Real Life | Consider investment and income strategies for late life and impaired living

08/09/2014 12:00 AM

08/05/2014 2:17 PM

We all know it. We should rearrange our precious, limited financial assets and incomes to handle the changes and costly challenges that aging and impairment mandate. Realities, needs and objectives evolve. Strategies must sync with them.

Over many decades of financial life, we nurture favorite, sacred-cow notions about managing money, smart ones and not-so-smart ones. Some are inbred, “time-honored virtues” that just don’t fit our needs anymore, such as big, low-interest deposit accounts and the huge, old expensive family home. Despite their sacredness, we need to learn to dismiss the undesirable ones. Goodbye, sacred cows. Hello, today’s financial planning techniques for tomorrow’s old age and declining abilities.

Wisdom abounds, from a galaxy of sources. Examples: the Internet, community outreach courses, print and digital literature, and knowledgeable advisers. Wealth management, CPA, financial planning and law firms offer informative and pleasant infomercial seminars.

Then there’s Cousin Bert, sounding as though he knows everything and happy to let us think so. He’ll mentor us for free. If a Cousin Bert is in your world, beware! He’s capable of unintentionally, disaster-ing us with all that he doesn’t know — and he doesn’t even know that he doesn’t know. For example, Bert, how come your income plan for Lillian triggered a lump-sum, attribution-rule income tax, hmm?

Instead, how much better it is to seek our serious money guidance from the best resources of all, our professional team, masters of the vital complexities and the treacherous “what ifs,” as we do for health care and tax and legal guidance. They’re the financial planners, life insurance professionals, securities counselors, realtors, CPAs, wealth mangers and the like — with impressive alphabet letters following their names and impressive reputations to match. Sure, we ultimately pay their fees and commissions, but that cost is a welcome and lucrative investment in a most successful financial voyage, without Lillian-type shipwrecks.

What will they tell us? My view of some fundamentals:

Above all, the right income structure becomes our primary objective. Typically, we need worry-free, sufficient, steady cash inflow, most of it insulated from wide marketplace price fluctuations, free from daily micro-management burdens and, preferably, tax-favored. Part of the inflow can be from moderately variable-yield investments to help hedge inflation and to give us a little market-watching fun. Among comfortable sources are pensions, annuities, blue-chip securities issued by major stable companies, government entitlements and federally insured accounts.

We switch our corporate assets to proven “investment-grade” securities, as though we were straight-laced bank trust officers, dwelling in recession-resistant, essential industries, such as health care, the food chain, transportation, traditional energy, banking and insurance. Those displace far riskier assets, such as speculative stocks, derivatives, time-shares, real estate development schemes, currency speculation and loans to Cousin Bert to revive his typewriter and mimeograph machine store. Out go the shares in small and upstart businesses and volatile ventures, like far-out, high-tech, third-world economic development, luxury homes, leveraged and subordinated financial instruments, and “junk” bonds.

“Speculative,” “leveraged” and “volatile, but will pay off in the long run” become dirty words, as we plan for the stage in life when dessert-before-the-entree no longer is just a joke. Only a minor share of our capital even should be in seasoned blue-chip growth securities. Instead, diversification, current performance, long-term downturn insulation and safety from the risk of loss become primary investment criteria. By the time “sounds too good to be true, hot tip” deals reach our eyes and ears, they’re fantasy.

Diversification to minimize risk becomes a sacred commandment. We spread our exposures among companies, industries, interest and dividend yield and capital gains, variable and fixed yields, long and short-term exposures, political realities and governance, geographics, countries of location and even the technologies that drive business’s daily operations. Mutual funds, unit investment trusts, life insurance and annuity companies and other asset-pooling entities are excellent diversifiers.

Liquidity becomes sacred, too. Securities should be convertible to cash within a few days or weeks without significant loss. No longer can we wait for “china eggs” to hatch in the long run.

To supplement pensions, IRAs, 401ks, and entitlements (government benefits), here are some ideas: life insurance cash values, investment-grade corporate and government bond funds and unit investment trusts, some blue-chip stock and mixed mutual funds (especially “dividend dogs”), a select few widely held joint ventures in rental properties and precious metals, short-term and floating-rate debt instruments funds, and both fixed and variable annuities.

I know, unless you are a certifiable financial guru, all this can be daunting. Relax, it’s OK, because your financial team knows all for you and thrives on masterfully shepherding you.

Sorry, Bert!

Here’s an often-overlooked idea: We all nourished our precious cash value life insurance over the years, but because we didn’t die young, not all of it is needed to support the family and pay off the mortgage. Now its job is to cover our final expenses, provide liquidity for our estates’ needs, help take care of our beloved and magically create bequests for family and charity.

But maybe you’re still carrying more than you want or need for those purposes. What to do? What not to do is cash surrender the excess, causing taxable gain and destroying a magnificent income benefit that’s yours because you’ve lived long instead of died early.

Convert or exchange that cash value into an annuity, fixed or variable. Magically create an income-tax-favored systematic distribution of principal and interest, guaranteed (at least as safe as U.S. government bonds) to last as long as you do, even if you live very long and receive far more than your principal. You can’t outlive your inflow from an annuity. Choose among many survivor options for your beloved, too, and arrange all sorts of cash-flow plans to coordinate with your and your beloved’s other incomes. Charitable gift annuities, donating whole or residual principal, create wonders without sacrifice. Lump-sum withdrawals even are allowed for vital needs.

Cash flow is high, despite the guarantees. For example, at age 65, each $ 10,000 of principal under one option flows about $600 per year, partly tax-free, to both of you, as long as either one of you lives. Singles or older start-ages get far higher amounts, even more than $ 1,000 per year.

Many advisers champion annuities as the most versatile and favorable roll-over vehicle for IRAs, 401ks, proceeds from the sale of property, lottery winnings, monetary awards, maturing investments and profit-sharing plan proceeds — to transform capital into desirable income.

Most annuities gradually liquidate the principal, so be sure to maintain other assets for bequests. Also, there are necessary and desirable risk and expense “loads.”

Sacred cow “lazy money,” like ridiculously low-interest bank deposit accounts in excess of a $25,000-or-so emergency fund, can work much harder if invested or annuitized. Your bank can provide plenty of emergency funding via a prearranged line of credit, incurring interest only when you need it. Another is the totally unproductive equity in that big old, money-devouring family home — sale or reverse mortgage (but that’s still debt) begets inflow and liquidity.

Throughout our income and investment planning, we must be vigilant of the minefields that threaten eligibility for entitlements, such as the various Social Security, veterans’, Affordable Care Act, Medicare and Medicaid programs. Let’s not inadvertently blunder into benefits disqualification or reduction because of income criteria, length-of-time requirements, net-worth thresholds, residency requirements and so on.

All just common sense? Sure, but uncommonly helpful? I hope so. Your comments are welcome.

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