Flight Plan for Retirement

Lists always make me stop and look.  I like lists.  Lists offer conciseness; they yield orderliness; and, at their end, they convey a sense of completeness.  Thus, I use lists a lot.  Recently I have been thinking about the differences displayed by those I know who appear to be enjoying very successful retirements from those who appear to be struggling.  Viola, another list began to take shape.

What I tried to do was to pinpoint those characteristics that financially secure retirees share.  I am not referring to the mega-rich.  Their lifestyles have no meaningful lessons for me.  Nor am I referring to those who have inherited their money.  Warren Buffet refers to those folks as members of the "Lucky Sperm" club, and it matters not what characteristics they may have; they offer no lessons for the vast majority.  I am referring to those that Thomas Stanley and William Danko discussed in their book, The Millionaire Next Door. They are the folks who have lived what could be termed ordinary lives but yet arrived at retirement with sufficient assets to enjoy it.  Granted, the definition of "enjoyment" varies widely.  For one couple it may dictate that their nest-egg needs to be three or four million dollars while another couple could enjoy their retirement with less than $300,000 in the kitty.  Much about "enjoyment" is subjective.  Nevertheless, the characteristics in the list below refer to those who have reached retirement with sufficient assets so that they do not expend too much energy worrying that they will outlive their money.  Of course I realize that someone may display all of the traits below for their entire life, and the ill winds of fate can still blow up a catastrophe.  Such is the nature of our lives.  With this list I am speaking in generalities, and that is always a bit dangerous.

Thus, with the above proviso in place, these are some of the things that these fortunate folks have in common:

1. They learned early in their adult lives to live on less than their income.  This is a prerequisite for saving and a prerequisite for a successful retirement.  If at any time they could save only a small portion of their income, they saved what they could; but they saved something.
2. They are thrifty.  Please note that being thrifty does not mean be miserly.  Ben Franklin, one of our country's Founding Fathers, was an early promoter of thriftiness.  Franklin noted that the thrifty "work productively, consume wisely, and save proportionately."  Thrift can be defined as the ethic and practice of the best use of all that we have: our time, our money, our health, all of our resources.  Franklin believed, as do I, that being thrifty allows us to be more generous.  There is much about being thrifty that recommends it.
3. They had a plan.  It probably was not an elaborate plan.  In fact, simple plans are easier to follow.  Their plan may have been as simple as contributing religiously to a 401k.  It may have involved a financial advisor, insurance salesman, or a CPA.  It may not have been a plan that I would consider optimum, but almost any plan is better than no plan.
4. They gained an education about and an understanding of basic financial topics early in their savings program.  They may have turned to professional help or they may have taken the time to read and educate themselves, but they acquired some basic knowlege in some fashion.  This not only helped them choose appropriate savings products, but it also made it less likely that they would overpay for something or fall for some charlartan's pitch.
5. If married, they stayed married.  Divorce reeks havoc on retirement plans unless there is considerable money there prior to the divorce, because, however much it is, it is definitely about to be divided when the couple begins talking divorce talk!
6. They have avoided self-destructive behavior.  They haven't eaten too much, drunk too much, or smoked too much.  Not only do these types of behaviors lead to physical problems that steal the joy from retirement, they lead to medical bills that can destroy retirement savings. 
7. They accurately assess their financial situation during retirement.  They do not want too much.  There are two ways to be "rich."  You can either have more money or want less things.  I watched my parents enjoy a wonderful retirement with a small nest egg, but they did not want too many things.  They were aware of what they could, and could not afford during their retirement years.
8. Finally, for lack of a better word, it does seem that luck plays a part.  Now I do believe the old saw that says "the harder I work, the luckier I get," but often it seems that something else is in play.  Some folks can go frolicking through the mine fields of life for years with nary a scratch while others, working as hard as they can, hit all of the trip wires.  Others just seem to always be in the right place at the right time.  Call it luck, fate, or whatever, it cannot always be easily explained.  The lesson I get from this observation is that we need to work hard and plan well, and then be ready to roll with life's punches.  We need to try to control those things which we can, and not worry too much about those things which we cannot.  As my Dad would say about doing our best, "That's all a mule can do!"

The definition of a successful retirement varies widely.  Some intend to never fully retire in the traditional sense.  I will probably go crazy and drag all of those around me with me if I ever truly retire in the traditional sense.  But most of us are looking forward to the day when we pursue those other things we have been dreaming and scheming about for so long as we fly airplanes, pursue the next sale, or head to the office or school room each day.  That is what I was contemplating as I compiled this list.  What characteristics should we strive to have in order to reach the point where we can pursue some of our other dreams.  Someone said that to be successful all one need do is observe those who are already successful and then do what they did.  Sounds logical to me.

