Retirement: A Full-Time Job

Reverse Mortgage as an Estate Planning Tool

(Photo Details:  Home sweet home.  According to the Wall Street Journal today, "slightly more than half of all assets owned by the bottom 50% of households comes from real estate.")

 

Even though I was a tax professional for many years, this estate planning technique came as a shock to me when I read it yesterday in the Wall Street Journal (you may have to be a subscriber to see that link.)  For those of you who were not tax accountants, here’s some background before I get to the punchline:

Estate Tax

Most people won’t pay an estate tax when they die.  Estates receive an exemption from tax which is adjusted for inflation each year.  For 2019, for example, if you die with $11.4 million or less in assets, you will owe no estate tax. 

When you are married, and you inherit the estate of your spouse when he or she dies, this exemption isn’t even relevant yet, because you can inherit an unlimited amount from your spouse and not pay estate tax.

Then, when the second spouse dies, (again assuming 2019 exemption numbers), you don’t just get an $11.4 million exemption, you can get double that—$22.8.  You get your own exemption and also the exemption that kind of travelled with your deceased spouse’s assets that you previously inherited.

Which means most of us do not pay estate taxes.

Step up in Basis

But wait, there’s more. When you die, the tax basis of your assets gets “stepped up” to the fair market value of those assets on the day you died.  So if you purchased Apple stock a zillion years ago for 50 bucks a share and it’s worth $250 the day you die, your heirs can sell it for $250 and pay NO capital gains tax.  If you had sold it while you were alive, you would owe tax on the $200 of gain.  So your heirs stand to inherit more if you don’t ever sell it because no one ever has to pay tax on that gain.  The taxable gain basically disappears.

All of this I already knew.

Now the punchline

What never occurred to me was this (from the Wall Street Journal article, in case you can’t read the link):

It means the optimal tax strategy for the very rich, fine-tuned and promoted by the wealth-planning industry, is straightforward: Hold assets until death, borrow against them for living expenses and barely pay income taxes.

When your children inherit those assets, they can sell, them pay no tax, and use the proceeds to pay off your loans. Remember, those loans were just your living expenses, which would be gone from your estate anyway because you needed that money to live. The only difference is the interest (and of course the absence of capital gains taxes.)   Depending on your tax rate, the interest rate, and the length of time those loans were outstanding, this might save you and your heirs more in taxes than it cost you in interest.  Not to mention, the assets you didn’t sell can still be appreciating. 

The Downsizing Trend in Retirement

Which brings me to your house.  A typical retirement planning technique is to sell the big house you raised your kids in and go buy a smaller, less expensive house, maybe even in a lower-cost locale. Then you can use all that great home equity you amassed to fund your golden years.

But there is a cost to that plan, and if you live in a state where housing has appreciated dramatically over those years, it might cost you quite a bit.

If you are married and you sell your house, you will probably qualify to exclude up to $500k of the gain on that sale of that house.  So if that’s as much gain as you have, this downsizing plan might work as advertised.

But if your gain is a lot more than the exemption, it’s worth running the numbers to see if it might just be cheaper to stay put and take out a reverse mortgage.  The house continues to appreciate, you and your heirs escape capital gains tax completely, and you were able to get the cash out to pay for living expenses while you were alive.  Just like, apparently, the rich and famous are doing with their estates.

Of course, if you really want to live somewhere else, don’t do something just because of tax reasons. Last time I did that, it didn’t work so out well.

As to whether this is how our tax laws should work, well that’s beyond the scope of this blog post. But you can weigh in on that in 2020.

 

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Related Posts:

            Penny Wise and Pound Foolish (or Stupid Tax Tricks)

            Two Dumb Financial Decisions I Made

            Three Ways Your Home Can Fund Retirement

 

Where is that Advantage of Aging Everyone Talks About?

(Photo Details:  Doug is the opposite of me.   Here he is when he found a guitar at a coffee shop in Italy, entertaining whomever happened to be there.)

 

I often hear people say that one of the advantages of getting older is that you stop caring what other people think of you. 

How old do I have to be to get to this point?

