAPFA, the National Association of Personal Financial Advisors, and use their search for an advisor feature. All advisors who are members of this organization are fee-only advisors who have a fiduciary duty to their clients.

The way someone is regulated also has a relationship to how they are compensated, which is the next key thing to consider when hiring someone. I’ll cover four of the most common compensation structures.

First, commissions. Under a commission structure, when you buy an investment or insurance product, your financial advisor receives a commission for the sale of that product.

Advisors who are compensated by commissions may have a limited set of investment products to choose from. I have met advisors under this model who sell only variable annuities, only mutual funds, or only life insurance. They know their products inside and out, but all too often, they have limited knowledge of the choices available outside of their product line.

If you have already determined the type of investment product you need, the right commissioned advisor may be a great resource to help you sift through the choices in that product line, but they may not be the best resource in helping you design your overall plan.

Next, there is hourly pricing.

With an hourly pricing structure, you are paying for your advisor’s time. Most advisors who charge hourly will provide you an up-front estimate of the amount of time it may take.

With hourly pricing, much like that of an attorney or CPA, rates vary with the experience level of the advisor. Average rates range from about $100 to $300 an hour.

I used to offer a la carte financial advice where someone would pay an hourly rate and I’d assist with whatever project they asked for. Why did I stop doing this? I found that when looking at only a piece of someone’s finances I couldn’t feel confident I was giving the right answer.

For some folks, hourly pricing is a perfect fit. An organization called Garret Planning Network offers a great search feature where you can locate hourly planners.

If you want portfolio advice on an hourly basis, check out RickFerri.com. Rick is a Chartered Financial Analyst who offers customized investment advice on an hourly, as-needed basis.

Next, you have financial planning fees. Some advisors charge per financial plan. They quote you a specific price that covers a set of services. Pricing may range from $1,000 to $15,000 for a written plan, recommendations, and a defined number of meetings. Typically, you get what you pay for, so if the plan is free, watch out. The plan pricing is often customized to the complexity of your situation.

And last, there is one of the most common structures, which is charging a percentage of assets managed.

Under this method of compensation, an advisor will handle the opening and management of accounts and may also offer financial-planning advice along with investment advice. Pricing ranges from about 0.5% to 2% per year. Usually the more assets you have, the lower the rate. Many advisors have minimum account sizes. You can ask an advisor what their minimum is before you meet.

There can be a vast difference in services offered for exactly the same rate. For example, brokers may put you in a fee-based account model where investments are managed by software. They may charge 1.5% a year and yet not be able to offer any tax planning advice.

At my firm, for a lower rate, we do far more than put you in an account model and rebalance once a year. We update your financial plan, provide advice on accounts outside our management, run an annual tax projection, and match your investment needs to your retirement cash flow needs. It takes far more hours than most people think. And, we keep people from making horrible mistakes with their money. Not everyone is cut out to do their own financial planning and investing. For those who aren’t, 1% is a great value.

As you age, you must also consider your spouse. You may be well qualified to manage your finances and investments on your own, but whose hands might your spouse end up in when you’re gone? It may be better for you to select the appropriate firm now rather than leave such a thing up to chance.

The last thing I want to cover is credentials.

As of 2017, a research firm named Cerulli Associates estimates there are about 311,000 financial advisors in the United States. About 82,000 have a Certified Financial Planner designation. To make sure your advisor has the basic education, what I might call a bachelor’s degree in financial planning, choose someone with the CFP® designation.

Another similar designation that qualifies someone is the PFS or Personal Financial Specialist designation which can only be acquired by a CPA.

By hiring a CFP or PFS you can be confident that your advisor has the needed education in the basic financial concepts they must know.

I started my career without any credentials and without any education in financial planning. I was earnest, believable, and genuine. I had never owned a home, didn’t know anything about taxes, and had no perspective on what a bear market would look like. Yet I was a financial advisor.

I believe a lot of advisors are like I was when I started my career: well-intentioned. However, that doesn’t mean they know what they are doing. At my firm we work as a team, so planners who are younger in their careers work side by side with someone more experienced. You’ll have to determine how much experience you think is appropriate. I recommend a minimum of five years.

You’ll also have to determine if you have other advanced needs. If you need an advisor who is a specialist, then look for additional designations. At Sensible Money, we are retirement income specialists. We carry an RMA or Retirement Management Advisor designation, which I equate to getting a master’s degree in the distribution phase. The focus of an RMA is on decumulation planning.

