Category: Insurance

Effective Retirement Plans Do Not End at Retirement

There are those fortunate individuals who, because of wise planning, are able to retire without having to worry about how much money they can spend after their paychecks stop.  These people can afford their needs and wants from sources like pensions and social security that adjust for inflation.  They have probably been saving all of their lives and have always lived below their means.  Others are not so fortunate.

Most middle class retirees fund their retirement spending from Social Security, a pension (perhaps), and income from investments.  Because people often live several decades after retirement, it’s vitally important to make estimates and projections about the future.

Here are just a few of the things that factor into how much it will cost to live once you retire:

  • Your basic living expenses; your “needs.”
  • The cost of your “wants” and “wishes” above your basic expenses
  • The age at which you want to retire.
  • The number of years in retirement.
  • Spousal income and, in two income families, the age at which each spouse retires.
  • Your pension benefits.
  • Life, disability and long-term-care needs.
  • The age at which you apply for Social Security.
  • The value of your investment assets at retirement.
  • The estimated return on your investment assets.
  • Your risk tolerance.
  • The rate of inflation during retirement.

Putting all these factors together is a complicated process that’s beyond the capability of most individuals who don’t work in finance.  Complex planning programs have been developed that can provide answers.  These answers typically provide a probability of success or failure via a procedure called “Monte Carlo” analysis.

We have found that people who begin planning early can make appropriate mid-course corrections while they still have time.  It also provides them with the peace of mind.  Having a well-thought-out plan for the future removes a great deal of worry an uncertainly.

If you are approaching retirement without a plan, give us a call for more information.  We would be happy to meet with you to discuss your needs.

Buying insurance and annuities

Two kinds of insurance products are often sold as investments, and should not be:

  • Life insurance
  • Annuities

There may be a place for both of them in your financial plan.  But they are often bought for the wrong reason because they are often misrepresented by the agent or misunderstood by the buyer.

Insurance products are complex and difficult for a layman to understand.  Let’s first review the basic purpose of these products.

Life insurance – its primary purpose is to replace the income that is lost to a family because of the premature death of the primary earner.  A young family with one or more children should have a life insurance policy on the earners in the family.  Ideally the insurance is will allow the survivors to continue to live in their accustomed style and pay for children’s education.

This usually means that younger families need more insurance.  However, there will be a trade-off between what a young family needs and what they can afford.  To obtain the largest death benefit, I suggest using a “term” policy.   “Whole Life” policies which have some cash value generally do not provide nearly as much death benefit and are less than ideal as investment vehicles.  Whole life policies are often sold using illustrations showing the accumulation of cash value over time.  What most people don’t realize is that illustrations are based on assumptions that the insurance company is not committed to.  This is the point at which an advisor who’s not in the business of selling insurance can prevent people from making mistakes.

Life insurance can also be used for other purposes.  One popular reason was to pay for estate taxes.  However, changes in the estate tax exclusion amount have made this much less attractive except to the very wealthy.

Annuities – useful for providing an income stream that you cannot outlive.  Like life insurance, it comes in a dizzying array of options that the average layman has trouble understanding. It is also one of the most commonly misrepresented insurance products.

Some of the most heavily promoted annuities are sold as investments that allow you to get stock-market rates of return without risk.  That’s one of those “too good to be true” offers that some people simply can’t resist.  The problem is that few people either read, or understand the “small print.”  Insurance companies are really not in the business of giving you all the upside of the stock market and none of the downside.  If they did, they would quickly go out of business.

These products are popular with salespeople because they pay high commissions.  Unfortunately they also come with very high early redemption fees that often last from 7 years to as much as 16 years.

If you have been thinking about buying a life insurance policy or an annuity you should first get some unbiased advice on what to look for.  Most insurance agents are honest, but like most sales people they would like you to buy their product.  It would be wise to get advice from someone who is an expert, but who is not getting paid to sell you a product.  There are a number of financial advisors who will provide guidance.  At Korving & Company we are Certified Financial Planners™ (CFP®) and licensed insurance agents, but we do not sell insurance products.   Since we don’t get paid to sell insurance we can evaluate your situation, advise you, and if life insurance or an annuity is what you need we can refer you to a reputable agent who can get you what you need.

Questions to ask when interviewing a financial advisor

A previous post referred to an excellent article on CNBC about financial advisors .  You first have to consider what kind of financial advice you want or need.

Once you determine the kind of advice you’re looking for, here are some key questions to ask when interviewing the financial advisor.

  • What are the services I am hiring you to perform?

  • What are your conflicts of interest?

  • Identify for me all of the ways you or your firm are compensated by me or by any other party in connection with services rendered to me or my assets.

  • Do you have a fiduciary duty to act in my best interests?

  • Describe your insurance coverage.

We’ll add a few more of our own:

  • What is your investment philosophy?
  • Do you do your own investing or do you use outside firms?
  • What kind of experience do you have?
  • Are your other clients similar to me?

If you don’t get straight-forward answers to these questions, go on to your next candidate.

