either the "Certified Financial Planner" is incompetent -

[swampmaple]

or I am. I felt like I was in the Twilight Zone last night when I started reading the "Personal Financial Analysis" he presented. This consisted of about twenty pages total - some boilerplate re "Income Tax Planning" and investments that wasn't personal to us, and the rest pretty colored graphs & pie charts and "Analysis" obviously created from some software program using data I'd given him (pay stub, copies of investment accounts, info re real estate investments, anticipated federal pension printout).

I had originally called this planner because I read a "Financial Makeover" column in the newspaper by a planner whose advice seemed good and was an "Independent" CFP, which I thought important (having suffered through an American Express planner experience some years ago). But when I called that planner she was not taking on new clients except on an ongoing basis (pay every quarter to manage investments) but recommended I call someone else associated with the Independent CFP association she belonged to. This led me to Mr X.

Well, I nearly had an out of body experience (which ideally would have had me turning over Mr. X and shaking the $500 we'd already paid out of his pocket) when I saw the row of figures on the "Retirement Capital Estimate" sheet. These showed fourteen consecutive years of deficit spending if I retired, as I planned, in May 2007 at age 51 1/2. The deficit started at $57,700 per year and tapered to about $24,000 per year before the tide turned. Adjoining columns indicated we would be depleting retirement accounts and Roth (the latter we don't own) over $300K to cover the shortfall.

As my fairly careful "self analysis" indicated my pension and rental income would cover 100% of our expenses starting at age 51 1/2, while our investment accounts would grow unmolested until we needed some withdrawal possibly for college expenses in ten years, I had a problem with the CFP analysis.

The next hour and a half was spent with me basically trying to figure out how in the world he got to the $57,000 a year deficit, pointing out some obvious errors, and multi-tasking by mentally composing a termination of service letter to him so we can get out of our "Agreement", i.e. contract, to pay him an additional $1,500 to $2,000 for the "Final Plan and Recommendations." (Which I've since done.)

So, here I am, by way of internet search and prior knowledge of the site from retirees who have gone before me. I am looking for a little reassurance from "the masters" and maybe some advice on specific questions that have been nagging me.

I am a federal law enforcement agent under the Civil Service retirement plan, close to 51 years old, with spouse and young children. We have - hey, one good thing about the bummer CFP experience was I made some nice spread sheets up for myself - $1,961,000 in assets and $208,000 in liabilities. All the liability is property mortgages - about $78,000 on our primary residence ($600K value) and $130,000 on four three-family rental properties (total value about $500,000, they're in kinda crummy low income areas but are solid and the rents carry the mortgages easily). We also have one single family rental property in good area (value $300K) with no mortgage but low rent/high taxes; and a buildable house lot (value $100K) which is basically just a tax burden and maybe gift to one of the kids, as it is next door to our house and we prefer it woods.

The rest of our assets are mostly tax deferred - about $200K in my TSP (invested in L 2020 fund, which I will add to until I retire); about $70,000 in UMAUTMA accts for children, in large cap DRIPS; $15,000 in spouse's trad IRA, $90,000 spouse's 401K (no addition since leaving job in 1997), $15,000 spouse's UPS stock; and $2,500 savings bonds. We keep about $25,000 cash in the rental business account and have $9,000 in 18 mos CDs too.

We live below our means - I think! - in that I've always put the max in TSP and we've put money into the rental property. We have one bottom of the line family mini-van, which we've been replacing each 3 years, no cable tv, no retail shopping habits, and generally no luxuries except living in the nice green suburb we do (with its high property taxes) and spending about $15,000 a year for family vacations and camps.

My biggest retirement asset is undoubtedly my pension. In May 2007, if I elect a minimal survivor benefit my pension gross will be about $77,000 (62% of hi 3 years). My when to retire decision was predicated on when I thought our net income would be the same as before retirement.

Recently, I figured I net about $64,800 per year from the job (from a gross of $128,000) after taxes, retirement, Medicare, TSP10% plus $5,000 Catch-up, payment on one TSP loan (now ended), and Health Insurance were taken out. In retirement, I figured net will be roughly the same as now - $64,000. (I am figuring only about 15% taxes total, maybe I'm wrong, as our state doesn't tax federal pensions and the rental properties seem to guarantee - with Sched E reductions to income - our total federal tax is consistently pretty low.)

