When you’re in your 40s, 50s and 60s and are vibrant and healthy, it’s hard to imagine that one day you will have difficulty managing your finances. The reality is that although we may be able to delay the onset with a healthy and active lifestyle, one of the first things we lose as we age is the ability to make complex decisions. Given this fact of life, we all need to create a long-term-care plan while we’re fully coherent and have all of our faculties.
While a long-term-care plan may or may not include long-term-care insurance, it’s much broader than this. A long-term-care plan addresses various physical and mental changes that occur as we age. It includes specific action steps that will be implemented by family members and other individuals to manage the various changes when they occur and reduce the associated disruption in our lives and those of potential caregivers.
Simplify with a retirement-income plan
A crucial part of every long-term-care plan is financial caretaking. Simplification of your financial life, including investments, is key to the success of your plan. You need to begin transitioning to a plan with less-complicated investments long before your cognitive abilities and your ability to manage them begins to decline.
A retirement-income plan is an excellent tool for thinking about and developing investment strategies that will provide you with the income you will need, while reducing your responsibility for managing the assets needed to produce the required income. The plan should match your projected annual inflation-adjusted expenses with after-tax income that will be maintainable for your life and your spouse, if married.
The foundation of your plan
Sustainable income should be the foundation of most retirement income plans. This is income that you can count on receiving when needed to pay for non-discretionary and other expenses. Examples include Social Security, pensions and fixed-income annuities.
In addition to predictability, sustainable income isn’t dependent upon the performance of the stock market and requires no management. Payments are automatically deposited in your checking account, generally on a monthly basis. This solves the investment management dilemma that we and our loved ones face when we experience cognitive decline, including more advanced life-changing challenges that occur with dementia and Alzheimer’s.
Another important and distinguishing feature of sustainable income is the fact that the periodic payment amount that will be received beginning on a specific date can be calculated with reasonable, if not exact, precision long before the payments begin.
Planning for sustainable income varies in complexity depending upon the particular type of income. Pension income is the easiest to plan for since the only decisions that need to be made are when to start your income and your desired payment option, e.g., life only, life with period certain, etc. Income taxation is straightforward given the fact that pensions are taxable as ordinary income to the extent that it isn’t attributable to your contributions.
Social Security planning is difficult assuming you want to optimize the amount of income that you will receive over your lifetime and your spouse if married. There are numerous strategies that can be employed, with income beginning anywhere between 62 and 70. Like other types of sustainable income, periodic payments increase to the extent that you defer your start date. Income-tax planning can be tricky since 0%-85% of Social Security income is taxable, with the percentage dependent upon the amount of your Social Security as well as other income.
Unlike pensions and Social Security, fixed-income annuities need to be purchased from life insurance companies. To the extent that they’re not provided as an employee benefit, we need to fund those purchases. This can be done with a lump sum or periodic payments over several years, depending upon the particular annuity and one’s needs. Income can begin immediately with an immediate annuity (SPIA) or it can be deferred for a number of years with a deferred-income annuity (DIA) or a fixed-index annuity (FIA) with an income rider. Income taxation varies with the annuity type and location, i.e., inside or outside a retirement plan.
Fixed-income annuity planning, while challenging, is easier when it’s done within the context of a retirement income plan. This framework allows you to determine the particular fixed income annuity types and products from the highest-rated insurance companies that will provide you with the largest after-tax periodic income payment amounts beginning at specified dates to match your needs using the least amount of premium dollars.
Plan for your financial mortality
Like it or not, the longer we live, the more vulnerable we become to experiencing cognitive decline. This can take many forms, beginning with reduced short term memory and ability to make complex decisions, to various types of dementia and Alzheimer’s. Knowing this fact of life, it’s incumbent upon each of us to develop a long term care plan while we still have our faculties. A crucial component of this type of plan is simplification of our financial life, including investment management.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.