Who, exactly, are these financial advisors

There’s a really great article on the CNBC website that discusses the question of what financial advisors are.  There is a lot of confusion because people use the term “financial advisor” for a group of people who are really different.  There is less confusion in the medical field because we distinguish between various kinds of doctors.  When you have a medical problem you distinguish between a pediatrician, a heart surgeon, a dentist or a psychiatrist.   They’re all doctors but people know there’s a lot of difference between them.

The same thing is true of financial advisors.  They could be a stock broker, an insurance salesman, or a Registered Investment Advisor (RIA).

Here is one important difference between brokers (technically known as Registered Representatives) who work for investment firms like Merrill Lynch, Wells Fargo, UBS or other major firms and investment advisors.

Brokers can only offer you investment advice that is incidental to them buying or selling financial products, whereas investment advisors are professionals who are paid by you to give you advice — advice that is in your best interest. The latter is called a fiduciary responsibility.

Before engaging an advisor, Ask yourself these key questions:

  • Are you looking for advice on individual stocks or someone to manage a diversified portfolio for you?

  • Are you looking for a product to solve a problem or a long-term financial plan?

  • Are your assets straightforward, or will you need more coordination because of complex estate-planning issues?

  • Are you an employee of a company, or might you be dealing with potentially complex tax issues, like selling your business?

  • Are your issues acute and immediate, or will they be ongoing or recurring?

  • How much do you want to rely on the recommendations of your advisor, or do you want to be the ultimate arbiter of what’s best for you, whether to follow a recommendation or not?

  • Are you prepared to evaluate each recommendation to determine whether it’s aligned with your needs?

These questions will help you determine what kind of financial advisor you need.

Feel free to contact us to answer some of your questions.

Family Business Financial Planning

A family business is one of the ways that individuals build something of value for themselves and their family. Suffolk is a great example of a community where family owned restaurants, hardware stores, gift shops, bike shops, jewelry, sporting goods, clothing and furniture stores line the streets. Suffolk has its national chains, but its most recognizable businesses – in the pork and peanut industry – began as family businesses.

These family shops often provide a comfortable living as well as job opportunities for family members of the founders. Whether they stay small and local or grow into large businesses, there are challenges that everyone running a business has to face.

The first is competition. For every business there is a better financed competitor. The supermarket doomed the family-run grocery store. Wal Mart is a feared competitor for anyone selling groceries, clothing, furniture, electronics, toys, eyeglasses; and now it’s even getting into banking.

The second challenge is a bad economy. Many communities have seen their downtowns shuttered when local industry left. The businesses depending on housing have still not fully recovered from the crash of 2008.

Finally, most small businesses are very dependent on one or a few key people. If the children don’t want to get into the business when the parents are ready to retire, the business often closes. There is no guarantee that a business can be sold when they owner is ready to retire. Unless the owner has prepared for this, the financial results can be devastating.

For all these reasons, the family business owner has to make sure that they have prepared themselves financially for life after the business. Succession planning is critically important and should be part of the business plan from the moment the business is started. If a business is a partnership, buy-sell agreements should be in place to avoid complications from the death of a partner. If a business is going to be passed along to children, the owners should be clear about the division of assets. Otherwise there is likely to be wrangling – or even lawsuits – over who is entitled to what.

Most people in business choose to convert from individual proprietorships to limited liability companies. This protects the business owners’ personal assets in case of a lawsuit against the business. Some convert to “Chapter C” corporations for tax purposes. If a company wants to grow even larger, it may want to raise cash by “going public” and selling shares to the general public.

One of the most common mistakes that business owners make is to invest too much of their money in the business. It’s a fact that a family business is a high-risk enterprise. Competition, the economy – even a change in traffic patterns – can bring a business to its knees. Building an investment portfolio should go hand-in-hand with building a business. When most of your money is tied up in your business you are making the same mistake as the investor who owns only one stock. Diversification reduces risk and provides a safety net. Factors that are out of your control could end up severely damaging your business value, thereby crippling your total savings and your future goals and ambitions.

In addition to the traditional savings and investment accounts, the tax code provides many ways for business owners to put money aside in a variety of tax-deferred accounts such as SEP-IRAs, 401(k) plans, and SIMPLE-IRA plans. As a business owner you can even set up a “Defined Benefit Plan” which works much like a traditional pension.

There are a great many things that running a business entails beyond offering customers a great product or service. People who start a business are usually focused on this aspect of the business. But to insure that the business – and the family – survives and thrives, business owners should seek the assistance and guidance of a team consisting of an attorney, an accountant and a financial planner. They may be in the background, but they are critical for the financial success of the family business.

Do you have a Dusty Trust?

What’s a dusty trust, you may ask, or a dusty will? They are trusts and wills that are so old that you have to blow the dust off. It’s a term made up by David Richmond of Eaton Vance.

Many actually THINK they are speaking the truth. For them, the definition of estate planning is the will and trusts they set up at age 35 when their youngest kid was still in diapers. Doesn’t matter that they are now in their late 60s and have accumulated millions since those early hopeful days, including all sorts of treasures, especially the most precious ones … grandchildren

But it also applies to trusts and wills that are not very old. The estate tax laws have been changing almost every year for the last decade. That means that terms like “estate tax exemption” now have very different meanings than they did 10 years ago. It’s possible that you could accidentally disinherit your spouse unless you update your estate planning documents.

