The first major legislation of Joe Biden’s presidency could be a $1.9 trillion coronavirus relief package that Democrats are fast-tracking through Congress to get relief to Americans quickly. Called the American Rescue Plan, the bill could impact individual Americans far beyond relief checks.
Here’s how the legislation could affect you:
1. Another Round of Relief Checks
Sending money directly to individuals has been discussed in Congress throughout the pandemic, but in the past year only two rounds of stimulus checks have made it to Americans. Most recently, some Americans received $600 checks starting in late December.
The American Rescue Plan calls for a third stimulus payment at the set rate of $1,400. Not everyone will receive a check—the relief funding is aimed at low earners and could also include adult dependents and families with mixed-status citizenship. While the rules of who qualifies as a mixed-status family aren’t entirely clear, we do know that the bill could extend eligibility to millions of families where one person isn’t a U.S. citizen. Many of these families didn’t qualify for the first two stimulus checks.
For now, it’s unknown whether eligibility will be based on your 2019 tax return or if your 2020 tax filing also will be taken into account. Generally, stimulus check eligibility considers your age, marital status, tax status, and adjusted gross income. Current proposals end eligibility for single taxpayers earning $100,000 or more, a head of household making $150,000 or more and married couples filing jointly making $200,000 or more. This round of stimulus checks could set the government back more than $420 billion.
Democrats hope to have the bill on President Biden’s desk in mid-March, when unemployment benefits and other pandemic aid ends. Checks could be sent out within weeks.
2. Increased Tax Breaks for Families with Children
Now, taxpayers can deduct as much as $2,000 per dependent child from their federal income tax bill. The American Rescue Plan could raise that deduction to $3,000 for every dependent child age 6 to 17 and to $3,600 for every dependent child who is younger than 6.
All families would be eligible for the full credit, regardless of how low their annual income is. Columbia University’s Center on Poverty and Social Policy estimates that coupled with the individual stimulus checks, the increased child tax deduction could decrease the number of children living in poverty by more than 50 percent.
3. Extended Unemployment Benefits
President Biden wants $400 weekly federal payments for the unemployed that will continue through September. The bill originally called for $300 payments that would end in March.
Biden’s proposal would be extended to people who have been part of the Pandemic Emergency Unemployment Compensation program and have used up their state unemployment benefits as well as to people who have participated in the Pandemic Unemployment Assistance program, which benefits freelancers, gig workers and the self-employed.
4. More Generous Food Stamp Benefits
The bill would retain the 15 percent increase in food stamps, which was set to expire in June, until September. To alleviate hunger, the legislation also would authorize $3 billion in nutrition assistance for women, children and infants; $1 billion in nutrition assistance to US territories; and work with restaurants to find jobs for unemployed restaurant workers and get food to Americans in need.
5. A Minimum Wage Hike
One of the more controversial aspects of the proposed bill is legislation that would raise the federal minimum wage to $15 per hour by the middle of 2025, and then it would increase accordingly with median hourly wages. While it’s unknown at this time whether the minimum wage increase will stay in the bill, the Congressional Budget Office has estimated that the increase would raise about 900,000 people out of poverty. While about 17 million people would get an increase in pay, as many as 1.4 million jobs could be lost as businesses try to offset costs.
6. Additional Business Assistance
Several business sectors that have been hit hard by the pandemic would receive aid in the American Rescue Plan. Airlines would get their third stimulus boost. This time, the bill would inject $15 billion into the industry as long as airlines didn’t cut pay or furlough workers through September.
The popular Paycheck Protection Program, which provides assistance to businesses for payroll and operating costs, would be replenished with $7.25 billion. Restaurants and bars that need help could receive grants of up to $10 million to pay rent, utilities, payroll, and other operating costs.
7. Help with Rent
The plan provides assistance for people who are struggling to pay rent or are facing eviction. About $5 billion is allocated to help renters pay their utility bills, and $25 billion (in addition to $25 billion allocated in December) would assist people with rent who make low or moderate incomes and are unemployed due to the pandemic. Federal eviction moratoriums, which were supposed to expire in late January, would be extended to the end of September. People who have federally backed mortgages would also have the same window to apply for forbearance.
Two key considerations in retirement planning are ensuring that you outlive your retirement income and that your financial plan can withstand changes in the market. Pensions used to provide this assurance, but as these types of savings plans become rarer, you may have to create your own guaranteed retirement income.
Deferred income annuities (DIAs) are a sometimes-overlooked financial tool that fortify retirement portfolios and guarantee that retirees will have a cash flow, regardless of market ups and downs. While financial advisers generally will not recommend investing the majority of your portfolio in a deferred income annuity, many do advise retirees to include them in their portfolios.
