So I’m still doing my taxes — my accountant has sentenced me to organize my expenses into categories, can you imagine? And one of the questions in my mind is whether I need to contribute to my retirement plan or not. While I was debating all things financial, I checked in with Richard L. Bellmer, CFP, president of Deerfield Financial Advisors in Indianapolis. Besides his work as a financial planner (you can find out more about his firm at www.deerfieldfa.com), Dick Bellmer is chairman of NAPFA, the National Association of Personal Financial Advisors, a network of fee-only financial planners.

Rookie: How do I find a financial planner?

Bellmer: Go to www.napfa.org, you can click on your state, and it will tell you all the people who work on a fee-only basis in your area.

Rookie: Why do I want someone who works fee-only?

Bellmer: Let’s say there are two planners you could work with, but they’re held to different standards depending on how they’re paid: One has a fiduciary relationship with you, one has a suitability standard. They agree you need a profit-sharing plan with a balanced fund in it, but what about when we pick funds? If the one with a zero percent commission has the highest rate of return, the no-fee planner, the one working under the fiduciary standard, will recommend that one. The planner who gets paid on commission, the one working under the suitability standard, might guide you to a fund with a 5 percent commission and a lower rate of return … that’s perfectly legal.

Rookie: I’m just digesting the irony of telling an audience of people who are paid on commission to use somebody who’s not.

Bellmer: That’s exactly right.

Rookie: So I find a couple of planners. Maybe I’m a little embarrassed. How do I nicely ask a planner if I’m too small a fish?

Bellmer: You just ask them. There isn’t any reason why you can’t ask that question, and I would. There are some planners that work on an hourly basis. If someone calls and they’re not the kind of client I handle, I can refer them to somebody who would be a good fit for them. These relationships last a long, long time.

Rookie: OK, so one of my first questions would be … how do I save for retirement if my income swings wildly from closing paycheck to closing paycheck?

Bellmer: The first thing you need to figure out is what you need to save for retirement. Someone who earns $50K and is ready to live on $40K has a different plan than someone who earns $200K, and lives on $210K. Sit down with your financial planner and figure out what the bogey is, then you can save toward it. First you have to understand what you need, then you can find the right plan.

Most people think when they retire their spending goes down, but in the first few years, generally, it actually goes up. You suddenly have all this free time … what do you think you’re going to do with it?

Also, think about what your current cash flow needs are. Your spouse might say, “You’re earning that, where is it?”

Rookie: As I’m figuring out how much money I’ll need in retirement, how do I figure out healthcare costs? My 75-year-old mom is less mobile than she expected, so she suddenly needs a companion, but she could live for 20 more years.

Bellmer: The biggest problem for people is if they retire early before Medicare kicks in. If nothing else, get a plan that covers the catastrophic. I have a friend who has cancer; radiation and chemo can’t do anything, while the drugs that can cost $7,000 a month.

For the older person, the catastrophic events will be taken care of. You need to understand what it covers and what it doesn’t. Think, what’s the history in my family? Another question I get asked all the time is “Do I need long-term care insurance?” I deal with a wealthier client, so their portfolio throws off more money than they spend. For that typical client, if they went into a long-term care facility, they would spend less than they’re spending now.

Rookie: So retirement plus healthcare gives me a goal, how do I figure out what kind of plan I need?

Bellmer: In most cases, saving into some kind of qualified plan is better than not.

Rookie: What’s a “qualified plan”?

Bellmer: A plan where you put money in, and there’s some kind of tax advantage. The simplest one is an IRA: I put money in, I get a tax deduction on it, the money grows tax-deferred, and I pay taxes on it when I take it out.

In most cases, the government is paying about 30 percent of those types of retirement contributions [depending on the individual’s tax bracket]; I like those kinds of plans.

Think of that as opposed to a brokerage account, which isn’t tax-advantaged.

Rookie: What else is there besides an IRA?

Bellmer: You could do a DB, or defined benefit plan. The advantage of a DB is you can have a very huge deduction, depending on your age. But you have to make the contribution. If you’re a real estate agent, and you make $300K one year and $50K the next, you might not want a plan where you have to put away $100K a year.

Rookie: What are the IRA contribution limits for the 2006 tax year?

Bellmer: It’s $4,000, and the amount is increased by $1,000 for people over 50 — we ought to get something for being old! You would have till April 17th to open one. If you’re going to do profit-sharing or a pension — something more advanced — check with your planner.

Rookie: What else should my readers be doing while they’re getting into fiscal shape?

Bellmer: If they’re saving for college for the children, they ought to look into 529 plans — those grow on a tax-deferred basis if the money comes out and is used for education. But, all 529 plans are not created equal. It changes all the time; your planner should be able to answer that question.

Also, if people do not have wills and trust, or haven’t reviewed them in the past five years, they need to do that. Check the beneficiary on your life insurance; is it your ex-wife? Review the secondary beneficiaries of your will. For that matter, if you have all your financial records in Quicken, don’t forget to tell someone the password.

It blows me away that financially sophisticated people will walk into my office, and they haven’t looked at their wills in 15 years. Their parents are named as executors and their parents are no longer alive.

I know thinking about dying and your assets isn’t a fun topic for Friday night, but if you don’t do it the state will, and nobody likes the state’s solution.

Rookie: Given the season, one last question about taxes. A lot of us work from home a lot; is claiming a home office an audit flag?

Bellmer: I’m not sure I would call it an audit flag; I don’t think any of us know what the audit flags are. But you do want to make sure you have t’s crossed and your i’s dotted. From my perspective, anything having to do with the IRS, you learn what the rules are and you play by them. Don’t have a home office and then try to deduct the renovations for your kitchen. 

***

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