20 Feb For one couple, retirement is now, but a trust can make it better
Paul, 67, is already retired, and Annie isn’t far behind.
Annie will be 63 this spring, and while she’d like to stop working full-time this year, she’s not sure if their money is ready without her substantial income.
“We are concerned about outliving out assets,” Annie said. “Will our income in retirement be sufficient to maintain our comfortable lifestyle?”
When they’re both retired, they’d like to travel more, and do the things they don’t have time for now, such as gardening, home improvement projects and yoga classes.
The couple, who has no children, has set aside $902,100 in 401(k) plans, $211,900 in IRAs, $12,100 in a brokerage account, $14,700 in mutual funds and $132,500 in bonds. They also have a sizable amount in liquid assets: $411,100 in Certificates of Deposit, $31,100 in a money market, $395,900 in savings accounts and $162,900 in checking.
Additionally, Annie has a lump sum profit sharing benefit of $143,000, and she’s eligibile for a $5,112 annual pension now, or $6,300 a year at age 65.
Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, reviewed the couple’s finances for NJMoneyHelp.com.
“Like most Baby Boomers, their major concern is outliving their income,” Pallitto said. “After reviewing their financial profile, I was happy to tell Annie that she does not have to go back to work anymore.”
That’s great news, but there’s still work to be done.
FINDING INCOME
Annie and Paul they thought they were spending about $85,000 a year when they reached out to NJMoneyHelp.com, but it turns out their spending is more like $100,000 to $120,000 a year.
For something as important as someone’s retirement, Pallitto said, he overestimates spending to be on the conservative side.
“We have a daily food cost that people don’t realize they spend, a coffee here and there, drinks, etc.” he said. “Once you retire you will be spending more because you will not be working 30 to 40 hours a week.”
Also, he likes to build in realistic vacation plans, whether it’s a few weeks away or multiple weekend excursions.
“Fortunately, they both have pensions, which in addition to their Social Security, will cover more than half of their retirement spending,” Pallitto said.
Pallitto said the couple doesn’t have children, and rather than have concerns about transferring assets to family members, they would like to give to their favorite charities.
And after reviewing their assets, Pallitto said their most difficult challenge will be to try to keep the couple out of higher tax brackets when they reach age 70 and have to take Required Minimum Distributions (RMDs) from their retirement accounts.
Pallitto said there’s an answer that can generate income, help the couple’s charitable wishes and save on taxes all at the same time: A Charitable Remainder Unitrust, commonly called a CRUT.
“A CRUT allows a grantor to transfer investments with large unrealized gains into a trust,” Pallitto said. “As the title suggests, the remainder interest goes to a charity or multiple charities.”
Once the assets are in the trust, they are sold, but the gain is not taxed because the beneficiary is a charity, he said.
The grantor of the trust determines, when the trust is established, how much income they want from the trust: 5, 6 or 7 percent or more.
“The higher the income, the lower the present value of the `remainder’ charitable contribution,” Pallitto said.
Annie and Paul don’t have significantly appreciated property because most of their savings are in Certificates of Deposit, but a CRUT would still afford them a large charitable deduction and lifetime income, Pallitto said.
He recommends they create a $400,000 CRUT with a 5.5 percent distribution rate.
Based on their ages, they would get a $120,800 charitable deduction this year and receive $22,000 a year income from the trust, he said.
Once this is established, the couple can closely monitor their 2015 income so they can use the $120,800 charitable donation deduction. In other words, they will maximize their income to fill up to the 28 percent tax bracket.
“For example, we may be able to convert $240,000 to $260,000 of their IRA to Roth IRAs, or just take out that amount, to utilize the charitable donation,” he said. “That would lower their RMD amount from their IRAs at age 70 keeping them in a lower bracket.”
ASSET ALLOCATION
If the couple follows Pallitto’s trust and IRA conversion or withdrawal recommendation, they’d have about $850,000 in non-retirement accounts plus $850,000 in retirement assets.
They would then need to re-allocate those funds to have a properly diversified portfolio.
Pallitto recommends investing 70 percent of the non-retirement assets in various types of municipal bond funds, and hedge the muni portfolio with an interest rate exchange-traded fund that will increase if interest rates rise.
The rest should go to high quality, dividend-paying stocks or stock funds. he said.
Their retirement assets would be invested in a balanced risk portfolio, which would include about 10 percent in alternative investments such as senior secure loans or Real Estate Investment Trusts (REITs).
They’d also need to properly allocate the funds in the CRUT. Pallitto says a balanced allocation of 50 percent stocks and 50 percent bonds would work well for them.
Pallitto also said that while the couple favors having a high cash balance on hand, they could make some changes here, too.
He recommends they keep $100,000 in cash, and put the balance of their liquid accounts into Certificates of Deposit, including some structured CDs which are FDIC-insured and liked to the stock market. These offer the highest possible returns but your principle is guaranteed, he said.
CASH CONCERNS
To maximize cash flow, Pallitto recommends that Annie and Paul use the file and suspend Social Security strategy. That would allow Annie’s benefit to continue to grow until her age 70, and in the meantime, she can collect 50 percent of Paul’s benefit.
“If a couple would collect $2,000 a month each at full retirement, by filing and suspending, one spouse can collect $1,000 a month from full retirement age till age 70, when that spouse’s benefit may go from $2,000 a month to $2,300 a month,” Pallitto said.
If the couple takes all these steps, during the next seven years until Annie turns 70, the couple’s pensions, Social Security and CRUT income will cover two-thirds of their retirement spending, Pallitto said.
Then when Annie turns 70 and begins collect her maximum Social Security benefit, all their income sources will cover 85 percent of their retirement spending.
One area worth addressing is the possible need for long-term care, which can cost as much as $120,000 a year in New Jersey.
Pallitto said based on this couple’s their income, assets and their estate plan, they do not need long-term care insurance because they could afford to pay the bills for care.
“If one or both were to need long-term care, they wouldn’t be spending $120,000 elsewhere, so they have more than enough,” Pallitto said.
He said they also do not have adequate wills, so as part of the establishing the CRUT, he suggests they get proper wills and other estate planning documents in place with an eye on minimizing New Jersey estate taxes, which kick in for estates valued at more than $675,000.
They should also review all of their retirement accounts to make sure the appropriate beneficiaries have been named.
This story was first posted in February 2015.
Money makeovers offered by NJMoneyHelp.com should be treated as general advice about personal finance and money decisions. Before you make any changes to your personal financial plan, see a professional who can consider your entire financial situation. If you’d like a free money makeover, email .Net Worth:
Assets:
- Checking: $162,900
- Savings: $395,900
- Money Market: $31,100
- CDs: $411,100
- Bonds: $132,500
- IRAs: $211,900
- 401(k): $902,900
- Profit Sharing: $143,000
- Brokerage Account: $12,100
- Mutual Funds: $14,700
- Primary Home: $450,000
- Investment Home: $200,000
- Personal Property: $50,000
- Autos: $18,000
Total Assets: $3,136,100
Liabilities:
- none
Total Liabilities: $0
Total Net Worth: $3,136,100
Budget:
Annual Income:
- Annie Salary: $245,000
- Paul Pension: $23,664
- Paul Social Security: $21,060
- Rental Income: $12,120
Monthly Expenses:
- Income Taxes: $4,757
- Housing: $2,418
- Utilities: $922
- Food: $410
- Personal Care: $35
- Transportation: $462
- Medical: $692
- Entertainment: $50
- Vacations: $1,000
- Charity: $500
- Gifts: $50