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Notes From the Fieldby Martin Weil

Archive for the ‘Ask Martin Weil, CFP™’ Category

January 31, 2014

Q: I am 54 with $1M. How long will my money last?

Martin's Answer:

The standard advice is that you can draw between 3-5% per year from an invested portfolio and have that portfolio last 30 years.  There is much debate over what is a “safe” sustainable withdrawal rate but most studies conclude that a 4% draw will survive whatever the markets throw at you over a 30 year period.  In your case that would mean $40K a year, increased annually only by inflation.

There are multiple calculators (search “How long will my money last”) that will give you a straight line estimate for different withdrawal rates.  These are helpful guides but are far from definitive.  The reality is that an investment portfolio of any sort will increase and decrease in value and these unpredictable fluctuations can have a dramatic impact on how long your money will actually last.  The more aggressive the investment portfolio, the more volatile your range of outcomes.  More upside to how long the money lasts, but also more downside.  Generally this is why individuals who are relying on a portfolio to support their current ongoing needs are best advised to invest in a low risk portfolio, one that minimizes the risks of major loss while protecting their savings against purchasing power erosion from inflation. This conservative approach may seem counter-intuitive to some who believe that taking more risk will allow them to earn more and thus take a higher annual % withdrawal.  When withdrawal rates are north of 5%, this is a temptation but it is in effect gambling with the odds against you.

Most people want to know whether their savings will last for their lifetimes because it is not much good if they spend money to last 30 years but they last 35.  To answer this broader question with any confidence requires two pieces of information:  How much you are routinely spending in total out savings and how long you will live.

As for how long you might live, we can only assume “the worst” and that is that you will outlive your expected median life expectancy of 84. Most with educations and some financial means in the US will.  Realistically that implies you will have expenses to support for perhaps 35 years from today.  Some of your present expenses may decrease in time.  Medical for example should decline when you are eligible for Medicare.  And you most likely will receive Social Security benefits at age 67 or after thus reducing the required draw from your assets. But other expenses may increase.

The best approach in my estimation is to have a rough plan for what the future holds financially for you and for this you may want to enlist the advice of a CFP in your area.

Originally posted on Nerdwallet

Have a question you'd like Martin to answer? Send to AskMartin@mwinvest.com and we'll let you know when it's been posted. To find answers to your specific and/or confidential questions, please call Martin at 1-877-442-8777 for a no obligation phone consultation.

November 1, 2013

Q: Other than 529 accounts, are there any other investment vehicles I should be considering to help take care of my children in the future?

Martin's Answer:

Assuming you are on track with your own retirement funding needs, then a 529 plan, Coverdell education Savings account, or even a Roth IRA is a great way to help fund a younger child’s college education. All have broadly similar tax-free benefits with the major differences that 529 plans have a $14,000 (2013) annual tax-free funding limit while the Coverdell is fixed at an annual funding limit of $2,000. A custodial Roth IRA in the younger child’s name may be used to fund education expenses but contributions are limited to the amount of the minor child’s earned income, or $5,000 per year, whichever is less.

Once your retirement is secure and you have fully funded the projected costs of college, it may be time to talk to an estate planning attorney to discuss the options suited to your situation. Any individual can make gifts, tax free, of up to $14,000 per year (2013) to anyone, including a minor or adult child. For children under the age of 18, custodial Gifts to Minors accounts (UGMA or UTMA) are a wealth transfer vehicle often employed by parents and relatives. I caution parents about these accounts because the child gains full control of the account generally between the ages of 18-21, depending on your state’s laws. Once the full owner, the now-adult child is free to use the funds as he or she pleases, and is under no obligation to use the funds for college or any other purpose intended by the original contributors. There is also a gift tax exemption for an unlimited amount of college education or medical expenses paid on behalf of any third party. But you must make the payments yourself directly to the college or medical provider to qualify for the exemption.

The last big ticket item that clients consider is helping a child purchase a home. A great idea as this provides them with a steady roof over their heads, can help their credit and gives them some equity of their own. The usual caveats apply regarding making sure your own needs are taken care of first, with the addition of some major cautions around gift tax, credit and ownership issues that are too complex for this short article. If considering this option, consult with your tax advisor and/or attorney first.

A version of this answer was originally published at Nerdwallet

Have a question you'd like Martin to answer? Send to AskMartin@mwinvest.com and we'll let you know when it's been posted. To find answers to your specific and/or confidential questions, please call Martin at 1-877-442-8777 for a no obligation phone consultation.

October 11, 2013

Q: What is the right time for me and my husband to take social security retirement benefits?

Martin's Answer:

Generally, the highest lifetime return to be had from Social Security benefits is to wait until you are age 70 to begin taking distributions. This is due to the 8% automatic annual increase in benefit payments when the start is delayed to that age, and the fact that most of us will live past their early 80s when the amount received from taking benefits later outstrips that of taking them at the typical retirement age.

If you decide however to start SS benefits before age 70 for whatever reason, an individual should never take them before full retirement age (“FRA,” currently age 66) unless in serious financial need, or in cases where a normal life expectancy is not anticipated.

For married couples, the higher earner should wait to age 70 to begin taking benefits. This is because they will earn that higher benefit both for their lifetime and for that of their surviving spouse. There is no further advantage to be had by waiting until after age 70 to start taking benefits.

An advantageous approach for spouses is for the younger of the couple to take spousal benefits at FRA. To make this possible, the older spouse will have to be over FRA him or herself and be receiving benefits already, or if not yet age 70, to “file and suspend” for their own benefit.  This arrangement allows one member of a married couple to take spousal benefits at FRA while allowing both of their primary benefits to continue to increase until age 70.

These are the general guidelines I use in my practice, though the reality is that the rules are complex and each situation needs to be evaluated individually. These guidelines do not necessarily apply to survivor benefits for spouses or children, benefits for divorced spouses or disability, all of which are beyond the scope of this outline. Also, note that you will need to enroll in Medicare at age 65, regardless of whether you start taking SS benefits.

Original question and answer posted at NerdWallet’s Ask An Advisor

Have a question you'd like Martin to answer? Send to AskMartin@mwinvest.com and we'll let you know when it's been posted. To find answers to your specific and/or confidential questions, please call Martin at 1-877-442-8777 for a no obligation phone consultation.

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