1. Funding college education Minimizing taxes
Welcome, and thanks for coming. Wealth Management is a term that refers to a multifaceted approach to accumulating wealth, preserving wealth, spending down wealth, and passing wealth on to heirs. Today we’re going to focus on three specific areas:
Funding college education
Minimizing taxes
Planning for income in retirement and transferring wealth
Funding college education: We’ll explore today’s challenges and highlight effective solutions that investors should consider to meet fund objectives.
Minimizing taxes: How can investors preserve more of their wealth by being “tax-smart”?
Planning for income in retirement and transferring wealth: Tapping into wealth during retirement to meet expenses is often a complex and daunting process for many investors. What strategies should be considered to ensure current income needs are met and any legacy objectives are fulfilled?
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2. Funding College Education Survey the scene to understand your options
Let’s start with funding college education.

3. College costs are rising
Four years of tuition, room, and board
$155,467
2028
$356,083
2010
Public college
$64,600
Private college
$147,960
College costs are going up. Using a conservative 5.5% inflation rate, if current trends continue, in 18 years tuition could cost over $155,000 at a public college. Whereas, tuition at a private college would be projected to total over $350,000.
Figures include tuition, fees, room, and board. Estimated growth rate of 5.0%.
Sources: The College Board, Trends in College Pricing 2010.

4. College debt is also rising
50% of full-time undergraduates use loans to help finance their college costs.
Among graduates from private universities who borrow money, the average debt is $26,190.
The median starting salary for a graduate with a bachelor’s degree is $55,700.
Few students can afford to pay for college without some form of education financing.
Undergraduate students receive 46% of their funding in the form of grants and 49% in the form of loans, including alternative nonfederal loans.
The proportions for graduate students are 33% grants and 64% loans.
Two thirds (65.7%) of 4-year undergraduate students graduate with some debt, and the average student loan debt among graduating seniors is $19,237 (excluding PLUS Loans but including Stafford, Perkins, state, college and private loans).
This level of debt seems even more daunting when you consider that the median salary for a graduate with a bachelor’s degree is $55,700.
Graduate and professional students borrow even more, with the additional debt for a graduate degree ranging from $27,000 to $114,000.
Sources: Trends in Student Aid 2010, Education Pays 2010 (The College Board),

5. A 529 college savings plan has many benefits
Tax advantages: Account grows tax free, and there are no taxes on funds withdrawn for qualified higher education expenses
Control: Investor controls account assets after the beneficiary reaches legal age
Flexibility: Anyone can contribute — parents, grandparents, other family members, friends
Do you have existing custodial (UGMA/UTMA) accounts?
Converting a custodial account to a 529 can help you benefit from tax advantages while increasing a child’s eligibility for financial aid.
So what is a 529 plan?
A 529 is a relatively new way to save for college. You contribute money, and you pay no federal taxes on the contribution while the account is accumulating. Also, you generally pay no federal income taxes on withdrawals to pay for qualified higher education expenses like college tuition, room, and board. Even better, thanks to the Pension Protection Act of 2006, the federal income-tax-free treatment of qualified distributions from 529 accounts is permanent.
And even though you invest the money for the benefit of someone else, you retain control of the account even after the student reaches legal age, which is generally age 21. This is not the case with custodial accounts like UGMAs or UTMAs, which are often used to help pay for college expenses. That means that if the beneficiary receives a scholarship or doesn’t go to college, you can still use your savings — either for the college expenses of another beneficiary or for whatever use you see fit. Keep in mind that nonqualified withdrawals of earnings are subject to regular income tax and a 10% additional tax.
This added level of control doesn’t make contributing any more difficult. Anyone can contribute to a 529 account, including parents, grandparents, and family friends.
Although qualified withdrawals are free from federal taxes, state taxes may apply. Not all states currently allow for tax-free qualified distributions of earnings. Withdrawals of earnings not used to pay for qualified higher education expenses are subject to taxes and penalty. You may wish to consult your tax or financial representative to ensure that you obtain the tax benefits you’re looking for.

