Goldstone Financial Group's Blog
Deciding how to divide your estate between your children is not always as clear-cut as it seems. An equal division would have you leave each of your children the same amount, but what if one has served as your caregiver for five years? What if one is extremely wealthy, while the other two are struggling financially? If you have four children, who gets the beloved family home or their great-grandmother’s wedding ring?
Experts say that however you decide to divide up your estate, harmony should be a guiding principle. An inequitable inheritance, especially when it comes as a surprise, can cause long-lasting conflict between siblings, and no one wants to leave behind a legacy of family discord.
Here are some ways to ensure that the distribution of your estate is equitable, minimizes conflicts, and follows your wishes.
Figure out what “fair” means
When you consider how your children should share your inheritance, certain situations may call for an equal division of assets. For example, if all your children are in similar economic and life circumstances and you haven’t already given any of them substantial gifts, equal financial distribution may be appropriate.
Alternatively, you may want to factor in the total amount of financial assistance you’ve given your children over their lifetime. In other words, you may want to adjust their inheritance to reflect what you’ve already given them. For example, you may have a child who you gave $50,000 to help pay off private college student loans, while your other children attended state colleges that were much cheaper. You could adjust your financial division to give one child $100,000 and the other two $150,000 each to make the inheritance equitable.
Sometimes people want to leave more money to one child as a reward or a necessity. For example, one child may have sacrificed greatly to provide in-home care for you, or you may have a child with a disability who will need money for care for the rest of their life. You may have created a blended family later in life and want to leave more to your biological children.
These situations can become sticky, but sometimes siblings will understand and even support another sibling receiving a larger share of the inheritance. In other cases, however, perceived inequities can lead to years of sibling disputes. If you’re not sure what will happen, consider making decisions that will create harmony, not conflict, between siblings.
Large family assets
It doesn’t always make sense to divide a large family asset such as a family home or business between multiple children. For example, if one of your children has settled in another state and one has stayed in your hometown, it may make more sense to leave the house to the child who lives locally and give the other child more of your assets to offset the value of the house.
A similar situation could arise with a family business. If one child has made a career in that business while another shows no interest, it could be detrimental to the business to split ownership between the children in the interest of being “equal.” In this case, you could leave the business to the child who works there and give the other child more cash.
Conveying your wishes
While you are of sound mind, clearly define your wishes. You can do this by writing a detailed letter that explains not only what your decisions are, but why you made them. This will eliminate any conjecture about your motivations that could lead to hurt.
Talk to your children. You may find that they are much more understanding than you’ve given them credit for. For example, you may find that a child who already is well-off is more interested in a sentimental family heirloom than an equal share of the assets. Discussions about your estate will help your children understand why you made the decisions you did and stave off potential conflict after you’ve gone. It will also give your family time to accept your wishes. Many times, it is the surprise bequests that create discord.
You also may want to ask your children how they feel about sharing assets. Are they all willing to put the time and money into keeping up the family vacation home? Would one child be willing to allow a sibling to inherit the family silver if they get the grand piano? Heading off potential conflicts through pre-emptive discussion can go a long way toward long-term harmony.
In some cases, you might not want your estate to be divided equitably—however you define that term—between your children. You may feel that one child doesn’t deserve it, or you may be estranged from a son or daughter. While these situations can be unpleasant, it’s worth considering whether an equitable division may be worthwhile to avoid emotional and financial conflict between siblings. An equitable division may also avoid the risk of the “slighted” child suing the estate—a situation where some of your assets could end up in a lawyer’s bank account.
Around the world, stay-at-home orders and travel bans have slowed transportation to a halt. Photos of empty roads during rush hour in major cities have circulated on social media, government orders have halted cruises, vacations, and other non-essential trips, and people are considering whether to postpone retirement.
The impact of a slowed-down world, along with an oil-price war between Saudi Arabia and Russia that flooded the international market with too much crude, has hit the oil industry hard. Crude oil prices fell to more than -$37 per barrel in April, and oil stocks have dropped almost 70 percent in 2020, which is a 20-year-low for Brent and West futures.
While the sector has made a slight recovery from its rapid freefall, stock prices are still low. The question remains whether this is a good time to invest in the oil and gas sector. Here’s what you need to know:
Crude oil prices reached new lows in April, but oil is still a significant part of the world economy. The renewable fuel market is gaining more of a foothold in the energy and transportation sectors. However, diesel, gasoline, and other oil-based fuels will continue to have a place in the markets for many years.
In addition, the crude oil market has not collapsed permanently. It has been put on hold as the need for commuting, traveling, and shipping have slowed down. Eventually the world will begin to reopen, as it already is in much of China, and the demand for fuel will rise. Whether fuel demand will return to pre-pandemic levels is unknown, but it is certain that some demand for oil will be restored, at least for the foreseeable future.
Should You Invest?
Is now the time to massively invest in a down market? The question is complicated, as oil companies likely will fare differently during the pandemic. Some will likely go out of business. An investment in a failing company will result in the loss of your investment. Investors considering an investment now in an oil company also will want to consider short- and long-term issues facing the industry.
Even though renewable fuels are eating into the crude oil market share, the industry will rebound in the short term. People will start driving again, and travel and shipping will resume as economies reopen and commerce ramps back up. Increased demand at any level will push oil prices—and stock values—up from their current prices.
If you choose to invest in oil companies now, the question will be which companies are on a firm financial footing. Investing in companies that are well-managed and capitalized could result in a short-term payoff when oil prices rise.
Long-term Outlook Is Grim
Whether to invest long-term in oil companies is a murkier question. Analysts say the market was already on an overall downward trend before the coronavirus shutdown reduced demand and led to historic declines. In addition, government and corporate actions regarding oil supplies have created a worldwide glut of oil.
Saudi Arabia, for example, has historically served as a stabilizer in the world oil market. In early April, it planned (along with the United Arab Emirates) to significantly increase oil production and use more natural gas as a country in an attempt to make more oil available on the market. In February, Saudi Arabia exported more than 43 percent more barrels of oil than the month before and had plans for even bigger exports in the months ahead.
Now, the oil market is so saturated with oil that the industry doesn’t know where to store it. For oil companies short on cash, this could be problematic because they can’t sell the oil they already have. As a result, some independent oil companies are struggling. Whiting Petroleum filed for Chapter 11 bankruptcy in April, and if the bankruptcy court approves, shareholders will keep only 3 percent of the company, losing 97 percent of their investment. Chesapeake Energy hired bankruptcy lawyers and began restructuring in March—before the market bottomed out.
Some analysts also warn that traditionally conservative oil investments, such as pipelines, may no longer be safe either, as production is disrupted and demand is low. This middleman industry could struggle as companies find themselves with pipelines filled with oil that no one wants to buy. Pipelines, especially those connected with weaker oil producers, could be in trouble.
Many analysts don’t see a bright side for the oil industry’s long-term prospects. Saudi Arabia traditionally has reduced production to help control the market. However, at this point the flooded market may be irreversible unless a majority of the world’s oil producers also decide to cut back.
With this in mind, investors should be wary of investing resources into any companies involved in oil production, drilling and fieldwork, pipelines, and selling components such as drilling pipes. Large, diversified companies such as Shell and Phillips 66 may survive. Unfortunately, even they may fall victim if the world makes a slow recovery from this economic crash.
The coronavirus has upended all aspects of people’s lives, from their jobs to their finances to their relationships. Despite the economic and social turmoil, there is some good news for people with the capacity to save for retirement right now. The federal government has pushed back deadlines for taxes and individual retirement accounts (IRAs) to help the economy and allow taxpayers to focus on other expenses.
In March, as much of the United States enacted stay-at-home orders and businesses began shutting down, the Trump administration announced that the tax deadline would be moved from April 15 to July 15. The date corresponds with a previous announcement that many tax payments also would be deferred to July 15.
Additionally, the IRS has waived minimum distributions and extended the deadline for contributing to your IRA to July 15.
What does this mean for your retirement? Most importantly, it gives Americans another three months to make a 2019 contribution to their IRA—no penalties will be assessed for contributions made during the extension. While contributions can now be made until the middle of 2020, they will be considered contributions toward the 2019 taxable year.
