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YOUR GUIDE TO HOW INHERITANCE TAX WORKS

YOUR GUIDE TO HOW INHERITANCE TAX WORKS

 

Benjamin Franklin once famously said that nothing in this world is certain – bar death and taxes. While many tend to laugh on this, it is something that is inevitably true. More ironically so in this case, where tax law has combined both these “certainties” into a unique experience called the inheritance tax.

Basically, the property you leave behind when you die goes down to your children, family and friends, or even to charity. And also to the government in the form of taxes. Said property may be deceased to any one of inheritance, estate, or state and federal tax statutes, or in some cases a few or all of them.

One chief area of concern is the inheritance and estate tax, which are often mistaken as one and the same. In this article, we’ll what inheritance taxes are and how they differ from estate tax.

 

Estate Tax and Inheritance Tax – the Key Difference

The first thing you should know about these two taxes is that while they are used in context of a deceased person’s property and assets (and are often famously called “death tax”), they are in fact two very different kinds of taxes. The exact definition of these two taxes, however, differs from one country to another and even from one state to another, as some states levy the inheritance tax while others don’t. In the context of this article, the definitions and standards mentioned are accurate with US law in general, with some state-wide variations.

Estate tax refers to the tax deducted by the federal government after the debts of your estates have been cleared, your property has been liquidated (if required), the funeral expenses have been made and the relevant officials (like the executor) have been paid their dues. It is only after the estate tax has been paid that the heirs receive their share (from the leftover worth). Needless to say, this is a tax that is paid by the estate itself.

Inheritance tax, on the other hand, is paid by the beneficiaries once they have received their share in the deceased’s property. In contrast to estate taxes, which are levied by the federal government, inheritances taxes are levied by the state governments, and that too by only a few states in the country. This often puts residents in some states at a double disadvantage of having to pay both taxes.

That said, there are exemptions to payment, which tend to reduce the amount that you will have to pay as taxes.

 

CONFUSED BETWEEN WILLS AND TRUSTS? HERE’S WHAT YOU REALLY NEED TO KNOW

CONFUSED BETWEEN WILLS AND TRUSTS? HERE’S WHAT YOU REALLY NEED TO KNOW

 

Practically everyone has heard of the terms “will” and “trust,” and knows the context in which they are used. However, most people assume that they are one and the same – which is far from truth. In reality, these two documents and their functions are very different. While they are both estate planning devices and are very useful, they serve different kinds of purposes, to the extent that they can be used in conjunction to make a wholesome estate plan.

To start with, let’s take a look at the basic definitions of the two documents – while a will is a document that consists of directions in which your wealth and/or assets should be distributed after your demise, a trust can be used to distribute them before death or during the period of death (or even afterwards – but that’s up to you). While the will becomes active after only after your death, the trust will come into effect the moment you create it. By law, a will requires the presence of a legal representative who will see to the implementation of your wishes after your death. A trust, on the other hand, requires no such thing. A trust is generally arranged between a person (or institution, like a law firm or a bank) – known as the “trustee,” and the person who stand to receive the property – called the “beneficiary.” Trusts generally have 2 types of beneficiaries – those who receive income from the trust when they are alive, and those who receive the leftover amount after the death of the first set of beneficiaries.

Another key difference between a will and a trust is the kind of property that they cover. While a will covers only that property which is in your name at the time of your death, it does not include any property that is held in a trust or even in a joint tenancy. On the flip side, a trust can only cover property which has been transferred to it; therefore, the property must be put in the name of the trust in order to be included in it.

By rule of law, a will is supposed to pass through probate, which means that it’s administration will be overseen by a court of law, which will make sure that the will remains valid and the all the directions on it are followed according to the wishes of the deceased wanted. A trust, on the other hand, passes outside probate, and therefore does not need the supervision of a court (or the extra time and money that goes along with it. It is also for this reason that a trust can stay private unlike a will, which will ultimately become a part of public record.

Deciding which is the best option for you can be tough, since each of them have their own advantages and disadvantages and their usefulness (or lack thereof) is dependent upon your unique situation. To get the best of yours and your survivors’ interest, you must make a proper consultation with your lawyer and financial advisor.

 

ESTATE TAX VS. INHERITANCE TAX

ESTATE TAX VS. INHERITANCE TAX

 

When the question is of Estate and Inheritance Taxes, the best news is that in most cases, you will be exempted – only those with big estates will be feeling the heat of taxes. That being said, there are some exceptions to this rule, and your unique inheritance situation (be it in terms of the size of the estate, your relation to the deceased, or anything else) may change your tax bill dramatically.

 

Estate tax vs. inheritance tax:

While many people consider estate and inheritance taxes to be the same, they are in fact two very different kinds of taxes. They have certain very vital differences, chief among them being the fact that estate taxes are deducted from deceased’s estate, whereas inheritance taxes are paid by the beneficiary. Depending on the size and location of the estate and the relationship between the deceased and the beneficiary, both, neither or either one could work as an active factor.

