(The following article is adapted from Beating The F.E.A.R. Factor: 15 Minutes to Your Ideal Retirement by Ronald Gelok with Adriane Berg.)
Let's say you're driving down the highway and want to change lanes. So you glance at your rearview mirror and side-view mirror and turn on your signal. You start easing over, and all of a sudden, somebody is leaning on the horn at you. Then, you scoot back to your lane as quick as you can, but your chest is pounding and you say to yourself: "Oh my gosh. I didn't even see that guy. He was in my blind spot."
Not seeing somebody in a blind spot can result in a devastating accident, and the same is true with your finances. If you ignore or can’t see your financial blind spots, there could be irreversible consequences that could destroy your retirement.
(MORE: 5 Big Mistakes Older Investors Make)
The four big financial blind spots are:
- Investment Risk
- Income Gap
- Catastrophic Illness
Here’s what you should know about each:
Tax Blind Spots
When it comes to taxes, one big financial blind spot is estate taxes. A lot of us are lulled into a false sense of security about them because the threshold for owing federal estate taxes is $5 million.
Here’s the blind spot: many, many states have state estate taxes. For example, anything over $675,000 in New Jersey is subject to state estate taxes when passed to the next generation.
(MORE: Tax Savers for Procrastinators)
For married couples, this blind spot can be fairly easily addressed just by doing a tax-planned will, which includes a marital trust for the benefit of the surviving spouse. That trust, in effect, gets its own estate tax exemption.
Another tax blind spot is the tax repercussion when we withdraw money from traditional IRAs, SEP-IRAs, SIMPLE IRAs, 401(k)s and other employer-sponsored retirement plans.
At age 70 ½, the federally mandated Required Minimum Distribution is 3.65 percent of the plan’s assets. That means for each $100,000 of retirement plan money, you'll have to pull out $3,650. But, by age 80, the Required Minimum Distribution exceeds 5 percent. Each year after 70 ½, you're required to take a little bit more out.
We're often misguidedly advised that if you're in your 60s, you shouldn't take any money out of your retirement plans because that's going to incur an income tax liability. But what's wrong with taking some money out of them then if that money is going to be taxed at a lower tax rate than if you wait until you're 70 ½ or beyond? Too much tax deferral can be like a pact with the devil.
Investment Risk Blind Spots
When you invest in stocks or bonds, there are no guarantees against loss or of performance. If a client says, "Look, I'm really craving some type of guarantee that will protect a portion of my retirement savings against loss and would give me some level of guaranteed income," we look to offerings from insurance companies that do just that.
We can use a fixed annuity tied to a market index. In that case, your account doesn't go backward when the market goes backwards. At the same time, you are capturing interest credits linked to the S&P 500 in the good years and keeping those gains, while avoiding losses in the down years with a lifetime income guarantee rider that will compound at 6 or 6.5 or 7 percent per year to meet future income needs.
(MORE: Risk Tolerance Is Overrated)
Income Gap Blind Spots
A generation ago, it seemed like retirement planning was a lot easier because most people had paychecks for life in the form of traditional pensions. Today, over 80 percent of us don't have pensions. Meantime, advances in medical technology are keeping people alive longer.
So people don't have guaranteed income for life unless they put together a system to create that.
You need to put a system in place that gives you guarantees to cover the income gap. If you look at what your expenses are and are likely to be in the future, and come up with a solution to cover the gap between those expenses and what you’ll get from Social Security, you’ll solve a big, big problem.
A financial planner can help you determine whether you’ll have an income gap.
Catastrophic Illness Blind Spots
If you ignore the blind spot of a possible catastrophic illness, your entire legacy could be lost to the expense of a nursing home. It’s not just the possibility of dementia or Parkinson's you need to plan for, it can be heart attacks and strokes. Seven out of ten seniors will need some type of long-term care.
If you’re not a fan of traditional long-term care insurance because the premiums are not guaranteed and could rise dramatically, there are alternatives to consider.
For example, single premium — sometimes referred to as single deposit — combination long-term care life plans. Also, life insurance policies with a chronic illness accelerated benefit rider can be used to pay for long-term care.