If you want an investment specialist, look for a CFA, or Chartered Financial Analyst. You most often see this designation among people who manage institutional money such as for mutual funds or pension funds. You may want a CFA, or want to work with a firm that has a CFA as part of their team, if you have advanced investment-management needs—for example, you may own a big chunk of employer stock, are an officer of a publicly traded company, or have inherited complex investments.

When it comes to hiring an advisor, lay out what you are looking for in terms of how the advisor is regulated, compensated, and what credentials they carry. Then only interview those who fit your criteria.

That wraps it up for the first part of Chapter 12 on “Whom to Listen To”. I will be recording additional content from Chapter 12 on “Interviewing Advisors” and on one of the most important topics I can think of - “Avoiding Fraud.”

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Thank you for taking the time to listen today. Visit amazon.com to get a copy Control Your Retirement Destiny in either electronic or hard copy format.

You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.

 

Chapter 12 (Part 2) - “Interviewing Advisors and Avoiding Fraud"

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers part 2 of Chapter 12 of the 2^nd edition of the book titled, “Whom To Listen Too.” Part 2 covers "Interviewing Advisors and Avoiding Fraud."

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

 

Chapter 12 (Part 2) – Podcast Script

Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. Fee-only means no commissions. I’m also the author of Control Your Retirement Destiny, a book that shows you how to align your finances for a smooth transition into retirement.

This podcast is an extension of the material in Chapter 12, on “Whom To Listen To”. I’ll be covering the topics of avoiding fraud and how to interview potential advisors.

If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

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We’ve all heard the saying “if it’s too good to be true….” So why do we fall for fraud, over and over? I think I know the answer.

To recognize if something is too good to be true, you must know what truth is in the first place. And when it comes to investing, a lot of people have no idea what is realistic and what is a fantasy.

By the end of this podcast, you will not be one of those people. I’ve got several real-life stories to tell – stories about fraud and why people fell for it. You are about to learn what to watch out for. And as a side note – for the personal stories I tell I change names and details for privacy reasons. Although details are changed, the substance of each story is true.

Let’s start with the biggest financial scam in U.S. history – what is known as the Bernie Madoff scam – a 65 billion-dollar Ponzi scheme. If you haven’t heard of him, Bernie Madoff was the former chairman of the NASDAQ stock market. Naturally when he started his own investment firm, people trusted him. His scheme came unraveled in December 2008 and many families lost their entire life savings.

One of the men credited with bringing down Madoff’s scheme is Harry Markopolos. He tells his story with his co-author Frank Casey in their book called No One Would Listen: A True Financial Thriller.

How did Harry Markopolos figure out Madoff’s scheme? Markopolos said, “As we know, markets go up and down, and Madoff’s only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately.”

Maybe Markopolos would suspect cheating immediately, but would you? Harry Markopolos was in the investment business. He knew what is and is not possible. But what about the average person who walked into Bernie Madoff’s office and was told that they could consistently earn 12% returns each year? Any one of us in the investment business would walk out and head to the authorities. But the average investor? They think that sounds great and that someone has the magic formula to make it happen. They don’t know that they should suspect cheating immediately.

How can you assess what is realistic and whether someone is lying? First, you must understand that safe investments earn low returns. If a proposed investment pays more than a money market fund or more than a one-year CD, than there is risk. If someone doesn’t explain those risks and tries to assure you that your money is completely safe, they aren’t telling the whole story. You also must know that volatility, or ups and downs, are a normal part of investing. If someone tells you it will be a smooth ride with great returns, watch out. Something is not right.

Despite the publicity that the Madoff scandal received, Ponzi schemes continue and people continue to fall for them. Most recently, a New York Times article chronicles “The Fall of America’s Money Answers Man” which is the story of Jordan Goodman, a well-known finance guru who has books and radio shows.

As Goodman’s work became more popular, he began touting all sorts of investments and was being paid to promote these investments. That is not illegal, as long as it disclosed. But he wasn’t disclosing all these relationships. And, on one of his radio shows in about 2014, Goodman began talking about one particular investment where you could safely earn 6% returns. He was quoted as saying “There’s a way of getting 6 percent and not having to worry about capital loss. It’s very safe.” This investment he was promoting turned out to be a Ponzi scheme.