 

ESTATE TAX

The Estate tax is levied on the property that gets transferred from the deceased. As already mentioned, most people are exempted from paying the estate tax, Thanks to the IRS exempting estates of less than $5.49 million from it. Added to that is the fact that the exemption is applied per individual, which means that if a married couple can enjoy an exemption of $10.98 million (double of the original).

Estates which exceed the aforementioned threshold have up to 40% of tax rate levied on them by the IRS. In this case, however, the IRS taxes the assets at the current fair market value of the estate, and not on the amount that the owner has originally paid to buy the estate.

According to Tax Foundation, a Washington DC-based think tank, estate taxes are collected by the District of Columbia and 14 other states. These states may have an exemption threshold that is lower than the IRS. For instance, the threshold in Massachusetts is around $1 million. That said, the estate tax that the owner will pay will be to the state government, and not to the IRS.

 

INHERITANCE TAX

Contrary to the Estate tax, the Inheritance Tax is levied on the beneficiary. According to a Tax Foundation analysis, this tax is currently levied by the states of New Jersey, Nebraska, Iowa, Pennsylvania, Kentucky, and Maryland currently levy this tax on those who receive inheritances.

Much like the estate tax, the Inheritance tax too has several exemptions. For instance, in most cases, the deceased’s partner and children are exempted from paying it.

That said, some people may be doubly disadvantaged as well. Some states such as New Jersey and Maryland levy both estate and inheritance taxes. In such cases, both the owner and the beneficiary and will have to pay taxes, and taxes will be paid to the state government as well as the IRS. The chances of this happening, however, still remain very slim. Estate taxes are generally paid only when the value of the estate is very high and/or the beneficiary is not directly related to the deceased.

 

TOP 5 INVESTMENTS FOR BABY BOOMERS

TOP 5 INVESTMENTS FOR BABY BOOMERS

As of late 2007, Baby Boomers began collecting their Social Security payments, marking the beginning of an interesting time when there will be a long list of them in the retirement age. Due to their size alone, they form a demographic category that has more total spending power than anyone else on the globe, which in turn makes their investing and spending power very impactful on the U.S. investment landscape and the economy overall.

Those approaching retirement must keep in mind that the choices they you make today will affect what their financial status will be 20 years (or more) down the line. This is the minimum one can expect, given that the average life expectancy for the baby boomer has been calculated as 83 years.

Here are 5 best investment strategies that you must consider:

Variable Annuity (VA)

Believe it or not, the value of insurance become more important as you approach your retirement age. While traditional whole life policies still remain, there now exist some newer, more updated theories and products which have garnered enough attention to make their own place. One such product is the variable annuity, which permits investors to sign up for what is very much like an insurance policy, the only difference being that the balances can be invested into bonds and stock holdings.

Variable Annuities allow holder to gain on cash balances above inflation, which is a key factor in keeping your insurance’s value. That being said, it is always better to be safe, and select a variable annuity with restraint, given that fees for each type tends to be very different. Also make sure that you understand every fee that you are paying, from annual fees and underlying investment fees to front- and back-end sales fees.

U.S. Treasuries

U.S. Treasuries actually make up for the sole investment for many retirement-aged individuals. With yields that are regarded as a benchmark of safety (the risk-free rate of return), treasuries make for a very safe and reliable investment, especially when the odds are risky. All treasury bonds are controlled by the U.S. government, which has so far not defaulted on a single Treasury bond. No matter how you access exposure to Treasuries, from individual bonds and mutual funds to exchange-traded funds, and others, they lend a lot of weight to your overall portfolio.

For those above 60 years of age, capital preservation is much more essential than capital appreciation. Not only do treasuries offer this, they also offer a steady stream of income and a chance for you to preserve your assets during inflation. While municipal and corporate bonds are sold in the same manner, they tend to have higher default rates and require more research to be done by the investor for evaluation of merits.

Certificates of Deposit (CDs)

CDs stand only second to Treasuries thanks to their high yield (which often goes higher than that of Treasuries of the same maturity), as well as the feel-good factor of giving your hard-earned money to an established financial institution like a bank. Plus, there is the Federal Deposit Insurance Corporation (FDIC) insurance. The only thing there is to remember here is that there is a threshold of $250,000 per bank, since the FDIC insures a specific limit to individual account holders. If your amount is greater than this, you will have to spread your money over several different banks.

Real Estate

As with any demographic, real estate is an investment that pays well if done wisely. As someone approaching retirement, there are many avenues you can explore: from buying a second property and/or rental property, to converting from a paid-off mortgage to a smaller but more efficient home. Many people actually enjoy moving to a smaller home and/or a new location. These options will help provide asset diversification and help you save on taxes, as well a offer you a place where you can spend that much-deserved extended vacation-time.