By the way, one of the most glaring errors the CFP made was expressing surprise when I told him one of the things wrong in his calculations was including State Income Tax on a federal pension - he ACTUALLY WAS UNAWARE OF THIS AND HE LIVES AND PRACTICES FINANCIAL ADVISING IN THIS STATE! Another error I know he made was including all the rental property mortgages in our expenditures and not making a related entry in income for the rent (which equals or exceeds mortgages).

Currently and in retirement I figure on $1,000 a month additional income from the rental of the paid off single family home we have (while accounting for its property tax and insurance in my expenditures). Anyway, all in all our yearly expenditures I figure at around $75,000 and I figure my anticipated pension + single family home rental income at $77,000.

So can you feel my pain at being told I would be $57,000 in the red for the first year, and another $300K or so more in the following years of retirement? I told the guy, "Look, this is crazy, I could never retire if this were true!" I followed that up by noting if I were so deluded as to fund the first ten years of early retirement by completely depleting TSP and IRAs there would be whopping early withdrawal penalties plus the 20% income tax off the top to consider.

Well sorry so long here - just needed to vent a bit and hopefully get some reassurance. One important point I didn't mention is that spouse is vested in a Teamster's pension which is not the greatest (has a very pseudo COLA in that the board of directors occasional "adjusts" payments upwards) but should be worth about $26,000 (or upwardly adusted equivalent) in 14 years, as well as SS to look forward to. I have no SS. Also the rental mortgages are all done by ten years from now, which will definitely free up about $3,000 a month (this won't seem like as much in ten years, but the rents go up with time).

Which brings me to the first of my nagging questions: In our case, is it reasonable to not take the full spousal annuity available with my CSRS pension, with the qualifiers I intend to fund a tiny annuity so that access to health insurance continues, and I intend to extend and increase my current term life insurance policy (so it covers until I'm 70, and goes from $400K to $1,000,000)? The full spousal annuity would reduce my pension about $7,500 per year. If I die, the spouse gets $45,500 per year (or whatever the COLA's equivalent is).

Re cost of life insurance, a million dollar term life policy for me is about $1400 per year (locked in rate for 20 yrs) or $1000 per year (locked in rate for 15 yrs.). My thinking here is within ten years paying off rental property mortgages frees up about $36,000 yr; and in 14 years spouse is eligible for about an additional $45,000 yr in Teamster's pension and SS. Also, kids will be in 20s and hopefully expenses will be done. So spouse has 3 additional income streams to look forward to - totalling more than what the spousal benefit would have been. Therefore eating dogfood scenarios are unlikely...and if we both stay alive we will be receiving about $6,000 per year in my pension while not having to tap investments. Worst case, I die early in retirement, life insurance can be used to immediately pay off rental property mortgages and the remaining $750,000 used to bridge the gap until pension/ss kicks in. Yet almost everything I read counsels against replacing spousal benefit (particularly CSRS one) with insurance. But I do think in our case it makes some sense. I would never be tempted by a "pension max" type insurance product, but simple term life insurance to me is quite different.

I have other nagging questions, but I'll save them for now.

thanks,

SwampMaple ("readytogo" was taken, so I went with the brightest fall foliage tree around here)

[Martha]

Swampmaple (lovely tree), I split your post into a stand alone topic. You ask a lot of good questions and I didn't want you to get lost in the general "introduce yourself" thread.

There are a number here with federal pensions who can give you some help, but I definitely agree that your financial planner didn't know what he was doing.

Have you also played with the FIREcalc retirement calculator? The link is at the bottom of the screen.

[kcowan]

Quote:

Originally Posted by swampmaple ...By the way, one of the most glaring errors the CFP made was expressing surprise when I told him one of the things wrong in his calculations was including State Income Tax on a federal pension - he ACTUALLY WAS UNAWARE OF THIS AND HE LIVES AND PRACTICES FINANCIAL ADVISING IN THIS STATE! Another error I know he made was including all the rental property mortgages in our expenditures and not making a related entry in income for the rent (which equals or exceeds mortgages)...

I think these errors justify applying for your $500 back. Are you sure he understood your input on these items? At least you should lodge a complaint with the BBB or Chamber or professional society if he does not refund the money.

The real issue here is the damage Mr X might be doing to less sophisticated clients.