How could you recognize that this was a scam? After all, maybe 6% doesn’t sound like a return that is too good to be true? Well, it’s all relative. In 2006, you could earn 6% in a money market fund, but in 2014, you were earning about zero in a money market fund. And in today’s low interest rate environment, you might earn 2.5%. So, if someone is promising a safe, stable 6% no-risk return, you should be skeptical. And if you do decide to go forward with such an investment, you most certainly would not put in more than 5-10% of your money.

As a legitimate investment advisor, my job is to provide people with a realistic set of potential outcomes. What happens when I compete with someone who is lying? It’s hard.

I can present all the logic in the world, but when some unscrupulous advisor promises bigger returns with no risk, it is often with a sense of helplessness that all I can do is stand by and watch someone lose money.

In 2007 I watched one of my clients get sucked in by this kind lie. He came in for our annual meeting about a month before he was supposed to retire. He told me he wasn’t going to need to withdraw money from his IRA as we had planned.

“Why?” I asked, intrigued.

He replied that he’d invested $100,000 in a currency-trading program that was paying him $5,000 a month. He showed me the checks he had been receiving.
I got a sick feeling in the pit of my stomach. I knew the math didn’t add up. At $5,000 a month, that’s $60,000 a year, on a $100,000 investment. No one can deliver those kinds of returns. But how do you explain this to someone who has checks in their hand?

Within six months, the currency trading program he invested in was discovered to be a scam, and the perpetrators were arrested. I wasn’t surprised.
After netting out the checks he received, and the tax deduction for the fraud loss, he ended up about $50,000 poorer. Luckily, the rest of his retirement money remained invested with me, in a boring balanced portfolio of no-load index funds, so his overall retirement security wasn’t affected.

Another thing scam artists do is appeal to your ego or to your religion – or both. I saw one former client of mine lose $4 million to such a scam.

After working together for several years, this client sent me a wonderful email letting me know how much they had appreciated working with me, but that they were moving their funds to a firm that shared the same religious affiliation as they did. This firm also told them they would have access to exclusive investments only available to high net worth individuals. There’s the ego appeal. And, the firm told them it would handle everything: legal work, accounting, and investments. In hindsight, this makes sense. It keeps other expert eyes from questioning what is being done.

A few years later, this client came back in to see me with a stack of papers in hand, asking me to help figure out what had happened to their money. I read, and I read some more. I turned white as chalk as I kept reading. Four million dollars—nearly all of their money—was gone. I immediately sent them to see an attorney who specialized in these types of cases.

How did this firm scam the client out of 4 million? They got them to sign a series of promissory notes. The notes were supposed to pay 10 – 12% returns and the money was going to be used for real estate development. The client signed the notes, wired the money, got a few interest check payments and that was it. They were told the real estate development floundered. I don’t know what really happened or where the money really went.

What I do know is the client’s lifestyle was forever changed.

How can you avoid such a scam? Well, legitimate advisors won’t ask you to sign a promissory note. Instead your money is placed with a reputable custodian like Charles Schwab, Fidelity, or T.D. Ameritrade. A custodian reports directly to you.

For example, my firm uses Charles Schwab as our primary custodian. We can initiate transactions, but Schwab reports those transactions directly to the client. We have no ability to make up what the account statement says. In the cases we have discussed so far there was no third-party custodian. So the advisor could make up what the statements said and what they were reporting to the client.

Con artists are skilled at finding people who are trusting and vulnerable. You may be savvy, but what about your spouse? This is another real-life case of mine. The story of Henrietta, who was referred to me by her CPA after her husband passed.

Henrietta and her husband Frank had an impressive collection of original art-work worth millions. Frank passed away when Henrietta was about 78 years old.

Frank and Henrietta had a long-term friend from the art world named Sam. Sam reached out to Henrietta after Frank’s death and offered to buy her art collection. Henrietta didn’t seek legal counsel because she’d known Sam for a long time. Why would she need an attorney? She trusted him.

They negotiated a purchase price of $3 million to be paid to Henrietta on a schedule of $25,000 a month for the next 10 years.

The checks arrived for about two years, then they suddenly stopped. Sam was nowhere to be found. Henrietta was finally able to track him down, at which time he told her he was going through financial difficulties, and that he would send her money as soon as he could. She waited. A few months later he sent one additional payment. Then nothing more.

