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©Wang Tom/123RF
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LO14.1
Analyze your current assets and liabilities for retirement and estimate your retirement living costs.
Planning for Retirement: Start Early
Why Is It Important Now?
Tomeeka recently learned that her grandparents had planned carefully for retirement during their working years. They watched as some of their friends spent money with little concern for the future. Tomeeka’s grandparents, on the other hand, made sure that they saved enough money to have a comfortable retirement. Even though it seemed far in the future, Tomeeka decided to start planning early for her own retirement, just as her grandparents had done.
Your retirement years may seem a long way off right now. However, the fact is, it’s never too early to start planning for retirement. Planning can help you cope with sudden changes that may occur in your life and give you a sense of control over your future.
A recent poll from Harris Interactive reported that 95 percent of people ages 55 to 64 years old plan to do at least some work after they retire. Another survey reported that future retirees expect to continue to learn and to pursue new hobbies and interests. Someday, when you retire, you too may desire an active life.
If you have not done any research on the subject of retirement, you may have some misconceptions about the “golden years.” Here are some myths about retirement:
You have plenty of time to start saving for retirement.
Saving just a little bit won’t help.
You’ll spend less money when you retire.
Your retirement will only last about 15 years.
You can depend on Social Security and a company pension plan to pay your basic living expenses.
page 460Your pension benefits will increase to keep pace with inflation.
Your employer’s health insurance plan and Medicare will cover all your medical expenses when you retire.
Some of these statements were once true but are no longer true today. You may live for many years after you retire. If you want your retirement to be a happy and comfortable time of your life, you’ll need enough money to suit your lifestyle. You can’t count on others to provide for you. That’s why you need to start planning and saving as early as possible. It’s never too late to start saving for retirement, but the sooner you start, the better off you’ll be. (See Exhibit 14–1.)
Exhibit 14–1 Tackling the Trade-Offs: Saving Now versus Saving Later—The Time Value of Money Get an early start on your plan for retirement.
*The table assumes a 9 percent fixed rate of return, compounded monthly, and no fluctuation of the principal. Distributions from an IRA are subject to ordinary income taxes when withdrawn and may be subject to other limitations under IRA rules.
Source: The Franklin Investor (San Mateo, CA: Franklin Distributors Inc., January 1989).
Saving Smart for Retirement: Even a Little Goes a Long Way
Long-term financial security starts with a savings plan. If you save on a regular basis, you will have money to pay your bills, make major purchases, meet your living expenses during your retirement, and cope with emergencies. Here are a few tips on how to start saving early.
Start now. Don’t wait. Time is critical.
Start small, if necessary. Money may be tight, but even small amounts can make a big difference, given enough time, the right kind of investments, and tax-favored investments such as company retirement plans, IRAs, and SEPs.
Use automatic deductions from your payroll or your checking account for deposit in mutual funds, IRAs, or other investments.
Save regularly. Make saving for retirement a habit.
Be realistic about investment returns. Never assume that a year or two of high market returns will continue indefinitely. The same goes for market declines.
If you change jobs, keep your retirement account money in your former employer’s plan or roll it over into your new employer’s plan or an IRA.
Don’t dip into retirement savings unless it is absolutely necessary.
Exhibit 14–2 It’s Never Too Early to Start Planning for Retirement
Start young. A look at the performance of $2,000 per year of retirement plan investments over time, even at 4 percent, shows the value of starting early.
Read the nearby Financial Literacy in Practice feature, “The Psychology of Planning for Retirement While You Are Still Young” for additional tips about the importance of saving now.
As you think about your retirement years, consider your long-range goals. What does retirement mean to you? Maybe it will simply be a time to stop working, sit back, and relax. Perhaps you imagine traveling the world, developing a hobby, or starting a second career. Where do you want to live after you retire? What type of lifestyle would you like to have? page Once you’ve pondered these questions, your first step in retirement planning is to determine your current financial situation. That requires you to analyze your current assets and liabilities.
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Conducting a Financial Analysis
As you learned in Chapter 2, an asset is any item of value that you own—cash, property, personal possessions, and investments—including cash in checking and savings accounts, a house, a car, a television, and so on. It also includes the current value of any stocks, bonds, and other investments that you may have as well as the current value of any life insurance and pension funds.
Your liabilities, on the other hand, are the debts you owe: the remaining balance on a mortgage or automobile loan, credit card balances, unpaid taxes, and so on. If you subtract your liabilities from your assets, you get your net worth. Ideally, your net worth should increase each year as you move closer to retirement.
It’s a good idea to review your assets on a regular basis. You may need to make adjustments in your saving, spending, and investments in order to stay on track. As you review your assets, consider the following factors: housing, life insurance, and other investments. Each will have an important effect on your retirement income.
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HOUSING A house will probably be your most valuable asset. However, if you buy a home with a large mortgage that prevents you from saving, you put your ability to meet your retirement goal at risk. In that case, you might consider buying a smaller, less expensive place to live. Remember that a smaller house is usually easier and cheaper to maintain. You can use the money you save to increase your retirement fund.
LIFE INSURANCE At some point in the future, you may buy life insurance to provide financial support for your children in case you die while they are still young. As you near retirement, though, your children will probably be self-sufficient. When that time comes, you might reduce your premium payments by decreasing your life insurance coverage. This would give you extra money to spend on living expenses or to invest for additional income.
OTHER INVESTMENTS When you review your assets, you’ll also want to evaluate any other investments you have. When you originally chose these investments, you may have been more interested in making your money grow than in getting an early return from them. When you are ready to retire, however, you may want to use the income from those investments to help cover living expenses instead of reinvesting it.
Estimating Retirement Living Expenses
Next you should estimate how much money you’ll need to live comfortably during your retirement years. Where you live during retirement has significant impact on your financial needs. (See the nearby Financial Literacy in Practice feature, “Your Retirement Housing.”) page 464You can’t predict exactly how much money you’ll need when you retire. You can, however, estimate what your basic needs will be. To do this, you’ll have to think about your spending patterns and how your living situation will change when you retire. For instance, you probably will spend more money on recreation, health insurance, and medical care in retirement than you do now. At the same time, you may spend less on transportation and clothing. Your federal income taxes may be lower. Also, some income from various retirement plans may be taxed at a lower rate or not at all. As you consider your retirement living expenses, remember to plan for emergencies. Look at Exhibit 14–3 for an example of retirement spending patterns.
Exhibit 14–3 How “Average” Older (65-74 and 75+) Households Spend Their Money
Retired families spend a greater share of their income for food, housing, and medical care than nonretired families.
*Includes cash distribution, alcohol, tobacco, personal care products and services, reading, education, life and personal insurance, and miscellaneous expenses.
