If you’re thinking of retiring, you have important decisions to make, and the best time to start thinking about them is immediately.

Your Social Security benefit is a good starting point. You should have a good idea of the benefit that you will receive from the annual updates that the Social Security Administration sends out.

Beyond that, how you’ll deploy your assets—your retirement plan balances, your business or real estate interests—to provide for your retirement income calls for some savvy planning. We’ll address here some of the financial decisions that you may find yourself facing

Programming your pension payouts
Traditional company pensions provide a lifetime annuity—fixed annual payments as long as you live. The payments are subject to income tax. If you’re married, your standard pension will be reduced in order to provide a continuing income for your spouse if she or he outlives you. But you may elect to receive higher payments for your life alone. This option may appeal to two-income couples where both husband and wife have earned good pension benefits.
If your spouse is in failing health, you may want to choose higher benefits based on your life expectancy only and obtain added life insurance to serve as an income source for your spouse if needed.

Lump sum payouts
Benefits from 401(k) and other similar company retirement plans commonly are paid in a lump sum. Some pension plans also offer a lump sum option. Lump sum distributions are subject to income tax in the year received. Indeed, withholding tax of 20% must be subtracted before you receive such a distribution.

How to defer tax. Unless you plan to use the lump sum payout for some specific purpose in the next several years, you’ll probably want to postpone tax by having your distribution paid directly to an IRA (a “rollover IRA”). By making a direct rollover, you avoid having 20% tax withheld from your distribution. You also may roll over a lump sum distribution within 60 days after you receive it. But with this option, you must replace the amount withheld from your distribution. Otherwise, you must list the withheld amount as an item of income on your federal income tax return for the year in which the distribution is made.

Rollover IRAs are subject to the usual IRA rules: Taxable withdrawals can be made without penalty anytime after reaching age 591/2. A regular program of withdrawals must begin once you reach age 701/2.
Whether or not a lump sum is rolled over into an IRA, devising an investment strategy requires careful, personalized analysis. See our investment management specialists for guidance.

Tax-wise ways to “cash out”
When owners of successful businesses or profitable real estate investments retire, converting their holdings to cash may result in the realization of large (and taxable) capital gains. Two possible ways to avoid the tax bite:

Sale of closely held stock to an ESOP. If certain requirements are met, an owner may sell stock to the company’s employee stock ownership plan (ESOP) and reinvest the proceeds, tax free, in a diversified portfolio of marketable securities.

Sale through a charitable remainder trust. Owners of real property or other assets that have appreciated in value often wish to make charitable bequests in their wills. But there’s another way to benefit charity. They may transfer the appreciated assets to a charitable remainder trust, reserving a life annuity. The trustee of the trust then may sell the appreciated assets and reinvest the entire proceeds, undiminished by tax on the realized gain, in income-producing securities.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Not many years ago, the typical retirement age, 65, was viewed as the onset of old age. Today, gerontologists define matters differently: If you’re between the ages of 65 and 74, you are one of the “young-old.” To be considered “old”, you need to be in the 75-to-84 age bracket. After that, you’re known, demographically, as the “oldest-old.”
Simply put, your chances are good that you are going to live many years in retirement. But will they be healthy years?

Who assumes responsibility?
If illness or injury strikes, you want to know that there is someone on hand to manage the day-to-day finances and your investments.
Your spouse might want to assume the responsibilities. However, that may be an unreasonable burden if he or she is also responsible for being your caregiver. And, of course, there is the question of his or her health. A long-term plan needs to take into account the fact that a spouse might not be alive or healthy when he or she is needed.
Single people face similar questions. They may not want to burden children or grandchildren with their finances and their care. Is there even family close by able to take on the responsibilities?

When you don’t take action
If you have not done any planning beforehand, and you become disabled, legal proceedings may be necessary in order to have someone step in and take over for you. A guardian will have to be named to manage your assets. It’s not hard to come up with a list of serious disadvantages to this scenario.
First, the process can be protracted and expensive. Second, because the legal proceedings are a matter of public record, you and your family may be exposed to unwanted publicity. Finally, and most important, because you may not be able to make your wishes known, the person whom you would want to handle your financial affairs may not be the person chosen by the court.
As a result, your financial assets may be put at risk. Decisions may be made by individuals not in the best position to make them. Indecision or lack of attention may have the same negative impact on your income, your asset base or both.

