Failing to Plan

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I don’t know about you, but the beginning of the year is when I usually do my greatest amount of planning. New Year’s resolutions, vacation itineraries, home improvement lists, and fitness routines can currently be found in my personal effects. Maybe I’m too rigid. Maybe I’m not spontaneous enough. What can I say? I need a plan of attack. Without one, I feel lost.

A lot of people I meet for the first time seem to view financial planning like a trip to the dentist. It’s not always fun, and you might not look forward to it, but it is necessary to keep your teeth clean and avoid a root canal. I’m no dentist, but I do firmly believe financial planning is necessary to accumulate and grow your assets, and to avoid the many financial potholes lurking around out there.

• Consider someone facing the huge burden of paying for their child’s college tuition the next four years versus someone who started a 529 Plan for their child eighteen years ago.
• Consider someone who wants to retire a year from now, but can’t possibly maintain their lifestyle in retirement versus someone who implemented a debt-reduction plan ten years ago so they could coast into retirement debt-free.
• Consider someone who made a generous charitable contribution the year after they retired when they were in a low tax bracket versus someone who more strategically made a generous charitable contribution right before they retired when they were in a high tax bracket.
• Consider the family of someone who is left in a coma after a tragic automobile accident with no estate plan in place versus the family of someone who took the time to execute a will, a Power of Attorney, and a Health Care Directive.
• Consider the family of someone killed in an automobile accident who never wanted to bother with the health questionnaire for life insurance versus the family of someone who made sure their family would be financially secure in the worst of circumstances.

 

Oftentimes it is better to be lucky than good, but I’m not always that lucky. I need peace of mind and confidence in my family’s financial security. I’m a firm believer in Ben Franklin's famous words that "If you fail to plan, you are planning to fail."

 

Just as a dentist can help a toothache, people often come to me at a time of financial crisis like imminent retirement, unexpected termination, a surprise job offer, a birth, a health tragedy, a death, or a divorce. Yes, I can certainly help, but it’s much easier and there are so many more options if you plan ahead. Maybe it’s me, but I prefer flossing a little along the way and having a few checkups every year to a painful toothache and a drill!

 

-Tom

Current Documents - It Does a Family Good

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Have you ever looked in the fridge and been really glad that you had a nice gallon of milk just sitting there? Not to get too crazy, but a gallon of milk kind of proudly stands out in a refrigerator with its crisp labelling, unusual shape, and pristine coloring. There’s just something about knowing that it’s there that can put a smile on your face. If you want cereal, it’s there, if you need to bake something, it’s there, and if you need something to wash down more Oreos than you would care to admit, it’s there.

There’s another scenario, though, and it’s one of my least favorite. Have you ever opened a gallon of milk and given it that customary sniff, just to make sure everything is as it should be, and had your nostrils greeted with the deplorable, putrid, sour smell of rot? Have you ever gone to the trouble of reaching up in the cabinets to retrieve your favorite glass and gone ahead and poured a glass of milk (bypassing the customary sniff test) only to find the inside of your mouth wrenching after that first gulp of spoiled milk? I know I have damaged my nostrils and angered my taste buds doing just that on more than one occasion, and it’s no good. You need milk, and unless you’re a two-gallon kind of family, you’re usually just out of luck. All you can do is pour the expired product down the drain, put the lid back on the jug so it doesn’t stink up your garbage, and head to the trash can.

Unfortunately, I’ve seen some estate planning and health care documents that resemble spoiled milk. They were originally done oh so well. They were crisp documents done by prestigious lawyers, they were printed on the obnoxious, extra-large-sized legal paper, and they were kept in a nice little binder in the family’s safety deposit box or the bottom of a dresser drawer. The documents were like a good gallon of milk – they were there if you needed them. However, time passes. Family relationships and dynamics change. Agents, guardians, and executors pass away themselves or lose their desire or capability to assist you. Minor children become adults and have children themselves. Financial institutions and governments change the wording required for everything to work as it was so intended. Any or all of these events can take a perfectly good set of estate planning or health care documents and spoil them. This will likely go unnoticed (just like a capped gallon of expired milk in a fridge), but when someone gets hurt or passes away and the documents are needed (just like a glass of milk to wash down a peanut butter sandwich), the documents can really stink and show just how "expired" they really are.