The new deadline automatically applies to all individual taxpayers and corporations—you don’t need to apply for a tax filing extension or fill out extra paperwork for a 2019 IRA contribution before July 15.
Contribution Limits and the New Deadline
The deadline has been moved, but the limits on how much an individual can contribute to their IRA account has not changed. For people younger than 50, the contribution limit for 2019 and 2020 is $6,000. For those age 50 and older, the limit is $7,000.
There are several reasons to take advantage of the extended deadline to contribute to your IRA.
If you were not able to save enough money to meet the limit by the April 15 deadline, you now have more time to save up for a larger contribution. Additionally, the recent market decline could make it a good time to invest, as your IRA will grow, tax-free, when the market rebounds.
If you do plan to make a contribution before the new deadline, in the interest of caution some financial advisors are recommending that you note “2019” on your check so that it’s clear what year the contribution should apply.
Other Ways to Take Advantage of the Extended Deadline
The new July 15 deadline also applies to health savings account (HSA) contributions. That means you can continue making tax-deductible contributions to your 2019 HSA through July 15. Money spent from your HSA on qualified medical costs also will not be taxed.
If you owe taxes, July 15 is also now the deadline for making tax payments that were due on April 15. On July 16, penalties and interest on unpaid balances will begin accruing.
Getting a Refund?
If you believe you’ll receive a tax refund, don’t put off filing. There’s no need to delay your receipt of that money in your account.
Special Rules for Required Minimum Distributions
For 2020, the federal government also has waived required minimum distributions (RMDs) for IRAs and 401(k)s and other qualifying employer retirement plans. This waiver applies to all RMDs due on April 1 and December 31 for retirement plans that you own or have inherited.
If you’ve already taken out RMDs in 2020, they are eligible for a 60-day indirect rollover. If you choose this option, the money will be deposited back in your IRA as if you’d never taken the distribution. The IRS also is offering an option under COVID-19 rules that could allow you up to three years to repay the distribution or report it as income.
Here are some ways to take advantage of these special rules.
If you don’t need cash, don’t take an RMD. This way, you can avoid paying taxes on the RMD and will keep the money in your retirement account, where it will continue to grow tax-free.
If you do need cash because you’ve been diagnosed with COVID-19 or you’ve been laid off due to the pandemic, you can take the withdrawal without penalty. The rules allow a withdrawal from a qualified IRA or 401(k) up to $100,000 without paying the 10% penalty charged to people age 59 ½ or younger.
Consider Switching to a Roth IRA
Here’s one more potential benefit of this unprecedented financial time.
Stock values have dropped dramatically, offering additional opportunities to increase your retirement savings over the long term. One option is to convert your traditional IRA to a Roth IRA. The money you move from the IRA to a Roth account will become taxable, but the (likely) lower value of the assets you shift will mean you’ll pay less in taxes than you will after the market rebounds. And after you keep the Roth IRA for five years and reach age 59 ½, you can make tax-free withdrawals from the account forever.
While few like to entertain thoughts of death, making a will while you’re healthy is a smart financial move. People who die without a plan for their estate leave their assets and property subject to rules of state law, which could mean giving everything to a spouse or dividing it among a spouse, parents, children, and even distant relatives. In cases where the deceased had more than one marriage, laws applying to the division of assets can get messy and cause family tensions.
Estate planning is the only way to ensure that your wishes will be carried out. Estate planning will leave your family in a better financial position, and it also could eliminate any fees associated with state dispersal of your assets. If you have not made plans for your assets in the case of your death, consider taking this important step.
Estate Planning Trends
Caring.com, a website that connects service providers with clients, surveys American adults each year to determine the average level of engagement with estate planning. The 2020 survey found that the number of adults who have a will or other estate planning document has decreased by almost 25 percent since 2017. The survey also showed that in comparison to 2019, 20 percent fewer older adults and 25 percent fewer middle-aged adults have wills or an estate planning document.
The survey asked respondents why they did not have a will, and a majority said it was because they didn’t know how to get one or couldn’t afford it. Around 60 percent responded that estate planning was “very” or “somewhat” important, yet the number of people who hadn’t considered whether a will or living trust was important rose by 12 percent over 2019.
Some of the reasons why people don’t think about estate planning vary. Some don’t like to consider death or believe it only happens to older people. Others don’t believe they have enough assets to warrant making a will, while others think the process is too complicated.
Basic Estate Planning Documents
Here are the three primary types of estate planning documents you’ll want to consider.
While you’ve likely heard of a will, perhaps you aren’t exactly sure what it is. In its most basic form, a will is a legal estate planning document that articulates how your assets will be distributed. Wills typically also stipulate:
- An executor who will make sure the will’s instructions are carried out
- Which people or entities, also called beneficiaries, will inherit the assets and deal with debts
- Directions as to when and how the assets will be distributed to the beneficiaries
- Who will serve as guardians for any minor children
Generally, you work with an attorney to prepare your will.
A trust is somewhat more complex and costly than a will. People establish trusts primarily when they anticipate a dispute among their beneficiaries over their assets. Trusts typically benefit people who have large estates, own a lot of property, or expect to have a disability or become debilitated before they die. Unlike a will, a trust can take effect while someone is still alive—it is then called a living trust.
The main benefit of a trust is that it allows large estates to avoid the costly and long probate process while ensuring that all assets are properly distributed and all of the decedent’s wishes are carried out. Also, wills that go into probate become public record, but a living trust remains private upon death, allowing it to be managed out of the public eye.
Like a living trust, an advance directive takes effect while you are still alive. It outlines your wishes for your life if you become incapacitated mentally or can no longer communicate. This important document can determine, for example, if you wish to receive CPR in an emergency.
In an age when modern medical care can provide many measures to sustain life, without an advance directive, your family can be left to make difficult decisions about your care. Estate planners recommend that all estate planning documents include an advance healthcare directive so that your loved ones can make decisions in line with your wishes.
How Can I Get Started?
While it’s possible to plan your estate using online advice, software, and forms, professionals do not recommend this route. Estate planning is an important step, and financial and legal professionals provide sound guidance through the process. They will get to know you and your wishes for your estate and can offer advice based on years of knowledge and experience. Professionals will also take into account state laws and any personal, tax, or legal issues that could impact your estate. You can make the estate process more streamlined by getting your documents in order and thinking through your feelings about end-of-life decisions and how you’d like your assets to be divided.
When uncertain financial times loom, questions about your retirement are sure to come up. Have I saved enough? Do I need to keep working? How can I safeguard my savings?
As people who lost significant savings in the economic recession of 2008 can attest, it’s possible to survive a recession. That year, an economic crash erased about $2.4 trillion from Americans’ 401(k) and IRAs. This was an especially hard hit for people approaching retirement, who didn’t have much time to rebuild their savings or wait for the stock market to rebound.
Here are some questions to consider when thinking through how your retirement will weather a recession.
Should I Begin Taking Social Security Payments?
While Americans are eligible to begin drawing Social Security benefits at age 62, often it can be beneficial to wait. The earlier you begin collecting Social Security, the smaller the payments will be—although one benefit is that you will receive more payments overall.
For every year that you wait to collect, your Social Security benefits typically will increase about 8 percent. You could claim the benefits early and invest them, but that option requires the discipline to invest the checks and a market that’s going to generate at least an 8 percent annual return (unlikely during a recession). Financial planners find that many people end up spending at least some of those early benefit checks. A better choice could be to hold off on withdrawing Social Security as long as possible.
When Should I Retire?
A recession may cause you to rethink your retirement plans. If you can no longer afford to stop working completely, you may find that a part-time job will generate enough income to match or exceed your portfolio’s annual distribution. For example, if your part-time job pays $13 an hour for a 20-hour workweek, you’ll earn $13,520 annually—the equivalent of a 13.5 percent annual return on a $100,000 portfolio value.
In today’s job market, you may find several types of part-time jobs that match your interests or skills. You could pet sit, plan weddings, repair cars, or turn almost anything you enjoy doing into a small business. You’ll also find plenty of work-from-home jobs that could draw on your professional skills or areas of interest. Working a part-time job would allow you to postpone withdrawing Social Security benefits and buy your portfolio some time to recover.
Should I Keep Contributing to My Retirement Account?
