Retiree Challenge: Making Your Money Last

The ultimate goal for most retirees is making sure their assets last as long as they live. Due to increased longevity, managing cash flow is more critical than ever. While many variables come into play, there are a number of planning moves that can help retirees live within their means and make appropriate adjustments in response to changes in income and expenses.

 

Tools for the Task

If you are retired or about to retire, you will need to clarify your current financial situation, as well as any significant changes you expect. Two sources will provide this information:

·     A net-worth statement, which provides a snapshot of your assets, debt, and cash reserves.

·     Your monthly or annual budget, with itemized breakdowns of your income and expenses. If you haven't retired yet, it's a good idea to prepare a projected budget of your retirement income and expenses.

Even with reasonable assumptions about investment returns, inflation, and retirement living costs, it is likely you will encounter numerous changes to your cash flow over time. Experts often recommend a monthly review of your budget, as well as a comprehensive annual review of your financial situation and goals.

What to Look For

What should you look for as you monitor your finances? Following are potential developments that could affect your cash flow and require adjustments to your plan.

·     Interest rate trends and market moves may result in an increase or decrease in income from your savings and investments.

·     You may also encounter changes in federal, state, and local tax rates and regulations. Watch for changes in Social Security or Medicare benefits or eligibility, as well as new rules affecting employer-sponsored retirement benefits and private insurance coverage.

·     Inflation and health care costs are two other variables that may have an impact on living costs and, hence, your retirement planning assumptions.

·     Life events such as marriage, the death of a spouse, and the addition or loss of a dependent may also affect your cash flow. In addition, cash flow is impacted by both small and significant choices you make over the course of your retirement, such as how much you spend on travel and entertainment and whether you live in a lower-cost or a higher-cost locale.

It is worth paying close attention to cash flow, making sure you budget carefully, and monitor income and expenses frequently. Take action whenever you believe that significant changes may be necessary.

While you may have a good understanding of what to expect in your retirement years, unforeseen changes can occur. Having a well-planned strategy may assist in making your money last longer after you retire.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Calculating Your Retirement Needs

When retirement was years away, calculating how much income you may need may have involved a lot of estimates. Now you can be more accurate. Consider the following factors:

1. The length of your retirement. The average 65-year-old man can expect to live about 17 more years; the average 65-year-old woman, 20 more years, according to the National Center for Health Statistics. Have you accounted for a retirement of 20 years or more?
2. Earned income. Working during retirement, even on a part-time basis, can reduce your need to tap into retirement assets for ongoing living expenses.
3. Your retirement lifestyle. Your lifestyle will help determine how much income you'll need to support yourself. A typical guideline is 60% to 80% of your final working year's salary, but if you want to take luxury cruises or start a business, you may need 100% or more.
4. Health care costs and insurance. Most Americans are not eligible for Medicare until age 65, and even then, Medicare doesn't cover everything. You can purchase Medigap supplemental insurance to cover some of the extras, but even Medigap does not pay for long-term custodial care, eyeglasses, hearing aids, and other ongoing essentials. For more on Medicare and health insurance, visit www.medicare.gov.
5. Inflation. Because the rate of inflation can vary over time, it's a good idea to tack on an additional 4% each year to help compensate for increases in the cost of living.

Running the Numbers

The next step is to identify potential income sources, including Social Security, pensions, and personal investments. Also review your asset allocation -- namely, how you divide your portfolio among stocks, bonds, and cash.¹Are you tempted to convert all of your assets to low-risk securities? Such a move may place your assets at risk of losing purchasing power due to inflation. You may live in retirement for a long time, so try to keep your portfolio working for you both now and in the future.

 

A New Phase of Planning

Once you've assessed your needs and income sources, it's time to look at tapping your nest egg. First, determine a prudent withdrawal rate. A common approach is to liquidate a maximum of 5% of your principal each year in retirement; however, your income needs may differ.

