Your Financial Future
Roxanne Fleszar

Roxanne Fleszar

Monday, 14 November 2016 00:00

Look at What Life Planning Can Do For You!

time to plan

Last year I attended a workshop developed by George Kinder, founder of the Kinder Institute of Life Planning. I had heard of this workshop for at least a decade and it consistently received rave reviews by my peers. The workshop dovetailed with the Financial Planning Association National Conference which was being held in Boston during the time I was in the area.

So how does financial planning incorporate life planning? First let’s take a step back and review the financial planning process. Clients typically come in to see me with a question or two, such as when should I begin to collect Social Security to maximize my benefit? Is my investment portfolio meeting my objectives? How should I invest an inheritance? Can I afford to retire in X years? I am going through a divorce; how can I best handle my cash flow and my assets?

Before answering questions, we have to know much more about them. We ask individuals to complete a comprehensive questionnaire detailing the names of their family members, assets, liabilities, cash flow, income, insurance coverage and estate plans and the like. They also complete a risk profile questionnaire which asks questions such as how they reacted to the stock market downturn in 2008; whether they are more concerned with maximizing portfolio returns or minimizing losses; and whether they are confident in their ability to make good financial decisions. We also want to learn much about their personal goals; whether they are supporting or plan to support other family members; if didn’t have to work anymore, what would they do; and their current strategy for handling their income and investments.

This is all important information; it is synthesized and a plan is developed, then reviewed and revised with a client. A road map with priorities is available for implementation and we assist with that as necessary.

So what did I learn about life planning at the workshop to enhance the financial planning process? We now take clients through several introspective exercises. We ask questions such as “What would you do if you had all the time and money in the world”?, “How would you live if you knew you only had five to ten years left?” and “What would you most regret if you died tomorrow”? Oh there are more exercises; our goal is to truly get to the essence of what is most important to them in both the short and the long-term. Very often there is an “ah-ha” moment for the client and/or their significant other as they gain a deeper and deeper understanding of what is most important to them . Finally, we need to determine a plan to finance their dreams, you may even say, to help them live their passion.

In the workshop, I went through the life planning process; it is very powerful. It brought out deep seated desires that surprised me. I developed a plan to achieve them. It will take several years but I am on the path to reach beyond my current wonderful life circumstances to truly living my passion.

If this process resonates with you, give me a call or send me an email.

put clients first

So what is the DOL? It is the Department of Labor and this agency has some folks really riled up over their effort to raise the investment advice standards for brokers who work with retirement plans. Essentially brokers and insurance agents will have to put their clients’ interests ahead of their own under the proposal that was announced this week. Fortunately, the Obama administration and many Democrats in Congress favor the proposal. Unfortunately, it faces opposition from Republicans and Wall Street.

So what is at stake here? The $11 trillion held in 401(k) plans and IRA’s. President Obama and his team are aware that tens of millions of people are nearing retirement age and will be making very important decisions regarding their retirement savings such as should they roll-over their pension assets to an IRA or retain them with the employer? Should they purchase an immediate annuity for guaranteed income? How should the funds be invested and what vehicles will meet the client’s objectives?

This proposal was first issued in 2010; Wall Street has been working against its passage ever since. Lobbyists and members of Congress will have 6 months or so to comment on the proposal and the topic is receiving a great deal of attention.

The DOL regulations currently in use were written 40 years ago before IRAs and 401(k) plans even existed. There is a suitability standard that an investment recommendation must meets a clients’ needs and risk tolerance. The proposed standard goes much farther in that the salesperson would have a fiduciary obligation to recommend investments are in the best interest of the customer.

Do you think that Americans who have been through the dot-com and technology bust of 200-2003, the housing crisis and the banking crisis of 2008-2009 deserve to have their interests be of utmost interest? I do. (Full disclosure, we are a fee-only registered investment advisory firm and acknowledge in writing that we act as a fiduciary to our clients).

Why is their opposition to the new proposal? Variable annuities are a popular and profitable product for brokerage and insurance firms; they will be most affected by the change as they can charge high fees and commissions. I have had new clients bring their annuity contracts to me for assessment and fees often exceed 3% annually.

Sixty-one percent of variable annuity sales occur in IRA accounts. This begs another question. Why does one need the tax-deferral of a variable annuity when an IRA is by design already providing tax-deferral?

The argument given by Wall Street is that smaller investors can’t afford to hire a fee paid advisor who acts as a fiduciary. There are mutual fund firms with low expenses and even robo-advisor firms that are providing investment services at low cost to serve smaller accounts.

