In the world of financial advisors, there has been a surge in publicly of the gold standard, the fee-only advisor. This is an individual who will charge a flat rate or a percent of assets under management, in industry terms, they are an investment advisor representative. These advisors are regulated by the State or SEC to document the needs of their clients and any changes in their risk tolerance, time horizon, and goals. When establishing these needs the advisor will fill out an extensive intake questionnaire to assess investable assets, liabilities, and tax planning.
Most people associate fee-only advisors to a Certified Financial Planner. Like the fee-only advisor, this is an investment advisor representative but they take another test and pays an annual fee to have this designation. In return, the CFP board creates campaigns to aware consumers of the benefits of working with a designated Certified Financial Planner. Like many designations, there is ongoing continued education to keep them current which can be purchased from their website at www.cfp.net.
Here’s the thing if the advisor sells insurance products they will not be able to call themselves fee-only advisor. When the advisor sells insurance their payment is called a commission, that commission is paid by the insurance company and the advisor is not acting as a representative of that company, but an agent who is filling out a suitability form instead of this extensive process. Since it’s paid by the company and not out of your pocket the agent is not required to disclose their commission.
Insurance instruments are tools for legacy planning, tax planning, and long term health care. In my opinion, to recommend these tools and understand how they fit into the big picture your agent should have an idea of the financial plan. If you outsource a portion of that plan if can allow weaknesses because there is not the careful vigilance of the financial advisor.
If you are looking for an advisor, make sure they are going to fit your needs and put together a comprehensive plan for your investments and insurance needs. Our firm is an independent insurance agency that will provide you with multiple carrier options and disclose all fees.
After my dad passed away at the end of August I was thankful that he had a plan in place and that we knew how execute it. October is “Estate Planning Awareness Month.” Here are some basics about estate planning that everyone should know.
Everyone should have a plan
Even if you think “you’re not rich enough” to have an “estate,” unless you’re homeless or destitute you should have an estate plan in place. Estate plans provide for the people you leave behind when you pass away, and help ensure that your final wishes get carried out. The last thing you want is your family members fighting over dishes or fishing poles when you’re gone, or having to sell the family home or take other drastic measures just to get by.
Often estate plans help reduce taxation to heirs. Even though the estate tax exemption doubled to $11.18 million for singles ($22.36 million for couples) as a result of the tax legislation passed last December, the exemption drops back down to 2017 levels after 2025, so it’s important to plan now to help take best advantage of estate tax laws for your particular situation.1
There are important differences between wills and trusts
1. Having a trust in place usually allows your estate to avoid probate court and keeps your finances private. Trust assets are usually distributed by the trust executor once a death certificate has been issued and funds are available immediately to your family.
If there are no estate planning documents, or if there is just a will in place, your family will have to go through probate court, which can take a very long time in some states, and can be very costly in terms of legal fees. Additionally probate court proceedings are generally published in the newspaper so that your financial situation and your assets become public knowledge. 2
2. A will is the document used to specify guardians for minor children. 2
3. It is often recommended that a will be used with a “pour-over” provision for all assets not specifically named in a trust; and/or that an exhibit or list of items be attached to a will to name individual gift recipients, be the items large or small, valuable or just sentimental.
Beneficiary designations take precedence
Beneficiaries you have named on life insurance policies, bank accounts and/or 401(k)s or IRA accounts take precedence over your estate planning documents. 3 This is extremely important to address, and all docs should match so that there are no conflicts or surprises later. Life changes such as divorces, deaths or birth of new children/grandchildren require that your documents and beneficiaries be updated. That’s why regular reviews are critical—we recommend annual reviews of all your documents, policies and accounts.
Attorneys may not know financial ramifications
Estate attorneys can create the documents you need, but they may not know about all the ins and outs of investments and insurance policies that can help expedite efficient wealth transfer, reduce potential problems and/or mitigate taxation as laws morph and change. Most experts agree that you need a team which includes your estate attorney, your CPA or tax preparer, and your financial advisor or wealth planner.
The importance of digital assets
Online assets are a new area of estate planning that need to be incorporated into your plan. The Uniform Fiduciary Access to Digital Assets Act, which has been passed in most states, provides that an owner of digital assets can specify who will be able to access and dispose of any digital assets after death so that email accounts, social media accounts, PayPal accounts, domain names, intellectual property stored on a computer and other things like virtual currency can be accessed by heirs. 4
Call us 425-610-9226. Let’s work together to update or create the proper distributions of your funds.
