Category Archives: Retirement Planning

Dealing with topics relevant to retirement needs and approaches to reach long term goals. We aim to help you find ways in which you can reach your goals and make a difference

Social Security – Have a plan

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Maximize your inflation protected pension plan
– Couples must have a Social Security strategy

According to a recent survey (1) married couples nearing retirement do not maximize their social security benefits.  The vast majority of people are unaware of strategies that could increase their lifetime Social Security benefit by $40,000 or more. Only those with high net-worth or higher income appear aware that couples should have a social security implementation strategy.

Seventy-four percent of people with household income exceeding $200,000 expect to receive advice on Social Security benefit options from a financial planner, compared to only 48 percent of those with household incomes less than $50,000.

Most (77 percent) felt that the best advice to maximize their Social Security retirement benefits would be the Social Security Administration. Unfortunately, SSA personnel are not trained to provide more information than monthly benefit amounts at different election ages, and the SSA prohibits its representatives from dispensing advice.

If you are approaching your full retirement age or are planning on enrolling to receive social security make the investment to evaluate your social security implementation strategy with a qualified financial planner.

(1) survey source form socialsecuritytiming.com

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Don’t Forget State Estate Taxes

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Don’t Forget State Estate Taxes

Don’t forget your state of residence and state estate tax changes when planning your Estate. Many differences between states require that you carefully review your estate and include state rules into your financial plan!  Even when you determine that you are exempt from federal taxes you may still have unexpected significant estate taxes at the state level.  Larger estates are more likely to have both but you’d be surprised that in some states how smaller estates may also qualified.

Nearly half of U.S. states impose an estate or inheritance tax regardless of whether the resident’s estate also owes federal estate taxes. Two states, New Jersey and Maryland, levy both estate and inheritance taxes!

Florida, Nevada, and Alaska are among states generally thought to be attractive place to retire, not only when you are living — because there is no income tax — but also when you die. Neither estate nor inheritance taxes are charged in these states.

Many estates owe taxes to multiple states because the deceased person owned a vacation home or other tangible property such as a boat outside of the state they lived in when they died. Intangible property, such as stocks and money in bank accounts, is taxed in the state the individual legally resided in at death, regardless of where the investments are physically located.

In California, we’ve phased out Estate taxes after 2005 and there is no inheritance tax. Executors of estates of persons who died on or after Jan. 1, 2005, are no longer required to file a California estate tax return.

Imposing just an estate tax, with exemption amounts ranging from $338,333 to $5 million, are Washington, Oregon, Minnesota, Ohio, North Carolina, Hawaii, New York, Delaware, Connecticut, Massachusetts, Vermont, Maine, Rhode Island, Illinois and the District of Columbia. Rates vary from 7% in Ohio to 19% in D.C.

Six states collect just an inheritance tax, which is paid by the heirs and not the estate, and generally increases for beneficiaries the more removed they are from being close family members. Rates range from 9.5% to 20% in Pennsylvania, Tennessee, Kentucky, Indiana, Iowa and Nebraska.

New Jersey begins taxing estates at $675,000 and has a maximum rate of 16%, in addition to a maximum 16% inheritance tax on beneficiaries who are not spouses or parents, or children or other lineal descendants. New York has a $1 million exemption for its estate tax, which also tops out at 16%.

Of course, states are always changing tax rules. So be mindful and consult a tax attorney before filing.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Taxes prior to Debt Super Committee Vote

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2012-13 Tax Planning
– Prior to Debt Super Committee meeting deadline (Nov 23rd)

There are at least 60 income tax provisions scheduled to expire at the end of 2011 but even if they do the most significant income tax changes are expected in 2013.

The Bush tax cuts are set to expire and income tax rates rise in 2013. At that time, itemized deductions would once again be partially phased out, the estate tax exemption will drop precipitously and the estate tax rate will jump unless they are re-enacted.  At the same time we’ll begin the new healthcare surtax in 2013 that will result in 3.8% tax increase on
certain types of investment income and a tax of almost 1% on wages above a specified threshold.
Between now and 2013, we expect much talk about changes but the Congressional bipartisan ‘supercommittee’ is considering controversial revenue-raising measures, such as limiting itemized deductions for high income tax payers and other altered tax treatments. The vote & recommendations on November 23rd will play a large part in our confidence that our economy will begin to grow soon before the tax increases in 2013.

Our long term success still remain with business growth and ability to create and support well paying jobs.

What does this mean for investors? That we plan for what we know, not what might happen.  But we keep our eye on what changes are approved so that we can adjust and still reach your personal and professional goals.