If you are still working full-time and have an IRA or 401(k) when a recession hits, you may have to consider whether you want to continue contributing. If you feel secure in your job, this can be a great time to buy into the market at low prices, and the market most likely will rally back.
However, recessions can be scary and emotional times for investors. Instead of getting caught up in the market, you may want to continue investing on your regular schedule. If you already have automatic paycheck deductions into your 401(k), this will be easy.
If a recession leaves you cash poor, however, and you haven’t been able to save up an emergency fund, you may need to temporarily stop contributions to free up cash for monthly expenses.
Should I Invest?
The days following a financial crash can be an excellent time to invest if you are willing to take the risk. For example, people who bought into the S&P 500 the day after Black Monday in 1987 saw 50 percent increase in only two years. If you have cash or savings on hand, consider investing through an index fund. You could recoup your losses from a recession quickly.
Which Accounts Should I Withdraw From?
Sometimes, people must draw on their investment portfolios during a recession to meet monthly expenses. While the best plan is to not touch your retirement accounts prematurely, if you’re in this situation, consider the tax implications of withdrawing from different types of accounts before you decide where to withdraw.
If you are already collecting Social Security and withdraw from a 401(k) or traditional IRA, the combined income could move some of your Social Security into a category where they are taxable. In this case, a better choice would be withdrawing from a Roth IRA, where withdrawals are not taxed and will not impact your Social Security payments.
If you do not collect Social Security, you won’t be affected by these rules. However, if you do prematurely withdraw money from your 401(k) and don’t pay it back, the withdrawal will set off a 10 percent penalty if you are younger than 59 1/2. However, the IRA does have 18 exceptions to this rule, so it may be worth reading the fine print if you need to make this kind of withdrawal.
Of paramount importance during a recession is staying calm and making good decisions about your retirement, even as the financial markets are in turmoil. If you are in doubt, a financial planner can help you navigate your finances during difficult times, as the decisions you make could significantly impact your retirement long after the recession ends.
While wealth managers and private bankers may seem interchangeable, these two financial services professionals are different. As you look for assistance and advice in managing your money, here’s what you need to know when deciding which one will best fit your financial needs.
What are they exactly?
One difference between wealth managers and private bankers is the way they interact with their clients. While there are many overlapping areas in their two approaches to managing money, wealth managers are more holistic; they get to know their clients individually and help them assess, manage, and plan their financial futures.
Though private bankers also provide financial guidance, they primarily work with high-net-worth individuals (HNWI) and provide access to concierge banking services that go far beyond what a typical bank customer would receive. And, unlike wealth managers, private bankers do not invest their clients’ assets—although they may provide in-house investment opportunities from time to time.
What do they do?
Wealth managers provide a long list of financial services to help you create and execute long-term plans for your finances and optimize your portfolio. Along with offering advice and recommendations on financial decisions, they can also execute investments. They bring to the job significant experience from working with other clients to provide context and seasoned advice for your financial decisions. You’ll meet in person with your wealth manager to talk extensively about your financial plans and current situation as well as your comfort level with risk.
Along with connecting clients with financial and legal specialists, wealth managers can provide services such as:
- Estate planning
- Tax strategies
- Retirement planning
- Charitable giving planning
- Risk management
- Financial planning
- Trust services
- Investment advice
- Legal planning
As with almost all financial advisors, you’ll likely be charged a fee (typically a percentage of assets under management that averages about 1 percent annually) for a wealth manager’s services. However, some may bill an hourly or fixed annual fee.
Private bankers offer similar services, including cash-flow management, investment planning, estate planning, and risk management. Banks assign HNWIs a private banker, who looks over their finances and sets up banking services that cater to their needs. Clients also are given access to perks and financial services at their bank, such as higher interest rates, prime mortgage rates, no fees or overdraft charges, and preferential pricing. Private banking clients will never have to stand in line for a teller or wait to meet with a banking specialist. They also will have access to exclusive opportunities such as private equity partnerships and hedge funds. Clients typically do not pay fees for private banking services, as private bankers are paid by the institutions that employ them.
Who do they serve?
Private bankers work with HNWIs—a client group that each bank may define a little differently. In general, however, an HNWI has at least $1 million in investible assets, although some banks will allow clients with liquid financial assets in the six figures access to private banking services.
Wealth managers typically have served a similar clientele, but in recent years, their services have become available to clients who aren’t considered HNWI but still have a considerable amount of investable assets.
Wealth managers build their practices on the relationships they have with each client. That means that you’ll do much more than fill out a survey or answer cursory questions when you first meet with your wealth manager. They will want to talk with you at length about your values, goals, and life plans. They may ask about any anxieties you have about your financial future, such as paying for your children’s college tuition or saving enough to retire comfortably. As your wealth manager gets to know you and what you value, they will be better equipped to guide you in all aspects of your financial life and build long-term strategies to help you reach your financial goals. As your relationship with your wealth manager deepens, you’ll likely find that they become an indispensable part of your financial decision-making process.
Private bankers may play a similar role in your financial life depending on the level of involvement your bank offers. However, turnover can be high—when a private banker moves to another institution, you’ll have to decide whether to stay with your bank or move with your private banker.
How do I choose one?
Deciding whether to work with a private banker or a wealth manager depends on your needs. If you are looking for financial advice along with the perks that a financial institution will offer an HNWI, you’ll likely want to work with a private banker with the financial institution that holds your money. If you are more interested in wealth management, you should research firms to find a good fit. Be sure to examine the firm’s size, services, and costs as well as any potential wealth manager’s expertise and experience.
While a college degree symbolizes another educational milestone, it may not mean that recent graduates have learned enough to manage their finances well on their own. Colleges typically don’t require students to take a personal finance course, leaving new alumni on their own to figure out budgeting, investing, and how to pay off sometimes staggering student loans.
That’s where a financial planner can step in. Working with a finance professional can help college graduates establish good habits, whether it’s designing and sticking to a budget or investing early in retirement savings. Here are some benefits of working with a financial planner after your college graduation.
Get Off to a Good Start
Figuring out how to manage your finances through trial and error can take years, and errors can be costly. You could quickly find yourself deep in high-interest debt with no savings and high student loan payments without a financial plan in place.
A financial planner can help you make good decisions from the start, which will shield you from developing bad spending and saving habits. You may make big decisions in your 20s, such as buying a car and a house, getting married, and saving for retirement, that will impact you for decades—if not your lifetime. Discussing your long-term goals with your financial planner beforehand can lead to good decisions that will build a solid financial foundation.
Make a Budget
Typically, a financial planner will first help you create a monthly budget that fits your income. If you’re a typical college graduate, you’ll likely leave school with a low bank balance, a higher income than you had while in school, lots of bills, and little inclination to stick to a budget.
That’s where trouble can seep in. Without a budget, we tend to lose track of how much we’re spending, rack up debt, and neglect savings. In the long term, this is not a good strategy for preparing for big financial outlays—such as paying for a house, a postgraduate degree, or travel—down the road.
A financial planner will work with you to create a budget, line by line. You’ll estimate how much you’ll spend monthly on recurring bills, such as your smartphone and rent, and then you’ll see how much is left over for “extras” such as eating out and entertainment. While a budget can feel limiting, getting your spending under control early in your post-college adult life will help you live within your means and avoid extra debt.
Plan for Student Debt Payments
Student debt payments typically don’t kick in until six months after graduation, and if your budget isn’t ready for it, this new monthly bill can be shocking. If your student loans are large, you may find the payment won’t fit into your new monthly budget.
This is where a financial planner can assist. Student loan repayment options can be complex, and you may be eligible to refinance your loans for a lower payment or to apply for a special payment plan or federal loan forgiveness program. Together, you can determine the best strategy for managing your student loans.
Building Your Savings
While retirement may seem a long way away, the earlier you start saving, the bigger payoff you’ll receive later, thanks to compound interest. A financial planner can talk to you about retirement savings options, such as a 401(k) plan or Roth IRA account. With a financial planner’s guidance and understanding of the level of risk you are comfortable with, you can make good investment choices that will build your savings over decades and set you up for a comfortable retirement.
If you have money left over in your monthly budget, a financial planner can help you invest it to build your savings so that you’ll have a financial cushion and a start on funds for big-ticket items such as a house. A financial planner also will work with you to draw up a long-term plan, factoring in your dreams and goals. With a financial strategy in place that includes a budget, savings plan, and retirement plan, your goals will seem more attainable, and you’ll have the tools you need to make good financial decisions.