1 “How the new tax law upends estate planning,” Financial-planning.com https://www.financial-planning.com/news/how-the-new-tax-law-changes-estate-planning-trusts-income-tax-planning (accessed October 18, 2018).
2 “Will vs Trust: Knowing The Difference,” Investopedia.com. https://www.investopedia.com/articles/personal-finance/051315/will-vs-trust-difference-between-two.asp (accessed October 18, 2018).
3 “Why Beneficiary Designations Override Your Will,” Thebalance.com. https://www.thebalance.com/why-beneficiary-designations-override-your-will-2388824 (accessed October 18, 2018).
4 “The Big Hole in Estate Plans: Digital Assets,” Thinkadvisor.com. https://www.thinkadvisor.com/2018/10/04/the-big-hole-in-estate-plans-digital-assets/ (accessed October 18, 2018).
Risk Management Is About More Than Your Investments
A lot of financial services professionals talk about “risk” when it comes to your stock market investments. But risk can encompass more than your investment risk tolerance. The broader definition of financial risk is the possibility of loss from any unexpected life event.
For instance, what will happen to your family’s income if one spouse passes away, becomes disabled or unable to work, or needs long-term care? What happens to your kids’ education fund, or your retirement? Risk management in this case means shifting risk of financial loss from adverse events to an insurance company in order to protect your family’s assets and lifestyle.
New Innovations in Life Insurance
First and foremost, life insurance offers financial protection to your family by helping mitigate the risks that you face from life’s unexpected tragedies, as it has done for hundreds of years. But in the last decade, life products have expanded and improved to offer much more.
Many new types of insurance policies and policy rider innovations have come about in order to answer the needs of Baby Boomers–10,000 of whom are turning 65 every day and will continue to do so until 2030.1
Life insurance companies are now covering a whole host of pre-retiree and retiree risks with permanent universal insurance policies and fixed annuities which offer features like:
1) Lifetime income in retirement
2) Spousal survivorship benefits
3) Long-term care coverage if needed
4) Disability coverage if needed
5) Income tax advantages
6) Tax-advantaged wealth transfer or death benefit
Universal Life Insurance or Fixed Annuities as Part of the Retirement Portfolio
In addition to the many retirement risks they can help address, new types of life insurance policies and fixed annuities may have other attractive advantages. Some of the newest policies offer the chance for growth by earning interest linked to market performance. And this potential growth comes with guaranteed* principal backed by the financial strength of the insurance carrier.
These are just some of the reasons more and more financial advisors are including permanent life insurance and/or annuities as part of the retirement portfolio itself.
Let’s Talk About Your Family
1 Pew Research Center “Baby Boomers Retire.” http://www.pewresearch.org/fact-tank/2010/12/29/baby-boomers-retire/ (accessed September 10, 2018).
This article is for informational purposes only and is not intended to provide any recommendations or tax or legal advice. We encourage you to discuss your tax and legal needs with a qualified tax and/or legal professional.
*Guarantees and protections for fixed or fixed indexed annuities and/or universal or indexed universal life policies are subject to the claims-paying ability of the issuing insurance company. These policies are contracts purchased from a life insurance company. They are designed for long-term retirement goals, and also intended for someone with sufficient cash and liquid assets for living expenses and unexpected financial emergencies, including, for example, medical expenses. Depending on the product, they may include surrender charges, rider charges, life insurance premium charges and/or other fees as detailed in the individual contract.
An indexed annuity or indexed life insurance product is not a registered security or stock market investment. As such, it does not directly participate in any stock, equity or bond investments, or index. Gains on indexed accounts are based on participation rates and other conditions offered by the issuing insurance company. Depending on the nature of funds used to purchase annuities, withdrawals may be subject to income tax and withdrawals before age 59½ may be subject to a 10% early withdrawal federal tax penalty.
When you hear “risk of longevity,” what exactly is meant? Longevity refers to “long life” or “length of life.” Simply put, longevity risk is the risk that someone will outlive their wealth and available income.
It’s a fact that people are living longer. Not only has the average life expectancy increased, but one out of every four 65-year-olds living today will live past the age of 90. One out of 10 will live past 95--the number of people living to age 100 increased more than 43% from 2000 to 2014!
From a financial point of view, living a long time can drastically affect many of your retirement costs, impacting and presenting a “risk” to many different items in your budget—right when you will be living on a fixed income.