It wasn’t until she hadn’t received a payment for two years that I was able to convince Henrietta to hire an attorney and pursue litigation. She kept telling me that Sam was a friend. She wanted to give him the benefit of the doubt. Henrietta was now 82. Of course, she didn’t want the hassle.

Eventually, Henrietta was able to recover about $1.5 million. I don’t believe she would have gotten any of that money back if I hadn’t encouraged her to take action. And I believe the family friend was counting on the fact that Henrietta was older and would just let it go.

How can you avoid such a scam? Early in retirement establish solid relationships with accountants, advisors and attorneys that you trust. And if your spouse is not involved in the finances, you still want to make sure they will know who to turn to.

The last story I want to tell is a story from my own family. The story of Aunt B, my dad’s aunt. Aunt B, at age 94, was a spirited and intelligent woman. She’d had a fulfilling career as a professor, had never married, and had managed to save a significant amount of money.

Over the past few years, her hearing and sight had become impaired, and a medical condition developed which meant Aunt B needed 24-hour-a-day in-home care.
Aunt B did not want to use an agency to provide care. She lived in a small town in rural Iowa and wanted local help. She found a group of three young women willing to provide in-home care services. They started coming around to stay with her regularly.

My dad had power of attorney over Aunt B’s financial affairs and lived about 15 miles away. The first problem arose when Aunt B decided it would be a great idea to write a $60,000 check to help a local failing business stay afloat. Dad investigated—and overruled. Aunt B was furious. We found out later that the business was owned by the spouse of one of the caregivers.

Dad continued to investigate and soon realized that the three caregivers had managed to drain over $300,000 out of Aunt B’s accounts within a matter of months.

When Dad tried to explain the situation to Aunt B, she became angry and adamantly defended the actions of her caregivers.

Dad brought in the police and an attorney. Despite clear explanations, Aunt B insisted that the caregivers were only going through a “naughty spell,” and that they should be forgiven and rehired.

The attorney, who was familiar with these types of cases, explained to us how these situations develop. Homebound people often forge close bonds with their caregivers. The caregiver becomes the eyes, ears, and primary news source for the homebound person and can exert great influence. The caregivers can screen phone calls, mail, and outside information, so their patient is only exposed to the information they want them to see.

Aunt B was nearly blind. They would present her with checks to sign which were supposedly for services like lawn care or house cleaning. She would sign the checks, which, in reality, were often made out directly to the caregivers. They also ordered new appliances, tools, and other household items, all delivered to their own homes, not to Aunt B’s.

To perpetrate their fraud, they convinced Aunt B that Dad was out to get her money. Each time he stopped by they would tell Aunt B that he was only there to look out for his own future inheritance. They had even talked Aunt B into changing her will to make the primary caregiver the main beneficiary. Luckily that was later remedied.

The scam would never have been discovered if Dad didn’t randomly stop in at Aunt B’s, ask questions, and poke around, even when she did not want him to.

Unfortunately, because this type of crime is not a violent crime, the care-givers received a sentence that is about equivalent to being on probation. They could easily be back out there, doing the same thing today.

We also learned from the attorney general that these care-givers had prior records and likely learned their techniques in prison, as strategies on how to defraud the elderly are passed along among the incarcerated. Someone trained to swoop in can do serious damage in a matter of weeks—then they vanish.

How can you avoid a scam like this in your family? Check in on your elderly family members. Get involved. And insist on back-ground checks even if the care-giver is part of your local community or referred by someone you know.

Before I wrap up this podcast, I want to cover one more thing - the topic of interviewing advisors. What questions should you ask? I’ve had prospective clients come in with a checklist where it was evident they didn’t know what they were asking. But at least they had done a little homework and arrived with some sort of screening process.

In the last podcast, we covered the basics on advisor credentials and compensation. I’d suggest you don’t even meet with an advisor unless they pass your basic screening process – which you can do before you meet with them. So, when I talk about interviewing advisors, I’m not talking about questions such as what credentials do they have. I’m assuming you already screened them and now you’re down to a final round of interviews with those who passed the screening process.

So, you’re interviewing, and you need to determine if this person is a good fit for you and your family. There are two questions I think are key. These two questions help you gauge the financial advisor’s communication and planning style.

The first of those questions is, “What assumptions do you use when running retirement planning projections?”