You must keep in mind to not take such decisions lightly though, and must consider consulting a certified advisor before you actually decide to embark on a decision. After all, there is a lot that needs to be considered here, from your net-worth diversification and liquidity needs to your finances and personal tax situation. Plus, if you opt to keep a rental property, you will yourself have to put some work and effort behind it.

Individual Retirement Account (IRA)

It is virtually impossible to make a best investment strategies list that does not have this option, and for good reason. In fact, if you’re one of those who has been investing for years, you probably have a well-funded IRA already. Once you retire, your 401(k) assets will roll over to either a Roth or a Traditional IRA. And in case you’ve crossed the age of 50, you can add more than your standard annual contribution limits to your account. IRAs make a particularly good strategy, since they have the ability eliminate capital gains taxes and reduce your future tax bills significantly.

Both the Roth and the traditional IRA have their own advantages. While asset transfers to a Roth IRA are not tax-deductible (meaning you still have to pay income taxes), the income that you will go on to receive will be completely tax-free. Furthermore, the assets in your IRA must reflect your overall asset allocation.

Special Mention: The Wild Card

Yes, we mentioned five investment strategies. But we decided to include this spot for those who apprehensive of spending 20+ years sitting around having nothing to do. While good investment ideas do involve careful financial planning, they also sometimes (if not always) involve (being creative and following your passion). In fact, any one of your hobbies can function well as an investment opportunity. This includes several activities such as:

  • Starting your own business
  • Classic cars
  • Paintings and fine arts
  • Coins and collectibles
  • Sports memorabilia

That being said, you must be well aware that these too have their boundaries. After all, there is no point in starting a business which will keep you so busy that you finally get in way over your head. However, if there is something you are truly interested in – and preferably have good knowledge about it, you must not hesitate to take it further, now that you will enter a phase in your life when you actually will get the time to do so. We do live in a world that is brimming with possibilities and age is really just a number. So long as you stick to putting a fixed percentage of your net worth (a maximum of 10%), you will be completely fine.

To Conclude:

Now that you are approaching retirement, the choices you make can and will affect how you will be leading your lifestyle for decades to come. You must, therefore, make sure to properly think about what you need, set your goals, and then set about selecting the best strategy (with the help of a professional) to achieve said goals.

THE BABY BOOMERS’ WAY TO SAVE FOR RETIREMENT

THE BABY BOOMERS’ WAY TO SAVE FOR RETIREMENT

Life for the baby boomers hasn’t been easy, at least as far as saving for retirements is concerned. They have indeed experienced quite a few hard knocks. However, they now have a sound retirement saving strategy in place – one that can actually be beneficial for the younger generations as well.

A lot has happened in the last 40 years which has pretty much spelt doom for common investment strategies – from sudden busts and booms, periods of deflation and inflation, to sharp rise and fall of interest rates and speculative ventures gone bad. bubbles that ended badly. To top it over, the S&P 500 in this period has stood at an average of 12% a year (a figure that includes both price range and dividends.

While one cannot say that boomers have been stable through all this time, one can definitely say that they have learnt well from their failures. And they are now keen to find ways that will help them save for the rest of their saving years.

According to an American Funds study, 65% boomers reported that they felt smart as investors when they stuck with their investment strategy. In the same study, 6 out of 10 reported that they remain quiet when the market gets volatile. Only a mere 2% say that they feel smart when they make a move that’s bold and risky but well-rewarding if it works.

The younger generations, however, don’t seem to share this sentiment. For instance, only 43% of millennials feel smart when sticking with their strategy, while the rest only feel smart when they attempt to pick a hot stock. The latter’s percentage, here, is almost 6 times more than the boomers.

Baby boomers, however, thanks to their experience, have learnt an entirely different lesson. They’ve understood that good times don’t last long – let alone forever. Thanks to the huge market upheavals following the financial crisis, a mere 16% of boomers believe that they will continue to get their benefits either at the same rate or at a better rate. This is of course a lesser figure that the 31% who believe the same.

All said and done, there is a perfect explanation why millennials are more optimistic. Given that they understood the importance of saving much before their boomers counterparts did, they have a bigger edge over them. According to the American Funds study, almost 60% of the millennials began to save for retirement before the age of 25, as compared to only 28% of boomers. That being said, they also tend to have a more pessimistic view of their later lives, thanks to the debt that most of them face, especially in the form of student loans. As opposed to the baby boomers, who believe that they will be happy throughout retirement, millennials do not believe that they will be that lucky.

The study also shows that despite their wise savings habits, baby boomers do tend to have their blind spots. While they do remain committed to low-cost index funds (which are known to produce good results in the long-term), they also leave them vulnerable to sharp short-term downward market moves, which, according to 81% of boomers, is a great matter of concern.