As to your plans, I think you are on solid ground in doing what you are thinking.

[yakers]

This is a simple reply but it really looks right to me. Based on your Federal pension, your wife's pension and you have affordable medical coverage it looks like you have everything covered by your pensions/TSP without other real estate, stocks & bonds. This is not just because of a decent COLAd cash flow its even more because your lifestyle & expenses are not extravagant.

[Brat]

Oh, and I would send a copy of this lovely document to the gal who told you to call the assn just for giggles.

[donheff]

With the Fed pension, just be very careful to ensure that you have the term insurance covered -- maybe put your spouse in charge of making payments Too many people don't handle that end correctly and end up leaving their spouse in trouble. It sounds like you already plan to pick up a minimum spousal benefit so she can keep health benefits - that is huge. Make sure you make it large enough to cover her self only health payments and she should be good to go.

The planner sounds certifiable.

[Brat]

I am a CSRS early retiree and did exactly as donheff suggested. My husband had lots of SS years. Because of Gov Pension Offset eliminated any opportunity to use his SS we skinnied his % down, assuring that he had enough to keep survivor FAMILY health benefits. I kept the life insurance (now eroding away since I am 65+). On his side we maxed his IRAs and after I retired I worked in the pvt sector and was able to add to the retirement pot.

If you are in good health and can obtain a life insurance policy til your spouse is age 70-75 do as I did. You need to factor in inflation when determining 'how much'. The annual cost should be equal to or lower than the spread between full and a reduced retirement.

Because I am female and younger than my husband statistically it works. If your wife is more than a couple years younger, or if you have any health risks, the both of you need to think long and hard before opting less than full retirement benefits.

[swampmaple]

of part of the $500 fee after receiving my (polite) email that requested termination of services and detailed a few reasons why. So that's a good thing...though I am left with some sense of "buyer's remorse" anyway. Guess I really wanted Mr. X to be clearly competent, informed, and full of good tips on such things as when/if to convert funds to Roth IRAs, how capital gains would affect us if we sell some rental property later on, how the GPO could reduce a SS survivor benefit for a CSRS annuitant... Funny I thought I would get most of that, but even more so a big "attaboy" when Mr. X met with us - something along the lines of "Hey, you're doing great, not many 50 somethings in your position, they don't make pensions like you have anymore, and great job on the other investments too."

Well I feel better reading the responses so far, thank you. In response to the few points raised I can say my plan is to fund survivor annuity on my CSRS pension in the amount of $3,600. As I understand it any amount above $1 guarantees spouse (maybe kids too if I die soon) can stay on health plan. As currently I pay about $1,800 per year for our BCBS basic family plan, and payroll takes it out automatically, I think we're fine with the $3,600 amount.

Re keeping payments current on term life insurance policy, we currently have the life insurance company automatically debiting our account monthly for the two term life insurance policies we have now. (I opted out of the gov't plan for myself eleven years ago after figuring SBLI cost less for same amount of coverage, and have been paying on two 20 year term policies - $300 & $400K - for spouse and myself ever since). My plan is to let spouse's run out in nine years, while extending/increasing mine to $1,000,000 and either 15 or 20 years term when I retire. If we continue with the automatic debits, I don't see a problem keeping payments current.

Re giving up the "full retirement benefit", I am given pause by Brat's comments:

"If you are in good health and can obtain a life insurance policy til your spouse is age 70-75 do as I did. You need to factor in inflation when determining 'how much'. The annual cost should be equal to or lower than the spread between full and a reduced retirement. Because I am female and younger than my husband statistically it works. If your wife is more than a couple years younger, or if you have any health risks, the both of you need to think long and hard before opting less than full retirement benefits."

I didn't base my thinking on how much/long to obtain term life insurance for spouse based on what age spouse will be when it lapses. Rather I was thinking of changes in our anticipated income in 3 scenarios - if we both live, if one dies, if the other dies. In our case I know with a reasonable degree of certainty we will have about $3,000 per month increase cash flow within ten years related to rental property mortgages being paid off. This occurs whether I am alive or dead.

In 16 years spouse is 65 and is reasonably certain of receiving pension worth about $2,000 month. Both anticipated income streams do adjust for inflation, though very likely not so well as a CSRS survivor annuity. Both occur whether I am alive or dead. Finally, at 65 spouse receives SS benefit. This occurs whether I am alive or dead. It may - I am so confused about SS benefits - be reduced by GPO if I am dead and spouse is receiving CSRS survivor annuity. It will certainly not be reduced if I am dead and didn't elect the CSRS full survivor annuity.

