This article outlines some of the critical personal economic considerations to examine in the course of establishing a financially comfortable retirement. Resources, including valuable websites, and free calculators are provided so that you can begin the planning process today.
How Much to Save
While your financial advisor is equipped to project the amount that you need to save in order to meet retirement goals, you can do many of these calculations on your own, right now. Why wait? Dinkytown’s website (dinkytown.net) has a number of calculators that can provide projections and make recommendations with respect to savings goals based on innumerable assumptions. You can even determine the rate at which you must play economic “catch up” if your current savings fall short of the optimum mark. By the way, many other online calculators will perform the same functions.
Before using any of these tools, it is first necessary to assess the present reality and outline concrete intentions about the future so that the retirement plan will be based on realistic assumptions. One size truly does not fit all. For example, some are willing to sacrifice material lifestyle (short-term and long-term) in order to retire early, while others prefer to enjoy the fruits of their labor today and are willing to work longer to pay for luxury items.
The objective is to be positioned with a lifetime of post-retirement income sufficient to maintain the desired lifestyle. The Dinkytown website outlines the information that must be input in order to determine whether the investor is on track.
Of course, assumptions such as rate of inflation and rate of return on investment are impossible to predict with certainty and change frequently. The analysis should be repeated annually so that adjustments can be made along the way to take into account changes in the economic picture. Yearly reviews also hold an investor accountable with respect to savings goals.
Investors normally shift investments to a more conservative mode after retiring because the ability to “ride out the market” is no longer intact. However, financial advisors generally agree that including investments with some growth potential will reduce vulnerability to inflation. A financial advisor can advise with respect to the appropriate asset allocation and diversification at various life stages. He or she can also assist in determining the amount to withdraw from the investment portfolio after retirement so as to achieve that delicate balance of supporting the desired lifestyle without running out of money.
Social Security Benefits
Although it is unlikely that the Social Security program will be obliterated in our lifetimes, the benefits are meager and support only a minimal standard of living—which is what people are relegated to who do not plan ahead to supplement it with other sources of income.
Social Security retirement income is available in most circumstances to those who have reached the age of 62 and are fully insured, but it usually is beneficial to delay the benefit until a later date.
The age at which Social Security is first drawn impacts the amount of the monthly benefit permanently for both the earner and his or her survivors. Currently, 100 percent of the benefits are available to those who begin drawing at normal or full retirement, which is between age 65 and 67, depending on the year of the individual’s birth. Those opting for “early retirement” at age 62 will receive as much as 30 percent less per month while people who retire after their normal retirement date receive a “delayed retirement credit” that stops accruing upon attaining age 70. An estimate of benefits (based on different retirement dates) can be obtained by setting up a password-protected account at the website My Social Security (ssa.gov/myaccount). Individual earnings records are available as well and should be checked for accuracy.
The Social Security Administration (SSA) offers an additional online Detailed Calculator (ssa.gov/oact/anypia/anypia.html), which provides a more accurate estimate of the financial impact of early or delayed retirement because it has the ability to factor in the actual earnings record.
Those considering whether or not to begin receiving Social Security need to consider the reduction in the benefit amount if earnings are above $15,720 (under full retirement age) or $41,880 (at full retirement age). In addition, Social Security benefits are subject to taxation if the taxpayer has certain other sources of income. The rules are detailed in IRS Publication 915.
IRAs and Plans Designed for Small Business
A number of tax-favored vehicles are available for those who wish to take charge of saving for their own retirement. Individuals can set up plans on their own by establishing an IRA (individual retirement account), Roth IRA, or nondeductible IRA. Qualified plans established by employers can be quite attractive for both the law firm employer and the employee.
The concept is that “before tax” income is contributed to the plans. In other words, the participant (or the employer contributing to an employee retirement plan) is entitled to a tax deduction for amounts contributed. Gains on investments in the account grow tax-free. When funds are distributed from the account, the distribution is included in the taxable income of the participant or employee. Because tax is ultimately paid, the plans are often referred to as tax-deferred plans.
Sole practitioners and partners in small firms wishing to maximize involvement in tax-deferred plans are encouraged to explore the features of SEP (simplified employee pension) and SIMPLE (savings incentive match plan for employees) IRA plans. Because they are less burdensome than 401(k) and profit-sharing plans from an administrative point of view, the maintenance costs are generally quite reasonable. The 2015 contribution limit for a SEP IRA is $53,000 and for a SIMPLE IRA is $18,000, enabling an attorney to save significant funds through these vehicles on a tax-favored basis.