6. Estate planning
Grandparent uses Putnam 529 for AmericaSM to lower estate tax
Contribution to 529 plans* Ω
Grandparents $650,000 Ω
$130,000 Ω
$130,000 Ω
$130,000 Ω
$130,000 Ω
$130,000
A 529 plan also offers estate planning benefits. While the contributions will reduce both current taxable assets and the value of their estate, the grandparents still control the assets in the account.
* Contributions are generally treated as gifts to the beneficiary for federal gift tax purposes and are subject to annual federal gift tax exclusion amount ($13,000 for 2009). Contributor may elect to treat contribution in excess of that amount (up to $65,000, or $130,000 for couples filing jointly, for 2009) as pro-rated over 5 years. Election is made by filing a federal gift tax return. While contributions are generally excludable from contributor’s gross estate, if the electing contributor dies during the 5-year period, amounts allocable to years after death are includible in contributor’s gross estate. Consult your tax advisor for more information.
* Married couples filing jointly may contribute up to $130,000 per beneficiary. Individuals may contribute up to $65,000. Contributions are generally treated as gifts to the beneficiary for federal gift tax purposes and are subject to annual federal gift tax exclusion amount ($13,000 for 2010). Contributor may elect to treat contribution in excess of that amount (up to $65,000 for 2010) as pro-rated over 5 years. Election is made by filing a federal gift tax return. While contributions are generally excludable from contributor’s gross estate, if electing contributor dies during 5-year period, amounts allocable to years after death are includible in contributor’s gross estate. Consult your tax advisor for more information.

7. Minimizing taxes Consider how to best allocate your resources
Now that we’ve discussed a few strategies for funding college education, let’s discuss preserving your wealth by considering tax-smart strategies.

8. Individual tax rates extended through 2012
Item
Description
Income, dividend, and capital gain tax rates
Ordinary income brackets remain in place with maximum 35% rate
15% maximum rate for qualified dividends and long-term capital gains
Deductions and personal exemptions
No income phase-outs through 2012 mean that taxpayers realize full advantage of itemized deductions and exemptions regardless of their income level
Increased standard deduction amount for married couples extended through to avoid “marriage penalty”
Local and state sales tax deduction
Option to deduct sales taxes in lieu of state/local income taxes extended through 2011
Let’s begin by reviewing broad tax rates – ordinary income, capital gains, and qualified dividends. The tax law extends the current rates and brackets through With no legislation the maximum income tax rate would have increased to 39.6%, capital gains to 20% and qualified dividends to 39.6% as they would be taxed as ordinary income.
The law eliminates phase-outs of itemized deductions and personal exemptions once a taxpayer reaches a certain income level. For example, in 2009, taxpayers saw the value of their itemized deductions begin to be reduced at an income level of $166,800.
Lastly, a provision reintroduced into the tax code in 2004 which allows taxpayers to deduct state/local sales taxes in lieu of deducting state/local income taxes is extended for tax years 2010 and This especially benefits taxpayers who live in one of the 9 states without state income tax (ex. NH, FL, TX).

9. Where are income tax rates headed?
Historical maximum U.S. federal tax rates, 1962–2012 (%)
Tax rate
Income: 35%
So, how concerned should we be about taxes in the future? During the past 50 years, tax rates have been at current levels or lower only 10% of the time. If tax rates revert back to pre-1980s levels, the tax savings investors enjoyed during their working years could be more than offset by higher taxes in retirement. Considering the current economic and political landscape, the prospect of rising tax rates must be allowed for as part of a comprehensive retirement strategy.
Internal Revenue Service, This chart reflects the maximum federal tax rate at each year-end.

10. Federal budget deficits are increasing …
Annual U.S. Federal budget deficit, 2000–2010 ($B)
$1.5+ Trillion
Annual federal budget deficits have existed since the first part of the century but have risen dramatically in the past couple of years, largely affected by the global credit crisis. In fact, the annual deficit more than tripled from 2008 to 2009 and is still estimated to increase for 2010 according to the Congressional Budget Office.
Source: Congressional Budget Office, Budget and Economic Outlook, January 2010.

11. The aging of America will further strain the system
Total U.S. Population age 65+
38 million
88.5 million
The vast majority of health-care spending occurs late in life, often in fighting the diseases that are the leading causes of death. As the Baby Boom generation continues to age and begins to confront late-life medical conditions, demand will almost certainly increase for costly and intensive medical treatment. Today, there are 38 million Americans age 65 and older, which represents 13% of the total population. This is projected to grow to over 88 million Americans by 2050, which will reflect 20% of the population. Meanwhile, there is scant evidence to suggest a corresponding increase in the supply of medical staff and services; as a result, the cost of care is likely to rise.
Today
2050
Source: U.S. Census Bureau, Facts for Features, May 2009.

