Life s certainties. The choice to retire. Three certainties in life. Opportunity and responsibility. Questions to consider

Transcription

1 Certainty Planning

2 Life s certainties The choice to retire Most of us have built our assets one at a time over many years. Each of us has built a patchwork of different assets purchased at different times for different reasons. Many of us have a comfortable retirement as a key financial goal. We ve consciously earmarked some of our assets for retirement and we ve diligently managed them through economic and tax law changes so we ll be able to retire when we think the time is right. Three certainties in life Over the years we ve learned that sometimes things don t turn out the way we expected. Our retirement planning needs to be flexible so it can respond to changes in our lives and in the economy. In a constantly changing world, we also need to plan for the things that are certain in our lives. No matter what happens, there are at least three certainties we can all count on: 1. Life is temporary; we aren t going to live forever. 2. Time is precious; none of us knows how much time we have. 3. No matter what we have, we can t take it with us; what s left over will be the financial legacy we leave behind. Opportunity and responsibility One day each of us will die and what we have will be passed on. Certainty Planning gives us an opportunity to make the most of what we leave behind. It s part of our retirement planning. If we re married or committed to someone, our planning needs to provide for their financial security as well as our own. Certainty Planning is one of the responsibilities of being an adult. Our parents taught us to clean up after ourselves and to act responsibly. We ve shared those lessons with our own children. Over the years we ve seen how often dividing up assets can create family conflicts and disagreements. If we don t want family conflicts to be part of our own legacy, we need to anticipate them and make plans to avoid them. Questions to consider As part of our retirement planning, we need to aress questions that are certain to arise: What assets will I pass along? How will those assets be passed on? Who will receive them? What problems could arise when my assets are transferred and how can I avoid them? 2

3 1 What assets will I pass along? The truth is that it s difficult to know today what assets we will be passing on. Different assets have different advantages and disadvantages. Which ones will be left over depends on a number of factors, including how long we live, what expenses we will have and how we own our assets. When they retire, wise people often look at their asset picture and decide: (1) which ones they should use up during retirement, (2) which ones they want to pass on and (3) which ones should be repositioned to improve their financial position. Like them, we should start by looking at the big picture of the assets we have today. Circle your current assets and estimate their value net of any debts or loans. Assets Cash Car (1) Car (2) Boats & Other Vehicles Collections/Antiques Jewelry/Gems/ Precious Metals Artwork/Miscellaneous Investment Assets Stocks Bonds Mutual Funds Brokerage Accounts ETFs Qualified Retirement Assets Traditional IRA 401(k) 403(b) Roth IRA Pension/ profit sharing plans Business Assets Ownership Interest (1) Ownership Interest (2) Business Real Estate Deferred Compensation Stock Options Insurance Assets Life Insurance (1) Life Insurance (2) Group Life Insurance Annuity (1) Annuity (2) Other Assets Real Estate Assets Residence Vacation Home (1) Vacation Home (2) Investment Real Estate (1) Investment Real Estate (2) Savings Assets Money Market Account Certificates of Deposit Savings Account 3