Source: Ann C. Foster, “A Closer Look at Spending Patterns of Older Americans,” Beyond the Numbers: Prices and Spending, vol. 5, no. 4 (U.S. Bureau of Labor Statistics, March 2016), https://www.bls.gov/opub/btn/volume5/spending-patterns-of-older-americans.htm, accessed May 4, 2017.
Don’t forget to take inflation into account. Estimate high when calculating how much the prices of goods and services will rise by the time you retire (see Exhibit 14–4). Even a 3 percent rate of inflation will cause prices to double every 24 years.
Exhibit 14–4 The Effects of Inflation over Time: The Time Value of Money
This chart shows you what $10,000 today will be worth in 10, 20, and 30 years, assuming a fairly conservative 4 percent rate of inflation.
The prices of goods and services rarely remain the same for any significant period of time because of inflation. How much will $10,000 be worth in 30 years, assuming a 4 percent rate of inflation? What can you do to counteract the effects of inflation?
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LO14.2
Determine your planned retirement income and develop a balanced budget based on your retirement income.
Your Retirement Income
The four major sources of retirement income are employer pension plans, public pension plans, personal retirement plans, and annuities.
Employer Pension Plans
A pension plan is a retirement plan that is funded, at least in part, by an employer. With this type of plan, your employer contributes to your retirement benefits, and sometimes you contribute too. (See the nearby Figure It Out! feature.) These contributions and earnings remain tax-deferred until you start to withdraw them in retirement.
Private employer pension plans vary. If the company you work for offers one, you should know when you become eligible to receive pension benefits. You’ll also need to know what benefits you’ll receive. Ask these questions during your interview with a prospective employer and start participating in the plan as soon as possible. Most employer plans are one of two basic types: defined-contribution plans or defined-benefit plans.
DEFINED-CONTRIBUTION PLAN A defined-contribution plan, sometimes called an individual account plan, consists of an individual account for each employee to which the employer contributes a specific amount annually. This type of retirement plan does not guarantee any particular benefit. When you retire and become eligible for benefits, you simply receive the total amount of funds (including investment earnings) that have been placed in your account.
Several types of defined-contribution plans exist. With a money-purchase plan, your employer promises to set aside a certain amount of money for you each year. The amount is generally a percentage of your earnings. Under a stock bonus plan, your employer’s contribution is used to buy stock in the company for you. The stock is usually held in a trust until you retire. Then you can either keep your shares or sell them. Under a profit-sharing plan, your employer’s contribution depends on the company’s profits.
In a 401(k) plan, also known as a salary-reduction plan, you set aside a portion of your salary from each paycheck to be deducted from your gross pay and placed in a special account. Your employer will often match your contribution up to a specific dollar amount or percentage of your salary. For example, as one of the retirement benefits, McGraw-Hill Education (the publisher of your textbook) offers its employees a 401(k) savings plan. Under this plan, employees can contribute up to $18,000 in 2017. The company matches up to the first 6 percent of the employee’s pretax contributions.
The funds in 401(k) plans are invested in stocks, bonds, and mutual funds. As a result, you can accumulate a significant amount of money in this type of account if you begin contributing to it early in your career. In addition, the money that accumulates in your 401(k) plan is tax-deferred, meaning that you don’t have to pay taxes on it until you withdraw it.
In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may page 466substantially reduce the growth in your account, which will reduce your retirement income. The following example demonstrates how fees and expenses can impact your account.
If you’re employed by a tax-exempt institution, such as a hospital or a nonprofit organization, the salary-reduction plan is called a Section 403(b) plan. As in a 401(k) plan, the funds in a 403(b) plan are tax-deferred. The amount that can be contributed annually page 467to 401(k) and 403(b) plans is limited by law, as is the amount of annual contributions to money-purchase plans, stock bonus plans, and profit-sharing plans.
Employee contributions to a pension plan belong to you, the employee, regardless of the amount of time that you are with a particular employer. What happens to the contributions that the employer has made to your account if you change jobs and move to another company before you retire? One of the most important aspects of such plans is vesting. Vesting is the right to receive the employer’s pension plan contributions that you’ve gained, even if you leave the company before retiring. After a certain number of years with the company, you will become fully vested, or entitled to receive 100 percent of the company’s contributions to the plan on your behalf. Under some plans, vesting may occur in stages. For example, you might become eligible to receive 20 percent of your benefits after three years and gain another 20 percent each year until you are fully vested.
DEFINED-BENEFIT PLAN A defined-benefit plan specifies the benefits you’ll receive at retirement age, based on your total earnings and years on the job. The plan does not specify how much the employer must contribute each year. Instead, your employer’s contributions are based on how much money will be needed in the fund as each participant in the plan retires. If the fund is inadequate, the employer will have to make additional contributions.
CARRYING BENEFITS FROM ONE PLAN TO ANOTHER Some pension plans allow portability, which means that you can carry earned benefits from one pension plan to another when you change jobs. Workers are also protected by the Employee Retirement Income Security Act of 1974, which sets minimum standards for pension plans. Under this act the federal government insures part of the payments promised by defined-benefit plans.
Public Pension Plans
Another source of retirement income is Social Security, a public pension plan established by the U.S. government in 1935. The government agency that manages the program is called the Social Security Administration.
SOCIAL SECURITY Social Security is an important source of retirement income for most Americans. The program covers 97 percent of all workers, and almost one out of every six Americans currently collects some form of Social Security benefit. Social Security is actually a package of protection that provides benefits to retirees, survivors, and disabled persons. The package protects you and your family while you are working and after you retire. Nevertheless, you should not rely on Social Security to cover all of your retirement expenses. Social Security was never intended to provide 100 percent of your retirement income.
Who Is Eligible for Social Security Benefits? The amount of retirement benefits you receive from Social Security is based on your earnings over the years. The more you work and the higher your earnings, the greater your benefits, up to a certain maximum amount.
The Social Security Administration provides you an annual history of your earnings and an estimate of your future monthly benefits. The statement includes an estimate, in today’s dollars, of how much you will get each month from Social Security when you retire—at age 62, full retirement age, or 70—based on your earnings to date and your projected future earnings.
page 468To qualify for retirement benefits, you must earn a certain number of credits. These credits are based on the length of time you work and pay into the system through the Social Security tax, or contribution, on your earnings. You and your employer pay equal amounts of the Social Security tax. Your credits are calculated on a quarterly basis. The number of quarters you need depends on your year of birth. People born after 1928 need 40 quarters to qualify for benefits.
Certain dependents of a worker may receive benefits under the Social Security program. They include a wife or dependent husband aged 62 or older; unmarried children under 18 (or under 19 if they are full-time students no higher than grade 12); and unmarried, disabled children aged 18 or older. Widows or widowers can receive Social Security benefits earlier.
Social Security Retirement Benefits Most people can begin collecting Social Security benefits at age 62. However, the monthly amount at age 62 will be less than it would be if the person waits until full retirement age. This reduction is permanent.
