It’s Never Too Early (or hopefully, it won’t turn out to be too late)
Posted September 8, 2008
Life is filled with seemingly good excuses for putting off planning for the long term. Who really enjoys imagining your old age and contemplating what your family will do if you die prematurely?
Coach 1 - Age 44, married, 2 children under 8. Assets not including home $250,000. Salary $277,000. $500,000 of life insurance. His will was written 10 years ago leaving everything to his wife.
What’s wrong with this picture?
With an income this high, unfortunately there are few tax advantaged savings strategies available for retirement or funding college education. Retirement IRA contributions are not deductible, and the Education Savings
Account (formerly Education IRA) is fully phased out at a taxable income of $220,000 (married filing jointly). At this income level, federal tuition assistance will not be available. And unless a savings plan is started for both of these future goals, future cash flow alone is highly unlikely to cover the costs.
His life insurance is probably inadequate to continue his family’s present lifestyle, especially after factoring in college expenses. What would be the additional costs of childcare if you’re his wife should die?
If both the coach and his wife die, their children could have full control of the assets as early as age 18 depending on their state of residence.
Coach 2: Age 56, married, two children in private colleges: one planning on medical school. Assets including home over $1,500,000. Salary $700,000. $1,000,000 of life insurance. Never got around to getting a will.
What’s wrong with this picture?
Even though living expenses are not extravagant, current annual cash flow seems to be nearly consumed by taxes and college expenses, leaving only about $75,000 a year for retirement savings. If he wants to pay for medical school, or help his kids out with a down payment on their first house, he will have to work until age 70 to retire at his present lifestyle.
The estate exceeds the current amount fully exempt from federal estate tax. If he and his wife die with a total estate of $2,500,000, death taxes could exceed $470,000 depending on their state of residence and year of death.
Where to start? Action plan for both:
- Analyze whether life insurance is adequate to provide for survivors. Analyze additional costs if spouse were to die and get a policy on spouse if needed. Analyze whether you need a disability income policy.
- Consult an attorney to create an estate plan designed to minimize estate taxes, provide asset management and defer distribution of assets to children.
- Evaluate how title to assets is held; coordinate beneficiary designations on life insurance and employee benefit plans.
- Develop a cash management program to segregate excess cash flow every month into higher yielding accounts prior to longer term investment.
- Analyze the degree to which you need a liquid reserve for emergencies like loss of employment or disability.
- Analyze how much retirement plans will contribute toward desired retirement lifestyle.
- Develop an investment strategy to achieve retirement goals based on the timeframe and risk level appropriate to this crucial objective.
