Money Mistakes We All Make

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So many of my posts are suggestions and recommendations to do what is financially right. Today I thought I’d head in a different direction and highlight some common financial wrongs. Here is a list of seven of the most common money mistakes I’ve run into, and I’m sad to say I’ve even committed a few of these myself!

• Not Considering the Financial Consequences of Student Loans: It’s so very easy to want to go to a certain college or institution or to get a specific degree, but will you really be able to get a job that pays enough to justify the expense? Far too many people sign up for mounds of student debt without considering the monthly debt payments and the length of those monthly debt payments versus their expected incomes when they are trying to decide what college to attend and what degree to obtain. It’s also important to make sure an advanced degree will equate to enough additional earnings to justify the expense.
• Postpone Saving: If ends are meeting, but there’s not much leftover, it’s easy to fall into the rut of saying that you’ll start saving just as soon as you can. This is dangerous because life magically seems to always be getting more expensive. No matter your income or lifestyle, finding a way to save a little each month is really the only sure-fire way to get ahead and make financial progress towards your goals.
• Too Much Car: Even after thoughtfully considering your finances and researching cars online, after taking a test drive at a dealership it is really easy to crave the better model with the premium wheels and entertainment package. Get what you need, not what you don’t. Additional money spent on a slightly nicer ride could go to a lot more critical financial goals such as establishing a rainy day fund or saving for retirement.
• Rush to Buy a House / Too Much House / Furnish Too Well Too Quickly: Buying a home too quickly can really strain a person’s finances. The goal should not be to live like you want to eventually live when you retire; the goal should be to live. Just like buying too much car, buying too much house is also really easy to do. Being a new homeowner brings a list of new expenses, large monthly mortgage payments can be daunting, and you can’t always count on the price of real estate going up. As you are furnishing a house it’s important to go at a reasonable pace and decorate things as you can, not just a bunch of junk all at once or a bunch of fancy things that torpedo your cash or create recurring credit card debt. A new house doesn’t have to look like Pinterest or Southern Living overnight!
• Children, but No Wills: Once you get married, you should probably have a will. Once you have kids, you should definitely have a will! A will is how you name guardians for your children, and even though it is the last thing you probably want to do between sleepless nights and sippy cups, it needs to be done. Wills also help make sure your spouse is looked after and your final wishes will actually be fulfilled.
• Being Too Risky / Getting Too Defensive: So much is written, and rightfully so, about investors who get too risky and end up losing large portions of their investment portfolios. I won’t pile on further to that rant today, but I will offer that I think there should probably be a little more written about investors who get too defensive and end up spending down their assets and losing their purchasing power because their portfolios don’t generate enough growth. Portfolio growth is a function of interest, dividends, and appreciation; interest and dividends alone may not be enough to help you maintain your lifestyle.
• Waiting Too Long To Move on Your Own Terms: Very few people want to move to the smaller house, the retirement center, or the skilled nursing facility, but there’s a lot to be said for moving when you can versus moving when you have to. Although often an emotional decision and process for the mover(s) and their family, doing so at your own pace and at your own accord is often a lot smoother and more dignified than waiting for a fall or other “triggering event.”

We all make mistakes, but now there’s no reason for you to make these!

-Tom

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

The Lightning Round: Round 4

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Thanks to all of you who submitted a question. Now, without further ado, here are my responses to five of your questions...

1.) I am looking at getting a new car, but I can’t decide how much I should spend. Do you have any tips?                                                                                                       
                                                                                                                                           - Hayley

How much to spend on a car or how much not to spend on a car, that is your question, and it’s a good one! Strictly financially speaking, I’d recommend you take a close look at your monthly income and your monthly expenses, and see how much extra cash flow you usually have on hand at the end of each month. Let’s say you find that number to be around $500. Then I would recommend you make sure you buy a car that allows you to have a monthly loan payment of less than $500. You should talk to the dealership or your local bank to see what kind of car loans and interest rates you could qualify for. That will help you calculate how much car you can probably afford to buy and still make financial progress month to month. If you are one of those people who saves up to buy a car and doesn’t need a loan, I’d recommend that you make sure you will have enough cash in the bank after your purchase to cover somewhere around three to six months’ worth of your living expenses.

 

Outside of the financial nuts and bolts, I would like to share a couple of other thoughts. First, it may not make sense to get a certain brand or a certain model if it costs a lot more than a very similar brand’s equivalent or the next best model. For example, my Jeep is a souped-up less expensive model that has almost everything the more expensive model has on it except the model name. Second, it may not make sense to go with a lesser brand or lesser model than you really want if you can afford it and the savings are only a few thousand dollars. A few thousand dollars is nothing to sneeze at, but if you will be driving your car for the next 10 years (like most people are these days) it might be nice to drive something you are excited about and proud of!