12. New health-care taxes take effect in 2013
Increase in the individual portion of the Medicare payroll tax on wages from 1.45% to 2.35%
New Medicare investment income tax of 3.8%
Will affect interest, dividends, capital gains, rental income
Distributions from retirement accounts are excluded
Interest from municipal bonds not affected
Targeted at individuals with more than $200K income (couples with $250K income)
There will be a combination of new taxes and tax increases designed to offset the cost of implementing health-care reform.

13. Be aware of the AMT Will you owe AMT? You may owe AMT if you
Claim children as exemptions
Live in an area with high income or property taxes
Claim miscellaneous itemized deductions
Your income
Chance you will owe AMT
$100K – $200K 4%
$200K – $500K
49%
$500K – $1M
69%
One area to look for tax savings is the Alternative Minimum Tax, or AMT. The AMT was originally created in 1969 to make sure that ultra-high-net-worth individuals were not able to avoid income tax. If the AMT calculation produces a higher tax liability than the regular tax system, the taxpayer is subject to the AMT.
Today, because of rising tax deductions, many more taxpayers are at risk for triggering the AMT. The AMT forces many taxpayers to give back some of the deductions they can take against their regular income tax, such as certain home equity loan interest, real estate taxes, and state and local taxes.
The tax law signed in December of Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 – provides relief from the AMT for over 20 million taxpayers. However, roughly 5 million taxpayers will still be subject to AMT.
Source: Urban-Brookings Tax Policy Center, Distribution of AMT, November 2010.

14. Tips for avoiding or minimizing the AMT
Select municipal bonds wisely
Proceed with caution before exercising stock options
Assess the impact of large capital gains
Defer certain tax deductions like local property taxes if you are going to owe AMT
Tips for avoiding the AMT:
Select municipal bonds wisely: If you think you may be subject to the AMT, invest in tax-exempt bonds that are not private activity bonds, or convert some of your AMT bond holdings to non-AMT bond holdings. There are municipal bond mutual funds that specifically avoid AMT exposure. You might also consider investing in higher-yielding taxable bonds.
Proceed with caution before exercising stock options: The decision to exercise incentive stock options should be made with the help of a qualified tax advisor. If exercising the options would result in you owing AMT, you could wait until a year when the tax ramifications are more favorable.
Assess the impact of large capital gains: A particularly large capital gain may exceed your AMT exemption amount. In addition, under AMT rules, there are fewer deductions to offset a large gain. Consider delaying the sale of a highly appreciated asset until a year when your AMT exposure will be lower.
Defer certain tax deductions like local property taxes if you are going to owe AMT: The tax-saving advantage of certain deductions will be lost if claimed in a year when you will owe AMT. For such a year, plan the timing of your deductible expenses, particularly tax and medical payments, to achieve fewer deductions relative to your regular taxable income.

15. Taxes on traditional retirement plans
Income for expenses
Federal income taxes
A dollar inside a traditional (pretax) retirement savings account may only provide 65¢ of income in retirement
Let’s explore retirement accounts and taxes. At current federal income tax rates, one dollar inside a traditional retirement plan or IRA may only provide 65 cents of income once taxes are accounted for (assuming the highest current income tax bracket of 35%). Since many retirees hold a large portion of their savings inside these traditional retirement accounts and IRAs, taxes can have a major impact on their ability to generate their desired amount of income.

