CategoryRetirement Planning Archives — C. Lynn Northrup, CPA, CPIM
Change starts with a sense of true urgency and in most cases needs to be created to make things happen. The enemy of urgency is complacency. Complacent people don’t look for new opportunities and they pay more attention to their internal feelings than external feelings. They tend to move slow when they need to move fast. What ever worked in the past is what guides them.
While anxiety and fear can drive behavior that might be mistaken for urgency, the resulting actions tend to be non-productive. This is called false urgency resulting from failure. The thought process from a sense of false urgency usually is not productive and proactive. It typically is mindless wheel spinning that creates no positive results.
A true sense of urgency is created and recreated by communicating the existence of great opportunities together with the existing hazards and roadblocks. People engaged in a true sense of urgency exhibit a strong need to move and win, now. The biggest challenge about creating a sense of urgency is taking the first step in initiating the action needed to succeed in a changing world. Real urgency isn’t a natural state of affairs because it needs to continually be created to get change initiatives moving and in the right direction. In a constantly changing world, the good news is that there are an over abundant number of opportunities that can be utilized to create true urgencies.
A true sense of urgency evolves from a set of feelings that creates a compulsive determination to move right now. True urgency is a process of winning the hearts and minds of the people needed to make change happen. Mindless emotion doesn’t get the job done. Winning change strategies utilize sound, ambitious, but logical goals using methods allowing people to experience the feelings that embrace the determination needed to make things happen.
The strategy for producing a true sense of urgency focuses on creating very alert, visibly oriented action, aimed at winning with daily progress toward achieving the vision and goals targeted at core emotional feelings. Here are the four tactics needed to make this strategy successful:
- Reconnect internal reality with external opportunities and obstacles using data, people, video, and other media.
- Avoid acting anxious or angry and always effectively demonstrate your own sense of urgency in meetings, one-on-one interactions and other communication with the people engaged in the change process.
- Take the opportunity to determine if crises can be used to your advantage and always proceed with caution.
- Remove the negative and urgency skeptics and keep the group complacent to avoid destructive negative urgency.
In addition to these four tactics is the necessity of keeping up the pressure to maintain a sense of continued urgency. The trap that can occur is achieving success and then losing your momentum of continuous improvement. Short-term success does not always translate to long-term results.
Here are some thoughts on maintaining urgency after making a successful change. Always be on the alert for potential declines in the sense of urgency. Realize that complacency can set in so be ready with backup solutions to maintain momentum. Take advantage of new developments to apply to change initiatives and improvements. Essentially, building a culture acting with a high sense of urgency will focus on the strategy for producing a true sense of urgency and application of the four tactics that are needed to make a positive change become a constant.
Changing demographics created by baby boomers represent big opportunities for CPAs. There are 10,000 boomers hitting retirement age each day and they need help in a lot of areas. While financial planning is usually the focus, there is an abundance of practice development opportunities.
Here are some shocking statistics. Over 13% of the population in the United States will be 65 by 2020 and more than 16% will be in excess of 65. By 2030, most baby boomers will have hit their 65th birthday. This means that more than one in five Americans will be 65 or older and about 10 million of them will be over age 85.
Money tops the list of problems since boomers haven’t saved enough to retire and survive through their later years. They also aren’t prepared to deal with declining health. Plus, they may have to contend with elder care either for parents or themselves. Combine these challenges with social security, Medicare, Medicaid, and estate planning there are lots of possibilities for added value business. There are a lot more people with questions, no answers, and the need for guidance.
CPAs can help retirees and elders on a wide range of areas. Typically, seniors turn to attorney’s for guidance which makes sense in many areas. However, CPAs educated on the needs of baby boomers and elders can become valuable and needed advisors to a huge segment of the population.
The first step for CPAs is getting up to speed on the issues. The next step is letting people know how you can help them. In addition to CPE programs there are a lot of resources to gain knowledge about elder issues. A good place to start is by gaining expertise on social security, Medicare, and Medicaid.
One of the opportunities for CPAs to help baby boomers is with basic budgeting and cash management. Boomers try to do their own planning and budgeting when objective input from a CPA would be a better option. Most boomers haven’t planned very well. Many will need to, or want to, pursue a business. Helping these boomers get started on the right foot can translate into added value revenue.
A simple budget spread sheet can be a useful tool for CPAs to assist boomers create an understanding of their situation and develop a plan for the future. Consider all possible income streams such as social security, pensions, plus any other sources of revenue. Expenditures should include housing, travel, medical, automobile, and all living expenses that boomers will incur. Most boomers think expenditures will be reduced in retirement. This often is not the case. A good analysis can become the basis for projecting into the future and providing boomers with guidance on possible options.