Let’s examine some of the issues affected by longevity:
1. Health Care
Health care expenses are a huge chunk of any retirement budget—even with Medicare. A healthy 65-year-old couple can expect to spend approximately $266,589 to cover health care expenses not covered by Medicare Part A during their retirement for Medicare Parts B, D and a supplemental insurance policy (sometimes called Part C). This assumes at least one of them worked and paid Medicare taxes and so their Medicare Part A premiums are covered.
And that total doesn’t even include dental, vision, co-pays, deductibles and out-of-pockets. When you add those in, a couple’s costs rise to $394,954 throughout retirement. Living longer not only increases yearly health care outlays, but your chances of developing a serious health issue increase as you get older.
Your odds of becoming incapacitated also increase with age, which could lead to the need for nursing care. In fact, 70% of people over 65 end will up needing some form of assistance. The average yearly cost of a semi-private room in a nursing facility is $80,300.
Yes, you can qualify for Medicaid to cover your nursing home stay—if you spend down all of your assets to poverty level. There are options to this scenario that you definitely want to consider.
Prices will continue to get higher through the years—in fact, inflation is part of the Federal Reserve’s monetary policy. Inflation undermines your purchasing power over time. While it’s true that if the Consumer Price Index (CPI) rises in a given year, retirees sometimes get a COLA (Cost-of-Living Adjustment) increase on their Social Security benefit check, you’d best not count on that. For the last few years, there has been no COLA, primarily because of low oil/gasoline prices. It goes without saying that the longer you live, the more you will spend on consumer goods and living expenses.
4. Excess Withdrawal / Inadequate Income
If your portfolio isn’t structured properly to provide enough income for a long life, you really are at risk of running out of money. Unexpected family expenses or needing to withdraw money during a market downturn can affect your nest egg negatively for the long term (kind of like compound interest in reverse). The death of a spouse is also a risk to your income, as Social Security benefits will likely decrease and taxes will increase due to fewer household exemptions.
The point of this article is not to inspire fear, but to inspire early, realistic retirement planning. Don’t worry about the future--let’s make some solid plans!
There has been a lot of talk about 401(k) since the House passed the Secure Act. It will still need to be voted on by the Senate and passed to the president but there are many large companies that are lobbying for it’s approval. I think this is a perfect time to review one of the bill’s most controversial provisions allowing more annuities in 401(k) plans. No one can argue that many Americans are aware of the word “annuity” and are quick to judge so let’s have a quick review of the history of annuities.
The annuity concept has been traced back to the Roman Empire. In return for their service, soldiers and their beneficiaries would receive annual payments for life known as “annuas,” the basis for the word annuity.
In the 17th century, these contracts were structured in the form of a “tontine” by feudal lords. Investors would contribute to a large pool of cash and receive annual payments for life. Upon death the payments ended and the remainder was redistributed among the group. If you were lucky enough to outlive everyone else in this arrangement you received the balance of the pool.
Despite their simple structure in the beginning, annuities have become increasingly sophisticated over time. When you invest in something, typically you assume all the risk. Since annuities are not investments, but are contracts with an insurance carrier, they allow you to transfer investment risk to the carrier. The risk you assume is that annuity payouts are subject to the claims-paying ability of the insurance company. (The only exception might be “variable annuities,” which are linked to a market index and rise—and fall—in value with the index.)
Recent innovations like fixed indexed annuities allow for growth in relation to an index, but the owner is protected from loss of principal if the index falls. With people living much longer and pensions quickly becoming a thing of the past, annuities can help provide income throughout retirement without the fear of running out of money. If you are considering the purchase of an annuity, it’s important to speak with a financial professional who understands them, and can explain the fine print of an annuity contract.
These investments are not for everyone and in the event that you employer has decided to open this option to you it’s best to discuss it with an Insurance Professional. Let me know if there is any way I can help you get clarity.
I highly encourage everyone to get a plan together yet many people still have trouble following through with the steps. I am going to reveal the steps you need to take leading up to your retirement date and you might be shocked to know that you need to start 10 years before you’d like to retire.
As you imagine going into retirement you might dream of traveling or tending your garden. I think everyone’s goal out of retirement is to be able to reap the benefits of the many years of hard work. Stress should be the last thing on your mind but for many retirees, they have some top regrets like; not saving enough, relying on social security to heavily, and not paying down debt. How does one avoid these issues?
1. Not saving enough
Take advantage of employee sponsored 401(k) is the obvious choice but statistics range from 30%-40% of private sector employees don't have access to a 401(k). In that case, saving a Traditional IRA and Roth IRA wouldn't be enough. Individual accounts for savings are instrumental in creating cash flow. For those who also don't have access to a pension, universal life insurance products widely known by Tony Robbins have become a great savings tool as well.
