“Think BEFORE You Act!”

Don is a very careful kind of guy. You know, the kind of guy who double checks the front door when he leaves to make sure it’s locked, or who reviews the bill at the restaurant before paying it.

You know, that kind of guy. He’s also the kind of guy who likes to keep his financial issues sort of, secret. He doesn’t like to use financial advisors, and in fact, his kids know next to nothing about what their folks have set up, financially speaking.

Now, his wife, Sheri, is a little more whimsical and less, well, careful. She’s much more spontaneous and impulsive about her life and how she does things. The exact opposite of Don. (You know how opposites attract?)

Anyway, when they came into our office, the mess they were in was pretty big, and amazingly, it turned out that Don was the one who accidentally got them into big financial trouble.

Here’s what happened.

Don, who is retired, quit working seven years ago, and is 71 years old now. Sheri, worked on and off, mostly part time, still works at a friends shop a few hours a week, mostly to keep busy and mingle with people. She’ also 71, and will be turning 72 in a few weeks.

Anyway, they both get Social Security income, and Don gets a small pension from when he was in the military a long time ago. His employer gave him a lump sum distribution of his retirement plan (a 401K) which he rolled over into an IRA, so he didn’t pay any tax on the distribution at the time.

A couple of years ago, Don was watching a show on cable that talked about financial matters, and they said that you have to begin withdrawing your IRA when you reach 70 1/2 years old. Right about the same time, there was an article in the AARP monthly publication that also talked about the same rule.

Don tried to read up on this, and from what he gathered, it seemed like he had to take some money out, and pay the tax on it. OK.

When he told Sheri about it, she said that she really didn’t have any opinion on what they should do, but that she’d really feel better if they got some help before making a move. She said, “I know you like to do this stuff yourself, and you’ve done a great job for us, but this sounds like it may be kind of complicated. Why don’t we talk to that guy who keeps sending us his newsletter? It couldn’t hurt to double check, could it?”

Don responded that, “I can read, and don’t need some nosy planner digging into our private finances!”

Sheri sighed, and let the subject drop.

Until they got the notice from the IRS last week, that is.

When Sheri went to open the mail, she saw a letter with a return address from the IRS. She didn’t like getting mail like that. She much preferred letters from her sister, Loretta, or catalogs from Stuart Weitzman.

When she took it into the house, she called Don over and she opened it. Her face got sort of pale when she saw that they were being billed for more than $11,500 in taxes and penalties!

Don grabbed it out of her hand, and re-read it from top to bottom. He couldn’t completely understand their gobble-de-gook, and realized that he needed to get more info.

He tried getting the IRS on the phone to explain it, but the man he got was as useless as a lump of coal. Sheri asked kind of sarcastically, “Well, is time to go get some help yet?” Her sarcasm was not lost on Don, who sheepishly agreed to come in to see us.

When they come in, we quickly knew what the problem was. Don had just enough information to be dangerous, and he really messed up.

What he thought, for some reason, was that the income they received from Social Security wasn’t subject to much tax because they hadn’t paid much in the past. Well, he was right, as long as their taxable income is below a certain amount, there’s no tax on any of it…but if your taxable income is above another amount…as much as 85% of it can be taxed!

Also, Don had decided that the income from the IRA withdrawal was not all taxed at one time because he had contributed to the plan for decades, and that it shouldn’t be taxed all at once. He thought it was spread out over five years. (He read about that, or something like it, in a magazine, or at least he thought he did, but he wasn’t sure now.)

We had to tell them that they in fact did mess up, and yes, the tax bill was probably correct. (But that we would have the CPA we work with look it over, obviously, and see if he could get in the middle, between Don and Sheri and the IRS, and reduce the bill somehow.)

Don was not a happy camper when the meeting was coming to a conclusion.

He said in a low voice, “Well, I guess I’ll stop being such a big shot, and stay out of areas I don’t know much about. And obviously, I don’t know as much about money as I thought. I always thought you guys were a frivolous, extravagant thing to use. Now I see why your office is so busy. Us regular folks shouldn’t be doing our own surgery either!”

Anyway, the long and short of this tale is that we were able to get some of the penalties reduced because the IRS admitted they calculated them incorrectly. And, when we dug into their whole financial picture we discovered that:

*They were overpaying on their taxes to the tune of $1,450 besides the mess we just described!
* They had the wrong kinds of insurance and were overpaying for it!
* They didn’t know if their money would last throughout their retirement without having to cut back or work more!
* They had no idea if their estate was set up the way they wanted it to be!
* They had no idea what would happen if one of them got sick and needed long term care!

And so on. In other words, they hadn’t done any proper planning…and as a result had no comfort or cushion!

Well, all that’s fixed now. We helped them rearrange their whole situation so that these problems were all fixed and they were maximizing the use of their assets and money…while knowing their plan has to be monitored every year to allow for changes in their personal situation, the economy or taxes.

While your situation might not be the same as theirs, you shouldn’t take that to mean your planning needs aren’t just as critical! PLANNING BEFORE TAKING ACTIONS IS THE MOST FUNDAMENTAL, AND IMPORTANT ELEMENT OF FINANCIAL SUCCESS!! So make sure you call us BEFORE making any moves! Don’t be your own financial surgeon! It just isn’t worth it!

We’re here to help you make smart choices about your money so you have the best shot possible of enjoying a “Worry Free Retirement”. Doing What You Want, When You Want, Where You Want!