 

Please let me know if you would like to discuss this further or talk about your specific situation.

 

2. Other than a will, what are some other things someone can do to be prepared if they pass away?
                                                                                                                                        - M. Tyler

So often when someone passes away they leave behind a very large and time-consuming mess for their loved ones. This is not intentional, but throw in a few surprise accounts or insurance policies, a few calls to Social Security, and a house full of possessions, and a monumental task is often what heirs, and certainly the executor, inherit first!

Outside of a current and well-drafted will, there are a few things you can do. One, you can make sure you have your primary and contingent beneficiaries in place for any insurance policies, annuities, and retirement accounts you may have. Remember, this is critical, as beneficiary designations trump a will, and if there is no beneficiary designation in place, assets might not be distributed how you want or intend. Second, you can give away special possessions/heirlooms that are below the annual gift exemption ($14,000 for 2015) while you’re still alive to make sure they end up where you want them. You could also potentially direct the distribution of certain special possessions in writing after death as long as your will allows it (consult with your estate attorney to make sure you have the proper language). This can help reduce the chance that two sisters will be fighting over a plate “mother wanted them to have.” Third, having a list of who you want as pallbearers, who you want to officiate your services, what hymns you want sung, and what you would like your obituary to say can also be of great benefit and relief to your grieving survivors. Fourth, having a list of important people to contact in the event of your death with their applicable information can really help your family, too. Finally, selecting and prepaying for your burial/cremation arrangements can also ensure that you get what you want and you don’t create an immediate financial burden on your loved ones at the time of your passing.

I hope this is what you were looking for. Not a happy topic, but certainly one worth considering.

3. What do you think about what’s going on in Greece? Will the European Union last?
                                                                                                                                               - John

I’ll be happy to share some thoughts on this, but this is obviously just my opinion.

I forget exactly what I was reading or where I was, but someone once explained the Eurozone problems to me with a very powerful example that I’d like to now share with you. Essentially think about the United States, a union of states, versus the European Union (EU), a union of nations. If you were to stop and ask a stranger from Georgia and a stranger from North Carolina what they are, what would they tell you? They would probably both say they were Americans; not Georgians or North Carolinians. If you were to stop and ask a stranger from Germany and a stranger from France what they are, what would they tell you? The German would tell you he is a German, and the Frenchman would tell you he is French. See the difference? This is why I think the EU may always have some serious problems.

I think the situation with Greece is too far gone to be worked out unless the rest of the Eurozone just flat out forgives their debts. The Greeks are tired of the austerity measures, and the Germans are tired of loaning money to the Greeks. Greek and German politicians know this. They keep kicking the can down the road and putting band aid after band aid on the problem, but eventually I think there will be a “Grexit,” a humorous and witty term that many have already come up with for Greece’s eventual exit from the EU. I guess we'll have to wait and see what this next round of called Greek elections holds.

As far as the EU, there are a lot of powerful people and countries that really want this to work, so it may continue to exist for quite a while. Personally, as I read about the unemployment and economic contractions going on in other counties such as Spain, Italy, and Portugal, Greece looks a little like the first domino to me. I think Great Britain may have been very wise to have joined the political union, but to have stayed out of the currency union when they joined the EU. There are simply too many little economies and country-specific industries in play. That said, there are still high-quality and thriving companies in Europe, and some countries such as Germany are still doing very well. My best guess, however, is more political, economic, and currency storms are on the horizon. Stay tuned!

4. Are you worried about robo-advisors?               
                                                                                                                                   - Anonymous

A timely question, and one being discussed by many in my industry. For those of you not familiar with the term “robo-advisor,” a robo-advisor is an investment platform that allows an investor to have their portfolio managed online with little to no human intervention. Robo-advisor platforms, such as Betterment or Wealthfront, have made a splash in the brokerage industry by being less expensive, more user-friendly, and more interactive than most of the traditional investment management platforms offered by human advisors.

Am I worried about robo-advisors? Not really. I think their popularity may cause human advisors to step up their game, but as braggadocios as this may sound, I really don’t think a computer can do all that I do. Investment allocation is just a piece of what I help clients with (there’s also tax planning, cash flow planning, estate planning, insurance planning, scenario analysis, and lots of decisions where both finances and emotions both need to be considered), so I really don’t feel that threatened. I’m also very curious to see how robo-advisors do when we get a cyclical market downturn, and investors want to be reassured that the sky is not falling. I want to see what robo-advisors say when a client needs to decide whether to save for their children’s education or retirement. I want to see what robo-advisors say to a son trying to gain control of his late father’s account. If the robo-advisors’ support staffs start taking client calls – and I think they will have to – they will have to raise their prices, and suddenly, they won’t be so robo anymore!

