I don’t know if you know this or not, but according to the Social Security Administration 96% of Americans are not able to fund a retirement that will last for their lifetime…allowing them to live the lifestyle they wish to live! This is the case for highly compensated people as well as average wage earners. To say that retirement planning is a big deal is an understatement. In order to plan a secure retirement you need to understand you are the most important factor in the process.
Pretty scary stuff, when you think about it! Do you know why this is? Well, in my opinion, it’s because people simply aren’t given the proper knowledge of how to correctly handle their finances when they retire from their company, or when they change jobs! This is true, even though most retirees have accountants, lawyers, financial advisors, company provided assistance, etc.!
It’s frightening when you think about it, but your retirement doesn’t leave much room for ANY mistakes. Right? I mean, this IS NOT A DRILL! This is your one shot at retirement, and you… And after last year, 2008 and the downdraft that occurred, you
Cannot Afford To Make ANY Mistakes! Period.
See, do you really know, (and I want you to be honest with yourself), EXACTLY how to make the RIGHT decisions on issues like:
- With the price of the stocks all over the place, how do you decide if you should sell some or wait? If you want to diversify, which shares should you sell? What about the tax consequences? Should you buy traded options to protect the price? How should you handle your company benefits? Do you know how to decide what to do with your stock, and stock options?
- Should you take a lump sum distribution? If so, how? What should you do with it? How much in cash, how much elsewhere? Who should be the new trustee or custodian? Will your retirement distribution money be subject to IRS penalties you’ve never heard of? Should you receive money now or wait until later?
- Are you protected from traps the IRS has set, as well as from other retirement financial disasters that can actually cause you to lose much more than the IRS ever could take?
- What would happen if someone became ill and needed long term nursing care? Who pays? How much? What if you don’t have enough money? What does the government do?
- Do you know how to avoid having as much as half of your money being grabbed by the tax man?
- Are your assets titled in the absolute, most dangerous way? (Hint- Most retirees make this enormous mistake!) Have you set up a virtually bullet proof asset protection plan?
- What kind of insurance should you now have? Do you keep what you had, or change it? Are you going to be over insured and waste money on needless coverage? Do you know how to figure out which choices will best suit your family’s new situation? And most important…
do you know if you will be likely to have enough money, after taxes, to live your life the way you wish to…for as long as you live? These are some of the important things we’re concerned here at The Wise Buck!
Have you analyzed all the options and choices available to you so you can make educated decisions from a fully informed standpoint?
These are just a few of the questions you must have answers to! If you don’t… you’re likely to be the next victim of the greedy IRS, or to run out of money! If you make even one big mistake… look out! After all, you only retire once, so you cannot afford costly mistakes! You must make the right decisions the first time!
These issues demonstrate how retirees are constantly at risk to see their retirement security and peace of mind diminish, or disappear all together.
I want you to have an easy to understand set of facts, that cut right through all the baloney, and tell you the biggest mistakes retirees make…and more importantly, how to avoid them! These are the things I see people making and the ones I want you, dear reader, to avoid.
You Need To Know How To Avoid The Traps That Are Set For You!
So let’s get into these important issues, and see if you’re making any (or all) of these mistakes!
1. Listening To The Wrong People!
It never ceases to amaze us how many intelligent people take advice about their retirement from people who are totally unqualified to give you this critical advice!
For example, when we see retirement messes, (which we see virtually every day) and we ask where they got this information that has screwed them up so badly, we inevitably hear things like:
“My brother-in-law told me to do that. He used to be an accountant at Westland Corporation, you know!”
“I asked the guy who’s office was next to mine for all these years. I figured he must know what he’s doing, since he’s friends with the boss.”
And so on. Everyone’s got an opinion about what you should do with your retirement. Unfortunately, just because they are your relative, or are involved in some area of finance unrelated to retirement planning, (like the person at the bank who takes applications for checking accounts and CD’s) or write articles for national magazines, doesn’t mean they know the answers to your retirement problems and questions!
I cannot stress enough how important it is for you to work with a specialist in retirement planning that knows this area backwards and forwards, inside and out! Someone who knows how to integrate and coordinate ALL areas of your complicated financial situation and sort it all out for you!
