MANAGING YOUR MONEY : PREPARE...
John Owen did a lot of simple things right.
When his company started a 401(k) plan, a tax-deferred retirement savings program, he signed up and contributed the maximum amount. He worked for a healthy company--Union Bank--and stayed there for 24 years. And, when he was younger, he put as much discretionary income as possible into mutual funds and real estate.
Between Social Security, his pension, 401(k) plan and other investments, Owen, 65, now says he’s reasonably sure that he and his wife will be comfortable through retirement.
“We are not going to luxuriate in opulence and wealth, but we don’t feel as if we are going to have to scrimp and starve either,” Owens said.
This level of comfort doesn’t “just happen.” Owen started investing and planning when he was about 35. If he’d started much later, Owen said he’s not so sure he’d be in such good shape today.
Indeed, investment experts maintain that once you’ve hit age 55, the time for planning is nearly past. There are a few things you can do at this late stage, but it is certainly more difficult.
“After 55, most of your options revolve around the alternatives you have with the pension plan you are currently enrolled in,” said Gregg Ritchie, partner at the accounting firm KPMG Peat Marwick. “Generally, at this point, you are no longer looking for wealth accumulation. You are looking to conserve principal and live off the earnings.”
Consequently, how you invest your money at this age is of paramount importance.
Generally, the income you have to work with in retirement starts with what you’ve accrued in your company-sponsored pension plan, Ritchie said.
Individuals usually will have to choose among three main methods of receiving these pension payments: a lump sum, monthly payments for the duration of the retiree’s lifetime or monthly payments that continue for the duration of the lifetimes of both the retiree and spouse.
Monthly payments under either the single or joint survivor plans are generally based on average life expectancies. So the best choice depends on your personal situation: whether you need monthly income, whether you are concerned about your spouse’s ability to get by after you are gone and how long you expect to live. If you are in good health and your 95-year-old grandmother is still going strong, you might earn more money through the monthly payments than a lump sum. But if you were anxious to invest in something that required substantial amounts of cash, you might prefer to take your money all at once.
From a tax standpoint, lump sum payments are relatively less attractive than previously because the 1986 tax act limited income averaging. Now, most newly retiring wage earners can average their income only over five-year periods, compared to 10 years under the previous law. In general, financial planners say, it makes sense from a tax standpoint to take a lump sum distribution only if declaring one-fifth of the amount as annual income would still keep you below the 28% tax bracket.
Those who opt for lump-sum payments are best advised to invest the proceeds conservatively, added Robert M. Coleman, a certified financial planner with Coleman Financial Planning Group in Pasadena. Treasury bills, certificates of deposit, highly rated municipal bonds and money market accounts are probably the best investment options because they are comparatively safe and provide relatively steady monthly income.
Although some other investments pay higher rates of interest, retired investors need to be cautious because they have little hope of replacing money lost through bad investments, Coleman said.
And investors should not be fooled by promoters. A higher investment return always means a greater risk.
Older investors are well-advised to use Treasury bills and bonds as their standard for the safest investment possible. Rates of return exceeding Treasury rates are usually riskier, but returns lower than Treasury rates are not necessarily safer.
To determine the safety of an investment, find out if the principal is government guaranteed. If someone else guarantees the investment, make sure you have the guarantee in writing and you are confident of the backer’s financial strength. As a final check, always ask yourself, “If this is such a great deal, why is it being offered to me?” Is the promoter a personal friend who has your best interests at heart? If not, and a high return is “virtually guaranteed,” why wouldn’t the promoter just borrow money and invest in it for himself?
Not every retiree has money to invest, and many find they need cash to meet the escalating cost of living.
Homeowners with accumulated equity can tap it as a source of capital. Choices include selling the home and moving into smaller, less expensive quarters, or taking advantage of the new “reverse mortgages,” a type of a loan specifically designed for house-rich but cash-poor older folks.
In a reverse mortgage, the lender makes monthly payments to homeowners based on the value of their houses. The bank is repaid when the homeowner--or most likely his heirs--sells the house. The amount of the loan and monthly payments depend on the borrower’s age and the appraised value of the home.
Despite the obvious benefits, these loans have drawbacks, which include high fees and, in most cases, high interest rates, which makes them most attractive only to very old homeowners with substantial equity in their homes. Moreover, they are offered only on a limited basis in most states.
In fact, many financial planners say most homeowners are better off simply selling their homes and taking advantage of a one-time tax break that allows them to keep $125,000 of the profit tax-free.
Estate planning is also a major concern for most investors in this age group who want to ensure that their survivors receive as much as possible with as little hassle as possible.
If you are affluent, you might consider giving away part of your estate early. Under current federal rules, you are allowed to give away up to $10,000 per person per year without triggering a special tax. It is particularly advisable to give away assets that are likely to appreciate significantly before you die, Ritchie said.
Living trusts, which hold assets in trust for your survivors, are also a good idea. Although they do not save on taxes, they save heirs from probate costs and delays. It does, of course, cost money to transfer your assets into the trust. But, in many cases, the cost is far less than probate.
TIPS
* Take advantage of tax rules for older Americans. Homeowners age 55 and older can sell their homes and take advantage of a one-time tax break that allows them to keep $125,000 of the profit tax-free.
* Use Treasure bills and bonds as the standard for the safest investment possible. Rates of return exceeding Treasury rates are usually riskier, but returns lower than Treasury rates are not necessarily safer.
* Look into the possibility of a living trust. It won’t save on taxes, but it can save your heirs probate costs and delays.