The true disservice to the millions of folks planning for retirement will be retaining the status quo.

Baby Boomers

As of July 1st, ten thousand baby boomers a day for the next 18 years will now be required to start taking required minimum distributions (RMDs) from their tax-qualified retirement plans! Those born in 1946 are now going to pay Uncle Sam a portion of their capital gains.

Boomers have had an opportunity for years to receive a tax-deduction for their contributions to IRA’s, SEP-IRA’s, 401(k)’s, 403(b)’s and various forms of pensions. Their assets have grown on a tax-deferred basis. And they have had the ability to compound over time. That’s all good. Now they are 70.5 years old, a critical age according to our tax code.

Uncle Sam is now asking for a portion of the proceeds in these accounts via taxation. Those individuals that were born between January 1 and June 30, 1946 can elect to take their first RMD by December 31, 2016 or wait until April 1, 2017. Thereafter and RMD has to be taken by December 31st of each year.

Folks that were born between July 1 and December 31, 1946 can wait until 2017 to take their distributions by year end or April 1, 2018.

Distributions are based upon the IRS’s life expectancy tables; most people choose a single life expectancy table but if they have a spouse that is their sole beneficiary, and they are 10 years younger than the account holder, they may elect to use a joint and survivor table which will lower their RMD.

The calculation is straight forward. Take the balance as of December 31 of a tax-deferred retirement account and multiply it by the factor on the table. The factor for a 70 year old individual on a single life expectancy table is 27.4. So if they have $100,000 in an IRA, $100,000 divided by 77.4 means that the account owner must take out $3,649.63. The factor decreases each year so that the tax obligation rises over time.

Note that the account can still grow on a tax-deferred basis even while they are taking distributions. For example, at age 76, an account that has grown to $110,000 would have a factor of 22; the tax liability would be $5,000.

If a person has multiple tax-deferred accounts they can calculate the obligation on each one, but aggregate the amounts and withdraw the funds from just one account. We often do this to reduce trading costs and the need to rebalance the portfolio over numerous accounts.

If they are not a 5% owner of a firm and are working beyond age 70.5 years, they may continue to make tax-deductible contributions to a 401(k) plan (but not to an IRA). Once they stop working, RMDs begin.

I have a philanthropic client and she makes full use of ability to donate her RMD each year to charity. She chooses to gift up to the maximum of $100,000 annually which is divided among a number of charities. The gift is directed to the named organizations as required. The amount donated is not part of her taxable income, thus a win-win for her and donee! This provision was recently made permanent for 2016 and on.

RMDs may increase a person’s tax bracket as well as their Medicare premiums. So have they also made after-tax contributions to a Roth IRA, a Roth 401(K) or a qualified pension? If so, those funds grow tax-free for life!

If an account holder has both tax-deferred and tax-free retirement accounts, with good tax planning they can take minimize their tax liability from year to year.

So what about you? Have you funded your tax-free or tax-deferred retirement accounts for 2016 yet?

gender identity

There are many studies over several decades that show that women earn higher long-term investment returns. Is there truly a difference in performance based on gender?

According to the research there are differences between the amount of trading and risk taking in portfolios, knowledge of finances, and use of a financial advisor between men and women. Let’s take a further look at these issues.

Trading: Going back to the 1990’s when Brad Barber and Terrance Odean of the University of California Davis looked at six years of gender based data on 38,000 households, men traded 45% more often than women. They earned approximately 1% less per year than women during the study.

A more recent study by SigFig, a portfolio optimization firm, analyzed their clients’ portfolios in 2014. In that year women had a 12% higher median return than men. In addition, men were were 25% more likely to lose money than women. In their analysis, men had turned over the securities in their portfolio 50% more than women.*

When you buy or sell a stock or a bond, you incur a trading cost. If the security is in a taxable account then your profits will be taxed by the federal government and most states. In addition, you hope to invest in a security that will provide a higher return than the one you sold. Interestingly, the Barber-Odean study showed that the security sold actually returned 2% more on average than the new investment over the following year!

During the 2007 to 2009 bear market, Vanguard Funds studied 2.7 million IRA accounts and found that men traded more often than women and were more likely to sell at market lows.

In 2015, Openfolio, an online investment sharing platform, found that women traded an average of 5.1 times versus men at 7.4 times in the year. Additional recent analysis by Betterment, a robo-advisor, shows that women change their asset allocation 20% less often than men and monitored their account 45% less often. In essence, women spent less time managing their portfolios yet they often earn a higher investment return.

