"How Much Did He Leave?" "All Of It" (Day 10)

Yesterday I wrote about what I see people do most often with retirement money, and said that instead of just complaining about their mistakes, I would offer some solutions.  As I often say, this isn't insurance advice.  Without sitting down with you and discussing the specifics of your situation, I can't make an informed recommendation.  What I'm posting here is very general, something to use to open a discussion with me or another professional and figure out an action plan, not something to take action on right now. 


People often tell me something along the lines of, "I want my money to run out the day I die, and the check to the funeral home to bounce".  They understand the old saying of "You can't take it with you."  However, they almost never actually spend their retirement money that way.  Just like a business, 401 (k) and IRA plans should have an "exit strategy" from the beginning.


These are some possibilities that in many cases are better than holding on to tax-deferred money until it gets passed to beneficiaries or a nursing home.

• Start a guaranteed income stream from the retirement funds and use it to buy a life insurance policy.  Often the best option is one that also provides a benefit if you need long term care.  Advantages:  Taxes on withdrawals are spread out over multiple years, and proceeds from life insurance to designated beneficiaries are not normally taxed.  Depending on age, health, etc, life insurance benefit could be more than the value of the retirement savings, even not figuring in tax advantages.  Depending on options chosen, beneficiaries may get both the life insurance benefit and more regular income.  At least they won't get everything as taxable.
• Gradually convert to Roth IRA.  You pay taxes on that part when you convert it, but it is later passed on without the taxes hitting all at once.  With some planning, you can offset the amount you convert with other deductions so you pay little or no tax on the money.  For example, I've had customers balance the Roth Conversion with deductions like large medical bills, HSA contributions, business losses/investments, work layoffs, etc.  I haven't had anyone do it, but it would be ideal to take a year off work to travel, live off savings, and do a Roth Conversion to turn money that's never been taxed to money that will never be taxed.  All without every paying any taxes on that money.  Do this only AFTER consulting with a tax advisor.  That's better than getting a surprise at tax time, and if the tax advisor is good, he or she often has ideas on how to do it even better than you and I think of doing it.
• Give it directly to a charity each year.
• Give a portion as gifts to family each year, paying a small amount of or no tax as you go.  With both this and the charitable giving, you get to see the benefits of your gifts, which is a lot better than saving on taxes.  They might even take you out fishing or water skiing on their new boat.

Those are just a few options.  A key to any of them is to have a plan for long term care.  Notice I didn't say, "long term care insurance" or "to pay for the nursing home".  The insurance part is sometimes involved in the plan, but just having a policy isn't enough, and often is not the best way to plan for it.  Nor is a nursing home always the best option.  But they are full of people who didn't plan because they didn't need a plan because, "I'm never going to the nursing home".