Thank you for attending CalCPA’s Dollars & Sense workshop. The goal of this program is to improve your knowledge and understanding of basic financial tools and goals—information that can help each of us in our daily lives. As CPAs, we are committed to the highest ethical standards and excellence. Our mission is to provide the public with trusted advice and counsel, on which you can base your most important financial decisions. Today’s program offers common-sense guidelines to help you make informed financial choices as you approach retirement. Personal financial planning is a key ingredient to achieving your goals. To help you prepare for retirement, we’ll discuss how to stretch your money, living arrangements, insurance needs and estate planning.
Making decisions as you approach retirement can be difficult and emotional, however, there are steps you can take to make this phase of your life a little easier. Discuss your options. Express your wishes and expectations with family members. Discuss long-term care insurance, living arrangements, medical care decisions, financial planning and estate planning. Prepare a Personal Data Record. In one document, collect all the information a family member would need if you were to become incapacitated, or were to either transfer your assets or create a power of attorney. This includes financial information, legal documents, medical information and accounts, insurance policies, and funeral and burial plans. Obtain Support and Advice. If you are concerned about the mental or physical capacities of your spouse, ask his or her doctor for a geriatric assessment. If you can’t care for your spouse yourself, seek guidance from a geriatric manager. If you do care for your spouse yourself, there are support groups, adult day care and caregiver training available to assist you.
Did you know that you don’t need millions to retire comfortably? You can retire on less if you spend less. It's that simple. While it's vital to save for retirement, making some compromises in your retirement lifestyle and managing your money carefully, you can achieve a full and satisfying retirement at a far lower cost than some would have you believe. It all depends on how you play the retirement game. By investing your portfolio wisely and drawing funds from it prudently, you can make the most of your retirement nest egg. CPAs say you should keep anywhere from 40 to 60 percent of your retirement savings in equities. Doing so allows your assets to continue to grow during your retirement years and provides you with some protection against inflation. Also, as a retiree, you can continue to build your retirement savings by reinvesting your interest and dividends. When it becomes necessary for you to tap into your savings, withdraw assets from your taxable accounts before you withdraw assets from your tax-deferred accounts. Doing so will allow the money in your tax-deferred plans, such as 401(k)s or Individual Retirement Accounts, to continue compounding tax-free for as long as possible.
Housing is the biggest monthly outflow for most retirees. Consider whether it makes sense to sell your home, pay off your current mortgage, and buy a smaller home or condo with lower property taxes, energy bills and maintenance costs. If you're willing to relocate to an area with a lower cost of living and low or no income taxes, the savings can be considerably greater. Before you choose a location based on income tax savings, check what estate taxes would apply to you there. If retirement is still several years away, do what you can to trim expenses or boost income now, so you can pay off your mortgage by retirement. Be creative. For some people, home sharing might be a good way to reduce housing costs and gain companionship. Another option is to agree to perform housekeeping or maintenance services in exchange for free or reduced rent. If you're &quot;house-rich and cash-poor,&quot; a reverse mortgage, which acts like a regular home mortgage in reverse, allows you to use the equity in your home as a source of income. Reverse mortgages are complicated. Remember, you will be depleting the equity you have in your home.
Other ways to stretch your retirement dollar include enjoying less expensive leisure activities. For example, if golf is your game, try finding a good public course and bypass expensive greens fees at a golf club. If you favor tennis or swimming, look for community courts or join the pool at your local YMCA. If you like to travel, travel out of season when others don't. Working in retirement is an alternative that more and more retirees are pursuing. The right job can provide welcomed cash and self-fulfillment. Joining a Medicare managed care plan is a less expensive alternative to purchasing Medigap insurance. Many of these plans provide comprehensive coverage for a small monthly fee or a small co-payment for office visits. On the down side, with some plans, your choice of doctors, hospitals, and other providers is limited to those in the plan's network. If it's payments for prescription drugs that are ruining your budget, you may be able to reduce your costs by asking your doctor to substitute a generic drug. Or, you may be able to use a mail-order pharmacy that charges significantly less for some prescriptions.
If you work for a company, you are probably eligible for an employer-sponsored retirement plan, or pension plan. Your pension plan along with other resources, such as Social Security, will help pay your expenses during your retirement. There are two major types of pension plans: defined benefit plans and defined contribution plans. The Employee Retirement Income Security Act provides protections for participants and beneficiaries in employee benefit plans. A defined benefit plan promises a specified monthly benefit at retirement. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance. A defined contribution plan does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan. Contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in his or her account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate because of changes in the value of the investments. Examples of defined contribution plans are 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.