Managing your own money right after college can be difficult, as you are suddenly juggling a (likely) higher income than you had from a college job, a myriad of financial choices, and the temptation to spend your newfound earnings at will. Enlisting the help of a financial planner will allow you to understand your financial limitations, pay down your debt, and avoid accumulating new debt through irresponsible spending. If you stick to a budget and make informed financial decisions starting in your 20s, you can enjoy decades of financial stability before you reach retirement.
Retirement, unfortunately, does not always coincide with the time we’re tired of our jobs, ready to start sleeping in, and looking forward to more time for hobbies. Choosing the right time to retire is largely dependent on our financial situation, and that doesn’t always match up with our mental readiness.
Retiring too early or without a sound financial plan could tarnish your golden years. Here are four factors to consider as you plan your retirement date.
Your debt level
Managing a lot of debt payments on a fixed retirement income can be difficult, especially if your budget is tight. Unexpected expenses will leave you with little wiggle room and could lead to difficult circumstances such as losing your house.
If you are in this situation, a better choice is to work for a few more years and focus your income on paying down debt, especially high-interest loans or credit. This may mean cutting back on extra expenses to pay more toward high-interest debt such as credit card balances. You may also want to downsize or pay off your mortgage altogether, reducing the monthly payments you’ll have to make in retirement.
If you’re not sure whether to dedicate income to your retirement account or debt payments, look at what your retirement portfolio is earning compared to the interest rate you’re paying on your debt. If you’re earning 7 percent in the market and paying a 3.5 percent interest rate on your mortgage, a better choice is to invest your money. If the situation is flipped, paying down your debt would be the wiser choice.
Whether you can pay your monthly bills
It’s generally accepted that you’ll need about 80 percent of your pre-retirement annual income for a financially stable retirement. If you’re already struggling to pay bills while you’re working, retiring with a lower monthly income will only make your situation worse.
Your monthly budget will change in retirement. You’ll receive income from your retirement savings, pensions, and Social Security, and your budget lines for work-related expenses such as community and lunches out will likely drop. However, these changes may not be enough to cover your budget comfortably if you were already living month-to-month. Before you stop working, think through your retirement budget and whether a few more years on the job and decreasing your expenses would put you in a better position to retire.
Your retirement plan
Estimating your financial needs in retirement can be a moving target, as you don’t know how long you will live and what your expenses will be as the years go on. Today, Americans are living longer—if you are nearing retirement age and are in good health, it’s likely you could live to 90. In that case, you’d need to plan for savings that would last as long as 25 years.
If you’ve thought about what retirement will be like but now how exactly you’ll fund it, you’re probably not ready to retire yet. After defining your retirement goals and lifestyle, you’ll need to estimate your retirement living expenses, plus annual inflation. Retirement budgeting can get complicated, as you’ll need to figure out how much Social Security you’ll receive depending on what age you’ll retire and factor in new expenses such as healthcare costs and travel plans.
Retirement also can bring large, unexpected expenses, such as pricey home repairs and vehicle replacements. If you’re not sure whether your retirement income would cover these costs, it may be best to take care of them now instead of factoring them into your retirement budget.
When you have a plan in place, whether you draw it up yourself or work with a financial adviser, you’ll have a better idea of how many years you’ll need to work to have the retirement you want.
Your anxiety level about quitting your job
It can be hard to stop working, even if you’re financially prepared. Plus, you may love your job and not really want to leave it. Work gives our days structure and purpose, and the thought of days on end with no concrete plans may be stressful. This can lead to spending over your retirement budget as you try to fill the time.
If you’re in this situation, you have several options for managing retirement. You can keep working and saving, which will be financially beneficial when you retire. You also can take a part-time job or a regular volunteer shift with a local organization as you ease into retirement. If you’re worried about your retirement budget, you can try living on your retirement income and see if it’s enough for you to manage comfortably.
If you find that you’re not ready to retire, you’ll reap the many benefits of extra years of work. Along with increased savings and more time to pay off debts, you can stay on your work’s healthcare plan and spend a few years preparing for living on a retirement budget.
As more Americans are facing a retirement with inadequate savings or pensions, some are choosing to delay retirement past age 65—and some research has shown working longer could pay off financially. However, critics aren’t sure this is the best route to extending or building your retirement savings.
A study conducted by researchers from the Stanford Center on Longevity and the Society of Actuaries, which was released in 2019, found that retiring later is beneficial. The report states that “delaying retirement, even for a few years, can significantly increase the eventual retirement income.”
Researchers looked at 292 strategies for building retirement income and found the most effective to be delaying Social Security payments until age 70. The longer someone can wait to draw down their retirement and postpone Social Security payments, the more retirement income they’ll have, according to the report.
Here’s what proponents of a later retirement—and their detractors—say about putting off retirement and working longer.
More savings: While logic says that the more years you work, the more time you’ll have to save, there may be additional benefits to putting off retirement until age 70. Working in the second half of your 60s could be a time of higher earnings than in the past, and you may be able to save more if you’re old enough to have paid off your children’s college tuition, your mortgage, or your car loan. This could leave you with more money to put away for your impending retirement.
The rules for IRAs also benefit older workers. People who are working and age 50 and older can make catch-up contributions to their retirement accounts, allowing them to save more in their IRA or 401(k) at a time when their earnings are high: up to $26,000 annually in a 401(k) and $7,000 annually in an IRA. If you work for a company that matches IRA savings, you’ll add some free savings to your growing retirement contributions.
Some research backs this strategy. According to the Center for Retirement Research at Boston College, 86 percent of people who work until age 70 will be financially comfortable in their retirement.
Expanded Social Security benefits: Current rules allow workers to retire at age 66 or 67 and receive their full Social Security benefits. While claiming Social Security is allowed as young as 62, some experts say that working a few years past official retirement age can reap substantial benefits.
For example, your payments will increase by 8 percent for every year you are eligible for Social Security benefits but don’t take them. This incentive ends when you are 72, the required minimum distribution age, but let’s say you wait until age 70 to retire. Here’s how it would work: If your monthly benefit is $1,500 and your full retirement age is 66, waiting until age 72 to claim Social Security would increase your monthly Social Security payment to $1,980—a lifetime benefit.
Fewer retirement years to fund: According to the Social Security Administration, people are living longer, which means they will face a longer period of retirement. The agency estimates that men who are 65 will live, on average, to about 84 years, while 65-year-old women will live on average to almost 87 years. About one-fourth of all people who are 65 years old will live past 90.
As life expectancy lengthens, so does the expected period of retirement. That means that working a few years gives you more time to increase your savings without spending it and decreases the number of years your retirement savings will need to provide an income. Here’s an example: At age 65, say you have saved $500,0000. If your savings earn a 4 percent annual return (a conservative amount), when you are 70, your savings will have grown by about $62,000.
70 is the new 60? If you are generally in good health, putting off retirement until you are 70 shouldn’t be cutting into your remaining years of health. Modern medicine and life expectancy rates mean you that you likely will have many years after age 70 to enjoy your retirement.
In addition, working a few more years might actually be good for your health. Researchers have found that working keeps you physically and mentally sharp, and one study even concluded that people who work longer might live longer, too.
Some financial experts, however, disagree that 70 is a better age to retire. Many people retire in their early to mid-60s because of health reasons, or they are pushed out of their job and don’t have the option to work longer. Some simply don’t enjoy their job and don’t want to spend their sixties unhappy in their employment.
Considering a later retirement is fine, but don’t bank your savings plan on it by waiting until you’re 60 to start seriously saving. The earlier you can put away money, the better. This will help you build a retirement savings that will allow you to retire when you want—regardless of your age.
With 2019 over, there’s no better time to build up your retirement savings than now. The arrival of a new year is an excellent opportunity to review your savings plan, especially if you are nearing retirement age.
While it’s always wise to start saving as early as possible, putting away money for retirement is a good move no matter when you start. You can start taking advantage of compounding interest, building your retirement nest egg as much as you can. Many financial advisors stress the importance of these savings, as Social Security will not likely provide a viable retirement income by itself. A retirement savings plan will provide the needed income to cover monthly expenses in retirement.