Why are these financial tools such a good idea? The main reason is they provide a guaranteed income for life, whether you live to 80 or 100. While the income they generate may not be enough to cover all your living expenses, they can provide peace of mind and a reliable source of income in your retirement years.
How Deferred Income Annuities Work
Unlike other investments that produce income, deferred income annuities guarantee income as long as you are alive—no matter how long your lifespan. This works because DIAs operate on the concept of the “mortality credit,” which means that the assets from annuities whose recipients live for shorter periods of time stay in the “mortality pool” to work for recipients who live longer. DIAs are managed by insurers, who can share risk with other clients.
To build a DIA, a buyer invests a one-time amount or makes incremental payments to an insurer, who invests the money and guarantees a regular income later on. The investor can choose when to start taking payments, although most begin at age 80 or later to ensure they have an income in the last year of life.
The key to maximizing income from DIAs, which convert part of your savings into regular income, is to invest before you retire. An early start can mean a higher stream of income after you stop working. Financial advisers generally recommend DIAs for everyone except those who can’t afford to commit their money to an investment, as DIAs are not liquid.
There are several good strategies for investing in a DIA. First, make a DIA part of a diversified portfolio, since it is not impacted by market conditions. A DIA can stabilize income projections and provide assurance that your basic bills will be covered in retirement (along with other guaranteed incomes from sources such as Social Security and work pensions). Investing in a DIA incrementally long before your retirement date also is an excellent way to build your own pension fund.
You and your spouse can each buy your own DIA, or you can buy one as a couple with a joint payout that guarantees the surviving spouse will continue receiving payments. For those concerned that they will die before they receive payouts or before payouts exceed the amount of the original deposit, ask your insurer about a return-of-premium option that will give beneficiaries the original deposit back. Be aware that this option will reduce the payout amount a little.
Why DIAs Are a Good Choice
The biggest advantage of DIAs is that you don’t use them until many years after you’ve invested. For example, if you buy a DIA when you are 50 years old, but don’t withdraw income until you are 80, you’re benefiting from annuities growth after 30 years of compounding interest.
Unlike an IRA or 401(k), which also grows over time and offers tax advantages, a DIA that’s not in a retirement plan (aka a nonqualified annuity) does not require you to begin withdrawals at age 72 to defer taxes. Additionally, DIAs do not have limits on how much you can contribute each year.
DIAs also provide more flexibility in how you distribute your retirement savings. For example, if you retire at age 70 and invest part of your savings in a DIA that you won’t use until you are 85, you can use the rest of your retirement money for income during the 15 years between 70 and 85. This will allow you more freedom with your money early in retirement, because you know you have a guaranteed income planned for your later years.
When Should You Buy a DIA?
The best time to buy a DIA is five to 10 years before you plan to retire, usually between ages 55 and 65. This will lengthen the duration of your deferral period and increase the size of your payouts.
Deferring the payout also allows you to make additional investments in your DIA over a long period of time, taking advantage of potentially lower interest rates as rates fluctuate. Investing in an asset that provides guaranteed income also reduces the need to take on riskier investments or to sell your investments in a down market to generate cash flow.
Creating a last will and testament is a key part of end-of-life planning. However, to clearly articulate your wishes for your assets and dependents upon your death, you must engage in the larger process of estate planning. A will is an excellent starting point, but it’s only one piece of managing one’s estate.
The terms will and estate plan are often (incorrectly) used interchangeably. Here’s how they’re different.
What Is a Will?
A will is a legally binding document that outlines how your property should be distributed after you die. Wills can be made quickly and easily—you simply need to put your wishes in writing or dictate them to someone else. You can include everything from who will receive your assets to who will take guardianship of your children to who will manage your business. A will also can include information about who will serve as its executor and make sure all of the instructions in your will are followed.
Wills are important because detailing your wishes can avert conflicts between family members over your property and about who should make important legal decisions following your death. Without a will, your family also would have to pay a lawyer or work with a public trustee to deal with your property.
What Is an Estate Plan? The
A broader approach, estate planning is a more involved process that ensures your beneficiaries receive the maximum benefit from your estate and that taxes and other fees and expenses are minimized. Estate planning allows you to provide input into matters that go beyond a will, such as trusts and property transfer.
Estate plans also can address issues such as power of attorney, superannuation, and transfer of financial assets. As with wills, you can appoint a guardian or trustee who will make sure that your beneficiaries are protected and your assets are transferred according to your desires. An estate plan can have numerous features, outlined below.