A Simplified Employee Pension Plan (SEP) allows employees to contribute on a tax-favored basis to individual retirement accounts owned by the employees. A Profit-Sharing Plan or Stock Bonus Plan is a defined contribution plan. The plan may provide, or the employer may determine, annually, how much will be contributed to the plan. The plan contains a formula for allocating to each participant a portion of each annual contribution. A 401(k) Plan is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary. The deferred portion is contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. Employees who participate in 401(k) plans assume responsibility for their retirement income. An Employee Stock Ownership Plan (ESOP) is a form of defined contribution plan, in which the investments are primarily in employer stock. A Money Purchase Pension Plan is a plan that requires fixed annual contributions from the employer to the employee's individual account. A Cash Balance Plan is a defined benefit plan that defines the promised benefit in terms of a stated account balance. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance.
As part of their retirement and investment plans, many Americans have variable annuities. Before you buy a variable annuity, you should know some of the basics—and be prepared to ask your financial professional questions about whether a variable annuity is right for you. A variable annuity is a contract between you and an insurance company. The insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. You should carefully review a prospectus provided by the insurance company or your financial professional before purchasing the annuity. You should compare the benefits and costs of the annuity to other variable annuities and to other types of investments, such as mutual funds. The prospectus should discuss the range of investment options offered by the variable annuity. The value of your investment as a variable annuity owner depends on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds.
Variable annuities differ from mutual funds in several important ways. First, with variable annuities you receive periodic payments for the rest of your life (or the life of your beneficiary). This feature protects against the possibility that you will outlive your assets after you retire. Second, variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount. Third, variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates, rather than lower capital gains rates. Section 1035 of the U.S. tax code allows you to exchange an existing variable annuity contract for a new annuity contract, without paying any tax on the income and investment gains in your current variable annuity account. These tax-free exchanges, known as 1035 exchanges, can be useful if another annuity has features that you prefer.
Are you able to take care of your home by yourself? If your answer is no, that doesn't necessarily mean it's time to move. Perhaps a family member can help you with chores and shopping. Or perhaps you can hire someone to clean your house, mow your lawn, and help you with personal care. You may want to stay in your home because you have memories of raising your family there. On the other hand, change may be just what you need to get a new perspective on life. To evaluate whether you can continue living in your home or if it's time for you to move, consider the following questions. Can you adjust to change; can you make new friends easily, do you want to live close to public transportation; can you afford someone to help you; and how does your family feel about your decision? If you are moving in with your child, will you have adequate privacy? Will you be able to move around in your child's home easily? If not, you might ask him or her to install devices that will make your life more convenient, such as tub or shower grab bars and easy-to-open handles on doors. You'll also want to consider the emotional consequences of moving in with your child. Talk about important financial issues with your child before you agree to move in. This may help avoid conflicts or hurt feelings later.
Assisted-living facilities typically offer rental rooms or apartments, housekeeping services, meals, social activities and transportation. The primary focus of an assisted-living facility is social, not medical. Before entering an assisted-living facility, you should carefully read the contract and tour the facility. Consider whether the facility meets your privacy and care needs. Find out if the facility is licensed or unlicensed, and learn who is in charge of health and safety. As for the cost, a wide range of care is available at a wide range of prices. Keep in mind that Medicare probably will not cover your expenses at these facilities, unless those expenses are health-care related, and the facility is licensed to provide medical care. Nursing homes are licensed facilities that offer 24-hour access to medical care. Individuals in nursing homes generally cannot live by themselves or without a great deal of assistance. It is important to note that privacy in a nursing home may be very limited. Although private rooms may be available, rooms more commonly are shared. When you choose a nursing home, pay close attention to the quality of the facility. Visit several facilities. Remember that most people don't remain in a nursing home indefinitely. If your physical or mental condition improves, you may be able to return home or move to a different type of facility. Nursing homes are expensive. If you need nursing home care in the future, do you know how you will pay for it?
