Investing For Your Future
Monthly IFYF Investment Message
September 2006
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This message was written especially for Investing For Your Future readers who are in the second half of their financial life. Age 50 (plus or minus 5 to 10 years) can be viewed as a "halftime" or "intermission" to assess where you currently stand and what you still want to accomplish financially. There are also new financial issues to consider (e.g., long-term care and retirement plan distributions) and many people express increased interest in simplifying their lives and giving back to others.
Below is a description of 10 key financial issues that older adults need to address:
1. The Basics - This includes cash flow (income and expenses) and net worth (assets minus debts) statements, written financial goals, and an emergency reserve of at least three months expenses.
2. Insurance - Policies to re-evaluate or consider for the first time include life insurance (do you still have dependents that need protection?), disability insurance (to continue your income, if currently employed), and health (e.g., Medigap coverage), long-term care, and umbrella liability coverage.
3. Investments - Never invest in anything you don't understand, diversify your portfolio, buy low expense investments (e.g., index funds and direct purchase stocks), and balance risk and reward. Many financial experts also advise gradually reducing the percentage of one's portfolio held in stock as one gets older.
4. Retirement Income - Most experts advise withdrawing no more than 4% to 4.5% of portfolio assets annually (and less if you are a conservative investor with little or no stock in your portfolio). Take 1/12 of the annual cash withdrawal in monthly installments to create a "retirement paycheck."
5. Minimum Required Distributions - Minimum withdrawals from Traditional IRAs and tax-deferred employer retirement plans (e.g., 401(k)s) must begin by April 1 of the year following the year that one turns 70 ½. Divide the amount held in retirement assets at the end of each year by the life expectancy factor in the IRS Uniform Distribution Table to calculate the correct amount.
6. Tax Avoidance- Income taxes can be reduced legally through strategies such as voluntary contributions to tax-deferred retirement plans, catch-up contributions for workers age 50 +, and long-term capital gains tax rates on investments held more than one year.
7. Untitled Property Transfers - Experts recommend making a written list of personal property and intended heirs. Share this list with family members and the executor of your estate. Some families may decide to "draw names from a hat" to distribute untitled items. For additional information about this topic, visit the University of Minnesota's Who Gets Grandma's Yellow Pie Plate? Web site at www.yellowpieplate.umn.edu.
8. Getting Help - Financial advisors can be extremely helpful for events such as receipt of a lump-sum pension distribution or life insurance proceeds. The best sources of referrals are often family and friends or other financial advisors that you employ (e.g., CPA or attorney). For the names of local financial planners to interview, visit http://www.fpanet.org or http://www.cfp-board.org.
9. Leaving a Legacy - People leave a legacy for others through their children and grandchildren, creative works, and time and money spent helping others. Charitable gifting can include outright gifts of cash or property, charitable trusts, and gifts made following death via someone's will.
10. Communication - Always ask people to serve before naming them to key positions such as executor or guardian in a will. In addition, prepare a "financial notebook" that includes lists of financial accounts, names and contact information of financial advisors, and the location of key documents.