Wills, power of attorneys, health care directives, and beneficiary designations are a lot more important than a dairy product. When someone gets sick or passes away they can’t just pour their old documents down the drain and get fresh ones. Their family could be legally required to drink the cup that is put before them based on their loved one's most recent estate planning and health care documents no matter how old they are, even if the family knows it is not what the deceased or incapacitated wanted or intended. I’m not trying to make anyone spend a bunch of money on attorney fees, but if you pull your documents and see that they have cobwebs on them, you may want to consider getting them updated. If you’ve recently had children or become a grandparent, if a family dynamic has seriously changed, if a key person in your documents such as a primary or contingent agent or beneficiary is no longer with us, or if your documents are more than about five years old, it may be about time to get your documents updated.

If you don’t have any documents at all, consider this your proverbial kick in the you-know-what. Living without proper documents in place is a lot crazier than not having milk in your refrigerator!
It wasn’t something I particularly enjoyed, but my family and I have our estate planning and health care affairs in order, and that gives my wife and me a sense of comfort and confidence. I can focus on other things, such as running to the store for a gallon of milk and maybe, just maybe, a pack of Oreos.

-Tom

Uh-oh!

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Have you ever had one of those Snickers “Wanna get away” moments? I know I have. There was the time when I was playing the White Rabbit in a comical version of Alice in Wonderland, and right in the middle of my solo, I looked over and realized my nice, fluffy, white tail had become detached from my pants. There was also the time when I complimented the beauty of someone’s relative’s cremation urn. Most recently, there was that moment when I came downstairs to see my “angelic” dachshund playing in the confetti of what used to be my wife’s work time sheet and to-do list for the week that she had asked me to move a little earlier in the day if I was going to let the puppy out. Uh-oh!

Uh-oh moments are a part of life, but some can be prevented. Part of my job as a financial planner is helping clients try to prevent financial uh-ohs, and the most common areas where I see blatant financial uh-ohs are actually estate planning and beneficiary designations. Today, I want to talk about a few common estate planning uh-ohs that you will want to make sure you and your loved ones avoid.

• Whose Name is Where?
• Many people are surprised to learn that their designated beneficiaries on retirement accounts and life insurance policies trump any designations in their wills. If a husband was suddenly killed and left everything in his will to his second wife, but the most recent beneficiary designation on file with his company’s 401(k) plan still lists his first wife as the beneficiary, the first wife will walk away with the 401(k) plan proceeds. If a grandmother’s relationship has fallen apart with one of her three grandchildren, and in her will she states her wishes to transfer assets to only two of her grandchildren, but the most recent beneficiary designation on file for her life insurance policy lists all three, the grandchild who has fallen out of favor will still receive his/her share. Wills and estate plans are not worth the paper they are written on if you do not make sure your beneficiary designations are properly coordinated with your wishes!
• Are Your People Still Your People?
• I’m not naive enough to think that most people enjoy updating their estate plan, but it really is necessary to periodically examine what you have in place to ensure that your wishes are actually fulfilled. Are your children’s named guardians still the people who you would like guarding your children? Have you even named a guardian for your children? Do you still want to give your uncle who has developed that gambling problem a share of your earthly wealth? At his age, is your older brother still mentally and physically capable to serve as your executor? Is your daughter who has now moved across the country still the best person to be your financial and health care power of attorney should something happen? Life changes and people do, too. If it’s been awhile since you looked at your will, there is a chance someone has passed away, someone has moved, someone is no longer capable to act in the capacity you formerly intended, or someone is no longer an individual who you would like to benefit through your final wishes. If any of these possibilities are the case, it’s probably worth dusting off your old estate plan to make sure there is no stone unturned.
• Is It Still Going Where It is Supposed To Go?
• Attorneys often use relatively flexible language in their client’s wills so that every time Congress slightly tweaks the tax law, their clients don’t have to come running back to rewrite their wills to match the new laws. While this is a great practice and an idea appreciated by all parties involved, the estate tax law has changed a good bit over the past few years - enough that I would urge you to take a look at your estate plan if it’s been awhile. For example, let’s say a lady has $3 million, and she specified in her 2003 will that she wanted to leave the maximum estate tax exemption at the time of her death to her son and the remainder to her husband. Well at the time the will was written in 2003 that meant $1 million to her son and $2 million to her husband. However, in 2013, that means $3 million to her son and not a dime to her husband because the current estate tax exemption is $5.25 million. I know this example has a lot of zeroes, but the point is the same - if the lady with the $3 million dies without reading this post and updating her will, her surviving husband will probably be saying more than “Uh-oh!”