All financial-planning projections are based on assumptions. There are assumptions about the rate of return, the pace of inflation, taxes, and much more.

If an advisor runs a financial plan projecting your investments will grow at 10% a year, you might have a problem. This assumption makes the future look rosy, but it’s probably make-believe. You need realistic projections to make appropriate decisions.

You want to find someone who uses a conservative set of assumptions; after all, you’d rather end up with more than what is projected on paper, not less.

All assumptions must be adjusted according to your personal circumstances and changes in the general economy. With that in mind, I am going to walk through a short list of what I consider realistic assumptions.
For investment returns: Projections using returns in the range of 5–7% a year seems realistic in today’s environment.
For inflation: your living expenses should be projected to rise about 3% a year on average, or maybe a little less if you’re already retired and have a higher net worth.
Real estate assets such as your home may go up in value about 2–3% a year on average.
And tax rates should be customized to you. For example, if you have a large sum of money in retirement accounts, you will pay taxes on that money as it is withdrawn. That puts you in a completely different tax situation than someone who has a large sum of money that is not in retirement accounts. This needs to be considered when running financial-planning projections.
There are of course many valid reasons to use assumptions that may vary from my guidelines. Your job as the customer is to ask what the assumptions are and to question things that seem unrealistic.

The second question I like is asking the advisor to explain a financial concept to you.

You want to work with someone who can talk in language you can understand. If an advisor speaks over your head, or their answer makes no sense and they do not respond well to additional questions, move on.

Here are a few concepts you should have learned in this podcast series that you could inquire about. You could ask:
What do you think of index funds?
Or how do you determine how much of my money should be in stocks versus bonds?
Or how do you help me figure out if I should put my money in a Traditional IRA or Roth IRA?
And ask how do you account for health care costs in my projections?
You want to make sure you understand the answer that is provided. This is a good sign that you’re working with someone who can communicate in a way that you can relate to.

To wrap up today, when evaluating investments and advisors, always keep in mind:

There no such thing as safe stable no-risk returns that are higher than what you get on current money market funds.
Your advisor would never ask you to sign a promissory note.
Work with advisors that use large well-known third-party custodians. You should never make deposits to an entity that your advisor controls.
And always interview advisors and work with someone who uses conservative assumptions and who takes the time to explain things to you.

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That wraps it up for this podcast on part two of Chapter 12, on “Whom to Listen To”. Thank you for taking the time to listen. In the Control Your Retirement Destiny book, I provide additional resources that can help you avoid fraud and interview advisors more effectively.

You can visit amazon.com to get a copy in either electronic or hard copy format.

You can also visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.

 

 

Chapter 13 – “Estate Planning"

In this episode, podcast host and author of “Control Your Retirement Destiny”, Dana Anspach, covers Chapter 13 of the 2^nd edition of the book titled, “Estate Planning.”

If you want to learn even more than what there is time to cover in the podcast series, you can find the book “Control Your Retirement Destiny” on Amazon.

Or, if you are looking for a customized plan for your retirement, visit us at sensiblemoney.com to see how we can help.

 

Chapter 13 – Podcast Script

Hi, this is Dana Anspach. I’m the founder and CEO of Sensible Money, a fee-only financial planning firm. I’m also the author of Control Your Retirement Destiny, a book that shows you how to align your finances for a smooth transition into retirement.

In this podcast episode I cover the material in Chapter 13, on “Estate Planning.”

If you like what you hear today, go to Amazon and search for Control Your Retirement Destiny. And, if you are looking for a customized plan, visit sensiblemoney.com to see how we can help.

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Even if you have never been to an attorney or drawn up a will or a trust, you have probably still done some type of estate planning- and not even known that’s what you were doing. How could that be?

If you have ever opened a bank account or named a beneficiary on a retirement account or life insurance policy, that’s estate planning. It’s a legal document that specifies where your assets go when you pass.

For example, if you open an account titled jointly with a spouse, friend or child, when you pass, that account belongs to them. It doesn’t matter what your will says – the titling of that account overrides any other documentation.

The same thing occurs with beneficiary designations on retirement accounts. The financial institution must disburse the funds to the beneficiaries you have listed – it doesn’t matter if you have a trust or will that says something else.

Many people don’t know this. And it can get you in trouble. I saw this first-hand with George and Faye.

