What to do now to protect your heirs from the Death of the Stretch IRA
This post is the fifth in a series about the Death of the Stretch IRA. The four posts that precede this one spell out the details of the proposed legislation that will cost your family a lot of money. In this post, I’m going to talk about some possible solutions to the problems that will be caused by the Death of the Stretch IRA that you should consider now. As I said in my earlier posts, using Lange’s Cascading Beneficiary Plan to take advantage of the existing minimum required distribution rules that allow inherited IRAs to be stretched will, for most of you, produce a much more favorable result than any other option available. The Death of the Stretch IRA legislation is designed to accelerate income taxes on retirement plans, so the Charitable Remainder Unitrust should be your “Plan B” that you consider only after the law changes.
How can Social Security help with the Death of the Stretch IRA?
If you’re considering retiring, the very first thing you should do is evaluate your Social Security benefits. Many people feel that the best age to take Social Security benefits is 62 – get back what you paid into the system before it collapses, etc! I used to agree with that line of thinking until noted economist Larry Kotlikoff brilliantly pointed out the flaw in my logic. Larry told me that the last thing I should worry about was not getting back what we had paid into the system if my wife and I die young. If you die, he said, you will have no financial worries – because you’re dead! Our fear, he told me, should be that we might live a very long time and possibly outlive our money. Wow! What an attitude adjustment! But after thinking about it, I realized Larry was right. Your Social Security benefits will give you a guaranteed income that will last for the rest of your life, so it makes sense to maximize them and get the most you can. I wrote an entire book on that subject – you can get it for free by going to the first page of this website – so I’m not going to cover those techniques in this blog. Or, check out an earlier blog post that talks about my latest Social Security book The Little Black Book of Social Security Secrets, Couples Ages 62-70: Act Now, Retire Secure Later. But, getting the highest Social Security benefit is something that you should be evaluating now, because it will benefit you before and after the Death of the Stretch IRA.
How much can you afford to spend every year in retirement?
Second, know exactly how much you can afford to spend every year during retirement, without having to worry about running out of money. Many financial advisors point to a rule of thumb known as the Safe Withdrawal Rate, which is the amount that you should be able to withdraw from your assets over the course of your lifetime without worrying about running out of money. And while there is certainly validity in knowing how much you can spend during the retirement, the problem with rules of thumb is that they are just that! I have proven that there is also a benefit to spending your savings strategically – I discuss it at length in my flagship book, Retire Secure! – but the idea, sadly, is usually not included in general discussions about Safe Withdrawal Rates. The bottom line? Don’t rely on estimates – talk to someone who is skilled in running the numbers, and then check your numbers regularly. That way, you won’t have to worry about running out of money, no matter when the Death of the Stretch IRA passes.
Are you paying to much to invest your money?
Third, know how much you are paying to invest your money. As more and more people become educated about investment fees, the trend (thankfully) has been to move away from high-cost products such as annuities and front-loaded mutual funds, and from stockbrokers who survive by constantly buying and selling in their client’s accounts. Instead, more people are looking toward low-cost mutual funds that can provide diversification, income and even growth without having to pay huge fees. The cost that you pay to earn a return on your money is so important that I’ve even been known to suggest that it should be included as part of your Safe Withdrawal Rate calculation. In years past, there was an odd prestige associated with the idea of having your money managed by a broker who charged high fees. That is not the case anymore! Americans are moving in droves to low-fee investments because they now fully understand how much they save over the long term. And doing the same will benefit you no matter when the Death of the Stretch IRA legislation passes.
Please stop back soon!
For more information on this topic, please visit our Death of the Stretch IRA resource.