16. Consider the benefits of a Roth IRA
Tax-free income in retirement
No required distributions in retirement
Heirs receive assets free from income taxes
Remember, beginning in 2010 everyone can convert to a Roth
The Roth IRA can help. It was established by legislation passed into law in Although investors cannot deduct contributions like Traditional IRAs, withdrawals are not taxed when distributions occur (assuming certain requirements are met). Roth IRA accounts can be funded from contributions or conversions from existing Traditional IRAs or other retirement plans.
The fact that Roth IRAs offer tax-free withdrawals is appealing to retirees looking to generate income in retirement. There are additional benefits as well:
If you don’t rely on accounts for income: Some affluent retirees do not rely on their retirement accounts to meet their income needs. In these cases, being forced to take required minimum distributions (RMDs) at age 70½ may be a nuisance since this income must be reported on the tax return. As retirees get older, these RMDs will generally increase each year because of their short life expectancy. Conversely, the fact that there are no RMDs with Roth IRAs means that more assets can remain in the account for future tax-free growth.
Heirs receive tax-free accounts: Distributions from a Roth IRA are not required until a non-spouse beneficiary, e.g., son, daughter) inherits the account. This preserves more assets for future generations. When a non-spouse beneficiary inherits a Roth IRA, distributions from the account must occur each year, but they can be withdrawn incrementally based on the beneficiary’s life expectancy. And, the income is free from federal income taxes (although the value of the Roth IRA at death is included in the deceased account owner’s estate for the purposes of calculating estate taxes). Although paying taxes immediately on assets converted to a Roth is an adverse factor to consider when making the decision, the act of paying those taxes does reduce the overall size of one’s estate.
Strongly consider
Few benefits
Some benefits
Consider

17. Planning for income in retirement and transferring wealth The decisions you make today impact the shape your retirement takes tomorrow
The third phase is planning for income in retirement and transferring your wealth after you’re gone. Let’s look at a few things you can do to preserve as much of your estate as possible for your heirs.

18. Longevity comes at a cost
The longer your retirement, the more savings you’ll need just to cover basic expenses such as food, housing, and health care
Assets needed at retirement
Everyone hopes to have a long and happy retirement. But, obviously, the longer you live, the more money you’ll need to support your lifestyle. To cover just the basic expenses — food, housing, and health care — you’ll need about $240,000 for 10 years and $440,000 for 20 years. If you’re fortunate enough to live 30 years after you retire, you’ll need more than $600,000.
And remember, these figures just represent basic expenses in retirement. The assets you'll need in retirement may be considerably higher depending on your lifestyle, financial objectives, and potential emergencies.
Note on 2008 Consumer Expenditure Survey — annual expenditures:
Food $8,255
Housing $20,974
Health care $3,984
Clothing $2,280
Transportation $11,450
Total $46,943
Minus Social Security of $20,000
Net needed = $26,943
Source: U.S. Department of Labor, Consumer Expenditure Survey, Expenses include food, housing, health care, clothing, and transportation. Total expenses based on a present value calculation assuming a retirement age of 65 and an investment return of 2% after adjusting for taxes and inflation. Date is most recent available.
Number of years in retirement

19. What about Social Security?
1950
2010
2030
2042
There were 16 U.S. workers for each Social Security beneficiary
Benefits owed exceeded taxes collected
2 workers contributing for each beneficiary
The Social Security trust fund will be exhausted $$ $0
On the topic of Social Security, there is a lot of talk about whether it’ll be around and what it’ll look like in the future as Baby Boomers start to retire.
Politics aside, there are significant challenges looming for Social Security as a result of a huge demographic shift in this country. It’s really a three-part story:
First, seniors are living longer in retirement and, therefore, are receiving Social Security benefits for a longer period than previous generations.
Second, we’ve got this huge wave of Baby Boomers — born just after World War II through 1964 — that will start to hit retirement age in the next several years. The first of them will turn age 62 in 2008 and, if nothing changes, will be able to begin receiving at least partial benefits.
And third, there’s the “Birth Dearth,” or the Baby Bust, that started in the trailing years of the Baby Boom when birth rates started declining. In fact, they’ve stayed low ever since.
So what you end up with is a smaller labor force supporting more and more retirees.
The Social Security Administration states that if nothing changes, benefits owed will exceed taxes collected in 2018, and the Trust Fund will be exhausted in We all know this is highly unlikely. What is more likely to happen is some or all of the following:
Payroll taxes can be increased to maintain current benefit levels;
We can decrease or delay benefits;
Other tax revenue can be used to fund benefits; or
The system can be changed to more of a defined contribution-style voluntary savings account, which is essentially partial privatization.
You can expect a lot of discussion on the topic of Social Security over the coming years—and it’s likely to get very political. Regardless of the outcome, you should NOT be planning on Social Security as the primary basis for your retirement income, but it can and should be part of your retirement income plan.
Social Security Administration, March 2010.

