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