Here are five smart moves you can make with your retirement savings in 2020.
Save early and often
While Vanguard reports that more millennials are joining 401(k) plans (some thanks to employers’ automatic enrollment programs), many aren’t checking in on their plan’s growth after they enroll. That means they also aren’t increasing their contributions, staying educated about what they’re investing in, or making sure that they aren’t paying high management fees that are taking away from their returns.
It’s smart to open a 401(k) plan when you’re young, but it’s equally important to keep tabs on your account and commit to regular contributions and, if possible, increase your contributions. Ideally, you will save between 10 percent and 15 percent of your income and maximize your employer’s 401(k) match. However, if that’s not possible right now, try a small increase in your contribution this year and increase it by 1 percent every time you receive a raise.
Make saving a habit
Prioritizing retirement savings can be difficult, especially when you’re faced with monthly bills and a budget devoted to paying down expenses. However, to build a strong retirement fund, it’s imperative to save now so you won’t have to play catch-up later. One way to ensure that you’re putting money away each month is to treat your savings contribution as a monthly bill.
If you create a monthly budget, add a line for savings alongside your allocation for electricity, the mortgage payment, and the water bill. Your savings are equally as important, and adding this budget line will prompt you to allocate money each month toward your retirement before spending money on “extras” such as entertainment and vacations.
One way to ensure you’re saving is to set up automatic contributions to your retirement account. That way you’ll consistently contribute every month, and when you get a raise or a bonus, you can make extra or increased contributions.
Begin envisioning your retirement
While the prospect of sleeping in, not working, and having endless days off may seem blissful right now, in reality, many retirees quickly find retirement boring—and their retirement savings may not fund a revised plan that includes travel, shopping, or other expenses.
To make sure that your retirement savings match your retirement plans, think through now how you might spend your time in retirement. Do you want to travel the world? Spend part of the year visiting family and friends? Buy a cabin in the mountains? Take classes at your local community college?
Once you get an idea of what you’d like to do in retirement, you can put together a budget reflecting how much it might cost and check whether your savings are on track to match it. If not, you may want to increase your monthly allocation. Or, you can think of a more affordable way to spend retirement that still will make you happy. Either way, planning your retirement now will guarantee a more fulfilling retirement.
Invest your retirement savings well
Your investment strategies for your retirement fund should change as you age. You might consider investing less aggressively as the years go on, as there won’t be time to recover any losses if the market sinks close to the time you plan to begin withdrawals.
For example, if a lot of your money is tied up in stocks, you may want to move a larger portion of it to bonds. As a general rule to follow, about half of your stock portfolio should be invested in stocks at age 60.
Increase your accounts
While one retirement savings plan is good, more can be even better. If you plan to max out your contribution to your 401(k) plan in 2020, consider opening a Roth IRA account with your tax refund or 2019 bonus. Roth IRA contributions are made post-tax.
However, if you are in a higher tax bracket, a traditional IRA may be a better choice. This option allows you to fund the account before your income is taxed; instead, you’ll pay taxes on withdrawals, when you’ll likely be in a lower tax bracket. This option allows you to postpone—and potentially pay less—in taxes.
To avoid another government shutdown, Congress passed a bipartisan spending bill in December. Tacked to it was a bill called the Setting Every Community Up for Retirement Enhancement (SECURE) Act that Barron’s describes as “the biggest retirement legislation in a decade.”
Many financial experts were surprised that the SECURE Act, which was backed by the insurance industry and lobbyists, was included in the bill. Earlier in 2019, the House passed it with a 417-3 vote, but several Republican senators put a hold on the bill and discussion on it reached a stalemate. While some lawmakers have raised questions about the SECURE Act and offered amendments, it generally has enjoyed bipartisan support.
With President Trump’s signature on the bill on Friday, December 20, the SECURE Act was signed into law. The legislation will reform the way that Americans save for retirement. Here are five key changes you need to know about.
Minimum age raised for RMD
Currently, people who own IRAs must begin taking required minimum distributions, or RMDs, when they become age 70 ½. The SECURE Act raises that age to 72. That means people who turn age 70 ½ in 2019 will have to take out their first RMD by April 1, 2020. Those who turn 70 ½ in 2020 or after can wait two years to withdraw their RMD.
Some analysts believe this change will significantly benefit retirees. Postponing RMD allows an IRA balance more time to grow through compounded interest and through additional contributions.
Age cap removed for IRA contributions
The SECURE Act will change a rule that restricted people from contributing to an IRA after they turned age 70 ½ (this restriction did not apply to Roth IRAs). Under the SECURE Act, there are no age limitations for contributing.
This change could help people who work into their 70s or beyond, allowing them to continue to make contributions to their IRA as long as they work. Under the SECURE Act, people will have more time to increase or catch up on their retirement savings. Coupled with the new rule increasing the age for RMD, people could significantly increase their retirement savings in those additional work years. According to research from experts at Stanford University, Cornerstone Research, George Mason University, and Financial Engine, putting off retirement for one year will benefit you 3.5 times more financially than saving 1% of your income over 30 years.
Benefits expanded to include part-time workers and more
With this change, the SECURE Act will respond to a changing economy with an increasing number of people working “gig” and freelance jobs. The act will allow many more employees who work part-time to save for retirement through their employer.
The SECURE Act also will allow people to withdraw as much as $10,000 from their 529 plan to pay back student loans. This move helps graduates because they will pay less interest as they repay their debt quickly and make them more financially secure as they enter the working world and begin families. As the nation’s student debt burden has surpassed $1.5 trillion, employers are looking for ways to help their workers manage this debt.
Parents of newborns, either through birth or adoption, will also get help through the SECURE Act. The act makes new parents eligible to withdraw $5,000 from their IRA, without penalty, to help pay the cost of delivery or adoption.
The end of “stretch” IRAs
Stretch IRA rules have allowed families to pass IRAs through generations tax-free. Under these rules, inherited IRAs kept their tax-deferred status when passed to non-spouse beneficiaries (typically children and grandchildren), allowing the IRA to grow without paying taxes. Stretch IRA rules, which applied to any type of IRA, meant that when a young beneficiary inherited an IRA, taxes and required distributions could be put off for decades.
The SECURE Act gets rid of these rules, and now non-spouse beneficiaries of an IRA must disperse its balance within 10 years. There are exceptions for surviving spouses, minor beneficiaries, beneficiaries who are disabled, beneficiaries who are chronically ill, and beneficiaries who are within 10 years in age of the account owner.
The primary beneficiary of this rule change? The U.S. government. Called a “tax acceleration,” eliminating stretch IRAs is estimated to generate about $15 billion in tax revenue in the next 10 years. It also can significantly change estate planning, as it eliminates a shelter for inherited income.
More annuities in 401(k) plans
While investors have always had the option of including annuities in their 401(k) plans, right now employers are responsible for making sure they are a good choice for their employees’ plans. Under the SECURE Act, insurance companies will become the decision-makers on annuities. Critics say this is a boon for the insurance industry, which sells annuities and lobbied for the passage of the SECURE Act.
Supporters of this rule change argue that annuities can be a sound investment choice because they provide a guaranteed income over the life of the retiree. However, because annuities are complicated investment products, investing in the wrong ones could mean large financial penalties and fees.
The calendar year is almost over, and if you’re saving for retirement with an IRA, there are several smart moves you can make before the end of 2019.
Contribute the maximum amount
For the first time since 2013, the cap on the annual contribution to a traditional IRA has been increased $500 to a maximum of $6,000 for contributors younger than 50. Those age 50 and older are allowed to contribute an additional $1,000 as a “catch up,” bringing their total allowable IRA contribution to $7,000.
To contribute to an IRA, you must have earned income from work, and you cannot contribute more to an IRA than you earned. IRA contributions in 2019 are tax-deductible, and if you or your spouse do not have a 401(k) or other work retirement account, you can deduct your entire 2019 IRA contribution on your tax return. Make your 2019 contribution before the next tax filing deadline passes on April 15, 2020.
If required, take your minimum distribution
If you are age 70 ½ or older, you typically are required to take a minimum distribution, or RMD, from your IRA. Figuring out the amount of your RMD, however, can be difficult, and it’s best to go over your retirement account with a financial expert before taking any distributions (errors can be expensive). The amount of your distribution depends on your life expectancy and how much your IRA is worth – the IRS calculates it by dividing your IRA balance on the last day of 2018 by your life expectancy or the applicable distribution period.