20. Early in your retirement
Create an income plan
Early in your retirement
Later in retirement
Part/full-time work
Pension income
Social Security
IRA withdrawals
Immediate annuity
Life insurance
Real estate
How to build an income plan is a lot more than I can fit on a single slide — or talk about in the time we have allotted — but I’d like to give you a sense of how an income plan might unfold and what some of the key drivers are.
Determining when you draw upon certain sources of income is very important. For example, the longer you delay taking Social Security, the more you will receive from it each month. Likewise, if you can take a portion of your savings and invest it for growth, then you may be able to use the time in your early retirement years to let it do so. Tax rates on withdrawals from various sources are going to be taxed at different rates, so the order of withdrawal is important too.
Naturally, if you are going to work in retirement, you’ll probably work in your early retirement years. This income is important because it can enable you to maximize your other sources of income; work may also provide a source for health insurance and may, in fact, allow you to continue to save and invest. Early retirement is also a great time to make sure you have the insurance you need, including life and long-term-care insurance — which will be more affordable at younger ages. 
At some point, phasing to age 67 over the next several years, you will have to start taking income from Social Security and withdrawals from your retirement accounts. Later on, you may also wish to downsize your home or take out a reverse mortgage, or add one more layer of guaranteed income through the purchase of an immediate annuity.
401(k) withdrawals
Long-term-care insurance
Investments are subject to market risk, including possible loss of principle.

21. Choose the right withdrawal rate
How long would your money have lasted?
Years
3% will last 50 years
4% will last 37 years
5% will last 22 years
6% will last 17 years
7% will last 14 years
8% will last 12 years
9% will last 11years
10% will last 10 years
Percentage of your portfolio’s original balance withdrawn each year
One of the important expectations to manage is how much you can withdraw from your portfolio if you want it to last. This idea is called “sustainable withdrawals.”
This chart takes a balanced portfolio mix of 60% equities, 30% fixed income, and 10% cash, then shows how long it will last at different withdrawal rates. What’s interesting is that because we’re dealing in percentages, the dollar amount of your nest egg doesn’t matter. Whether you have $100 or $100,000, 50% is still half.
The chart shows that if you take 10% out of your savings each year, you can expect your savings to last about 10 years. Based upon this mix, a 6% annual withdrawal rate, increased each year to keep up with inflation, will last around 17 years.
The moral of this story is that you should try to limit your withdrawals to no more than 5%, given what we know about how long you are likely to spend in retirement.
This example assumes a 95% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods from 1926 to 2010 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

22. Watch your asset allocation
How long would your money have lasted?
The information below shows how various asset allocations affect a portfolio’s expected longevity. It assumes that 5% of the original account balance is withdrawn each year and that withdrawals were increased each year to account for inflation.
PORTFOLIO TYPE
ALLOCATION
20 YEARS
30 YEARS
40 YEARS
CONSERVATIVE
20% stocks
50% bonds
30% cash
BALANCED
60% stocks
30% bonds
10% cash
GROWTH
80% stocks
20% bonds
0% cash
88%
25% 4%
96%
75%
56%
96%
79%
71%
We know withdrawals are an important factor. What about how your portfolio is invested?
This chart shows the probability of success for 4 asset mixes — ranging from conservative to aggressive — assuming a 5% systematic withdrawal rate that is inflated annually at 3%. The mixes range from 20% equities in the conservative portfolio to 80% in the aggressive portfolio. And it looks at retirement or income generation periods of 20, 30, and 40 years.
So what does it tell us? It tells us that if you’re planning for a 20-year retirement, you have a pretty solid probability of success withdrawing 5% each year, even with the most conservative portfolio. All of the asset mixes appear to do just fine.
But what if you want to plan for a longer income stream — like 30, 35, or 40 years? The numbers tell us that if you want a greater probability of success for a longer period of income, you’ve got to increase the expected return of your portfolio by including a larger allocation to equities in your portfolio. Depending on the income period you’re planning for and your tolerance for risk (i.e., running out of money during the period), you may want to consider moving from a conservative or balanced portfolio to a portfolio that looks more like the growth portfolio — with a mix of 80% equities, 20% bonds, and 0% cash.
A 2003 study (“Asset Allocation and Portfolio Survival,” John Norstad, October 2003) indicated that expected return and portfolio volatility are very important in determining portfolio survival. This study showed that a 1% increase in the expected return of a portfolio increases the survival rate by about 9% and a 2% decrease in volatility increases survival rate by about 4%.
In fact, 60% to 70% equities seems to be the optimal allocation to equities if you’re planning a 5% withdrawal for a long period of time. Going up to 80% doesn’t really seem to pay off. You’re taking more risk and actually reducing your probability of success. Not a good tradeoff.
Even then, there is a fairly significant chance of failure if you’re planning for a 40-year income stream. If that’s your goal, you might consider dialing down your withdrawal rate still further to 4.5 or 4%. Based upon our study, that should help extend the income stream and improve portfolio survival.
80%–100% probability
60%–79% probability
0–59% probability
This example assumed a 95% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods from 1926 to 2010 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

