By Sandy Botkin CPA, Esq.

Copyright 2009 by Sandy Botkin. All Rights Reserved.

“Planning is bringing the future into the present so that you can do something about it now!—Alan Lakein

Here is an example that actually happened to me that brings the importance of good planning for everyone. 

One of my friend’s sisters ended up taking care of her grandmother. In order to facilitate the care, the sister co-signed on the bank accounts in order to pay bills necessary for the grandmother. All went according to plan until the grandmother died. Despite having a clause in the grandmother’s will that all of her assets were to go to her only daughter, all bank accounts were transferred to the granddaughter by the bank. The reason was the joint ownership overrides a will! The granddaughter felt that she earned the money; this caused an irrevocable rift in the family between that granddaughter and everyone else! The sad part is that this could easily have been avoided with proper advice to the grandmother.

This will be the first or many articles that will discuss some salient, practical problems that affect or will affect everyone. We will be discussing in the future many topics that deal with financial, tax, and elder planning such as:

• Planning for Medicare so that  the government doesn’t take all  you money
• Which investments are right for you?
• How do we protect our retirement so that we have more money than life?
• How do we plan to reduce our taxes as much as legally possible?
• What is the best way to save for college and education expenses?
• What are some good, inexpensive ways to protect from law suits?
• When is investing in tax exempts better than taxable bonds?
• What types of mutual funds are best?
• How do we plan for a parent with Alzheimer’s disease?
• How do we evaluate nursing homes and long term care insurance?
• When should be take social security? You will be surprised at the answer. Moreover, if we take it too early, what can we do in order to correct our mistake? ( hint- there is a dirty little secret that very few people know about.)
• How do we know what level of care to give for a handicapped parent or one developing dementia?
• What are the latest “scams” being perpetrated today? You will be surprised at what I will be saying.
• The best way to hedge most bonds from inflation and interest rate increases.
• What types of legal documents should everyone in the world have?
• How you can literally “eat away and golf away” your taxes
• How to get the equivalent of a deduction for your kid’s education and wedding. No kidding!
• How to make your car a tax deductible goldmine
• How to eliminate up to 40% of your social security and Medicare taxes
• How to eliminate most capital gains taxes.
• How to deduct most trips as business trips
• What to do in order to bullet-proof your records from the most picky tax examiner.
• And much, much more.

 

I do know that some of you are young. You might be thinking, “OK, reducing my taxes sounds great, but why do I need to know about elder planning issues or estate planning?” There are two answers. First, do you have parents? They will need to plan. You can copy any article and give it to your parents. Moreover, as the old saying goes, “if you do no planning, you automatically plan to fail.” Even young, single folks need to do investment, tax and even basic estate planning. Moreover, lives change which cause changes in plans every few years.

I promise you that when you finish reading all my articles, your subscription to our newsletter will be very worthwhile for just this information alone!

 

What’s changed in life?

When my parents were growing up and when they were raising kids, most people worked for the same job all their life. They were well taken care of with medical insurance, a great pension and other benefits. Just think of the old shows such as Ozzie and Harriet (for those old coots who remember this show) and My Three Sons’ dad and Beaver’s parents. They stayed married all their life and worked at the same job in the same occupation forever. So what’s changed?

First people are living much longer. The average life expectancy today in the US is just over age 77,which is twelve years higher than most of the developing countries. This should be compared to prior years:

 

Year                                                                        Average life Expectancy

Classical Greece and Rome

(Around 300 BC to 300 AD)                        20-30

1900                                                                        47.3

1960                                                                        69.7

1970                                                                        70.8

1990                                                                        75.4

2000                                                                        77

2009                                                                        77.7

 

Secondly, we are in a must faster world. The amount of knowledge that we need to know has expanded geometrically with the onslaught of new ideas, discoveries and the use of the internet. This requires a lot more knowledge

Third, divorce rates are skyrocketing. The divorce rate in America for first marriage, vs second or third marriage: 50% percent of first marriages, 67% of second and 74% of third marriages end in divorce, according to Jennifer Baker of the Forest Institute of Professional Psychology in Springfield, Missouri.”

Sandy’s elaboration: I guess folks don’t learn their lesson.

 Life’s risks that require planning

There are 12 reasons for everyone to do some planning. I will discuss some of them here. They include

• Disability from sickness or injury
• Law suits
• Income taxes and Estate Taxes
• Death
• Improper spending habits
• Inflation
• Large future expense planning
• Planning for divorce and multiple families
• Longer life
• Retirement with financial independence
• Procrastination. Yes, this may be the worst killer of wealth!