You’ll be penalized 50 percent if you miss your RMD, a significant penalty for a retirement account. If you don’t need the money from an RMD but have to take it, you can donate the disbursement to a charitable cause through a qualified charitable distribution (QCD). In this case, the donation will go straight from your IRA to a qualified charity of your choice, and it will not be counted as personal income. QCDs are limited to $100,000 each year.
Review your assets
December is a great time for a year-end review of your investment policy statement (IPS). This document lays out how much of your money should be in cash, bonds, and stock, and when each category will rebalance. At the end of the year, you can evaluate whether your investments match the allocations on your IPS. If they don’t, which is likely, you may want to rebalance your account.
Financial experts recommend creating an IPS before the end of the year if you don’t have one. While it’s ideal to create your IPS in a calm market, if that’s not possible, make one right away, no matter the market conditions.
Avoid taxes on distributions
One significant downside of a traditional IRA is that distributions can be taxed and converting to a Roth account can eliminate some of these potential losses. Also, investors who donate their RMD to a qualifying charity or use the disbursement to buy a qualifying longevity annuity contract also can avoid disbursement taxes.
Converting to a Roth IRA may be an especially wise choice in years when your taxable income is low. The taxes you pay in a slow year will set a baseline for you to make good choices when your taxes could be higher. Investors between ages 59 ½ and 70 ½ likely won’t benefit from a Roth IRA conversion, however, as they aren’t required to take RMDs.
If you inherited a traditional IRA in 2019, you must take the RMD by the end of 2019 and pay the taxes on it – even if you are younger than 70 ½.
Don’t overdo it
While saving for retirement is generally encouraged, can you contribute too much to an IRA? Yes, and there are consequences. For example, if your income is better than usual for one year, and you make a large contribution to your IRA, you may have to pay a 6 percent penalty on your extra contributions until you fix the error. If you have over-contributed, there are remedies:
- Withdraw the excess contributions before April 15, 2020.
- If your tax return already is on its way to the IRS, you can remove the extra contribution and send in an amended tax return by the deadline in October.
- If you apply the extra contribution amount to 2020, you will still have to pay the 6 percent penalty on it for 2019, but you’ll get a “head start” on next year’s contribution.
While these are fixes, the best approach is to not make excess contributions at all.
Looking forward, IRA contribution rules will not change in 2020 – the maximums will remain at $6,000 and $7,000, depending on your age, for combined contributions to Roth and traditional IRAs. The window for 2020 contributions begins Jan. 1 and ends April 15, 2021.
The family office has served as an integral part of wealth management since ancient times, although the modern form of the family office was born in the late 19th century with the Rockefellers. In 1882, John D. Rockefeller created an office to organize his many lines of business and oversee his family’s investments; this office managed the Rockefeller wealth as an investment portfolio, rather than individual businesses. Though this setup was never described as a “family office,” it’s similar to the concept today. In essence, a family office is an organization, typically made up of financial professionals, who help wealthy clients and their families manage their money and make sound decisions about their investments and financial futures.
In 2020, according to a recent Forbes report, the idea of the family office will continue to evolve and grow in response to cultural, economic, and financial trends. This structure still will help individuals and families build and preserve legacies, amass inheritances, and protect family businesses. However, many family office providers will need to rethink think their structures and purposes in response to a changing world, according to Forbes.
Here are six trends that will affect the family office in 2020.
Family offices already are preparing for a recession, according to Forbes. A UBS Campden Wealth Family Office Report published this year notes that more than 50 percent of family offices are prioritizing increasing their cash reserves, mitigating risk, and taking advantage of opportunistic events. Almost half of the family offices surveyed are also increasing their contributions to direct private equity investments, while 42 percent are prioritizing private equity funds and 34 percent are investing more in real estate.
Transitioning family businesses
Many families now are selling their established businesses or buying other family businesses, while others are moving from managing companies to managing large wealth portfolios. This trend is increasing the need for family offices, as families seek to preserve their wealth and legacies for future generations, according to Forbes. Family offices are providing support and structure for wealthy families transitioning into new stages of wealth management.
Advances in technology and changes in global economic patterns have created a new phase in globalization that some experts are calling “Globalization 4.0.” Trade in the global south is growing quickly, and the developing world is playing a greater role in international trade flows. In addition, automation, artificial intelligence, Big Data, the Internet of Things, and other paradigm-shifting technologies are impacting markets and trade, giving rise to a trend that’s seeing more products made locally, close to their consumer markets. For family offices, this shift can force rethinking about where individuals and families want their holdings located and how they will structure their governance.
New family office structures
Wealth is shifting as the number of billionaires worldwide declined by around 5% amid market changes and slowing economies. However, more family offices are being created, according to Forbes, as businesspeople who started companies in the 1990s sell and tech entrepreneurs are preparing to put their companies on the market. Much of this influx of wealth will be invested, and for individuals and families, a family office can be an excellent structure to manage assets and chart a financial future.
How will this impact family offices? This influx of investors looks different from previous generations. Instead of a single or multi-family office, investors are looking for new structures, such as virtual and private multi-family offices or on-demand resources. The sharing economy has also made its way to the family office, as some investors now are interested in pooling their resources with other families to open more investment opportunities.
Prioritizing other risks
Family offices now are increasingly factoring in non-financial risks when making decisions about their investments. Climate risk, for example, is now part of the World Bank’s risk management strategy. Since the publication of the Panama Papers, which exposed the innerworkings of some family offices’ investments, the threats to an individual’s or family’s reputation is more frequently considered when assessing risk. Another important factor is the risk surrounding succession, which fails two-thirds of the time. According to Forbes, half of family offices do not have a succession plan. This is clearly a risk that more family offices will need to prioritize.
The role of banks and financial advisors has diminished as digitization has given family office holders more access to systems and information. Often, family office members can manage their own investments and transactions, which can give them complete control over how their portfolio grows.
Digitization also is affecting wealth management services that work with family offices. Families are demonstrating growing concerns about the security of their information and are asking for greater access to their transactions and portfolios. To meet these demands, wealth management services must increasingly utilize software and other digital tools to store data in a centralized, accessible location. They must also provide regular, open communication with clients, as well as more tailored, customized solutions.
Long-term care insurance, which covers the cost of nursing homes, in-home care, and assisted living, can help tremendously if such a need arises when you retire. According to the AARP, out-of-pocket costs for long-term care average $140,000 (and these types of expenses typically aren’t covered by Medicaid), and by the time you reach the age of 65, there is about a 50-50 chance that you’ll have to pay for long-term care at some point. The U.S. Department of Health and Human Services has stated that 70 percent of people who are turning 65 will need long-term care.
Why, then, do so few people not plan for their long-term health care needs? Only about 7.2 million Americans have long-term care insurance, according to the AARP, and for many people, it’s a problem that they aren’t prepared to handle. Long-term care insurance policies can be costly, and the premiums typically become more expensive as you grow older. When you’re still relatively young and healthy, the need seems less pressing. As a result, long-term care insurance can be an easy expense to postpone. Here’s why you need, at minimum, a plan for financially managing long-term care issues, even if you’re perfectly healthy right now.
Assess Your Situation
First, it’s helpful to look at your life circumstances. Do dementia or other debilitating diseases run in your family? If that’s the case, you may need assisted care later in life. Consider how you’d pay for this care. Will your savings cover it? Would your children be able to help? Could you use your home equity? In some situations, financial advisors say that you could comfortably do without long-term care insurance, such as if you are using less than 4 percent of your savings for annual living expenses. If you have few assets, then you may qualify for Medicaid.
However, most people will eventually have to face the reality of how to cover long-term care. According to LifePlans, an industry research firm, long-term care insurance premiums cost an average of $2,700 a year. The average stay in a nursing home is about two-and-a-half years, and prices tend to increase each year. Genworth Financial has tracked the price of care for 16 years, and its 2019 data shows that the costs for assisted-living facilities and in-home care have increased, on average, between 1.71 percent and 3.64 percent each year since 2004, an increase that’s often greater than the U.S. inflation rate. For in-home care, that’s an average increase of $892 each year, and for a private room in a nursing home, it’s an increase of about $2,468 annually.
