Financial Articles

April 25 2023

What Concerns Do You Have About Your Retirement?

Celebrated astronaut, author and speaker Chris Hadfield – the first Canadian to walk in space – likes to begin his talks by asking three questions: “What’s the scariest thing you’ve ever done? What’s the most dangerous thing that you’ve ever done? And why did you do it?” He then goes on to describe how he overcame many of his concerns about space travel by visualizing – and preparing for – the various circumstances he might face during his mission, including what could go wrong.

So, what do you envision for your own retirement? Where will you live? How will you spend your free time? Do you plan to work part-time to some extent? Do you anticipate that you may need to provide care for an elderly parent or perhaps an adult child during retirement? What could possibly go wrong that could endanger your own mission in retirement?

Many of the risks you will likely encounter in retirement center around three questions: How long do you plan to live? How much income will you need? How long do you plan to work?

How long do you plan to live?
The Social Security Administration estimates that, once a woman reaches age 65, she has a 50 percent chance of living past the age of 90. A man, once he is 65, has a 50 percent chance of living beyond age 87. For a couple, there’s a 50 percent chance that one spouse will live beyond age 94 and a 10 percent chance of living beyond 100.

Did you know there are over 2 million individuals over the age of 90 and over 53,000 over the age of 100 who are currently receiving Social Security benefits?

All other goals notwithstanding, most people deeply want to preserve their own dignity throughout retirement. They do not want to run out money prematurely and lean on others for support.

How much income will you need?
This puts a premium on knowing your number – that is, the amount of income you’ll need to fund the things you’ll need and want throughout your retirement, which could last 30 years or so. Most financial professionals recommend that you save and invest enough so that you can cover at least 80 percent of your current household income.

Start by going back to the vision I mentioned earlier. What does living in retirement look like for you?

Next, take inventory of your basic needs and wants to include in your retirement budget. Basic needs generally include out-of-pocket medical expenses, (e.g., Medicare premiums), utilities, any mortgage payments, groceries, etc. The items in the wants category include discretionary items like travel, season football tickets, eating out, etc.

Finally, examine how the costs for your basic needs and wants stack up against your sources of income, such as a Social Security benefit, any pension benefit, workplace retirement accounts, IRAs, etc.

For a deeper dive into the retirement income calculations, check out this calculator from the Department of Labor and this workbook from the Financial Planning Association.

How long do you plan to work?
In its 2016 Retirement Confidence Survey, the Employee Benefit Research Institute found that 67 percent of American workers plan to work to some extent during their retirement years; yet, only 27 percent of retirees actually reported work of any kind.

There are multiple reasons for this disparity – from health concerns to involuntary changes in work circumstance, all of which are beyond the grasp of complete control.

If you have job now, though, you have direct control over such choices as how much you contribute to your workplace retirement account, your investment allocation in your account, and how this resource fits within your overall financial picture. Did you know that small changes can make a significant impact over time? For example, at 211 degrees water is hot; yet, as authors Sam Parker and Mac Anderson mention in their book, 212◦: The Extra Degree, just one small degree higher creates boiling water. And boiling water creates steam – power than can drive a locomotive great distances!

This is merely a conversation starter, of course. Reach out to a local CFP^® professional today to discuss your own financial picture in broader detail.

April 25 2023

Global Market Volatility: How to Stay in and Weather the Storm

melanie Financial Articles

Who considers a 700-point decline in the stock market a ‘good time’? Certainly not the millions of Baby Boomers on the verge of retirement with underfunded 401(k)s. And certainly not new Millennial investors. No sooner do they overcome their market wariness to venture into stocks, than they see their small holdings get smaller.

At moments like these, such as we have recently experienced with the unexpected British decision to leave the European Union, the urge to do something, rather than just standing there as a victim, can be overwhelming. But as seasoned investment advisors remind us, with each such climatic event, history shows that such pain is usually temporary. The worst thing to do with your U.S. and International equities – assuming you had a well-diversified portfolio – is to get out. (Now, if only the British public had heeded that advice…)

But let’s just say that the blow to the European economy is just the beginning of worldwide recession as some pundits predict. Suppose the uncertainty lasts for more than a news cycle or two, and blights the rest of the year, or even beyond. Does it make sense then to do absolutely nothing?

Probably not. At very least, each major market setback signals to investors that they should be evaluating and rebalancing their portfolios. Loss harvesting in taxable accounts also makes sense, though be aware that rebalancing and loss harvesting can work at odds, since the first requires trimming “winners” where the second leads to dumping “losers.” Doing either activity just based on plusses and minuses without evaluation of the quality of your holdings is not recommended.

But for those still itching to make some kind of move, consider the following financial planning strategies designed to benefit from temporarily lower asset valuations.

Doing an IRA-to-ROTH conversion
If you have been thinking about the benefits of a ROTH account, where your assets can grow tax-free for your lifetime and that of your heirs, you may want to convert some or all of your IRA assets into a ROTH. At the time of conversion, you will incur an ordinary income tax liability on the value of the assets transferred. Doing this when asset values are depressed allows you to get more of your IRA assets into a ROTH for a given tax cost.

