Financial Planning for Retirement

How Much Can You Save with Advance Planning?

July 5th, 2007
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nest egg

The devastating reality is that without advance planning, sometimes a lifetime of saving and assets must be spent in order to cover the costs of care. However, a careful evaluation can help you avoid costly mistakes and can significantly augment or maximize the value of the resource. Where do you begin?


Make a List of Your Assets and Predict Your Future Care Needs

First start with a clear accounting of all resources. Then consider your present needs and those that you can realistically anticipate in the future. Depending on your situation, the future calculations may include the needs of a spouse and/or dependents.

Long-term care is a huge expense that can run between $25–100K per year (and up!). The following methods can be used in combination with one another.

  • Long-term Care Insurance
  • Medicare/Medicaid Strategic Planning
  • Private Pay (spending down personal savings and assets)

Don’t Just Plan for Today, Plan for the Future

If I could give only one bit of advice to my clients, it would be this: do not avoid advanced planning. Too many clients avoid this step. Oftentimes in these scenarios, long-term care insurance (LTCI) purchase is no longer possible, either due to the elderly person’s ineligibility or because the policy is so costly that it no longer makes sense. Sometimes, even when there is an existing LTCI policy, the elder may not qualify for care based on the terms of the contract. Many people believe that Medicare or Medicaid will pick up the ongoing nursing home bills—that is not the case. Consulting an elder law attorney may be a worthwhile endeavor to see if there are any payment strategies that are suited to your particular situation.

Don’t forget: every situation has different parameters, resources and needs! Think about what’s important to you. Some of the variables that might affect your financial plan include dependents, taxation, liquidity, markets, risks and management.

Determine What Should be Sold or Adjusted First to Meet the Financial Shortfall

Consider:

  • The value of the asset today and markets conditions (present and future)
  • The amount of income these assets produce (and future projections)
  • Whether the assets can create more income or benefits
  • The financial implications of maintaining these assets
  • Whether the assets are liquid (easy to sell)
  • The costs of sale, transfers, or changes (consider associated fees, income and estate taxes, and commissions)

After you have determined which assets to tap, think about how whether you will invest the net or spend a portion to meet the costs.

Bank Accounts & Money Market Accounts

  • Should maintain adequate liquidity for paying bills and emergencies

Stocks & Bonds

  • Evaluate the investment risk factors
  • Review the income and tax benefits (i.e., dividends at lower tax rate)
  • Consider how market conditions affect present and future value
  • Determine tax basis to ascertain capital gain if sold

Investment Real Estate

  • After-tax cash flow (present)
  • Evaluate management and maintenance options
  • Determine capital gain calculation
  • Consider how market conditions affect present and future value

Life Insurance Policies

  • Find out whether they can be prematurely tapped or sold

Personal Property & Valuables

  • Determine the best way of obtaining maximum value
  • Consider the taxation involved, if applicable

Retirement Funds (e.g., IRAs or company pension plans)

  • Increase distribution
  • Figure out how the tax ramifications will affect your income

Privately Owned Business

  • Determine the possibilities and benefits that can be created
  • Establish the value with an independent business appraiser

The Home

  • Consider taxation and costs
  • Speak to a financial advisor about deferring capital gains (possibly increasing financial benefits)
  • Determine whether an equity loan or reverse mortgage is right for you (turning the home into a source of income)
  • Rent a room or exchange room and board for needed services

It’s smart to weigh the costs and benefits in all financial decisions. However, not everyone has the experience or the knowledge to do so on their own. Don’t be afraid to obtain assistance from professionals with fiduciary experience. Depending on your needs, you may choose to speak with an elder law attorney, an accountant, a financial planner, or a combination of these professionals. Think of it as an investment: the protection and savings these consultations can result in is a guaranteed return.

Posted in Advanced Planning, Financial Planning for Retirement: Suzanne Wolfson, Planning for Long Term Care, Reverse Mortgages

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2 Responses to “How Much Can You Save with Advance Planning?”
  1. Brenda Says:

    I live about 60 miles away from my mother and work full-time, but through family friends we met a lovely young woman looking for a place to live without much money. This girl now lives with my mom and helps her get her groceries and does laundry and other errands. And my mom couldn’t be happier as she still lives at home, which is exactly where she wanted to be.

  2. Suzanne Wolfson Says:

    Brenda,

    Sounds like you have found a great solution for your present needs. Not every one is so lucky to find someone to help out in their home whom they feel they can *really* trust. I encourage people to look at these types of options because an elder’s desire to stay in the home should be respected, if it is feasible.

    Again I congratulate you on your creative solution. However, I urge you to discuss with your mother what her future needs might be and how they can be accommodated. By planning and looking at all possible options prior to making a decision, you and your mother will hopefully be more comfortable with your choices.

    Thanks for the response,

    Suzanne

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