The Importance of Planning for Widowhood

 

Jane Young, CFP, EA

Jane Young, CFP, EA

According to the Administration on Aging, in 2010 there were four times as many widows as widowers. Over half of all women over 75 live alone, and one third of all women who become widows are under the age of 65.   About one third of all women who reach 65 are likely to live to 90.  Twenty seven percent of unmarried women, between ages 65 and 69, are poor compared to only 7% for all married women.  Women frequently have erratic work experience, due to family obligations, resulting in lower pensions than men.   Only about one third of all women will receive a pension in comparison to about two thirds of all men.  

These are just a few statistics indicating why it is crucial for women to plan ahead for the uncomfortable, but very real possibility of becoming a widow.  Many couples spend years planning for retirement together, but avoid planning for the possibility of living alone.  Couples need to develop a plan that addresses issues that must be dealt with upon the death of a spouse, as well as a plan for long term financial security for the surviving spouse. 

Start by working with an Estate Planning Attorney, whom you both feel comfortable with, to draft your wills and powers of attorney.  Part of this process should include reviewing the beneficiary designations on all of your retirement accounts and insurance policies to be sure they are consistent with your estate planning goals.  This is also a good time to discuss end of life preferences with one another.

The next step is to organize your finances and ensure that you both know what you have, where you have it, and how it can be accessed.  Take an active role in managing your finances.  If you are uncomfortable or don’t understand your finances, do some reading, take some classes or ask your planner to help you better understand your financial situation.   If you decide to work with a financial planner, take the time to select someone with whom you have complete trust and confidence – someone you can rely on as a trusted resource, should you become a widow.

Ensure that you have adequate emergency reserves to cover funeral expenses and living expenses for several months while the estate is settled.   The loss of a spouse is extremely difficult and you don’t need money worries on top of the tremendous emotional hardship you will be experiencing.

Incorporate the possibility of losing a spouse in your long term financial planning.  Run retirement scenarios and develop a plan that meets your goals together and on your own.  Review and understand survivor benefits associated with Social Security and Employer Pension Plans.  If your projected cash flow falls below your expenses, consider purchasing term life insurance or developing contingency plans to reduce your expenses. 

The Widow’s Guide to Social Security Benefits

The Widow’s Guide to Social Security Benefits (via Credit.com)

As a Certified Financial Planner™, I work with a lot of widows trying to navigate the tricky world of Social Security benefits after their spouse passes away. Social Security provides you, as a widow, with a choice between your own Social Security benefit based on your work history, and a survivor…

Stock Can Be a Good Option in Retirement

 

 

 

 

 

 

Jane M. Young

As we approach retirement, there is a common misconception that we need to abruptly transition our portfolios completely out of the stock market to be fully invested in fixed income investments.   One reason to avoid a sudden shift to fixed income is that retirement is fluid; it is not a permanent decision. Most people will and should gradually transition into retirement.  Traditional retirement is becoming less common because life expectancies are increasing and fewer people are receiving pensions. Most people will go in and out of retirement several times.  After many years we may leave a traditional career field for some well-deserved rest and relaxation.  However, after a few years of leisure we may miss the sense of purpose, accomplishment, and identity gained from working.  As a result, we may return to work in a new career field, do some consulting in an area where we had past experience or work part-time in a coffee shop.

Another problem with a drastic shift to fixed income is that we don’t need our entire retirement nest egg on the day we reach retirement.   The typical retirement age is around 65, based on current Social Security data, the average retiree will live for another twenty years. A small portion of our portfolio may be needed upon reaching retirement but a large percentage won’t be needed for many years.   It is important to keep long term money in a diversified portfolio, including stock mutual funds, to provide growth and inflation protection.   A reasonable rate of growth in our portfolio is usually needed to meet our goals. Inflation can take a huge bite out of the purchasing power of our portfolios over twenty years or more.   Historically, fixed income investments have just barely kept up with inflation while stock market investments have provided a nice hedge against inflation.