Undoing, then redoing, an IRA-to-ROTH conversion
When stock prices fall significantly in value, relative to the recent past, a window of opportunity also opens for those who did an IRA-to ROTH conversion in the prior year or earlier in the same year when asset prices were higher. You are allowed to reverse this conversion, putting the assets moved into the ROTH back into the IRA, and thus eliminating the tax liability incurred at the time of converting. You can then move the assets returned to the IRA back into a ROTH after a 30-day waiting period. In so doing, again you will incur taxes, but because asset values have declined, the tax cost of the second conversion will be much lower. (Be sure to check the rules and deadlines for ROTH re-characterizations and subsequent conversions on www.irs.gov.)

Leveraging gifts
Let’s suppose you have a block of Apple stock that you intend to give to children or grandkids, but want to keep within the annual gift tax exemption limits (currently $14,000/per year/per donee). If you make the gift at the time of a big market decline, you can get more shares of stock to your beneficiaries without incurring any gift tax liability.

Reducing the value a large estate to save estate taxes
A down stock market may benefit beneficiaries of very wealthy, recently deceased individuals whose taxable estate consists primarily of stocks. Estate executors can choose to value the estate at the time of death or at an alternate date: six months after date of death if property is not otherwise sold before, in which case the sell date determines the estate value of the disposed property. A market decline soon after the death of a wealthy individual opens the possibility of using an alternative date for estate valuation, resulting in more wealth being transferred to beneficiaries and less to the IRS.

There are, admittedly, some downsides to these “lemons to lemonade” moves. One or two are relevant only to the mega-wealthy and their beneficiaries. All require a finely tuned sense of timing and quick action. For the other 99 percent and procrastinators, the best response to a big plunge in the stock market is to do nothing. Just three days after Brexit, markets started to climb again.

So when the next crisis hits – be it Frexit or Grexit – and the urge to do something becomes overwhelming, try this: call a CFP^® professional and get your own exit plan – one that is triggered by the changes in your life and circumstances, and not by all the other people running for the doors.

April 24 2023

Confident Savers: Slow and Steady Wins the Race

melanie Financial Articles

Would you know a “confident saver” if you saw one walking down the street or in a crowd? My guess is probably not, and in a paragraph or two, I’ll explain why this may be so.

CFP^® Board recently surveyed 1,000 working Americans over 25, and “Confident Savers” emerged as one of four distinct demographics with respect to their financial attitudes and behaviors. The description says it all: these are people who save, and save regularly, and as a result feel pretty good about the future. As for the good feelings of the other three groups – “Concerned Strivers”(CS), “Tentative Savers”(TS), and “Stretched Worriers” (SW)? Well, not so much.

But the distinction of Confident Savers in this regard does not mean they are all that different from other folk. Yes, they are older and perhaps as a result, have fewer children living in the home than average. But in certain other ways we usually associate with class or privilege, they are not all that special. For example, 68% of them are white or Caucasian, fewer than is the case with TS, where 73% are white. The median income for Confident Savers is $50K-$100K, and the same is true for CS and TS. The majority of Confident Savers have employer sponsored retirement plans, but the same is true of CS and TS. Just like other survey segments, Confident Savers believe that financial planners are the best source of financial information and worry most about credit card debt and mortgage debt as compared to other types of liabilities such as auto or student loans. And half of them consider Social Security as one of the most important sources of retirement.

So why is it that these seemingly regular people are six times more likely to be millionaires than CS or TS, and 13 times more likely than SW? Are they examples of the “Millionaire Next Door” – a type defined in the 1990s by Tom Stanley in his book of the same name? Stanley’s neighborhood millionaire was a guy or gal who worked hard, bought second-hand cars, and had little interest in keeping up with the Joneses. In short, they were the quiet accumulators who did not drive, wear, or flaunt their wealth.

We cannot know for sure if the Confident Savers of CFP^® Board’s survey are another manifestation of Stanley’s millionaires. The survey did not ask for the make and model of respondents’ cars, or the labels on their clothes. But my guess is that the two groups are very similar in terms of rigorously and consistently living below their means.

So what are the unremarkable ways that Confident Savers earn their right to sleep well at night, as demonstrated by the fact that 65 percent of them claim to be “very” or “extremely” confident that their savings will lead to a comfortable retirement?

Putting first things first: savings. The highest financial priority of Confident Savers is –wait for it – saving money! In this regard they are well ahead of the other groups in terms of what they see as important.
They save regularly. Eighty-eight percent of Confident Savers save each and every month.
They save early. On average, this group started saving for retirement around 25 years old – long before most people even start thinking about their retirement years.
They recognize the value of outside expertise. Confident savers are twice as likely as the other groups to hire a financial planner to manage their money.

So there you have it: four basic blocking and tackling steps toward financial security. No need for lottery tickets, taking big fliers in the market or being reincarnated as the next Steve Jobs or Mark Zuckerberg. Confident Savers are the tortoises, not the hares, in life’s financial contest. They don’t have to push and sweat as retirement comes near – they can take it easy in those final laps. After all, isn’t that what retirement is for?