These designations outline who will receive what from your estate, including who will receive your retirement account, your savings, your home, and your life insurance policies. This aspect of estate planning allows you to carefully and strategically appoint who will receive which pieces of your estate. Designating beneficiaries helps prevent posthumous conflicts between family and friends over your assets and ensuring that you maximize your estate among your beneficiaries.
If someone does not leave a will or designate an executor, the estate can be turned over to a probate court, which will distribute it. This can be a lengthy and costly process that also can be made public. The easiest way to avoid probate is to move your assets into a living trust, which will distribute your assets and property in the trust to your beneficiaries upon your death.
Because your property has already been distributed to the trust, you can avoid probate altogether. Owning properly jointly (it will go to the surviving co-owner) and designating beneficiaries for major assets such as bank and retirement accounts can also can help avoid the probate process.
Powers of Attorney
This important designation allows a person or people you trust to act on your behalf—including in legal matters—if you are incapacitated or if you die. You can appoint as many people as you’d like, and you can designate different powers of attorney for different situations.
Letter of Intent
Working with a financial professional to draw up an estate plan can be a timely process in which you discuss your plans—and the motivations behind them—at length. Together, you can draft a letter of intent for the executor of your estate that outlines everything from the details of your funeral to an overview of how and why you want your estate executed.
While a letter of intent is not a legally binding document, it offers an opportunity for you to share your heart and your values with your beneficiaries. As they make significant decisions about your estate, the letter will give you a guiding voice.
Where Do I Start?
The popular stereotype that wills and estate planning are for the rich is wrong. Anyone who has assets, no matter how modest or how many, can write a will or plan their estate to ensure that their property is handled how they want after their death.
Some end-of-life documents, such as a living will, also allow you to legally establish your end-of-life wishes in the case that you are unable to make decisions yourself. Estate planning can be an involved process, but the peace of mind you will gain, for yourself and your beneficiaries, will be invaluable.
If your estate is small, you can find guidance online for making an estate plan. However, if you have a large or complicated estate, a qualified financial professional can assist with this process. They will spend time getting to know you and your wishes for your estate and then incorporate that knowledge into the plan they craft with you.
A new year is a natural time for a fresh start and a new resolve, so there’s no better time to consider new ways to approach your finances in 2021—especially in light of the unusual circumstances that 2020 wrought on our finances and lives. Instead of setting out complicated resolutions that could be hard to stick with, consider adopting some of these more straightforward approaches that still can help you create a stronger, stabler financial position.
Save More Money
This resolution is the complement of the common resolve to spend less, and experts say it’s easier to follow. Rather than solely focusing on how you budget your money, try turning your attention to saving. You’ll be surprised at how much this shift can impact your finances.
First, decide now how much of your income you’d like to save every month based on your bills and salary. You may choose a percentage, such as 15 percent of your take-home income, or a dollar amount, such as $400 each month. Then, make sure you move the money into a savings or investment account or create a savings column in your budget to avoid absorbing it elsewhere, such as overspending on your credit card to compensate for the income now going to savings.
Track Your Spending
Whether your spending goals include buying a house, paying off a car loan, or spending less on groceries, keeping track of how much you spend is a vital first step to creating a budget to help you get there. When we estimate our spending, we often underestimate, which can lead to overspending and no progress toward larger financial goals.
You can figure out exactly how much you’re spending by examining old credit card and bank statements or using budget tracking software. Then, you’ll have a realistic idea of how much you spend and can make educated decisions about budgeting and saving—including chipping away at those big spending goals.
2020 provided some unique opportunities for spending changes that you may want to make permanent. Many people saved money due to restrictions on travel, dine-in eating, and entertainment venues. If your budget benefited, you may want to consider making those spending cuts permanent.
Focus on the Future
Sadly, COVID-19 cut many lives short unexpectedly, and it often left these people isolated in hospitals and assisted living facilities unable to consult with family, friends, or planners who could help them with financial paperwork. Future financial planning, whether it’s outlining your wishes for your estate or solidifying your retirement savings plan, is vital.
One smart resolution is to create a detailed retirement plan and stay with it. Do you want to continue your current lifestyle after you retire? Downsize your home and lifestyle? A planner can help you figure out how much you need to save to achieve your retirement goals and show you how to organize your financial documents to keep your spending and savings up to date. With a retirement plan in place, make it your resolution to follow it.
Estate planning is another key factor in planning for your financial future. A financial planner can talk to you about your goals for your estate and help you put plans in place now.
Pay Off Debt
Aside from causing anxiety, debt can hold you back from living the lifestyle you’d like and reaching big goals like traveling the world or purchasing a house. If you struggle with debt, resolving to pay it down is vital.