I am also skeptical of robo-advisors because I’ve already seen some of their shortfalls first hand. For example, I had an individual bring me an account that they had elected to rebalance after every deposit. Well, with a little bit from each paycheck going into their account, that meant they rebalanced 24 times in a year, resulting in a lot of tiny, annoying, and tax-inefficient short-term capital gains having to be recognized at ordinary income tax rates. By selecting a friendly looking box to rebalance offered by the robo-advisor, this investor incurred additional trading fees, higher taxes, and a much more complicated tax return than was likely necessary. The investor meant well and knew it was prudent to rebalance his portfolio periodically, but any decent human advisor wouldn’t have allowed a portfolio to be rebalanced twice a month!

I may be in the minority of financial advisors out there who think this, but I’m sort of excited about robo-advisors. I think they can be a helpful tool so people invest sooner rather than later. I think they can make basic analytics more available to more people. I think their gadgets and apps will help modernize some of the ancient and confusing monthly statements being generated by large investment custodians. As a CPA who lived in the world of Turbo Tax and now a CFP in the world of robo-advisors, I welcome the technology and I encourage you to carefully try it, but my caring, easy-to-understand, and customized-to-working-with-you human self will still be ready to take your call when you need me!

5. What about you? What are you most worried about as far as your finances?                
                                                                                                                                    -Kristin

Hey now! I’ll be the one asking questions around here. Just kidding! Thanks for the question!

I’m worried about a lot of things. I’m worried about the new expenses my son just brought into my monthly budget. I’m worried about the mortgage my wife and I took on when we moved. I’m worried if we’re saving enough for retirement considering neither one of us has a job that offers a pension, and I’m less than bullish on the chance of us receiving any meaningful Social Security income by the time we qualify.

How do I sleep with those worries? We spend less than we make. We save as much as we can. By growing our family and buying a house we’ve made a bet on ourselves, and I have faith we can do it.
Sure, there will be hard times and bumps in the road, but I believe we can do it. And I might or might not have a pretty sophisticated financial progress spreadsheet somewhere...

If you build up an adequate rainy day fund, you adequately insure your family should there be an unexpected death, disability, long-term illness, or liability, and you have an adequate estate plan in place to execute your wishes and desires, there’s really not much left to do. Do the best you can, live below (or at least within) your means while still making memories and enjoying experiences, and carry on. Monitor your progress and adjust your strategy as necessary. That’s what I tell clients, and that’s what I do myself.

Still, I do savor diaper coupons, I can’t wait to be debt-free, and I’m not above picking up pennies in the parking lot (heads or tails).

Thanks again for all the questions. Remember, our series on “Normal Investors” starts next week. I hope you’ll check it out because I’d be willing to bet that there is a pretty good chance you aren’t as normal as you might think. Just saying!

-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

Keeping It in the Family

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A common goal of many of the clients I serve is keeping “it” in the family. No, that’s not a south Alabama reference; I’m talking about keeping heirlooms, assets, and wealth inside the family clan. There are many financial aspects that families need to consider, and some may require complex, technical, and creative solutions to get the intended job done. My intent in this post is to scratch the surface and bring a few common issues I’ve seen to your attention.

Annual exclusion gifting- In 2014, you can give $14,000 or less to another individual, and it will be exempt from gift tax implications. This is a great way to keep assets in the family, as the transfer is exempt from gift taxes and can reduce the assets of older family members that could potentially make up an otherwise taxable estate. However, this practice can also create problems if the recipients start feeling entitled to the gifting or become dependent on it and the donor can’t bring themselves to cut off the giving if their own financial situation becomes less favorable.

Unintended Will Consequences- Leaving things to family members by will is also a great and somewhat obvious way to keep things in the family, but there can still be problems. What if you leave your residence to your two kids 50/50 and one wants to sell it and one wants to keep it? Your bequest just became a family feud! What if your will leaves all of your assets to your second wife and her will leaves all of her assets to her kids from her first marriage? If you have kids from your first marriage and predecease your second wife, your kids could be totally left out if the proper estate planning is not in place! What if you leave all of your stuff to your daughter and she couldn’t care less about your beloved coin collection that your brother would love to have? Without specifically bequeathing personal effects, the possessions that some people in your family view as treasures could be treated as trash, literally!

