Strategies for a Successful Retirement: Before, During, & After , livre ebook

Strategies
for a
Successful
Retirement:
 
Before, During & After
By John Lau, CFP ® , CPA
 


 
 
Copyright 2012 © by John Lau
 
 
All rights reserved.
 
No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by an information storage and retrieval system, without permission in writing from the author.
 
Published in eBook format by eBookIt.com
http://www.eBookIt.com
 
ISBN-13: 978-1-4566-0812-5
 
 


 
 
 
To the men and women who helped build this country to its present greatness. You have my sincere gratitude and admiration for all you have done.
----John Lau, Author
 


Preface
Preparation is the key to success in every stage of life, from grade school to college, to entering the work force, to marriage, and to retirement. The level of success depends largely on how well you prepare for the journey.
Today’s retirees face a financial world that is more complex than ever before – the tax law is getting more complex; everything seems to be getting more expensive; the economy is certainly getting more unpredictable; while new financial products and strategies seem to crop up every other day. It is just getting more difficult to keep up. As the menu of retirement choices gets more complex, navigating through the sea of retirement has become increasingly challenging. In my twenty five years of working with retirees, I have certainly witnessed the increase in the complexity of retirement. As we get older, the margin of error becomes narrower. We don’t have as much time to undo a mistake, or to right a wrong, which means making the right decisions have become more important than ever. This book is written to help retirees strategize and make the right choices in each phase of retirement --- Before, During & After.
The first three chapters of the book are written to help you lay down a solid foundation for retirement – making the right choices about your company retirement plan; deciding when to take social security benefits, and preparing a retirement budget.
Once the foundation is secure and the financial landscape is in place, your retirement plan will need to be constantly monitored, pruned, and maintained. Chapters four and five show how to plan for stable income and financial peace of mind during retirement while disinheriting the IRS from your retirement accounts.
Wouldn’t it be a crying shame to do everything right but fumble the ball at the end of the game? The final chapters are about estate planning. They address the need for an estate plan, identify the common mistakes that people make in the settlement and administration of their estates, and show how to avoid them.
Each of the chapters can be expanded into a full length book, so their contents are not meant to be an in-depth thesis. Readers are well advised to further research on the topics of their interests and to seek help from appropriate professionals in their implementation.
 
Good luck and Bon Voyage on your next journey…..
 
----John Lau, Author
 
 

 
List of Figures
Figure 1 – The Retiring Gap
Figure 2 – Sequence of Returns
Figure 3 – Pyramid of Investing
Figure 4 – 3-Legged Stool Allocation Charts
Figure 5 – Spend Regular Money First
 
List of Tables
Table 1 – Social Security Normal Retirement Age
Table 2 – Retirement Budgeting Formula
Table 3 – Determining Cash Flows from Rental Activities
Table 4 – Retirement Budget Template
Table 5 – After-Death Checklist
 
Before Retirement
 

1. What to do with Your Company Plan
When you decide to retire, one of the decisions that you will face early on is what to do with your company retirement plan. Should you keep your company plan or roll it over to an IRA account? What is the right decision for you? The answer will be based partly on your company retirement plan, but mainly on your personal situation. There isn’t a “one-size-fits-all” solution. This chapter is intended to help you choose the most suitable retirement distribution option, for you.
Pre-retirees need proper counseling to make the right decisions regarding their company plans. The complexity of retirement plans has increased over the years, and you should be fully aware of the pros and cons of the options that are available because the one that you choose will impact your retirement for years to come.
 
