ANSWERS A SPOUSE SHOULD UNDERSTAND

Retirement Decisions – Instilling Confidence; Inspiring Life

?Retirement is a life changing event for everyone in the family.?When those working received salaries there was a “known” stream of income that mutually you could balance with the expenses.??Upon retirement the salaries are replaced by various cash flows: pensions; IRA distributions; Social Security; investment income; etc. ?Both of you have spent years of preparing; doing all the right things; using all the company benefits; accumulating assets and together you go to sign the retirement paperwork.?Are you prepared for the decisions that mutually you will have to understand and sign off on retirement paperwork???

?Those considering retiring used to wait till age 59.5 because they could take distributions out of their IRA accounts without the 10% early withdrawal penalty.?Then they considered waiting till age 62 because they could get social security early at a reduced rate.?More recently, those considering retiring want to wait till age 65 because they will be eligible for Medicare/Medicaid. ?Medical insurance is a big thought in retiring. ??

?No matter the age that you decide to retire, you will have to make decisions that impact both of you.?Some of the decisions cannot be changed at any time while others can be changed or modified at a later time.?This is one of the matters that makes retiring a difficult decision.?Both of you need to be engaged in the decision making process and understand the consequences of your decisions.

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Here are 9 questions a spouse should understand as the answers impact both of you.

?1.??????Do you fully understand the pension choices being offered to both of you??

A simple pension might offer:

1)????Single life annuity (SLA) meaning when the retired spouse dies, the surviving spouse gets nothing.?If the surviving spouse dies first, the retired spouse continues to get same SLA payment.?If this choice is taken the surviving spouse must sign a waiver releasing the company of any legal liabilities.?Taking SLA and buying term insurance to replace the lost income needs to be explained.

2)????50% meaning when the retired spouse dies, the surviving spouse gets half or 50% of the monthly pension.?If the surviving spouse dies first, the retired spouse does not take a reduction.

3)????100% meaning when the retired spouse dies, the surviving spouse gets full or 100% of the monthly pension.?If the surviving spouse dies first, the retired spouse gets same 100% pension.

This is very important because this decision cannot be changed except through a divorce.

2.??????Do you decide to take a lump sum out of the pension or one of the monthly pension choices??The lump sum gets rolled into an IRA rollover for the retired spouse with the surviving spouse as the primary beneficiary and the children as contingent beneficiaries.?The children receive a legacy. The monthly pension can be passed to the surviving spouse but when the surviving spouse dies the pension is over, nothing for the children.?There are always exceptions or modifications, so you need to understand the company’s pension plan.?This is another decision that cannot be changed.

3.??????Will the retired spouse be receiving a severance package??Some companies offer employees up to 1.5 years of pay to take retirement early.?This can be a great way to add to your liquidity at the bank; pay down debt or use the monies to transition to a 2nd career.?Beware of becoming cash rich from the severance to becoming cash poor because you spend all the monies on paying debts.?The interest on home mortgages can still be a tax write off on your income taxes.?Take your time and consider all your options with liquidity; transition; taxation; low interest debt.

4.??????Will the retired spouse plan on taking Social Security early at 62 or wait to normal retirement age 66+??By deferring Social Security payments, Social Security payments grow around 8% a year.?Studies show that by taking Social Security early at age 62, the retired spouse living to around age 76 “breaks even”.??An important thing to know is that the surviving spouse can get 50% of the monthly pay of the retired spouse at age 62 or the surviving spouse’s own Social Security at age 62 whichever is higher.?Upon the passing of the retired spouse or the surviving spouse one of the Social Security payments will stop.?

5.??????How do you both plan on “living” the rest of your life??People that retire have lots of “free” time to do what they want, when they want.?This sounds like a great thing but some people have trouble adjusting to all the “free” time.?Hopefully, you will have a passion, hobby or 2nd career which you can devote time to.?Appreciate each other’s time and each of you should honor your spouse’s time to do what they enjoy which might not always include you.

6.??????Are your checking/savings and brokerage accounts in single name, joint name or both??If they are in single name, you should use a Payable on Death (POD) for banks and a Transfer on Death (TOD) for brokerage firms to avoid the assets going through probate.?Probate is avoided because you name a beneficiary.?If you use a joint account, you will have a choice of Tenants in Common (TIC) or Joint Tenants with Right of Survivorship (JTWROS).?TIC involves probate.

7.??????Do you understand the benefit of “stepped up” cost basis??When either one of you die the survivor gets a “stepped up” basis on the assets held outside retirement accounts.?The “stepped up” basis is often much higher than the before death cost basis (usually purchase price).?Some investors do not sell assets because of the capital gain tax consequences.?Having the “stepped up” cost basis after one dies allows the survivor to sell assets reducing capital gains taxes and diversifying the investment portfolio.

8.??????Do you understand the investment strategy and discipline that is being used in your accounts??People fail to share their investment strategy and discipline with their spouse resulting in confusion when the decision maker dies. ?I met a professional that was proud of his stock picking abilities and he told me Financial Advisors would soon be dinosaurs.?I replied that if he did not share all his knowledge with his spouse and children that I had no fear of becoming extinct.?The grieving spouse and children are at the mercy of trying to establish a relationship with a Financial Advisor they may have never met or only know from a referral.?

9.??????Do you know your Financial Advisor and do you feel comfortable with them??Let me make this clear, all financial advisors are not the same.?Financial Advisors differ in years of experience, investment philosophy, practice, how they are compensated, their accreditations, and their purpose.???At Baird we have the freedom to focus on what is most suitable for our clients.?In addition to the Financial Advisor, you should know these professionals: CPA; Attorney; Banker; and Insurance Agent.

?Understanding these 9 questions will give you and your spouse a head start and will give you both more confidence in making decisions inspiring you to move to the phase of life where both of you truly “live” it.?With plenty of time to check off things on your bucket lists. ?

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Gary Foose is a Financial Advisor with Baird Retirement Management in Lake Jackson.?Baird is located at 208 Parking Way, Lake Jackson. Gary is on LinkedIn. Gary’s personal website is GaryFooseBaird.com.

?Gary achieved his Retirement Management Advisor? designation from the Investments & Wealth Institute.??RMA? certification demonstrates Gary’s commitment to enhancing his knowledge and skills to better serve you.?The Retirement Management Advisor? program is an advanced certification for financial professionals that provides them with knowledge to build custom retirement income plans for their clients to better mitigate risk and ensure better outcomes.

This material is for educational and discussion purposes only. This does not take into account the specific investment objectives, financial situation or need of any particular client and may not be suitable for everyone. You should consider the contents of this report as a single factor in making any decision. Additional fundamental and other analyses would be required to make any decision about any strategy identified in this report. While Baird does not offer tax or legal advice, our Financial Advisors regularly work with clients’ attorneys and tax professionals to help ensure that all phases of wealth management are addressed. Robert W. Baird & Co. Incorporated.