The 8 Biggest Mistakes People Make With Their Finances Before and After Retirement

239 Pages·2001·1.81 MB·English

by  Terence L. Reed

This publication is designed to provide accurate and authoritative information in regard to the subject
matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal,
accounting, or other professional service. If legal advice or other expert assistance is required, the ser-
vices of a competent professional should be sought.
Vice President and Publisher: Cynthia A. Zigmund
Editorial Director: Donald J. Hull
Senior Project Editor: Trey Thoelcke
Interior Design: Lucy Jenkins
Cover Design: DePinto Studios
Typesetting: Elizabeth Pitts
 2001 by Terence L. Reed
Published by Dearborn Trade, a Kaplan Professional Company
All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any
manner whatsoever without written permission from the publisher.
Printed in the United States of America
01 02 03 10 9 8 7 6 5 4 3 2 1
Library of Congress Cataloging-in-Publication Data
Reed, Terence L.
The 8 biggest mistakes people make with their finances before and
after retirement / Terence L. Reed.
p. cm.
Includes index.
ISBN 0-7931-4906-1 (7.25 × 9 pbk)
1. Retirement income—United States—Planning. 2. Finance,
Personal—United States. 3. Investments. I. Title: Eight biggest
mistakes people make with their finances before and after retirement.
II. Title.
HG179 .R365 2001
332.024′01—dc21
2001003647
Dearborn Trade books are available at special quantity discounts to use for sales promotions, employee
premiums, or educational purposes. Please call our special sales department to order, or for more infor-
mation, at 800-621-9621, ext. 4364, or write to Dearborn Financial Publishing, 155 North Wacker
Drive, Chicago, IL 60606-1719.
Contents
Foreword vii
Preface ix
Acknowledgments xi
1. Not Investing for the Long Term 1
Past Investment Advice 3
What to Use for Your Fixed Investments 5
The Dividend-and-Interest Method 9
Systematic Withdrawal 11
Failure to Accumulate 14
Stretching Her Resources 15
2. Taking on Financial Risk 21
Financial Risk 21
Diversification Matters 22
Put It in Writing Please 23
Political Risk 23
Look at Risk before You Invest 23
Key Points on Financial Risk 29
Key Points on Market Risk 30
Key Points on Inflation Risk 30
Key Points on Interest Rate Risk 31
iii
iv Contents
3. Failure to Do Dignity Planning 33
Our Sense of Self 33
Dignity Planning 34
Your Medical Decisions 35
Your Financial Affairs 37
Durable Power of Attorney 44
Disability Insurance 53
Plan for the Best, Prepare for the Worst 53
Important Policy Benefits 54
4. Not Having Good Long-Term Care Coverage 55
A Case in Point: Without Resources 55
If Medicare Doesn’t Pay, Who Does? 57
Long-Term Care Insurance 59
Indemnity Plans 61
Don’t Overinsure 62
Would You Like Your Policy Tax Qualified or Nonqualified? 64
Who Should Consider Purchasing Long-Term Care Insurance or Home Care Coverage? 66
Another Way to Reduce Premium Costs 73
How to Check on the Financial Status of an Insurance Company 74
5. Not Planning Properly for the Transfer of Your Estate 75
Put It in Writing 75
A Matter of Will 77
Loss of Some Tax Advantages 83
Typically Married Couples 84
Gift to Minors 85
Using Living Trusts 86
A Brief History of Certain Tax Laws 91
How Much Is a Tax Credit Worth? 93
Key Points to Remember about the Federal Estate Tax 95
A Case in Point: Harry and Sharon Make a Mistake 96
How to Preserve Your Unified Credit Amount 98
Other Major Mistakes People Make 100
Skipping Generations 101
Gifting Assets at the Wrong Time 102
Owning Life Insurance in Your Own Name 103
Other Irrevocable Trusts That Can Dramatically Reduce Taxes or Replace Wealth 106
Charitable Remainder Trusts 107
Using the Wrong Beneficiary on Your IRA 109
Common Disasters and IRA Plans 110
Contents v
Naming Children as Beneficiaries 111
Seven Key Points to Keep in Mind 115
6. Paying Too Much in Taxes 117
Tax Awareness 118
The Power of Deferring Capital Gains 122
Mutual Funds—The Hidden Tax 125
Tax-Free Investments 127
Tax-Deferred Annuities 131
Taxation of Social Security Benefits 135
What Is So Wrong with Congress Taxing Our Social Security Benefits? 136
Eight Major Tax Traps That You Should Be Aware Of 138
7. Using the Wrong Investment Strategies 147
Accumulation versus Investment 147
Taking the Next Step 148
An Investment Is 148
Mutual Funds 148
Unit Investment Trusts 157
Individual Stocks 164
Individual Bonds 169
Variable Annuities 173
Rules for Being a Successful Investor 182
Other Books to Assist You in Becoming a Better Investor 195
8. Having the Wrong Type of Life Insurance 197
There Are Many Choices 199
Financial Leverage 201
Newer Types of Coverage 203
The Benefits of Having a Tax-Free Spigot 204
The Purpose of Life Insurance 206
How to Pay Estate Taxes Economically 207
Collecting before Your Time 210
Viatical Settlements 211
Insurance Company Rating Systems 212
Glossary 215
Index 221
The 8 Biggest Mistakes People
Make with Their Finances Before
and After Retirement
For special discounts on 20 or more copies of The 8 Biggest Mistakes
People Make with Their Finances Before and After Retirement, please call
Dearborn Trade Special Sales at 800-621-9621, ext. 4364.
Foreword
M
oney and its accumulation is a fascinating and important subject, yet it remains
confusing to many retirees. This stems from the fact that there are too many sources
of financial information, each with its own agenda. In fact, successful people share
two important personality traits: They are accumulators and they are investors. Sel-
dom are people good at doing both of these jobs. It simply requires a different mind-
set to do each.
Terence’ s book should help every retiree do much better at both of these tasks.
He has included strategies and techniques used by financial professionals, yet
Terence has conveyed these thoughts in a manner that can be utilized by the average
retiree.
Over the years, Terence has taught and lectured on various financial topics. He
has consistently brought up the important issues that retirees are actually facing, and
given workable solutions. For years on his radio show, Terence has offered practical
and realistic solutions for retirees faced with real financial problems. This book is
the result of Terence having listened to his audience and actual clients. This book
should serve as a valuable road map toward being a better investor and for giving
your family more security.
The information that follows in this book, The 8 Biggest Mistakes People Make
with Their Finances Before and After Retirement, will clearly communicate the pri-
mary mistakes people are making in their retirement planning. Use this book both as
an information source and as a guide to financial situations as they arise. You will
find a multitude of tips and suggestions. There is no question that you will benefit
from reading this book.
Richard W. Paul, CFP, RFC, CEP
vii