Risk: Perhaps it’s the testosterone and other hormones that cause men to feel confident and take on more risk in their portfolios. A study by Fidelity Investments in 2013 discovered that men were more likely to hold 100% of their portfolio in stocks which incur much more volatility than a more balanced portfolio of stocks, bonds and cash.

Studies show that women prefer a balanced portfolio and exhibit more patience then men with their investments, allowing them to grow. Instead of using stock tips which often don’t pan out, women prefer to research an investment before diving in.

While losses are greater in a down market in a stock centric portfolio, gains are higher in a bull market. Theoretically, a higher allocation to equities can benefit investors in the long-term. Of course timing and security selection play a huge part in actual investment returns for anyone!

Financial assistance:

Men have their strengths of course. Overall, they have a greater knowledge of finance are more comfortable about speaking and studying financial matters. Generally speaking, they earn more than women. Many can calculate their retirement income needs. Hence, it is not surprising that they save more both personally and have fifty percent more money in their company retirement accounts.

Women tend to gravitate toward working with a financial advisor, in many cases because they are less confident in their knowledge of finance and investing. They tend to use professionally managed portfolios, like target-based retirement funds or risk-based funds, in their company sponsored retirement plans, rather than selecting individual funds or securities.

It is not surprising that men’s poverty rate in retirement is significantly lower than women’s. Based upon women’s greater longevity, lower wages or because of taking time off to take care of family, women need to save more. Women should learn more about investing and money management so they can feel confident that they are making decisions in their best interest.

I find in my own practice that women and men often differ in their approaches to investing; educating clients to take the best attributes of what both sexes provide is a winning solution.

ask a cfp teen roth ira smaller

As a member of Zonta Key West, I am pleased to be participating in JOURNEY TO SUCCESS, PART 2 on Saturday, June 25th. Our goal is provide business skills to assist girls and women in their journey to career success.

In this morning session we will be covering time management and money management skills. We will discuss banking basics such as how to open and maintain a bank account; apply for a credit card or a mortgage. In addition, we will review the rules of thumb that apply to maintain an emergency savings fund based upon her income, the maximum amount of pay for rent or to incur for a mortgage.

Not surprisingly, my job is to discuss the growth of money. So we are going to tackle a basic money concept that everyone should have learned in their math class in high school, but rarely do, the compounding of money.

A traditional IRA provides a tax deduction and the growth of earnings on a tax-deferred basis. Under current regulations, once one reaches age 70.5 years, they must start to withdraw funds which are taxed at ordinary interest rates.

I really encourage young persons with any earned income to open a Roth IRA instead; they are special in that the principal and earnings grow tax-free for life! Dependent children who start working do not have to pay taxes if they earn less than $6,300 in a calendar year. They have a zero tax rate so they don’t need the tax deduction.

For example let’s look at your 17 year old daughter in her first job. She saves $1,000 the first year. Assume she opens a Roth IRA with those funds and it is invested in the stock market which earns an 8% annual return until she reaches age 70. That $1,000 grows to $477,000 and it is tax free on withdrawal!

Later she gets a good job and at age 25 starts saving for retirement in her Roth IRA. She saves $3,000 a year until age 70. Wow, at the same 8% annual return she has accumulated $2,529,590 in her account and it remains tax free! Of course she could save more; the current maximum annual contribution for an IRA is $5,500 and $6,500 if you are over age 50.

Compound interest provides for wealth creation. But it also can work for wealth destruction if you incur debt and repay it over long periods of time. Let’s look at an example. Your daughter decides to go on vacation to California for a week; she borrows $3,500 on her credit card to do so. If the interest rate she pays compounds monthly at 17% and she takes 7 years to pay it off, the trip will cost her $18,932! Ouch, that was a very expensive trip that cost her over 5 times the amount she borrowed.

Unfortunately, in 2015 the average American family had $15,762 in credit card debt. If we assume they carry this average balance for 30 years at 17% interest compounded monthly they will spend $2,494,427. Almost $2.5 million went to their credit card company instead of funding their financial goals! These companies bank on the fact that Americans don’t understand how compound interest works.

Understanding compound interest can assist your daughter in making important decisions about saving, investing, retirement planning, purchasing cars, and her home. Let’s make sure you share this concept with her!

In my past article “Estate Planning…Do it Yourself or the State Will do it for You”, we discussed the importance of having a will. Now we will go further and discuss why you need another important document, a revocable trust with an incapacity clause.