23. Pay attention to order Type of income Taxability Social Security
May be partially taxable as ordinary income
Pension income
Taxed as ordinary income
IRA and 401(k) distributions
Ordinary income rates
Dividend income
15% rate
Long-term capital gains
Liquidation of investment principal
Not subject to taxation
On that topic, it’s important to consider where your income — or more accurately your cash flow will come from — since where the money comes from determines its taxability.
Dividends and capital gains are generally taxed at a 15% tax rate. Distributions from IRAs and 401(k)s are taxed as ordinary income at rates that range from 15% up to 35% depending on your total level of income.
So, given a choice of where to draw your next dollar from — all things being equal — you’d want to take it from a taxable account where you’ll generate a capital gain — taxable at a 15% rate — versus a tax-deferred account — taxable at some higher rate. In other words, as you plan the order in which you will liquidate assets to provide retirement income, you’ll want to delay dipping into your IRA and 401(k) balances as long as you can.
Bottom line is that taxes you pay now unnecessarily reduce the amount of savings you’ve got working for you — so you miss out on not just the extra money paid as taxes, but also the earnings (potentially over a long time) on that money.
Now, based upon current tax rules, you’ll have to start pulling money out of your IRA or 401(k) accounts once you reach age 70½, but as a general rule, the longer you delay accessing those monies, the better off you’ll be.
Having said all that, it’s important to recognize that the optimal solution is based upon your specific fact set, so it’s important to talk to your financial advisor and tax professional about your situation. For example, these general rules can be skewed by your overall income, which drives your tax rate and other issues such as Social Security taxation.
This is not intended as tax advice. Please consult your independent tax advisor regarding tax ramifications.

24. Stretching an IRA to create generations of wealth
IRA owner’s wife dies at age 70, ten years after the IRA was created and before taking RMDs. Their 46-year old son begins receiving annual payments based on his life expectancy. He names his wife as his beneficiary. Value of IRA: $200,000.
29 years later, the son dies. His wife continues the established distribution schedule. She may not treat the IRA as her own and no rollover is available.
The IRA is depleted, having generated over $3 million in income.
First year
Year 10
Year 20
Year 30
Year 39
$12,019
$24,506
$54,566
$124,329
$270,526
Let’s talk a little more about stretching the life of your IRA. A great way to extend your IRA’s tax-deferral benefits after you’re gone is by creating something called, appropriately, a Stretch IRA. A Stretch IRA is designed for someone who can fund retirement without using IRA assets. It allows the beneficiary to stretch the required distributions over his or her own own lifetime and therefore provides the longest allowable period of tax deferral. As a result, it reduces the short-term tax burden on the beneficiary.
This example shows how a $200,000 IRA can continue to grow and benefit from tax deferral long after the initial owner dies, and produces over $3 million in distributions before it is fully withdrawn.
Annual Required Minimum Distributions in selected years
Income is based upon an initial investment of $200,000 and cumulative annual distributions for 39 years. This hypothetical illustration assumes an 8% annualized return (8.30% effective return) and that distributions are kept to the required minimum. It does not represent the performance of any Putnam fund or investment or take into account the effect of any fees or taxes. Investors should consider various factors that can affect their decision, such as possible changes to tax laws and the impact of inflation and other risks, including periods of market volatility when investment return and principal value may fluctuate with market conditions. The Stretch IRA feature is designed for investors who will not need the money in the account for their own retirement needs.