Fly/Drive Safely

4 August 2009

By the time we shuffle off of this mortal coil, most of us will have accumulated some things.  Much of those things will be what your heirs (and others as well) will likely categorize as "junk."  Maybe it was your favorite collection of soda bottle caps, or your collection of empty paint buckets, but to them it will likely just be junk.  Along with that junk, you will likely have accumulated an assortment of other assets; perhaps bit of real estate (think the family home), maybe an insurance policy or two, a 401k somewhere, and a few other financial assets.  If it falls your lot to leave us this year, the threshold where the federal estate tax becomes an issue is when what you leave totals 3.5 million dollars.  If you have the good sense to wait until next year, 2010, to leave, that threshold becomes unlimited, as there is no federal estate tax scheduled for next year.  For 2011, the threshold amount for a taxable estate reverts back to 1.0 million dollars, the amount it was in the early 90's.  Of course everyone, and I do mean everyone in Washington, expects the Congress to take action to change that prior to next year.  President Obama is pushing to keep the federal estate tax at 45% on estate amounts over 3.5 million dollars, and I suspect that that is very close to where the estate tax will ultimately end up.  At that level only about one of every 400 deaths would leave a taxable estate.  So, most of us do not have to concern ourselves with the estate tax.  This does not mean that we should not concern ourselves with estate planning.  Everyone should have a will so that your heirs will know who gets what of your estate.  A will is important for a number of reasons beyond the scope here; so make sure you have a will!

If you find yourself in the enviable position of knowing that you will eventually have a taxable estate, there are a number of things that you can do to mitigate the effects of that pesky federal (there is also a state estate tax in Tennessee) estate tax.  One important aspect of the federal estate tax is that a person can transfer ANY amount to his/her spouse tax-free.  At the death of the second-to-die spouse however, the federal government comes calling for its portion.  The services of a good estate attorney, and the use of various trusts, can prove useful in minimizing and delaying the taxing of one's estate.  Eventually though, Uncle Sam is expecting to get his share.  The only way to ultimately avoid or minimize estate taxes is to minimize the estate.  This means transferring ownership of portions of your estate while you are still among the living; i. e., you  need to give some of it away!  

In 2009 the IRS allows individuals to give away up to $13,000 tax free each year.  One can give away more, but giving away more than $13,000 triggers the requirement to file form 709, the federal gift tax reporting form.  Each and everyone of us has a lifetime exemption of $1,000,000 that we can give away tax free.  Once we pass this threshold, we have to pay gift tax, which is taxed at the same rate as estates.  Now the good news is that that $13,000 per person per year does not impact your lifetime exclusion of $1,000,000.  It is only when one gives more than $13,000 to one person that the lifetime exclusion is reduced by a like amount.  For example, a husband and his wife could each give $13,000 to their son and daughter-in-law, as well as their two grandchildren ( a total of $104,000) tax free and with no impact on their $1,000,000 lifetime gift tax exclusion.  They could do this year after year, as long as the tax laws are not changed to disallow it.  Of course, this also has the effect of lowering the giftors' estate, and ultimately transferring more to those whom they would prefer to have their estate, rather than to the federal government.

There is also a way of transferring a closely held family business prior to death that will greatly lower estate taxes.  Granted, there are some provisions in the tax code that mitigate the effects of estate taxes on closely held (family owned) businesses and farms.  The taxing gurus have recognized that onerous estate taxes can literally spell doom for family businesses or family farms, where much of the wealth is tied up in land.  Thus, there are provisions in the tax code, that if applied properly, mitigates some of the tax problems.  But a better way may be to form a family limited partnership, and take advantage of the yearly gift exclusion amount.  It works something like this:

An owner (or owners) of a business transfers the business (or property) to a limited partnership.  The initial owner becomes the general partner and retains full managerial control of the business, as well as the liability associated with the business.  The limited partnership will then value the business and issue an appropriate number of shares (which will likely be non-voting shares) in the business.  This is accomplished with the help of an attorney and an accountant who are familiar with this aspect of the tax code.  (One wants to make sure all of the t's are crossed and the i's are dotted when doing this.)  Over the course of the next few years, the original owner will take advantage of the gift tax exclusion amount and transfer an amount of stock to his heirs that equals the exclusion amount in value.  This allows the original owner to continue to control the company and draw a salary while transferring a significant portion of the ownership to his heirs over the course of a few years.  Of course, the big thing it accomplishes is that it transfers value from his estate before it is taxable, and it allows the owner to see that his business ends up with those that he would prefer to have it prior to his death.  This has been challenged by the IRS in court, and when set up properly, has always withstood the challenge.

It is certainly pleasant to have accumulated enough assets that one anticipates having a taxable estate, but it is true that a larger estate brings with it more concerns.  It also brings with it the need for more planning.  One can still enjoy what they have, while helping others (be they family members or various deserving charities) and take steps to lessen the effects of the federal estate tax.  Give some of it away while you're still alive; see how much fun that can be!

Fly/Drive Safely

4 July, 2009