4 What assets will I pass along? (continued) How we use up our assets during retirement depends on how much income we have and how much of it we ll have left over to spend after taxes. Taxes have the potential to play a big part in what we ll have to spend and what may be left over to pass on. As we turn our assets into cash to pay our retirement expenses, taxes are often triggered. We need to think about taxes because every dollar we pay in taxes is a dollar we can t save, spend or share. To maximize retirement income and pass on more of their net worth, wise people control the impact of taxes by carefully choosing which assets to use up, reposition and pass on. Because different assets are taxed in different ways, they tend to use assets that are taxed favorably. Because some assets are taxed in similar ways, we can organize them conceptually into three tax buckets : (1) a taxable bucket, (2) a tax-deferred bucket and (3) a tax-free bucket. Each column below lists many of the assets that can be found in each of these buckets. Look at your list of assets and circle that asset in the appropriate column below. Taxable Bucket Interest Income Savings Accounts Money Market Accounts Certificates of Deposit Interest from Bonds Interest from Mutual Funds Short Term Capital Gains Mutual Funds/ETFs Qualified Accounts 1 IRAs, SEPs 401(k), 403(b) Pension Plans Profit Sharing Plans ESOPs Deferred Compensation 2 Non-Qualified Annuities Equity Investments 3 Tax-Deferred Bucket Capital Growth Income Stocks Real Estate (non-homestead) Bonds Tax-Free Bucket Tax-Free Income Roth IRAs Municipal Bonds Homestead Equity 4 Life Insurance 5 1 Distributions from qualified accounts are generally required when the account owner reaches age 701 2; distributions are generally fully taxable. 2 Deferred compensation plans are available only to key business employees; while they are not qualified accounts, they generally have similar income tax consequences. 3 Asset growth in Equity investments is generally taxed at long-term capital gains rates if the requisite holding period has been satisfied; that period is currently one year. 4 Limited to $500,000 for married couples & $250,000 for singles upon sale if used as principal residence at least 2 of last 5 years. 5 Life insurance death benefits are generally income tax free under IRC 101. Policy cash values grow tax-deferred; as long as the policy is not a modified endowment contract (MEC) withdrawals are generally income tax-free up to basis and policy loans are generally income tax free as long as the policy stays in force. Cash value withdrawals and loans generally reduce the death benefit payable at the insured s death. 4

5 Tax considerations can be important One of our biggest fears during retirement is that we may run out of money. We may be able to reduce this risk by carefully selecting and managing our assets. Understanding the different ways in which our assets may be taxed may help us have more after-tax spendable income. If we need to sell or liquidate an asset(s) to produce more spendable income, we need to carefully consider which one(s) to use first. The order in which we access our tax buckets and the assets in them may directly impact how long our retirement savings will last and which assets will be left to pass on. Here are some possible rules of thumb to consider in accessing the retirement assets we have in our tax buckets: 1. To maintain purchasing power, it often makes sense to continue tax-deferred growth as long as possible. 2. When using or repositioning assets in a tax bucket, it is often wise to spend lower yield assets before spending those with the potential to produce higher yields. 3. Often assets in the taxable bucket have the smallest potential for after-tax growth; when this is the case, it may make sense to use them up first (or reposition them into assets that have the potential for tax-deferred growth). 4. When using assets in the tax-deferred bucket, it often makes sense to first use up those that will be taxed at the highest rates. 5. Because they have the potential to provide both tax-deferred growth and tax-free distributions, if often makes sense to use up assets in the tax-free bucket last. 6. Because tax laws change over time, it may be wise to save for retirement by using a variety of different assets that are in more than one tax bucket; by diversifying across several buckets, we may have more flexibility if the tax laws change. The order in which we use up our retirement assets directly impacts which assets we ll pass on at death. In many cases, some of the assets in our tax-deferred and tax-free buckets will be among those we will pass on. 5

6 Some assets may pass on more value than others When it comes to passing on assets at death, all our assets aren t equal; some assets have the potential to pass on more value than others. That s because different assets can be subject to different problems when they are passed on. Some assets fluctuate in value. What they are worth can go up and down with changes in the marketplace. We can t be sure what they will be worth at death. Other assets may lose value if they are subject to: Taxes Fees Probate costs Transfer costs Management costs Sales commissions Because of taxes, costs and changes in value, some of our assets have the potential to pass on more value to our families than other ones. Usually, these are the assets our families would prefer to inherit and which may pass on our wealth more efficiently. If you were inheriting assets, put a check mark next to the features you would like to have in assets you might receive: Predictable value (value is known in advance with relative certainty) Asset value has the potential to keep up with or exceed the rate of inflation Liquid (benefit is delivered in cash or cash equivalents) Limited income tax exposure (the asset s value isn t reduced by income taxes) Limited exposure to commissions, costs or management fees Easily divisible among family members Limited exposure to probate costs and federal estate taxes Other features: When we re not sure which assets to use up or reposition in our planning, it may be helpful to look at them from our families point of view. Which of our assets are going to produce the most net value for them? Which assets are likely to be the most flexible and efficient in settling our affairs and helping our families move forward? Which assets are least likely to create conflicts or disagreements? Evaluating the assets we have from our families perspective, may help us in making financial decisions. 6