In the past, people could receive full retirement benefits at age 65. However, because of longer life expectancy, the full retirement age is being increased in gradual steps. For people born in 1960 and later, the full retirement age will be 67. If you postpone applying for benefits beyond your full retirement age, your monthly payments will increase slightly for each year you wait, but only up to age 70.
Financial experts recommend that retirees delay taking Social Security to increase their lifetime income, but most of today’s retirees took Social Security before their full retirement age. An estimated 72.8 percent took benefits before age 65, and only 14.1 percent took benefits the month they reached their full retirement.
Social Security Information For more information about Social Security, you can visit the Social Security website (www.ssa.gov). It provides access to forms and publications and gives links to other valuable information. To learn more about the taxability of Social Security benefits, contact the Internal Revenue Service at 1-800-829-3676 and ask for Publication 554, Social Security and Equivalent Railroad Retirement Benefits.
OTHER PUBLIC PENSION PLANS Besides Social Security, the federal government provides several other special retirement plans for federal government workers and railroad employees. Employees covered under these plans are not covered by Social Security. The Veterans Administration provides pensions for survivors of people who died while in the armed forces. It also offers disability pensions for eligible veterans. Many state and local governments provide retirement plans for their employees as well.
Personal Retirement Plans
In addition to public and employer retirement plans, many people choose to set up personal retirement plans. Such plans are especially important to self-employed people and other workers who are not covered by employer pension plans. Among the most popular personal retirement plans are individual retirement accounts and Keogh accounts.
INDIVIDUAL RETIREMENT ACCOUNTS An individual retirement account (IRA) is a special account in which the person sets aside a portion of income for retirement. Several types of IRAs are available:
Regular IRA: A regular (traditional or classic) IRA lets you make annual contributions until age 70½. The contribution limit was $5,500 per year in 2017 and after ($6,500, if 50 or over). Depending on your tax filing status and income, the contribution may be fully or partially tax-deductible. The tax deductibility of a traditional IRA also depends on whether you belong to an employer-provided retirement plan. For example, in 2017, if you were covered by a retirement plan at work and you filed a page 469joint return, then your tax-deductible contribution was reduced if your adjusted gross income was between $99,000 and $119,000.
Roth IRA: Annual contributions to a Roth IRA are not tax-deductible, but the earnings accumulate tax-free. You may contribute the amounts discussed above if you’re a single taxpayer with an adjusted gross income (AGI) of less than $133,000. For married couples, the combined AGI must be less than $196,000. You can continue to make annual contributions to a Roth IRA even after age 70½. If you have a Roth IRA, you can withdraw money from the account tax-free and penalty-free after five years if you are at least 59½ years old or plan to use the money to help buy your first home. You may convert a regular IRA to a Roth IRA. Depending on your situation, one type of account may be better for you than the other.
Simplified Employee Pension (SEP) Plan: A simplified employee pension (SEP) plan, also known as a SEP IRA, is an individual retirement account funded by an employer. Each employee sets up an IRA account at a bank or other financial institution. Then the employer makes an annual contribution of up to $54,000 in 2017. The employee’s contributions, which can vary from year to year, are fully tax-deductible, and earnings are tax-deferred. A business of any size, even the self-employed, can establish a SEP IRA. The SEP IRA is the simplest type of retirement plan if a person is self-employed.
Spousal IRA: A spousal IRA lets you make contributions on behalf of your nonworking spouse if you file a joint tax return. The contributions are the same as for the traditional and Roth IRAs. As with a traditional IRA, this contribution may be fully or partially tax-deductible, depending on your income. This also depends on whether you belong to an employer-provided retirement plan.
Rollover IRA: A rollover IRA is a traditional IRA that lets you roll over, or transfer, all or a portion of your taxable distribution from a retirement plan or other IRA. You may move your money from plan to plan without paying taxes on it. To avoid taxes, however, you must follow certain rules about transferring the money from one plan to another. If you change jobs or retire before age 59½, a rollover IRA may be just what you need. It will let you avoid the penalty you would otherwise have to pay on early withdrawals.
Education IRA: An education IRA, also known as a Coverdell Education Savings Account (Coverdell ESA), is a special IRA with certain restrictions. It allows individuals to contribute up to $2,000 per year toward the education of any child under age 18. The contributions are not tax-deductible. However, they do provide tax-free distributions for education expenses.
Exhibit 14–5 summarizes the various types of IRAs.
Exhibit 14–5 Various Types of IRAs
IRAs can be a good way to save money for retirement. What are the features of the Education IRA?
Type of IRA |
IRA Features |
|---|---|
Regular IRA |
|
Roth IRA |
|
Simplified Employee Pension Plan (SEP IRA) |
|
Spousal IRA |
|
Rollover IRA |
|
Education IRA |
|
Whether or not you’re covered by another type of pension plan, you can still make IRA contributions that are not tax-deductible. All of the income your IRA earns will compound tax-deferred, until you begin making withdrawals. Remember, the biggest benefit of an IRA lies in its tax-deferred earnings growth. The longer the money accumulates tax-deferred, the bigger the benefit.
IRA Withdrawals When you retire, you can withdraw the money from your IRA by one of several methods. You can take out all of the money at one time, but the entire amount will be taxed as income. If you decide to withdraw the money from your IRA in installments, you will have to pay tax only on the amount that you withdraw. A final alternative would be to place the money that you withdraw in an annuity that guarantees payments over your lifetime. See the discussion of annuities later in this section for further information about this option.
KEOGH PLANS A Keogh plan, also known as an H.R. 10 plan or a self-employed retirement plan, is a retirement plan specially designed for self-employed people and their employees. Keogh plans have limits on the amount of annual tax-deductible contributions as well as various other restrictions. Keogh plans can be complicated to administer, so you should get professional tax advice before using this type of personal retirement plan.
page 470LIMITS ON PERSONAL RETIREMENT PLANS With the exception of Roth IRAs, you cannot keep money in most tax-deferred retirement plans forever. When you retire, or by age 70½ at the latest, you must begin to receive “minimum lifetime distributions,” withdrawals from the funds you accumulated in the plan. The amount of the distributions is based on your life expectancy at the time the distributions begin. If you don’t withdraw the minimum distributions from a retirement account, the IRS will charge you a penalty.