The budgeting exercise helps provide an independent sense of reality on retirement finances. Most boomers have lived week to week and haven’t saved for retirement. Now they will need advice on how to make it through their aging years. CPAs are a logical source to provide much needed advice on how these seniors can manage their future.
Having additional knowledge to help seniors gives CPAs an edge in developing an elder practice. Here are some thoughts on how to gain the needed knowledge and information. Take CPE on estate planning tools. This will give you a foundation on the basics of wills, trusts, and powers of attorney. You can use these tools to help these seniors manage their affairs. You need to have signed powers of attorney for business and medical reasons in case these people can’t manage their own affairs. If you are advising boomers on carrying for elder parents, having these documents in place is essential and critical.
Most boomers don’t think about elder care and what it entails. CPAs who understand the complexities of assisted living facilities and nursing homes can provide much needed support to seniors. Take the time to learn about assisted living facilities, nursing homes, and other senior housing possibilities. I learned about these issues because of the need to deal with aging parents and in-laws. Usually these areas aren’t addressed in depth until it becomes a necessity.
Many boomers who are suddenly faced with caring for aging parents have lots of questions and need assistance. CPAs can provide useful guidance by being knowledgeable on the various facets of senior housing and care. There are a variety of options for seniors, including ways to keep them in their home as long as possible. By understanding the array of possibilities will put you in position to offer solid guidance.
Most of the questions raised by boomers will be directed to assisted living facilities and nursing homes. I think the best way to gain knowledge about them is to visit and take a tour. These organizations will inform you on their billing structure and other financial information. During your tour make an effort to observe the quality of the staff, the rooms, and the food. Another consideration is the capability of the medical staff. Finally, take note of the variety of activities and transportation options available to residents.
When visiting nursing homes it is essential to realize that they provide skilled care which is a big difference from assisted living facilities. Also, determine if they accepts Medicaid since not all of them provide this option. This can become a big issue when elders run out of money and need to be moved. Most assisted living facilities have special areas to care for dementia and Alzheimer residents called memory care units allowing residents to stay until the end.
Gaining knowledge of senior housing facilities can also become a great networking and marketing opportunity as these organizations are happy to know of available resources for their residents. CPAs who understand elder care and associated issues represent a valuable and needed resource.
CPAs who understand the shifting demographics can position themselves to provide significant added value assistance to a segment of the population that needs all the help it can get. While it will take some time to gain the necessary knowledge and market it, I encourage CPAs to step up and fill the need. Seniors need your help.
Before you can develop a meaningful plan for elder care you need to carefully assess each situation. The assessment should begin with opening up the lines of communication with your elders. They may not want to talk about it, but it is essential. Without effective and honest communication there can be no assessment and no plan. Family dynamics are frequently difficult at best. The best approach is to listen carefully to your elder’s thoughts and ideas and with no preconceived notions or ideas. Start with a clean canvas and attempt to come up with viable and workable solutions that best fits their situation. In addition to your elders, the lines of communication need to include other family members because they need to be on board and in agreement with the planning process.
When dealing with older people try and maximize their ability to make choices for as long as possible. This gets to be a fine line and you’ll have to tread carefully. My experience is that you will clearly know when it is time to take over certain responsibilities. Before you can really start to develop an effective plan, you need to make an assessment of your elder’s situation which should include health, money, housing, transportation, and their social network. Your planning should be focused on minimizing crisis situations and reducing confusion. Good planning helps to avoid these situations.
Your initial assessment should include gathering essential information on the support network used by your elder. The list should include the names and phone numbers of the key services and support system that will be needed and utilized. Some things that should be considered include doctors, pharmacy and medications, insurance agent, bank information and contacts, repair services, friends and neighbors, and any one that will be interacting with your elder.
Each person’s situation is unique. I think the planning process needs to start with health and an elder’s ability to take care of their day to day living needs and hygiene in a safe manner. You will want to talk with your elder’s doctor, any therapists, and even their neighbors. This may seem like spying but getting objective input from people who have observed your elder is critical. Knowing and understanding a person’s ability to drive, cook, and maintain living quarters is a must in making an assessment and developing a meaningful plan for them.
The next step after gathering this first set of information is to evaluate housing. Look at the exterior and interior lighting, the existence of stairs and determine if they are safe. Also, check the location of the home relative to shopping or medical services. Is the house in poor repair, cluttered or untidy? Does the home have wheelchair accessibility? Your goal is to evaluate whether or not your elder is truly capable of living in the home that is safe and in maintaining their own individual safety.