Beneficiary designations should also be reviewed regularly. I spoke with someone recently whose wife passed away earlier this year. He was forgetful, and his investment account still had his wife’s name on it. She was the beneficiary of his IRA as well as his life insurance policy. Her name was still on the deed to their home.

The role of a good Registered Investment Advisor (RIA) like Korving & Company is to review your estate plans and beneficiary designations, advising you about changes that you need to be aware of. Whether its changes in the tax laws or changes in your personal life, keeping you updated will keep your heirs from inheriting a tangled mess.

For more information, get a copy of our estate planning guide: Before I Go.

Do retirees need life insurance?

People who have been paying life insurance premiums for many years are reluctant to stop.  But often the need for a death benefit is gone once the kids are grown and there is enough money for the couple to live comfortably for the rest of their lives.

Keep in mind that the reason for purchasing life insurance in the first place is to protect the bread-winner and make it possible for the surviving spouse to put the kids through college. Since these factors are no longer in play once they retire, we have to ask out clients to reconsider whether the additional expense is still warranted.  This is especially true if the insurance is a term policy which often gets more expensive a people age.

Canceling one’s coverage shouldn’t be a casual decision. In some instances, clients have already paid a great deal of money into these policies, and given their advanced years will never be able to obtain another one for the same rate. So before dropping the coverage, people should think long and hard about any possible implications.

In any case, if you have life insurance policies it’s wise to review them on a regular basis, make sure that the beneficiaries are the ones you want to receive the proceeds and check the tax implications of policies outside of irrevocable life insurance trusts.

If you have questions, ask your financial advisor.

Review Your Beneficiary Designations

From the law firm of Williams, Mullen.

The Supreme Court has ruled that if a former spouse is the named beneficiary of life insurance benefits under FEGLIA, the former spouse receives the proceeds.  Hillman v. Maretta, No. 11-1221 (June 3, 2013).  The Supreme Court held that FEGLIA (the Federal Employees’ Group Life Insurance Act of 1954) preempts Virginia Code Ann. § 20-111.1(A) and (D).  The Virginia statute was written to automatically revoke a beneficiary designation in any contract that provides a death benefit to a former spouse where there was a change in decedent’s marital status.  The statute also provided a separate cause of action against a former spouse if the former spouse received the proceeds as a named beneficiary.  Following the Hillman ruling, the Virginia statute will not operate to revoke or otherwise change a beneficiary designation under FEGLIA.

10 Mistakes Gen Y Makes with Advisors

1. Not Having an Advisor Help with Big Financial Decisions

Keep in mind that you are dealing with a financial advisor, not a stock broker.  If you can’t tell the difference you’re dealing with the wrong person.  Big financial decisions affect your plan, your investments and your future.  The role of a financial advisor is to advise you on all the important financial decision you make.

2. Not having a spending plan in place

As Dave Ramsey is fond of saying: every dollar should have a name.

3. Not “paying themselves” first rule

First pay yourself by putting some money aside.  If it’s hard , have it done automatically so you don’t have to do it yourself every payday.

4. The Ones who Make Less Money Can be Less Receptive to Advice

Poor people are poor for a reason, and that reason is often that they don’t want to take advice.

5. Not Appreciating their Long Time Horizon in Investments

The biggest asset that a young person has it time.  They may not have much money but the magic of compounding turns a small amount into a big amount over time.

6. Itching to Get Ahead Professionally

It takes time and patience to get ahead.  An advanced degree does not necessarily let you skip rungs on the ladder of success.

7. The Budget Cliche

If you don’t know where you’re money’s going it’s impossible to know where to economize.  There are several good computer programs that can help you keep track of where your money is going.

8. This Generation Struggles with Insurance

It’s the young professional who is most in need of insurance and who is apt to put off getting it until it’s too late.

9. Working with “Old School” Advisers

The old school advisor is really a stock jockey who doesn’t bother to listen to your needs but promises to “beat the market.”  This person is not an advisor, he just wants to manage your money.

10. Planning too far out

Too often people get a lengthy, expensive “financial plan” that projects the future 40, 50 or 60 years out.  That’s nonsense and a waste of time and money.  Simple plans of a few pages are better and should be reviewed annually and updated with new information.  Keep in mid the old saying: the map is not the territory.

Working with Widows

Advisors who work with widows know that there is often a great deal of confusion after a spouse dies.  Widows are often told not to do anything for a year.  This is terrible advice.  First of all, assets held in joint name have to be transferred into the name of the surviving spouse.  Beneficiaries have to be updated on retirement accounts and insurance policies.   Trusts and wills have to be reviewed.  And investments that were made and understood by the deceased are often not appropriate for the survivor. 

The best advice for the widow is to find a trustworthy financial advisor, explain the situation and allow the advisor ro guide the widow through the process of getting on with life.  Of course, it’s easier if the has a copy of the Before I Go Workbook to help.

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