We need to think in terms of segregating our portfolios into imaginary buckets based on the timeframes in which money will be needed.  Money that is needed in the next few years should be safe and readily available.  Money that isn’t needed for many years can stay in a diversified portfolio based on personal risk tolerance.  Portfolios should be rebalanced on an annual basis to be sure there is easy access to money needed in the short term.

A final myth with regard to investing in retirement is that money needed to cover your retirement expenses must come from interest earning investments.  Sure, money needed in the short term needs to be kept in safe, fixed income investments to avoid selling stock when the market is down.  However, this doesn’t mean that we have to cover all of our retirement income needs with interest earning investments.  There may be several good reasons to cover retirement expenses by selling stock.   When the stock market is up it may be wise to harvest some gains or do some rebalancing.  At other times there may be tax benefits to selling stock.

 

Mutual Funds May be Your Best Option

 

 

 

 

 

 

Jane M. Young

Generally the typical investor is better off investing in stock mutual funds than in individual stocks. A mutual fund is an investment vehicle where money from a large number of investors is pooled together and invested by a professional manager or management team.  Mutual fund managers invest this pool of money in accordance with a predefined set of goals and guidelines.

One of the primary benefits of investing in stock mutual funds is the ability to diversify across a large number of different stocks.  With mutual funds, you don’t need a fortune to invest in a broad spectrum of stocks issued by large and small companies from a variety of different industries and geographies.  Diversification with mutual funds reduces risk by providing a buffer against extreme swings in the prices of individual stocks.   You are less likely to lose a lot of money if an individual stock plummets. Unfortunately, you are also less likely to experience a huge gain if an individual stock skyrockets.

Another benefit of stock mutual funds over individual stocks is that less time and knowledge is required to create and monitor a portfolio.  Most individual investors do not have the time, expertise, or resources to select and monitor individual stocks.  Mutual funds hire hundreds of analysts to research and monitor companies, industries and market trends.   It is very difficult for an individual to achieve this level of knowledge and understanding across a broad spectrum of companies.  Mutual fund managers have the resources to easily move in and out of companies and industries as investment factors change.

Most individual investors appreciate the convenience of selecting and monitoring a diversified portfolio of mutual funds over the arduous task of selecting a large number of individual stocks.   Stock mutual funds are a good option for your serious money.  However, if you really want to play the market and invest in individual stocks, use money that you can afford to lose.

For diehard stock investors, there are some advantages to investing in individual stocks.  Many stock mutual funds charge an annual management fee of between .50% and 1% (.25% for index funds).  With individual stocks, there is a cost to buy and sell the stock but there is no annual management fee associated with holding stock.

Another advantage of individual stocks is greater control over when capital gains are recognized within a non- retirement account.  When you own an individual stock, capital gains are not recognized until the stock is sold.   In a high income year, you can delay selling your stock, and recognizing the gain, to a year when it would be more tax efficient.   On the other hand, when you invest in a stock mutual fund you have no control over capital gains on stock sold within the fund.  Capital gains must be paid on sales within the mutual fund, before you actually sell the fund.  Mutual funds are not taxable entities, therefore all gains flow through to the end investor.

Pitfalls in Taking Early Social Security

Jane M. Young CFP, EA

 

You can begin taking Social Security at age 62 but there are some disadvantages to starting before your normal retirement age.   The decision on when to start taking Social Security is dependent on your unique set of circumstances.  Generally, if you plan to keep working, if you can cover your current expenses and if you are reasonably healthy you will be better off taking Social Security on or after your normal retirement age.  Your normal retirement age can be found on your annual statement or by going to www.socialsecurity.gov and searching for normal retirement age.