This is an excerpt from my book, Navigating Retirement and the Challenges of Aging which covers a complete range of issues facing our aging population. The key is effective planning for elder care and the retirement phase of life.
There are five key things that seniors need to know as they prepare for their retirement and the later phases of their life. The problem is they may think about these issues but fail to get the help they need as they approach their 65th birthday. My e-book Navigating Retirement and the Challenges of Aging provides these answers:
- What am I going to do and where?
- Social Security?
- Health Care?
- Caring for Elders?
These critical issues need to be addressed well before reaching the age of 65 and should become part of a regular planning effort. Dealing with these issues head on is essential because delaying just makes things more difficult.
Everyone needs to understand where the money will come from and think about what could happen if it isn’t enough. Itemize your assets and liabilities then determine the cash inflows and the cash outflow. It is pretty tough to plan until you get these answers. If you don’t like the answers, you need to come up with a plan on how to make things work.
What and Where
The next question deals with what are you going to do after you stop working. Depending on your retirement vision (or reality), you need to decide where you will live. These are big questions and will require change and adjustments.
So you will be eligible for social security. When do you start drawing it and are there ways you can maximize your benefit? Navigating Retirement has an entire chapter devoted to the best strategies for getting the most out of your social security.
Maintaining good health as you age is critical and having good health insurance is essential. Medicare kicks in at age 65 and but it doesn’t cover everything. It is essential to register for coverage with Social Security three month before you turn 65. Failure to do so could result in penalties. Navigating Retirement explains what you need to do, when, and health care coverage options. The book also explains typical health issues that seniors encounter.
Caring for Elders
What if suddenly you need to help care for one of your parents, your spouse, or another loved one? This is an area where seniors are not well prepared. However, caring for a loved one can suddenly become a reality. Again, Navigating Retirement provides you with the essential information to address these questions. More and more seniors are coping with the challenge of caring for a loved especially as Alzheimer’s and dementia strike our loved ones.
These are only five of many issues and questions that senior are facing. They need answers and my goal with Navigating Retirement and the Challenges of Aging was to provide them with simple and straight forward guidance.
Aging and retirement is supposed to be the time to relax and enjoy after the result of years of hard work. Don’t we wish it were that easy? Even if you are one of the lucky ones who planned and saved in addition to having a plush retirement pension, don’t think you’re out of the woods. The best way to deal with these challenges is to create a vision for your retirement.
This process isn’t easy, but it will pay off. Here is what I want you to do. Commit your retirement decision process to writing since it will make you think more clearly and improve your chances for success. Develop a vision of what you want or plan to do in your retirement years.
Here is a checklist of seven things to consider. Begin thinking about each of these questions and it will help you create your unique retirement vision. Start your thinking process and begin the process of creating your vision.
- What are your hobbies and what will be your fun activities in retirement?
- Will you need to continue working or make a career change?
- Where would you like to live (geographically)?
- What are your housing requirements?
- What is your state of health and are there any issues?
- Have you planned your retirement finances?
- Have you considered the need to provide eldercare giving?
First, write down answers or thoughts for each of these questions. It will start you to think about things that had not previously entered your mind. Your thoughts will shift and change. These changes are normal. I have provided a decision guide in the appendix, which will help you through the process of developing a good retirement vision.
Having fun in retirement and hobbies should be the easiest part of the vision process. Everyone has dreams about what to do in their leisure time. In some cases, the things you would like to do will take precedent over the things you have been doing. It may be golf, gardening, or travel. Maybe it will be a combination of a number of things. Things you wanted to do but you have put off because of work.
Some people have dreamed about pursuing a hobby when they get to retirement. The difficulty is that dreams and reality don’t always mix. What they imagined things to be turn out to be different. After a person has worked for a long time at his profession, it is tough to turn off the switch. They find that they have a tough time leaving the work routine. This is something to consider in your planning process.
For baby boomers getting ready to retire or change their life, this is an essential step. Going through the process of thinking about the future will pay big dividends. I think these seven steps will help clarify your thinking and planning.
Here are ten ideas that we’ve come up with realizing they are not all encompassing. You are welcome to comment and add to the list. We have more that we will share with you in a later post. This is an ongoing process!
1. Conserve energy by turning off the lights and keeping the heat down.
2. Scale down to one automobile. We did and several other couples in our neighborhood did and without any serious drawbacks. If you need an additional vehicle for a short time – go rent one.
3. Eat in and not out. If you do eat out, look for early bird specials and other deals.
4. Prepare a detailed budget and carefully review all line items for possible savings.
5. Maintain your car by changing the oil and rotating the tires.
6. Cut down on magazine subscriptions and use the internet more frequently, besides you’ll get more data faster and more currently.
