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5 More Questions Clients Recently Asked

Dana here.

I wrote about the first of five non-investment-related questions recently asked by clients in the May Financial Sense Newsletter. If you missed it, you can find it here. It addresses these five questions:

  1. What is the best way to distribute the estate of my wife’s mom, who recently passed?
  2. Which account should my retirement paycheck come from, and how much will I get after taxes?
  3. My mom needs long-term care. Here is what the facility told us, and will this also apply to my situation when I’m older?
  4. We plan to spend about $30,000 per year on vacations. We found a vacation club with a $20,000 upfront cost that would save us about $6,000 a year on lodging. Is it a good deal for us?
  5. Should I begin my Social Security now at 68 or wait until 70?

I cover five additional questions we’ve received in the last few months in this newsletter.

6. Should I keep these universal life insurance policies on myself and my spouse?

Rick and Lisa have over $5 million in financial assets and two grown children. Rick is still working at a job he enjoys, although he could retire anytime. They have two universal life insurance policies, with $1 million of insurance for Rick and $500,000 for Lisa. They wanted to know if they still needed these policies and, if not, what to do with them.

Do they need the insurance? What are the tax consequences of cashing them in? Do the policies have enough cash value to be self-sustaining, meaning they could stop paying premiums? What other options are available for the policies?

Rick and Lisa have enough financial security that either of them or their children will be fine when the first spouse passes. From the standpoint of providing for dependents, they don’t need life insurance. Under current 2022 tax rules, a married couple can exempt $22.12 million of assets from estate taxes ($12.06 million per spouse) with the proper filing at the first death. They are well under that limit, although the rule-makers can change that limit with new tax acts.

Keeping the life insurance would make them feel comfortable spending more of their assets while knowing something was going to the kids. Still, overall, the conclusion from a financial standpoint was, no, they don’t need the policies.

Between the two policies, there is over $350,000 of cash value. If they cash them in, over $100,000 of that will be considered gain (cash value above total premiums paid). You report such policy gains as taxable income on your tax return (this type of gain is not eligible for the more favorable long-term capital gains rates.)

Rick’s income is high, and now is not the time to cash in the policies.

These policies also have riders which cover the premium in case a disability happens and a term-rider that adds more to the death benefit. Neither of these features is needed anymore, and both riders add cost to the policy.

We requested an “in-force illustration” from the insurance company to see our options. This illustration provides a projected financial model of how the policies may perform if we drop the riders that aren’t needed and if Rick and Lisa pay no more premiums. From the analysis received back, the policies would continue to stay in force for life even with these changes.

We advised Rick and Lisa to stop paying premiums. Once Rick is retired and their earned income is lower, we’ll evaluate again and see if it makes sense to cash the policies in, convert them to annuities for guaranteed income, or keep them as they are since they are self-sustaining.

7. I’m looking at upsizing my house and moving to Florida. How much house can I afford?

Mark is in the medical field in the Northeast, with one year left until retirement. He and his wife Stella live in a paid-off home valued at $1.8 million. They are considering a move to Florida. Their question: Can they afford a $5 million home? Could they go up to $6 million?

There were several considerations to unpack in this question. A larger home entails higher property taxes, maintenance, and utility costs. However, in Florida, there would be no income taxes. We created a financial model that incorporated these factors. In addition, we had to know the cost basis of their current home to determine how much capital gains tax would be owed upon the sale and thus how much cash from the existing house could help pay for the new home. Ultimately, the answer was yes; they could afford a $6 million home with up to a $3 million mortgage with a 5% interest rate.

The second part of their question was one about cash flow timing. Could they buy the new home without selling their current house first? They had options to use cash by borrowing from a cash-value life insurance policy, using a home equity line of credit, or cashing in or borrowing against a portfolio of stocks and bonds.

After going through the options and watching interest rates and real estate prices rise, Mark and Stella decided against the new home. They concluded they feel quite happy with their current mortgage-free residence and some extra trips to Florida in the winter.

8. I’m feeling the impact of inflation. What kind of retirement paycheck raise can I take – and now that I’m traveling, can I withdraw an extra $25,000 for travel this year?

Linda has been retired for several years and hasn’t been able to do the traveling she had planned. She takes a $7,400 per month after-tax retirement paycheck from her portfolio. We’ve offered an increase to her monthly withdrawal each year, but she has responded that what she was receiving was sufficient. This year, though, things were feeling tighter. And she is ready to start vacationing again. She asked how much extra she could take out for travel this year.

We increased Linda’s monthly after-tax retirement paycheck to $7,900 a month, a 5% raise. And sent her a lump sum of $25,000 we had set aside for travel expenses. We tested these increases first to ensure they posed no risk to her long-term retirement income needs. The metrics we applied were within the ranges we wanted to see, and Linda is out traveling without worrying about the financial impact.

