How to divide assets in a blended family

Benjamin Franklin said “the only two certainties in life are death and taxes.”

As a fiduciary financial advisor, one of the most important topics to address is how to divide assets in a blended family.

If something were to happen to you, how do things play out? How do you divide an estate with step children? How do you protect your assets from stepchildren? What about the effects of an unequal inheritance? What about estate planning for a blended family with adult children?

Each situation is unique. Take what applies to you, and make a plan!

How to divide your estate with stepchildren?

The reality is that blended families are almost as common as a traditional family. A blended family is a marriage that involves children from a previous marriage or relationship.

It’s important to consider your own family dynamics when dealing with retirement and estate planning issues.

A remarriage when children are young is very different than becoming a blended family when the children are adults.

You might think if the children are young, it’s more likely you will handle your estate planning and wealth transfer strategies like your “traditional family.” And that may be correct in the sense that you want to divide your assets equally to your biological children and stepchildren.

One potential hurdle to look out for is guardianship issues of your minor children. If something unexpected happened to you and your spouse, it’s possible that an ex-spouse might have guardianship rights over your child or stepchild. Additionally, if your children are minors, the guardian will take custody of their assets until they are age of majority.

You probably want to avoid your ex spouse taking custody over your children’s inheritance. Instead, consider setting up a trust and naming a successor trustee (someone other than your ex of course).

How to protect assets from stepchildren

The most basic form of an estate plan is a will. A will allows you to name specific beneficiaries that will inherit your assets when you die (among other important decisions). You could name your spouse, children from your previous marriage, and even perhaps your stepchildren. You can also exclude anyone you wish within certain limitations.

The issue with having a basic will is that if you do predecease your spouse, all of the assets you leave to your new spouse will be his/her property outright. This means that after his/her death, the remaining estate will be property of their beneficiaries, likely their children (your stepchildren).

This could be problematic if your ultimate goal was to leave your remaining estate to your children, not your stepchildren.

The way to get around this issue is to set up some sort of marital trust, the most common being a Marital Bypass Trust. This can allow you to name the trust as beneficiary of your assets. The trust could be the beneficiary of all, or a portion of your estate.

First and foremost, this type of trust will ensure your spouse is taken care of for their lifetime.

Once your spouse passes away, the remaining trust proceeds will then be left to your children (or other remaining designated beneficiaries). This will prevent any other “unwanted beneficiaries” from receiving your estate.

If you have an existing trust, make sure it’s been reviewed and updated in accordance with the SECURE Act rules. Otherwise, there could be some unfavorable tax consequences for your beneficiaries.

What about adult children in a blended family?

If you are a blended family with adult children, it’s possible one or more of the following might apply:

An age gap with your new spouse
You or your spouse have accumulated substantial assets before your remarriage
You and your new spouse might have children together and separately
Your new spouse might be closer in age to your adult children

If there is an age gap in the remarriage, it’s likely that you will have two separate estate planning and wealth transfer strategies.

Take care of your spouse for their lifetime
Leave a financial legacy to your children

As discussed earlier, the likely solution here is to set up a trust that allows for your spouse to benefit, and then ultimately your children.

However, you may consider leaving some or all of your assets to your adult children if:

your spouse is financially independent
you don’t want your children to wait until your spouse dies to receive their inheritance

If this is appealing, you must be aware of the elective share rules in your state.

Elective Share

For community property states, assets accumulated jointly are assumed to be owned by both parties. However, in non-community property states you can own assets separately despite being married. You can leave those assets to another beneficiary other than your spouse, as long as you leave your spouse a certain % of your total estate (this is known as the Elective Share).

Florida, for example, has an Elective Share rule stating 30% of your assets must be left to your spouse, regardless of what your estate plan says. Additionally, there is no requirement for how long that new marriage lasted!

Even if you set up a trust, certain trusts might fail the elective share test. Therefore, be careful if you have goals to leave a larger portion of your estate to your children instead of your spouse.

If you and your spouse are financially independent, you might consider signing a prenup or a postnup. This will ensure that you have the legal right to “disinherit” your spouse and overrides the elective share rules.

Consider Life Insurance

Life Insurance is a great tool if you have multiple estate planning and wealth transfer goals.

Here’s an example:

Let’s say the bulk of your assets are inside of a 401k or IRA and you get remarried.

Let’s say your adult children are on their own, building their careers and growing their families.

Because of this, you’d like to leave your kids money when you die, but you also want to make sure your new spouse is taken care of during retirement.

First, you may consider setting up a trust for the benefit of your spouse and naming that trust the beneficiary of your 401k or IRA. Your children would be the contingent beneficiary of the new trust. This will protect against any stepchildren or new spouses from inheriting your assets.

If the trust is set up properly, your spouse can maintain favorable life expectancy rules when it comes to required minimum distributions.

Now that your spouse is covered, you buy a new life insurance policy with your children as primary beneficiaries. This way, they aren’t waiting for stepmom/stepdad to pass away to receive their inheritance. If you already have life insurance, you could make sure it’s structured properly and simply name your children as primary beneficiaries.

This also gets around the issue of the elective share. The calculation for the elective share will typically not include death benefits from life insurance. However, it might count cash value, so make sure you structure the policy properly in accordance with your state’s rules.

If the goal is to own the policy throughout retirement, you will want to make sure it’s a permanent policy, not term. Term insurance is more likely to expire before it pays the death claim, and you don’t want to be shopping for permanent insurance when you’re 70.

Effects of an unequal inheritance

If you have multiple sets of beneficiaries, you might be thinking of the effects of an unequal inheritance.

Let’s say you have adult children that are well off financially. However, you also have children with your new spouse that are still 100% dependents.

In this scenario, you might consider leaving a larger percentage of your estate to the side of the family that needs it most.

If you consider this strategy, I highly recommend setting up a trust. This will reduce the likelihood of issues being contested in court, and the terms of the trust remain private. Additionally, it’s likely your dependent children are minors and would need someone to oversee their inheritance (a trustee) until they are responsible adults.

Another consideration for an unequal inheritance is the impact of income sources that will be lost for the surviving spouse. This could include Social Security, pensions, annuities, distributions from IRA’s and investment accounts.

Upon the first spouse passing away, the surviving spouse is entitled to the larger of the two Social Security benefits. However, this still results in a reduction of Social Security income for the survivor.

If you have a pension or annuity that stops at your death, you also need to consider the impact of this lost income.

If your IRAs or 401ks are left to your children instead of your spouse, could your surviving spouse maintain their standard of living for years or even decades to come?

Additionally, would your surviving spouse be able to pay for long-term care if a large portion of your estate was left to your children?

These are all issues you should think through to help divide your assets within your blended family.

One final thought on this topic is that it’s not just about how much you leave, but how you are remembered.

The act of making things easy to manage for your loved ones is a big part of how you will be remembered! Leaving a big mess to clean up won’t help that cause, regardless of how much money you leave behind.

Tax Considerations

The types of assets that are left to children, your spouse or a trust are all important from a tax standpoint.

Qualified Retirement Accounts

Leaving your qualified retirement accounts to your spouse outright will create the optimal tax benefits. These include IRAs, 401ks, 403bs, 457bs, TSPs etc.

On the other hand, leaving qualified assets to your children will likely trigger the new 10-year rule. With the SECURE Act coming into effect in 2019, these accounts can no longer be stretched according to the child’s life expectancy. This will likely result in an acceleration of taxes that could have been minimized had these accounts been left to a spouse.

Naming a trust as beneficiary of a qualified plan also presents some challenges. Tax brackets are significantly higher for trusts versus an individual.

In 2022, a Married Filing Joint taxpayer would have to earn over $647,850 in taxable income to cross the highest tax bracket at 37%.

For trusts, the highest tax bracket threshold is only $13,450!

If you name a trust as beneficiary of a retirement plan, make sure your attorney has revised or drafted the documents to align with the SECURE Act rules. This could mitigate unnecessary tax implications.

