Retirement Q&A
A: Gifts are never taxable to the recipient, but they could be taxable to the gift giver. The current annual gift tax exclusion limit is $15,000. You can give away up to this amount to as many people as you would like each year without any taxes or reporting requirements.
Each person also has a lifetime federal estate tax exclusion, which is $11.7 million as of 2021. You can give more than the $15,000 to any person any time if you elect to use up a portion of your lifetime exclusion. To do this, you need to file tax form 709 to let the IRS know. There are some other considerations and exemptions, so for more detail, read: Gifting and Taxes.
Q: How do I calculate my Required Minimum Distribution?
A: The company that holds your IRA usually calculates it for you, although it is your responsibility. The math is pretty simple:
Step 1 – Find out your IRA account balance as of the previous December 31.
Step 2 – Divide by the number from the Uniform Life Expectancy Table that corresponds with the age you will attain on your birthday in the current year. Note, RMDs begin in the year your turn 72.
Let’s look at an example: Suppose your account balance last 12/31 was $250,000 and you are going to be 72 on your birthday this year. You can see from the table above that the divisor that corresponds with your age is 25.6.
Therefore, $250,000 ÷ 25.6 = $9,766. You must withdraw this amount by 12/31 of this year.
One caveat to the above. You can use the Joint Life Expectancy table, which results in a smaller RMD, if your spouse is more than 10 years younger than you. There is also a different table, the Single Life Expectancy table for beneficiaries of an account (an inherited IRA).
Now that you understand the math, here is an RMD Calculator to make things simple on yourself.
Q: What is my Full Retirement Age for Social Security?
A: The table below shows your Full Retirement Age (FRA) based on when you were born:
Q: How much are Social Security retirement benefits increased if I defer past my full retirement age?
A: You accrue “Delayed Retirement Credits,” which increase your benefits at a rate of 2/3rds of 1% for every month (8% per year, simple interest, not compounded) you wait beyond your full retirement age. Your benefits can increase by 32% if your full retirement age is 66 and you delay collecting until age 70.
Q: Should I get a will or a revocable living trust?
A: Most people with significant assets use a revocable living trust, in addition to a will. The main advantage of the trust (over a will) is your heirs get to avoid the ugly probate process (a potentially expensive and time-consuming legal process), your affairs remain private (financial affairs can become public record during the probate process), and it is much more difficult to contest a trust than a will. The other advantage of the trust is it can remain intact and continue to hold and distribute assets for many years after your passing. Read: Lack Of Estate Plan Puts Prince’s Estate In Jeopardy.
Q: How does a reverse mortgage work?
A: A reverse mortgage is the only way to borrow money against the equity in your home without ever having to make a payment. A reverse mortgage can reduce financial stress and/or improve a retiree’s standard of living. The loan, plus interest, gets paid back when the last remaining homeowner passes away or moves out of the home. Any remaining equity after paying off the loan passes to the homeowner’s beneficiaries. The loan is also non-recourse, so you and your heirs can never owe more than the value of the home. The youngest homeowner must be 62 and any existing mortgage must be paid off by the reverse mortgage. Read: Reverse Mortgage: An Underutilized Tool? & Reverse Mortgages: The Latest Research.
Q: How will I know whether I have enough money to retire?
A: Some people obviously have more money than they will ever spend, but most retirees are not in that situation and, therefore, need a plan. Some people use spreadsheets, which can give a false sense of security because they assume a consistent return on investments each year. There are too many variables, such as one-time inflows/outflows, inflation, and the variability of investment returns. The best projections are created using financial planning software that can run hundreds or thousands of scenarios, using randomized investment returns. This type of planning will give you a range of outcomes, the median (most likely) outcome, and the probability of success (i.e., not running out of money).
For more details on this topic, read: Retirement Planning: Frequently asked Questions.
Q: Do you have any advice for raising financially responsible children?
A: Yes! Although we specialize in retirement planning, we have written extensively about raising financially responsible children. Please read and share these: Financial Tips for Young Families, The Allowance Agreement, Teaching Kids About Money, Preparing Kids to Inherit Wealth, Parenting With Wealth – 5 Things To Never Tell Your Kids, Is College Worth the Costs, Budgeting Is Crucial To College Grad Success, Household Budget, and Boomerang Kids.
Q: What is a better investment: rental real estate or the stock market?
A: In any given time period, stocks can outperform real estate or vice versa. Our blog post: Rental Properties vs. The Stock Market goes through an example of an actual property based on actual expenses and anticipated growth rates. A balanced portfolio of stocks and bonds, held for 30 years with no leverage, is likely to equal or possibly even exceed the 6.64% that our real estate investor (also with no leverage) is expecting in our example. Another consideration that favors stock portfolios over real estate is that a stock/bond portfolio is less hassle and more liquid. That being said, there is still a place for real estate. It is a good diversifier to be held in addition to stocks, bonds, and other asset classes. It also can provide tax benefits from interest expense and depreciation deductions.
Q: Do retirees need life insurance?
A: The short answer is that it depends on your retirement plan and financial situation. You need to consider whether your surviving spouse or family will need the money, and whether the potential benefits of your policy outweigh the ongoing costs. It makes sense for many retirees to exchange their current policy for one that offers more appropriate coverage, costs, or benefits once retired. One attractive benefit of some newer policies are long-term care (LTC) riders that enable the policyowner to use a portion of the death benefit to pay for LTC. To examine this topic more in depth, read: Life Insurance – Do Retirees Still Need It?