Exhibit 14–6 presents the timeline for retirement planning,
Exhibit 14–6 Timeline for Retirement Planning
Age |
Actions to take |
|---|---|
50 |
Begin making catch-up contributions, an extra amount that those over 50 can add to 401(k) and other retirement accounts. Check your Social Security statement online every year for earnings accuracy and to learn what your estimated benefits will be. |
59 1/2 |
No more tax penalties are levied on early withdrawals from employer-provided retirement savings plans such as 401(k) plans and other individual retirement accounts, but leaving money in means more time for it to grow. Also, withdrawals will be taxed as regular income. |
62 |
The minimum age to receive Social Security benefits, but delaying claiming means a better monthly benefit |
65 |
Eligible for Medicare Sign up for Medicare and Medicare Part D. |
66-70 |
Receive Social Security full benefits, depending on your birth year. Earn Social Security Delayed Retirement Credits, which increase monthly benefits for each month claiming is delayed between the full retirement age and age 70. |
70 1/2 |
Start taking minimum withdrawals from most retirement accounts by this age; otherwise, you may be charged heavy penalties in the future. |
Sources: U.S. Department of Labor, Social Security Administration, and Department of Health and Human Services 2017.
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Annuities
What do you do if you have funded your 401(k), 403(b), Keogh, and profit-sharing plans up to the allowable limits and you want to put away more money for retirement? The answer may be an annuity. You will recall from Chapter 10, an annuity is a contract purchased from an insurance company that provides for a sum of money to be paid to a person at regular intervals for a certain number of years or for life.
You might purchase an annuity with the money you receive from an IRA or company pension. You can simply buy an annuity to supplement the income you’ll receive from either of these types of plans.
You can choose to purchase an annuity that has a single payment or installment payments. You will also need to decide whether you want the insurance company to send the income from your annuity to you immediately or begin sending it to you at a later date. The payments you receive from an annuity are taxed as ordinary income. However, the interest you earn from the annuity accumulates tax-free until payments begin.
Living on Your Retirement Income
As you plan for retirement, you’ll estimate a budget or spending plan. When the time to retire arrives, however, you may find that your expenses are higher than you expected. If that’s the case, you’ll have some work to do.
First, you’ll have to make sure that you’re getting all the income to which you’re entitled. Are there other programs or benefits for which you might qualify? You’ll also need to think about any assets or valuables you might be able to convert to cash or sources of income.
You may have to confront the trade-off between spending and saving again. For example, perhaps you can use your skills and time instead of money. Instead of spending money on an expensive vacation, take advantage of free and low-cost recreation opportunities, such as public parks, museums, libraries, and fairs. Retirees often receive special discounts on movie tickets, meals, and more.
page 472WORKING DURING RETIREMENT Some people decide to work part-time after they retire. Some even take new full-time jobs. Work can provide a person with a greater sense of usefulness, involvement, and self-worth. It may also be a good way to add to your retirement income.
DIPPING INTO YOUR NEST EGG When should you take money out of your savings during retirement? The answer depends on your financial circumstances, your age, and how much you want to leave to your heirs. (Your heirs are the people who will have the legal right to your assets when you die.) Your savings may be large enough to allow you to live comfortably on the interest alone. On the other hand, you may need to make regular withdrawals to help finance your retirement.
If you dip into your retirement nest egg, you should consider one important question: How long will your savings last if you make regular withdrawals?
Whatever your situation is, once your nest egg is gone, it’s gone. As shown in Exhibit 14–7, dipping into your nest egg is not wrong, but do so with caution.
Exhibit 14–7 Dipping into Your Nest Egg
NOTE: Based on an interest rate of 5.5 percent per year, compounded quarterly.
Source: Select Committee on Aging, U.S. House of Representatives.
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LO14.3
Analyze the personal and legal aspects of estate planning.
Estate Planning
The Importance of Estate Planning
Many people think of estates as belonging only to the rich or elderly. The fact is, however, everyone has an estate. Simply defined, your estate consists of everything you own. During your working years, your financial goal is to acquire and accumulate money for both your current and future needs. Many years from now, as you grow older, your point of view will change. Instead of working to acquire assets, you’ll start to think about what will happen to your hard-earned wealth after you die. In most cases, you’ll want to pass that wealth along to your loved ones. That is where estate planning becomes important.
For example, identifying various kinds of wills and trusts will help you devise an estate plan that protects your interests as well as those of your family. Creating an effective estate plan will allow you to prosper during retirement and provide for your loved ones when you die.
What Is Estate Planning?
Estate planning is the process of creating a detailed plan for managing your assets so that you can make the most of them while you’re alive and ensure that they’re distributed wisely after your death. It’s not pleasant to think about your own death. However, it is a part of estate planning. Without a good estate plan, the assets you accumulate during your lifetime might be greatly reduced by various taxes when you die.
Estate planning is an essential part of both retirement planning and financial planning. It has two phases. First, you build your estate through savings, investments, and insurance.
Second, you ensure that your estate will be distributed as you wish at the time of your death. If you’re married, your estate planning should take into account the needs of your spouse and children. If you are single, you still need to make sure that your financial affairs are in order for your beneficiaries. Your beneficiary is a person you’ve named to receive a portion of your estate after your death.
When you die, your surviving spouse, children, relatives, and friends will face a period of grief and loneliness. At the same time, one or more of these people will probably be responsible for settling your affairs. Make sure that important documents are accessible, understandable, and legally proper.
Legal Documents
An estate plan typically involves various legal documents, one of which is usually a will. When you die, the person who is responsible for handling your affairs will need access to these and other important documents. The documents must be reviewed and verified before your survivors can receive the money and other assets to which they’re entitled. If no one can find the necessary documents, your heirs may experience emotionally painful page 474delays. They may even lose part of their inheritance. The important papers you need to collect and organize include:
Birth certificates for you, your spouse, and your children.
Marriage certificates and divorce papers.
Legal name changes (especially important to protect adopted children).
Military service records.
Social Security documents.
Veteran’s documents.
Insurance policies.
Transfer records of joint bank accounts.
Safe-deposit box records.
Automobile registration.
Titles to stock and bond certificates.
LO14.4
Distinguish among various types of wills and trusts.
Legal Aspects of Estate Planning
Wills
One of the most important documents that every adult should have is a written will. A will is the legal document that specifies how you want your property to be distributed after your death. If you die intestate—without a valid will—your legal state of residence will step in and control the distribution of your estate without regard for any wishes you may have had.
You should avoid the possibility of dying intestate. The simplest way to do that is to make sure that you have a written will. By having an attorney help you draft your will, you may forestall many difficulties for your heirs. Legal fees for drafting a will vary with the size of your estate and your family situation. A standard will costs between $300 and $400. Make sure that you find an attorney who has experience with wills and estate planning.
Types of Wills
You have several options in preparing a will. The four basic types of wills are the simple will, the traditional marital share will, the exemption trust will, and the stated amount will. The differences among them can affect how your estate will be taxed.
SIMPLE WILL A simple will leaves everything to your spouse. Such a will is generally sufficient for people with small estates. However, if you have a large or complex estate, a simple will may not meet your objectives. It may also result in higher overall taxation, since everything you leave to your spouse will be taxed as part of his or her estate.
