Category: Financial Planning

The Benefits of a Modern Retirement Plan

The Benefits of a Modern Retirement Plan

If you are like most people approaching retirement, you are probably wondering if you’re financially ready. You may have a pension. You plan on collecting social security. You may have put money into your employer’s 401k plan. You and your spouse may each have an IRA and some money in the bank. You may have some life insurance or an annuity or a long-term care policy.  

Does that mean you can retire when you want? The answer is: it depends.

There are lots of things that can happen in the 20 to 40 years you will be retired. Here are a few things that may cause you to ask questions.

Question #1: Is your Social Security safe? 

The Social Security trust fund is currently projected to be able to pay full benefits until 2035. How will it affect you if the funds run out? A retirement plan should answer that question.

Question #2: Is your pension safe?  

Company and public employee pensions are underfunded. What happens if your company, city, or state goes bankrupt? It could happen.

Question #3: How long will your retirement savings last?  

You may be planning on your investments continuing to grow at the rate they have in the past, but what if they don’t?  

Question #4: How risky are the investments in your portfolio?  

Many people have been lulled into believing that all they need to do is put their money into a low-cost index fund. The index lost nearly 50% in 2009 and 34% in March 2020. If you’re still investing in stock index funds as you near retirement just because they’re “cheap,” you may be taking on way more risk than you realize.

Question #5: How much will it cost if you or your spouse need to go into a nursing home?  

Long-term care insurance may pay for it, but the insurance is not free.  For some people buying a policy makes sense, while for others it might not.  A financial plan can help answer whether a long-term care policy is right for you.

Question #6: What happens if inflation comes roaring back?  

Living on a fixed income after you retire makes inflation a much bigger threat than when you were working.  

Question #7: How does living too long or dying too soon affect your retirement plan?

Critical decisions are often made during the retirement process without enough consideration of how long you will live. While a plan can’t answer how long you’ll live, it can project how your plan will be altered if you live longer or shorter than you think.  

 

In the past, retirement planning was a static process. Planners took the information supplied by their clients and provided a book of charts and graphs designed to show their financial condition for decades in the future. The technology limited what you could do.  

New computer programs allow Financial Planners to run thousands of tests to analyze a number of different scenarios. The new planning process also allows people to check, update, and re-review their plans as time passes and conditions change. These programs allow scenarios to be run in real-time and can be generated for a modest cost by Certified Financial Planners™ (CFP®s) who specialize in retirement planning.

Do You and Your Spouse Bicker About Money?

Do You and Your Spouse Bicker About Money?

I recently read an advice column about a couple who frequently bickered about money. The husband and wife disagreed about whether to pay off their mortgage. One wanted to pay it off faster and have the peace of mind that comes with reducing debt. The other wanted to take advantage of the tax write-off the mortgage interest brings while spending money on current needs and wants.

Money issues, unfortunately, are near the top of the list for why marriages fail. This is because money, and how it’s spent, affects our lives on a daily basis. Money and the things it can buy have a big influence on the way we view ourselves and, often, on how others see us. Which is more important to you, a new car or more money in the bank? A home with more bedrooms or a bigger retirement account?   

Marriage is often about compromise. Communication is often the key.  But in many cases, there is conflict and spouses can’t come to an understanding or agreement. One spouse may be so focused on frugality that the family is deprived of simple pleasures. On the other hand, spending beyond the family’s means often leads to unnecessary debt and, ultimately, financial ruin.

If this is an issue with you or someone you know, this may be the time to consult with a financial planner. Financial planners have the tools and training to help couples develop financial guidelines that will help them come to an agreement that both can live with. Creating a financial plan together may show a way for a compromise between parsimony and extravagance.

If you find yourself arguing over money, give us a call. We may be able to help you resolved your differences.

Becoming Rich Is Not the Same Thing as Staying Rich

Becoming Rich Is Not the Same Thing as Staying Rich

What does the term “rich” mean to you?  Many of us are blessed with a great family, friends, good health and a lot of the things that make life worth living.  But as a financial advisor, my job is to help people achieve financial prosperity and keep it throughout their lives.  And that often means that the strategies they used to become “rich” in the monetary sense are not the same as the ones they need to stay that way.

Take the case of an entrepreneur.  Starting a business is inherently risky.  You typically have to commit your own capital or borrow it to get started.  Then, as the boss, you depend on yourself for a paycheck.  Successful business owners often find that they have become monetarily “rich,” but the majority of their net worth is tied up in the business.  If the economy or a competitor hurts their business, they can lose it all.