Next, you'll need to decide when and how much to withdraw from your tax-deferred and taxable investments. Investors are required to take annual withdrawals from employer-sponsored retirement plans and traditional IRAs after age 70 1/2. Be aware that these withdrawals are subject to federal income tax.²

The advantage of maintaining tax-deferred investments for as long as possible is their ability to compound on a pre-tax basis and thus offer greater earning potential than their taxable counterparts. In contrast, long-term capital gains from the sale of taxable investments are currently taxed at a maximum of 15%.

It is never too early to start planning for retirement. Considering some of the recommendations above can be helpful in determining what the best options are for your post retirement years.

 ¹Asset allocation does not assure a profit or protect against a loss in a declining market.

²Withdrawals from tax-deferred accounts made prior to age 59 1/2 may be subject to an additional 10% penalty. In the case of employer-sponsored plans, there are special rules that apply to plan participants aged 55 and older who separate from service.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Should You Tap Your Retirement Account?

Since the housing and stock markets collapsed a few years ago, millions of Americans have found themselves in need of cash, either for short-term or long-term expenses. Those who have contributed regularly to a workplace retirement plan, such as a 401(k) or 403(b), may find it tempting to tap into those accounts to help cover their bills, either through a loan or a distribution. Before any pre-retirement withdrawal is made, it's important to know the facts and consider the consequences. 

Your decision should be influenced, in part, by the severity of your needs and the tax implications of the option you choose. Loans are not considered taxable distributions unless they fail to satisfy plan rules regarding the amount, duration, or repayment terms. However, distributions (including hardship withdrawals) are generally taxable as ordinary income, and workers who receive retirement plan distributions before reaching age 59 1/2 may be required to pay an additional 10% early withdrawal penalty.

Loan Considerations

When considering a loan, there are several rules to keep in mind.

·     The IRS generally limits the amount of a loan to 50% of your vested account balance, up to a maximum of $50,000.

·     Most retirement plan loans must be repaid within five years, although loans used to purchase the participant's primary residence may be paid back over a longer period of time.

·     You may not be able to make new contributions to your plan until the loan is paid off. Additionally, loans are repaid with after-tax contributions, and interest (usually 1% or 2% above the prime rate) is due.

It's important to remember that not all plans allow loans. A violation of any of the plan's loan rules may cause the loan to be treated as a taxable distribution. Additionally, an employer may require participants who have taken a loan to repay the entire amount immediately upon leaving the company, regardless of the original repayment schedule. If an ex-employee fails to do so, the employer is required to report the loan to the IRS as a distribution.

Hardship: A Last Resort

The government has made the rules around applying for and receiving a hardship withdrawal of your retirement plan assets difficult for a reason: they want to ensure that the need for those funds is vital. Most plans only allow a hardship if all other means (including loans) have been exhausted.

Hardships can be taken if they meet certain requirements, including:

·     Unreimbursed medical expenses for you, your spouse, or dependents.

·     Purchase of a principal residence.

·     Payment of college tuition and related educational costs (such as room and board) for you, your spouse, dependents, or nondependent children.

·     Payments necessary to prevent eviction from your home, or foreclosure on the mortgage of your principal residence.

·     For funeral expenses.

·     Certain expenses for the repair of damage to the employee's principal residence.

Ordinary income taxes (both federal and state, if applicable) are due on the withdrawal amount, but the 10% early withdrawal penalty may not apply in certain situations, such as when the distribution is made:

·     Because of a qualifying disability.

·     To pay medical expenses that exceed 7.5% of the participant's adjusted gross income.

·     Due to a "separation from service" (i.e., ceased to be employed by the company sponsoring the plan) during or after the calendar year in which the participant reaches age 55.

·     To an alternate payee under the terms of a qualified domestic relations order (QDRO).

·     On account of certain disasters for which IRS relief has been granted.

Note also that a hardship withdrawal cannot be repaid into your account. Your retirement plan administrator and financial professional can help you determine your options. Be sure to consider all options and consult a professional before making decisions that could effect on your financial future.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Financial Planning Tips for Unmarried Couples

Today's "modern family" is decidedly nontraditional. According to the latest Census data, fewer than 25% of American households currently consist of married couples with dependent children, while more than 40% of unmarried couples have children under the age of 18. Even the term "married" can be defined differently depending on where you live. Some states allow and recognize same-sex marriage, but the majority of states and the federal government do not. Therefore, it's important for domestic partners to ensure they have legal protections in place to protect their families and themselves.