TRADITIONAL MARITAL SHARE WILL The traditional marital share will leaves one-half of the adjusted gross estate (the total value of the estate minus debts and costs) to the spouse. The other half of the estate may go to children or other heirs. It can also be held page 475in trust for the family. A trust is an arrangement by which a designated person, known as a trustee, manages assets for the benefit of someone else. A trust can provide a spouse with a lifelong income and would not be taxed at his or her death.
EXEMPTION TRUST WILL With an exemption trust will, all of your assets go to your spouse except for a certain amount, which goes into a trust. This amount, plus any interest it earns, can provide your spouse with lifelong income that will not be taxed. The tax-free aspect of this type of will may become important if your property value increases considerably after you die.
STATED AMOUNT WILL The stated amount will allows you to pass on to your spouse any amount that satisfies your family’s financial goals. For tax purposes, you could pass the exempted amount of $5.49 million (in 2017). However, you might decide to pass on a stated amount related to your family’s future income needs or to the value of personal items.
WILLS AND PROBATE The type of will that is best for your particular needs depends on many factors, including the size of your estate, inflation, your age, and your objectives. No matter what type of will you choose, it’s best to avoid probate. Probate is the legal procedure of proving a valid or invalid will. It’s the process by which your estate is managed and distributed after your death, according to the provisions of your will. A special probate court generally validates wills and makes sure that your debts are paid. You should avoid probate because it’s expensive, lengthy, and public. As you will read later, a living trust avoids probate and is also less expensive, quicker, and private.
Formats of Wills
Wills may be either holographic or formal. A holographic will is a handwritten will that you prepare yourself. It should be written, dated, and signed entirely in your own handwriting. No printed or typed information should appear on its pages. Some states do not recognize holographic wills as legal.
A formal will is usually prepared with the help of an attorney. It may be typed, or it may be a preprinted form that you fill out. You must sign the will in front of two witnesses; neither person can be a beneficiary named in the will. The witnesses must then sign the will in front of you.
A statutory will is prepared on a preprinted form, available from lawyers, stationery stores, or internet sites. Using preprinted forms to prepare your will presents serious risks. The form may include provisions that are not in the best interests of your heirs. Therefore, it is best to seek a lawyer’s advice when you prepare your will.
Writing Your Will
Writing a will allows you to express exactly how you want your property to be distributed to your heirs. If you’re married, you may think that all the property owned jointly by you and your spouse will automatically go to your spouse after your death. This is true of some assets, such as your house. Even so, writing a will is the only way to ensure that all of your property will end up where you want it.
SELECTING AN EXECUTOR An executor is someone who is willing and able to perform the tasks involved in carrying out your will. These tasks include preparing an inventory of your assets, collecting any money due, and paying off your debts. Your executor must also prepare and file all income and estate tax returns. In addition, he or she will be responsible for making decisions about selling or reinvesting assets to pay off debt and provide income for your family while the estate is being settled. Finally, your executor must distribute the estate and make a final accounting to your beneficiaries and to the probate court.
page 476SELECTING A GUARDIAN If you have children, your will should also name a guardian to care for them in the event that you and your spouse die at the same time and the children cannot care for themselves. A guardian is a person who accepts the responsibility of providing children with personal care after their parents’ death and managing the parents’ estate for the children until they reach a certain age.
ALTERING OR REWRITING YOUR WILL Sometimes you’ll need to change the provisions of your will because of changes in your life or in the law. Once you’ve made a will, review it frequently so that it remains current. Here are some reasons to review your will:
You’ve moved to a new state that has different laws.
You’ve sold property that is mentioned in the will.
The size and composition of your estate have changed.
You’ve married, divorced, or remarried.
Potential heirs have died, or new ones have been born.
Don’t make any written changes on the pages of an existing will. Additions, deletions, or erasures on a will that has been signed and witnessed can invalidate the will. If you want to make only a few minor changes, adding a codicil may be the best choice. A codicil is a document that explains, adds, or deletes provisions in your existing will.
A Living Will
At some point in your life, you may become physically or mentally disabled and unable to act on your own behalf. If that happens, you’ll need a living will. A living will is a document in which you state whether you want to be kept alive by artificial means if you become terminally ill and unable to make such a decision. Many states recognize living wills.
Exhibit 14–8 is an example of a typical living will.
Exhibit 14–8 A Living Will
page 477To ensure the effectiveness of a living will, discuss your intention of preparing such a will with the people closest to you. You should also discuss this with your family doctor. Sign and date your document before two witnesses. Witnessing shows that you signed of your own free will.
Give copies of your living will to those closest to you, and have your family doctor place a copy in your medical file. Keep the original document readily accessible, and look it over periodically—preferably once a year—to be sure your wishes have remained unchanged. To verify your intent, redate and initial each subsequent endorsement.
Most lawyers will do the paperwork for a living will at no cost if they are already preparing your estate plan. You can also get the necessary forms from nonprofit advocacy groups. Partnership for Caring: America’s Voices for the Dying is a national nonprofit organization that operates the only national crisis and information hotline dealing with end-of-life issues. It also provides living wills, medical powers of attorney, and similar documents geared to specific states. Working through end-of-life issues is difficult, but it can help avoid forcing your family to make a decision in a hospital waiting room—or worse, having your last wishes ignored.
SOCIAL MEDIA WILL Social media is part of daily life, so what happens to the online content that you created once you die? If you are active online, you should consider creating a statement of how you would like your online identity to be handled. You should appoint someone you trust as an online executor. This person will be responsible for the closure of your email addresses, social media profiles, and blogs after you die. Take these steps to help you write a social media will:
Review the privacy policies and the terms and conditions of each website where you have a presence.
State how you would like your profile to be handled. You may want to completely cancel your profile or keep it up for friends and family to visit. Some sites allow users to create a memorial profile where other users can still see your profile but can’t post anything new.
Give the social media executor a document that lists all the websites where you have a profile, along with your usernames and passwords.
State in your will that the online executor should have a copy of your death certificate. The online executor may need this as proof in order for websites to take any actions on your behalf.
POWER OF ATTORNEY Related to the idea of a living will is power of attorney. A power of attorney is a legal document that authorizes someone to act on your behalf. If you become seriously ill or injured, you’ll probably need someone to take care of your needs and personal affairs. This can be done through a power of attorney.
LETTER OF LAST INSTRUCTION In addition to a traditional will, it is a good idea to prepare a letter of last instruction. This document is not legally binding, but it can provide your heirs with important information. It should contain your wishes for your funeral arrangements as well as the names of the people who are to be informed of your death.
Trusts
Basically, a trust is a legal arrangement that helps manage the assets of your estate for your benefit or that of your beneficiaries. The creator of the trust is called the trustor, or grantor. The trustee might be a person or institution, such as a bank, that administers the trust. A bank charges a small fee for its services in administering a trust. The fee is usually based on the value of the assets in the trust.
page 478Individual circumstances determine whether establishing a trust makes sense. Some of the common reasons for setting up a trust are to:
Reduce or otherwise provide payment of estate taxes.