7. Reduce your travel by taking day trips and enjoying what’s near you.
8. If you do take trips and stay in hotels, plan carefully and try to utilize your points for free nights.
9. When traveling by automobile take a cooler and pack food. Then ask your hotel for a room with a microwave and refrigerator to cut down on eating at restaurants.
10. Just plain do without and scale back.
My wife Jessica commented after editing this post – “pretty stark” – but you do what you have to do when times are tough. Maybe we should send this list to the Wall Street bankers taking big bonuses.
Everywhere you go the black cloud of the economy hangs over you like a constant drizzle telling you to crawl into a fox hole and don’t spend any money. Being of retirement age, this strikes home because we have worked hard all our lives. Now we’re working even harder and earning less.If we can’t retire, what are we going to do? My situation is a little different because I have consistently flunked retirement. I still relate to the issue since as a CPA advisor, I share everyone’s pain. People want answers and I’m frequently asked to provide them. These are tough answers because each situation is different.
One of the tough choices is with people who retired thinking their savings would carry them through their golden years. The first thing all retirees need to do is recalculate their budget and compare their current expenditure level to their retirement income. Most people took a hit on their investment portfolios and need assistance on how to invest the remainder. Most retirees should cut back on the fat and downsize where possible. There are a number of things that can be done to cut back on expenses. I’ll touch on some of these ideas in a future post. The key here is to match your retirement expenses to your retirement revenue as closely as possible.
Where can retirees get good unbiased advice? More CPAs will be shifting their focus to providing some level of financial advice. This is a good place to turn for people who have smaller portfolios. You should be looking for good practical advice on how to plan and budget for the future. It could be money well spent.
If you have a shortage of future revenue, you might want to explore getting a part-time job to narrow the difference. I realize this is neither why you retired nor what you had in mind when you retired. My advice is to deal with the world the way it is and not the way you wished it was. We all have to do what we have to do. One idea for part-time work is to link work with a hobby so it is more fun.
The person contemplating retirement also has tough choices. One of the main questions to ask is how long do I continue to work? I always try to have people develop a retirement strategy to gain a sense of what they want to do and where do they want to live during retirement. Based on personal experience, living in a retirement community can make it difficult for retirees to find acceptable work since there are a lot of people competing for a limited number of jobs. This is where developing a careful and thorough strategic plan for retirement really can make a difference.
When my wife and I considered moving to Montrose, Colorado as our last move, I developed a strategic plan similar to what I would do for a business client. We evaluated the pros and cons in addition to developing a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of how we were going to spend our retirement years. This removed the guess work from our decision process. We rented for a year until our house in North Carolina sold. I have seen a number of people saddled with two homes because they failed to think through all of the available options. Another mistake is buying a house prior to living in a community for a period of time. After they realized it wasn’t for them they were stuck with a house they couldn’t sell.
Retirement involves lots of choices and many difficult decisions. I will regularly include blog posts dealing with many of these issues. I welcome comments and questions. Since I have experienced many of these same challenges, I think I can help.
Now that we have a new President many people will think that his recovery program will have us back on track in a few months. I’m not so optimistic. My advice is to prepare for a longer term period of slow economic activity, maybe as long as two to three years. This isn’t what you want to hear, but it could well be reality. Assuming such a dismal projection, it is important for us to develop a survival strategy – perhaps strategies.Your strategy needs to include a thorough understanding your competition and markets. You will need to be aggressive and radically different to gain the necessary market penetration. Don’t think your sales volume will be like prior years. It’s probably going to be lower and with reduced profit margins. The world is different now. Keep reworking your strategy almost on a daily basis to make sure you’re on track. Agility is the key to survival.
Developing a budget is essential. The budget needs to include revenue projections together with generation of cash flow. This means managing how you invoice, manage accounts receivable, manage inventories, and manage accounts payable. Maintaining an effective and effective cash conversion cycle is the most critical measurement indicator that you can monitor. When projecting your expenses you need to reduce them to various levels to match the level of revenue projected. Your expenditure budget needs to include survival level outlays representing the minimum level of expenses possible. When you understand how low you can go then you can adjust to revenue levels appropriately.
A component of the budgeting exercise should draw you into analysis of your business processes to understand where there are opportunities to improve these processes. In the new business environment improvement of business process flow will be the key to attaining a competitive advantage. One of the best opportunities to improve business processes will be in reducing paper work and improving accounting efficiencies. We have forgotten the back office which represents huge opportunities.
Many CPAs are too focused on taxes and financial statements and fail to provide the business advice that clients need. This will change as businesses will seek out the advice they need to survive the recession. If businesses fail to receive what they need from their CPA then they should seek a professional who has the expertise to guide them through the tough times ahead and will be responsive to their needs and requirements.