Taxable Investments

Investments including stocks, bonds, mutual funds, ETFs, real estate, tangible property and even crypto assets would fall under this category. This assumes these investments are held outside of an IRA, 401k or other qualified retirement plan.

The major tax benefit for these assets is the step up in cost basis after death.

How does the step up in cost basis rule work?

Let’s say you bought $100k of Apple in 2000 and it’s now worth $500k. If you sold $500k worth of Apple, your capital gain would be $400k (500k – 100k).

If you die before selling it, your beneficiary gets a “step up in the cost basis.” Instead of your beneficiary paying taxes on the gain of $400k, their new cost basis is now $500k. If they sold the stock immediately thereafter, they would have little to no capital gains taxes due!

For married couples, there are some additional rules that are based upon the state you live in. For community property states, assets are assumed to be owned jointly, and therefore only ½ of the basis is assumed to be stepped up upon the death of the first owner. Upon the death of the second owner, than the full step up rule is applied.

In non-community property states, you could in fact own assets separately from your spouse so they can take advantage of the FULL step up at your death. This could be accomplished with a revocable living trust in your name only, OR perhaps individual ownership with your spouse as beneficiary (via TOD or POD designations).

Make sure you consider your estate planning and wealth transfer goals before making any changes to your asset titling!

Life Insurance

We’ve already discussed the functionality of leveraging life insurance to take care of one or more of your wealth transfer objectives.

From a tax standpoint, this is one of the most tax efficient assets to leave a beneficiary. It’s 100% income tax free and probate free! Additionally, you can structure this strategy to pass outside of your estate by way of an Irrevocable Life Insurance Trust (ILIT).

If you have a beneficiary with special needs, you could also fund their “Special Needs Trust” with life insurance.

Action Items

Your estate planning and wealth transfer strategies should be personal to you!

Make sure you are taking care of your loved ones the way you intend to.

Make sure you have the proper documents in place that align with your intentions.

Make sure you update and revise all of your beneficiary designations.

Make sure your financial plan is coordinated with your estate plan and wealth transfer goals.

And finally, do your best to make things simple for your loved ones. Communication and clarity are critical to avoid unnecessary conflict. You don’t want your loved ones to question “why” things were set up a certain way.

I hope you found this information valuable!

Make sure to SUBSCRIBE so you don’t miss out on any of our retirement planning insights!

SCHEDULE A ZOOM call if you want to discuss your current situation with a Fiduciary.

And finally, join our “BLENDED FAMILY RETIREMENT AND ESTATE PLANNING” Facebook group for ongoing dialogue and insights from our team of experts!

Kevin Lao

August 19, 2022

Retirement Readiness Checklist

You are in the final stretch of your career!

Congratulations on a successful career! You’re in the proverbial 7th inning stretch, ready to finish strong and start the next chapter. Along with all of the excitement is a bit of uncertainty about the unknown. Use our updated “Retirement Readiness Checklist” to help you prepare for whatever is next!

Step 1: What is your vision for "retirement?"

The word retirement means different things to different people. Maybe you want to travel the world for the next 10 years. Perhaps you want to spend more time with loved ones. Or, you might have a business venture you’ve always wanted to pursue.

This is the most exciting part about retirement planning. You define what success means during this next chapter, not your current or former boss.

Write down your biggest hopes and dreams you wish to experience. If you are married, you and your spouse should sit down together to craft your vision. You will be surprised at how much you learn about one another! My wife and I do this on an annual basis, and I’m always learning new things about what’s on her heart and mind.

You should also decide whether you will work in any capacity during retirement. You might find yourself wanting to work part-time for the same company, or perhaps pursuing opportunities with a different firm.

This is also known as a phased retirement, where you “try it out” before fully retiring.

This is perfectly acceptable as it might be tough to quit your job cold turkey. It also provides some financial incentives including; delaying retirement account withdrawals, deferring Social Security, and continuation of group benefits.

You might decide not to work at all, and that’s okay too!

Perhaps you dedicate your time volunteering for a passion project that excites you!

Whatever it is, this is your time to create your ideal schedule, which brings us to step 2.

Step 2: Create an ideal day/week

Many people don’t realize that depression is more common than you think in your retirement years.

According to Web MD, over 6 million people over 65 are impacted by depression. However, only 10% receive treatment. One of the reasons is the feeling of embarrassment. Why would one feel depressed if they achieved financial independence?

Upon retiring, most people want to check off things on their bucket list. It might be a dream vacation, or moving into their forever home, buying a boat, etc. This can cause a spike in excitement in the early years which we call the “Go-Go Years.” However, as you enter the “Slow-Go” and “No-Go” years in retirement, that excitement fades and depression can begin to set in.

If routines or structure aren’t in place with how you are spending your time, and with whom, the feeling of losing purpose can have a negative impact on mental health.

Also, it’s more likely you have experienced the loss of a loved one or close friends.

How do you solve this issue?

Create an ideal day or week and decide:

Who do you want to spend your time with?
What are you spending time doing?
Where are you living and whom are you living close to?
Where are you traveling?
What are some new hobbies you wish to start?
What do you want to learn?
What activities can you eliminate from your schedule? (preferably ones that are draining your energy)

This will help maximize your fulfillment in retirement and avoid that feeling of loneliness or isolation.

Step 3: Make a Budget

Stay with me on this one!

I know, nobody likes to make a budget. However, I find this exercise creates a ton of excitement around an otherwise mundane topic.

Make a list of anything that will cost money, but divide them into three separate categories:

- Needs

- Wants

- Wishes

Examples of NEEDS are:

Housing
Utilities
Food
Clothing
Transportation
Insurance
Healthcare needs

A Quick "Aside" on The Housing Decision

Once you have decided on where you will be living in retirement, you will need to discuss whether or not you want to pay off your mortgage.

Having a mortgage in retirement isn’t necessarily a bad thing. It’s all about personal risk tolerance and liquidity needs.

If you are comfortable with taking on some risk with your investment portfolio, you could earn a higher return relative to the interest rate on your mortgage. All while keeping your investments liquid.

If you decide to pay off your home with a lump sum, how does that impact your liquidity needs? Sure, you could take out a home equity line of credit or cash out refinance, but your home is not truly a liquid asset.

As interest rates have been creeping higher, this debate has begun to lean slightly more in favor with paying off the mortgage. However, you might be locked into a 3.5% (or even better) interest rate, so keeping your funds liquid and investing in other asset classes could pay off in the long run.

With all that being said, there is a legitimate argument that having no debt in retirement provides a psychological benefit. I’m all about helping people with peace of mind, and if paying off the mortgage can help with that, let’s do it (forget the math)!

Aside from the mortgage issue, you are likely going to consider whether or not to stay in your current home, downsize, or even move to a new city. The conventional wisdom has been to downsize in retirement.

However, I have found that not having enough space in the home might limit your adult children and grandchildren’s ability to visit (if that’s important to you)! In other circumstances, I’ve had clients downsize and absolutely love the reduced maintenance and upkeep…but usually after the period of de-cluttering, selling, or giving away “stuff.”

Additionally, moving to a new city might sounds appealing given a lower cost of living or more favorable tax advantages, but it’s a big decision that should not be taken lightly.

If you do decide to either downsize or move to a new market, you will need to factor in how this will impact you financially in this first category of “needs.”

Examples of WANTS are:

Travel
Home Improvement
Major Purchase (Boat, RV, Pool, Hot Tub etc.)
Education funding (children or grandchildren)
New Home
Wedding

“Wants” could be reduced or even eliminated, if needed, during a period of unfavorable financial circumstances or as you begin to slow down.

Examples of WISHES are:

Leaving a financial legacy
Major gifting/donations
Dream vacation home

“Wishes” are things you would love to accomplish as long as your needs and wants are covered throughout retirement.

Enjoy this exercise and make it fun and interactive!

Estimate each cost

I find most people know what their “needs” cost on a monthly or annual basis. However, certain expenditures in the “wants” or “wishes” categories might be more difficult to estimate.

Do your best. Remember, you can always revisit these on an annual or semi-annual basis, as we will discuss in Step 10.

