Because while he was lowering his current taxes, he was also increasing his future taxes. His required minimum distributions would be higher when they started, and by tapping the annuities he would trigger ordinary income. When he or his wife passes away, the survivor will be filing as a single taxpayer using compressed brackets. And when the son inherits, he will pay tax at the high rates applicable to such a high income.

The father might have been better off using the proceeds for his expenses and making strategic withdrawals or conversions of the IRA retirement accounts to Roth accounts. Yes, he would pay some taxes now, but at rates much lower than what his family is probably facing in the future.

The choice he made to place deferral above all else will likely cost his family far more money than what he saves choosing among competing annuity contracts.

The Assumption Of Good Health
Many retirees make the mistake of assuming they will be healthy into their old age. Some stay healthy for a long time, but most eventually face some issue that causes problems for them or their families.

Many people assume physical ailments like arthritic joints will be handled by surgery and that there’s no need to think about long-term care. “I’ll be able to get around enough,” is a common sentiment. If you are active, it is difficult to see yourself struggling to get to an upstairs bedroom. But the idea of moving into a “retirement community” may make you cringe.

The fact is, even the most fit people will slow down—first a little, then a lot. Retirees are wise to think through what they would want in different scenarios, besides thinking just about how they will pay for it. It is not a fun conversation, but it beats ignoring the possibility and creating a pinch.

The riskiest assumption is that one will remain mentally sharp. I’ve lost count of the number of times someone said to me, “If I start losing it, then I’ll turn things over to (fill in name here).” That may be a fine plan, but without the proper documents in place, it may not be possible.

When people are suffering from cognitive decline, they do not have a good grasp of how their acuity has changed. My father passed away in 2018 after suffering dementia. He did not understand that the wild things he said were wild, or even that he’d said them.

But Dad had his affairs in order long before the signs of decline were evident—so decisions could be made for him. I’ve seen a lot of families who were not so well prepared. A particular aggravation involves seniors, usually men, who “run the money” for the household but do not adequately prepare their spouse to handle the assets.

It is common for a couple to divide labor, and that works well until it doesn’t. Every year I speak with several wives whose husbands are not as sharp mentally as they used to be. It is tough to witness people in decline, but when they’re in charge of the money and you don’t know what’s going on or feel as if you can control things, it can be downright terrifying. These ladies are scared.

A good planner can help alleviate, if not eliminate, fears about finances and what needs to be done. Sadly, too many retired men need to keep handling money because it gives them a sense of relevance. They can’t imagine enlisting the help of a professional. But consider what my dad did. You’re more likely to properly prepare when you realize it’s better that your wife has her finances in order when you’re not there to handle things.

Financial planning is so powerful because it anticipates these types of mistakes. I assure you, Mom didn’t care about the category ranking of the mutual funds in dad’s IRA anywhere near as much as she cared that his documents were well constructed and valid. Planning starts with bigger-picture strategic issues and then finds the tactics needed to support the strategy. Doing things in the opposite order can lead to costly mistakes. 

Dan Moisand, CFP, practices in Melbourne, Fla. You can reach him at [email protected]

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