April 24 2023

Ten Key Questions to Ask Your CFP® Professional

melanie Financial Articles

Before establishing a relationship with a financial planner you will want to interview several people to make sure they’re the right match for you and exhibit key traits of a good advisor. Here are 10 important questions to ask before selecting a financial planner.

1. What experience do you have?

Ask for a brief description of the financial planner’s work experience and how it relates to their current practice. CFP^® professionals must have a minimum of three years planning experience. Check and verify their background.

2. What are your qualifications?

Ask about the credentials your planner holds, and learn how they stay up to date with current changes and developments in the financial planning field. CFP^® professionals expand their knowledge and stay informed through mandatory continuing education courses.

3. What financial planning services do you offer?

Credentials, licenses and areas of expertise are all factors that determine the services a financial planner can offer. Generally, financial planners cannot sell insurance or securities products, such as mutual funds or stocks, without proper licenses. And they cannot give investment advice unless registered with state or federal regulatory bodies.

4. What is your approach to financial planning?

Make sure the planner’s investing philosophy isn’t too cautious or overly aggressive for your needs. Learn how they will carry out recommendations or refer tasks to others.

5. What types of clients do you typically work with?

Some financial planners prefer to work with clients whose assets fall within a particular range, so it’s important to make sure the planner is a good fit for your individual financial situation. Keep in mind that some planners require you to have a certain net worth before offering services. When you search for a CFP^® professional on this site, you can specify your investable asset range to find a financial planner whose services best match your needs.

6. Will you be the only financial planner working with me?

Some financial planners work with their clients directly, and others have a team of people that work with them. Ask who will handle your account, meet them and ask whether the planner works with professionals outside their own practice, such as attorneys, insurance agents or tax specialists. If yes, get a list of their names to check on their backgrounds.

7. How will I pay for your financial planning services?

Planners can be paid in several ways: through fees, commissions or a combination of both. As part of your written agreement, your financial planner should make it clear how they will be paid for the services to be provided.

8. How much do you typically charge?

Although what you pay will depend on your particular needs, the planner should be able to provide you with an estimate of possible costs based on the work to be performed. Costs should include the planner’s hourly rates or flat fees, or the percentage of commission received on products you may purchase.

9. Do others stand to gain from the financial advice you give me?

Ask the planner to provide you with a description of his conflicts of interest in writing. For example, financial planners who sell insurance policies, securities or mutual funds may have a business relationship with the companies that provide these financial products. CFP^® professionals agree to abide by a strict code of professional conduct and have an ethical obligation to put your interest first when delivering financial planning advice and services.

10. Have you ever been publicly disciplined for any unlawful or unethical actions in your career?

CFP Board, the Financial Industry Regulatory Authority (FINRA) and your state insurance and securities departments each keep records on the disciplinary history of financial planners and advisors. Ask which organizations the planner is regulated by and contact these groups to conduct a background check. CFP^® professionals are subject to disciplinary action if they violate CFP Board’s standards.

April 24 2023

Four Easy Tips to Become and Stay Financially Fit

melanie Financial Articles

Year after year, getting healthy is a top New Year’s resolution for Americans, while saving more and spending less typically ranks lower on the list of priorities. While many people will purchase gym memberships they may never use, taking steps to improve financial wellness is a resolution worth pursuing, and sticking to.

Saving more and spending less is a good place to start when trying to improve your financial situation; however, many people require additional help to reach their goals. CFP^® Board Ambassadors – CFP^® professionals who help to support CFP^® Board’s consumer advocacy and mission to benefit the public – offer the following tips to help you become and stay financially fit.

Create a budget: Creating a budget is a simple way to determine how best to spend your money. Start by reconciling last year’s expenditures and creating a list of necessary payments. Giving yourself a “cheap month,” such as spending $100 a week, can help define your needs. In addition, working with your spouse or partner can help identify a realistic budget and prevent overspending.
Put yourself first: Spending too much on adult children, parents and other family members can jeopardize your long-term financial situation. Having children live within a budget will force more careful spending while teaching a valuable lesson. For adult dependents, spend carefully; you can’t take care of others if you haven’t taken care of yourself.
Maximize benefits: Take full advantage of your existing benefits package, such as your 401(k) or retirement plan. For a 401(k), make sure to maximize your investment by matching your employer’s contribution. If you operate within individual funds, rebalance your 401(k) account periodically. Establishing a dollar cost averaging arrangement – investing set amounts at regular intervals regardless of the financial climate – for a new account, such as a Roth IRA or 529 plans, can also increase your savings.
Know yourself: Many people have chronic issues of overspending or mismanaging debt. Developing smart habits can improve your finances. If you fail to prudently spend with credit cards, cut them up. If you struggle to meet basic payments, round up to the nearest whole number on larger expenses. For example, if your car payment is $375, plan on spending $400 per month.

Big or small, everyone can take steps to improve their financial well-being. This year – while you’re working on your physical fitness – get you finances in shape by scheduling a meeting with a CERTIFIED FINANCIAL PLANNER^TM professional who can help you take action to improve your financial situation.

For more information on working with a CFP^® Professional, click here.