After all, how many times are you going to retire? Shouldn’t you be sure that the advice you’re getting is right for you, and not generic, not given in the context of your ENTIRE financial situation…or just plain wrong?
Be sure to find a retirement specialist, just like you would look for a cardiologist if you had a heart problem.
Would you ask your brother-in-law or another executive to analyze your electrocardiogram? If not, why would you ask him to analyze your entire financial situation?
Doesn’t that make a lot of sense?
2. Not Understanding The Tax Consequences For Investments, IRA’s, Pensions, Etc.!
One of the participants who is a doctor in a Plan I manage recently called and asked: “Mike, I need to take the money from my 401k to pay for an extra order of Botox.” True Story. Ok, so once I told him of the tax consequences, he said he would reconsider. But let me just say:
Uncle Sam Is A Relative You Should Give As Little As Possible To!
Other tax issues that retirees frequently get messed up on are:
How much should you withdraw from retirement plans?
When should you withdraw from the plans?
Should you let qualified plan money sit inside the plan, and use other money to live off of?
Is living off the income generated by investments one of the worst things you can do?
Should you take a withdrawal from your IRA to pay off your car or vacation home, so you’ll have lower monthly payments?
Should you stop working at a certain time to collect Social Security now?
Should you wait to apply for Social Security? Or, should you work part time? And, how does that affect your Social Security payments?
What about the taxes on your Social Security income? Are there legal and safe ways to reduce it?
What about the taxes on the interest in CD’s or other bank accounts? Is there a better way to invest to reduce those taxes? Or, will living off interest, and leaving your capital untouched cause you to lose money because of inflation?
Or…
I think you get my point.
There are literally dozens and dozens of tax decisions you must make, whether you want to deal with them or not! Over the last 10 years, I’ve heard my fair share.
Let’s think about a simple example here. If you were to save $400 a month in taxes, simply by knowing the laws, and how to legally reduce your taxes, that’s $4,800 a year you’d have that you didn’t have before!
What could you do with an extra $4,800?
What about saving even more off of your income taxes? We show people how to do it all the time!
Could You Use A Few Hundred (Or A Few Thousand) Dollars Extra Cash Each Month?
If you want to make sure your income, estate and gift taxes are as low as legally possible, you need to work with a qualified retirement specialist, who can lay out all your options for you…allowing you to make an informed decision, as opposed to an emotional decision.
3. Choosing The Wrong Pension Option!
Let me illustrate this mistake with a real life example from a client of ours who was an executive at a company.
The client Louis, had retired a few years ago, and his wife, Janet, had not worked outside the home, and had no pension of her own. When Louis left the company, he was given a range of choices of how to handle his pension pay out if he were to die before Janet.
The choices were quite confusing, and they both decided to take the higher payout now, counting on the life insurance Louis had to cover Janet if he died. (With the help of Janet’s sister’s husband’s brother, who used to be an accountant, of course.)
Anyway, Louis died just one year after retirement in a tragic accident. Janet was left with no pension income, but did get Louis’ life insurance proceeds.
She Had To Go To Work, Because She Outlived Her Retirement Money!
In a matter of only four years, Janet had to get a job because the amount of insurance money was way too low for her needs. See, what seemed like a fortune to them, isn’t really a fortune in dollars and expenses.
What did they do wrong?
They made a critical decision like this from the seat of their pants, without having someone prepare a detailed financial projection of which option would best meet their needs, before making the irrevocable election!
If Louis and Janet had done this, she would be receiving a much higher income, and have the insurance proceeds to boot!
Now, does this mean that all retirees should take the lower pay outs and have the survivor get some sort of a pay out? No, not at all. There is no such thing as any strategy that applies to some or all retirees!
Your situation, is your situation. It is as unique as your fingerprints.
And just like no two fingerprints are alike, no two retirements are alike.
Please promise us you’ll not take “canned” advice, particularly when it comes to monumental decisions like choosing a retirement pay out!
4. Misunderstanding What Medicare And Social Security Does And Doesn’t Pay For!
The Government Is Not Going To
Take Care Of You!