Preface
M
ost of us only retire once. Wouldn’ t it be nice to be able to practice this event
before we actually have to do it? Over the past 20 years, I’ ve assisted hundreds of cli-
ents through the retirement process and, more importantly, I have allowed them to
stay retired with less stress, less anxiety, and with the knowledge that they can focus
on the important issues such as their health, family, and, perhaps, travel. In this book,
important strategies, tactics, and information are given that you can access in a timely
fashion.
I encourage you to use this book both as a knowledge builder and as a valuable
resource tool to be used over time. Read over the information casually to note the
areas you may be weak in and then go back to do a more detailed study. Keep in mind
that this book was designed to be used. Don’ t hesitate to mark various pages that you
feel require the urgent attention of either yourself or a loved one!
Consider using this book as a bridge between yourself and the financial profes-
sionals in your life. If you find that your personal financial plan does not include the
strategies written about in this book, find out why not. Listen and interact intelli-
gently with your advisors. Keep in mind that tax laws are constantly changing. The
tax and estate rules illustrated in this book are current as of May 15, 2001. Many new
changes are proposed and may be phased in over the next ten years. This makes it
imperative that you seek out a competent tax advisor before implementing any of the
strategies discussed in this book.
After reading this book, many people will realize they have some major pot-
holes on their road to retirement. This book can serve as a wake up call to help you
greatly improve your financial picture. Still other readers will find this book a valu-
able resource for confirming if they are on the right track or if their advisors have
given them the full attention they deserve. Remember, it’ s never too late to apply good
financial advice! Above all, remember this is your life. Make it as secure, enjoyable,
and filled with as much bliss as God intended!
ix