Forgotten Beneficiary Designations- What if you forgot to change the beneficiary designation of your company’s life insurance policy to your second husband after you remarried and the proverbial bread truck comes by? Forget you look like Wile E. Coyote - your second husband would be left without an asset he could have really benefited from while your regrettable ex-husband would be the recipient of a most pleasant and unexpected surprise! Remember, beneficiary designations trump your will!

The “Tax Bite”- There are numerous strategies that you can employ right before the end of your life (and even at death) to reduce Uncle Sam’s potential income and estate tax bites out of your estate. Less tax means more money to your charities, causes, and heirs. Uncle Sam’s share can be sizable, so tax planning should always be considered if you want to keep as much in the family as you can.

Closely Held Family Business Succession- If there is a closely held family business involved in your affairs, there definitely needs to be a clear succession plan in place to ensure the business entity stays in your family or at least compensates your family. Far too often when a business’s founder or leader passes away, a family disagreement between heirs with different objectives, expectations of the business, and degrees of interest or experience with the business comes to light. If the business just automatically goes to the spouse, that person could be forced into a position they don’t want to be in, or frankly, aren’t good at. Think of how painful it would be for the former business owner looking down to watch the value he or she painfully built up brick by brick fall apart, fail, or become a relationship strain for their family.

Annual exclusion gifting, careful will considerations, proper titling and beneficiary designations, advantageous tax planning, and thoughtful family business succession planning can help keep it in the family. Many people don’t want their heirs to know too much, and I totally get that, but I’d also counter that you don’t want your heirs to know too little either. I’ve heard it said that people spend forty years accumulating assets, twenty years trying to preserve assets, and about thirty minutes figuring out how to distribute their assets. If you want to keep family peace, leave the legacy you intend, and keep as much of your wealth in the family as possible, I’d advise getting together with your financial advisor, estate attorney, and accountant to take a look.

-Tom

Per Stirpes or Bust

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Do you have a will that leaves things to friends and family you care about? Do you think there is a pretty good chance you might inherit some money from someone who is still alive? If you answered yes to either or both questions, listen up!

Say you have a will and you wish to leave your fortune to your three sons: Alvin, Simon, and Theodore. Say Alvin, Simon, and Theodore have all grown up, and each has a son of his own. Well, if you wrote your will to state that the remainder of your estate was to be divided up equally between Alvin, Simon, and Theodore, what would happen if Alvin died before you had a chance to update your will? If you had the Latin legal phrase known as “per stirpes” included in your wishes (which means “by root or representation”), then Alvin’s son would inherit Alvin’s portion, and Simon and Theodore would inherit their portions. If you do not have per stirpes written, and instead have the phrase “per capita” included in your wishes, then Alvin’s son would get nothing, and Simon and Theodore would split your estate 50/50. Talk about a family feud! If you don’t have “per stirpes” or “per capita” included in your wishes, and Alvin died before you, I honestly couldn’t tell you how your will would pay out without carefully reading the entire document.

I’m not writing this today to scare you to death so we can see how your estate plan shakes out. I’m writing this to encourage you to dust off your latest will and make sure it actually reflects your last wishes, whether per stirpes or per capita. If you think you might inherit some money from someone who is still alive, I encourage you to figure out a way to share this post or drop some sort of hint to make sure your heirs are looked after should something happen to you before your likely grantor.

Finally, please make sure your retirement accounts (401(k)s, IRAs, deferred compensation plans, etc.) and life insurance policies’ beneficiary designations also reflect the last wishes of your will. This is imperative because retirement accounts and life insurance policies' beneficiary designations trump a will. For example, if your 401(k) beneficiary designation says Alvin, Theodore, and Simon per capita, and your will says everything to Alvin, Theodore, and Simon per stirpes, your 401(k) will actually be split per capita! Remember, that would mean your grandson (Alvin’s son) would not see a dime from your 401(k) should Alvin predecease you!

Most of the clients I work with seem to want “per stirpes” to be in place, but that is neither right nor wrong. If you want to ensure that only the people you have specifically named will be able to initially receive your assets, it’s perfectly fine to have “per capita” in place. I just want to encourage you to take a look at your will and beneficiary designations if you are not sure what you have in place because relying on the defaults could lead to your final wishes being skewed and some pretty unhappy chipmunks.

-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

You Just Got Married, Now What?

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Marriage is amazing. It’s even better than I imagined. That being said, I can definitely relate to the title and sentiment of this post.

To be exact, it hit me on the flight back from the honeymoon. I had just finished an amazing week in a Hawaiian paradise with my beautiful bride. Life was good. There she was sleeping soundly through the slight turbulence that had awoken me. It had been a great time, but it was time to drop her back off at her place and get back to my plans, right? No? I honestly remember thinking, “Oh yeah, I’m married to her. Now what do I do?”