We have met people who have had very successful careers climbing the corporate ladder.  It’s not unusual to find that the successful executive is largely rewarded with company stock.  But being part of a successful corporation doesn’t come with a guarantee that the stock will retain its value.  Some of the best-known names in American industry have lost 50%, 75%, even 100% of their value over the last 50 years.

Both the business owner and the corporate executive become “rich” by focus and discipline.  To avoid losing part – or all – of their wealth requires a change in emphasis.  It means risk reduction via diversification.  It means finding a financial advisor who can create a portfolio that is robust enough to reduce the risk that the economy, competitors or unforeseen events destroy the financial future they have worked so hard to build.   

Of course, this also applies to those people who have benefited from a general run-up in the stock market and have achieved a measure of financial independence but who are now concerned about holding on to what they have.  Be sure not to confuse luck with smart investing.  The last decade has been good to all investors.  It’s important to remain prudent and remember the first rule of making money is to not lose it.

Call us to find out how we can help you keep what you have worked so hard to get.

6 Charitable Tax Moves to Consider Before Year-End

The recently passed Tax Cuts and Jobs Act is the most extensive and far-reaching change to the tax code in more than thirty years.  In addition to altering the existing tax brackets, the standard deduction has also been nearly doubled, which means that going forward taxpayers will need to provide more itemizable deductions in order to exceed the standard deduction.  If you plan to give to charity before year-end, here are six planning moves to consider.

1. Donate Highly Appreciated Stocks or Mutual Funds.

The stock market has been on a terrific run, and you may have highly appreciated stocks or mutual funds that you are holding on to because you do not want to pay capital gains taxes.  By donating appreciated investments, you avoid paying the capital gains tax and can receive a deduction for the fair market value of the investments.

If you are considering gifting mutual funds, do so before they declare their year-end dividends and capital gains and you will save on taxes by avoiding that income as well.  While a deduction for appreciated securities is now limited to 30% of your Adjusted Gross Income (AGI), you can still carry the unused portion to future tax years.  When making a gift of appreciated securities, you should notify the charity that you are doing so in order for them to know who to send the record of receipt to (so that you can have that on hand when filing your taxes).

2. Combine Giving from Multiple Years Into One Year

Because the standard deduction has now been nearly doubled, consider lumping several years’ worth of contributions into one year to occasionally exceed the standard deduction. The strategy here would be to “lump” our charitable giving in one calendar year so that our itemized deductions exceed the standard deduction, and then simply claim the standard deduction in the following year(s).  The following graphic attempts to illustrate what this might look like for an individual taxpayer:

3. Use a Community Foundation or a Donor Advised Fund

If you want to create a legacy, are unsure of where to contribute right now, or want to consider “lump” giving, use a Community Foundation or Donor Advised Fund (DAF) to max out your contributions. A DAF is a unique type of account that is maintained an operated by a qualifying charitable organization, including most Community Foundations.  Once you create a DAF and contribute to it, your contribution qualifies for a charitable deduction on your tax return.

However, even though you can deduct the entire amount in the year that you make the contribution, you can make distributions from the DAF in future years to the charities of your choice.  In other words, you aren’t required to distribute all the DAF’s funds in the year that you make your contribution to it.  So, you could “lump” several years’ worth of charitable giving into your DAF and then make annual distributions to your favorite charities over the course of the next several years until your next “lump” contribution.

Additionally, the money in your DAF can be invested, creating the potential for even greater giving in the future via the power of compounding interest.

4. Create a Charitable Lead or Remainder Trust

If you are considering an even larger donation, or are interested in asset-protection, you may want to consider creating either a charitable lead or remainder trust. With a charitable remainder trust, you get a deduction for your gift now; generate an income stream for yourself for a determined period of time; and at the expiration of that term, the remainder of the donated assets is distributed to your favorite charity or charities.  A charitable lead trust is essentially the inverse of the remainder trust: you get a deduction for your gift now; generate an income stream for one or more charities of your choice for a determined period of time; and at the expiration of that term, you or your chosen beneficiaries receive the remaining principle.  The deduction you receive is based on an interest rate, and the low current rates makes the contribution value high.

5. Donate Unused Belongings

Donate your extra property, clothes, and household items to charity. Make time to clean out your closets, spare bedroom and garage, and donate those items to one of the many charitable organizations in our area.  CHKD, Salvation Army, Purple Heart, ForKids, Hope House are just a few organizations that will take old clothes, appliances, household items and furniture.  Some of them will even come to you to pick up items.  Make sure to ask the charity for a receipt and keep a thorough list of what you donated.  You can use garage sale or thrift store prices to assign fair market values to the donated items, or you can use online programs (such as itsdeductible.com) to figure out values.