2. Relying too heavily on Social Security
When discussing cash flow there are many tools out there that retirees and individuals should consider to make up the difference. Dividends from an individual account, annuities, life insurance, and investment properties. All of these have their pro's and con's but if you are able to speak with a professional about products or investments well before retirement in your 40's or even 30's quick conversations can have a lasting impact. In reality, you should also keep in mind that the Social Security benefit will be pushed back later and you may never get it.
3. Debt in retirement
Growing up we were told not all debts are equal and that some are good for tax purposes or to build credit, these rules don't apply when you retire. 10 years prior to retirement you should seriously consider a debt consolidation strategy to co-inside with your retirement date. I say 10 years to make sure you are not caught up in with tax burdens from large withdrawals from an IRA. You will always want to talk to a tax professional about consequences.
Above all the most important action is to put a timeline together. When you are able to review it regularly with a professional they can help guide you to avoid major pitfalls. I think you will look forward to my next post “Retirement Checklist”.
After I got my first source of steady income at 22 I kept thinking "Why am I giving my money away to rent when I could have a house paid off by 50"? I pictured what I'd do in retirement, take my suped-up golf cart to the course and then head to the store for groceries. I had to make sure there were a couple of restaurants that were in walking distance too. I even wanted to be close to a hospital in case I got hurt. When I found my checklist home I bought it, not with my father not with a spouse all alone as a single woman at 23. I lived in it for a year before I was offered a job in San Francisco, then I ended up turning it into a rental down the line.
As millennials, my husband and I are looking to purchase another rental property and my mindset is still the same. If we can start purchasing rental properties now they should be paid off by the time we need retirement income. We don't have pensions and while we are paying into social security "full retirement age" will most likely be pushed back to age 70.
Why is passive income through rentals so attractive? Here are my top 4 reasons.
When evaluating properties not all are created equal and realistically you should have a property manager helping you along the way. But if you are able to start now you could have multiple properties paid outright to improve your income stream in retirement. Now start asking a professional if you might fit your retirement plan.
With Women’s History month coming to a close it’s be wonderful to celebrate the strides that women have made to get us to have equality but it never ceases to amaze me how finances can be so lopsided. There are still practices out there that will funnel questions through my husband about our finances (not knowing my background) and keep little eye contact with me. Why is that?
It wasn’t until recently that the finance industry was EXCLUSIVELY run - and dealt primarily with men. While most data is comparable between men and women about preparing a plan, what is their biggest concerns, and what’s important in retirement. The biggest difference between men and women is where they turn for advice. Over half of women surveyed cited they would go to workplace resources as their first choice, where most men cited online resources*. As I write this blog post I am aware that my primary intended audience will not find this information because of that stat.
Here are my tips on becoming financial fit:
As you look for someone to handle your finances you need to come up with an outline to guide you. Along with that you must feel confident in the relationship that you have with your advisor and have regular communication. I look forward to sitting down with you to go over your goals and plan to move forward to an early retirement.
*Empowered - Embrace responsibility northamericancompany.com
It seems like the answer should be fairly straight forward but in reality it depends on several factors the biggest one being taxes. If you are looking to take out a lump sum of money to pay off your mortgage before you go into retirement you may want to reconsider the taxable implications of how you have received this money. Let’s take 2 different examples of paying off a $50,000 mortgage and your taxable income is $38,500 as a single filer.
Example A: IRA Distribution
Withdrawing money from these accounts will be taxed at ordinary income. If you are going to need $50,000 you will need to pay taxes on that distribution. If you add the $38,500 wages to the $50,000 distribution you may jump from a 12% bracket to 24% 1. In that case you will need to pull out roughly $66,000 to cover your taxes
Example B: Investment Account
The basics on withdrawing from these accounts are conditional so I have made a map that will guide you in the amount of taxes that you may have to pay.
Another great option is what I like to call bridging. This is when you have decided that you have saved enough in your retirement account and instead of maxing out contributions you reduce it to the min for the match and save the rest in a high yield savings account. This is not for everyone and you will need to be aware of the tax implications that it will cause you. With that being said if you are looking to use the funds less than 12 months you will have protection of principal and growth at rate from 2% or more with full liquidity.
Reducing your debt in retirement is always a best practice because you never know what will happen. I highly recommend before you make a decision like this is to talk to your CPA and financial advisor to see how a longer term plan can reduce your taxable liability and coordinate timing of your retirement.
Sources: https://taxfoundation.org/2019-tax-brackets/ 1