If I elect the full survivor benefit on my CSRS pension it reduces the pension more than $7,500 per year, or the COLA'd equivalent. For $1,000 per year I can get a fifteen year term $1,000,000 policy starting when I retire, or $1,400 per year for a twenty year term. Full survivor annuity does not mean spouse gets all $77,000 a year when I die - only about $45,500.

Our yearly spending, (not counting retirement investment) pre retirement,is about $75,000, close to equal to my net from job - $64,000 plus income from the paid off single family rental I own - $12,000. Without full survivor annuity, my pension in May 2007 would be about $64,000 per year net, the rental income continues. So if I were to elect full survivor benefit we would be deficit spending at $6,000 per year (not counting investment gains, or the mortgaged rental property business).

I have thought and thought about this and I just can't see the sense of the full survivor CSRS annuity in our case. We are living comfortably on the amount my pension would be in retirement. We both live: we live very comfortably as three additional income streams kick in. Spouse dies: I live comfortably on pension plus rental incomes and maybe a tiny benefit from spouse's pension survivor annuity. I die early: spouse lives comfortably on life insurance proceed, then rental incomes, and at 65 pension and SS. I die late: spouse gets no life insurance payout because the term's lapsed, and no CSRS survivor benefit- but still with independent income that more than equals the $45,500 - or COLA's equivalent - of the CSRS survivor annuity. In other wourds, spouse will have more than what we are living on now...comfortably.

If someone can give me a convincing argument why we as a family should reduce our spending by $6,000 a year in the immediate future and years onward to fund a survivor benefit for spouse that if deployed will add $45,500 to spouse's independent income that by itself is projected to roughly equal what we are now comfortably living on...I'm all ears. I don't know, and it's opposite my usual "save for tomorrow" mentality, but $6,000 a year less would mean some of our nice vacation time together is scrapped, and/or I work a few years more - missing out on some of those fun young child associated activities I'd like to do more of (our youngest is 4).

Again, thanks for comments. I am enjoying reading the old posts and trying to extract good ideas re Roth IRAs and capital gains etc. Will probably post separately on fire and money later with specific questions.

Swampmaple

[Martha]

Over the last several years we have sold our rental properties we personally owned or owned through wholly owned LLCs. Also, real estate investments where we were passive investors are in the process of selling out as condo conversions. We had lots of tax advantages for a number of years. We were able to offset passive losses from real estate where we were investors against rental income from properties we fully owned. We ended up with considerable tax free income which helped us on the road to FI.

Now were are paying for it. Each of the past several years we have had to pay tax on the gains from the sale of the properties that have sold. We have had to pay tax at the 25% rate on the amount attributed to recapture of depreciation. Because we were able to use all that depreciation for a number of years, the tax effects were big. Fortunately, the properties have been all selling at a good gain so their is plenty of money to pay the tax. It is possible to get in a bit of a jam if you have a big mortgage on the property and have used a lot of depreciation.

One alternative many people use is doing a 1031 exchange into like kind property to postpone the need to pay the tax. We were never able to find an investment we were thrilled with to do a like kind exchange. Also, we knew we didn't want to be in the rental business forever and would have to pay the tax at some point, so we bit the bullet and have been paying the tax.

One popular type of investment people seem to be doing like kind exchanges into are TICs, or tenants in common investments. You become a co-owner with others in a project that is professionally managed. I have a number of worries about TICs, so if you become interested in exchanging into that type of investment, be sure you are aware of the risks.