Legal Protections

Unmarried partners lack many of the legal protections granted to spouses in the event of divorce or death. Although most states will consider a claim by an unmarried partner, there is no specific legal precedent in the absence of a written contract. Domestic partners may wish to consider creating a domestic partnership agreement that details the sharing of expenses as well as the ownership and distribution of assets should the relationship end. Unmarried couples with children should consider signing a written agreement acknowledging parental rights and responsibilities and having each partner name the other as primary guardian in their respective wills.

Retirement Considerations

Unmarried couples are not eligible for their partner's Social Security benefits and, in some cases, employer sponsored retirement plan distributions. The IRS allows a non-spousal beneficiary of an IRA to take required distributions over his or her lifetime rather than in a lump sum, allowing for potential tax-deferred growth over a longer period of time. Domestic partners who can afford to do so may want to contribute the annual maximum to an IRA to capitalize on this benefit.

Estate Planning Issues

If an unmarried individual dies without a will, the state may distribute assets to his or her closest blood relatives, leaving out the surviving domestic partner. To help rebut a challenge to a will, domestic partners may want to videotape their wishes in the presence of an attorney.

Federal tax law allows all assets to pass to a spouse tax free and no applicable estate taxes are due until the second spouse dies. Unmarried couples, however, do not enjoy this tax advantage. For those with significant taxable assets, it will be necessary to pursue other avenues to avoid estate tax. One strategy is to purchase life insurance to pay any potential federal and state estate taxes. The surviving partner must own the insurance to avoid it becoming part of the estate of the deceased. Therefore, each partner should own enough insurance to pay anticipated taxes on the assets of his or her partner.

Protecting your family’s financial future is important. If you are part of a “modern family”, it is important to understand the benefits and limitations of the laws and regulations in your state, as they could have long-term financial effects.  

This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual's situation is different. You should contact your legal and/or tax professional to discuss your personal situation.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Transferring Assets to a 529 Plan

A 529 College Savings Plan may be an attractive vehicle for those looking to save for a child's education.¹ If you have already committed college-earmarked assets to another type of financial vehicle, such as a Coverdell Education Savings Account or a custodial account for a minor beneficiary, you may want to investigate transferring those assets into a 529 plan.

 

Making the Move from a Coverdell

Amounts transferred from a Coverdell account to a "qualified tuition program" (IRS lingo for a 529 plan) are viewed as qualified education expenses by the IRS and are therefore tax free as long as the amount of the withdrawal is not more than the designated beneficiary's qualified education expenses.

There are several reasons why a college saver may want to take this course of action:

• Consolidation with a more generous contribution limit. Whereas Coverdell accounts limit contributions to $2,000 per beneficiary per year, 529 plans typically allow much higher lifetime contribution limits in excess of $200,000 per beneficiary in many states.
• No income restrictions. Unlike Coverdells, 529 plans generally do not impose income limits that restrict the ability of higher-income taxpayers to contribute.
• No taxes or penalties. Moving assets from a Coverdell to a 529 does not trigger taxes or penalties.

There are also some drawbacks. Keep in mind that Coverdells and 529 plans are still relatively new, so legal and procedural precedents for specific strategies may not be well established yet. Since the funds in a Coverdell are owned by the beneficiary, any assets moved to a 529 plan owned by a parent could be construed as a transfer of ownership from the beneficiary to the parent. This could raise legal issues down the road if the parent subsequently changes the beneficiary. What's more, Coverdells can be used to pay for primary or secondary school costs, whereas 529 plans are limited to college expenses.

Relocating UGMA/UTMA Assets

Many 529 plans accept rollovers from custodial accounts established for minor beneficiaries, such as those created under the provisions of the Uniform Gifts/Uniform Transfers to Minors Act (UGMA/UTMA). Be aware that the money in an UGMA/UTMA account belongs to the minor, so any subsequent withdrawals after a transfer to a 529 plan may only be used for that minor. Also, since contributions to 529 plans must be in cash, UGMA/UTMA assets first need to be liquidated, with any capital gains taxable to the minor.