 

Death is one of the two certainties in life according to Benjamin Franklin, and it is often a big enough burden on the deceased’s friends and family without a nasty financial surprise. If this post has given you the slightest doubt in your current estate plan’s ability to fulfill your wishes, I urge you to please make time to take a look.

 

-Tom

You’re Retired, Now What?

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Just because you are retired does not mean you need to stop managing your finances. It does mean that after a long day at work, I’m a little jealous of you, but what do you care? You’re retired! After all those hours, all of your sacrifices, all of your savings and retirement plan contributions (hopefully), you deserve it. Today, I’m going to wrap up our suggested financial plan for a lifetime and offer some suggestions on how to make the most out of retirement without running out of money. Here goes…

• Get your cash up. I’ve found that most people have a “magic number” they like to maintain in their personal cash account. What’s yours? (I bet a number just popped into your head.) Some people I know have $10,000 or less because they don’t trust themselves with temptation, and that’s fine, - they know themselves. Some have almost 5 years’ worth of living expenses in cash because that gives them enough security to turn off the radio and television personalities who are telling them that the world is about to end for the 276th time. There is no correct answer, but I’d figure out how much your annual living expenses are above your annual incoming Social Security and/or pension payments, and I’d set aside somewhere between one and two times that amount in cash. If you stay above your “magic number,” you’ll be happier.
• Fine tune your asset allocation, again. No, this is not a copy and paste from last week; this is a genuine suggestion. If you don’t want to risk running out of money in your eighties and wondering where you can get a job, make sure your portfolio is in a prudent place. You want to have a sizable allocation in cash and bonds to ensure the stability of your nest egg, but you also need a sizable allocation in equities to allow for principal growth and to protect against inflation. What’s your checking account earning you right now? What do you think the inflation rate will be over the next decade? What do you think the stock market’s volatility will be over the next decade? See why you need an adequate amount of cash and bonds for income and stability, but at the same time, you also need an adequate amount of stocks for growth and inflation-protection?
• Vigilantly watch your annual withdrawal rate relative to your investment assets. No matter how wealthy you are, your investment assets get to dictate your lifestyle in retirement, not the other way around. If you look back and see that you are withdrawing more than 4 or 5% per year and you are in your 60s or early 70s, my alarm bells are going off, and yours should too! 5 to 6% in your 70s and 80s is likely doable, but don’t push it. I know you can’t take your money with you, but running out of funds to support yourself is a lot worse on you and your kids than leaving them a little.
• Update your Estate Documents. Not to be morbid or anything, but most of the time when people retire, they have a good portion of their life behind them. You need to make sure you have an up-to-date will that fulfills your desires and leaves behind the legacy you intend. As tax laws change, you may need to revisit your will periodically to make sure your plan is still on track. It’s also a good idea to redo your power of attorneys and health care directives as states frequently update these documents. It is not only crucial to have these forms in place, but you also need to have current versions in place to make sure your doctors, hospitals, and financial institutions will honor your intended wishes and listen to those you wanted to act on your behalf.
• Give while you’re living. I know, I know; I just told you to be careful about withdrawing and outliving your nest egg, and now I'm telling you to give it away. The key is thoughtfully balancing your wants, needs, and wishes, and avoiding acting on a whim. Back to my original point though: a colleague of mine often tells people to “Keep giving while you’re living so you’re knowing where it’s going,” and I couldn’t agree more. If you are in a comfortable enough financial position, wouldn’t it make you happier to see your grandson’s excitement if you took him to the Grand Canyon yourself as opposed to having to look down on him through some clouds and pearly gates? Wouldn’t it mean more to your kids if you set aside funds for your new granddaughter’s college tuition right off the bat as opposed to giving them the assets posthumously after they’ve been sacrificing and struggling to save for years? Again, I’m not trying to be morbid, and you need to be careful not to become the sugar momma or sugar daddy for several generations, but at least consider doing what you can, and actually want to do for others you care about, while you are able to enjoy the memories.
• Move on. I recognize I’m still a relatively young guy in this wild and crazy world, but I am often just as much a counselor to clients as I am a CPA or financial planner. I can’t tell you how many people I’ve seen struggle with retirement emotionally. You need to realize that retirement is not just sleeping in and going to the beach. Retirement is a financial, life-changing event. You no longer have a boss (except your wife). You may no longer have deadlines. You may have more free time than you actually want. You may see many workplace “friends” fade into just former co-workers. Many people love retirement from the start, and I hope you do, but it can hurt emotionally. My suggestions would be to find or dust off some hobbies, volunteer with some organizations you care about, find some television shows or a good book, travel, exercise more, and reconnect with some old friends or make some new ones. Most importantly, diligently and patiently work on reshaping your life with your spouse and family. You may not be used to being around them as much as you are in retirement, but they aren’t used to being around you as much either!