6. Qualified Charitable Distributions (QCD’s)

If you are over age 70 ½, regardless of whether you itemize or not, make a qualified charitable distribution (QCD). We discussed this charitable donation method in detail in an earlier post, which can be found here.  Essentially a QCD allows you to donate all or a portion of your IRA Required Minimum Distribution to a qualifying charity.  The donated amount is not included in your taxable income and also helps to lower your income for certain “floors” like social security benefit taxation and Medicare Part B and Part D premiums.  QCDs are very tax-efficient ways to make charitable donations.

 

Disclaimer:  This material has been prepared for general information purposes only, and is not intended to provide, and should not be relied on for, personal tax, legal, investment, financial planning or accounting advice.  You should consult your own tax, legal, investment, financial planning and accounting advisors before engaging in any transaction.

2 Great Ways to Give to Charity That Can Help Save on Taxes

With year-end tax planning looming in the next few months, we are bringing you two ideas for donating to charity that could save you additional money at tax time.

Donate Appreciated Stocks or Mutual Funds

The first idea is to donate appreciated stocks or mutual funds from your taxable accounts.  Donations of highly appreciated securities actually receive double tax savings.  First you get to deduct the full market value of the donation, up to 30% of your adjusted gross income, which can help to reduce your taxable income.  Second, the donation of securities also allows you to avoid paying the state and federal capital gains taxes that you would have owed if you had sold the stock.

Qualified Charitable Distribution

The second idea is something called a “Qualified Charitable Distribution.”  A few years ago, Congress passed a law that allows those who are over 70 ½ years old to give up to $100,000 to charity directly from your Individual Retirement Account (IRA).  You may use these qualified charitable distributions (QCDs) to satisfy all or part of your annual required minimum distribution (RMD).  Those who give to charity using this method get special tax treatment of their gift.

Typically, taking money out of your IRA is a taxable event – the withdrawal adds to your taxable income and inflates your adjusted gross income (AGI).  However, QCDs do not count as taxable income and therefore have no effect on your AGI.  This is significant because your AGI determines a number of things, including Medicare premium costs, the net investment income Medicare surtax, the taxability of Social Security income, itemized deduction phase-outs, and exemption phase-outs, to name a few.

So making a qualified charitable distribution allows you to satisfy all or part of your RMD without increasing your taxable income or your adjusted gross income.

What are the rules?

  • You must be over 70 ½ on the date of distribution.
  • QCDs are limited to $100,000 per person per year.
  • Only distributions from a Traditional IRA, Rollover IRA or Inherited IRA (where the beneficiary is over 70 ½) are eligible. You may not make QCDs from SEP or SIMPLE IRAs, nor from any type of employer retirement plan; those types of accounts must be rolled over into a Rollover IRA before they may qualify.
  • Your QCD must go to an organization designated by the IRS as a “qualified charity.” This list includes all 501(c)(3) public charity organizations, but explicitly excludes donor-advised funds, private foundations and other grant-making organizations, as well as “split-interest” charitable trusts (such as charitable lead trusts or charitable remainder trusts).
  • The QCD must be made directly to the charity. This is non-negotiable.  The distribution will not qualify if the check is made out to you, or if the money is first transferred into a non-IRA account of yours before it goes to the qualifying charity.  The IRS does not provide a way to correct mistakes.  Most trustees and custodians already have forms and procedures in place to help you make these transfers; make sure you are specific with them about your intent, and that they know how to handle your request.  (Checks should be made out directly in the charity’s name and mailed to the charity’s address.)
  • Ensure that no tax is withheld from your QCD to the charity (no withholding is necessary since this is a non-taxable distribution).
  • Make sure to alert the charity that you are making a QCD to them, as some custodians may not put any information on the check or wire transfer that would personally identify you.
  • Make sure you get a confirmation letter from the charity acknowledging your gift and stating that you received no goods or services in exchange for it.
  • To report a QCD on your Form 1040 tax return, you generally include the full amount of the charitable distribution on the line for total IRA distributions (15a). On the line for the taxable amount (15b), enter zero if the full amount was a QCD (or calculate the taxable amount if your QCD was less than your total required minimum distribution) and write “QCD” in the blank space next to the line.

With either of these charitable donation and tax-saving strategies, it’s always a best practice to let the organization that you’re making the gift.  This way they will know who to send the record of receipt to, so that you will have documentation to hold on to for your tax returns.

As we’ve mentioned before, we are not accountants and therefore suggest that you consult with your accountant to see if either of these ideas would make sense for your particular situation.

DIY Retirement

The Risks of Do-It-Yourself Retirement Plans

Do-It-Yourself Retirement Planning?

A report recently published by the Federal Reserve Bank on the economic well-being of U.S. households discusses what people have saved for retirement versus what they will actually need, commonly known as the “retirement gap.”  The survey found that only 47 percent of DIY investors were comfortable with handling their own 401(k)s, IRAs or other outside retirement accounts.