1. Disability from Sickness or injury:   Approximately three in ten people will face some form of disability before retirement and 1 in 7 will be expected to be disabled for five years or more.[i] This is an area that far too few people are prepared for nevertheless properly insured for. We will discuss this problem, including analyzing disability insurance policies, in later articles.
2.  Law Suits:  It is astonishing that most folks don’t worry more about the possibility of law suits. It was been estimated that you have at least a 1 in 200 chance of being sued in your life. It has also been estimated that there are about 15 million lawsuits filed each year, which is one every 2 seconds![ii] Even worse, some commentators have noted that a majority of these law suits are frivolous and meant solely as a nuisance. Planning for asset protection, especially if you have any significant liability exposure due to your occupation is becoming increasingly crucial today. We will discuss some strategies for asset protection in future article as well.
3. Income Taxes and estate taxes: This is another of those insidious problems that too many folks don’t plan for. When I was born on caugh …1948…caugh, taxpayer freedom day was around April 1. Thus, everything you earned after the first three months of the year was yours to keep! Today, taxpayer freedom day is estimated to be May 28 if you add in the federal budget deficits (according to the Tax Foundation)!

 However, there are many other types of insidious taxes that will hit you in the future that we will need to discuss such as estate taxes, Medicare’s potential drain on your assets or those of your parents, and switching to more tax friendly investments and investment vehicles. Finally, if you want to leave your kids a nest egg, proper estate planning and probate planning becomes essential. In fact,  did you know that once you hit a flat exemption, the government takes a whopping 35% of your total net worth ,and it could be much higher!? 

4.  Death: This is not my favorite topic but since everyone has a 100% mortality rate, it is a crucial topic. Sadly, most folks have the wrong type of will or, even worse, no will at all. In addition, there is a lot of planning for death such as seeking out the best type of life insurance, type of documents that everyone should run out and get. In addition, estate planning is crucial as noted above, etc. 

5.  Improper Spending Habits: Have you ever asked yourself, “Where did all the money go?” If so, you are probably piddling it away with such things as Starbucks coffee, a breakfast pasty, eating out too much, cigarettes etc. Money Mastery, which is out of Bountiful, Utah, notes that they have seen folks who make over $200,000 a year yet have a lifestyle deficit. When this is combined with inflation, the effect is financial death, which means bankruptcy.

 

As of June 2009, the average household had over $9,100 of credit card debt per household.[iii] Today, it has been estimated that Americans, in total, have over one-trillion dollars of credit card debt!

 

Recently, bankruptcies are at an all time high and foreclosures hit 1.5 million, which is partly as a result of folks over buying what they probably couldn’t afford anyway.

So what’s the answer? The answer, according to Money Mastery’s book entiled, “Money” is to track your expenses for one month. You would keep track of everything spent by check, credit card of even cash. More on this will be discussed in later articles. If you want to have access to a good tracker for your expenses check out our tax tracking tools page

Sandy’s Elaboration: Interestingly, you don’t need to budget or even go on a financial diet. The secret is

 

 Knowing that you can have anything you want. You just can’t have everything!

Thus, if you want to eat out every day, you might have to cut back on some other expenses such as savings for college.

6.  Inflation: Most people don’t worry as much about inflation and taxes as they should because of what was referred to as “The Jumping Frog Effect.” Imagine placing a frog in boiling hot water. What do you think he will do? The answer is to jump out. However, if you place the frog in lukewarm water, he will stay there even if you slowly raise the temperature till he cooks to death!

 

Most people are accustomed to inflation and to having withholding on their taxes. Thus, they really don’t feel the ever increasing bite that both of these problems have on their life. Here are some expenses that I saw twenty years ago. Compare them to today:

 

                  20 years ago           Today                                   

Automobile          $4,300            $20,000

Postage stamp    $0.06              $0.44

Movie Ticket        $1.25              $8.25 (unless you are a senior or student)

As you can see, prices are much higher than they were 20 years ago. Sadly, most folks never plan for this or incur what I call, “Going Broke Safely.” Let me use an example of what I mean

Example: Mary wants to protect her retirement nest egg. She only buys bonds and puts her money into bank CDs. Let’s say that her bank gives her a whopping 3% interest, which is a bit high today. She would earn $3,000 for every $100,000 invested. However, this isn’t the whole story. She would have to pay federal and state taxes on the interest, which we will assume would be about $1,000. Thus, she would be left with $2,000 after taxes. If inflation exceeds 2%, she will be slowly losing her purchasing power. I call this going broke slowly! This is a huge problem for everyone today especially for retirees. 

7.  Large Future Expense Planning: We all will have some form of this. This includes saving for a home, college and wedding planning for kids. College tuition, room and board, which today might be as much as $50,000 per year, is expected to exceed $96,500 per year by 2020! There are many issues involving these large expenses such as, what is best way to save for college costs and wedding. With cars, should you pay cash, accept dealer financing, lease a car, use home equity or use the IRS vs. actual expense?  For homes, I have a whole book written on this entitled, “ Real Estate Tax Secrets of the Rich,” which I will be taking topics out of my book and placing them in future articles.

8.  Planning for divorce and/or multiple families:  With a possible 50-70% divorce rate, you would think that folks would learn their lesson, unless your name is Donald Trump and can easily afford it. Sadly, many people not only pay alimony and child support but also support a whole new family. I call this “Going broke loudly.” This family change certainly necessitates a whole new review of your planning documents at the least. Moreover there are some important tax planning issues that deal with divorce that everyone should know, which will be discussed in future articles. 