I hope you’ve gotten something out of the Now What? series. I encourage you to save these posts and put them in a place where you will periodically stumble across them to see how you’re doing. I’m not saying this because I think I’ve got it all figured out or because my plan is tailor-made for you; I’m saying this because I want you to be able to live a full life and retire in style without always fearing your finances. My suggestions won’t work for everyone, but in many cases, I believe they will get you off to a really good start.

Well, I finished the Now What? series, now what? Guess you’ll have to check back in next week.

-Tom

You Just Had A Kid, Now What?

Credit: Maggie Smith

I love kids. One day I want one; maybe even two. Okay, you caught me, I’d take three, but that’s about as many as I care to think about. My wife and I will be thankful for however many kids we end up having, but we already know kids are hard work.

Take me for instance: I once threw such a fit in a shopping mall that, as my dad carried me out, I started kicking and screaming violently. I’ve been told a cop stopped my father because the officer thought I was being kidnapped… until my mom could set the record straight. There was also a period where I perfected the art of throwing my pacifier under tables to the most difficult spot to reach possible. My proudest moment though, came when a cook at a Waffle House told my parents they would have to leave because their kid was “disturbing the regulars.” Hard to believe anyone could forgive that, but my parents forgave me, and in time, my whole family forgave the Waffle House chain. We laugh about it now.

I hear there is no greater love than a parent has for a child, and as I said, one day I hope to experience it. I look forward to laughing with my wife and children as our family grows and the years roll by, but I can also tell you from professional experiences that being financially responsible for a child is no laughing matter. Today, I’ve got a few quick tips for you after you start having children to make sure you’re not the one saying, “Wahhhhhhhhhh!”

• Increase your savings. Your cost of living just got more expensive. You may have gotten a new tax exemption, but the tax savings will come nowhere close to what having a child will cost. According to new government data, a middle class family may spend nearly $235,000 on a kid from birth through age seventeen. That’s more than most people spend on a house, and that figure doesn’t even include college! Because your living expenses are on the rise, your rainy day fund needs to be on the rise, too. I know formula and diapers are expensive, but even if you are temporarily becoming a one-income family, you have got to adjust to get your savings up to 9-12 months’ worth of living expenses. Your kid could get sick, your car could fail, or you could have a pipe burst in your home. I know increasing your savings will require sacrifice, but it’s not just about you (or even your spouse) anymore!
• Get adequate life insurance. I was fairly serious when I mentioned this last week after buying a house, but now I literally want you to envision me banging my fist on the table. If something happens to you and you can’t work, can your spouse and child live comfortably? How is your spouse going to earn money if he or she is staying home with the kid? How can your spouse keep working and afford for someone to look after your child during the workday? See the paradox your untimely death could put the people you care about most in? You can prevent this danger by getting enough life insurance to eliminate your debts, provide for adequate childcare for a number of years, and provide a replacement stream of income in case, due to unfortunate circumstances, you aren’t able to contribute. Life insurance premiums are often not as expensive as you might think, and can your family really afford you not having life insurance? You could get hurt instead of passing away, so disability insurance may also be worth some careful consideration.
• Get a will. Once again, you really should have taken care of this when you got married, but if you did not, now is the time. I say this not for you or for your assets; I say this because a will is how you name a legal guardian for your child. I don’t know about you, but I want to have some say as to who would look after my offspring should my wife and I pass away. Just a thought, but if you’re going to pay an attorney to draft a will, you might as well finish your estate plan with power of attorneys and health care directives while you’re at it.
• Start saving for college. As I mentioned in a previous post, there are many effective ways to pay for college, but the most important thing is to start saving sooner rather than later. I personally recommend 529 qualified tuition plans as the best technique, as they are relatively easy to set up, and many investment platforms have an option for your investment allocation to change automatically from more risky to more conservative as the child gets older. After the initial setup, all you have to do is save and watch your plan assets, and your child, grow. All that being said, let me reiterate that your retirement plan is more important than saving for your kid to go to college. Putting your child in a situation years down the road where you do not have the assets needed to sustain yourself in retirement can be a lot more emotionally difficult and financially burdensome to your child than asking him or her to apply for scholarships or to pay off their own student loan.
• Teach your kids about money as they grow. This needs to be an ongoing process from not always giving a quarter for every gumball machine, to offering an allowance in return for chores, to encouraging your child to get that first job. Everyone is different, but the “money messages” my parents instilled in me as I grew up to always live within my means, to save whatever I could, and that I could be whatever I wanted, but would have to earn every inch and dime are still with me today. These lessons taught me that I would one day have to spread my wings and fly, and they have molded me into the person I have become. I’ve heard it said that, as parents, you need to remember you are not just raising kids, you are raising adults.