If your portfolio mainly consists of investments and bonds, with stock index funds forming a very low percentage, it is better to stick to index funds. However, half of all generations still fail to understand the problems short-term risk of an index fund – the fact that things can turn real ugly real fast in case the market turns sharply lower, especially during the initial period of retirement.

YOUR GUIDE TO ESTIMATING TAXES DURING RETIREMENT

YOUR GUIDE TO ESTIMATING TAXES DURING RETIREMENT

While retirement does mean no work, you still must pay your taxes. Unsurprisingly, paying taxes can get tricky during a time when you’re not actually working, and instead are relying upon savings (which no matter how large, is still limited). It is therefore essential for you to estimate the taxes that you must pay, and plan your budget accordingly to avoid any inconvenience later.

Taxes during retirement work the same way as they would when you work, i.e. calculated on the basis of your annual income. Every source of income is taxed differently, which is why it is a good practice to have sound knowledge of the various nuances of tax rules.

The following are the most common types of retirement income and the various tax rules for them:

Social Security Income

If Social Security as your sole retirement income source, you will probably not have to pay taxes in retirement. If you have income sources other than this, however, then at least a part of your Social Security income will probably be taxed. The amount of tax determined is based upon a formula, can vary from zero to 85%, depending on your additional sources of income. Other income sources are termed as “combined income” by the IRS, and this combined income is plugged into a formula in your tax worksheet which will determine the percentage of your benefits which will be taxed annually.

Usually, retirees with large amounts of monthly pension will pay up to 85% from their Social Security benefits, and will pay their total taxes at a rate of 15-45%. Retirees relying only Social Security mostly get their benefits tax-free.

IRA and 401(k) Withdrawals

Generally, retirement accounts withdrawals are during retirement. This includes both IRA withdrawals and withdrawals from plans like 401(k), 403(b), and 457, among others, all of which are reported as taxable income on your tax return. The percentage of benefits that you must pay as tax will depend upon a combination of your total income, your deductions and the particular year’s tax bracket. For instance, if your year has more deductions than income (say, for instance, if you spent a lot on medical expenses), you might be exempted from paying any tax on withdrawals for that particular year.

Roth IRA withdrawals, if done properly will be tax-free.

Pensions

Pension income is generally taxable. The best way to determine the tax on your pension is to use a simple guideline – if the withdrawal goes in before tax at the time of withdrawal, then it will be taxed. Since most pension accounts are funded with pre-taxed income, all of the amount will be written-off as taxable income each year on your tax return. In such cases, you can ask for your to be deducted from your pension check.

Annuity Distributions:

IRA or retirement account-owned annuities are taxed on the basis on tax rules in the section on IRA withdrawals. If the annuity was purchased with the help of money that was not within an IRA (or any another retirement account), then the tax will apply based on the kind of annuity purchased.

In case of immediate annuity, only a certain portion will be considered interest, and only this portion will be included in the taxable income section of your return. The annuity company will inform you of your “exclusion ratio” i.e. is, the amount of annuity income which will be excluded from the taxable income.

As for withdrawals variable or fixed annuities, the earnings need to be withdrawn first. This implies that if the account is worth more than your contributions, you will initially withdraw earnings or investment gain, which will be taxable. Upon withdrawing all your earnings, you will be withdrawing the original contributions, i.e. cost basis, which are tax-free.

Investment Income

Investment income works the same way as dividends, capital gains and interest income, by being reported on a 1099 tax annually. It is sent directly from the financial institution where your accounts are held. If you are systematically selling investments to generate income during retirement, every sale you make will generate a long/short term capital gain (or loss), which will subsequently be reported on your tax return. Taxes are nullified only when the other sources of income are not very high.

Selling your home

If the home you are selling has been lived-in for a minimum of two years, you have a high chance of not having your home taxed unless your gains are more than $250,000 (in case of a single person) or $500,000 (in case of a married couple). Renting homes have more complex rules, and tax calculations for the same require the expertise of a tax professional, who will help you determine the amount of gains which need to be reported.

THE RETIREE’S GUIDE TO PLANNING TAX STRATEGIES

THE RETIREE’S GUIDE TO PLANNING TAX STRATEGIES

Believe it or not, planning your ahead in time can helps you manage them efficiently once you have retired. In order to do so, you must have a thorough understanding of the various options that are available to you. Once you gain this understanding, you will be able to choose the right strategies which will help you keep your tax bill as less as possible. With the right decision, retirees can gain some control over their taxes thanks to the ability to being able to decide the amount that they need or want to withdraw from their retirement plans.