George was referred to me shortly after Faye passed away from pancreatic cancer. This was a second marriage and Faye had two children from a previous marriage. When Faye was diagnosed, they had wisely visited an attorney and had a trust drawn up. Faye wanted 1/3 of her assets to go to each of her two children and 1/3 to George, so that is what the trust said.

However, nearly all of Faye’s assets were in her company retirement plan. And Faye never changed the beneficiary designation on this plan to the trust. George was named as the beneficiary.

Unfortunately, George and Faye thought the trust document would take care of this. They did not realize the trust has no legal authority over her retirement plan unless she took the next step of filing updated beneficiary paperwork.

Now, George was in the awkward position of inheriting the entire account. Luckily, George is a good guy, and continues to honor Faye’s wishes by taking withdrawals and then sending the appropriate after-tax amounts to Faye’s children. However, this has unfortunate tax consequences for George, forcing some of his other income into higher tax rates.

Overall though, this case has a happy ending because George is doing the right thing. But not everyone would.

The type of estate planning error that happened to George and Faye could have been avoided if the estate planning had been coordinated with the financial planning. Many attorneys don’t ask clients for a detailed net worth statement. I’m not sure why. They should and they should look at the types of accounts that someone has so they can make recommendations that will work.

An attorney can draft the best documents in the world, but if they don’t make sure the client follows through on all the other paperwork that is needed, those documents can become pretty ineffective.

In this podcast, I’m going to cover a few basic things you need to know about estate planning. However, I am not an attorney. Nothing I say should be considered legal advice. Rules vary by state and you will always want to get advice that is specific to your situation.

With that in mind, the four topics I want to cover are titling accounts, setting up beneficiary designations, trusts, and I’ll briefly touch on the topic of estate taxes.

First, account titling.

You have retirement accounts, and pretty much everything else. When I say retirement accounts, I mean IRAs, Roth IRAs, 401ks, 403bs, SEPS, SIMPLE IRAs and any other type of company sponsored retirement account like a pension or deferred compensation plan.

Retirement accounts must be in a single person’s name. We are frequently asked by married couples if they can combine their retirement accounts, or title an IRA in a trust. The answer is no. A retirement account must be owned by one individual.

The way you specify where your account goes upon your passing is by the beneficiary designation you put on file.

With non-retirement accounts you have more choices. Most people open bank accounts in their name or jointly with a spouse or partner. If an account is titled only in your name, upon your death it will need to go through probate. When you add a person to the title or add a beneficiary to the account, then the account can pass directly and avoid the probate process.

One of the first things we do when bringing on a new client is review account titling. Many people are not aware that you can add beneficiaries to a non-retirement account. This is accomplished through something called a P.O.D. or T.O.D. registration. P.O.D. stands for payable on death. T.O.D. stands for transfer on death. And some financial institutions have their own term for this type of account. For example, Schwab calls it a DBA or designated beneficiary account.

Let’s look at an example. Assume you add your daughter as a joint tenant on your bank account. Your will (or trust) specifies that your money should be split evenly between your children. At death, what happens?

Legally that entire bank account belongs to your daughter regardless of what the will (or trust) says. A financial institution must pass assets along according to how the account is registered or titled.

There are three key things to know.

First, if the account is registered only in your name, and you have a will, then the will controls how the account is disbursed. However, because there is not a direct beneficiary named or another person on the account title, this account will have to go through probate.

Second, if you title an account in the name of a trust, then the terms of the trust control how the account is disbursed. Assets and accounts titled in a trust will avoid the probate process.

And third, if you add a joint tenant, or some other formal account registration such as tenants in common, transfer on death, or payable on death, then that account registration takes precedence over the will or trust.

Let’s say we have Joe and Mary who have two children. They have a jointly titled account, which means if either Joe or Mary passes the account belongs to the survivor. However, if Joe and Mary both pass, the account will have to go through probate. To avoid this they can add their two children as designated beneficiaries to this account, so if both pass, the account goes seamlessly to the children without all the red tape.

This type of titling can be accomplished with real estate also. You can file a transfer on death deed or a beneficiary deed for a minimal filing fee.

Now, some people prefer to add their children to an account or to the title of their home while they are alive. Please, don’t do this without understanding the potential consequences. When you add another person to the title, that account is now subject to their creditors. If they get in trouble, your assets could be at risk.

It could also cause a tax mess. Particularly when it comes to how capital gains taxes work upon death.