And finally, tally up each category for your projected retirement income goal!

Step 4: How much of your retirement income will come from fixed sources?

The first pillar of your retirement income is your guaranteed or fixed income. These resources may include:

Social Security
Pension
Annuities
Employment Income

These sources are immune to market fluctuations, and you can rely on them for either a fixed period, or for life.

Social Security represents over 40% of retirement income for those over 65. Therefore, it’s important to make the right Social Security decisions. Some of the factors you might consider when choosing when to begin taking Social Security are:

Age at retirement
- The earlier you retire, the longer you will need to wait until your full retirement age (between 65-67)

Life expectancy
- If you have longevity in your family and are in good health, you might decide to delay Social Security past full retirement age. Age 70 is the latest retirement age where your benefit will be the highest.
- Another consideration if you are married is your spouse’s life expectancy. Even if you are not in great health, delaying benefits could help maximize the survivor benefit to your spouse.

Other assets/income sources
- If you have other assets or income to draw upon early in retirement, you might consider delaying Social Security for the reasons mentioned above.
- However, if you need the income sooner to avoid draining your investment accounts, you might consider taking the benefit earlier (or working longer)

There is no “one size fits all” answer to taking Social Security. I wrote another article on Social Security considerations that you can read here, but I also recommend speaking to a qualified fiduciary financial planner to address this important issue. Of course, we can help with this 😊!

Step 5: Determine your income gap

What is a safe withdrawal rate for retirement?

Once you have calculated your total expenditures for your needs, wants and wishes, and have tallied up all your fixed income sources, it’s time for some basic math.

The first part to the equation is how much of your “needs” are covered by guaranteed income? If the answer is 100%, you are in great shape!

If it’s less than 100%, you will need to make the decision on how to draw income from your other assets like 401ks, IRAs, brokerage accounts etc., to fill the income gap.

It’s okay if your guaranteed income does not cover 100% of your needs. Most of my clients will draw income from investments to cover the income gap.

However, this brings about the question, “what is a safe and reasonable rate of withdrawal in retirement?”

A reasonable withdrawal rate is relative to your goals and risk tolerance, but anywhere from 3% – 7%/year could be reasonable. The higher the rate of withdrawal, however, the more risk of your plan failing. The lower the rate of withdrawal, the lower the risk of your plan failing.

Step 6: Make the decision on how your investments will be managed

Once you have determined the income gap, you will need to decide on the process of how investments will be managed. If you are a “do-it-yourselfer,” make sure you have a process in writing! This includes:

What is your optimal asset allocation?
Which investments will you use to create your optimal asset allocation?
How often will you re-balance and monitor your accounts?
How much will you withdrawal each month, quarter, or year?
Which accounts will you withdrawal from first?
The tax impact of withdrawals
A process to determine which investments to liquidate and when

For the “do-it-yourselfers” out there. If something ever happened to you:

Death
Disability
Incapacity

What is the contingency plan? Who is stepping in to fill that role? Is it a spouse? Adult child? Sibling?

Do they have the ability, AND the availability to step in as the new “investment manager?”

One of the primary reasons I find clients hire my firm or another fiduciary financial advisor is because they are the investment guru, but their spouse/son/daughter/sibling is not! Or, their children don’t have the time to take on this role given they are busy with their own family and career!

Therefore, my “do-it-yourselfers” want to be involved in the process of hiring a fiduciary financial advisor to help manage the affairs if/when something does happen to the them.

For those of you who have no interest or capacity, make sure you hire a fiduciary! A fiduciary is someone who looks out for your best interests, always! And yes, we can help you with this! Our firm specializes in retirement planning including investment management.

Step 7: What to do with your old 401k and employer benefits?

When you are implementing your investment strategy and income strategy, you will need to decide on how to best consolidate accounts.

Perhaps you have several 401ks or 403b plans. Maybe you have multiple brokerage accounts with different institutions.

You might consider consolidating accounts to simplify your balance sheet. I find most retirees want to avoid complexity!

By doing so, it will make managing your investments easier during retirement, particularly when it comes to making withdrawals.

It will also help clean things up for your beneficiaries or powers of attorney, and we will discuss this topic more in Step 8.

The argument against doing a 401k rollover might include:

– Plans to work past 72 and defer required minimum distributions

– Certain proprietary investments within an employer plan that are not offered elsewhere (fixed annuities etc.)

Otherwise, rolling over those plans into one consolidated IRA will open the door for more investment options and diversification. Additionally, you have more control over liquidity and fees within the investments you select.

Other Benefits to Consider

Life Insurance
401k Contributions + Catch Up
Health Insurance
Legal Benefits
HSA (Health Savings Account)

Reviewing the checklist of benefits you will lose is an important exercise when gauging your retirement readiness.

You should begin to think about how you will replace these benefits when you retire, and maximize these benefits while you are still employed.

For Life Insurance, consider whether you will want to own some life insurance in retirement. If so, purchase an individual policy that is portable after you retire. If you can’t buy an individual policy, see if you can extend coverage with the group for a period of time.

401k’s and 403b plans allow for catch up contributions after you turn 50. Take advantage of these catch up contributions while you can!

Here are the limits for 2022 on certain qualified plans:

401k/403b/457: $20,500/year + $6,500/year catch up
SIMPLE IRA: $14,000/year + $3,000/year catch up
IRA/Roth IRA: $6,000/year + $1,000/year catch up
HSA: $3,650/year (single), $7,300/year (family) + $1,000/year catch up (age 55+)

In that final stretch of planning for retirement, your children might be done with school and you finally have some extra cash flow. Take advantage of this final decade as it can pay huge dividends in your later years when healthcare costs tend to rise!

For legal plans, you might consider having your estate documents reviewed and updated before you officially retire. These legal plans often have an estate planning benefit that can save you thousands of dollars while you are still employed.

Finally, consider health insurance options. If you are retiring and are eligible for Medicare, compare the Original Medicare with Medicare Advantage. Shop for plans, use a broker to help find you the best deal based on your medical needs.

If you are retiring before you are Medicare eligible, consider your options for health insurance. Perhaps your spouse will continue to work, or you may work during the early phase of retirement.

Otherwise, you may need to buy an individual policy on the exchange (healthcare.gov). These policy premiums are based on your income, so there could be some planning opportunities to keep your income low until you reach age 65 and qualify for Medicare.

Step 8: Update your Estate Plan, and keep it up to date!

How will your assets transfer to your loved ones? Who will step in to make decisions if you are unable to? How are your assets titled? What is the tax impact of the assets transferred to your beneficiaries? These are all questions that you need to consider for your Retirement Readiness Checklist!

The basic estate planning package that everyone needs includes:

A Will
Financial Power of Attorney
Medical Power of Attorney
Living Will/Advanced Medical Directive

Others might need to supplement these documents with a revocable living trust, an irrevocable trust, a special needs trust, or a marital bypass trust. Speak to a qualified attorney who specializes in estate planning in your state!

An Estate Plan, however, is not simply what documents you have drafted!

Do you have three IRAs and two 401ks that can be consolidated into one? Do you have physical stock certificates in a safe that can be moved to electronic custody?
Do your beneficiaries know where all of your life insurance policies are, or which financial institutions you have accounts with?
What about passwords?

An estate plan is also about making things simple for your loved ones!

Keep key decision-makers in the loop as to what their roles are (and are not)!
If you name one adult child as Power of Attorney, have that discussion with them.
If you have other children, make them aware also.
It could be difficult, but you need to be the one to speak up on “why” you made certain decisions. Otherwise, it could impact how you were remembered and/or the relationships between your children.
Finally, keep an “important document list” that outlines where your accounts are and at least one point of contact for each institution. (I have a template you can use, and I’d be happy to share it if you send me a Linkedin connection request asking for it!)

Step 9: Medicare or Healthcare Decisions

Are you 65 or older and eligible for Medicare? Well, make sure you take advantage of the special enrollment periods! That way, you can avoid penalties and unnecessary medical underwriting.