Here are a few tips to help you get started with planning your tax strategy:

  • Exemptions and Deductions: Make sure to take complete advantage of all personal exemptions and/or itemized or standard deductions. These will help you determine the amount of your income that should be tax-free. For retirees, taxable distributions can be coordinated with their medical expenses, property taxes and mortgage payments.
  • Increase your Retirement Contributions: This can be particularly useful if you have multiple available deductions. You can try withdrawing more retirement funds than when is necessary in a given year once your deductions exceed the taxable income. This will help you avoid paying extra taxes in the next year(s) which could have a low or even zero tax rate.
  • Defer retirement plan distributions: By deferring your retirement plan distributions until they are required by tax law or until you need them, you can keep your taxable distributions to a minimum, and therefore push your income to subsequent tax years. Taxpayers who wish to go with this plan should start withdrawing funds from their traditional IRA plans and 401(k)s once they reach the age of 70 1/2. Distributions should start by April 1 of the year next to the year in which the taxpayer turns 70.5 years; this is known as the “required beginning date.” You can calculate the minimum amount to be distributed by dividing your account balance by the life expectancy figures published by the IRS in Publication 590. To make things easier, you can try web-based calculators to estimate the minimum required distributions.
  • Elderly-specific tax credits: While taxpayers of and above the age of 65 are eligible for the special tax credit, actually qualifying for the same requires some careful planning, for the adjusted gross income (AGI) must be within certain limits.
  • Maximize your tax-free income: By selling their main home, taxpayers can have up to $250,000 exempted from their capital gains. If you are married, this figure will increase two-fold to $500,000. Interest that is earned from municipal bonds is also tax-exempt.

How is Retirement Income Taxed?

Retirees have a range of sources from which they earn their income, from pensions and annuities to Social Security benefits. Each of these sources are subject to a separate set of tax rules.

Social Security: Depending on your income profile, your Social Security can stand to partially or fully tax-free. While finding out where you stand does require some careful and complicated calculation, it is worth the benefits you will get in terms of less taxes and better planning.

Pension or Annuity Income: These can partially or fully taxable. Distributions will be fully taxed in the event that all contributions to your pension were made with tax-deferred dollars. However, if you have contributed any after-tax dollars for funding your plan, you can get some cost basis in the plan contract.

IRA Distributions: Depending upon the kind of IRA you have, your individual retirement account’s distributions can be fully or partially taxable, or even completely tax-free. Distributions get fully taxed when the taxpayer has a deductible traditional IRA. However, if you have any basis in a non-deductible traditional IRA, your distributions will be partially tax-exempt. Roth IRAs are mostly totally tax-free so long as you full two basic requirements, namely, your first Roth IRA should have been made at least 5 years before any distribution, and the funds should be distributed after you have reached the age of 59 1/2.

401(k) Plans: 401(k) plan distributions are fully taxable on account of the fact that these contributions were not included in your taxes when they were made. These get the same treatment as Roth IRA distributions.

Your Guide to Earning Well after Retirement

Your Guide to Earning Well after Retirement

So, you’ve been working hard and saving well for all of your professional life and are now on the threshold of retirement. Needless to say, the time for you now is to actually enjoy all that you’ve wanted to do so far.

Before you jump on the retirement bandwagon, however, you must ensure that your savings and post-retirement earnings are enough to last for the rest of your life – all while factoring the ups and downs of the market, unprecedented expenses, inflation, and of course, longevity.

However, it’s not as daunting as it may sound at the moment. By remembering the following key factors when making your post-retirement income strategy, you can make your life a smooth and easy one – with no worries of having to come out of retirement to earn. Ever.

#1: Longevity

Thanks to advancement in science and technology, the mortality rates have down a lot. This makes it quite likely for healthy 65-year-olds today to live until their 90s – or at least their 80s. And if one goes by currently available data, longevity expectations will only serve to increase in the coming future.

This implies that the possibility of people living for 30 years or more after retirement is pretty commonplace. And that needs an equal amount of income to boot. If you do not plan out your strategy thoughtfully, you may just end up outliving your savings and having to come out of retirement, or worse, living on Social Security as a source of income (Given that the average Social Security benefit is around $1,296 a month, one can say that it isn’t enough to cover all needs).

#2: Inflation

Just because the current rate of inflation is low, doesn’t mean that it won’t fluctuate. Even if it doesn’t, it will surely have a powerful impact over a long time – say, 20-30 years. This can – and does – have a profound effect on retirees, who unlike their younger, working counterparts do not have the option of relying on raises and incentives.

A lower rate of inflation too can have a profound impact on the purchasing power of a retiree. For instance, an inflation rate of 2% would turn what is $50,000 today into $30,477 25 years from now. Looking at this in another way, if you bought something by spending $50,000 today, you would have to shell out $82,030 to purchase the same thing 25 years from now. It is therefore important that you make your plans early and put into factor the effects of inflation in order to be able to maintain your current lifestyle.