Long-term care insurance helps pay for the care of an individual who can no longer independently perform the basic activities of daily living, such as bathing, dressing, eating and using the bathroom. Cost and coverage vary with each plan and depend on many factors, including the age and health of the individual. To keep premiums low, purchase before age 60, if possible. You can purchase an inflation rider to ensure your coverage keeps pace with rising costs. Choose a shorter benefit period that limits the number of years your policy pays benefits. Go with a longer elimination period. The higher the number of days you must receive long-term care services before the policy kicks in, the cheaper the premium. Accept a limited benefit amount. You’ll pay higher out-of-pocket costs to keep premiums low. Part of the insurance premium may be tax deductible as a medical expense, so be sure to check. Some employers offer this less expensive group coverage. Some insurers discount prices if both you and your spouse buy coverage. Nationwide, very few people actually collect on these policies. A large number of policies are cancelled or allowed to lapse before any benefits are received due, in part, to the increase in premiums. Check with your insurance carrier for their benefit payout rate.
If you are retired or thinking of retiring, you likely are concerned about your health care needs. Most people age 65 or older who are citizens or permanent residents of the United States are eligible for Medicare, a federal program that provides health insurance to retired individuals, regardless of their medical condition. Medicare coverage consists of two parts: Medicare Part A (hospital insurance) and Medicare Part B (medical insurance). A third part, Medicare Part C (Medicare Advantage), is a program that allows you to choose among several types of health-care plans. Prescription drug coverage will begin in 2006, when the Medicare prescription drug benefit (Medicare Part D) becomes available.
Generally known as hospital insurance, Medicare Part A covers services associated with inpatient hospital care. These are the costs associated with an overnight stay in a hospital, skilled nursing facility, or psychiatric hospital, including charges for the hospital room, meals, and nursing services. Part A also covers hospice care and home health care. You are eligible for Medicare Part A without paying a monthly premium if at age 65: You receive or are eligible to receive Social Security or Railroad Retirement Board benefits based on your own work record or on someone else's work record (as a spouse, divorced spouse, widow, widower, divorced widow, divorced widower, or parent), or You or your spouse worked long enough in a government job where Medicare taxes were paid. In addition, if you are under age 65, you can get Part A without paying a monthly premium if you have received Social Security or Railroad Retirement Board disability benefits for 24 months, or if you are on kidney dialysis or are a kidney transplant patient. Even if you're not eligible for free Part A coverage, you may still be able to purchase it by paying a premium.
Generally known as medical insurance, Part B covers other medical care. Physician care--whether you received it as an inpatient at a hospital, as an outpatient at a hospital or other health-care facility, or at a doctor's office--is covered under Part B. Laboratory tests, physical therapy or rehabilitation services, and ambulance service are also covered. Although Medicare Part B is optional, most people sign up for it. If you want to join a Medicare managed care plan or a Medicare private fee-for-service plan, you'll need to enroll in both Parts A and B. And Medicare Part B is never free. You'll pay a monthly premium for it, even if you are eligible for premium-free Medicare Part A. Under Medicare Part C programs, private health-care plans may offer Medicare benefits. These private health-care plans include managed care plans and private fee-for-service plans. The Medicare Part C programs are in addition to the fee-for-service options available under Medicare Parts A and B.
Beginning in 2006, Medicare recipients will be eligible to enroll in Part D, which was legislated as the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Under Part D, Medicare enrollees may voluntarily participate in various prescription drug plans. Participants will be charged a monthly premium, however, for the service. The basic premium is expected to be about $37, but the premium may vary by plan and will likely increase annually. Once enrolled, participants will pay the first $250 of their prescription costs for a year out of their own pocket. Then they will pay 25% of their prescription drug costs and the plan will pay 75% of the costs up to $2,000. Then there comes a gap in coverage. If their prescription costs exceed $2,250 for a year, enrollees will have to pay 100% of all prescription costs for the next $2,850. Once total prescription costs reach $5,100, however, the plan will then start paying 95% of the costs for anything over $5,100.
Some medical expenses are not covered by either Part A or B. These expenses include: Routine physical exams Dental care Hearing aids Eye care Custodial care at home or in a nursing home
Medicare HMOs combine Medicare and Medigap in a single plan. The government pays the plan you select a flat fee to administer services that qualify under Medicare. You continue to pay Part B Medicare premiums, but you no longer need to buy a Medigap policy to supplement your Medicare coverage. Before you settle on a plan, determine what the plan covers and how much it will cost you to get the services you want. Some managed care plans charge a premium in addition to the Medicare Part B premium, while others do not. Some Medicare managed care plans offer benefits that are not covered by Medicare's fee-for-service program, including some prescription drug coverage, vision care, hearing aids, and dental care. In Medicare HMOs, you will be asked to select a primary care physician (PCP), generally a family practice doctor or an internist, who directs your care. Your PCP provides you with basic health care services, coordinates your care, and refers you to specialists when he or she determines it is medically necessary. Some plans give members more freedom to get care from doctors or hospitals that are not part of the plan's network. Generally, more choice translates into higher cost. While the quality of care is the most important feature of any managed care plan, assessing that quality is a relatively new field. You can get an assessment of a plan by contacting the National Committee for Quality Assurance (NCQA), a private, not-for-profit organization.