A perceived disadvantage is that employers may be required to make contributions on behalf of employees. Another perspective is that providing an attractive benefit package will not only attract top talent but will serve as a retention feature as well.
Because the specific rules governing tax-deferred plans are quite complex, discussion of the topic in detail is beyond the scope of this article.
Additional information about IRS rules governing tax-deferred plans can be found in IRS Publication 590: Contributions to Individual Retirement Arrangements, and IRS Publication 560: Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans).
The Long-Term Care Dilemma
Approximately 70 percent of people over age 65 require long-term care services during their life. Many are stunned to discover that the cost of a nursing home stay can run upward of $100,000 annually, depending on location. Many don’t realize that Medicare is not intended to cover the cost of custodial care. In most circumstances, the long-term care resident is responsible for satisfying the expense out of private funds until assets are sufficiently depleted to the point of Medicaid qualification.
Planning ahead for the contingency of the exorbitant and escalating cost of long-term care is a critical piece of the financial planning puzzle. Some, motivated by a desire to preserve assets for the spouse or other heirs and to take advantage of the flexibility in the choice of care options, opt to purchase long-term care insurance (LTCI). Indeed, LTCI funds types of care (such as home care and assisted living) not covered by the Medicaid program currently in effect in many states. However, LTCI can be prohibitively expensive for some, and premiums may increase in the future. Guide to Long-Term Care Insurance published by America’s Health Insurance Plans and available online (ahip.org/GuideLTCInsurance) provides valuable information about many of the issues to consider when purchasing LTCI.
Medicaid is a joint federal-state program that covers medical expenses for the “impoverished.” Most people, even lawyers, confuse the Medicaid and Medicare programs. Medicaid is a needs-based program administered by the states, whereas Medicare is an entitlement program administered by the federal government. Some qualify for Medicaid owing to eligibility for Supplemental Security Income (SSI), while others qualify because they are in need of long-term care. The lion’s share of government funds expended in this arena are paid to skilled nursing facilities. Although waiver programs adopted in some states cover certain assisted living costs, most states have unfortunately failed to expand their programs to pay for care in the community setting (i.e., at home).
An applicant must satisfy a two-pronged test (medical and financial) in order to qualify for benefits. Suffice it to say that most applicants meet the medical threshold—presumably because few would choose to live in a nursing home unless they met the government’s “level of care” guidelines.
Medicaid qualification from a financial perspective is predicated on satisfaction of both a resource and an income test, with married and single individuals being subject to different standards. If you or a loved one is faced with the possibility of a long-term care stay, it is essential to consult with an experienced elder law attorney immediately in order to determine the application of the rules in a particular jurisdiction. Planning opportunities may be forfeited with the passage of time.
Retirees often are drawn to a different environment because of better climate, proximity to children, or other attractions. However, changing domicile can have a potential impact on cost of living, income, estate and gift tax liability, and availability of government benefits, as well as myriad other legal rights. A thorough study of germane information would be a wise investment of time if considering a move. The website maintained by Retirement Living Information Center (retirementliving.com) is an excellent resource geared toward seniors. Notably, a section is devoted to a state-by-state comparison of sales, personal income, inheritance, and estate tax rules and rate structures. The Tax Foundation’s website (taxfoundation.org) is also stocked with valuable material.
Those who own property in more than one state may wish to re-establish domicile in what has been treated, up until now, as the second (or even third) home. Each state’s criteria with respect to establishing domicile can vary and should be thoroughly investigated and carefully followed. The abandoned state will not be so quick to relinquish coveted income and estate tax revenues.
Attorneys of all ages will benefit from participating in the retirement plan process, and it is never too late to get started. This is the time to face reality no matter the state of the lawyer’s current financial position. Indeed, young attorneys who start contributing to a retirement plan today will have a significantly more secure and comfortable retirement than those who wait until age 60 to begin this process. However, even those who have accumulated less than desirable amounts based on age attained can still create a secure retirement, although adjustments will need to be made with respect to current spending/saving behavior. Expectations regarding number of years to be worked and lifestyle may also need to be modified.
Some attorneys of retirement age aren’t ready to leave the workforce, either for financial or emotional reasons. Those who have accumulated enough wealth to retire completely may wish to continue working simply because they like to make positive contributions. Others need to work for economic reasons and will rely on income earned after “retirement” to supplement the retirement fund already accumulated. Still others may wish to continue working but to pursue a new career path. Beginning a savings program at a young age will provide a foundation for a career change if that is the lawyer’s vision. Attorneys who design and implement a financial plan taking into account the principles outlined above will generally have greater flexibility in their later years than those who leave their financial security to chance.