25. Consider a bucket approach
Short-term income bucket
Meet immediate cash flow needs, emergency fund, etc.
Cash
CDs/money market
Short-term bonds
Immediate annuities
Social Security/pension income
Wages
Mid-term income bucket
Mix of growth and income, replenish short-term, guard against market volatility
Bonds
Deferred annuities
Absolute return funds
Asset allocation funds, balanced funds
Long-term income bucket
Inflation hedge, longevity
Growth stocks/funds
Real estate
Commodities
Some retirees may find it useful to segregate their nest egg into different “buckets” based on when they will need the funds to meet their income needs. There are many different versions of this type of strategy. For example, in order to meet current income needs and prepare against any short-term circumstances, a portion of the overall nest egg would be invested in very safe, liquid accounts (CDs, money market, etc.). For the mid-term and longer-term buckets, accounts would be allocated according to their investment objective. For example, the longer-term bucket might consist of growth stocks or funds, real estate, and commodities in order to keep up with inflation and protect against the risk of outliving your assets.

26. Do you need an estate plan?
Do you have children who are minors?
Are all of your assets owned jointly with your spouse?
Are most of your assets in real estate, a business, or a retirement plan?
Do you have a durable power of attorney?
Do you have a living will/health-care proxy?
Do you own property in another state?
Do you have children from a prior marriage?
First, everyone should consider developing an estate plan. If you can answer “yes” to even one of the questions listed here — and just about everyone can — you need an estate plan.

27. Stick to your plan: Important documents for staying in control
Durable power of attorney
Health-care proxy
Will
Revocable and irrevocable trusts
The biggest risk of not having an estate plan is that your estate won’t be distributed the way you want it to be after you’re gone. If you die intestate — which means dying without a will or dying with a will that doesn’t dispose of all property — you can be sure that your wishes won’t be fulfilled. When someone dies intestate, his or her property is transferred by state law, which may or may not be the way the decedent would have liked. Estate planning puts you in control.
These estate planning tools are relatively easy to set up and constitute the foundation of any good estate plan.
A durable power of attorney gives someone else the right to act on behalf of the person creating the power. And it’s durable in that it remains in force after the incapacity or disability of the maker. It does not remain in force, however, if the maker dies. That’s when the will would take over.
A living will spells out the individual’s wishes regarding life-sustaining measures. And it might incorporate a do-not-resuscitate order if a person doesn’t want to be mechanically or chemically resuscitated if his or her heart stops.
You might have also heard of something called a health-care proxy, or a durable power of attorney for health care. This document is designed to appoint a surrogate decision-maker for health-care decisions if the creator becomes incapacitated to the point that he/she can no longer make those decisions for him/herself.
Finally, there’s the will. This document instructs how your assets are to pass to heirs at the time of your death, who will wrap up your affairs (your executor), and who will be the guardian of any minor children

28. What are the next steps?
Consider transferring existing custodial accounts to a 529
Fund a 529 to remove assets from your estate
Talk to your tax professional on how to minimize AMT
Use a Roth IRA to create tax-free income in retirement and avoid required distributions
Consolidate retirement assets and develop an income plan
Review legal documents like wills and trusts
We’ve covered a lot of ground in our discussion today. So what are the next steps?
Consider transferring existing custodial accounts to a 529
Fund a 529 to remove assets from your estate
Talk to your tax professional on how to minimize AMT
Use a Roth IRA to create tax-free income in retirement and avoid required distributions
Consolidate retirement assets and develop an income plan
Review legal documents like wills and trusts

29. Putnam 529 for America is sponsored by the State of Nevada, acting through the Trustees of the College Savings Plans of Nevada and the Nevada College Savings Trust Fund. Anyone may invest in the plan and use the proceeds to attend school in any state. Before investing, consider whether your state’s plan or that of your beneficiary offers state tax and other benefits not available through Putnam 529 for America. If you withdraw money for something other than qualified higher education expenses, you will owe federal income tax and may face a 10% federal tax penalty on earnings. Consult your tax advisor.
You should carefully consider the investment objectives, risks, charges, and expenses of the plan before investing. Ask your financial representative or call Putnam at PUTNAM529 for an offering statement containing this and other information for Putnam 529 for America, and read it carefully before investing.
Putnam Retail Management, principal underwriter and distributor Putnam Investment Management, investment manager.
Investors should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at Please read the prospectus carefully before investing.
This information is not meant as tax or legal advice. Please consult your legal or tax advisor before making any decisions. Shares of mutual funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution; are not insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency; and involve risk, including the possible loss of the principal amount invested.
Putnam Retail Management putnam.com

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