Financial planners recommend approaching your debt strategically. That means paying off higher-interest debt, such as credit card balances, first. You could also take a wider approach and focus your payments on debts that carry a specific interest rate and above.
Whatever approach you choose, resolve to understand the amounts and interest rates of your debt and create a strategy for tackling them in 2021. And that doesn’t necessarily mean paying them off completely. If repaying 25 percent of your balances in 2021 is realistic, set that as your goal. The satisfaction of reaching it will only serve as a motivator to continue working toward debt-free finances.
Build up Your Emergency Fund
If we’ve learned anything from 2020, it’s that life can change drastically, and sometimes that comes with unexpected financial ramifications such as a job loss or hospitalization. While financial experts recommend shoring up at least six months’ pay in savings for such situations, the Financial Industry Regulatory Authority found that almost half of Americans don’t have enough in an emergency fund. Without savings set aside, you are risking financial disaster.
Savings like this doesn’t happen quickly, so plan to build it gradually by committing to a monthly contribution to your emergency fund. Additionally, set this money aside for true emergencies—don’t dip into it to pay bills or offset extra spending if you can help it.
Sometimes, we decide we’d rather not know the details of our finances. Maybe we’re worried that an in-depth look at our money would reveal spending habits we’d prefer not to acknowledge, or perhaps “ignorance is bliss” and we don’t want to think about how little money we have in the bank. Perhaps we’re embarrassed by our lack of savings and investments.
Financial planners note that these kinds of fears, whether of change or the unknown, often prevent people from seeking financial planning services. We know it’s important to save money and plan for our future, but we often don’t know how to do it, and sometimes, learning seems overwhelming. However, taking charge of your finances by working with a financial planner can help you achieve major financial goals such as buying a house or paying for your child’s college tuition.
Here are a few ways to approach your finances with confidence.
Remember: No One Is Judging You
Whether your savings are scant, you’ve taken on two large car payments, or you’ve made a poor investment, a financial advisor will not judge your decisions. Finance professionals are there to help you manage your money—they aren’t concerned with how much you earn, what your assets are, or what financial mistakes you’ve made. Their job is to help you get into a better financial situation. And remember, you will not be the first client they’ve worked with who’s made a financial mistake!
Don’t Believe It’s Only for the Wealthy
One common misconception is that financial advisors are only for the ultra-wealthy. Many people worry that their money doesn’t warrant advice or that they don’t have enough to invest. This may have been true in decades past, when most financial advisors required clients to have a minimum amount of assets, but today, financial advisors are increasingly offering services catering to people who have less money to invest. These services focus on helping people manage their money, often through online financial planning investment services. Financial advice benefits everyone, even those who haven’t accumulated a lot yet.
While the details of financial planning can be intimidating at first, once you delve in, you will likely find rewards in managing your money well. There’s a certain satisfaction that comes with paying off credit card debt, retiring student loans, and building your savings and retirement accounts. The best part is that once you get a taste of the personal benefits of financial planning, you’ll want more.
Know You Can Afford It
While the perception is that financial planning is expensive, it’s simply not the case. Working with a traditional financial planner can indeed cost thousands of dollars, but there are less-customized options for financial planning that are much more affordable. While you may have to trade in-person, personalized attention for an online financial management service, these cheaper alternatives are still excellent options for helping you invest and manage your money.
Also, these services typically don’t require cash up front. Instead, they’ll take a percentage of the money you invest through them. They usually charge around 1 percent, so if you invest $10,000, your financial advisor’s fee will be $100, which likely will be deducted directly from your investment account.
Computer-based services, also called robo-advisors, are another affordable way to manage your investments. They likely won’t require a minimum account balance (or if they do, it’s low), and their fees are based on your assets under management (AUM). The AUM fee will range from .25 percent to .5 percent, which calculates to between $12.50 and $25 for a $5,000 account balance. While you won’t get personalized financial advice for your fee, computer algorithms will create and monitor your portfolio for you.
Online financial planning services, a step up from robo-advisors, offer investment management along with personalized financial planning. Some services don’t require a minimum account balance, and their customized services can range from a dedicated Certified Financial Planner to a team of financial planners. Typical AUM fees for these services range from .30 percent to about .9 percent or a flat annual fee starting at several hundred dollars based on the level of services you need.
Take the First Step
While finance professionals have sometimes gotten a bad rap as predatory, self-serving people, that’s not reality. Financial advisors care about their clients, work with their best interests in mind, and don’t judge clients’ situations or choices. They are focused on finances and helping you make the best decisions with your money.
When you find the financial planning service that best matches your needs and goals, you’ll be glad you did. The peace of mind you’ll get from having and sticking with a financial plan will be well worth the discomfort you may feel when you first reach out to a professional for help.