9. I’m 84 and never going to outlive my money. How much can I gift to my grandchildren? Could I give $400,000 away this year?

Carolyn turns 84 this year. Her husband, Wayne, is also 84 and in a long-term care facility. With plenty saved and a comfortable lifestyle, she wants to give away as much as possible. She wanted to know how much she could give away to family and charities while still ensuring she had enough to support her needs should she live another twenty years. 

After running Carolyn’s projections, we came up with a plan where she can front-load her gifting, giving away $416,000 this year, with $16,000 each coming from her and $16,000 from Wayne to be disbursed among children, their spouses, and grandchildren. Why $16,000? That is the current limit you can give away without filing a gift tax return (gift tax returns aren’t necessarily bad, as covered in the next question.) Carolyn will also gift her annual $60,000 required minimum distribution to charity each year.

Carolyn can continue to gift this much for the next five years. After five years, gifting may need to be reduced depending on investment results.

Carolyn is happy to know she can assist family now and have the experience of seeing first-hand the difference it makes in their lives.

10. Can we afford to help our adult daughter buy a home?

Matthew and Barbara know their retirement lifestyle is secure. They are likely to pass along a respectable amount to their grown children one day. However, they would prefer to help their children now. They were concerned there would be taxes if they gifted $200,000 to their daughter for a down payment on a home. This concern comes from a misconception about filing gift tax returns. You can give more than $16,000 per year to someone and pay no tax.

Here’s how it works. You can pass along $12.06 million per spouse in 2022 tax free. It works by getting a tax credit (called a Unified Credit) on the amount of estate tax owed on $12.02 million of estate value. If you gift $200,000, you file a gift tax return that allows you to use some of that credit today. Now, you would have $11.86 million remaining to pass along free from federal estate tax.

If your own retirement goals are secure, helping future generations now can be done in many cases without incurring any taxes.
 
As we hope you can see, financial advisors provide advice on many financial topics that have nothing to do with investments. If you’re considering starting a relationship with a financial advisor, start a conversation with us by filling out our Pre-Meeting Questions. We then schedule a complimentary introductory discussion.


Our next free webinar:

How to Build a Retirement Spending Plan

How much you'll need in retirement depends on how much you'll spend. But so much changes as you enter retirement; health coverage, taxes, and sometimes you have a mortgage now, but know it will be paid off five to ten years after retirement.

We'll be discussing:

  • Why the rules of thumb on retirement spending don't work
  • Things people forget about when making a retirement budget
  • How to account for health care expenses
  • The impact of inflation on your retirement spending
  • How taxes vary depending on the nature of your savings

When: Thursday, June 16, 2022 5pm AZ/ 7pm CST/ 8pm EST

You can register at:
 How to Build a Retirement Spending Plan


If you missed our last webinar:

You can watch it, or any of our other webinars on our YouTube channel. How to Plan for Health Care Costs in Retirement can be found here:

How to Plan for Health Care Costs in Retirement



Podcasts & Video

Be Aware of Financial Biases
In this podcast Dana discusses the biases people bring to the table. Not behavioral biases, but beliefs about product types. People can "react" and instantly think stocks or annuities or reverse mortgages are inherently bad. All products have an appropriate use. It is not the product that is bad - but how it is sold or used could be inappropriate.

Be Aware of Financial Biases

Required Minimum Distribution Video
What are RMDs? How do you calculate the RMD? Can you take the RMD from one account instead of separately from each account? Sensible Money's Dana Anspach and Julio Lopez-Brito explain everything you need to know.

Everything You Need to Know About Required Minimum Distributions



Financial Sense is an almost-monthly publication of Sensible Money. It's about financial planning and smart money decisions, not sensation and hype. You know.... sensible.

How inflation can affect your portfolio

In this video Sensible Money's Beau Kemp discusses how inflation can affect your portfolio.
 

How Inflation Can Affect Your Portfolio

understanding Pension PAYOUT OPTIONS

If you, or someone you know have questions about which pension payout option may be the best, watch this video with Amy Shepard from Sensible Money.

Understanding Pension Payout Options

Get Smart About Social Security
Watch Dana’s new course, How to Plan the Perfect Retirement.
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Is that the right solution for you?
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A smart Social Security decision gives you peace of mind.
Visit Social Security Wise.
Get Smart About Your Retirement
Watch Dana’s new course, How to Plan the Perfect Retirement.
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While the “accumulation” phase is not necessarily complicated, the “decumulation” phase involves more complex interactions between many moving parts. In this course, you’ll learn how to apply a planning process that addresses these complexities so you can be confident you have enough money to last your whole life.

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