One plan: a durable power
A durable power of attorney is a legal document in which you give someone the authority to act on your behalf in the circumstances that you designate. Although a regular power of attorney lapses in the event that you become mentally incompetent, a durable power remains in effect.
The authority that you grant to your “attorney-in-fact” can be as sweeping or as narrow as you wish. The power to pay bills, collect debts, prepare tax returns, borrow funds, purchase insurance and fund a trust are among the most common powers granted. Parents who want to take advantage of the federal annual gift tax exclusion and make gift-tax-free transfers to children and/or grandchildren of up to $14,000 in 2014 should spell out that authority in the durable power-of-attorney document.
A durable power of attorney can be an effective tool. Unfortunately, some institutions require that the power be executed on their particular form—simple if you’re in good health, perhaps impossible if you’re incapacitated. Then, too, over several years a question of the validity of the durable power may arise.

A comprehensive plan: a living trust
For long-term financial and estate management, give consideration to a revocable living trust. This arrangement offers you comprehensive protection that can last as long as it is needed.
You can create a living trust now. The agreement is revocable—you can make changes at any time, even cancel it if the need arises. Initially, the agreement calls for you to retain full control over all investment decisions regarding the assets in the trust.
The trustee’s responsibilities may, if you wish, be limited to everyday investment chores and recordkeeping duties. If you become incapacitated, or upon your request, the trustee will assume full management of your assets, acting as you have directed in the trust agreement. In addition to handling your investments, the trustee’s responsibilities may be extremely wide-ranging. You may authorize your trustee to use trust income to employ household help, hire nurses and even pay your monthly bills.

Q&A on Advance Directives
While you are doing your planning, you also may want to consider creating an advance directive regarding your future medical care.
What are Advance Directives?
• “Advance directive” is a general term that refers to your oral and written instructions about your future medical care, in the event that you become unable to speak for yourself. Each state regulates the use of advance directives differently. There are two types of advance directives: a living will and a medical power of attorney.
What is a Living Will?
• In a living will you put in writing your wishes about medical treatment should you be unable to communicate at the end of life. Your state law may define when the living will goes into effect and may limit the treatments to which the living will applies. Your right to accept or refuse treatment is protected by both constitutional and common law.
What is a Medical Power of Attorney?
• A medical power of attorney enables you to appoint someone you trust to make decisions about your medical care if you cannot make those decisions yourself. This type of advance directive may also be called a “health care proxy” or “appointment of a health care agent.” The person you appoint may be called your health care agent, surrogate, attorney-in-fact, or proxy. In many states the person whom you appoint is authorized to speak for you at any time you are unable to make your own medical decisions, not only at the end of life.
Do I need an Advance Directive?
• It’s a matter of personal choice. There are many benefits to creating advance directives. They give you a voice in decisions about your medical care when you are unconscious or too ill to communicate. As long as you are able to express your own decisions, your advance directive will not be used, and you can accept or refuse any medical treatment. But if you become seriously ill, you may lose the ability to participate in decisions about your own treatment.
What laws govern the use of Advance Directives?
• Both federal and state laws govern the use of advance directives. The federal law, the Patient Self-Determination Act, requires health care facilities that receive Medicaid and Medicare funds to inform patients of their rights to execute advance directives. All 50 states and the District of Columbia have laws recognizing the use of advance directives.
If you are interested in finding out more about advance directives and the laws governing them in your state, the not-for-profit organization Partnership for Caring has a Web site at http://www.partnershipforcaring.org, or you can call them at 1-800-989-WILL.

Taking action
It’s important to make your plans while you’re able to do so. Talk over the issues presented here with those closest to you, as well as with your financial and legal advisors and an institution such as ours, experienced in establishing living trusts for our clients.

© 2013 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2013, are not reflected in this article.

Tax-exempt municipal securities pay interest to U.S. taxpayers that is exempt from federal income tax. Because of that fact, traditionally, munis have not had to pay interest rates as high as those of U.S. Treasury bonds. So investors in high brackets could do better with munis because their after-tax return turned out to be higher than with taxable bonds. But recently, many investors have been reluctant to lend money to cities and states that could be facing financial crises. The concern has kept many investors out of the muni market, driving yields up and prices down.