On a capital asset (such as a home, a stock, or a mutual fund) you have what is called your cost basis; what you paid for the asset. Upon your death, your heirs get what is called a “step-up” in cost basis, which means their cost basis for tax purposes is the value of the asset at your date of death.

Let’s look at an example using your home.

Assume you bought your house many years ago for $100,000. You’ve done no major improvements so this $100,000 is your cost basis. Today the home is worth $400,000. Upon death, your heirs inherit the house worth $400,000 and immediately sell it. How much do they have to pay in capital gains taxes?

Assuming they sell the home for $400,000, they pay no capital gains taxes on the $300,000 of gain because their cost basis was stepped-up to the date of death value.

This step-up in cost basis can be voided by titling your property inefficiently. This happens with the common practice of adding an adult child to the title of the house.

For example, let’s say after your spouse passes, you add your son to the title of your home. Technically you have gifted him half the value of your home, and instead of the home passing to him at death, he co-owns it with you now.

This means he does not get that entire step-up in cost basis upon your death; only the interest attributed to you gets a step-up. Let’s walk through the numbers.

Assume the same facts: you paid $100,000 for the home, and upon your death it is worth $400,000, and your son sells it for that amount.

Your half of the asset gets a step-up in cost basis, so your share of the house has a basis of $200,000. Your son’s share, however, would have a basis of $50,000 (half your original basis). He now owes tax on $150,000 of gain. At a potential 20% capital gains tax rate, that is $30,000 in taxes owed. This could have been avoided by having the asset transfer to him on death rather than using joint ownership.

This example applies to investment accounts such as stock and mutual funds as well as property. This situation can easily be avoided by titling accounts more effectively.

What you can do with a property is either set up a beneficiary deed or transfer on death titling. Or if you have a trust, title the property in the trust. This way the house or account remains in your name while you are alive and automatically passes upon your death. If you want one or several of your children to have control of the asset now, with a trust structure you can add them as a co-trustee. This means they could make decisions about the asset, but they would not be an owner of the asset for tax purposes.

There can be significant tax and legal implications to how you title accounts. That’s why I call it the hidden form of estate planning that everyone does, but no one knows they are doing it.

I understand as you get older you may want a relative to have access to an account to assist with bill paying. What can you do in that situation? Many banks also offer a designated signer account. This designated signer can write checks on the account, but they are not a co-owner. This means their creditors cannot go after the asset. It also means it is easy to remove them if that becomes necessary.

The designated signer registration doesn’t spell out what happens to the account upon your death, but it does allow someone other than you to pay bills and write checks on the account while you are alive.

Overall there are four things that can be impacted by your account titling. One is taxes. Two is a creditor’s ability to go after the asset. Three is who the asset goes to when you pass. And four is who can make decisions about the asset now. All four of these need to be considered when you add or remove someone to an account title or property deed.

The next topic I want to cover is beneficiary designations.

Many people name beneficiaries and never update them. This applies to life insurance policies and retirement accounts. There are numerous cases every year where someone gets divorced, passes away and their ex-spouse gets the retirement accounts and life insurance. Any time you get married or divorced, you need to update everything.

If you haven’t checked your beneficiaries in awhile, it’s time to do some homework. List all your accounts, how they are titled and who the current beneficiary is. If you need to change a beneficiary, it’s pretty easy. Call the financial institution and fill out a new form. In many cases, you can now do this online.

If you are married, this is your first marriage, and there are no children outside of the marriage, then naming beneficiaries can be simple. Ideally your spouse is named as the primary beneficiary on all IRAs and retirement accounts.

Assuming your children are functioning adults, they can be named as contingent beneficiaries.
The legal concern with this structure is that upon your passing your spouse could remarry, leave everything to their new spouse, and bypass your children. If this is a concern, you may need a more complex structure (a trust) to address this.

Consider a more complex structure if you are in a second marriage and have children from previous marriages, have minor children, or have an adult child with dependency issues or special health needs.

That brings us to the topic of trusts.

A trust is a legal document that provides instructions on how the assets in the trust are to be handled, and by whom they are to be handled.

There are three main parties to a trust. There is the grantor, which is the person or people whose property is going into the trust. There is the trustee or trustees, which are the people in control of the trust assets. And there are the beneficiaries – the people who will benefit from or inherit the remaining assets one day.