Benefits of Long-Term Care Insurance
Some believe that Medicare will pay for long-term care, but this coverage typically only covers short-term nursing home care or a percentage of at-home care costs. Additionally, patients must be in specific situations in order to qualify for this type of care. Most of the time, families must pay for the care themselves. This is why long-term care can be so valuable, as it covers the cost of residential or in-home care, regardless of the diagnosis. Premiums are based on how much coverage the policy holder would like to have on a daily basis. Policies are typically available from private insurance companies or through employer-sponsored insurance plans. Some companies offer their employees group long-term insurance plans, which are often cheaper. One drawback is that once you no longer have a job, then you lose the insurance plan.
If you do want long-term care insurance, it’s never too early to purchase it. Waiting until you are sick or older may seemingly save you money in terms of the premiums. However, your age and health can work against you if you try to purchase coverage late in life. Conditions such as multiple sclerosis, metastic cancer, dementia, and Parkinson’s disease—all progressive health conditions—are often reasons why applicants are not approved for long-term care insurance. In 2010 (when the most recent data became available, according to the American Association of Long-Term Care Insurance website), 23 percent of people in their 60s who applied for long-term care insurance were rejected, and 14 percent of applicants in their 50s were declined. According to the American Association of Long-Term Care Insurance, the prime time to apply for long-term care insurance is when you are in your mid-50s.
Considerations to Keep in Mind
In addition, there are some considerations to keep in mind if you’re thinking about purchasing long-term care insurance. The number of carriers offering long-term care has shrunk significantly. According to one expert, 10 years ago more than 100 insurance companies offered long-term care policies; now, only about 12 do so. Questions remain about how much longer these policies will be available, even for those who have already purchased them.
If you’re in “The Big Middle,” a term that SCAN Foundation Chief Bruce Chernof coined for those who are not wealthy enough to pay their own long-term care costs and not poor enough to qualify for Medicaid, the choice remains about whether to invest in long-term care insurance.
Financial decisions in our youth can be simple. How much can I afford to pay in rent? Should I budget for two meals out a week or four? What amount of car payment can I afford?
As we get older, however, our finances—and our financial decisions—can become more complex. As we accumulate wealth and begin thinking about the financial side of issues such as retirement, second homes, and leaving an inheritance, most of us could use some guidance. That’s where wealth management comes in.
What is wealth management?
Wealth management is an individualized financial planning service for highly affluent clients. These individuals work with either a single wealth manager or a financial advising team that provides comprehensive services and has expertise in a wide range of financial services and products.
What is a wealth manager?
Serving as personal consultants, wealth managers focus on issues that affect extremely wealthy clients, such as managing estate tax rules. They spend time getting to know their clients, including their financial and life priorities.
Along with answering questions and meeting with their clients, wealth managers often coordinate legal and accounting services for them as well. Wealth managers help clients with all financial planning needs, whether it’s setting up a trust for your grandchildren or working through how tax rules impact your business’s income.
Wealth managers provide across-the-board financial services, working with clients on all aspects of their financial holdings and decisions. Clients looking for a single service, such as help with retirement planning, may find it is more efficient to work with a financial planner who offers a la carte services. Similarly, individuals who are interested in guidance creating an investment strategy may want to consider a portfolio manager, who will offer advice on maximizing returns and minimizing risk but won’t provide additional financial services.
Wealth managers provide many services. These include estate and tax planning; accounting; retirement planning; providing legal guidance on finance-related matters; offering investment management and advice; setting up trusts and foundations; creating a plan for charitable giving; engaging in risk management; and planning for Social Security benefits.
Your initial meetings with a wealth manager may be more conversational as you talk through your personal and financial goals. A wealth manager will need to be familiar with the entirety of your finances as well as your financial history, hopes and plans for your future, and the legacy you want to leave. Using all this information, a wealth manager will craft a financial strategy that will meet all of your goals.
How do I find a wealth manager?
Generally, there are two types of wealth managers. Large firms such as Merrill and Morgan Stanley offer wealth management experts along with banking and other types of financial services. Smaller independent firms, on the other hand, may provide a more personalized experience.
Either way, you’ll want to make sure that the wealth manager you choose is certified. Only one certification specific to wealth management, the certified private wealth advisor (CPWA) is available.
Financial advisors with this certificate are qualified to work with clients whose net worth is at least $5 million. The certified financial planner (CFP) and chartered financial analyst (CFP) certify a professional in general financial planning practices and are valuable certifications for wealth managers.
You can start looking for a local wealth manager through online search. This should provide information about large financial institutions and small private firms in your area. You also could ask around. Word of mouth can be a valuable tool in finding a qualified professional that others— especially peers who have similar levels of wealth and financial situations—recommend.
The cost of wealth management services typically is based on a percentage of the client’s assets that are being managed. That means the more financial assets you have, the higher your fees will be. Firms may also add other charges—Morgan Stanley, for example, charges fixed fees for specific accounts and services. It’s important to talk to your wealth management advisor about their rates and fees before agreeing to work together.
What if I prefer online services?
If you’re more comfortable behind a computer screen, many financial institutions offer wealth management service online—although you’ll lose the personal touch of face-to-face meetings. Meetings can be moved to the phone or a video conference while much of the financial information is provided online.
Some online services offer unlimited access to a human financial provider or team of providers for a flat annual fee that’s determined by the services you need and how complicated your financial needs are. Other services calculate fees based on a percentage of your assets. The downsides for some of these services, especially when they offer a team approach, is that you may not consistently work with the same financial adviser.
Regardless of the criteria you use to select a wealth management service, it’s vital to think through your needs and research your options thoroughly. You have spent a lifetime building up your wealth. Your financial decisions often will impact your family for decades or more to come. This means it is important to work with a qualified wealth manager who takes the time to understand your financial situation and long-term goals.
The two basic types of retirement accounts are the 401(k) and the individual retirement account (IRA). While it is easy to confuse the two, they are actually quite different. While a 401(k) is an employee-sponsored account, anyone can open an IRA. This makes it an important product for people who do not have access to a 401(k) or who have already maxed out contributions to that account.
Unfortunately, the contribution limits for an IRA are significantly less than for a 401(k). However, they remain extremely important vehicles for retirement savings because of their tax advantages. An IRA is a way for the government to incentivize retirement savings outside of the employee-sponsored account.
The Various IRA Options Available Today
To open an IRA, individuals only need income from a job that is claimed for tax purposes, which rules out income from Social Security or an investment. When opening an IRA, individuals need to choose between a traditional and a Roth account. Like a 401(k), an IRA comes with certain tax benefits.
With a traditional account, individuals can contribute to the IRA and avoid paying any taxes on those contributions. However, when money is withdrawn from the account, it is taxed at that time. A Roth account involves investment of taxed income. Later, withdrawals can be made without paying any taxes, provided that individuals do not touch the account until they are at least 59.5 years old.
Some forms of specialty IRAs exist. For example, a simplified employee pension (SEP) IRA is geared for small-business owners and self-employed individuals. These accounts operate much like other IRAs except that they have much higher contribution limits.
Small-business owners are required to contribute the same rate to eligible employee accounts and their own. In other words, if the owner saves 10 percent of compensation, 10 percent of an employee’s compensation must also be saved. Employees cannot contribute directly to their own SEP IRA.
Another product is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. This product is designed for companies with 100 or fewer employees. A SIMPLE IRA is easy to set up and allows employees to contribute to their own accounts.
Questions to Think about When Opening an IRA
Individuals can open IRAs through most financial service providers, from banks and credit unions to brokerage firms. Different service providers offer various advantages and disadvantages, so it is important to do some homework before opening an account.
Ideally, the financial institution provides individuals with a wide range of resources, from online education materials to in-person meetings, to help guide choices. These resources can help individuals plan for the future. Also, different providers will charge different types of fees. While some companies charge monthly fees, others have customers pay per trade.
Sometimes, companies will charge both monthly and trading fees, so it is important to understand the full payment scheme. Otherwise, individuals may end up paying a lot more for the service than they originally intend. It is also important to figure out what types of investments can be held in the account.