A fly in the ointment?

Although tax-free income is a lure, there is some question whether the attraction is the same for people of retirement age. Concern centers around the effect that municipal bond coupon payments have on Social Security. Although not taxed itself, income from municipal bonds is included in the “provisional income” used to determine how much of each retiree’s Social Security benefit is subject to income tax.
Here’s how it works. Your provisional income is one-half of your Social Security benefit plus all your other income for the year, including tax-free income. If this total is more than $32,000 and less than $44,000 on a joint return, or between $25,000 and $34,000 on a single return, you pay tax on up to 50% of your benefit. Above those limits the taxable amount increases to a maximum of 85%.
The calculation may be complex, but if your provisional income exceeds those upper limits, it makes no difference whether it comes from taxable or nontaxable sources, Uncle Sam will tax 85% of your benefit. Nonetheless, if your income does not reach those limits, municipal bonds actually can reduce the tax exposure of your Social Security benefit.
How would that work? Because the interest yield from munis is lower than that of taxable government or corporate bonds of comparable maturity and credit quality, you have less bond interest to include in provisional income.
For those with too much income to qualify for lesser taxation of their Social Security benefit, the switch to tax-free income won’t provide the same double kick. However tax-free bonds still may be valuable, especially for those in the top marginal tax brackets.
Time for a tax break?
At a time when many states and cities are facing their own financial crises, it’s not unrealistic for someone considering an investment in a municipal bond or bond fund to be concerned about the potential default on interest or principal payments. To help keep that risk to a minimum, consider seeking out investment-grade issues, or those for which you can purchase insurance.
Also, you probably will want to stick with plain vanilla “general obligation” bonds that are considered less risky than revenue bonds and, in addition, won’t face possible exposure to the alternative minimum tax.
Of course, we would be happy to consult with you on the role that tax-free municipal bonds appropriately might play in your retirement portfolio.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Whatever your hopes and dreams for retirement, the reality is that the income that replaces your wages will prove to be the key to attaining the quality of life in retirement that you envision. Social Security is a start. A pension from the company retirement plan may augment that income. But managing the income from your investments will require a more active role. Below are three key decisions, among many, that you’ll need to make.

Deciding when to make your moves
Will you be making changes in the kinds of investments that you have when you retire? Many people want to increase their share of income-producing investments or seek more security and less risk.
It is impossible to predict the best time to move from one particular investment class into another (from stocks into bonds, for example). One recommended strategy is to shift investments gradually, perhaps over two or three years.

This kind of “transitioning” reduces the impact of the market environment at any one point in time.
Keep in mind, however, that you shouldn’t follow the process too strictly. Taxes and transaction costs will need to be factored into the equation.

Deciding from where to withdraw your money
Some of your retirement income will be paid regularly and automatically (Social Security benefits, for instance). But if you need additional income to meet your expenses, which of your investments should you tap?

From a tax perspective, withdrawing money from an IRA doesn’t make sense if it isn’t necessary. Your investments are earning tax-deferred income, and that’s too valuable a benefit to give up, if you don’t have to. Once you reach age 70 1/2, you will, by law, have to begin regularly scheduled withdrawals.

Instead, many professionals suggest setting up a “spending account.” A spending account is made up of liquid assets—for example, a money market fund. The account will provide a source of additional income to meet your regular expenses when other sources are insufficient. The rule of thumb is to keep enough in the account to meet one year’s expenses. Of course, the amount in the fund will fluctuate as you make withdrawals and additions to the account.

Deciding your “withdrawal” rate
How much can you “safely” withdraw from your retirement money each year and make sure that enough remains available to last for the rest of your life?

There is no shortage of opinions and studies on the subject. During the bull market years of the 1990s, some retirement planners suggested that you could withdraw 5% to 6% a year without eating into your principal. But others have put the rate in a more conservative 3% to 4% range. In today’s financial climate, you may want to be even more conservative, if you can afford to do so.

But more than figures will enter into your decision. How comfortable you are about having enough to last through retirement, the expenses associated with your retirement activities, and your feelings about how much you want to leave to your heirs also may influence your decision.

Endnote
This brief discussion only touches on the important subject of retirement planning. We’ll be glad to discuss your needs and assist you in crafting a strategy that will help ensure that you enjoy the kind of retirement that you deserve.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.