Income Planning

Do you need money from your assets during retirement to maintain your current lifestyle?  If you answered yes, then income planning is something you must begin today.  The following example illustrates the importance of creating a solid income plan for retirement.

Imagine a scenario where two brothers, three years apart in age, both retire when they are 62 years old.  At their respective retirement, both brothers had exactly $1 million in assets and had the exact same investments.  They withdrew the exact same amount each year of 5% or $50,000, adjusted for cost of living each year, and lived 30 years in retirement before passing away.  This story ends happily for the older brother who retired in 1962 and died 30 years later with a large estate, but unfortunately it does not end as well for the younger brother who retired in 1965 and ran completely out of money 22 years later at age 84.

How can this have happened?  Everything was identical other than the year of retirement.  In this case, that made all the difference since the older brother experienced positive returns the first couple of years in retirement while the younger brother had losses in his portfolio.  It could just as easily been the other way around because both brothers left their retirement in the hands of the stock market’s whims.

When discussing income planning, the main focus needs to be on yourself and ensuring that you will get the income you need until you pass away.  Ideally, you would protect the assets that will provide income and grow what is left in case you live past your life expectancy.

Calandra Wealth Management can show you how to protect your principal from losses while guaranteeing income that you cannot outlive.  Call the office at (678)302-6621 to develop an income plan that will put you in control.

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10 Tips for 401k

Roth Conversion Rules:

- Currently taxpayers can convert traditional IRA’s and qualified retirement accounts, suck as 401k accounts, to a Roth IRA as long as their adjusted gross income is under $100,000. In 2010, and for all subsequent tax years, the $100,000 limit is eliminated and all taxpayers will be permitted to convert their retirement assets to a Roth IRA.

- The amount converted to a Roth IRA will be included as ordinary income for the year in which the account was converted. However, for 2010 only, the taxpayers can elect to defer half of their tax liability to 2011 and the other half to 2012.

- The Roth IRA will grow and be distributed tax free as long as distributions are not taken within five years of the first contribution or conversion, and not before age 59 ½.

The current market provides a low-cost conversion opportunity. Considering many individuals have experienced a loss in  their retirement accounts over the last 18 months, now may be a perfect time to recognize the income tax liability. An IRA worth $100,000 in 2007 may now be worth $60,000. By converting the $60,000 retirement account to a Roth IRA, the taxpayer is locking in the tax liability at the lower amount.

Hedge against increasing income tax rates. For those who believe income tax rates will eventually increase, now may be the perfect time to convert retirement assets to a Roth IRA. Considering the current budget deficits and the costs of the bailouts and stimulus, many believe that income tax rates increases are inevitable. If you share that belief, then you may wish to realize taxable income now and take advantage of today’s historically low income tax rates.

Tax diversification. There are advantages to having a tax-free Roth account to draw from in retirement. By being able to supplement retirement income with tax-free income, retirees increase their like likelihood of keeping themselves in lower income tax bracket. By Building a tax-free Roth account, retirees will have more flexibility and control  in managing their taxes

Social Security planning. A tax-diversified retirement portfolio also helps with Social Security planning. Up to 85% of Social Security benefits are taxable. However, if a married couple’s Modified Adjusted Gross Income (MAGI) is under $32,000, Social Security benefits will be tax-free. When calculating Social Security purposes, the tax payer needs to include taxable and tax-exempt income, and 50% of their Social Security benefits. Interestingly, although tax-exempt income is included in this calculation, Roth IRA distributions are not.

A Roth Conversion offers a unique tax opportunity

If the account goes up                                                            If the account goes down

January 2010                               October 2011 January 2010                                October 2011

$100,000 account value                 $150,000 account value $100,000 account value                $60,000 account value

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The 3 Phases of Your Financial Life

1. ACCUMULATION (years 20-60 approx.)

Phase 1 is titled “ACCUMULATION”. This is the phase of your life where you should concentrate on the accumulation of assets. These assets you are accumulating should be the main focus of what will ultimately fund your retirement years. Since you are younger during this phase and have more time to wait, you can afford to be more risky in your choice of investing.

Experts of Phase 1:

· Brokers: Most brokers deal in primarily managed money, or investments that require constant monitoring. Although you are at the risk of the stock market, you can achieve the highest return from the types of accounts that most brokers specialize in. Brokers (such as money managers from firms like Meryl Lynch, Edward Jones, etc.) make their money by the continued management of the funds they sell to their clients. Without money to manage, they do not make a fee/commission.

Common Investment Vehicles of Phase 1:

· Mutual Funds, ETFs, common and preferred stocks, model portfolios

· Asset Allocation (diversified portfolios of risk-based investments)

2. PRESERVATION (years 60-through death)

Phase 2 is titled “PRESERVATION”. During this phase, you should concentrate on preserving the assets you have worked all your life to accumulate. Time is growing shorter and shorter and you now have less time to get back what you may have already lost. Since timing is so important, you must understand exactly how much risk you can afford to take on. Based on your income needs as well as the goals you have set for your hard-earned retirement dollars, you must invest accordingly. Keeping your money safe during this phase is a key component to achieve a stable income plan, one that you cannot outlive and can always rely on.

Experts of Phase 2:

· Retirement and Estate Planners: Financial professionals that focus their energy solely on retirees or those soon to be retired deal with investments that focus on the preservation of assets. Planning for retirement is a tricky business that many investors do not have a sound plan for. Rather than accumulation of assets, the preservation of what you accumulated plays a significant role in providing you with an income plan. Almost 60% of retirees run out of money before they run out of life because they have not altered their investment strategies upon entering this phase of life

Common Investment Vehicles of Phase 2:

· CD’s, Insured Deposits, Government Bonds, Fixed Annuities, Fixed Indexed Annuities, Fixed Income Models

· True Diversification (safe investments with risk tolerance according to individual situations)

3. DISTRIBUTION (beyond death)

Phase 3 is titled “DISTRIBUTION”. This phase determines what happens to the money you have preserved throughout phase 2. Depending on your current financial situation, you may or may not have money left over when your retirement plan has run it’s course. For those who properly plan to have assets left over for their heirs, it is important that you achieve a distribution (or “estate”) plan for when you walk out on life.

Experts of Phase 3:

· Estate Planning Attorneys and Retirement Planners: The most important objective once you have passed away is the distribution of your retirement assets to your heirs in the most efficient and tax advantageous way possible.

Common Investment Vehicles of Phase 3:

· Wills, Trusts, Power of Attorney, etc.

· Avoiding probate and estate tax

For more information on the “3 Phases”, or if you would like to schedule a free, ½ hour consultation to discuss this report as it pertains to your personal situation, call our office today at 419-626-8600.

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Atlanta, GA Money Advice – Phil Calandra

http://www.kewego.it/video/iLyROoafvth1.html

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