7 2 How will my assets be passed on? Deciding which assets to pass along is one thing, but actually passing them on can be complicated. We can t tape labels to our assets to tell our families who should get what. The process of transferring our remaining assets to loved ones is fraught with potential difficulties and needs to handled carefully. The devil is in the details! Exactly how our leftover assets will be passed on depends on what assets we own and how we own them. Most people own their assets in any of three different ways: (1) sole ownership in their own names alone, (2) joint ownership with a right of survivorship and (3) ownership under a contract. From your asset list, put each asset and its estimated net value in the appropriate ownership column. In Your Name Alone* Jointly with Someone Else (With Right of Survivorship) Under A Contract Through Probate (will or intestacy) By Operation of State Law By Beneficiary Designation If you died today, what portion of your assets would be subject to each of these transfer systems? Percentage $ $ $ % % % * If you ve lived in a community property state (TX, NM, NV, AZ, CA, WA, ID, LA, WI) while you were married, you and your spouse may each have a 50% interest in any assets which you acquired during the time you resided in that state. Because of your spouse s interest, you may only be able to transfer 50% of those assets. Consult your attorney for further information. 7

8 Some things you may not know about beneficiary designations Most of us are aware of wills and the role they play in passing on a financial legacy. Unfortunately, many of us aren t as aware of the role beneficiary designations can play in passing on our assets. A will may not have any impact at all on how assets with beneficiary designations are distributed. Here are some important facts about beneficiary designations: 1. Beneficiary designations generally can t be made in a will; they must be made in writing on a form acceptable to the asset provider. 2. B eneficiary designations can t be changed orally; they can only be changed in writing on an acceptable form. 3. G enerally, it isn t possible to make one blanket beneficiary designation that will apply to all your beneficiary assets; they must be made asset by asset. 4. I n many cases it may be possible to name two types of beneficiaries: (1) primary beneficiaries (your first choice ) and (2) contingent beneficiaries ( backup or substitute beneficiaries who will receive the asset (or a share of it) if a primary beneficiary is unable or unwilling to receive it). 5. Beneficiaries can t name their own replacements. 6. T he rules about beneficiary designations can be confusing because they aren t uniform they can be different from asset to asset and company to company. 7. S ome beneficiaries have more flexibility when receiving an asset than others (e.g. when a spouse who is the beneficiary of an annuity or IRA/qualified retirement account, he/she may be able to roll it over to their own name). 8

9 3 What about your beneficiary designations? Often beneficiary designations are easy to overlook. For many people, some general statements about beneficiary designations are true. Put a check mark by any statements that are true for you: You ve made a number of separate decisions about your beneficiary designations at different times over several years. You re not sure which of your assets allow you to name a beneficiary. In some cases you made your beneficiary decisions quickly and without looking at your other beneficiary decisions or the terms of your will or trust No one told you that your beneficiary decisions could have tax consequences and consequently you may not have considered the impact of taxes in your decisions You haven t reviewed your beneficiary decisions within the last two years. You may remember some of your primary beneficiaries, but you aren t certain who you ve named as your successor (contingent) beneficiaries. You aren t sure where the written records of your beneficiary designations are; it might be difficult to locate copies of your current beneficiary designations. You re not sure how to go about getting information on your current beneficiary designations or how to change them. Are your beneficiary designations up-to-date? Your beneficiary designations could control the future of a large part of your financial legacy. Unfortunately, they are often overlooked; without proper understanding and attention to detail, they could create problems. Look at your beneficiary designation assets. List them below with the following information: Asset When Established Current Primary Current Contingent Date Last Reviewed 1) Asset 2) 3) 4) 5) 6) 7) 8) 9) 9