Avoid probate and transfer your assets immediately to your beneficiaries.
Free yourself from managing your assets while you receive a regular income from the trust.
Provide income for a surviving spouse or other beneficiary.
Ensure that your property serves a desired purpose after your death.
Types of Trusts
There are many types of trusts, some of which are described in detail in this section. You’ll need to choose the type of trust that’s most appropriate for your particular situation. An estate attorney can advise you about the right type of trust for your personal and family needs.
All trusts are either revocable or irrevocable. A revocable trust is one in which you have the right to end the trust or change its terms during your lifetime. An irrevocable trust is one that cannot be changed or ended. Revocable trusts avoid the lengthy process of probate, but they do not protect assets from federal or state estate taxes. Irrevocable trusts avoid probate and help reduce estate taxes. However, by law you cannot remove any assets from an irrevocable trust, even if you need them at some later point in your life.
CREDIT-SHELTER TRUST A credit-shelter trust is one that enables the spouse of a deceased person to avoid paying federal taxes on a certain amount of assets left to him or her as part of an estate. Perhaps the most common estate planning trust, the credit-shelter trust has many other names: bypass trust, “residuary” trust, A/B trust, exemption equivalent trust, or family trust. It is designed to allow married couples, who can leave everything to each other tax-free, to take full advantage of the exemption that allows $5.49 million (in 2017) in every estate to pass free of federal estate taxes. The surviving spouse’s estate in excess of $10.98 million (in 2017) faces estate tax of 40 percent.
DISCLAIMER TRUST A disclaimer trust is appropriate for couples who do not yet have enough assets to need a credit-shelter trust but may have in the future. With a disclaimer trust, the surviving spouse is left everything, but he or she has the right to disclaim, or deny, some portion of the estate. Anything that is disclaimed goes into a credit-shelter trust. This approach allows the surviving spouse to protect wealth from estate taxes.
LIVING TRUST A living trust, also known as an inter vivos trust, is a property management arrangement that goes into effect while you’re alive. It allows you, as a trustor, to receive benefits during your lifetime. To set up a living trust, you simply transfer some of your assets to a trustee. Then you give the trustee instructions for managing the trust while you’re alive and after your death. A living trust has several advantages:
It ensures privacy. A will is a public record; a trust is not.
The assets held in trust avoid probate at your death. This eliminates probate costs and delays.
It enables you to review your trustee’s performance and make changes if necessary.
It can relieve you of management responsibilities.
It’s less likely than a will to create arguments between heirs upon your death.
It can guide your family and doctors if you become terminally ill or unable to make your own decisions.
Read the nearby Financial Literacy in Practice feature to make sure that living trust offers are trustworthy.
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Setting up a living trust costs more than creating a will. However, depending on your particular circumstances, a living trust can be a good estate planning option.
TESTAMENTARY TRUST A testamentary trust is one established by your will that becomes effective upon your death. Such a trust can be valuable if your beneficiaries are inexperienced in financial matters. It may also be your best option if your estate taxes will be high. A testamentary trust provides many of the same advantages as a living trust.
Taxes and Estate Planning
Federal and state governments impose various types of taxes that you must consider in estate planning. The four major types of taxes are estate taxes, estate and trust federal income taxes, inheritance taxes, and gift taxes.
ESTATE TAXES An estate tax is a federal tax collected on the value of a person’s property at the time of his or her death. The tax is based on the fair market value of the deceased person’s investments, property, and bank accounts, less an exempt amount of $5.49 million in 2017; this tax is due nine months after a death.
ESTATE AND TRUST FEDERAL INCOME TAXES In addition to the federal estate tax return, estates and certain trusts must file federal income tax returns with the Internal Revenue Service. Taxable income for estates and trusts is computed in the same manner as taxable income for individuals. Trusts and estates must pay quarterly estimated taxes.
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INHERITANCE TAXES Your heirs might have to pay a tax for the right to acquire the property that they have inherited. An inheritance tax is a tax collected on the property left by a person in his or her will.
Only state governments impose inheritance taxes. Most states collect an inheritance tax, but state laws differ widely as to exemptions and rates of taxation. A reasonable average for state inheritance taxes would be 4 to 10 percent of whatever the heir receives.
GIFT TAXES Both the state and federal governments impose a gift tax, a tax collected on money or property valued at more than $14,000 (in 2017) given by one person to another in a single year. One way to reduce the tax liability of your estate is to reduce the size of the estate while you’re alive by giving away portions of it as gifts. You’re free to make such gifts to your spouse, children, or anyone else at any time. (Don’t give away assets if you need them in your retirement!)
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page 482
Chapter Summary
LO14.1 The difference between your assets and your liabilities is your net worth. Review your assets to ensure they are sufficient for retirement. Then estimate your living expenses. Some expenses are likely to decrease while others will increase.
LO14.2 Your possible sources of income during retirement include employer pension plans, public pension plans, personal retirement plans, and annuities. If your income approximates your expenses, you are in good shape; if not, determine additional income needs and sources.
LO14.3 The personal aspects of estate planning depend on whether you are single or married. Never having been married does not eliminate the need to organize your financial affairs. Every adult should have a written will. A will is a way to transfer your property according to your wishes after you die.
LO14.4 The four basic types of wills are the simple will, the traditional marital share will, the exemption trust will, and the stated amount will. Types of trusts include the credit-shelter trust, the disclaimer trust, the living trust, and the testamentary trust.
Federal and state governments impose various types of estate taxes; you can prepare a plan for paying these taxes.
Key Terms
individual retirement account (IRA) 468
Self-Test Problems
Beverly Foster is planning for her retirement. She has determined that her car is worth $10,000, her home is worth $150,000, her personal belongings are worth $100,000, and her stocks and bonds are worth $300,000. She owes $50,000 on her home and $5,000 on her car. Calculate her net worth.
Calculate how much money an average older (65-74) household with pretax annual income of $52,366 spends on food each year. (Hint: Use Exhibit 14–3.)
On December 31, 2014, George gave $14,000 to his son and $14,000 to his son’s wife. On January 1, 2015, George gave another $14,000 to his son and another $14,000 to his son’s wife. George made no other gifts to his son or his son’s wife in 2014 and 2015. What was the gift tax?
Solutions
Assets
Liabilities
Car
$ 10,000
Mortgage
$ 50,000
Home
$150,000
Car
5,000
Personal belongings
$100,000
Total liabilities
$ 55,000
Stocks and bonds
$300,000
Total assets
$560,000
Net worth
=
Assets
−
Liabilities
=
$560,000
−
$55,000
=
$505,000
page 483An average older household with an annual income of $52,366 spends about 12 percent of their income on food. Thus, $52,366 × 12 percent = $6,284.
