Archive for Financial Planning

Mistakes in Estate Planning

No one knows when they are going to die. Most people feel they have ample time to make preparations, but, too often people die prematurely. Here are some typical estates planning errors I have seen in my career.
1) No will or trust.
2) Not updating beneficiaries in the will or trust.
3) Not updating beneficiary designations on IRA/401K or other qualified plans (especially after a death or divorce).
4) Not having a list of usernames, passwords, and answers to “secret questions”. This list needs to be available to spouse or executor of your estate.
5) Not notifying the 3 credit agencies immediately so no one can claim identity of the deceased. Unscrupulous people check obituaries and then try to apply for credit cards in the name of the deceased.
6) Not requesting at least 20 original death certificates with raised seals to unlock insurance benefits, investment accounts, Social Security, Medicare, Medicaid benefits (some people say, but, all my accounts are JTWROS. You still must provide proof of the death).
7) Not preparing for higher automobile insurance rates when one spouse dies (since the risk is higher for only one person).
8) If the deceased was the owner of a credit card and the spouse was a user, then the accounts will be cancelled. Consider having separate cards.
9) Special collectables like guns and sports cars need to have all the paperwork available to sell or transfer the title.
10) Not having an accurate summary of ALL your finances.
The list goes on and on.
Sit with your financial advisor to get started on it today, not tomorrow.

IRA Mistakes on RMD- #3

What happens when a person gets RMD aggregation wrong?
There are two potential penalties when people make RMD aggregation mistakes: the penalty for excess contributions and the penalty for missed RMDs.

THE 6% PENALTY
RMDs that are rolled over to another retirement plan create an excess contribution in the receiving account, which must be corrected as soon as possible.
When an excess contribution is corrected by October 15 of the year after the year for which the contribution was made, the amount of the excess plus or minus the gains or losses attributable to the amount of excess contribution must be removed from the account as well.
Excess contributions that are not corrected are subject to a penalty of 6% per year for every year they remain in the account. Form 5329 should be filed with the IRA owner’s tax return to report the excess contribution and to calculate the 6%.

THE 50% PENALTY
When a distribution is taken from the wrong type of account, you have a missed RMD. For example, suppose a person accidentally takes the 403(b) RMD from his IRA. This is against the rules. The person has a missed RMD in the 403(b). The penalty for a missed RMD is a steep one- it is 50% of the amount not taken.

Most people use qualified plans like 401k,403(b) and IRAs to save for retirement, but, the tax traps are so heavy that I do not recommend using them. I share with my clients much better accumulation strategies that provide tax FREE income for life and are not a tax trap like these other vehicles.

The 28/36 rule

What is a manageable mortgage payment? A rule of thumb among mortgage lenders is the “28/36″ measure of how much of your total pretax income goes to paying back loans: no more than 28 percent for monthly housing expenses( property taxes, homeowners insurance, homeowner’s dues, and mortgage), and no more than 36 percent for all debt ( car, home, student loans, credit cards). This “debt-to-income” guideline means on a 30 year mortgage of $180,000 at 4.5% will be a payment of $912 and you will need a household income of $52,000 to meet the guideline.

Banks also take into account the “loan to value” ratio of how much of your own money you are putting down. This assumption is that people will be more likely to keep up payments on a home that is worth more than the mortgage. The classic 20 percent down payment. Plus , you now have “skin” in the game.

Sign these Important Papers

Most Americans, regardless of age, avoid thinking about sickness or death with the hope that it will never happen. None the less one need to be practical in their thinking. Here are some important papers you must have completed.

Advance directive: A living will, a type of advanced directive, tells loved ones and medical personnel the treatment you want or don’t want should you be unable to speak for yourself due to accident or coma.

Durable power of Attorney for health care : Often included in an advanced directive designates your choice of who can make medical decisions for you when you cannot.( you may want to laminate this and put it in your wallet and/or hold it in an electronic storage that family members have access).

Will: With a Will you can head off potential family squabbles by spelling out who gets what. For those with asset values over $100,000 we always suggest a Living Trust that contains a Pour Over Will.

Durable Financial Power of Attorney: Not all of your assets can be in a Living Trust. If you are alive yet incapacitated, the only way a person chosen by you can access an IRA, pension or other financial account on your behalf is through this document. Many brokerage accounts have their own forms so better check with them to see if they are needed also.

This is just a start. In many cases you can get these forms online for a low fee. If you want to be certain you are doing it correctly in your state it is worthwhile to hire an attorney.

Saving Money Before and During Retirement

Saving money before and during retirement so their standard of living doesn’t suffer is important for many retirees. Unfortunately, many Americans aren’t saving nearly enough and are falling short of setting aside adequate funds to support their retirement needs. The average retirement savings for people aged 56-61 is only $163,577. Meanwhile, retirees can spend nearly $275,000 on health care. The National Institute for Retirement Security estimates that America has an up to $14 trillion gap in retirement savings.

If you are retired and finding that balancing your savings and spending is an ongoing challenge, follow these tips for ways to trim your expenses and save more.

1. Cut Your ‘Time-Saving’ Costs
When you’re employed and busy managing your career and family, spending money on time-saving items—like professional house cleaning or monthly food-subscription services—can be helpful. Once you retire, however, you typically have more time on your hands. You may be paying for items that are no longer necessary. You can save money each month by trimming or eliminating any time-saving resources you don’t need to support your retirement lifestyle.

Actions to take:
• List all the monthly, quarterly, and annual subscriptions and services you have. Identify which ones aren’t necessary.
• Consider taking over household chores you pay someone else to manage.
• Assess how much you spend on eating out, and switch to eating in for some of those meals.

2. Reduce Your Health-Care Costs
Retirees typically spend a large amount on health care, often siphoning income that could be used for other expenses. Unless you have the money to pay these bills, they could leave you in a financial bind. You can help reduce some of your medical costs by learning to shop around. For example, changes like getting an MRI at a radiologist instead of a hospital can make a difference in your medical bills, as the radiologist is typically less expensive.

Actions to take:
• Get comparative quotes from hospitals and other medical professionals.
• Check prescription costs at different pharmacies, and consider buying generic.
• Revisit your insurance plans to help identify if you’re receiving the best value.

Every retiree’s financial life and needs are different, so knowing a true breakdown of your daily, monthly, and yearly costs (your budget) is important for finding ways to save. By taking time to assess what may be unnecessary spending in your life, and reducing or eliminating these expenses, you may have more money on hand for other lifestyle needs.

To learn more about how you can trim your spending or pursue other financial goals in retirement, please contact us. We’re happy to help you explore strategies for your unique needs.

“It’s not the situation, but whether we react (negative) or respond (positive) to the situation that’s important.”

–Zig Ziglar