If you are eligible for Medicare, the primary decision is whether or not you will go with “Original Medicare” or Medicare Advantage.

Original Medicare is great because there is no “network” or managed care. You can pick and choose whatever specialists you want to see without worrying about a referral. The deductible is also extremely low (less than $300/year)! You will need to buy supplemental policies to cover prescriptions as well as gaps in Medicare part A and part B. Either way, it’s a great way to plan for how much your healthcare expenses might be.

Medicare Advantage has been growing in popularity, but sometimes people are misled into thinking it’s the less expensive route. If you are going to the doctor frequently, or have special medications, you might find yourself paying more for Medicare Advantage despite premiums being lower. Also, be sure to check out the network of providers as you may find your doctors don’t take certain insurance policies. If you are a snowbird, make sure the network is robust in both areas that you live.

There are some great independent Medicare advisors out there that I would recommend speaking with:

I interviewed the lead advisor for Chapter, Ari Parker, on one of my podcast episodes. Give it a listen for his insight on the topic:

Episode 13: Planning for Healthcare Costs in Retirement

If you are younger than 65 and not Medicare eligible, you are going to buy private coverage through the exchange. There are a variety of plans to choose from. The online marketplace is a great place to go to search for plans and screen for what features are most important to you.

Healthcare.gov

Step 10: Make a Long-term Care Plan

I discussed this topic with Jean Wilke-Ausman, the Director of Long-term Care Solutions at Stewardship Advisory Group; she gave a phenomenal headline to kick this topic off.

“Why a checkbook is not a plan for long-term care.”

Just because you have the means financially to pay for long-term care expenses, does not mean you have a plan. Furthermore, just because you have insurance doesn’t mean your plan is complete.

Medicare doesn’t cover custodial care, so you will ether pay out of pocket, buy insurance, or some combination of the two.

Some considerations if you decide to self-insure:

If you needed care, how would it impact your surviving spouse?
How would it impact your financial legacy goals?

Jean also added these issues to consider when self-insuring:

“Who is going to manage the liquidation of assets?”
“What about considering market fluctuations while managing withdrawals for care?”
“Who is going to manage the caregivers providing the custodial care?”
“What about changes in the real estate market”
“What about navigating taxes when liquidating certain assets?”

Perhaps your spouse has been managing your care for months or even years, and it’s now time to hire a caregiver. “Having insurance provides that liquidity need,” added Jean. “Having insurance can avoid you having untimely withdrawals from investments that have other purposes.”

Partner up with experts like a fiduciary financial advisor who understands long-term care planning, and someone like Jean who can be a quarterback to finding the right coverage.

There is no one-size-fits all with long-term care planning, but being proactive will help prevent you from becoming a burden on your loved ones later in life.

Step 11: Communication and Ongoing Review

Life will change! Your family will evolve! You will welcome new family members, and unfortunately say goodbye to others.

Make sure you continue to revise your plan. Keep your plan flexible.

Communication is important in all aspects of life, but particularly when it comes to dealing with issues in retirement. Active communication with your spouse, children, grandchildren, friends, work colleagues, neighbors, and other acquaintances, will help you stay connected during your retirement years.

It’s easy to unplug after retirement but staying involved with relationships can help you enhance your legacy well beyond how much you leave behind financially.

In the event of an unforeseen circumstance, it’s best for your loved ones to know who is in charge of what, and there is no question what your intentions are!

Nobody wants to leave a mess for their family to clean up, so keeping open lines of communication is paramount as we all go through the aging process.

Final word

I hope you found this information helpful.

Just remember, you are likely feeling a ton of excitement mixed with uncertainty. This is completely normal.

Our clients that have successfully retired started by planning early! If you aren’t technically starting to plan early, it’s okay too. My Mom loves to say, “better late than never!”

And guess what, planning doesn’t end the day you retire. Your plans will evolve and become more clear once you have more time and energy to think about the future. Therefore, continue to adapt and adjust based on what life throws at you.

Control what you can control, and the rest will fall into place.

Make sure to subscribe below so you never miss our retirement insights!

If you would like to schedule a Zoom with me to ask specific questions, you can access my calendar below.

Thanks for reading and I look forward to hearing your feedback along with suggestions for future topics! You can drop me a line at [email protected]

Kevin Lao

August 12, 2022

4 Retirement and Estate Planning Strategies for Blended Families in Florida

What is a blended family and why does it impact my retirement plan?

First, what is a blended family?

Simply put, a blended family involves a remarriage that comes with children from a previous marriage or relationship. Maybe you and your new spouse both have children from previous marriages. Or, perhaps you have children with an ex and a current spouse.

There are many varieties of blended families, and they are quite common. In fact, it is estimated that 40% of households with children in the United States are blended of some kind. Each blended family has unique circumstances, but retirement and estate planning strategies are more complex when it comes to dealing with blended families. I have been working with blended family retirement planning for over 13 years in our home base of Florida, as well as across the United States virtually, so let’s discuss some key issues to focus on.

How does having a blended family impact my retirement plan?

There are four major topics we will cover in this post. Keep in mind, there are other considerations you should address, and no two families are identical. You have to consider your own family dynamics, financial situation, and much more. However, this should get you started as you think about planning for retirement with a blended family.

When should you claim Social Security?
How will you approach your retirement income withdrawal strategies?
How will you pay for Long-term care costs?
Inter-generational Wealth Planning and Estate Planning

1. When should you claim Social Security?

Social Security is likely your largest source of guaranteed income in retirement. It represents 40% of all income for those 65 and older.

There is a possibility you and your spouse each have children you may want to leave assets to, and this could impact the surviving spouse’s retirement income plan. For example, if you have three children and a new spouse, you may decide to divide your estate into 1/4 for each beneficiary.

However, Social Security is one income stream that will always be available to the surviving spouse, no matter what. So, how can you maximize the lifetime benefits for you and your spouse?

If you and your spouse are both eligible for Social Security benefits, the surviving spouse will keep the larger benefit after the first spouse dies. If you have the opportunity to delay Social Security longer to maximize your benefit, this will also maximize your surviving spouse’s benefit if they were to outlive you. If you are able to delay until age 70, you will be eligible for your largest monthly benefit. If that benefit is larger than your spouse’s, it will help maximize their Social Security income in the event some of your assets were not left outright to your spouse.

Other blended family Social Security nuances....

Dependent benefits are also important.

22% of men and 18% of women have a 10 or more year age gap in a second or third marriage. Therefore, you may have remarried a younger spouse, with potentially dependent children. Or, you are remarried and had new children with your younger spouse. Nonetheless, if you are approaching retirement age, consider dependent benefits for Social Security! Dependents are defined as children under age 18 (or 19 if still in high school), or disabled before 22. These dependents could be eligible for a Social Security benefit when you start collecting yours! The benefit is equal to 50% of your primary insurance amount and is available for each dependent child and for your spouse, regardless of age!

There is a cap on the total amount paid based on your primary insurance amount, and it usually ranges between 150%-180% of your full retirement benefit. The caveat is you must begin claiming yourself in order to trigger the dependent benefits. This may result in you filing earlier than you had anticipated. Therefore, you have to run some calculations to see what is best for your situation.

Another consideration is determining your ability to collect Social Security on an ex-spouse. This will depend on how long the previous marriage lasted, and whether it ended in a divorce or premature death.

For example, if your first spouse passed away and you remarried after age 60, you could still qualify for survivor benefits on your former spouse. On the contrary, if you were remarried before 60, those former spouse’s survivor benefits will be forfeited.

For divorcees, ex-spousal benefits will be forfeited (in MOST cases) once you are remarried, but you would then be eligible for a spousal benefit from your new spouse. This is often a consideration on whether or not to legally remarry if your former spouse’s benefit would result in a significantly higher monthly benefit. But let’s be honest, if you want to marry your new partner, don’t let a few extra Social Security dollars prevent you from doing so!