There was no gift tax in 2014 or in 2015 since George gifted $14,000 to his son and son’s wife in each of the two years.
Problems
Shelly’s assets include money in checking and saving accounts, investments in stocks and mutual funds, and personal property such as furniture, appliances, an automobile, a coin collection, and jewelry. Shelly calculates that her total assets are $165,200. Her current unpaid bills, including an auto loan, credit card balances, and taxes, total $21,300. Calculate Shelly’s net worth. (LO14.1)
Prepare your net worth statement using the Assets – Liabilities = Net worth equation. (LO14.1)
Ted Riley owns a Lexus worth $40,000. He owns a home worth $275,000. He has a checking account with $800 in it and a savings account with $1,900 in it. He has a mutual fund worth $110,000. His personal assets are worth $90,000. He still owes $25,000 on his car and $150,000 on his home, and he has a balance on his credit card of $1,600. What is Ted’s net worth? (LO14.1)
Calculate approximately how much money an older (age 65-74) household with an annual income of $45,000 spends on housing each year. (Hint: Use Exhibit 14–3.) (LO14.1)
Using Exhibit 14–3, calculate approximately how much money the household from problem 4 spends on health care. (LO14.1)
Ruby is 25 and has a good job at a biotechnology company. She currently has $10,000 in an IRA, an important part of her retirement nest egg. She believes her IRA will grow at an annual rate of 8 percent, and she plans to leave it untouched until she retires at age 65. Ruby estimates that she will need $875,000 in her total retirement nest egg by the time she is 65 in order to have retirement income of $20,000 a year (she expects that Social Security will pay her an additional $15,000 a year). (LO14.2)
How much will Ruby’s IRA be worth when she needs to start withdrawing money from it when she retires? (Hint: Use Exhibit 1–A in the Chapter 1 Appendix.)
How much money will she have to accumulate in her company’s 401(k) plan over the next 40 years in order to reach her retirement income goal?
Gene and Dixie, husband and wife (ages 35 and 32), both work. They have an adjusted gross income of $95,000 in 2017, and they are filing a joint income tax return. Both have employer-provided retirement plans at work. What is the maximum IRA contribution they can make? How much of that contribution is tax-deductible? (LO14.2)
You have $100,000 in your retirement fund that is earning 5.5 percent per year, compounded quarterly. How many dollars in withdrawals per month would reduce this nest egg to zero in 20 years? How many dollars per month can you withdraw for as long as you live and still leave this nest egg intact? (Hint: Use Exhibit 14–7.) (LO14.2)
Problems 9, 10, and 11 are based on the following scenario:
In 2016, Joshua gave $14,000 worth of Microsoft stock to his son. In 2017, the Microsoft shares were worth $23,000.
What was the gift tax in 2016? (LO14.4)
What was the total amount removed from Joshua’s estate in 2017? (LO14.4)
What was the gift tax in 2017? (LO14.4)
In 2017, you gave a gift of $14,000 to a friend. What was the gift tax? (LO14.4)
Problems 13, 14, and 15 are based on the following scenario:
Barry and his wife, Mary, have accumulated over $3.5 million during their 50 years of marriage. They have three children and five grandchildren.
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How much money can they gift to their children in 2017 without any gift tax liability? (LO14.4)
How much money can Barry and Mary gift to their grandchildren in 2017 without any gift tax liability? (LO14.4)
What is the total amount of estate removed from Barry and Mary’s estate in 2017? (LO14.4)
The date of death for a widow was 2017. If the estate was valued at $7.5 million and the estate was taxed at 40 percent, what was the heir’s tax liability? (LO14.4)
Joe and Rachael are both retired. Married for 55 years, they have amassed an estate worth $4.4 million. The couple has no trust or other type of tax-sheltered assets. If Joe or Rachael died in 2017, how much federal estate tax would the surviving spouse have to pay, assuming that the estate is taxed at the 40 percent rate? (LO14.4)
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To reinforce the content in this chapter, more problems are provided at connect.mheducation.com. |
Apply Yourself for Financial Literacy
How will your spending patterns change during your retirement years? Compare your spending patterns with those shown in Exhibit 14–3. (LO14.1)
Obtain Form SSA-7004 from your local Social Security office. Complete and mail the form to receive a personal earnings and benefits statement. Use the information in this statement to plan your retirement. (LO14.2)
Prepare a written report of personal information that would be helpful to you and your heirs. Be sure to include the location of family records, your military service file, and other important papers; medical records; bank accounts; charge accounts; location of your safe-deposit box; U.S. savings bonds, stocks, bonds, and other securities; property owned; life insurance; annuities; and Social Security information. (LO14.3)
Read this entry on the Money Under 30 website: https://www.moneyunder30.com/do-i-need-a-will. Using this information, prepare a report on the following: (a) Who needs a will? (b) What are the elements of a will (naming a guardian, naming an executor, preparing a will, updating a will, estate taxes, where to keep your will, living will, etc.)? (c) How is this report helpful in preparing your own will? (LO14.3)
Make a list of the criteria you will use in deciding who will be the guardian of your minor children if you and your spouse die at the same time. (LO14.3)
REAL LIFE PERSONAL FINANCE
PLANNING FOR RETIREMENT
Is a bad day fishing better than a good day at the office? Yes, according to a retired dad, Chuck. With his company pension, at least he didn’t have to worry about money. In the good old days, if you had a decent job, you’d hang on to it, and then your company’s pension combined with Social Security payments would be enough to live comfortably. Chuck’s son, Rob, does not have a company pension and is not sure whether Social Security will even exist when he retires. So when it comes to retirement, the sooner you start saving, the better.
Take Maureen, a salesperson for a computer company, and Therese, an accountant for a lighting manufacturer. Both start their jobs at age 25. Maureen starts saving for retirement right away by investing $300 a month at 9 percent until age 65. But Therese does nothing until age 35. At 35, she begins investing the same $300 a month at 9 percent until age 65. What a shocking difference! Maureen has accumulated $1.4 million, while Therese has only $553,000 in her retirement fund. The moral? The sooner you start, the more you’ll have page 485for your retirement. Women especially need to start sooner, because they typically enter the workforce later, have lower salaries, and, ultimately, have lower pensions.
Laura Tarbox, owner and president of Tarbox Equity, explains how to determine your retirement needs and how your budget might change when you retire. Tarbox advises that the old rule of thumb—that you need 60 to 70 percent of preretirement income—is too low an estimate. She cautions that most people will want to spend very close to what they were spending before retiring. There are some expenses that might be lower, however, such as clothing for work, dry cleaning, and commuting expenses. Other expenses, though, such as insurance, travel, and recreation, may increase during retirement.