The point of opening an IRA is to invest money for retirement and have it grow over time. As a result, the exact investment options tend to matter quite a bit—especially for people who like to play an active role in investing decisions. People who prefer a more passive approach to investing should consider the possibility that they may want to get more actively involved in the future.
The Basics of Investing in an IRA
When it comes to investing money through an IRA, people need to consider the tradeoff between risk and return. An IRA should be viewed as a long-term investment. Generally, individuals will use an IRA to invest in stocks, especially if they are more than a decade away from retirement.
The stock market involves more risk, but it also usually yields higher returns than products like a certificate of deposit or a Treasury bond. While it is highly unlikely to lose money with these safe investments, individuals will also not earn much money. Different service providers may have some guidance to offer about how to navigate the creation of an effective portfolio. However, it is important that customers not feel pressured.
Alternately, individuals may want to take a fairly hands-off approach to investing in an IRA. In these cases, they may choose something like a total market index fund, which provides access to the kind of diversity needed to mitigate much of the risk involved in the stock market. These funds choose investments from a range of different geographic locations and across a number of different industries.
Individuals would struggle to obtain such diversification alone, even if investing very large sums of money. This option is for people who are willing to leave their money in accounts for long-term gains without the need to micromanage it. Another option for people who prefer a hands-off approach is a robo-advisor. This service will select investments based on the investor’s preferred cost and risk profile.
For many people, the prospect of saving for the future and planning for retirement is daunting. You may feel like you have no options to increase your savings, or worry that you’ll have to make major sacrifices in retirement. You’re not alone—millions of Americans over the age of 40 lack substantial nest eggs for retirement.
However, don’t despair. There are many strategies to substantially boost your savings, even if you feel behind. People under the age of 40 have even more options to get a jumpstart on retirement savings, considering the power of compounded interest.
Some of the strategies you can use to quickly increase your retirement savings include:
Invest in permanent life insurance.
Most people have heard that they should buy term life insurance and invest the rest of their money, rather than going for the more expensive option of permanent life insurance. This option can work for some people, but many others end up spending the money they would otherwise invest, despite their best intentions. For many retirees, permanent life insurance is a better option.
With permanent life insurance, you’ll pay ongoing premiums, which is a sort of automated savings. Each premium increases the cash value of the policy tax-free, and you can borrow funds against the policy or sometimes withdraw cash from it. In addition, the policy will pay out death benefits, which aren’t subject to income taxes. In other words, permanent life insurance can serve as a way of supplementing your retirement income with non-taxable money. Think of permanent life insurance as a sort of bond or certificate of deposit (CD) that increases in value steadily over time.
Save the raise.
As you advance in you career, you’ll likely receive raises that provide a little extra room in your budget. While a raise can sometimes relieve the pressure on a tight budget, many people can make ends meet without the extra income. Frequently, a raise just leads to a corresponding increase in spending. But what would happen if you saved your raise instead? If you put that extra income into a retirement account rather than buying a nicer car or new home, for example, you’ll set yourself up for a more comfortable retirement where you won’t have to sacrifice much to maintain your standard of living. The best part about this strategy is that you won’t have to make cuts to your budget or feel pinched by the extra savings, since you’ll still enjoy the same monthly income.
Take advantage of Roth savings.
Research has shown that Roth accounts are one of the most underutilized retirement preparation strategies. Many people understand the importance of maxing out a 401(k) and taking advantage of employer matching, but aren’t aware that they can do even more. Roth accounts are funded with after-tax income, but withdrawals during retirement are not subject to taxes. This option is especially good for people who may be in a higher tax bracket in retirement than they currently are. The other value of a Roth account is its potential to diversify your retirement savings. With both tax-deferred and Roth accounts, you can minimize the potential impact of future tax changes.
Purchase a home.
There’s still debate about whether buying or renting makes better financial sense. In some areas, renting a home is certainly cheaper in the short term than a down payment, mortgage, and property taxes. At the same time, research by the Harvard University Joint Center for Housing Studies shows that people who own homes tend to increase their wealth significantly more than renters, even after controlling for socio-economic differences and other factors. This may be because home ownership is a type of forced savings. Every mortgage payment builds equity in your home. You pay down your debt on the home while its value likely increases. Of course, it’s important to think strategically about home ownership and realize it is a long-term investment. If you buy and sell homes frequently, you’ll squander any gains on closing fees and other one-time expenses.
Fund a Health Savings Account.
Not everyone is eligible for a Health Savings Account (HSA), but those who are often fail to use them strategically as they prepare for retirement. Contributions to an HSA are tax-deductible and can be invested to fund qualified healthcare expenses you’ll encounter later in life, including during retirement. Very few people use an HSA for long-term savings, even though the accounts can be rolled over annually. With healthcare costs typically increasing during retirement, it’s important to have money set aside to deal with these expenses. An HSA can help you offset the costs of healthcare without needing to rely on your primary sources of income. Ideally, you would start investing in an HSA early and invest the money so that it grows over time and serves as a sort of insurance.
Ideally, retirement is a time when people relax and enjoy their lives, but following bad financial advice or not planning enough can keep you from fulfilling your retirement dreams. While it is imperative to understand the key financial steps to take in preparation for retirement, it is equally as important to know the errors that many people make. Knowing these common pitfalls can help you to ensure that you stay on the right track as you plan for retirement.
Read on for some of the most common financial mistakes that people make in relation to retirement:
Paying off a mortgage.
People often want to enter retirement with as little debt as possible. Many think that paying off their biggest monthly expenses, such as their mortgage, early is the quickest way to free up more money. However, home loans tend to have very low interest rates—paying off a mortgage now will not save you much in the long run. In fact, it may be best to refinance your home at a low rate and invest the money that you would have otherwise used to pay off the home loan early.
You should always think about interest rates in relation to debt and strive to get rid of high-interest debt, such as credit cards, first. When it comes to low-interest debt, paying it off is not always the best decision since your money can be invested with a return higher that the interest on the loan.
Investing in variable annuities.
An annuity is a great investment tool for retirees since it provides monthly payouts, sort of like a pension. The most common type of annuity is deferred, which means there is a set payout upon maturity.
However, many people select variable annuities, which invest in the market. While the return can prove higher with variable annuities, they are also vulnerable to market fluctuations and can fees as high as 3 percent. These fees quickly eat into retirement savings, especially when that loss is compounded over the years. For these reasons, variable annuities can actually detract from retirement savings.
Neglecting emergency funds.
Everyone needs an emergency fund, even retirees. In fact, emergency funds become even more important during retirement, a time when many people live on a fixed income.
Emergency funds also prevent you from dipping into retirement accounts, such as a 401(k), during a financial emergency. Borrowing from retirement comes with massive penalties and fees, and doing it even once can significantly lower your overall savings (as the money that would otherwise compound over the years has been taken out). The makeup of an emergency fund will vary according to household, but a good general rule of thumb is to have enough saved to cover living expenses for at least a few months.
Taking Social Security benefits too early.
Too many retirees fail to understand how the value of Social Security benefits changes depending on when they are taken. Though you can get 100 percent of your Social Security benefit at age 66 or 67 (depending on birth year), it pays to wait even longer if you do not have a great financial need. Benefits continue to increase beyond 100 percent after full retirement age until you turn 70 (at that point, it will not grow anymore). Waiting means a significantly higher monthly benefit, and that amount will remain the same for as long as you remain living. The increase in payout starts to outweigh the cost of delaying for anyone who lives past age 82.
Purchasing a timeshare.
Many retirees imagine themselves using a timeshare frequently enough to make the purchase worth it. Unfortunately, this is rarely the case. In addition to the upfront cost of the timeshare, you will also need to pay annual fees to maintain the property. Even if you do use your timeshare frequently, the fees may not be any cheaper than simply renting a vacation home, an option that provides much more flexibility. Also, timeshares are not very liquid, so getting rid of them can be quite difficult.
In general, retirees should avoid timeshares altogether unless they get them at a significant discount from a third party and are sure they will use them regularly.
Retiring too early.
Too often, people retire before they are ready because they feel some sort of pressure to do so. Taking the time to work a few more years can keep you from getting bored, and it can also help you save more money for retirement. Then, when you do retire, you will have more spending money to engage in fun activities, like traveling. While you may have expectations about when you should retire, it’s important to be realistic about savings and work for a few more years, if you can.