At some point in your life, you may lack the mental capacity to make or communicate responsible decisions about your own health care. Without directions to the contrary, medical professionals are generally compelled to make every effort to save and maintain your life. You may want to take steps now to control your future health-care decisions. You can do so by adopting one or more advanced directives for health care. If you do not adopt such a directive for health care, a family member may have to petition the court for the authority to make those decisions for you. There are three types of advanced directives for health care. Be aware that not all are allowed in every state. Check with your state to find out which one(s) you can consider. A living will lets you decline certain types of medical care, even if you will die as a result. Generally, a living will can be used only to decline medical treatment that “serves only to postpone the moment of death.” A durable power of attorney for health care, or health-care proxy, lets you appoint a representative to make medical decisions on your behalf. It becomes effective only when you’ve become incapacitated. A Do Not Resuscitate order is your doctor's order that tells all other medical personnel not to perform CPR if you go into cardiac arrest.
In addition to planning for your health care, you’ll want to plan how your estate will be disposed when you die. Successful estate planning transfers your assets to your beneficiaries quickly with minimal tax consequences. You may think estate planning is only for the wealthy. If your assets are worth $1.5 million or more, estate planning may benefit your heirs. By the time you account for your home, investments, retirement savings and life insurance policies you own, you may find your estate in the taxable category. Even if your estate is not likely to be subject to federal estate taxes, you may need estate planning to ensure your assets are disposed of as you wish.
There are a number of estate planning methods that you can use to minimize federal taxes on your estate. You can make annual tax-free gifts of $11,000 each to any number of individuals. Couples can give combined gifts of $22,000 per recipient. You can shield property transferred to a spouse from taxes. Federal tax law generally permits you to transfer assets to your spouse without incurring gift or estate taxes. Marital deductions, however, may increase the total combined federal estate tax liability of the spouses upon the death of the surviving spouse. To avoid this problem, many couples choose to establish a bypass trust. With a bypass or credit shelter trust, the first spouse to die can leave the amount shielded by the unified credit to the trust. The trust can provide income to the surviving spouse for life. Upon the death of the surviving spouse, the assets are distributed to beneficiaries. Charitable gifts are not taxed as long as the contribution is made to an organization that operates for religious, charitable or educational purposes. Life insurance trusts can be designed to keep the proceeds of a life insurance policy out of your estate and give your estate the liquidity it needs. The proceeds from life insurance held by the trust may pass to trust beneficiaries without income or estate taxes.
It’s been a pleasure talking with you today. I know we covered a lot of information that may be difficult to remember. Thankfully, you have all this information in the 360 Degrees of Financial Literacy packets that you received when you walked in. At this time I will be happy to answer any questions you may have.
Retirement: How to Achieve Your Financial Goals
Preparing for Retirement <ul><li>Discuss your options </li></ul><ul><li>Prepare personal data record </li></ul><ul><li>Obtain support and advice </li></ul>
How to Live on Less <ul><li>Invest wisely </li></ul><ul><ul><li>Equities </li></ul></ul><ul><ul><li>Reinvest </li></ul></ul><ul><li>First tap taxable accounts </li></ul>
How to Live on Less <ul><li>Reduce housing costs </li></ul><ul><ul><li>Downsize </li></ul></ul><ul><ul><li>Seek a lower cost of living </li></ul></ul><ul><li>Trim expenses now </li></ul><ul><li>Be creative </li></ul><ul><li>Reverse your mortgage </li></ul>
