Portfolio

by Contributing Columnist

Published: April 13,1998

Did you ever see a big camper trailer rolling down the highway with a bumper sticker that says “We’re spending our children’s inheritance?”

Maybe you’ve got one just like it.

If your retirement dollars are now rewarding you for a lifetime of work, congratulations! Having enough money during retirement is a great stress reliever. But many retirees with adequate assets still worry. They’ve worked hard to build their assets and think more about protecting their dollars from risk than spending, investing, or gifting them. If you’re avoiding decisions about assets because of concerns about risk, you’re not alone.

The risk factors

Many retirees with modest nest eggs — say shares of company stock they received after years of faithful service, or accumulated dollars in a bank account — may also have memories of the Great Depression and can’t ever forget the “rainy day” lesson it taught them. Many have decided to get along on their Social Security and fixed pensions income and keep hands off any other assets they may have, in some cases to the point of depriving themselves or others of the power of those assets. Unfortunately, there are risks in being too protective of assets. Let’s look at three of them:

• Inflation — If most or your retirement dollars are parked in accounts earning low or no income, they probably aren’t keeping up with inflation. Certainly, it’s wise to have an FDIC-insured checking or savings account at a bank (FDIC protects account values up to $100,000). But if all of your dollars are in these accounts, they could be losing ground. Using simple arithmetic, if an asset’s return is 3% an inflation is at 2.5%, (the annual percent change for the Consumer Price Index in 1997), the asset’s real return is .5%. Inflation erodes the spending power of your dollars as it has historically. Remember that loaf of bread at 35 cents? Or a first class postage stamp at 18 cents back in 1981? For some items, like medical care and a college education, costs have risen even more each year.

• Estate taxes — Many Americans who pinched pennies during the Great Depression scoff at the idea that their modest belongings could be considered an estate. But you don’t have to be extremely wealthy to have an estate. Estates with taxable assets of more than $625,000 in 1998 are subject to estate taxes, which start at 37% and can reach 55%, depending on the estate’s size. Although estate tax laws are complex, it’s safe to say that all directly owned assets are counted as estate assets at death. That includes the current value of a home (not the price paid for it), any real estate, cars, jewelry, art or other collections and personal possessions. Included also are intangible assets you own, like bank accounts, annuities, retirement plan assets, stocks, bonds and mutual funds, limited partnerships or life insurance death benefits or cash values. If your heirs are then held responsible for funeral costs, debts you incurred, and possible state death and inheritance taxes, they may want to get a bumper sticker that says “I’m spending what’s left of my inheritance.”

• Gift tax — Many older Americans plan to give a large gift to their children or grandchildren at a later date when they’ll really need it, maybe to help with a down payment on a new home or for higher education. They’re unaware of the limits on the amount that can be gifted each year without being subject to taxation. The gift tax exclusion allows anyone to give away up to $10,000 each year to any number of individuals. (A married couple may give away up to $20,000 a year to any individuals.) This exclusion will be indexed for inflation in the future, but isn’t expected to change much until the year 2000 or later. Money that is gifted over and above that amount is included in the calculation to determine the giver’s estate tax.

All in the family

Incidentally, these rules for gifting are for giving to another individual. Should a grandparent want to help with college tuition, there’s a provision that allows direct payment to the college (for tuition only; not for other expenses) that is not subject to the $10,000 gift tax limitation. Also, the amount of cash allowed for a donation to a qualified charity is 50% of a person’s adjusted gross income. This could be an issue for retirees with substantial assets but relatively small amounts of taxable income.

Although each of us must follow our own instincts when protecting our hard-earned assets, it helps to know about some of the hidden threats to a seemingly risk-free nest egg. Estate planning, gifting, and investing to stay ahead of inflation can be complex topics and it may be to your benefit to consider professional advice.

Gary N. Garner is a personal financial advisor with American Express Financial Advisors in Jackson.


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