Taking Social Security early will result in a reduced benefit.  Your benefits will be reduced based on the number of months you receive Social Security before your normal retirement age.    For example if your normal retirement age is 66, the approximate reduction in benefits at age 62 is 25%, at 63 is 20%, at 64 is 13.3% and at 65 is 6.7%.  If you were born after 1960 and you start taking benefits at age 62 your maximum reduction in benefits will be around 30%.

On the other hand, if you decide to take Social Security after your normal retirement age, you may receive a larger benefit.  Do not wait to take your Social Security beyond age 70 because there is no additional increase in the benefit after 70.  Taking Social Security after your normal retirement age is generally most beneficial for those who expect to live beyond their average life expectancy.  If you plan to keep working, taking Social Security early may be especially tricky.  If you take benefits before your normal retirement age and earn over a certain level, the Social Security Administration withholds part of your benefit.   In 2012 Social Security will withhold $1 in benefits for every $2 of earnings above $14,640 and $1 in benefits for every $3 of earnings above $38,880.  However, all is not lost, after you reach full retirement age your benefit is recalculated to give you credit for the benefits that were withheld as a result of earning above the exempt amount. 

Another potential downfall to taking Social Security early, especially if you are working or have other forms of income, is paying federal income tax on your benefit.  If you wait to take Social Security at your normal retirement age, your income may be lower and a smaller portion of your benefit may be taxable.  If you file a joint return and you have combined income (adjusted gross income, plus ½ of Social Security and tax exempt interest) of between $32,000 and $44,000 you may have to pay income tax on up to 50% of your benefit.  If your combined income is over $44,000 you may have to pay taxes on up to 85% of your benefit. 

The decision on when to take Social Security can be very complicated and these are just a few of the many factors that should be taken into consideration.

 

 

 

Financial Guidance for Widows in Transition

 
A workshop from the heart for women who are widowed

or anticipate becoming a widow in the future . . .

or those with a widowed friend or family member

 Friday, August 3, 2012 from 9:30am – 11:30am 

at Bethany Lutheran Church

4500 E. Hampton Avenue

Cherry Hills Village, 80113

OR 

  Friday, August 3, 2012 from 2:00 – 4:00 PM
 
at First Lutheran Church

1515 N. Cascade Avenue

Colorado Springs, 80907

 There is no charge to attendees, but advance registration is required.
Call 1-800-579-9496 or email Bob.kuehner@lfsrm.org

 Join us for a special presentation by Kathleen M. Rehl, Ph.D., CFP®, award winning author and speaker. She presents practical information in an engaging and entertaining manner, along with issues of the heart. The workshop is open to all . . . although it’s especially designed for women. So, bring your gal friends for an enjoyable morning out together.

   Kathleen’s world changed forever when her husband died. From personal grief experiences, her life purpose evolved-helping widows to feel more secure, enlightened and empowered about their financial matters. She is passionate about assisting her “widowed sisters” take control of their financial future.

 Dr. Rehl is a leading authority on the subject of widows and their financial issues. She is frequently invited to give presentations across the country on this topic.

 She and her book, Moving Forward on Your Own: A Financial Guidebook for Widows, have been featured in The New York Times, Wall Street Journal, Kiplinger’s, AARP Bulletin, U.S. News & World Report, Consumer Reports, Investment News, Bottom Line and many others. The guidebook has received 10 national and international awards.

 To devote more time to writing and speaking, Kathleen closed her practice to new clients some time ago. She was previously named as one of the country’s 100 Great Financial Planners by Mutual Funds Magazine.

 Please be our guest for this educational and enlightening workshop!

 This event is a sponsored gift to the community from
 Jane M. Young, CFP with Pinnacle Financial Concepts, Inc.
   

 (719)260-9800

www.MoneyWiseWidow.com

 
   
 

Financial Words of Wisdom from Widows for Widows

Jane M. Young, CFP, EA


I have met with numerous widows over the last few years to get a better understanding of what they are experiencing and to learn how I can best support and assist them.   Below I have shared some of the most meaningful and consistent messages and comments I heard from these brave women.  I hope this is helpful to both men and women who have recently lost a spouse and family members of someone who has recently lost a spouse.