9.  Longer life:   I constantly am asked, “Why this is a problem?” The reason is that a longer life creates more problems. You will probably have increasing costs of medical care. You have a longer chance of a law suit. You have to worry that your money will outlive your life. Thus, we need to discuss not only how much you need to have at retirement but also how to protect your retirement from being depleted.  Finally, problems such as becoming handicapped physically or mentally might require a variety of services such as independent care, assisted living or even a nursing home. There are many issues here that will warrant some knowledge by you.

10.  Retirement with financial independence:  I remember reading in a Miami paper about two elderly people who were forced to live on dog food because they couldn’t afford to live otherwise. YUCH!   

There are an estimated 77 million baby boomers headed into retirement.[iv] For older workers ages 55-64, a whopping 30% have no personal retirement savings.[v] Nada, Zilch! Even more startling, only 15% of elite households, who were upper middle income or higher earners, have saved at least four times earnings. Moreover, even at four times earnings, you still might not have enough for retirement.

Example: Marc and Robin earn a combined income of $120,000 per year. If they only saved $480,000 for retirement and  spend 3% of their money each year, they will only earn $13,400 per year in interest before taxes. Check out CNN’s retirement calculator. See http://cgi.money.cnn.com/tools/saveyoung/index.html . It has been estimated that folks should have at least $2,000,000- $3,000,000 worth of investable assets to have a reasonable standard of living at full retirement

Sandy’s elaboration: Frankly, you should probably have closer to $4, 000, 000, which should give you a good retirement and a nice cushion for inflation, which is why I am still working.

 

In fact, It has been estimated that fewer than 10% of all Americans can retire with the same standard of living that they had before retirement. There are many questions here as to what you should invest in and what asset allocation should you have?

11.  Procrastination:  There is a real, high cost to procrastination. An example will illustrate this.

Example: John , who is 25 years old, decides to put away his full Roth IRA each year of $5,000 for forty years till he retires by age 65.If he earns a long term rate of 6% on his money, he will have at retirement $820,238. However, if he puts the same money away for only 30 years, which is only 10 years less, he would have $419,018. At 9% the difference is even more astounding: $1,841,459 vs.$742,876

Albert Einstein once said that, “Compound interest is the eighth wonder of the world.” The key behind getting rich in retirement is simply saving at least 10%-15% of what you made ( see my video on Tax Strategies for Business Professionals) and to diversify your investments so that you can make a better rate of return over inflation.

Here is a shocking example of how interest and time affects investments. We bought Manhattan from the Indians for a measly $24 in 1626. If the Indians invested this money till now, which is 385 years at a measly long term rate of 6%, they would now have over 130 Billion dollars! If they were to earn 9% a year, this amount would rise to an approximate whopping 6 trillion, one-hundred and fifty-eight billion! They could have bought Manhattan back and still had several trillion dollars left over!

In fact, there was a book written entitled, “The Millionaire Next Door”[vi] that noted that the majority of millionaires were folks who were savers and put away money for retirement throughout their life.

Bottom line: When planning for your future retirement, listen to Einstein and the authors of the Millionaire Next Door. Save as much as you can without touching it till retirement, get a return that exceeds inflation and give yourself some time to make this money. Moreover, get started NOW and read all the forthcoming articles on the edge site. You will make your life a lot less taxing in many ways.

Summary of Important points:

*            Planning is important regardless of your age

*            Lifestyles and living requirements has changed over the years

*            People need to plan for eleven contingences: Disability from sickness or injury, lawsuits, income and estate taxes, death, Improper spending habits, inflation, large future expenses, divorce and multiple families, longer life, retirement with financial independence, and procrastination.

*            If you want to cure bad spending habits or reduce your debts, you must track your spending for two months and see where you can cut back. Remember, “You can have anything you want. You just can’t have everything.”

*            Understand that compound interest is the eighth wonder of the world. It can work for you or it can work against you with debt.

*            Your net return after investment should be looked at “after-tax.” In addition, this after-tax return on investment should exceed inflation or your will be “going broke slowly.”

*            Finally, if you want to get rich, follow the advice of both the Millionaire Next Door and Einstein:

1. Be a saver and save at least 10-15% of your net income each year

2. Never touch this money except for retirement           

3. Save as long as possible. Let compound interest work for you

4. Get your taxes down to the legal minimum each year. This takes planning and some work. Start your home study course now!

5. Diversify Your Investments

6. Make your after tax return on investments exceed inflation.

7. Don’t procrastinate. Get started now.

 

Sandy Botkin is a lawyer and CPA who specializes in tax planning for small business and real estate tax issues. He has several recommended home study courses and is a best -selling author.  You can access his courses by getting a subscription to this site.

 

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[i] Council for Disability Awareness

[ii] Legal Reform Now web site (See http://www.legalreform-now.org/menu3_3.htm)

[iii] www.Cardweb.com

[iv] Cnnmoney.com

[v] according to a recent analysis by benefits consultants Watson Wyatt, which reviewed data from the 2007 Survey of Consumer Finances (the most recent available).

[vi] The Millionaire Next Door, by Stanly and Danko