 
Protection Against Creditors
An important factor in making the roll or no-roll decision is the creditor protection consideration. For protection in non-bankruptcy cases, company retirement plans still offer the best protection against creditors. Most employer-sponsored plans, including 401(k)’s, are covered by the Employee Retirement Income Security Act (ERISA) and are completely protected from creditors (except the IRS and former spouses in divorce proceedings).
IRAs are not covered by ERISA, so they do not have the same protection as company plans. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has expanded the protection for IRAs. Certain IRAs (rollovers from SEP or Simple IRAs, ROTH IRAs, individual IRAs) are now exempt up to at least $1.0 million in bankruptcy cases (adjusted periodically for inflation.) Other IRAs (rollovers from most employer sponsored retirement plans, 401(k)s, 403(b)s, etc.) are entirely exempt. For anything short of bankruptcy, protection is determined at the state level. If you roll over your company plan to an IRA and wish to keep the unlimited bankruptcy protection feature, it is advisable that you roll the money into a Rollover IRA account so they can be kept separate from your contributory IRA account (which is subject to the $1.0 million protection limitation).
If asset protection is a concern, you would be well advised to consult an attorney.
Instead of leaving your retirement funds in your employer-sponsored plan, you may also annuitize your account, or take a lump-sum distribution.
 
 
Annuitization
Annuitizing your retirement account means converting your account to an income stream. Payments may be for a period of time (e.g. five, ten, twenty years…), or for your lifetime. People choose the annuitization option either because they don’t want to manage their money, or they need a guaranteed income stream to live on, or both. The downside is that the annuitized payments are usually not adjusted for inflation, which will expose you to inflation risk. Furthermore, you would no longer have an asset. What if you have an emergency, or maybe you want to leave a financial legacy to your loved ones? A solution to the latter would be to purchase life insurance naming your loved ones as beneficiaries, but it still will not address the issues of inflation risk or providing funds for emergency needs. This is why rolling over your employer-sponsored plan to an individual retirement account (IRA) could be a better alternative.
 
 
Rollover/Lump-Sum Distribution
A lump-sum distribution is the complete withdrawal from your company retirement plan. You may take a lump-sum distribution any time after retirement, and not necessarily in the year that you retire.
A lump-sum distribution can be taken in cash, in an IRA rollover, or transfer to another company plan. If taken in cash, there is a mandatory rule to withhold 20% of the distribution for federal income tax. Even if you roll over the distribution to an IRA later, the 20% withholding rule still applies, unless it is a trustee-to-trustee rollover.
The term “rollover” can be confusing. There are two ways that a company plan can be rolled to an IRA – a 60-day rollover or a trustee-to-trustee rollover, they are both rollovers, but the tax consequences are very different.
 
 
The 60-Day Rollover
In a 60-day rollover, a check is made out to you, the plan participant (with a 20% federal withholding). Then you have 60 days, including weekends and holidays, to deposit the money into an IRA to complete the rollover. If you missed the 60-day deadline, you would have to pay tax on the entire distribution amount.
The 20% mandatory federal tax withholding can be problematic, so even if you complete the rollover within 60 days, you would have to ‘make up’ for the withheld amount or taxes will be due.
 
· · · · ·
 
Example: Claire has a company 401(k) worth $600,000. She took a lump-sum distribution at retirement. Instead of directly transferring the money to an IRA, she had the plan custodian cut her a check. Because of the 20% mandatory federal income tax withholding, the check amount will be $480,000 ($600,000 minus 20% Federal tax withholding). The other $120,000 is remitted to the IRS as taxes withheld. Say Claire does not have any immediate use for the money, so she deposits the $480,000 into her IRA account within 60 days in order to avoid taxation on the distribution. This is all fair and square for the $480,000; however, her lump-sum distribution is $600,000, so in order to defer taxes on the entire distribution amount, she would have to ‘make up’ the $120,000 and deposit that back into her IRA in the 60 days grace period. Otherwise, she would have to pay taxes on the $120,000.
 
· · · · ·
 
 
Trustee-To-Trustee Rollover
This is sometimes referred to as a direct rollover. With a trustee-to-trustee rollover, the rollover check is made out directly to the custodian of your IRA account (not to you personally). Sometimes the check is sent directly to the IRA custodian, or the check may be sent to you (but not payable to you). All you would have to do is deposit the check in your IRA custodian’s account to complete the rollover. With a trustee-to–trustee rollover there is no 20% federal withholding requirement.
 
 
Partial Rollover Is Ok
Rollovers are often referred to as lump-sum distributions which implies an “all or nothing” proposition. In truth, you may roll part of your company plan over (partial rollover) and leave the rest in the p