Don’t worry. The diapers and screaming will quickly turn into borrowing your old car and dating. Follow the above steps, teach your kids a little about life and finances, and love them a lot. One day your kids might just fly away, make you proud, and come off your “payroll!”

-Tom

Documents You Need to Have But Don't Want

Credit: David Castillo Dominici

As I was beginning this post, an Aflac commercial featuring Yogi Berra getting a haircut came to my mind. In the commercial, Yogi’s friend asks him what insurance he is chattering about. Yogi replies, “It’s the one you really need to have. If you don’t have it, that’s why you need it.” With apologies to the Aflac duck, this post is not about insurance, but it is about three documents you need to have.

1. Financial Power of Attorney- Everyone should consider having this document in place so that a family member or a trusted friend can manage your financial affairs should something happen to you. Many people shrug this document off, but I ask you this: if you were to have an accident or become seriously ill, are you 100% confident that someone in your life would, or even could, pay all of your bills? What about all those account logins and passwords? Is your spouse even listed as someone the power company can speak to about your account? Without a Financial Power of Attorney, a family member would have to invest a lot of time and money to try to get authorization to handle your personal business if something were to happen to you. With a Financial Power of Attorney in place, even if you take a golf ball to the temple and are incapacitated, an agent you have designated will be able to handle your monthly bills or even more complicated financial affairs on your behalf, without any difficulty or delay.   
2. Advanced Health Care Directive- Everyone should consider having this document in place so that a family member or a trusted friend can make health care decisions for you should you become incapacitated. This document varies from state to state, but it serves two purposes: (1) to give you a chance to outline how you want to be treated or to what extent you want your life prolonged should you become seriously injured or ill (like a living will) and (2) to allow you to designate someone or several people to have the authority to make health-related decisions for you that you are not in a position to make (like a health care proxy). If you remember the Terri Schiavo Case from several years ago, I don’t need to tell you why having an Advanced Health Care Directive is important. If you don’t want family members, friends, doctors, and courts fighting as they try to interpret your wishes, make sure you have this document.
3. Last Will and Testament- In a perfect world, everyone over the age of 18 would have at least a simple will. You need a will to protect your family and protect your assets. The rules are different in every state, but having a will can minimize probate, reduce family conflict, and ensure that your earthly assets end up where you want them. Most importantly, if you have minor children, a will names a guardian that will take care of your most valuable assets.

Thinking about these documents is not fun. Preparing these documents takes time and will cost money, but they ensure that you are looked after. It will be hard enough on your friends and family when these documents have to be exercised, but at least everything will be in place. Having a Financial Power of Attorney, Advanced Health Care Directive, and a last will and testament will give you and the people you care for peace of mind.

Yogi was right about these documents, if you don’t have them, it’s why you need them!

-Tom