#3: Market volatility

Ups and downs of the market can be extremely unsettling when a retiree who is banking upon living comfortably on a fixed amount for the rest of your life. No matter what the circumstances you will need stocks for growth potential, both when you’re saving for retirement and when you have actually retired. By default, the assets you have should be able to last you a minimum of 30 years.

#4: The Amount of Money Withdrawn

Now this one is a no-brainer – no matter how inflation- or market-proof your savings are, they won’t last long if you draw too much. On the other hand drawing too little (mostly out of fear of your savings diminishing) will have an adverse effect on your lifestyle and psychology.

A sound retirement income plan includes recommendations on the amount of money that you can safely withdraw from your savings and still have the confidence in the fact that you won’t run out of money. Believe it or not, planning in this area (or lack thereof) can have a dramatic effect on how long your assets will last.

Elements of a Sound Retirement Income Plan

Now that you know the factors you must consider when preparing a retirement income plan, you should know the various important elements that make a good one.

The following are the basics of a sound income plan for retirement:

#1: Guaranteed income that will take care of daily expenses

The first thing your plan should fully cover is your daily expenses. This covers all the non-negotiable requirements that you have as a human being housing, clothes, food, health care and utilities. Not only should this income be able to last for the rest of your lifetime (30 years or more), it should have sources of income that are stable and do not easily get swayed by external factors.

Generally, there are 3 main sources of guaranteed income:

– Social Security: For most, this acts as a base of income post-retirement. When and how you take money from here has a profound impact on your retirement. While it may be tempting to start taking the money the moment you are eligible (generally at 62 years of age), it can prove to be costly later. Starting at 62 instead of waiting till you reach full retirement age (FRA) will lead to reduced monthly benefits.

– Pensions: While pensions were very common in the past, that is no longer the case. In fact, the U.S. Department of Labor says that only 14% workers today have a proper pension plan to speak of. In the event that you fall among them, you must decide on how you would like to draw the money – as a monthly payment or as a lump sum. In case you are not among the 14%, you can follow certain paths that will allow you to make a pension-like stream of income.

– Annuities: Basically, an annuity is a contract made with an insurance company that pays you a set income in return for an up-front investment that you made. This payment can either be made over the rest of your life or over a set period of time, and is unaffected by market upheavals. Fixed income annuities are of several types, such as a deferred income annuity, immediate income annuity, and fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB).

#2: Growth potential that can fulfill long-term requirements

Aside from the daily, non-negotiable expenses, you will also have other expenses that will cater to your hobbies and dreams (for which you will have time) – such as pursuing a new hobby or going on a vacation or buying a boat. When you construct your income plan, you must make sure that it includes investments that have a potential to grow and try to keep up with the rates of inflation and meet these demands. A good practice in this regard is to use your investment portfolio and pay for these discretionary expenses. That way, you could easily cut back in case the market suffered a sudden downfall.

Having a mixed bag of cash, bonds and stocks, that work according to your frame of time, financial position, and market tolerance is a very good place to start. You must execute your strategy carefully though, because while a conservative strategy will lead you to miss out on the growth potential of stocks in the long-term, a plan that is too aggressive may lead to you taking far too many undue risks – which could prove very costly when the market becomes volatile.

#3: Flexibility that can help you refine your plan with the passage of time as much as possible

Quite obviously, the more flexible your plan is, the better it will perform. As a rule of thumb, your plan must be able to adapt to any curveballs it may get. Plenty of things in can happen after you retire – both good and bad – while you may get an inheritance, you may also experience a sudden medical emergency or have your parents move in. If and when such things happen, you must have a plan in place that can cushion you against the financial hardships that you will have to suffer otherwise.

One good practice that helps in this regard is to have income from different sources. Not only will this create a more diversified stream of income during retirement, it will also help you protect yourself against some very important risks like longevity, emergencies, inflation, and fluctuations.

Take for instance, a plan that includes a combination of taking withdrawals and income annuities. While the former is not guaranteed to stay for life, it does offer the chance to control how much money you can withdraw each month. The downside to this is that the money might just run out if you draw too much, live a long life or if the market hits a sudden low. Income annuities, on the other hands are not flexible and have very little potential to grow, but act as a guaranteed source income that will stay for life

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To Conclude…

It’s a given fact that everyone’s situation – both financial and social is unique, and there is no “one foolproof income strategy” that will suit the requirements of all investors. You must therefore, identify your own situation and requirements, determine the need of growth potential, and then plan a strategy that will best suit your life as a retiree.