How to Live on Less <ul><li>Lower leisure expenses </li></ul><ul><li>Get a job </li></ul><ul><li>Reduce healthcare costs </li></ul><ul><ul><li>Medicare </li></ul></ul><ul><ul><li>Generic drugs </li></ul></ul>
Know Retirement Plan Options <ul><li>Defined benefit plan </li></ul><ul><ul><li>Specified monthly benefit </li></ul></ul><ul><ul><li>Federally protected </li></ul></ul><ul><li>Defined contribution plan </li></ul><ul><ul><li>No specified benefit </li></ul></ul><ul><ul><li>Value fluctuates </li></ul></ul>
Identify Retirement Plan Options <ul><li>Simplified Employee Pension Plan </li></ul><ul><li>Profit-Sharing plan </li></ul><ul><li>401(k) Plan </li></ul><ul><li>Employee Stock Ownership Plan </li></ul><ul><li>Money Purchase Pension Plan </li></ul><ul><li>Cash Balance Plan </li></ul>
How Do Variable Annuities Work? <ul><li>Issued by insurance company </li></ul><ul><ul><li>Carefully review prospectus </li></ul></ul><ul><ul><li>Compare benefits/costs </li></ul></ul><ul><ul><li>Check investments </li></ul></ul>
How Do Variable Annuities Work? <ul><li>Characteristics of variable annuities </li></ul><ul><ul><li>Periodic payments </li></ul></ul><ul><ul><li>Death benefit </li></ul></ul><ul><ul><li>Tax-deferred </li></ul></ul><ul><li>Tax-free 1035 exchanges </li></ul>
Where Will You Live? <ul><li>Will you move? </li></ul><ul><li>Consider lifestyle questions </li></ul><ul><li>Consider privacy issues </li></ul>
Where Will You Live? <ul><li>Assisted-living facilities </li></ul><ul><ul><li>Primarily social </li></ul></ul><ul><ul><li>Licensed or unlicensed </li></ul></ul><ul><ul><li>Wide cost range </li></ul></ul><ul><li>Nursing homes </li></ul><ul><ul><li>Primarily medical care </li></ul></ul><ul><ul><li>Expensive </li></ul></ul>
Long-Term Care Insurance <ul><li>Purchase before 60-years-old </li></ul><ul><li>Consider benefit/elimination periods </li></ul><ul><li>Consider costs and </li></ul><ul><li>Check benefit payout rate </li></ul>
Understanding Medicare <ul><li>Most people eligible at 65 </li></ul><ul><li>Two parts </li></ul><ul><ul><li>Hospital insurance </li></ul></ul><ul><ul><li>Medical insurance </li></ul></ul><ul><li>Medicare Advantage </li></ul><ul><li>Prescription drug benefit </li></ul>
Understanding Medicare <ul><li>Medicare Part A </li></ul><ul><ul><li>Covers hospitalization </li></ul></ul><ul><ul><li>Requires no premium at age 65 </li></ul></ul><ul><ul><li>Eligibility </li></ul></ul><ul><ul><ul><li>Receiving Social Security </li></ul></ul></ul><ul><ul><ul><li>Or worked for government </li></ul></ul></ul>
Understanding Medicare <ul><li>Medicare Part B </li></ul><ul><ul><li>Covers other medical costs </li></ul></ul><ul><ul><li>Requires premium </li></ul></ul><ul><li>Medicare Part C </li></ul>
Understanding Medicare <ul><li>Medicare Part D </li></ul><ul><ul><li>Requires premium </li></ul></ul><ul><ul><li>Pays 75% of initial drug costs </li></ul></ul><ul><ul><li>Has a gap </li></ul></ul><ul><ul><li>Pays 95% over $5,100 </li></ul></ul>
Understanding Medicare <ul><li>Some expenses not covered </li></ul><ul><ul><li>Physical exams </li></ul></ul><ul><ul><li>Dental care </li></ul></ul><ul><ul><li>Hearing aids </li></ul></ul><ul><ul><li>Eye care </li></ul></ul><ul><ul><li>Custodial care </li></ul></ul>
Understanding Medicare <ul><li>Medicare HMOs </li></ul><ul><li>Other considerations </li></ul><ul><ul><li>Benefits and costs </li></ul></ul><ul><ul><li>Doctors and hospitals </li></ul></ul><ul><ul><li>Quality of care </li></ul></ul>
Plan Ahead for Health Care <ul><li>Living will </li></ul><ul><li>Durable power of attorney </li></ul><ul><li>Do Not Resuscitate order </li></ul>
Handling Disposition of Estate <ul><li>Estate planning </li></ul><ul><ul><li>Minimizes tax consequences </li></ul></ul><ul><ul><li>Needed if worth $1.5 million or more </li></ul></ul><ul><ul><li>Ensures how assets are disposed </li></ul></ul>
Reducing Taxes on Your Estate <ul><li>Make annual gifts </li></ul><ul><li>Shield property </li></ul><ul><li>Use trusts </li></ul><ul><li>Make charitable gifts </li></ul><ul><li>Fund a life insurance trust </li></ul>