10 A tool for managing beneficiary assets: Your beneficiary folder When it comes to making beneficiary decisions, it s important to know where we are today. That means having access to the latest information. To make good decisions, we need to have all our beneficiary information at our finger tips. If we can t find a copy of our most recent beneficiary designation paperwork, we can t be certain who our beneficiaries are or what options may be available. A good way to solve this problem is to have a beneficiary folder. Here s how to make one: 1. Review the list of beneficiary assets you ve compiled and make sure it identifies all of your beneficiary designation assets. A any which you may have forgotten. 2. L ocate the beneficiary designation paperwork for each asset on your list. Remember to include TOD (transfer on death) accounts at banks and other financial institutions. 3. Organize that information and put it in a beneficiary folder; make sure to include a hard copy of each beneficiary designation. 4. Review each of your primary and contingent beneficiary designations to determine if they still represent your desires today. 5. C hange/update your primary and contingent beneficiary designations as your family and financial situation changes. Changing a beneficiary usually requires filling out and filing a new beneficiary form. 6. Coordinate your beneficiary designations with your wills, trusts and other wealth transfer documents. 7. R eview all beneficiary designations at least every two years to make sure they are up-to-date; when you file a new form, include a copy in your beneficiary folder. 8. Tell people you trust where your beneficiary folder is so it can be located when it is needed. Your folder can also include copies of your wills, trusts, powers of appointment, living wills & health care proxy statements. 10

11 4 Potential wealth transfer problems We all hope to have a long and active retirement. However, sometimes unexpected things happen. A suen accident or illness can change everything. Our planning needs to consider this possibility. Death could trigger a number of problems that could seriously impact the people we love. None of us wants to leave behind a legacy of problems or cause divisions within our families. Ask yourself these questions: 1. Will there be enough left for my spouse/partner and children? Will he/she/they be financially secure? 2. Do I have any problem assets that could be difficult to deal with? These could include: ďbusiness ď interests ďhome ď ďcollections ď ďfamily ď heirlooms 3. Do I have any heirs with special considerations? ďspecial ď needs children? Children with emotional, marital, legal or dependency problems? Children deeply in debt? Certainty Planning is part of retirement planning Thoughtful planning forces us to think about which assets we have and how to make the most of the income they may produce. Consciously allocating our assets across the three tax buckets may increase our os of secure retirement. As part of planning for retirement, we need to plan for the things in life we know are certain to happen. Markets and tax laws change frequently. But, the three certainties in life stay the same: 1. Life is temporary; we aren t going to live forever. 2. Time is precious; none of us knows how much time we have. 4. Are there likely to be any conflicts between some of my family members? Poor relationships between my current spouse/partner and children? Strained relationships between children? Children born from different relationships? Children who have different amounts of financial resources? 5. Do I have causes or charities I would like to do something for? 6. How much of my financial legacy might be lost to costs and taxes? Income taxes on IRAs or qualified plan accounts ďestate/inheritance ď taxes Administration costs, sales commissions or management fees 3. No matter what assets we have, we can t take it with us; what s left over will be the financial legacy we leave behind. Certainty Planning helps us take care of ourselves and those we love. By thoughtfully managing our assets and how we pass on the leftover ones to those we leave behind, we can leave a positive legacy that our families will appreciate and remember. Certainty Planning is an important way we can show them our love. 11

12 Not FDIC/NCUA Insured Not A Deposit Of A Bank Not Bank Guaranteed May Lose Value Not Insured By Any Federal Government Agency These materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support the promotion or marketing of the matters aressed in this document. Each taxpayer should seek advice from an independent tax advisor. The Voya Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws may change and the strategies suggested may not be suitable for everyone. Clients should seek advice from their tax and legal advisors regarding their individual situation. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its products issued. All are members of the Voya family of companies Voya Services Company. All rights reserved. CN /15/2016 Voya.com