To make things easier, you can try following these six easy steps to create a basic yet strong income plan that will serve you well once your retire – and will last as long as you live:

Step #1: Study your lifestyle and situation and make financial as well as personal goals

Step #2: Plan a basic retirement income strategy in order to determine how long your current savings will last, and how you can successfully extend this period while maintaining your lifestyle

Step #3: Determine the following factors

– When you should take the help of Social Security
– The portion of your investment portfolio that you want allocated to a contingency fund, protection, and growth potential
– How your investment portfolio will be managed and who will do the managing

Step #4: Execute your strategy with the right combination of savings and income-producing investments, which will serve to balance your investment priorities and financial requirements

Step #5: Review your savings and investments regularly with an investment professional and always make an effort to refine your portfolio so that to suit your personal and financial requirements.

Step #6: Don’t forget to enjoy your retirement and live your dreams!

Top 5 Retirement Plan Options

Top 5 Retirement Plan Options

In today’s day and age, there is no dearth of good retirement plans. That said, there are some caveats if you really want to benefit from them, the chief among them being the fact that there is no one way to achieve your goals and gain maximum profits.

According to Jennifer Landon, founder and president of Journey Financial Services, there is no such thing as a “silver bullet” when it comes to finding an ideal retirement plan. This is due to the basic reason that any retirement plan which qualifies as “good” is comprised of a combination of income sources that have specifically been structured for the set goals.

While there are more retirement plan options than one can count, here are five options that work best with almost all sorts of requirements:

PENSIONS

Quite unsurprisingly, pensions work as the best retirement plans on account of the fact that they ask very little from you. When it comes to pensions, the money is contributed by the employer and funds are managed professionally. All that is left for you to do, therefore, is to keep working till you qualify for it.

That said, it is not a suitable option for everyone. According to Marc Labadie, vice president of CR Myers & Associates of Southfield, Mich, pension plans today are very different than what they used to be. While they are standard for people working for the government and municipal corporations, they are getting decreasingly popular in the corporate sector. Even the pension plans that still stand have become less generous. In fact, many don’t even offer a cost-of-living adjustment, which means that the first payment and the payment of say, 30-35 years later (when you’ll be 90 or 95) will be the same.

Labadie further added that in order to live comfortably future retirees who do have pension plans should make it a point to save additional funds – or move down to a lesser lifestyle.

DEFINED CONTRIBUTION PLANS

Defined contribution plans like 401k or 403b allow you to give your future the kind of direction you desire by allowing you to choose your plan, change the options, make contributions, and over and above all – choose to participate (or not) in the first place. According to several financial, defined contribution plans serves as the best retirement plans – right next to pensions – since the employers who offer them usually match a specific portion of your contributions. Tim Swanson, executive vice president and U.S. head of Citizens Private Bank & Trust, says that in most cases, this turns out to be a dollar-for-dollar match, making an immediate 100% return on the employees’ money.

Needless to say, the biggest upside to such plans is having your contributions automatically deducted from the paycheck – thereby saving you the hassle of making an extra effort to save and/or invest. The downside, however, is that there is a limit to how much you can contribute. For instance, the limit for people under the age 50 (as of 2015) was $18,000, whereas the same limit was increased by $6,000 for people over 50 (and only in terms of catch-up contributions).

While some employers do offer a Roth 401k option, which tax the funds you contribute upfront, most 401ks are conventional and require you to pay taxes when you make withdrawals.

ROTH IRAs

Funded with taxed money, Roth IRA refers to an individual retirement account which will give you the opportunity to grow and make withdrawals – without paying taxes. According to Swanson, one of the best retirement plans (that he himself usually recommends) is to sign up for a 401k and then do a Roth IRA – in the event that they can afford it. Doing so will allow them to get a plan that is well-balanced and permits them to pre-tax contributions to the employer plan as well as after-tax contributions to the Roth plan – both at the same time.

Roth IRAs also come recommended for the younger savers, regardless of whether their plans are sponsored by their employer. Labadie says that it is very advantageous for the young saver (who literally is several decades away from retirement) to pay taxes today at a known rate today, see it grow tax-deferred, and finally pay out as tax-free – when the tax rate is unknown.

All said and done, Roth IRA too is not a viable option for all. Whether or not you’re eligible and how much you can contribute depends upon your modified adjusted gross income and tax filing status.

GUARANTEED INCOME ANNUITIES

Annuity refers to an insurance product which permits you to invest in the present day, and receive a guaranteed income stream in return from the time of your retirement. You get the option of receiving your payments per month, quarter, or year, or even as a lump sum.

Annuities are of several different kinds. There is the single-premium immediate annuity (SPIA), which allows you to invest and then trigger the income immediately (though it is currently not a popular option due to the low rates of interest). Also available is the deferred-income annuity (DIA) that has a cash-refund option. This is a much more popular option due to that fact that it allows you to control the time when you can trigger the income stream and gives you the options to not annuitize at all – if you don’t need and/or want it.

REAL ESTATE

If you’re close to retirement with no substantial savings in place, you should consider real estate as a viable retirement-planning option. According to Landon, while anyone can choose to opt for real estate as a retirement plan, it serves best for the 50-60 age bracket since they are the ones who need to prioritize their income-producing options.