Ouch! Sorry if I seem like I am screaming. Yes, Medicare does cover medical expenses. But, it only covers certain ones, and only after you have paid a deductible!
Many, many medical expenses aren’t covered by Medicare, and are usually picked up by a Medicare Supplement policy, or out of your pocket.
But, those supplements still don’t cover extended nursing home care. Not a penny.
Here again, we have an un-planned for situation that can literally wipe out a family’s retirement nest egg, that nine out of ten retirees don’t have any clue about!
Warning! (By the way, did you know that in order to qualify for state support from Medicaid, you literally have to spend your net worth almost down to zero first? You have to clean out all of your estate, assets, investments, and so forth until you are worth under $2,000! It’s only when you’re nearly flat broke that Medicaid kicks in to help you!
Don’t make the mistake of thinking that Medicare or Social Security are going to take care of you. They don’t!
Sure, they cover many things, but there are still huge, gigantic gaps that if you don’t plan for yourself ahead of time, you’ll never have them taken care of!
You must know what the government does help you with, and what they don’t help you with!
And, you must have a plan to address the almost unknown areas that could cause your family some real problems! Don’t wait until you’ve been completely wiped out before you figure them out!
5. Getting Caught By The New 20% Withholding Penalty For Lump Sum Distributions!
Are you aware of the tax law that has caught thousands of unwary retirees in its ugly web?
If you are retiring, or transferring a lump sum distribution from a company plan at a later time, and you don’t follow the paperwork rules exactly right, you could end up having 20% of your money withheld from your distribution!
And, to make matters even worse, you can end up paying taxes and penalties if you can’t make up this 20% difference out of your own pocket!
A Tax Trap To Look Out For!
For example, if you were getting a $200,000 distribution, and you had it go to an IRA, but didn’t fill out the paperwork correctly, you could end up having $40,000 withheld from your transfer!
And, if you didn’t have the $40 grand lying around to put into the IRA to make up for the withholding, you will be taxed on that $40,000, even though you didn’t get the money! (Which could cost you anywhere from $6,000 to as much as $16,000 in taxes depending on your bracket!)
No, I’m not making this up. This disaster was passed by Congress to nail unsuspecting retirees with lump sum distributions. Why? Because the government is looking for any way to get their hands on large chunks of money, that’s why! Forgive my candor but you have to be on your toes.
But wait. There’s more. If you are under 59 1/2 years old, and this happens to you, you get to pay an extra 10% penalty on top of all the extra taxes! Yes, this is just one tax trap that is waiting to get a lot of retirees where it hurts the most, when they can afford it the least!
How do you avoid this?
Make sure that you get expert help in filling out the paperwork for making your choices of how to receive your lump sum! I cannot tell you how many times we’ve worked with retirees who thought they had it all figured out right, who did it on their own, or even with “help”, and ended up really screwing up big time!
6. Owning Your Assets The Wrong Way!
One of the biggest mistakes I see is retirees who own their assets in ways that subject them to all kinds of unnecessary risks!
For example, the most common way that retirees own their home, investments, bank accounts, etc., is in joint tenancy with rights of survivorship.
While this is a simple way to own assets, in many cases, it could be a huge mistake!!!
Why? Well, some of the reasons are:
- You could pay way more in estate taxes than necessary!
- If one of you has a liability problem (a car accident, for example) both of you could lose everything!
- If your marriage goes down the tubes, they can clean out the accounts!
- If your kids are on the accounts, if they go bankrupt or whatever, YOU could lose YOUR money!
- Many retirees put their kids on some of their accounts, which later ends up costing gift taxes, and can screw up your family’s finances if someone goes into a nursing home.
Joint tenancy is, in many cases, a financial disaster waiting to happen!
(Now, I am not giving you any legal advice, just pointing out some potential problems!)
Some clients have Living Trusts they set up and think they’ve protected their estate. Not necessarily true! A Living Trust may help protect assets, but in may cases it does nothing to protect your assets from liability or other problems. In fact, most of the time, they don’t even protect your assets from income or estate taxes!
