Tuesday, September 11, 2007

Is There a Chance You Will Outlive Your Savings?

In recent surveys one of the biggest concerns of retirees is that they will run out of savings or not have enough money to live on down the road.

Between inflation, health care, long term care, the uncertainty of social security and nonexistent or dwindling retirement and/or pension income, it is a very valid concern.

For many, appreciated assets such as real estate, their businesses, stock portfolios, or professional practices are intended to be the mainstay for retirement purposes.

Often, 20, 30 or even 40 years have been spent in the accumulation phase. The value of the asset has probably increased many times over. It is reasonable to think that this increase is yours to keep when it comes time to sell.

The reality is that depending on the asset and how it is held, 15-50% of your profits might be given in the form of taxes to the IRS, never to be seen again. Can you really afford to lose that much and still survive financially throughout your remaining retirement years?

Even if you can, do you want to?

A common thought is to pay the tax and reinvest what is left over. Sounds good, right? You’ll be back to where you started in no time. Chances are good that you are wrong again.

If you are close to or in retirement, you need to protect this money, as you cannot afford to lose any via a risky investment. There is no longer time to recover large losses because you are not working as much or at all. You also have to realize you will be draining this asset over time to live on, so each year less interest will accumulate.

So, you have to put it in a relatively safe investment. Safe investments tend to have low returns. Often these returns are taxable, so the proceeds are further lowered by income tax. You’ve just given away a good portion of your asset sale to taxes, and now that lump sum goes to work at low interest rates, it decreases over time, and the interest is often taxable.

If it is invested in a less liquid area such as real estate or annuities, you won’t be able to easily access your principle in large amounts anyway. Borrowing equity from a property means making payments to a lender, and where is the repayment money going to come from if you are not working?

Look at how long you have held your asset and how often you have ever needed a large lump sum all at once. The income you received was most likely on a monthly basis all along, either as rental or business income. Don’t forget, if you do need a large sum for some reason, you still have collateral the bank recognizes to borrow against, or you might keep some as cash for emergency purposes.

The bottom line is that you, the seller, often benefit most when you retain as much of the asset appreciation as possible, defer or spread out the tax obligation for as long as possible, and receive a guaranteed monthly income over a number of years or the rest of your life depending on how you set it up. This is the philosophy of retirement plans, pensions, annuities, social security and all other forms of retirement income vehicles.

Ask yourself if it is your goal to have enough money to live on forever, or if you want to face the dilemma of re-entering the work force at an advanced age to make ends meet? That is, if it is even possible due to inevitable health constraints and job availability.

Don’t think with a short term vision. Look far into the future and take steps to secure it for you and your family.

Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858

Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html

Know Your Risk Tolerance

Everything in life has risk. When it comes to finances, whether they are placed into a savings account, cd, the stock market, real estate, hedge funds, etc. there is an associated risk.

The extremes are that the savings account risk is that your money won’t keep up with the cost of inflation. On the other end of the spectrum, the investment could potentially lose all value.

When you are selling a highly appreciated asset, you need to determine exactly what risk tolerance is for the proceeds. This will help determine what course of action is right for you.

Here are just some of the factors that should be considered.

Do you have other assets or is this your only one?
Are you still earning income, close to retirement, or already retired?
Are you comfortable owning stocks, real estate, annuities or fixed rate savings?
Do you need a certain amount of monthly income, do you want to leave the largest legacy or is your intent to be charitable?
Do you need to remove assets from your estate for estate tax planning purposes?
Do you pay too much in ordinary income tax?
How important are guaranteed returns?
Do you understand the benefit of the time value of money?
Are you aware of how leveraging your assets may increase your return potential?
How would a loss of any kind affect the rest of your finances?

Identifying the risk is just the beginning of your decision making process. However, it will narrow down which options allow you to sleep comfortably at night. When all is said and done this is perhaps the most important aspect there is.

Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858

Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html

Let Me Be Your Advocate

Having someone on your side who knows the right questions to ask is crucial.

I think the only thing worse than not knowing the right questions to ask is not knowing if the answers you get are accurate, complete or even truthful.

I run into this same dilemma every time I take my car in for service. Outside of the basics, the mechanic can convince me that I won’t even make it home without an expensive repair because my knowledge of auto mechanics is minimal.

A good solution for me is to bring along a friend who is more familiar with the inner workings of autos. Once the mechanic realizes that he or she is speaking with someone knowledgeable, it is less likely that they will propose a repair that is unnecessary or overcharge.

One of the services I offer my clients is to be their advocate when speaking with an individual making an alternate proposal. I know exactly what questions need to be asked and the answers that should be forthcoming.

All parties involved should be present on a conference call, so there is no “he said, she said” and everyone hears the same thing. On my end, I also welcome anyone the client would like to have present during our discussions, so that any questions they have are also addressed.

Once you have all of the pros and cons of each option, you have the tools to make a truly educated choice.

Remember that as long as whoever you are dealing with is being straight with you, you’ll know you are doing the right thing for your situation.

Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858

Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html