This week marks the last round for our current roster of "Ask the Experts" writers. Our thanks to certified financial planner Steven Zeller in Gold River, Calif.; certified financial planner Jerod Wurm in Roseville, Calif.; and estate planning attorney Amy Halloran in Sacramento, Calif.
QUESTION: I turned 70 1/2 in November and know I'm supposed to take a required minimum withdrawal from my annuity. How do I find out how much to withdraw? The broker who sold it to me said not to worry; the company would send a notice. But I haven't received any notice and am afraid of incurring a penalty. What do you suggest?
ANSWER: First, I recommend contacting the annuity company directly to determine whether your account is subject to the Required Minimum Distribution rules. The RMD rules apply only to qualified accounts, such as IRAs and employer-sponsored retirement plans.
If it is a tax-qualified annuity (held inside an IRA, for instance), the annuity company can likely assist you in calculating the required distribution. The IRS allows delaying your first distribution until April 1, following the year you turn 70 1/2. However, that means you must take two distributions the first year: the delayed 2010 distribution by April 1 and the current 2011 distribution by Dec. 31.
Call the company soon, as the penalty for not taking a required distribution can be 50 percent of the amount you should have taken.
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Q: I am 64 and was widowed two years ago. I have a pension of $1,578 per month and collect monthly Social Security of $1,100. Fortunately, we paid off our mortgage five years ago, so my minimal required income is about $4,600 per month. My husband and I saved during our working years so I now have about $525,000 in an IRA and $285,000 in another investment account. I also have $50,000 in a savings account that I don't know what to do with and another $250,000 from my husband's life insurance benefit. I am worried about affording nursing home expenses if needed and unsure how to protect the money I have left. Can you give some advice?
A: Based on your minimal overhead of $4,600 per month, there is some flexibility to structure your assets so they address your long-term concerns. Let's organize it so you don't have to worry. I'd recommend viewing your money in terms of buckets.
The first is your investment bucket. This would include your IRA assets and your $285,000 investment account. Use this bucket to generate your monthly income supplement of $1,922, which is what you need to live on above your Social Security and pension.
Based on that amount, you'd need about $23,000 a year, which would mean a withdrawal rate of about 2.8 percent from your investment bucket. Given your age, that would be a safe level of withdrawals.
The next bucket is an "income reserve" bucket. Because we are living in uncertain times, it's wise to have a two-year reserve of supplemental income. You could set it up using $50,000 of the $250,000 in life insurance proceeds. This bucket is in case your investments suffer a temporary but significant decline. Typically, we'd recommend keeping one-third in a money market fund, one-third in short-term bond funds and one-third in a high-quality, intermediate (5- to 10-year) bond.
The third bucket is for major expenses, such as a new roof, a new car or other unexpected expenditures. This should be a liquid savings account. You could comfortably put in $100,000 from your husband's life insurance proceeds, leaving another $100,000 to address your concerns about long-term care.
You can look at long-term care coverage in several ways. One option is to purchase a lower annual premium policy that does not have any cash value or benefit if you die without needing long-term care.
Another option is a whole life insurance product with a long-term care rider. If you need the cash, you withdraw it from the policy's cash reserve; if you need long-term care, it provides a substantial amount of insurance to cover those expenses.
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You really have to carefully investigate each option to see which is most suitable for you, if at all.
I do not know enough about your financial situation to recommend specifics on your investment bucket, but the strategy outlined here is a good start to preserving your assets during uncertain times.