 

Moving Savings Bond Assets

The third option for a transfer to a 529 plan involves cashing in qualified U.S. savings bonds and contributing the proceeds to the plan, in accordance with the guidelines established by the IRS and the Treasury Department's Education Bond Program.² You can find more information at the Treasury Department's Treasury Direct Web site: http://www.treasurydirect.gov/indiv/planning/plan_education.htm.

¹By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

²Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing "Investors should consider the investment objectives, risks, charges and expenses associated with the municipal fund securities carefully before investing. The issuer's official statement contains this and other information about the investment. You can obtain an official statement from your financial representative. Read carefully before investing.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

Portions of this material prepared by Standard & Poor’s Financial Communications. All rights reserved.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Budget Your Way to Extra Savings

Investing a few hours to create and maintain a household budget may be the key to identifying opportunities to save more for the future, including long-term goals such as retirement. Yet it's surprising how few households take the time to commit to a budget. Many financial experts recommend making time for this task, which could pay dividends down the road.

Get a Grip on Your Money

Finding the extra money to save is not always easy. The good news is that many families realize they spend money on nonessentials -- such as eating out and specialty coffees. These are expenses that can often be reduced with the aid of a budget. A budget may also help you reduce large expenses to make room for savings. For example, if your transportation costs are considerable because of a long commute to work, look into carpooling with a colleague or working at home periodically.

Budget Basics

The first step is to understand and summarize your various sources of income, which may include earnings from a job, alimony, real estate income, and income or dividends from investments. Next, determine how you spend your money. Start by tracking your spending for a month. Gather bills and receipts and don't forget things like an occasional splurge on new shoes or a cup of coffee.

You may want to group expenses into the following categories:

Fixed committed expenses, such as mortgage, loan, and insurance payments that are the same from month to month.

• Other committed expenses, which are things you can't live without, such as food and clothing.
• Luxury expenses, which are things you like but don't necessarily need.

You can tally your income and expenses in writing if you prefer. Or consider trying one of the many online budgeting programs to help get you started.

At the end of each month, see how your actual spending stacks up against your budget and how much income is left over. When looking for places to cut additional costs, start with luxury expenses, followed by other committed expenses.

Budgeting will initially require some extra work and organization. But a little extra effort now can go a long way toward helping you pursue your financial goals.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

Portions of this material prepared by Standard & Poor’s Financial Communications. All rights reserved.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Kids and Money: A Little Education Pays Off

Just about anyone who's ever watched a child or grandchild go from the crib to kindergarten and beyond has uttered the phrase, "They grow up so fast." Although you can't really freeze a youngster's precious moments in time, you can take steps to make sure that his or her journey to adulthood starts with a sound understanding of money, investments, and personal financial responsibility. The following activities will help.

Count on Counting Your Change

Smart shopping might begin with a hunt for bargains, but it should end with a review of your transactions. To drive this message home, encourage your kids to unload the groceries and simultaneously compare price tags with the receipt. If they find a mistake, let them hold on to the refund.

Play "The Stock Market Game™"

Get online and go to www.smg2000.org. There you'll find "The Stock Market Game," sponsored by the Foundation for Investment Education. It lets kids in grades 4 through 12 assemble and monitor a hypothetical $100,000 portfolio for 10 weeks.

Make a Matching Contribution

Want to motivate a child to save? Just offer to "match" a portion of each savings account deposit he or she makes. And don't be afraid to set a few rules — for example, matching contributions can't be spent on candy or pizza.

Take Stock of Household Products

If your child is old enough to understand the concept of stocks and publicly traded companies, go through the house together and identify favorite items, such as computers and clothing. Then look up the manufacturer's stock price and monitor it over time.

Learning about money doesn’t have to be focused on boring numbers and theory. A little creativity when children are young can help cement some good habits now that will pay huge dividends for them in the future.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

Portions of this material prepared by Standard & Poor’s Financial Communications. All rights reserved.