2. What is a safe withdrawal strategy for retirement income?

There is a good chance you and your new spouse both had assets before you were remarried. Perhaps you and your spouse have Traditional IRAs, 401ks, Roth IRAs, and taxable brokerage accounts. However, those account values probably vary between the two of you. Furthermore, you may have slightly different estate planning goals involving children from your previous marriages.

The key is to come up with a safe withdrawal strategy from each bucket based on:

tax characteristics
risk tolerance
inter-generational wealth planning or estate planning goals
insurance coverage
other income sources like Social Security or a pension

If you plan to leave everything to your new spouse and simply divide it evenly between all of the remaining children, the withdrawal strategy is more straightforward. However, if your children will inherit assets upon your death, how does that impact your new spouse’s retirement income plan? Will they have enough to live on throughout their life expectancy? Remember, Social Security will be reduced after the death of the first spouse, as discussed earlier.

Also, let’s say each of you has children from a previous marriage. If you are burning through your assets more aggressively to support the retirement lifestyle, how does that impact your goal to leave money to your children?

The SECURE Act changed the game with inherited IRA's/401k's.

If your children are in a higher tax bracket, you might not want to leave them your IRA or 401k outright. Your surviving spouse will likely have more favorable withdrawal options and be able to stretch this account over their life expectancy. Conversely, leaving the 401k or IRA to your children will likely trigger the new 10-year rule from the SECURE Act of 2019. This would force them to liquidate the retirement accounts fully within 10 years, likely triggering a much higher tax consequence than had you left those assets to your spouse. This is especially true if you are a Florida resident without a state income tax, and your children are residents of a state with high-income taxes (California, New York etc.). In these situations, you may want to consider a slightly higher withdrawal rate on your 401ks or IRAs, and a slightly lower withdrawal rate on your taxable brokerage accounts or Roth accounts. This way, you maximize the tax friendly assets to your children, and also maintain the tax efficiency of traditional 401ks and IRAs by leaving them to your spouse first.

There is no one-size-fits-all solution to creating a withdrawal strategy, but starting with open conversations about each other’s legacy goals for both sets of children and getting on the same page about a plan is a great first step. Once the goals are set, a safe withdrawal rate should be established. I wrote an article about this and you can read it here. The basic formula I use is; Financial Goals – Income sources – Risk Intolerance = Safe Withdrawal Rate from investments. Noticed how I used risk intolerance instead of risk tolerance. The reason is that the less risk you are willing to tolerate (the higher your intolerance score), the lower your withdrawal rate would be to accommodate for lower expected investment returns.

Should I follow the 4% rule?

Bill Bengen created the 4% rule back in the 1990’s, which back tested rolling 30 year retirement periods from 1926 to 1976. He concluded that a 4% withdrawal rate resulted in money left over at the end of retirement in all of the tested periods. You could certainly use this as a starting point, but there is much more to consider. If you want to maximize the inheritance for your children, you might need to stay close to 4% or even below it! If you don’t have a huge desire to maximize your estate to children, you might be able to inch closer to a 5% or even 6% safe withdrawal rate.

If you are comfortable with more volatility in your investments in order to maximize returns, you could potentially have a slightly higher withdrawal rate than 4%, perhaps 5%-6%. On the other hand, if you cannot withstand any volatility, supporting a 3%-4% withdrawal rate is a more realistic goal.

Finally, guaranteed income sources play a role in determining your rate of withdrawal. If you have most of your expenses covered by Social Security and/or a Pension, your rate of withdrawal required might even be 0%! In this scenario, you could choose to simply reinvest your earnings, gift to your children or even your favorite charity. On the other hand, if guaranteed income is a very small portion of your required standard of living, your rate of withdrawal might be higher than average.

All of these factors; guaranteed income, risk intolerance, and financial goals; play a role in determining what withdrawal rate to use, so be careful with using a rule of thumb from a textbook.

Using the "Guardrail" approach to withdrawals...

The higher your withdrawal rate, the greater the uncertainty. If you are more aggressive with your investments, you could expect higher returns, and maybe for a period of time a 5% or even 6% rate of withdrawal works just fine. However, what happens when the first recession hits? Or the first bear market?

This is why we like to use Dynamic Withdrawals by way of a “Guardrail Approach.” This involves reducing the rate of withdrawal during a significant downturn in stocks. Conversely, our clients can increase spending when markets are performing well. In our modeling, we have concluded that this is the best way to maximize the safe withdrawal rate, but at the same time maintain flexibility based on current economic conditions. I also wrote more in-depth about this topic in this blog post.

Should I Buy An Annuity?

One final topic to consider is whether or not you will purchase an annuity to fund retirement. There are many flavors of annuities, but the general concept is to create an income stream that you cannot outlive, much like Social Security. These products also provide some peace of mind in that the income stream is typically guaranteed, and not tied to market volatility. If you don’t have a pension, this could be a nice supplement to Social Security. Furthermore, you can name your spouse as a joint annuitant to ensure that they will continue to receive the life income if they outlive you. These products can also be beneficial in that it could allow you to take more risk with your investment portfolio, as well as impact your safe withdrawal rate, knowing that a good portion of your expenses will be covered by guaranteed income.

Many consumers believe they will be sacrificing their intergenerational wealth planning goals for their children or grandchildren by purchasing an annuity. Based on research in the industry, this might be true if you were to die prematurely. However, if you were to live to or past your life expectancy, it could actually result in an increased amount of wealth transferred. The reason is because your investments were able to ride the ups and downs of the market without being tapped into during a recession or bear market. I always recommend seeing what’s out there and comparing the rates between several carriers as they do vary greatly.

Finally, interest rates have been on the rise so far in 2022, and that trend is expected to continue at the moment. Therefore, the payout rates have become quite attractive for new annuitants, so it’s prudent to do some due diligence as you approach retirement.

3. Long-term care planning

Long-term care planning is complicated enough to prepare for during retirement. For blended families, long-term care planning is even more complex. If you and your spouse both accumulated assets for retirement, how will one pay for Long-term care costs if they are needed? Do both of you have Long-term care insurance? Or, do you plan to self insure? Are your estate planning goals the same?

Chances are, we will all need some level of custodial care at some point in our lives. The question is, how extensive is the care? And, for how long is care needed? Genworth published their annual study that indicates there is a 70% probability of needing Long-term care costs for those 65 or older. If you have children from a previous marriage, and your spouse needs care, are you going to burn through your own assets to pay for it? If you are like me, you will do anything you can to take care of your spouse and give them the proper care they need. However, if you have goals to leave money to your children, is that a risk worth NOT planning for?

On the other hand, if your spouse has children from a previous marriage and you needed care, how would he/she pay for it? Would you expect your spouse to accelerate withdrawals on their accounts unnecessarily in order to provide you care?

Should I buy Long-term Care Insurance?

If you are still young enough and healthy enough, you could consider buying Long-term care insurance. The last time I checked, it’s very rare to find a company that will cover you if you are over age 75. The sweet spot is often between 50-60 years of age, as there is a much lower decline rate and premiums are still affordable. When you get into your 60s and 70s, the decline rate goes up substantially and your premiums are quite costly.

Long-term Care Insurance is a very clean way to dedicate specific resources for this major retirement risk. Of course, nobody has a crystal ball, and you might be in the 30% that never needs care, but it’s a gamble you may not want to take.

There are also hybrid Long-term Care and Life Insurance policies that will provide a death benefit if you never use the funds for Long-term Care. Or, a reduced death benefit if you only used a portion of the Long-term Care benefit. This can provide you with some peace of mind knowing that someone will benefit from the policy. These products are much more expensive, so be prepared to write some larger checks. Also, work with a broker that can represent multiple carriers to help you shop around.

What about an annuity with a Long-term Care rider?

If you or your spouse have health issues that might preclude you from getting traditional Long-term Care, consider an annuity with a Long-term Care rider. These products do require a certain level of funding, but they are a viable option if you have a nest egg you could allocate to protect against this risk. Even Suze Orman, who is typically anti life insurance, is an advocate for these types of hybrid policies!

What about “self-insuring?”

There is nothing wrong with self-insuring, just over half of my clients decide to go this route.