With the most common type of trust, called a revocable living trust, the grantor, trustee, and current beneficiary are the same set of people.

For example, let’s say Wally and Sally Sample, the couple we follow in the Control Your Retirement Destiny, set up a revocable living trust.

The title of their trust is “The Sample Family Revocable Living Trust, dated August 9, 2018.” The trustees are Wally and Sally, so they can easily sign for and make decisions about any property in the trust while they are alive. They manage accounts titled in the trust the same way they always have. No restrictions apply.

They are also the current beneficiaries of the trust, but upon their death, or in the event they are incapacitated, the trust names the successor trustees, people who can then make decisions, and it spells out what is to happen to the property in the trust, who it goes to, and over what time-frame.

Let me explain how this comes together with the case of Ellen. Ellen’s husband passed away several years ago and she is now in her 80’s with one daughter, Sara. She always invited her daughter to join our meetings. As the years passed, I could see that Ellen’s cognitive abilities were changing. She asked me to take instructions from Sara; however, legally, I could only take instructions from Ellen. Ellen was the trustee and she was not technically incapacitated, so although the trust named Sara as a successor trustee that provision only became effective if Ellen was seriously incapacitated. I encouraged them to visit their estate planning attorney and add Sara as a co-trustee to Ellen’s trust. They did this and a few years later when Ellen entered an assisted living facility it allowed for Sara to seamlessly continue to manage Ellen’s affairs.

One of the key benefits of a trust is that is spells out who is to step in when you can’t make decisions on your own. You can do that through a successor trustee or add a co-trustee. Another benefit of a trust is that the assets that pass via trust avoid the probate process.

However, setting up a trust document alone is not enough. Once a trust document is completed, assets must be moved into the trust by changing the account registration and/or property titles. Once you have a trust, instead of your name on an account, it should list the trust as the account owner.

It is astonishing to me the number of people who set up a trust, but don’t change their account registrations or property titles. In this situation the trust can become a nearly useless document. It may be sitting there, on the shelf, but if no assets are ever titled in it, what exactly does that document apply to? Not much.

There is something called a pour-over will, which can be used to fund a trust after your death, but those assets must now go through probate. And if you are incapacitated, and an account is not titled in your trust, your co-trustee or successor trustee will have difficulty managing that asset. Much easier if you move the appropriate assets into the trust while everyone is healthy.

While you are titling assets into your trust should you also name the trust as the beneficiary on your retirement accounts? Only if your attorney advises you to. Retirement accounts have some unique tax characteristics when passed to a spouse or to a real person. A trust is not a person – it’s an entity and sometimes when the trust is the beneficiary of a retirement account it can void some of the tax benefits.

There are special trusts, called conduit trusts, that can be set up to avoid this. Overall, having the trust be the beneficiary of a retirement account is complicated. When it’s part of a strategic plan designed by an attorney, it can be good.

The last topic I want to cover is estate taxes. In 2019, most people won’t be subject to the federal estate tax. That’s because current law says you can pass along $11.4 million in assets and no estate tax applies at the federal level. If you’re married that means jointly you can pass along $22.8 million.

However, 12 states implement a state-level estate tax. And in many of those states the amount that is exempt from this tax is much lower than the federal level. For example, Massachusetts and Oregon have a $1 million exemption amount. In Oregon, amounts over a million are taxed at a rate that can range from 10% – 16%. Then there are states like New York, where they say that you can exclude up to about $5.5 million – however it is what is called a “cliff tax” so if your estate value is too much more than that $5.5 million, then the entire estate will be subject to the estate tax, with rates as high as 16%.

Depending on what state you live in, planning techniques that can help reduce state-level estate taxes could be quite applicable to you.

I’ve now covered the basics on account titling, beneficiary designations, trusts and estate taxes. And, I must remind you, none of this is legal advice and I am not an attorney.

Getting your affairs in order is a great feeling. I think it’s worth it to find a good attorney and do it right.

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That wraps it up for this podcast on Chapter 13, on “Estate Planning” and for our initial recording of the Control Your Retirement Destiny Podcast, which covers the material in the printed book. We plan to update the material as major changes occur, and we plan on future episodes of the podcast to cover additional topics.

You can always get a copy of the book on Amazon in either hard copy or electronic format.

And you can always visit sensiblemoney.com, to see how a staff of experienced retirement planners can help.