Sunday, January 14, 2018

Using retirement funds pre-retirement

It is common wisdom among estate planners and commenters on financial matters that people between the age of 60 and 70 should not touch their retirement accounts until they are required to do so, and that those who have reached the point at which they must take required distributions (around age 71) should take only the required minimum distributions (RMDs). While this is good thinking for many people, it will not work for everyone. 

The common recommendation no doubt arises from the assumption that most clients have a sizable retirement account and a sizable investment account comprised of non-retirement assets. The recommendation is based on the fact that non-retirement funds consist of money on which tax has already been paid, and thus using that money will not result in the recognition of income and the imposition of additional tax based on that income. 

But a client who has a very large retirement account and whose other assets are modest may benefit from a bit more liberal thinking about the use of the retirement funds. 

Let us do a bit of calculating for a moment. Let’s begin by assuming a client who 60 and who has exactly $100,000 in retirement funds. We know that 
  • His RMDs will begin in about 10 years. 
  • His accounts are likely to grow to about $138,000 in that time, assuming no additional contributions are made. 
  • His RMD for the first year, often his age 71 year, will be $5,223. 
A $5,000 annual distribution is of course not much. 

These calculations do “scale” perfectly, though. If we change one assumption, considering a retirement account with a current value of $1 million, it will change the following parameters. 
  • His accounts are likely to grow to about $1,380,000 in that time, assuming no additional contributions are made. 
  • His RMD for the first year, his age 71 year, will be $52,230. 
Now we are talking about a significant required minimum distribution. 

Let’s say that our client decides that he wishes to use the money to enhance his quality of life during the next ten years. Each year, he wants to use $7,500 of his accounts (probably netting about $6,000 after taxes) to do some traveling with his wife. What is the result? 

When he reaches age 71, he finds that 
  • His total retirement account is $1.3 million, or about $80,000 less than it would have been if he had not touched the money. 
  • His initial RMD is $49,000, or about $3,200 less than it would have otherwise been. Each successive RMD is also moderately smaller than it otherwise would have been. 
The differences, in all honesty, are not that great. And there is a real-life factor that seems to elude many who comment in this field. In general, our client is likely to be much better able to travel and get around in his 60s than he will in his 70s. The ability to use his money to travel and in general to enhance the lives of both spouses is likely to be greater in their 60s. In general, the money will be more useful to them in those years than it will be when they are 75, 80 or 85 years old. 

Sunday, November 26, 2017

Social Security marriage wrinkles

  1. Are you approaching age 60?
  2. Are you currently unmarried? 
  3. Were you previously married for more than 10 years?
  4. Have you been divorced for more than two years?
  5. Did your ex-spouse have higher lifetime earnings than you did?
If you answered yes to all of these questions, or in some cases all but the second, then you may be entitled to a social security benefit payment that is higher than the benefit you would receive based on your own earnings.

If your ex-spouse is alive, you will be entitled to a benefit of one-half of what his or her benefit is, if that figure is higher than your own, beginning as early as age 60, or in some cases even age 50 if you are disabled. Taking that benefit will not reduce the benefit that the ex-spouse and his/her current spouse will receive.

If your ex-spouse is deceased, you will be entitled to a benefit that is 100% of his/her benefit, under the same conditions.

Normally, this benefit is available only if you have not remarried. If you remarry after age 60, however, it is available.

There are other wrinkles as well - other very rare exceptions to this divorced widow(er)'s remarriage penalty that will apply to those who remarry before age 60, based on the Social Security status of the new spouse. Contact us for additional details, if desired.

Saturday, October 14, 2017


The Swedish term Döstädning, used by Margareta Magnusson in this book, literally means "death cleaning," a method to "declutter your home and minimize your worldly possessions so your loved ones don’t have to do it for you" after you are gone.

It is said by one reviewer to refer to "to putting your life in order—years or even decades before it becomes urgent," although the approach can also be useful for those of us who are young and healthy, just as an approach to simplifying our lives.

The Gentle Art of Swedish Death Cleaning: How to Free Yourself and Your Family from a Lifetime of Clutter
to be released in January 2018

Thursday, October 12, 2017

IRS discontinues MyRA

The MyRA program that we described in our November 2015 post has now been cancelled by the IRS, citing "extremely low" participation by taxpayers.

Sunday, September 24, 2017

Protecting against real estate fraud

Several Registers of Deeds in Michigan, including Marquette County, now offer a free Property Fraud Alert service. This will send you an alert any time that a document relating to your home or other real property is filed.

Surprising as it may seem, one of the ways that identity thieves can defraud banks and disrupt the accounts of individuals is to apply for a home equity line of credit in the name of a homeowner, without his knowledge. When a mortgage or other document is recorded, there is no legal requirement that notice given to the landowner that the recording has taken place. (The Register of Deeds will return the document, after recording, to the address as directed on the document itself.)

How often does this happen? The answer is not clear. There are several known varieties of mortgage fraud, and the reports indicate that this one is relatively uncommon. But it has been reported in several jurisdictions. 

If a fraudulent mortgage is given to a lender by a fraudster pretending to be the homeowner, there can be a long delay before it becomes apparent that the damage has been done. The thief will be long gone, and the issuing bank will often have accumulated a number of missing payments, before the issue comes to the attention of the homeowner. The first clue can be the discovery that the homeowner's credit rating has been seriously impaired. The work needed to convince the bank that the mortgage it thinks it holds was not in fact executed by the homeowner can take months.

The Property Fraud Alert service will provide a notice, by email or by telephone, of any filing made in the name of the subscribing participant. This will give him or her early notice and allow for corrective action before the problem grows to unmanageable proportions.

Only 13 of Michigan's 83 counties offer this free service. In the Upper Peninsula, this includes Marquette and Houghton counties.

If you want to find out right now what real estate documents are on file under your name, you can visit the Marquette County Register of Deeds DirectSearch page.

Tuesday, September 5, 2017

Court confirms creditor protection for life insurance

The Michigan Court of Appeals has issued a decision confirming that all elements of a life insurance policy, including the cash value of a whole life or universal life policy, are exempt from levy by a judgment creditor.

The plaintiff sued the defendant - for what is not disclosed - and recovered a judgment in the amount of $2.5 million. Plaintiff sought a writ of garnishment seeking to have the Prudential Insurance Company turn over the cash value of a policy that had been sold to the defendant. Defendant objected to the request.

MCL 500.2207 protects life insurance policies from claims of this nature by creditors. But the plaintiff argued that this section was intended to protect only the death benefit that is payable to the beneficiaries named by the insured, money that the insured himself does not own and can not reach while he is still alive. The cash value, the plaintiff argued, is fully available to the insured and can be taken out by him at any time, although this would reduce the total amount payable under the policy to the beneficiary after the insured is gone.

The Court of Appeals rejected that argument, ruling that the intent of the Legislature was to protect the entirety of the policy. One important point that it noted was that the cash value, if untouched during the insured's lifetime, will add to the recovery by the beneficiary. Conversely, allowing a creditor to attach the cash value would diminish the amount ultimately received by the beneficiary.

Sunday, September 3, 2017

CFPB resources for clients

The Consumer Financial Protection Bureau is a Federal agency that was established under the Dodd-Frank Act in 2010. Its Ask CFPB page provides information on a number of financial topics and answers to questions that people have asked the agency over the years. If you have a question or issue, this page is often a good source of information that can prepare you before you consult with us about the issue.

Similarly, CFPB's Resources for Older Adults and their Families page provides useful information, including “Protecting against fraud and financial exploitation” and “Tools for financial security as you age.”