Questions
In the past, many workers chose to stay with their employers until retirement. What was the major reason for employees’ loyalty?
How did Maureen amass $1.4 million for retirement, while Therese could accumulate only $553,000?
Why do women need to start early to save for retirement?
What expenses may increase or decrease during retirement?
Continuing Case
STARTING EARLY: RETIREMENT AND ESTATE PLANNING
Jamie Lee and Ross, now in their 50s, have plenty of time on their hands now that the triplets are away at college. They both realize that time has flown by; more than 24 years have passed since they married!
Looking back over the years, they realize that they have worked hard in their careers, Jamie Lee as the proprietor of a cupcake café and Ross, self-employed as a web page designer. They enjoyed raising their family and strived to be financially sound as they looked forward to a retirement that is just around the corner. They saved regularly and invested wisely over the years. They rebounded nicely from the recent economic crisis over the past few years, as they watched their investments closely and adjusted their strategies when they felt it necessary. They purchase vehicles with cash and do not carry credit card balances, choosing to use them for convenience only. The triplets are pursuing their master’s degrees and have tuition covered through work-study programs at the university.
Jamie Lee and Ross are just a few short years from realizing their goals of retiring at 65 and purchasing the home at the beach!
Current Financial Situation
Assets (Jamie Lee and Ross combined):
Checking account, $5,500
Savings account, $53,000
Emergency fund savings account, $45,000
House, $475,000
IRA balance, $92,000
Life insurance cash value, $125,000
Investments (stocks, bonds), $750,000
Cars, $12,500 (Jamie Lee) and $16,000 (Ross)
Liabilities (Jamie Lee and Ross combined):
Mortgage balance, $43,000
Credit card balance, $0
Car loans, $0
page 486Income:
Jamie Lee, $45,000 gross income ($31,500 net income after taxes)
Ross, $135,000 gross income ($97,200 net income after taxes)
Monthly Expenses
Mortgage, $1,225
Property taxes, $500
Homeowner’s insurance, $300
IRA contribution, $300
Utilities, $250
Food, $600
Gas/Maintenance, $275
Entertainment, $300
Life insurance, $375
Questions
As Jamie Lee and Ross review their assets, can you tell them which will be valuable to them for income as retirement approaches?
Jamie Lee and Ross estimate that they will have $1 million in liquid assets to withdraw from at the start of their retirement. They plan to be in retirement for 30 years. Using Exhibit 14–7, how much do you think Jamie Lee and Ross can withdraw each month and still leave their nest egg intact? How much can they withdraw each month that will reduce their nest egg to zero?
Jamie Lee and Ross have been hearing many stories recently about acquaintances who are passing away without leaving a will, which made Jamie Lee and Ross anxious to review their estate plan with an attorney. They do not want to think about eventually passing on, but they know it is an essential part to careful financial planning. It was suggested that they assemble all of their legal documents in a place where their heirs would be able to access them if necessary. What documents would you suggest that Jamie Lee and Ross make accessible?
Jamie Lee and Ross are now having the attorney draw up a will for each of them. What is the purpose of having a will? Do they need to have an attorney to draft a will? What type of will would you recommend they have, based on their marital/family status?
Spending Diary
“KEEPING TRACK OF MY DAILY SPENDING GETS ME TO START THINKING ABOUT SAVING AND INVESTING FOR RETIREMENT.”
Directions The consistent use of a Daily Spending Diary can provide you with ongoing information that will help you manage your spending, saving, and investing activities. Taking time to reconsider your spending habits can result in achieving better satisfaction from your available finances. The Daily Spending Diary sheets are located in Appendix D at the end of the book and in Connect Finance.
ANALYSIS QUESTIONS
What portion of your available finances involve saving or investing for long-term financial security?
What types of retirement and estate planning activities might you start to consider at this point of your life?
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Type of plan |
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Name of financial institution or employer |
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Website |
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Minimum initial deposit |
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Minimum additional deposits |
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Employer contributions |
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Current rate of return |
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Service charges/fees |
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Safety insured? By whom? |
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Payroll deduction available? |
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Tax benefits |
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Penalty for early withdrawal:
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Other features or restrictions |
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What’s Next for Your Personal Financial Plan?
Survey local businesses to determine the types of retirement plans available to employees.
Talk to representatives of various financial institutions to obtain their suggestions for IRA investments.
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Estimated annual retirement living expenses |
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Estimated annual living expenses if you retired today |
$ |
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Future value for years until retirement at expected annual income of % (use future value of $1, Exhibit 1–A of Chapter 1 Appendix) |
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Projected annual retirement living expenses adjusted for inflation................ |
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(A) $ |
Estimated annual income at retirement |
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Social Security income |
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Company pension, personal retirement account income |
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Investment and other income |
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Total retirement income................ |
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(B) $ |
Annual shortfall of income after retirement (subtract B from A)................ |
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Additional amount required to fund the income shortfall at retirement |
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Expected annual rate of return on funds before retirement |
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Expected years in retirement |
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Expected annual rate of return on invested funds after retirement |
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Additional amount needed at retirement to fund the shortfall................ |
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Future value factor of a series of deposits for years until retirement and an expected annual rate of return before retirement of % (use Exhibit 1–B of Chapter 1 Appendix) equals |
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Annual deposit required to accumulate the amount needed (D ÷ E)................ |
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What’s Next for Your Personal Financial Plan?
Survey retired individuals or people close to retirement to obtain information on their main sources of retirement income.
Make a list that suggests the best investment options for an individual retirement account.
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Are your financial records, including recent tax forms, insurance policies, and investment and housing documents organized and easily accessible? |
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Do you have a safe-deposit box? Where is it located? Where is the key? |
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Location of life insurance policies. Name and address of insurance company and agent. |
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Is your will current? Location of copies of your will. Name and address of your lawyer. |
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Name and address of your executor. |
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Do you have a listing of the current value of assets owned and liabilities outstanding? |
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Have any funeral and burial arrangements been made? |
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Have you created any trusts? Name and location of financial institution. |
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Do you have any current information on gift and estate taxes? |
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Have you prepared a letter of last instruction? Where is it located? |
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What’s Next for Your Personal Financial Plan?
Talk to several individuals about the actions they have taken related to estate planning.
Create a list of situations in which a will would need to be revised.
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Type of will |
Features that would be appropriate for my current or future situation |
Attorney, address, phone, cost |
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What’s Next for Your Personal Financial Plan?
Create a list of items that you believe would be desirable to include in a will.
Obtain the cost of a will from a number of different sources.
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Type of trust |
Benefits |
Possible value for my situation |
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What’s Next for Your Personal Financial Plan?
Talk to legal and financial planning experts to contrast the cost and benefits of wills and trusts.
Talk to one or more lawyers to obtain information about the type of trust recommended for your situation.