A revocable living trust can take care of you when you are alive and upon your death. If prepared correctly, it is a robust part of your estate plan. It is a living document that works for you today, unlike a will which works in your behalf after your death. It is revocable, which allows you to change it throughout your life.

Why bother with this trust? Let’s assume my father passes and leaves his home to me in his will. His assets will have to go through probate whereby he substantiates his intent to leave me his home. A court order is necessary to transfer the deed to me. An attorney will handle the case through probate, charging a percent of the estate or a fee determined by the attorney. In Florida, estates of less than $100,000 are 1.5% to 3%; a $100,000 to $1 million estate is at $3,000 plus 3% of the value; and an estate over $1 million is $30,000 plus 2.5% of the estate. Wow!

If my father had set up a revocable trust instead, the home would become an asset of the trust. He could have named himself the trustee of the trust, thus making all the decisions about the house: the right to refinance the mortgage, renovate the house or even sell it. He still pays the property taxes and other related expenses of ownership; while the house is held in benefit of him, he will be the primary beneficiary and I will become the remainder beneficiary.

Importantly, when my dad passes, there is no need for the house to go through probate saving time and significant money. As the successor trustee I sign an affidavit of the death of the trustee and sign a deed that changes ownership to me through a lawyer or title company. The cost is very minimal and the time to execute the change is just weeks instead of months or even years!

You should fund the trust with your bank and investment accounts, real estate holdings and outstanding loans that have yet to be paid. You must change or have an attorney change all of the accounts to the name of the trust, a relatively easy process. (Note, IRA’s and other pension account assets do not go in a trust as they are disbursed according the named beneficiaries).

To be complete, a trust should have an incapacity clause which will allow a person you select to be named as a successor trustee to handle your personal and even business interests when you cannot. A secondary successor should also be named if the first cannot fulfill their duties.

Estate planning is difficult for most of us as we envisage our mortality but it will make certain that our affairs are handled in a timely and cost effective manner. What a gift to those you leave behind.

I have previously written about being an effective role model for your children: save a portion of every paycheck, maintain an emergency reserve, budget wisely and talk openly with your children about money. Last but not least, encourage their development of good math skills while they are in school.

So what else can you do? Beth Koblinger, a bestselling author and a member of the President’s Advisory Council Capability, was instrumental in the creation of Money as You Grow:20 Things Kids Need to Know to Live Financially Smart Lives. You can find it online for free.

Kobliner breaks down money concepts that children can learn by age. Note the emphasis in bold for each point. While all points are valuable, I’ll expand upon one concept for each age.

Age 3 to 5 Years

  • You need money to buy things.
  • You earn money by
  • There’s a difference between the things you want and the things you need.
  • You may have to wait before you can buy

A terrific idea is to label three jars, “Spending”, “Sharing” and “Savings”. Every time your child receives money divide it equally between the jars. The spending jar is for small purchases such as a cookie or colored markers. The money in the sharing jar can go to a favorite cause or a friend/neighbor in need. Lastly, if your child has a goal of buying a more expensive item, they may have to build up the savings jar to be able to purchase it. This teaches goal setting and patience.

Counting the money together as new contributions are made teaches about the value of each coin and paper dollar and also helps set expectations as to when they will reach their goal.

Ages 6 to 10 Years

  • It’s good to shop around and compare prices before you buy.
  • It can be dangerous to share information
  • Putting your money in a savings account will protect it and pay interest.
  • You need to make choices about how to spend your money.

We all make choices every time we shop… is it the store brand crushed tomatoes or the name brand which is $.20 more? Is it a new dress in a department store or are you going to shop at your favorite consignment store? Is it a new car or a used car?

As you shop with your child, discuss how and why you are making your decisions. “Do we need this now, or can we wait six months”? “Can we find this to be less expensive elsewhere”? It provides then with an understanding that there are tradeoffs and options.

Next time, we’ll look at ages 11 to 18+!

Age Based Money Lessons for Your Kids

I have previously written about being an effective role model for your children: save a portion of every paycheck, maintain an emergency reserve, budget wisely and talk openly with your children about money. Last but not least, encourage their development of good math skills while they are in school.

So what else can you do? Beth Koblinger, a bestselling author and a member of the President’s Advisory Council Capability, was instrumental in the creation of Money as You Grow:20 Things Kids Need to Know to Live Financially Smart Lives. You can find it online for free.

Kobliner breaks down money concepts that children can learn by age. Note the emphasis in bold for each point. While all points are valuable, I’ll expand upon one concept for each age.