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Do I Need a Financial Advisor?

Investment Approach

Not everyone needs a financial advisor. But if you are not sure about how your financial assets should be invested, or if you have made major errors when you invest, you are a candidate for getting professional financial advice.

Fees are the main barrier that keeps people from getting the kind of advice that would improve their financial lives.

But just as doctors get paid for keeping us healthy and lawyers for protecting our interests, getting good financial guidance is worth every penny. Solving our financial problems has a huge impact on our lives. Making sure we don’t run out of money during a retirement that can last decades is often people’s biggest fear in life.

People who are in good shape financially may not need assistance. However, too many times people need guidance but are reluctant to pay for what they need. Instead, they search the internet, or ask friends or family who are often not knowledgeable. And even if they get good advice, friends and family are not going to create a plan and make sure that the plan is followed. That’s not their job.

That’s were a professional investment advisor comes in. They’re paid to help you create a plan, to design a portfolio that aligns with your plan, to manage that portfolio and to alert you in case the plan needs adjusting. Like a physician conducting a periodic physical, a financial professional keeps track of your progress and fixes it when things go wrong.

If you think you may need help, find an advisor in whom you have confidence, pay them a fair fee for their services and you’ll be rewarded with peace of mind knowing that your financial future is in good hands.

5 Reasons Why You Should Work with a Professional to Create a Retirement Plan

  1. Focus your goals in retirement and how you will pay for them.
  2. Address your concerns and expectations for retirement.
  3. Identify things that could pose a threat to your retirement and manage them.
  4. Feel more educated, confident and in control of your financial future.
  5. Help you navigate the complexity of financially moving into retirement.

Let us help you create the plan that will give you confidence to face decades in retirement.

Financial Planning is the New Employee Benefit

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Some of the most progressive companies are introducing a new employee benefit: company-paid financial guidance.

Concerned about their employees’ retirement funds, and acknowledging the increasing scarcity of skilled employees, companies are looking for a benefit that is relatively inexpensive while making a big difference in employee satisfaction.

Financial insecurity troubles most people, from the entry-level employee to the highly compensated professional. Half of U.S. households are at risk of being unable to maintain their standard of living in retirement, according to one study. For most people, financial stress is a distraction from work and leads to lower productivity.

Money is the single largest source of stress for employees, ahead of work, relationships or health.
Employers are concerned about the impact employees’ financial problems are creating problems at work. Here’s what employers say they are most concerned about:
• Lack of retirement readiness 16%
• Paying down debt 15%
• Lack of emergency savings 13%
• Other 3%

Without professional guidance, most people take a seat-of-the pants approach. But that leaves them and their families wondering how they will survive the decades that they will spend after leaving the work force.

Many companies offer a retirement program, like a 401k, but are ill-equipped to do more than provide a menu of investment choices. To fill the information gap, more companies are offering financial-wellness programs. Others are considering such a move.

A program offered by Korving & Co. is a series of programs, provided by a CFP® (Certified Financial Planner™) professional. These are designed to educate participants about debt, investing, and retirement income planning.

Providing employees with professional education about these issues, on company time, in a relaxed setting is an economical way for companies to help their employees reduce stress. It also creates a great deal of good will and loyalty on the part of employees.

Retirement: The Good News and the Bad News

First, the good news. According to a leading investment firm, current retirees are doing just fine. They studied a large group of retirees. They’re doing very well.  The group that retired about 20 years ago have about 80% of their retirement savings intact. In fact, one-third of these retirees have more money than when they retired.

But here’s the bad news. These retirees are different from those retiring today or those just beginning their careers. Their experiences are different and so are their resources.

If you have been retired for 20 years that makes you about 85 years old. These older retirees grew up during the “Great Depression” and that had a lifelong impact on them. Their experience made them lifelong savers. Many also worked for companies that provided their employees defined benefit pension plans.

This means is that many of these pensioners have two sources of income: a company pension and social security. Living within their means, they were able to leave their personal retirement assets untouched.

Some of the more affluent may have bought vacation homes which have appreciated in value. Others have begun gifting to their children and grandchildren.

We can’t infer from their success that newer retirees will do nearly as well. There are several reasons why. Except for government employees, few private sector employees have defined benefit pension plans. Social Security is under pressure and will simply not have enough in the Trust Fund to continue to pay retirees at the same rate as current retirees. Medicare is also running large deficits which will result in higher medical expenses for the elderly.

New and future retirees will not have private pensions, face lower social security income and higher medical expenses. Only saving and investing wisely will save them.

For more information contact us.

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