This year and next year (are consistent with 2010) present us with tactical and strategic decisions that may require action before those rules expire.

Here are two lapsing provisions:
AMT Patch was extended from 2010 to 2011. If Congress
does not extend it, the AMT exemption for 2012 would
return to earlier, lower levels and will result in more tax owed.

The portion of the Federal Insurance Contributions Act (FICA) tax that goes to Social Security was reduced temporarily in
2011 from 6.2% to 4.2%. With no extension, the higher rate
returns in 2012.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

2012 Social Security Rate Update

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Annually SSI and Social Security payments are increased by the Consumer Price Index (CPI).  The CPI was just announced at 3.6% and this increase will translate to a similar increase for 55 million SSI (disabled) and SS (retired) recipients starting on December 30th.

Don’t be too quick to spend it! We expect an increase in Medicare premiums to be announced soon.  Even so, drug premiums are not expected to increase (Part D) and for many their out of pocket costs have decreased with the new donut hole coverage.  We caution that medical costs have risen and can be expected to translate into a rate increase for Medicare premiums.  Your specific situation will dictate if this rate increase translates to available cash.

On that note – October 15th started open enrollment for Medicare.  Make your annual Medicare selection before December 7th (www.Medicare.gov).

Although it may turn out to be good news for those already retired, it also  means that workers can expect an increase in their payroll taxes.  The ceiling for social security taxes will rise from $106.8K to $110K.

Currently 161 million workers contribute to Social Security taxes while 63 million receive SSI or Social Security income.

We’ll keep you posted and let us know if we can be of assistance.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

 

Always have a valid WILL

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What is a will? Your will is a legal document in which you describe instructions to be carried out after your death. You can direct the distribution of your assets (money & property), and give your choice of guardians for your dependents.  It becomes irrevocable (unchangeable) when you die.

In your will, you can name:
1. Your beneficiaries –
2. A guardian for your minor children – a person responsible for your child’s personal care if you and your spouse die before the child turns 18. You may name your guardian, who may or may not be the same person, to be responsible for managing any assets given to the child, until he or she is 18 years of age.
3. An executor – an institution or person to collect and manage your assets, pay any debts, expenses and taxes due (on court approval) and distributed to beneficiaries according to the instructions on the will.  Role has significant responsibilities and is time-consuming – choose the executor wisely.

Does a will cover everything I own? No. Your will affects only those assets that are titled in your name at your death.  The following may not be affected by your will.

Life insurance
Retirement plans
Assets owned as joint tenant with rights of survivorship
“Transfer on death” or “pay on death.”
“Community property with right of survivorship” – Married couples or registered domestic partners may hold title to their community property assets in their names as “community property with right of survivorship”.  When the first spouse or domestic partner dies, the assets pass directly to the surviving spouse or partner without being affected by the will.

What happens if you don’t have a will? If you die without a will (you die intestate), California law will determine the beneficiaries of your estate.

Contrary to popular myth, if you die intestate everything is not kept by the state but the state may inherit your estate under certain situations.  In California, those married or in a registered domestic partnership will have their community property assets passed to their spouse/registered domestic partner.  They may also receive part of your separate property assets, with the rest going to your children, grandchildren, parents, sisters, brothers, nieces, nephews and other legal relatives.

If you are not married or in a legal partnership, your assets will be distributed to your closest relatives and if your partner dies before you, their relatives may also be entitled to some or all of your estate.  Friends, a non-registered partner or your favorite charity will receive nothing unless you name them in a will.

If you die intestate and your deceased spouse/registered partner have no living relatives then your estate does go to the State of California.

What if my assets pass to a trust after my death? A will can provide that all assets be distributed to trust on your death.  When trusts are created under a will, they are testamentary trusts.  If you have a living trust (a trust established during your life) then your will is referred to as a pour over will.  The purpose of such a will is to make sure that any assets not already in the name of your trust are transferred to your trust upon your death.

How is a will carried out? A will is managed by a court-supervised process called probate.  The executor of a will needs to start the probate process by filing a petition in court seeking official appointment as executor.  The executor can take charge of your assets, pay debts and, with court approval, distribute your estate to your beneficiaries.

Advantages of probate:  Rules that are followed on dispute are defined and quickly executed.
The court reviews the executor’s handling of the estate protecting the beneficiaries’ interest

Disadvantages of probate: It is public – your words and the value of your assets are on public record.
Fees are usually higher because they are based on a statutory fee schedule which can be more than under a trust. It takes longer – usually 6 weeks for each court request

Who should know about your will? You will need to decide who should know about your will – the exact content will be (at minimum) known by your attorney and yourself.  Your executor and close family should know how to access your documents but don’t need to know the details.  Your original signed will, should be kept in a safe place (lawyer’s safe or a fireproof box).