Age 3 to 5 Years

  • You need money to buy things.
  • You earn money by
  • There’s a difference between the things you want and the things you need.
  • You may have to wait before you can buy

A terrific idea is to label three jars, “Spending”, “Sharing” and “Savings”. Every time your child receives money divide it equally between the jars. The spending jar is for small purchases such as a cookie or colored markers. The money in the sharing jar can go to a favorite cause or a friend/neighbor in need. Lastly, if your child has a goal of buying a more expensive item, they may have to build up the savings jar to be able to purchase it. This teaches goal setting and patience.

Counting the money together as new contributions are made teaches about the value of each coin and paper dollar and also helps set expectations as to when they will reach their goal.

Ages 6 to 10 Years

  • It’s good to shop around and compare prices before you buy.
  • It can be dangerous to share information
  • Putting your money in a savings account will protect it and pay interest.
  • You need to make choices about how to spend your money.

We all make choices every time we shop… is it the store brand crushed tomatoes or the name brand which is $.20 more? Is it a new dress in a department store or are you going to shop at your favorite consignment store? Is it a new car or a used car?

As you shop with your child, discuss how and why you are making your decisions. “Do we need this now, or can we wait six months”? “Can we find this to be less expensive elsewhere”? It provides then with an understanding that there are tradeoffs and options.

Next time, we’ll look at ages 11 to 18+!

1 intro

In my past article “Estate Planning…Do it Yourself or the State Will do it for You”, we discussed the importance of having a will. Now we will go further and discuss why you need another important document, a revocable trust with an incapacity clause.

A revocable living trust can take care of you when you are alive and upon your death. If prepared correctly, it is a robust part of your estate plan. It is a living document that works for you today, unlike a will which works in your behalf after your death. It is revocable, which allows you to change it throughout your life.

Why bother with this trust? Let’s assume my father passes and leaves his home to me in his will. His assets will have to go through probate whereby he substantiates his intent to leave me his home. A court order is necessary to transfer the deed to me. An attorney will handle the case through probate, charging a percent of the estate or a fee determined by the attorney. In Florida, estates of less than $100,000 are 1.5% to 3%; a $100,000 to $1 million estate is at $3,000 plus 3% of the value; and an estate over $1 million is $30,000 plus 2.5% of the estate. Wow!

If my father had set up a revocable trust instead, the home would become an asset of the trust. He could have named himself the trustee of the trust, thus making all the decisions about the house: the right to refinance the mortgage, renovate the house or even sell it. He still pays the property taxes and other related expenses of ownership; while the house is held in benefit of him, he will be the primary beneficiary and I will become the remainder beneficiary.

Importantly, when my dad passes, there is no need for the house to go through probate saving time and significant money. As the successor trustee I sign an affidavit of the death of the trustee and sign a deed that changes ownership to me through a lawyer or title company. The cost is very minimal and the time to execute the change is just weeks instead of months or even years!

You should fund the trust with your bank and investment accounts, real estate holdings and outstanding loans that have yet to be paid. You must change or have an attorney change all of the accounts to the name of the trust, a relatively easy process. (Note, IRA’s and other pension account assets do not go in a trust as they are disbursed according the named beneficiaries).

To be complete, a trust should have an incapacity clause which will allow a person you select to be named as a successor trustee to handle your personal and even business interests when you cannot. A secondary successor should also be named if the first cannot fulfill their duties.

Estate planning is difficult for most of us as we envisage our mortality but it will make certain that our affairs are handled in a timely and cost effective manner. What a gift to those you leave behind.

With 10,000 persons retiring a day in the USA, there is a lot of interest in the best timing strategy to begin to collect Social Security benefits. Yes, baby boomers are moving on to the next stage in their lives.

Are you aware that a couple with high wage earnings could receive $84,000 a year in Social Security benefits if they deferred collecting until age 70? To receive the same income, they would need a personal portfolio of approximately $2 million to accommodate withdrawals of 4% a year without dipping into their principal. Social Security payments are guaranteed by our government, are indexed to inflation and receive some federal and state tax benefits. What a deal!

You may have heard that for those at full retirement age, which is age 66 for individuals born between 1943 and 1954, the benefit increases by 8% a year until age 70. That sure beats the 0.2% one is earning in their bank account today. Their Social Security benefit will be a whopping 32% larger when they start collecting their benefit and that amount will be indexed to inflation going forward.

A decision to delay collecting Social Security is a trade-off; you give up benefits at an earlier age to collect a higher benefit in the future. There is a break-even period where you earn more than you gave up which has to be adjusted for inflation and the time value of money.

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