Many of my friends have shared having their own “Aha moment” similar to mine, where they realized what they had done by getting married. Can you relate? I hear that from the “Aha moment” forward it’s a wonderful, lifelong journey, but always a work in progress, and after a few years of marriage, I believe it. This is a long way of saying that I do not have all of your marriage answers, but I might have a few ideas that can help your financial matrimony. Here are a few suggestions:

• Have a Plan. This is by far the most important nugget I can offer. In a perfect world, part of this discussion would have probably happened before saying "I do," but making a plan shortly after marriage while you’re trying to get your name changed and write all those thank-you notes will be just fine. You need to decide which accounts to combine and which to keep separate. You need to be in agreement on what is going to be saved, know who is going to handle what expenses, and decide in what order your large, post-marriage expenditures are going to be addressed. I know couples who smash everything together. I know couples who keep everything separate. As long as it works, either is fine, but I personally would combine as much as possible. It’s easier to keep up with, it’s more transparent for both spouses, and at the bare minimum, it means less mail telling you that you have been pre-approved to buy the country of Lichtenstein! If you are completely truthful and talk about your finances frequently with your new spouse to ensure you are sticking to your plan (or adapting appropriately), I can almost promise you the rest will eventually work itself out.
• Develop a Budget. Guys, you may no longer be able to save up money for golf by eating at Taco Bell three times a week. Girls, guys are always going to be in shock at how much it costs to do your hair. Now that those two bombshells are on the table, let’s move forward. Make a budget, just like you did or should have done when you were still flying solo, and stick to it. The good news is there are hopefully two incomes and a few duplicate expenses that can probably be eliminated by living together and combining your finances. The bad news is you have to mesh two spending/saving/investing philosophies into one or else this could be a battle for the rest of your marriage. Keep trying to save at least 10%, keep donating or tithing if you choose to, and keep making those Roth IRA contributions and at least maximizing your employer’s 401(k) or retirement plan match like we talked about last week. I know you need to buy furniture, but it comes a piece at a time. I find many newlyweds (myself included) have this itch to try to live like their parents from the very beginning of their marriage. Please realize that it took your parents years of saving, sacrificing, and working to achieve the lifestyle you were born into. Instant gratification and spending can feel good, but it can set you back terribly. Also, keep paying off all those credit cards and obliterate any remaining student loans or car loans that are hovering. In my book, the only long-term debt you should be considering is relative to buying a home.
• Buy a Home. If you are uncertain about your job or you and your spouse aren’t fairly certain about where you want to live for the next 5-10 years, you might be able to skip this paragraph. I just know that I would be remiss to not address buying a home since this is so high on many married couples’ lists. What I can tell you is that in the short term, renting is better, and in the long term, buying is better. Here is an interactive graph by The New York Times that may help make my point and will give you the chance to examine your particular situation. Buying a home is a great way to work towards building equity and is a life goal for many people, but it is a decision that warrants careful consideration. With historically low interest rates and many discounted properties out there right now, it may still be a good time for you to buy, but make sure you can afford your obligations. By purchasing a home you will have a monthly mortgage payment, you will have to purchase homeowners insurance, and most painfully, you won’t be able to call the landlord to fix something when it breaks. Another consideration you will need to make will be relative to your life insurance and wills. If you purchase a home, you will at least partially own a fairly large asset, and with that large asset, comes responsibility. You must make sure you and your spouse can afford to keep that asset should something happen to either of you by likely taking out life insurance policies on both of you that exceed your loan amount. You must also make sure you and your spouse can easily and clearly keep that asset should something happen to either of you by likely drafting wills. I’m not trying to scare you from buying; my wife and I bought a home ourselves. I’m just telling you that home ownership costs more than you ever think, so save, save, save, and don’t rush into anything you could regret.
• Save More. Whether you are saving up for that home down payment or not, my suggestion to save more deserves its own bullet point. I advised you to work towards having at least $10,000 in a rainy day fund as a bachelor or bachelorette, but it’s time to up the ante. After you’ve made that marital budget, you are going to want at least 3 to 6 months' worth of living expenses. In this crazy world, lean towards 6. After you have that saved up for emergencies only, your additional savings can go towards new pieces of furniture and buying things no one gave you off your wedding registry. After those expenditures, your additional savings can go towards debt principal payments, into a home purchase fund, or towards savings for the next car.

Of course, you could always start saving money for a baby fund. Wait, that’s next week…

-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