If you decide to self-insure, having that discussion with your spouse about what assets to use to pay for care is critical!

If you have accounts that are more tax favorable to leave to your heirs, you may not want that account aggressively spent down for your care!

Also, consider the state you live in relative to your beneficiaries. If you live in a state like Florida or Tennessee without a state income tax, you might consider using some of your 401k or IRA to pay for care. This is especially relevant if your children are in a higher tax bracket and/or live in a state with high income taxes.

Have a plan, communicate it with your spouse, your financial planner, and your other agents so they know what to do! I also wrote an entire article on Long-term Care planning if you want to check it out here.

4. Estate Planning Basics for Blended Families

We have touched on some of the estate planning and intergenerational wealth planning challenges throughout this article. Each spouse might bring a slightly different perspective on transferring wealth. However, the amount you leave or who you leave it to isn’t the only estate planning challenge for blended families. Here are some other key points to consider:

Who will step in to help make financial decisions as you get older?
What about healthcare decisions?
Who is going to be the executor of your estate, or successor trustee?
Do you have any special considerations for any of your beneficiaries? (special needs, spendthrift concerns, son/daughter-in-law concerns, or stepchildren that you may or may not want to include)

These individuals should know what their role is, and what it is not! We’ve all heard of horror stories when someone dies without a plan, and unfortunately impacts how that person is remembered. If you have ever watched the show “This is Us,” there is a scene in the last season where Rebecca calls a family meeting with her three adult children and her second husband. This is a textbook model on how a family meeting should be conducted!

If there are different sets of children involved, consider naming one child from each “side” to participate. If it’s a successor trustee role, perhaps you can name successor co-trustees to avoid any ill will.

I certainly would make sure that a successor trustee or successor financial power of attorney is financially savvy and responsible. This does make things a bit tricky if one “side” does not have a viable option. Instead, I’ve seen where families will name the successor trustee a corporation, also known as a corporate trustee, to serve in that capacity. This way, clients don’t have to worry about anyone’s feelings being hurt because they couldn’t be trusted.

Don’t worry about giving specific dollar amounts on what you are leaving. You certainly can, but it’s not the point. The point is proactive communication and agreement from the adult children and other beneficiaries. This can really protect their relationships long term, which is far more meaningful than the dollar amounts they each receive.

If you didn’t see the episode of This Is Us, check it out here!

Should you consider a trust for your blended family?

I spoke with my own attorney and friend in detail about this. His name is Ryan Ludwick and he’s an Estate Planning specialist with Fisher and Tousey law firm based in Florida. He told me some couples come in with the idea they want to simply leave everything to one another, and then whatever is left will be divided evenly to the children. This makes things very simple, almost like a traditional family estate plan.

However, certain blended family dynamics could be solved with a trust. For example, if you want your spouse to utilize the assets for retirement if they were to outlive you, but still guarantee the remaining assets are left to your children, you might consider a trust.

A trust would essentially be set up for the surviving spouse. When you pass away, the trust becomes irrevocable (nobody can change it), and your spouse can use the assets for their care. Once the second spouse dies, the remainder beneficiaries (presumably your children) will receive the trust assets.

A few reasons why a trust could make sense are:

The assets held in trust would not be up for grabs in the case of a remarriage.
Potential creditor protection benefits.
Oversight – meaning you could name a trustee to help manage the trust, in case your surviving spouse was incapacitated down the road, or if they don’t have the financial acumen.
And of course, the terms are your terms, and cannot be altered.

Ryan also made a great point to be careful with naming a trust as primary beneficiary of a retirement account (401k or IRA). There might be unfavorable tax results by doing so, and you should consult with your financial planner and estate attorney before making any changes.

Life Insurance

Life Insurance could also be a great tool for estate planning for blended families. You could set up a new policy, or change the beneficiary of an old policy, to satisfy certain estate planning goals.

For example, let’s you wanted to split your investment assets four ways at your death between children and your new spouse. Between your spouse losing one Social Security benefit and only receiving 25% of your estate, their ability to maintain financial independence could be at risk. Therefore, you could consider leaving your life insurance policy to your spouse to make them whole.

On the other hand, you may not want to leave those 401ks or IRAs to your children for reasons mentioned before. Therefore, you could elect to leave those assets to your spouse (outright or in a trust), and leave the life insurance policy to your children. The death benefit is always tax free, so this solves the issues related to inheriting retirement accounts with the new SECURE Act law.

Elective Share Rules

Ryan said to “be careful of the elective share rule for spouses.” In Florida, and many other states without community property laws, the spouse is entitled to a percentage of the estate, regardless of what your will says. For Florida, it’s 30%. So let’s say you only designate 10% to your spouse in your will, he or she could contest this in court, and would likely win.

There are legal ways to get around this by way of signing a prenuptial agreement, or having your spouse sign a waiver form. It’s just something to be mindful for, especially with blended family estate planning.

Final word

As you can see, blended families are unique in an of themselves, so cookie cutter retirement and estate planning advice doesn’t work.

There are other considerations for blended family retirement planning, and no two situations are created the equal, which is why we love helping people like you!

Book a call with us!

If you have questions or want to discuss your situation, feel free to book a 30 minute Zoom call and we would be happy to connect with you.

Subscribe to our email list!

If you liked this article, be sure to subscribe to our email list so you don’t miss out on any of our latest articles!

Kevin Lao

July 6, 2022

Six Reasons To Take Advantage of Roth Conversions

Pay me now or pay me later applies to your retirement accounts. Let’s talk about when it makes sense to pay up now and minimize your tax liability during retirement.

Kevin Lao

May 27, 2022

Tax-Loss Harvesting

Investment losses can be painful, but they often come with great opportunity. This includes not only buying equities at discounted prices, but significant tax benefits if you are opportunistic.

Kevin Lao

May 13, 2022

Should I purchase I-Bonds?

Inflation is running hot, the market is volatile, and I-Bonds have become attractive. This article addresses the basics of I-Bonds and how you can assess if they are right for you.

Kevin Lao

April 19, 2022

Are Financial Advisors Worth It?

"How do fiduciary financial advisors add value?"

In my nearly 14 years in this business, I’ve seen financial advice given by many different professionals. Insurance agents, stock brokers, bank representatives, real estate professionals, next door neighbors and the like. I’ve seen some great advice given, but also some terrible advice. This often times leads to the general public to think “are financial advisors worth it?” This is especially the case now given the lines are blurred between different segments of the “financial services” industry. Vanguard did a study called “Advisor’s Alpha” which I have found is the most helpful and accurate summary of value-added services a comprehensive financial advisor provides. I’ve referenced it to clients and other professionals since 2014 when it was originally published. To summarize it briefly, they outline seven areas of advice that add value to the client’s portfolio by way of net returns annually. They have assigned a percentage to each of the categories which amounts to approximately 3%/year in net returns! In this article, I will highlight some of the key components of their research, as well as put my own spin on it based on my thousands of hours working with clients directly.

What is comprehensive advice?

First things first, not all advisors are comprehensive (and that’s okay). However, this article is specifically for firm’s like mine that are focused on comprehensive advice and planning, and I would argue the 3%/year figure is on the low end. I will get into this more shortly.

Here is a breakdown of Vanguard value-added best practices that I mentioned previously:

The first thing that should jump out to you is that suitable asset allocation represents around 0%/year! This is given the belief that markets are fairly efficient in most areas, and it’s very difficult for an active fund manager to consistently beat their benchmarks. This is contrary to the belief of the general public in that a financial advisors “alpha” is generated through security selection and asset allocation! What’s also interesting is that the largest value add is “behavioral coaching!” I will get into more about what this means, but I would 100% agree with this. Sometimes, we are our own worst enemy, and this is definitely true when it comes to managing our own investments. It’s natural to have the fear of missing out, or to buy into the fear mongering the media portrays. So if you take nothing else away, the simple notion of having a disciplined process to follow as you approach and ultimately achieve financial independence will add 150% more value than trying to pick securities or funds that may or may not outpace their benchmarks!