My advice is to be flexible, disciplined, patient, and focused. This is a time to think different because life will be different. The old rules aren’t going to work so you need to find new guidelines and ways to do business. Lower your expectations and hope for the best while preparing for the worst. While things look pretty dismal, this is a good time to look for opportunities to improve your competitive position and profitability.
Clients that wish to make contributions to charities can take advantage of low interest rates and depressed asset values to create and fund a charitable lead trust. This technique works much the same as a GRAT, but provides a stream of payments to a charity rather than back to the grantor during the initial term of the trust. A charitable lead annuity trust (CLAT) is an irrevocable trust that gives a designated charity (this can be a family foundation or a public charity) the “lead” interest consisting of a stream of payments for a term of years or for an individual’s life and thereafter passes the remainder interest to (can continue as a trust for the benefit of) remainder beneficiaries – usually the donor’s children.There are special rules on the use of CLAT’s for GST tax purposes which make this tool less attractive for estate planning on passing wealth to grandchildren. Because of this drawback it is best that donors designate their children (or trusts for their benefit) as the remainder beneficiaries of any CLAT.
The charitable beneficiary receives an annuity from the trust for the term of the CLAT, after which the remainder flows to the grantor’s children. Similar to a GRAT, the value of the gift to the remainder beneficiaries is established by referencing the 7520 rate. Any return in excess of this assumed interest factor results in a tax-free gift to the remainder beneficiaries.
Another variation and an alternative to a CLAT is establishing a GRAT and then making annual gifts to charity of the amounts received back from the GRAT in the form of an annuity payment. This allows the grantor to retain complete control over amounts given to charity as well as selecting the charitable recipients in each year. It also provides the grantor with an annual income tax deduction for the amount of the contributions.
The techniques we have been discussing is appropriate for people with estates large enough to incur an estate tax imposed at death. The current exemption from federal estate tax is $3.5 million. While this was scheduled to phase out in 2010, it is likely that the Obama administration will continue the exemption at this level. I don’t know how long interest rates will remain at these levels but it represents a great chance to pass on wealth to children at a significantly reduced cost of federal estate tax.
These are unique tools for high wealth individuals to preserve the value of their estates. I hope you enjoyed these series and can benefit from them.
Low interest rates and assets values represent a perfect opportunity to freeze estate values and minimize inheritance taxes. The freeze technique utilizes a grantor trust which takes advantage of even lower interest rates than afforded by the 7520 and avoids revaluation of trust assets on an annual basis. This technique is more attractive than the GRAT application for use with assets that are difficult to value.A grantor creates and funds an irrevocable trust for the benefit of descendants. The initial funding of the trust is usually done with cash in an amount equal to 10 percent of the value of the property that will be included in the sale. This trust is a “grantor trust” making the grantor the owner of the entire trust for income tax purposes, even though the trust is a completed gift for gift and estate tax purposes.
Once the trust is funded, the trustees purchase the assets from the grantor in exchange for a promissory note. Since the trust is not a consideration for income tax purposes, the sale does not result in recognition of a capital gain. The trustees continue to pay down the note using the cash flow generated by the purchased assets, or by borrowing funds from a third-party lender, or by making payments in kind. The note can be structured as an interest-only note with a balloon payment of principal at the end of the term of the note.
The property sold to the trust is removed from the grantor’s estate immediately; with no risk of inclusion should they die during the term of the promissory note. If the grantor dies before the note is paid, any portion of the unpaid balance will be included in the grantor’s estate.
The interest rate used for the promissory note is lower than the 7520, meaning that less value is returned to the grantor via the sale technique than would be the case when using a GRAT. The promissory note is structured as a balloon note in contrast to GRAT annuity payments which must be paid with no more than a 20 percent annual increase. Accordingly, the sale technique has the advantage of allowing the subject property more time to appreciate outside of the grantor’s estate. One of the key advantages of this technique is that it is more appropriate for passing wealth to grandchildren than the GRAT technique.
One of the disadvantages of the sale technique is that it must be funded initially by a gift with sufficient assets to provide security for the promissory note. This strategy also requires some use of the lifetime gift tax exemption and cannot produce a $0 gift like the GRAT strategy. The value of the assets subject to the sale can change upon audit. The GRAT technique is based upon a specific tax statute whereas the sale to a grantor trust is a creative use of several different tax laws. However, if the technique is successful, there is an opportunity to pass on wealth to grandchildren with very minimal use of the life time gift tax exemption and GST tax.
We have one more neat estate freeze technique which we will share with you in the next blog post.