See, many attorneys just listen to your situation and set up your wills, trusts, etc., without analyzing and coordinating all the issues you should consider and just set you up in a simple, but sometimes dangerous way! (For example, would you be surprised to learn that over 75% of the people find out that the Living trust doesn’t cover a large percentage of their assets because things haven’t been titled properly…even though the client is “working” with an attorney?)
You have to take a look at the way you own your assets in the context of your whole financial situation, so you don’t risk losing everything you’ve worked for because you’ve placed your assets in jeopardy!
Asset ownership is a serious yet often overlooked area that can turn into a gigantic mistake!
7. Misunderstanding Or Not Knowing All The Tax And Other Traps That Surround Your Stock Options Like Sharks Circling Their Prey!
While this situation doesn’t apply to everyone, if you have either Non-Qualified Options (NQO’s) or Incentive Stock Options (ISO’s), and you make any mistakes in the decisions that need to be made in dealing with them…you could kill yourself financially, as surely as a bullet would to your heart!
Listen. If you do not understand all the subtleties, fine points and traps involved with managing a portfolio of NQO’s or ISO’s, you can cost yourself a fortune! For example…
I recently met someone who just paid a little over $1,100,000 in additional and needless taxes… because she did not set up a stock option plan that was integrated and coordinated with her overall financial situation!
See, she had never done a plan to determine how to handle all the decisions that go with stock options like, “Should I exercise some or all or none? If I do exercise, which ones should I do in which order?” Or, “Should I wait until the stock hits a certain point?” Or, “How will exercising affect my taxes and net worth and retirement plans?” And so on.
For example, did you ever hear of, know about, or set up a plan to protect yourself against a hideous beast of a tax called the “Alternative Minimum Tax (AMT)? Probably not. Did you know that if you exercise and/or sell shares acquired through exercising stock options, and certain conditions exist in your financial situation (most you’ve never heard about)…that you could end up paying the dreaded AMT, which is a tax that you pay only if it ends up being HIGHER than your regular tax! It’s a total nightmare!
You can only imagine the look of horror on retirees faces when they find out that what they thought was a low, or no tax decision actually cost them tens or hundreds(or millions) of dollars in AMT taxes they never heard of, that no one warned them about, or taught them how to coordinate their financial situation so this would never happen! Please make sure that these sort of unknown penalty taxes don’t apply to you!
8. Thinking “Risk” Just Involves Losing Principle!
Here is a big mistake that happens every day. In fact, I recently heard someone say: “We don’t want to take any ‘risk’ with our retirement funds and stock! We want them to be totally safe and free of ‘risk’!”
(Have you ever thought about that yourself?)
There’s More Risk In *Riskless* Investments Than You May Think!
Let’s discuss what the definition of “risk” is, in the first place? If you look it up in the dictionary, you’ll see that it is defined as “A chance of encountering a loss or harm, a hazard or danger”.
Now, you’ll notice it doesn’t say. “loss of principle”. It just is defined as “loss”. This is a major distinction we need to make here. Most retirees think “risk” means that you put your investments somewhere, and the $100,000 you started with is now worth far less than $100,000.
And yes, this is one type of risk…and a real one at that!
But it is only one type of risk. There are others that are just as scary and that can hurt you just as badly as losing principle!
By the way, if I told you that you are actually losing real money in the bank, would you believe me? Would you think I was lying, because CD’s are insured by the FDIC? I guess this is the time to explain what I mean.
If you are making 4% interest on a CD, and you are in the 28% tax bracket, your net, after tax, yield is only 2.88%!
4.00% interest earned
x 28% tax = 1.12% lost to taxes
2.88% net after tax yield.
Now, that would be bad enough, but we cannot forget about our friend, inflation. Yes, they claim inflation has been licked. That it’s gone. Why? Because it’s been hovering around 3.5 – 4% for the last few years.
Now, that is considered low, low inflation by today’s standards.
But, did you know that in the early ’70’s, when president Nixon instituted price controls, inflation was an incredibly high 4%!
Isn’t that interesting?
That in 1972, 4% inflation was considered so high, that the government tried putting price controls in place. Now, when inflation is at the same exact level, 20+ years later, it’s considered insignificant by our friends in the Capitol!