Before I dive into my interpretation of their study, I want to note that I will be using five major categories instead of seven. Some of the above mentioned can be consolidated, and there are also some value added practices I, and many other comprehensive planners, incorporate that are not listed in their research.

What are the five value-added practices? I use the acronym “T-I-R-E-S”

Tax planning
Income Distribution Planning
Risk Management
Expense Management
Second set of eyes

Tax planning

There are four major components of tax planning a comprehensive financial advisor should provide. The first component is what we call “asset location.” The saying that comes to mind is “it’s not what you earn, it’s what you keep.” Well, taxes are a perfect example of not keeping all that you earn. However, some account types have preferential tax treatment, and therefore should be maximized through sound advice. Certain investments are better suited for these types of tax preferred accounts and other investments tend to have minimal tax impact, and therefore could be better suited OUTSIDE of those tax preferred accounts. A prime example is owning tax free municipal bonds inside of a taxable brokerage or trust account, and taxable bonds inside of your IRA or Roth IRA’s. Another example could be leveraging predominantly index ETF’s within a brokerage account to minimize turnover and capital gains, but owning a sleeve of actively managed investments in sectors like emerging markets, or small cap equities inside of your retirement accounts. According to the Vanguard study, this type of strategy can add up to 75 basis points (0.75%/year) in returns if done properly, which I would concur.

The second component is income distribution. This is often thought of much too late, usually within a few years of retirement. However, this should be well thought out years or decades in advance before actually drawing from your assets. One example I see often is when a prospective client who is on the brink of retiring wants a comprehensive financial plan. Often times they have saved a significant sum of money, but the majority of the assets are held inside of tax deferred vehicles like a 401k or IRA, and little to no assets in a tax free bucket (Roth). This type of scenario limits tax diversification in retirement. On the contrary, someone who has been advised on filling multiple buckets with different tax treatments at withdrawal will have many combinations of withdrawal strategies that can be deployed depending on the future tax code at the time. I have incorporated the rest of the income distribution value-added practice in the next section, but this practice as a whole is estimated to add up to 110 basis points (1.1%/year) in additional returns!

Legacy planning is the third component of tax planning that a comprehensive financial advisor should help with. This isn’t discussed in the Vanguard study, but it’s safe to say a comprehensive plan has to involve plans for your inevitable demise! You might have goals to leave assets to your heirs, especially if you are fortunate enough to have accumulated more than you will ever spend in your lifetime. With the SECURE Act, qualified retirement plans are now subject to the “10-year rule,” and therefore accelerating tax liabilities on your beneficiaries. However, if you incorporate other assets for legacy that can mitigate the tax impact on the next generation, this can save your beneficiaries hundreds of thousands, or even millions of dollars simply by leveraging the tax code properly.

Finally, navigating tax brackets appropriately can be another way a comprehensive advisor adds value. If a client is on the brink of a higher tax bracket, or perhaps they are in a period of enjoying a much lower tax bracket than normal, planning opportunities should arise. If you are in an unusually higher tax bracket than normal, you might benefit from certain savings or tax strategies that reduce their adjusted gross income (think HSA’s, pre-tax retirement account contributions, or charitable giving). If you find yourself in a lower tax bracket than normal, you might accelerate income via Roth conversions or spending down tax deferred assets to lessen the tax burden on those withdrawals. Additionally , considerations on the impact on Medicare premiums in retirement should also be taken into account when helping with tax planning.

As you can see, even though I am not a CPA and I’m not in the business of giving tax advice, helping you be strategic with your tax strategies is part of the comprehensive planning approach. All in, you should expect to increase your returns up to 1%/year (or more depending on complexity) by navigating the tax code effectively.

Income Distribution Strategy

In my personal practice, this ends up being a significant value add given the work I do with post-retirees. A systematic withdrawal strategy in retirement will involve a monthly distribution 12 times throughout the year. This reduces the risk of needing a sizeable distribution at the wrong time (similar to the concept of dollar cost averaging). For a 30 year retirement, this means 360 withdrawals! Most retirees have at least two different retirement accounts, so multiply 360 by 2 for 720 different income decisions to navigate. In my experience, the selling decisions are often what set investors back, especially if they are retired and don’t have the time to make it back. By putting a process in place to strategically withdrawal income from the proper investments at the right time, and maximize the tax efficiency of those withdrawals, this can add up to 1.1%/year in returns alone, according to Vanguard’s study! I’ve also had clients tell me they value their time more and more the older they get. Instead of spending their retirement managing income withdrawals each month, they would much rather travel, play golf, go fishing, spend time with their grandchildren etc. So yes, I would agree with the Vanguard study that 1.1%/year is appropriate for this category, but I would also argue the peace of mind of not needing to place trades while you are on an African Safari with your spouse is priceless! Yes, I did have a client who admitted to this, and no, his wife was not happy! That’s why they hired me!

Risk Management

The major risks you will see during your lifetime from a financial planning perspective are:

Bear market
Behavioral
Longevity
Inflation
Long-term care
Premature death
Incapacity or aging process

Vanguard’s study focuses mainly on the behavioral risk (value add up to 1.5%/year) and re-balancing (.26%/year). As I mentioned earlier, it’s fascinating they rank behavioral risk as the largest value add out of any category! What is behavioral risk? Let me tell you a quick story. A client of mine was getting ready to retire at the beginning of 2020, right as the pandemic reared it’s ugly head. He had 30+ years working in higher ed and climbed the ladder to ultimately become president of his college for the last 15 years. He is a brilliant man, and a savvy business person. When the pandemic hit us, he was terrified. Not only did he see his portfolio drop from $2.5mm to $2.25mm in four weeks, but he was worried this could lead to the next depression which his parents lived through. We had at least a dozen conversations during those weeks about how he was losing sleep every night, which of course was miserable for he and his wife. Finally, in our last discussion he informed me he wanted to sell out of his retirement investments and move to cash. I plead my case in that we had a well thought out diversified strategy, and looking at the math, we had enough resources in fixed income investments to pay his bills for the next ten years! However, I told him it was his money and I was ready to place the trades if that is what he wanted. He told me he would think on it for the next 24 hours. The next day, he called me and said I was right, we had a plan, and he wanted to proceed with sticking to the plan. Well, by the end of 2020 his account not only fully recovered, but it grew to $2.75mm! I am not pumping my chest on performance, but by being the behavioral coach he needed at that time earned him $500k of growth in his portfolio (a whopping 22%).

I can literally share a hundred of these stories not just from the pandemic, but stories from 2008/2009, the dot com bubble etc. The point is, having an advisor you trust that can help you navigate through the ups and downs of the market and tell you what you NEED to hear, not what you WANT to hear is invaluable. Furthermore, it can free up your time to focus on what matters in your life and have the professionals worry about the market for you!

So all in all, I would agree on the 1.5%/year value add for behavioral coaching and .26%/year to help re-balance the portfolio properly. However, Vanguard’s study doesn’t even take into consideration proper insurance planning and estate planning advice a comprehensive advisor gives to their clients which are also value-adds in and of themselves. In that sense, I would argue this category can add up to 2%/year in additional returns to a client.

Expense Management

This is oftentimes overlooked when working with a financial advisor. Much of the public believes working with an advisor will be more expensive! However, many of them are used to being sold high commission investment products or services that are overpriced. However, through due diligence and leveraging the proper research, Vanguard estimates clients should save on average 0.26%-0.34%/year on expenses. From my personal experience, this might even be on the low end. However, for arguments sake and given it’s their research, let’s say we agree with the value-added range set forth.