*** THIS INFORMATION IS PROVIDED ONLY AS EDUCATION AND NOT AS LEGAL ADVICE ***

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Financial Planning if you don’t have children

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Financial Planning & Retirement Planning for Singles & Couples

Financial planning is often addressed by couples when they plan or have their first child.  In our society this is part of becoming responsible parents.  In turn this process brings parents closer together and forces them to review short and long term goals like cash flow & retirement planning.  In many cases, the process can help parents deal with their own emotions about money and bring about personal growth and a greater maturity that strengthens their relationship.

I’ve addressed financial and retirement planning for parents through presentations and workshops and would like to share some highlights for non-parent couples and singles.

Child-free couples and individuals should consider that often children serve as an important support for a parent’s retirement plan.  Their children and grandchildren often serve as a social and sometimes financial support network that is not available to those without children.  I propose that without children growing older requires more, not less, financial planning to ensure that a plan and a support network are created.

Think about your current network.  Do you have individual(s) that could be your advocate(s) and help you or make for you medical and financial decisions?  You’ll need to identify and empower advocate(s) that will care for you if you are hurt and unable to communicate your wishes.  Your advocate may need to answer questions regarding your quality of life and make critical financial decisions in your stead.  For example: Who will file your taxes or sign your insurance claims?  Who will pay your bills? Who will decide if it is time for you to sell your home and move to a more appropriate care facility?  Who will decide the level of care you want and can afford?

Couples can often depend on each other but sometimes you may want to choose a medical advocate whose beliefs are the same as yours – that may or may not be your current partner.

Planning the financial support network is particularly important for those without children.  Saving maximally for retirement is critical since you’ll likely need more financial income to retain your independence during retirement.  Singles need to plan earlier since they may have even more expenses.

Finally, once you are gone your loved ones will need clear direction on how you want your assets distributed. Don’t leave the courts to decide or your hard earned assets may go to a cause (or individual) you would not want supported.

A financial and retirement plan should help you understand yourself and your behavior around money – through understanding you can better work with your loved ones and make lasting joint retirement decisions.

Seek independent advice and explore the actions that you need to implement today to have your finances support your future wishes.  The time is now.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Retirement Planning for Business Owners

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Retirement Planning for Business Owners: Compare 401K, SEP-IRA and Pension plans.

For self employed and small business owners to be personally successful they must contribute to their retirement savings at some point during their business development.  Some will do it a bit at a time while others will wait until they generate large profits.  Regardless, you should ensure that you minimize your tax liability while contributing towards your ideal retirement.

How do most self-employed select between available retirement savings plan?  Sometimes this is a decision based on ease of use, other times on a lack of understanding or incomplete or misleading information.  Here is a tiny overview of the major retirement plans available: SEP-IRA, 401K, Pension plans.

The most popular retirement saving vehicle for the self-employed is the SEP-IRA.

In many cases, the 401K should be considered since it exceeds the SEP-IRA limits and provides other benefits.  On the surface, 2011 limits for both SEP-IRA and 401K appear the same (at $49K), so what is the difference?  The way the contribution is calculated provides the key to why you can defer more with a properly designed 401K plan.

On a $100,000 W-2 earned income in 2011 a business (Corporation) owner (less than 50 years of age) can contribute $41.5K to a 401K or $25K to a SEP-IRA.  Yet so many self-employed use the SEP-IRA.  The lower contribution maximum of a SEP-IRA guarantees higher taxes and lower chance of attaining a reasonable retirement living standard. In many situations the 401K is a planning vehicle that not only provides more tax-deferred contributions but can be a resource in an emergency.

Even so, a 401K is not the best retirement saving tool for all self-employed.

For some, a better tool is a self-employed pension plan.  Although a pension plan does require a great deal more planning it is by far one of the best tools available to small business owners with high company earnings.

Make informed decisions about your tax and retirement options.  These decisions should be product neutral and planned to meet your specific situation.

If you have questions – let me know.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

 

Introduction to Living Revocable Trust

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Introduction to a Living (Revocable) Trust

(information summarized from the State Bar of California)

Living trust is a legal document that you use to control your assets during your life and that your trustee can use to direct your assets when you are incapacitated or at death.  Your assets (bank accounts, brokerage accounts) are put in the name of a trust (instead of your own) and administered by the trust.