Sure, there are some areas where this is true:  I don’t care what people think about what I am wearing.  I don’t care what people think about my political views.  And I no longer concern myself about what people will think when I tell them I’m retired.

But I still get very nervous when I play piano in front of people.  And that’s because I really do care what people think. 

If I stumble and can’t remember the rest of a song, are they thinking, “Wow, she’s been playing for six years now and she can’t even finish a song?”  When I sing are they thinking, “This is as bad as the pre-qualifying rounds of American Idol?”  And this is just informally performing in my own living room.  I would never let friends come to my recitals!

My Uncle Jim used to tell me not to worry about these things because “They can’t do what you’re doing.” (Although he used a little more colorful language to make his point.)

Even without actual people I know in the audience, the nerves aren't any better.  Because at a recital, where several small jazz combos are playing a couple tunes each, the other piano players CAN do what I’m doing.  And much better than I can do it.  I care what they think.

The funny thing is, I have several friends now who play musical instruments, and I NEVER think any of those things I’m worried about them thinking about me. 

My friends Kim and Jeff are learning to play ukulele.  I’m always delighted to hear Kim sing along with her playing—it’s lovely!  And Jeff finally played for us recently.  He says he hates playing in front of people because his hands don’t move as easily as when he is practicing by himself.  Yes, I know how that is!  He apologizes when he makes a mistake—much of the time I didn’t really even notice there was a mistake.  And even if I did, I see that it’s NO BIG DEAL.  It’s really fun to see his progress and I’m so proud of them both for taking this on.

So maybe it’s not a matter of trying not to worry about what people think, but being more generous about what they might be thinking.  Maybe people are actually thinking nice, supportive thoughts like I am thinking when my friends are playing. 

I’m just not sure how to convince my shaking hands of that.

 

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Related Posts:

    Where am I Going to Find Ten Thousand Hours?

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A Vacation from Vacationing

(Photo details:  Italy, 2017--biking out of the seaside town of Oltranto after an al fresco lunch)

 

Yesterday I wrote a test-drive post, which has made me in the mood to tell you more about some of those things I touched on in that post.  This one is to answer the travel question.

On our last big trip, to Italy two years ago, I made Doug sign a piece of paper on the flight home that said, “I, Doug, hereby certify that I am never travelling again.”  That was on the flight that was cancelled, well the one we ran to with three minutes to spare because our flight had been cancelled. Wait, let me start at the beginning.

In general, I was already souring on travel before this trip.  I miss my piano, my friends, and my cat when I’m on gone (not necessarily in that order).  Travelling has always been a trade-off between fun and hassle.  When I was working it was worth the hassle to get to spend quality time with Doug.  Now I get near full-time quality time with Doug, so travelling to do something I can already do for free without the hassle is less appealing.  Not to mention the aforementioned friends, cat and piano.

This trip started with the usual discomforts of air travel, hassles of connections, and time-zone-change exhaustion.  After spending two hours getting from gate to curbside at the Rome airport, in my jet-lagged haze, I left my purse behind in the taxi from the airport to the hotel. You know, the purse with my wallet, phone, and both of our passports.  My phone ringer was off and the battery was dead anyway, so I couldn’t call my purse to get the attention of the driver.  Luckily, I had arranged the ride through the hotel when I booked the room, so, they were able to track down the right taxi company who called the driver who brought my purse back within the hour.  But that didn’t stop us from worrying and then ruminating on the what-if’s all afternoon.

After two delightful days in Rome, we were flying to Brindisi for our organized bike trip through Puglia.  I’ll spare you the play-by-play on the three separate delays of our flight so I can get right to the escalator story.   After we all finally queued up for the flight, a fourth announcement about our flight was made.  We would now be leaving from a different gate.

The agitated mob now made its way to the new gate.  At the end of the terminal we all stepped onto an escalator that would take us down to a gate where a bus would drive us out to the plane.  As soon as an older Italian woman stepped on the escalator behind Doug, she promptly fell down and rolled between Doug and me on the escalator. As Doug and I tried unsuccessfully to lift her, her friend, who was in front of me, tried to reach back and help, and fell herself. 