Second set of eyes

Vanguard doesn’t reference this in their study, but that objective point of view is sometimes necessary to drive positive change. I don’t have any specific data on how to quantify this, but I hear time and time again from clients that they so much appreciate having me as an accountability partner. Think about trying to get in tip top shape without a coach or personal trainer! You might do okay, but you certainly wouldn’t push yourself as hard as you could have if you had a coach or trainer. On the contrary, I often hear from new prospective clients how information overload and the fear of making a mistake has caused a whole lot of inaction, which can significantly hurt returns and performance. Think about a surgeon attempting to perform surgery on their own body! They simply wouldn’t. Not that I am comparing my occupation to a surgeon, but someone working to achieve financial independence would benefit substantially from a trusted third party to help navigate all of the different financial decisions they will encounter in their lifetime. This also could be true for married couples who might have differing views on finances. After all, financial reasons are the #1 cause for divorce in America. If I can help a married couple get on the same page with their financial vision, that is a win for them, no questions asked! Without specific data, I would have to say my gut feel is that objectivity should add an additional 0.5%/year in returns over the duration of a relationship, as well as more self confidence and peace of mind that you are on the right path.

If we tally up our TIRES acronym:

Tax planning = 1%/year
Income Distribution Planning – 1.1%/year
Risk Management – 2%/year
Expense Management – 0.26% – 0.34%/year
Second set of eyes – 0.5%/year

This gives us a total value add range of 4.86% – 4.94%/year in additional returns. My firm’s average fee is roughly 0.85%/year. This is why I get so excited to help new and existing clients. The value you receive, is far greater than the cost to pay me, creating a win-win situation. Now, not EVERY client will experience in additional 4-5% in additional value. Some might receive 2%/year, some might receive 10%/year! However, all of you who have yet to work with a comprehensive planner, or for those of you working with an advisor who may not be doing a comprehensive job, it might be time to reevaluate and see what holes you need to fill. If you are interested in learning how to work with me directly, you can schedule a mutual fit meeting with the button below. Or, you can visit my “Process” and “Fees” pages on my website.

Add Your Heading Text Here

CFP fiduciary financialplanning retirement

Kevin Lao

January 21, 2022

Stress Test Your Retirement Plan

Have you stress tested your retirement goals?

“When you retire, there are two doors in which you can walk through. Door #1, the people outlive the money. Door #2, the money outlives the people. My mission is to help people walk through door #2.” – Nick Murray

Karen and Pat had a goal to retire in 2009 at the age of 62. They planned to take Social Security, start drawing Pat’s pension, and then supplement the difference with withdrawals from their retirement portfolio. Who could have predicted that the Great Recession would wipe out 50% of the stock market value the year before they planned to retire? They lost nearly 35% of their portfolio, and the decisions that followed ultimately pushed their retirement plans back 11 years! Pat was a classic “Do-it-yourselfer” and seemed to have the financial house in order, and Karen relied on his handling of their financial affairs. What I’ve learned is the closer major milestones become, such as retirement, the fear of loss is amplified. The only way to mitigate the risk of loss is to have a disciplined process that can be followed during the good times, and the bad times, which would have helped Karen and Pat navigate through the Great Recession relatively unscathed.

Since that experience, I have seen many different events play out that have derailed retirement goals. On a more positive note, I have personally helped countless families prepare for and execute a successful retirement. I have come to the conclusion there are 5 major financial risks that could seriously impact financial independence and put you in jeopardy of running out of money. As part of our financial planning process, we stress test each of these risks to see how our client’s financial goals would be impacted. The 5 stress tests are as follows:

1. Bear Market Risk (a 20% or more drop in the stock market)

2. Longevity Risk (living longer than you anticipate)

3. Inflation Risk (what if inflation is higher than we anticipate?)

4. Prolonged Low Return Risk (experiencing lower returns than expected)

5. Long-term Care Risk (the cost of needing custodial care later in life)

For a limited time only, we are offering a complimentary Retirement Review to stress test your retirement goals to see how we can help you on your path to financial independence. By clicking the START HERE below, you will begin the process with a brief questionnaire. My team will process this information and get in touch with you if we have any questions or initial thoughts. We will then schedule a 30-45 minute Retirement Review to show you our findings to improve your probability of success. We look forward to helping you!

Kevin Lao

October 15, 2021

Should I Buy Long-Term Care Insurance?

70% of those 65 and older will need long-term care services. The question is, how will you pay for it? We will address buying insurance vs “self-insuring” in our article.

financialplanning long term care retirementplanning

Kevin Lao

October 4, 2021

6 Stress Tests for a Bulletproof Retirement

You're invited to join us live on Thursday, September 30th @ 2pm - 3pm EST.

Have you stress tested your retirement plans? If you are within 10 years of retirement, you must have a plan for the 6 “what-if” scenarios that could derail your financial goals.

The year was 2007, and my parents were all set to retire in just 12 short months. My Dad worked in IT and is a first generation American. My Mom was a preschool teacher and had no retirement benefits. She knew little about what was going on with their financial plans aside from listening to my Dad complain every time the market was down. As we now know, 2007 was the beginning of the Great Recession, which is the worst recession we’ve seen in our lifetime. Stock markets were down close to 50% and unemployment reached 10%. Like many other hard working Americans, the Great Recession of 2008 ended up pushing my parents’ retirement back 11 years. I made it my mission to help every day families prepare for the what-if scenarios when planning for retirement, including:

What if we go through a recession like 2008?
What if one, or both of us live longer than expected?
What if there are changes to Social Security?
What if market returns are lower than we anticipate?
What if there is higher than expected inflation?
What if there is a long-term care event during retirement?

These are the 6 most common concerns that keep my clients up at night. My value proposition is to stress test each one of them and ensure their plans are bulletproof to and through retirement. I look forward to meeting you live at our webinar.

annuities CFP financialplanning long term care retirement

Kevin Lao

September 20, 2021

How to divide your estate with stepchildren?

How to protect assets from stepchildren

What about adult children in a blended family?

Consider Life Insurance

Effects of an unequal inheritance

Tax Considerations

How does the step up in cost basis rule work?

Action Items

I hope you found this information valuable!

Make sure to SUBSCRIBE so you don’t miss out on any of our retirement planning insights!

SCHEDULE A ZOOM call if you want to discuss your current situation with a Fiduciary.

And finally, join our “BLENDED FAMILY RETIREMENT AND ESTATE PLANNING” Facebook group for ongoing dialogue and insights from our team of experts!

You are in the final stretch of your career!

Step 1: What is your vision for "retirement?"

Step 2: Create an ideal day/week

Step 3: Make a Budget

Stay with me on this one!

Examples of NEEDS are:

A Quick "Aside" on The Housing Decision

Examples of WANTS are:

Examples of WISHES are:

Estimate each cost

Step 4: How much of your retirement income will come from fixed sources?

Step 5: Determine your income gap

Step 6: Make the decision on how your investments will be managed

Step 7: What to do with your old 401k and employer benefits?

Step 8: Update your Estate Plan, and keep it up to date!

Step 9: Medicare or Healthcare Decisions

Step 10: Make a Long-term Care Plan

Step 11: Communication and Ongoing Review

Final word

Make sure to subscribe below so you never miss our retirement insights!

If you would like to schedule a Zoom with me to ask specific questions, you can access my calendar below.

What is a blended family and why does it impact my retirement plan?

First, what is a blended family?

How does having a blended family impact my retirement plan?

1. When should you claim Social Security?

Other blended family Social Security nuances....

Dependent benefits are also important.

2. What is a safe withdrawal strategy for retirement income?

The SECURE Act changed the game with inherited IRA's/401k's.

Should I follow the 4% rule?

Using the "Guardrail" approach to withdrawals...

Should I Buy An Annuity?

3. Long-term care planning

Should I buy Long-term Care Insurance?

What about an annuity with a Long-term Care rider?

What about “self-insuring?”

4. Estate Planning Basics for Blended Families

Should you consider a trust for your blended family?

Life Insurance

Elective Share Rules

Final word

Book a call with us!

Subscribe to our email list!

"How do fiduciary financial advisors add value?"

What is comprehensive advice?

What are the five value-added practices? I use the acronym “T-I-R-E-S”

Tax planning

Income Distribution Strategy

Risk Management

Expense Management

Second set of eyes

Add Your Heading Text Here

Have you stress tested your retirement goals?

You're invited to join us live on Thursday, September 30th @ 2pm - 3pm EST.

Our Firm

Services

Insights & more