[Mr._johngalt]

Quote:

Originally Posted by Martha Over the last several years we have sold our rental properties we personally owned or owned through wholly owned LLCs. Also, real estate investments where we were passive investors are in the process of selling out as condo conversions. We had lots of tax advantages for a number of years. We were able to offset passive losses from real estate where we were investors against rental income from properties we fully owned. We ended up with considerable tax free income which helped us on the road to FI. Now were are paying for it. Each of the past several years we have had to pay tax on the gains from the sale of the properties that have sold. We have had to pay tax at the 25% rate on the amount attributed to recapture of depreciation. Because we were able to use all that depreciation for a number of years, the tax effects were big. Fortunately, the properties have been all selling at a good gain so their is plenty of money to pay the tax. It is possible to get in a bit of a jam if you have a big mortgage on the property and have used a lot of depreciation. One alternative many people use is doing a 1031 exchange into like kind property to postpone the need to pay the tax. We were never able to find an investment we were thrilled with to do a like kind exchange. Also, we knew we didn't want to be in the rental business forever and would have to pay the tax at some point, so we bit the bullet and have been paying the tax. One popular type of investment people seem to be doing like kind exchanges into are TICs, or tenants in common investments. You become a co-owner with others in a project that is professionally managed. I have a number of worries about TICs, so if you become interested in exchanging into that type of investment, be sure you are aware of the risks.

A couple of times recently I thought (briefly) about selling this place
and moving. Then it occurred to me that I would owe big taxes
on the gain with no good way to offset. Hate paying taxes.
Considered the 1031 exchange deals.........too much bother for me.
Sooooooo, I am stuck here for now, although as I've said;
if I must be in Illinois it's a pretty nice place to be.

JG

[Brat]

My discussion about the survivor benefit was focused on achieving the acturial equivalent through term life insurance on your life for the period of time where she would need it the most: were you to die young and and she faced 30+ years depending on the balance of your joint estate. Because I am CSRS, were my husband to pass away, I would receive 0 SS benefits because of GPO.

You evidently do have term life insurance, I assume guarinteed renewable. In that case you have the risk covered.

I know that if your wife receives Fed retirement she can avail herself of the health care program even if it isn't sufficient to pay the premium IF she pays the balance from other resources. As an older retiree, having watched my parents age, I have learned that it is difficult for the elderly to keep track of details. My approach is to make our plans as self-operating as possible. If I should pass away first I don't want my husband at age 90 to loose health insurance because he forgot to make the payment.

[swampmaple]

difference to fund the full CSRS survivor annuity, can't one or the other of us work at a little part time job? I always thought I didn't want to be one of those agents who "retired" then started doing background investigations or some other job related task. Hey, maybe my spouse could increase those "fun" fitness instructor job hours at the Y - would take 400 hours though at the $15 the Y pays.

In a way I hate to spend money unnecessarily, in another way I hate to pass up what everyone seems to think is a "great deal." Even if it potentially does make the spouse much more well off than we are now while mourning my demise...

[Nords]

Quote:

Originally Posted by swampmaple If someone can give me a convincing argument why we as a family should reduce our spending by $6,000 a year in the immediate future and years onward to fund a survivor benefit for spouse that if deployed will add $45,500 to spouse's independent income that by itself is projected to roughly equal what we are now comfortably living on...I'm all ears.

The survivor benefit is an employer's group second-to-die plan intended to help out non-working spouses without any other pension income. You guys have already bridged the gaps in all the survivor variations so you're covered.

Besides, as the stack of survivor benefits paperwork will remind you, it's her choice. It'd be great if she was willing to work to make up the difference, but right now you appear to be in the unfortunate position of being worth more dead than alive...

... Hey, maybe this is why the husbands usually end up running the investments. It makes them worth more alive than dead.

Quote:

Originally Posted by Martha One alternative many people use is doing a 1031 exchange into like kind property to postpone the need to pay the tax. We were never able to find an investment we were thrilled with to do a like kind exchange. Also, we knew we didn't want to be in the rental business forever and would have to pay the tax at some point, so we bit the bullet and have been paying the tax. One popular type of investment people seem to be doing like kind exchanges into are TICs, or tenants in common investments. You become a co-owner with others in a project that is professionally managed. I have a number of worries about TICs, so if you become interested in exchanging into that type of investment, be sure you are aware of the risks.

I think the explosive growth in 1031 companies is intended to "help" people avoid taxes by separating them from a portion of their potential profit problems. In the long run it might offer a better return to eschew the 1031 fees, just pay the taxes, and buy a REIT fund.

Every time I research a TIC-service company I end up more interested in buying their stock than in their products. I think the TIC companies have found a wonderful way to finance their real estate investments with other people's money. I'd love to see a TIC's yield (what the property manager is paying for the privilege of using their money) compared to commercial mortgages. The last couple companies I looked at were paying 40-85 basis points over PenFed's long-term CDs...