Landon says that it is best to opt for the investment that will give them the most of their money. Real estate, for more reasons can one can – and does give this opportunity by creating a decent – yet constant income stream.

When it comes to making real estate your retirement plan, it is always recommended to purchase the property with a lump sum in order to avoid the complications and hassles of debt during retirement. You should also set apart some money for taxes and repairs.

The only downside of real estate is the fact that property management is an active process that requires constant working and involves ongoing and real risks. And that may turn out to be bothersome for some people. That said, once you weigh the pros and cons of real estate together you will realize that it might just prove to be a better option than most.

4 GREAT WAYS TO GENERATE INCOME AFTER RETIREMENT

4 GREAT WAYS TO GENERATE INCOME AFTER RETIREMENT

Putting a plan in place that can generate enough money to support you after retirement can be tricky at best. Not following the right plan…or rushing into something may just sound the death knell for all of your hard-earned savings.

Here are five great ways in which you can generate good income during your retirement. They’re no “get-rich-quick” schemes, and will need quite a bit of involvement; however, the rewards will be worth it in the end.

TOTAL RETURN PORTFOLIO

Constructing a portfolio of bond and stock index funds (or working with a financial advisor who does this work) is a fantastic way to create a stable source of income post-retirement. The portfolio, which is created to help you achieve a respectable long-term rate of return, allows you to additionally follow a specific set of withdrawal rate rules which will typically permit you to draw 4-7 percent a year. It will also allow you to increase your withdrawal in relation to inflation.

The logic that underlies “total return” is that you, the investor, are able to target a 10-20-year average annual return which exceeds – or at least equals your rate of withdrawal. While you may be targeting a long-term average, your returns can – and does deviate from said average every year. Therefore, in order to follow the investment approach successfully, you should maintain a diversified allocation that is independent of the yearly portfolio fluctuations.

This approach is best-suited to experienced investors, who are well-versed with the art and science of managing money and making timed, disciplined and logical decisions. It can also be taken by people who can – and are willing to invest by hiring an advisor who is experienced in using the approach.

RETIREMENT INCOME FUNDS

This is a special type of mutual fund, which automatically distributes your hard-earned money across a diverse portfolio of bonds and stocks by owning an assortment of other mutual funds. Specially constructed to provide a single package that can accomplish all needs and fulfill all objectives, these funds are managed with the sole aim of producing a stable monthly income, which is then distributed to you, the investor.

Funds vary in type on the basis of their objective – while some produce high monthly income use principal to fulfill their payout targets, others produce a low monthly income amount but have a more balanced approach as regards preserving principal.

The greatest advantage of a retirement income fund is for you to have the ability to control your principal amount and be able to access your money anytime you want. However, you must know that this comes with a catch – withdrawing amount from your principal will lead to a proportionate decrease in your future monthly income.

RENTAL REAL ESTATE

Quite unsurprisingly, rental property can – and does act as a stable source of income. Make no mistake, though – it is neither a get-rich-quick scheme nor a passive involvement where you can sit and earn while doing nothing. Owning and managing real estate is a proper business in itself, and will never generate proper income if it is not treated as such.

Rental real estate will include several different kinds of requirements – both intended and unintended – in terms of money, time and most importantly, involvement on your part. Therefore, you must factor-in any and all expenses and other things that may be required to maintain the rental property. You should also consider a definite time-frame for which you will own and maintain the property, and consider the vacancy rates (given that no property can remain occupied 100% of the time).

Unsure where to start? Try reading books on investing in real estate, talk to retirees who work as experienced investors, or join a club that specializes in real estate investing.

BONDS

Simply put, a bond is made when you loan your hard-earned money to a municipality, corporation or government. The bond, which is set to mature at a specific date, will earn the lender a specific amount of money (paid by the borrower) for a specific period of time until the bond matures, which is when the principal is returned to the lender. For many retirees, this interest income (called “yield”) which received from a bond (or a bond fund) can act as a stable source of income.

Bonds are of several types, each of which indicates the time-period before maturity and the level of financial strength of the bond’s issuer. Besides short-term, mid-term, and long-term bonds, there are floating rate bonds (which have adjustable interest rates), and high-yield bonds (which have low ratings but pay high coupon rates). Bonds are also available individually and in packages.

A bond’s principal value fluctuates with change in the rate of interest. For instance, a rising interest rate environment leads to decrease of existing bond values. While this principal fluctuation won’t matter if you plan on holding the bond to maturity, it will if you own a bond mutual fund and wish to sell it and use the funds for living expenses.

You should definitely buy bonds if you’re looking for small but stable income – and a guaranteed principal after a certain amount of time (i.e. once they mature). But if you’re trying to get high returns, or making gain on capital appreciation, you should consider other options.

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