  • Avoid making major decisions during the first year.  I think I heard this from everyone I spoke with and it is very wise advice.
  • Be obsessively selfish, after the loss of a spouse it is especially important to focus on you and physically take care of yourself.  Later, once you are feeling better you can help others.
  • Grief is very sneaky, one moment you feel fine then it sneaks up on you.  Expect some irrational behavior.
  • Be easy on yourself, it is normal for grief to last three years.  The fog will begin to clear after the first year but things will still be fuzzy for up to three years.  This can be difficult because friends and family expect you to heal more quickly than is realistic.  Everyone grieves differently but three years is very normal.
  • During the first year you feel like you’re operating in a fog, it is easy to forget key dates.  You frequently feel lost and confused and forget how to do things.
  • Grief can consume hours and hours of your day.  It’s hard to focus and get things done.  There is very little energy to learn new things.  It’s normal to feel apathetic.
  • The loss of a spouse is a huge tragedy in your life.  Everyone else seems so focused on themselves. Try not to get upset at others who go on with their own lives as if nothing has happened.  They are busy and they don’t want to open themselves to the pain.
  • It’s very important to take the time to select a trusted team of professionals.  Your team should include an attorney, financial planner and an accountant, if your financial planner does not prepare taxes.
  • Being a new widow can be very scary, it is scary to be alone.  You have a tremendous need for encouragement and acknowledgement that you are making progress.  Try to spend time with positive and supportive friends and family.
  • It’s hard to shift from making plans and setting goals together to making plans and setting goals on your own.  You don’t have to do everything the way you had planned with your spouse.  You need to set your own course and reach for new hopes and dreams.

 

Advantages and Disadvantages of Variable Annuities

 

Jane M. Young, CFP, EA

 

What is a Variable Annuity?


A variable annuity is a contract with an insurance company where you invest money into your choice of a variety of sub-accounts, similar to mutual funds. Non-qualified, variable annuities provide tax deferral on gains until the funds are withdrawn. Upon distribution your gains are taxed at regular income tax rates as opposed to capital gains rates. Variable annuities generally charge fees twice those charged by mutual funds. Additionally, you will be to subject to substantial early withdrawal charges if you purchase an annuity from an advisor who is compensated through commissions. Most variable annuities provide the option to buy a guaranteed death benefit option and/or a Guaranteed Minimum Withdrawal Benefit. These do not come without a cost and can be very complex.  Below are some advantages and disadvantages of Variable Annuities.
Advantages and Disadvantages of Variable Annuities:

Advantages:

  • Tax Deferral of gains, beneficial if you have maximized limits on other retirement vehicles such as 401ks and IRAs.
  • No Required Minimum Distribution at 70 and ½ as with traditional retirement accounts. There is no Required Minimum Distribution on Roth IRAs.
  • Death benefit and Guaranteed Lifetime Withdrawal Benefits (GLWB) riders can be purchased for additional fees. However, the death benefit is rarely instituted due to long term growth in the stock market. GLWBs can be very complex and not without risk.
  • Trades can be made within annuity without tax consequences – this is also true within all retirement accounts.
  • Non-taxable transfers can be made between companies using a 1035 exchange.
  • No annual contribution limit. Traditional retirement plans have annual contribution limits.

Disadvantages:

  • Gains taxed at regular income tax rates as opposed to capital gains rates on taxable mutual funds.
  • Higher expense structure –Mortality and Expense fees substantially higher than mutual funds.
  • Substantial surrender charges for up to 10 years on commission products
  • 10% penalty on withdrawals prior to 59 ½, this is also true with most traditional retirement accounts.
  • Complex insurance product
  • Lack of liquidity due to surrender charges and tax on gains
  • No step-up in basis, taxable mutual funds and stocks have a step-up in basis upon death
  • Loss of tax harvesting opportunities