How can this be? Could it be that inflation has changed, or is it more likely that the government has changed the way they want us to view and perceive it? I will have to write an entire post about that and I will because you deserve it. But let me just speak a bit about inflation…
Let’s see , how does this supposed “not so bad” inflation affect our CD example?
Losing Money On So-Called *Riskless* Investments Is Very Real!
Well, remember in our example that we’re at 2.88% net, after tax yield. Now let’s subtract inflation from this yield, to arrive at your true change in value, adjusted for the loss of purchasing power:
2.88% net, after tax yield
less 3.50% inflation
(0.62%) True return
Those brackets, by the way, mean a negative real rate of return! Yes, that means that you have a loss of value, of $62 for each $10,000 you have invested in CD’s!
Now, if I asked you to put money in an investment that was guaranteed to lose $62 for each $10,000 you invested, you’d run away from me faster than a deer from a lion. Yet, if you have CD’s, then you are doing the exact same thing!
What you need to do is figure out how much monthly income you need, and then build a plan that uses the tax- favored items! This assures that you get the cash flow you need, and avoid wasting money on paying the taxes you don’t need… with assets that have some chance to keep up with inflation! There are hedges you can use to protect against inflation or deflation, like gold or silver bullion.
See, the risk we’re talking about here is the risk of losing purchasing power! This risk is so profound, yet almost totally ignored by most retirees, that is, until it’s too late!
Now, no one is suggesting you not keep some money in CD’s or other guaranteed programs, because that would be foolish.
But, on the same token, having too much in these type of investments can assure that you have a high risk of running out of money! No one wants to outlive their money. Misunderstanding the risk of the loss of purchasing power is a mistake you do not want to make!
9. Paying For The Wrong Kinds, And Wrong Amounts, Of Insurance!
For some reason, when people are retired, many of them hang on to old insurance coverage of all types, just because they’ve had them for a long time, and are resistant to change. I’m not sure why, but it seems to be the case more often than not.
Listen, when you are in retirement, you have little extra room in your budget to waste money on needless coverage, or to be shortchanging yourself on coverage you do need!
Many retired clients find they can get more coverage in the areas they do need, and eliminate or reduce coverage on stuff they don’t need, and save hundreds or thousands of dollars in the process!
Most people can have truly bad auto, homeowner, condo, health, long term care, and life policies! All the coverage can be bought with all the wrong information, from people who are motivated by all the wrong reasons.
This financial area must be reviewed and coordinated, OBJECTIVELY, with all the rest of your finances!
10. Not Doing Consistent, Careful, Ongoing Planning!
Yes, planning is the single, most effective technique to have a safe and secure retirement! It worked during Teddy Roosevelt’s days, it worked in the 50s, and it works now! See, the reason most of us aren’t going to win the retirement game, is that we don’t follow this crucial sequence, when it comes to managing our finances:
1) Figure out where you are today.
2) Figure out where you want to be.
3) Get a true understanding of the options you have available to you. (Not from biased sources.)
4) Develop a plan that will provide the right “course” to follow.
5) Make the changes necessary to get the plan going.
6) Watch your progress, and make the proper adjustments to keep the plan “on course”.
Makes a lot of sense, doesn’t it?
Kind of the same process you go through every day when planning a trip to the mall, or taking the kids to practice, or going on a visit or vacation, etc. Or like you do at your job before making decisions.
Could you imagine how you could get through your daily life, or keep the business alive without following this sequence of events?
But, can you really say the same thing about your money? Do you truly know where you are today? Are you certain you have specific goals of where you want to be financially? Can you say that you know all the choices you have available to you? Have you set up a plan to get where you want to be?
Or, like most of us, are you “winging it” as you go along???
In all the years I’ve been helping people win the game of money, and when studying the characteristics of families who are truly financially independent, I find one common theme.
Not their age, nor occupation, nor sex, nor income, nor any of those things.
No. The one common attribute is that they make a constant effort to plan for their future.
That’s it. It may not sound very exotic or romantic. But it’s simple, and it works. You know, usually, the most effective things in life, are the most simple and basic. Now, with this ridiculous attack on your future by the government, and the uncertainty of being retired, you need to plan for your own future, more than ever!
And that’s it.
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