So I tried to lift the woman in front, Doug tried to lift the woman in back, all as they are each yelling in Italian.  As the bottom of the escalator approached, and visions of a massive pileup spun in my head, I gave up and jumped over the first woman to the landing.  Then Doug leapt over the two women to the landing.  By this time, everyone behind us was running UP the down escalator away from the melee.  

An airport worker raced over and hit the emergency stop button (why didn’t I think of that?!?), but nothing happened!  I can’t even tell you how it was this ended because I was in such a state of disbelief.  I mean they were both ok, but I don’t even know how!

The bike trip through Puglia was fun, but we already established that vacation is fun.  What we are talking about now is the trade-off between fun and hassle. 

At the end, after enjoying Rome for another couple days (yes fun, again not the point), we took another taxi out to the airport.  Doug somehow misplaced the 50 Euro bill he withdrew from the ATM the night before, so we didn’t actually have enough money to even pay the taxi driver the full fare. No, they don’t take credit cards. We tried to supplement the difference with American dollars, but he was not interested.  He said it’s fine, just give him what Euros we had. 

Yes, I know this also turned out to be a happy story, but you know that sinking feeling before you know it’s all going to work out?  That’s the one I’m tired of having by now.

But we must do it once more. Because the flight from Rome to San Francisco was delayed.  It had been cancelled the day before because of equipment problems.  They tried to fix it the problem, and Doug overheard one of the mechanics telling one of the airline workers they need to cancel this flight too. The fix was unsuccessful.

We wound up second in the line to make alternate plans at the gate agent, since Doug had overheard the conversation before the official announcement was made.  And since we had no checked luggage, we were able to get moved to a different airline’s flight six gates away that was boarding NOW and connecting through Vancouver.

So yes, it all worked out, and Doug got the excitement of sitting behind Steve Kerr on the flight home. But still it was very easy to get Doug to sign the never-travelling-again pledge.

 

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Related Posts:

    Having a Great Time, Wish You Were Here Instead of Me

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Surprise! An Update from Sydney

(Photo Details:  That's me at the piano in my first jazz combo performance--playing Take the A Train)

 

How long I have been retired now:  11 years.

Questions I never ask anymore:  Do I have enough money to get me through the rest of my retirement?  How will I fill my time?  Should I be more productive?  What will people think when I tell them I’m retired? 

Oh, and I never feel guilty about being retired.

In fact, I never think about my life as “retired life.”  It’s just life.  Which is probably why I haven’t been blogging about retirement at all the last couple years. I don’t contemplate the “issues” of retirement anymore. 

Questions I do ponder now: Will I ever be a really great jazz pianist?  (Heck, I'd settle for really good.)  Am I practicing in the best way to improve my skills?  Will I ever be able to perform without feeling nervous?  When will I be so comfortable playing with other people that I can listen to the other musicians and respond in real time?

Oh and will I survive another Trump presidency if it comes to that? 

But mostly it’s the music that consumes me.  It is my passion. 

In a lot of ways, my life now looks much like it did when I was working.  I actually get up earlier, because now I have a cat and she wakes me up early because she doesn’t know how to make her own breakfast.

I spend hours in the morning at my computer.  But instead of working, I’m checking in on the stock market, reading the Wall Street Journal, the New York Times, and the Washington Post.  (Well actually, that’s a lot like when I was working too, to be totally honest . . .).  I’m answering email and planning my day.  Because I’ve got to squeeze in a workout and an hour or two (or three) of playing my piano. Because Monday night is small jazz combo class, and Thursday night is jazz big band class with my dad.  And Wednesday is piano lesson day.  Tuesday I have a regular walking date and Fridays a regular lunching date.

It’s a lot like work, I mean if you totally loved everything you were doing every minute of every day when you were working.

And just like back in the day, we’re on the couch with a glass of wine at 5pm watching Anderson Cooper. Unwinding from our day’s activities.

Things I still love to do when I can squeeze them in:  Painting my house, gardening, reading.

Things I used to love but not so much anymore:  Travel.

Things I used to love but am now taking out for a test drive again:  Blogging.

 

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Related Posts:

    Postcard from Retirement

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