You manage the trust during your life and your successor trustee (an institution or person) will direct it when you are unable or unwilling to do it yourself.  This type of trust is called a revocable living trust or revocable inter vivos trust or grantor trust.  Your trust can be amended or revoked while you are competent.

  • A living trust agreement gives the trustee the legal right to manage and control the assets held in your trust.
  • Instructs the trustee to manage the trust’s assets for your benefit during your lifetime
  • Names the beneficiaries (person and charitable organizations) who are to receive your trust’s assets when you die
  • Finally, it gives guidance and certain powers and authority to the trustee to manage and distribute your trust’s assets – the trustee is a fiduciary.

What can a living trust do for me? It can allow someone of your selection to make financial decisions and act on your behalf if you’re unable to manage them yourself.  In setting up your living trust, you may serve as its trustee initially or you may choose someone else to do so.  You can name a trustee to take over the trust’s management for your benefit if you ever become unable or unwilling to manage it yourself.  At death or if disabled your trustee like a will’s executor and would then gather your assets, pay any debts, claims and taxes, and distribute your assets according to your instructions.  Unlike a will, this can only be done without court supervision or approval.

Should everyone have a living trust? No.

What are the disadvantages of a living trust?  No court supervision.
Cost of trust can be higher than creating a will.
Creates additional paperwork since lenders don’t usually lend to a trust and you may need to take it out of the trust (by deed) before you can take the loan on any real property.

If I have a living trust, do I still need a will? Yes.  Your will affects any assets that are titled in your name at your death and are not in your living trust or some other form of ownership with a right of survivorship.

Will a living trust help reduce the estate taxes? No.

Will I have to file an income tax return for my living trust? During your lifetime the trust is identified by your social security number and all income and deductions related to the trust’s assets are reportable on your individual income tax returns.

How do you find an attorney to work with you?
Ask us for a referral or ask a trusted friend. You can also call the California State Bar – certified referral service.  www.calbar.ca.gov/lrs or 1-866-442-2529.  You may want one who is ‘certified specialist in estate planning, trust and probate law’ although some good estate attorneys do not have this certification.  You could also check a list at www.californiaspecialist.org and click Specialist Search. Some attorneys charge hourly and others have a fixed/flat fee.  Always be wary of insurance an annuity sales companies giving estate planning advice.  You may want the pamphlet “How Can I Find and Hire the Right Lawyer?” from the state bar: www.calbar.ca.gov

** The information provided is NOT legal advice it is only provided for informational purposes to guide you through this process **

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Kaiser Permanente Physician Retirement

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Kaiser Permanente Physician Retirement Package

After a long career, retiring physicians employed at Kaiser are faced with a Retirement Package that presents excellent opportunities and multiple planning pitfalls. Giving yourself and your adviser sufficient time to plan each component will yield the greatest return for your situation. Make sure that your retirement plan supports your goals and addresses each phase in retirement while reducing your tax burden. Start early!

The first component of the Kaiser Retirement Package is based on the number of years of credited service and the average of your highest paid three consecutive annual earning (base+bonus) years. For most long-term Kaiser doctors, this is their largest retirement resource that can be in the range of $200,000/year (amount does depend on the specific situation). Although HR will calculate this value for you there are many critical decisions that you and your adviser will need to address. Some decisions such as your payout structure will need to be based on your goals, estate wishes and your tax situation. They will require that you make life-long decisions on how you will receive these retirement benefits. Will it be for Life, Joint & Survivor, Period Certain or Installment? – These are not generic or trivial questions.

The second component in Kaiser’s Retirement package for physicians is the Defined Contribution plan that will also be calculated for you but will require your input – particularly on how you wish it distributed. Do you want it as a lump sum, an installment or defer until you are 70.5? For tax reasons in particular, it is critical that this decision be made as early as possible (ideally 5 years before you plan to retire). Often this component of the Kaiser Retirement package generates about $30,000 per year (this amount does depend on your specific situation). Don’t forget that this amount will be further supplemented by social security.

The third component of Kaiser’s physician retirement package is a Salary Deferral employee funded or 401K plan. Your annual contributions, of tax deferred dollars ($16,500 limit in 2009), properly allocated and rebalanced will grow to supplement the first two components of the Kaiser Permanente Retirement Package. With these three components Kaiser physicians can retire at close to pre-retirement salary levels.

The final piece of the Kaiser Retirement Plan provides benefits such as health care, dental and insurance benefits. These should be reviewed carefully with your adviser to ensure that they match your lifestyle and will support all of your retirement needs.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com