10 Questions Clients Ask
Dana here.
Many people think you hire a financial advisor primarily to manage your investments. While we bring discipline and strategy to investing, the bulk of our discussions with clients are not about investing and the markets.
Every week, we receive many non-investment-related questions, and we're able to guide our clients in ways that provide value beyond what can be measured in the portfolio. Below I cover the first five out of ten key questions we've received in the last few months.
1. What is the best way to distribute my mom's estate?
Jill's mom passed in January with an estate of about $1.5 million that included retirement accounts, mutual fund investments, and real estate. Jill was named the executor and responsible for distributing the estate among herself and her two siblings. However, one of the siblings, Sally, had received a $200,000 gift from mom several years ago; the will instructs Jill to deduct this amount from Sally's share of the inheritance. And, $200,000 of the estate will be a rebate of the down payment Jill's mom had paid to the long-term care facility she was in, and the facility has up to two years to distribute this rebate. Jill wanted to know what tax impacts the estate and beneficiaries could anticipate and how to go about distributing the estate.
We set up a spreadsheet showing the total allocation to each party, less the $200k that already went to Sally. The spreadsheet had a timeline illustrating what assets Jill can disburse now to give beneficiaries access to immediate cash versus what will be disbursed later after expected liquidation events occur.
For taxes, we explained how the step-up in cost basis works on non-retirement assets and suggested tax withholding on the distribution of the inherited retirement accounts. We also offered guidance on the best way to handle illiquid real estate assets. In addition, we explained that some assets may be distributed in-kind as shares of the existing investments or liquidated and distributed as cash.
Assisting with an estate distribution is something we've done many times, and it can be complex. It's wonderful to be a resource for our clients when they incur this responsibility.
2. Which account should my retirement paycheck come from, and how much will I get after-tax?
Kathleen is retiring this June. She has a 401(k) with a loan against it with a $600 monthly payment that currently comes out of her paycheck. Once retired, she'll continue to have to pay that loan back from a bank withdrawal, and she'll be going on Medicare and will pay Part B premiums, whereas her current health insurance is 100% paid for by her employer. She has a 401(k), an Employee Stock Ownership Plan, an IRA, a Roth IRA, and an inherited IRA. She wanted to see exactly how to structure her retirement paycheck to begin this July.
We took Kathleen's current take-home pay and added back the $600 additional for the 401(k) loan payment plus health insurance Part B premiums to calculate she'd need a $4,200 per month after-tax retirement paycheck to keep her on an even keel. We determined the best place to take this from in year one would be from her inherited IRA.
Next, we calculated the gross distributions needed with a 20% federal and 2% state tax rate. We set her paycheck up with automatic tax withholding, so she won't need to make quarterly tax payments.
It will be three more years until her 401(k) loan is paid back. Once that is complete, she'll be able to take advantage of a particular type of tax treatment called NUA, or Net Unrealized Appreciation, on her ESOP. She'll need to roll over her entire 401(k) and ESOP balance out of her employer plan to use NUA tax treatment. She can't do a rollover until the 401(k) loan is repaid or else the remaining loan will be considered a distribution. And, if she takes a withdrawal from her 401(k) plan before the rollover, it will void her ability to use the NUA tax treatment. It is critical Kathleen does not withdraw from that account until the eventual ESOP distribution.
(Note - many 401(k) plans will require you to repay a 401(k) loan in full at retirement. Do not assume you can continue to repay your loan after retirement. You must see your plan rules to find out what is allowed)
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?
Bill is 62, and his mom is in her 90s. Bill is working with his siblings to get their mom into a care facility in the Midwest. Bill thought he heard the facility say that if she self-paid (out of her assets) for two years, she would be eligible for Medicaid (state aid) to pay for her care.
Unfortunately, it doesn't quite work that way. Each state sets its specific requirements to qualify for Medicaid – but in general, all states require you spend down assets to a pretty low level before Medicaid kicks in. Some facilities accept Medicaid patients, and some don't. This facility explained to Bill that if they have a patient who eventually qualifies for Medicaid, as long as they have been in the facility self-paying for a two-year minimum, the facility will continue to accept them as a Medicaid patient. It is easy to see how Bill misinterpreted this to think after two years Medicaid would begin covering his mom's care. However, she has plenty of assets, and it is unlikely she will qualify for Medicaid for a long time.
Bill also wanted to know if there was a way to protect his assets if he needs care later in his life. Most of Bill's assets are in retirement accounts. His options are limited unless he is comfortable annuitizing all his assets or giving them away using a specially designed irrevocable trust. From a planning perspective, we are not keen on either of those options for Bill. If Bill decides to pursue asset protection strategies for himself or his mom, he will need to work with an elder law attorney.
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?
Scott and Cindy retired early in their late 50s. Now they are in their early 60s, empty-nesters, and ready to head out and have some fun. Initially, the travel club seemed like it could be a good thing. If you can save $6k per year on a $20k investment, that is an excellent return on investment.
After asking more questions, this vacation club also has a low annual fee of $750, estimated to rise by 2-3% a year. This fee is for life, and there is no cap on the amount of annual increase allowed. Most clients vacation quite a bit in their go-go years but slow down and travel less when they reach their late 60s or early 70s. With a lifetime fee, no annual cap on how high it can go, and no ability to cancel the program, we advised against it.
While it may save them money in the short term, in a decade, that annual fee could be thousands of dollars and increase each year over twenty years when they likely won't be using it as much. When you tweak the assumptions, what initially looked like an attractive return quickly turned into a potential negative return.
5. Should I begin my Social Security now at 68 or wait until 70?
Mandy and her husband Jason, both now 68, retired in their early 60s. They are each projected to begin Social Security at 70. Typically, we have one spouse – usually the lower historical earner – begin Social Security at their Full Retirement Age of 66 or 67, while the highest-earning spouse delays until 70. Why not in this case? With them both being the same age, in perfect health, and a family health history indicating their life expectancy could be longer than average, the probability analysis shows they are likely to be better off both claiming at 70. Why? They will likely have many years together where both can claim maximum benefits.
We discussed this and went through the numbers. Ultimately, whether Mandy claims at 68 or 70 will make no material difference in their retirement income. If they want to hedge against once spouse passing early, it will make sense for Mandy to claim now. The decision boils down to whatever they feel is best for them. They decided to go with the analytical analysis and have Mandy wait until 70.
Stay tuned; in June's newsletter I'll cover the following five questions, which are:
- Should I keep these universal life insurance policies on myself and my spouse?
- I'm looking at upsizing my house and moving to Florida. How much house can I afford?
- 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?
- 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?
- Can we afford to help our adult daughter buy a home?
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
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