IRA's

All IRA’s Are Not Created Equally

The individual retirement account (known as the IRA) was created to allow people to stash away money for retirement on a tax favorable basis. There are a variety of IRA’s, some are specifically for individuals and others which serve business owners. There are numerous financial institutions, from banks to mutual fund companies to brokerage firms that will allow you to open such an account. Most people might not be aware of this but there is a huge difference between a bank IRA and a brokerage IRA.

Bank IRA’s are a great place to put your retirement dollars if you are looking for safety and security. Such accounts are going to utilize certificate of deposits (CD’s) or other safe options like money market funds to invest your dollars. You can be assured that having your money here, you will not lose a cent. Plus having your funds placed there allows them to be protected by the Federal Deposit Insurance Corporation (FDIC). Some banks may offer riskier options, like mutual funds (which are not covered by the FDIC), but primarily the safe options are what you will typically see. This doesn’t seem like a big deal on the surface, however, playing it too safe with your retirement dollars could hurt you in the long run. Banking solutions by their very nature are low-yielding, thus this will subject you to purchasing power (your dollar today won’t be worth much in the future) risk over time due to inflation. IRA’s were designed with the intent of being utilized as a long-term financial instrument, which means it isn’t wise to use CD’s or money markets (which are more geared towards short-term goals) to fund your retirement.  A bank IRA makes perfect sense if you are within a couple of years of retirement because you can’t afford to be too risky simply due to the fact that you don’t have enough time to make up any losses. Or, if you just don’t have the appetite to really take any substantial risk with your money, this option is also appropriate.

The brokerage IRA enables you to purchase securities… stocks, bonds, mutual funds, exchange-traded funds (ETF’s), etc. However, by purchasing securities you are adding more risk to the equation. Unlike the bank IRA, you could lose some of your initial investment and you will see your account balance fluctuate over time. This usually scares people but have you ever thought about your retirement account in this manner… what if retirement is 10/20/30 years away, and the market is down and as a result, so is your account balance. If you’re not at retirement age, meaning you have absolutely no need for these funds, then you have only “lost” on paper. Why exactly are you worried? Most people don’t have a good response to that, thus we need to change the way we think about short-term news in relation to our long-term accounts.

No one individual has control over the stock market, but over the long-haul, having money in the stock market can be extremely rewarding for your brokerage IRA. The neat thing about the brokerage IRA is that you are able to invest in a money market type of fund, along with the other riskier solutions. The one thing you want to avoid is having a brokerage IRA open and ONLY having money market funds within it. This happens quite often because people will rollover funds from an old 401k or 403b and the money will just sit in a money market fund (which is the default), not being invested. Or, they will open a brokerage IRA, fund it, and never make a decision on what to invest in. Take full advantage of all your options within the brokerage IRA.

timeless tips

5 Timeless Financial Tips

Most people would agree that discussing your finances can be extremely challenging. The biggest hurdle that plagues us…getting started. Just like with anything else, when it comes to beginning your journey to financial glory, you must set a goal. Once the goal is set, now it’s time to take action.

Of course, there is no “one-size fits all” type of approach, and no matter where you are in your life, you may need to address one or all of the following as it applies to your financial game plan:

(1) Create a spending plan (also known as the budget).

How much do you earn? How much do you spend? How much are your bills each month? How much do you save/invest? Try your best to stick to a spending plan each month and have someone hold you accountable when you do not stick to it. Please do not beat yourself up if you don’t stick to it each month because it’s hard to change your spending habits overnight. Grade yourself on a 3-month basis because if you can manage this over an extended period of time, then guess what, you’ve created a brand new habit! And if the conventional way of “budgeting” doesn’t work for you, consider an alternate strategy, like the 50/20/30 plan.

(2) Pay off credit card debt.

We all know that credit card companies make money off the interest they charge on your account. Here are a couple of tips: 1) Stop spending money that you don’t have; 2) Pay off the card with the highest interest rate; 3) Consider paying off the smaller balance (this will give you the emotional jolt to continue to fight against the larger balance) 4) If possible, pay more than the minimum payment each month. 5) Try the debt-snowball technique

(3) Build an emergency fund.

Make sure to have between 3-6 months worth of living expenses saved at all times. Or for those over-achievers, considering having 9 months to 1 year’s worth. This may be a challenge, but you will never be upset with yourself for saving money when an actual emergency pops up.

(4) Determine personal insurance needs.

Many people may be uninsured or under-insured and this could prove detrimental to your overall financial game plan if the unexpected happens. Consider your situation and see if life insurance and disability income insurance provided by your employer will sufficiently cover your needs. If need be, consider owning personal insurance outside of what is offered through your job. Please note that if you change jobs – or lose your job – typically, you will lose those employer-provided benefits, because the employer is paying the premiums, thus you don’t “own” the policy. Personal policies can help ensure that you’re protected, no matter where you work or what happens with your job situation. Also, your age and health play a HUGE role in how an insurance company will set the price of their policy, so please keep that in mind.

(5) Begin/review your retirement plan.

We all work extremely hard, but what do we have to show for all our years of service? Many companies are doing away with pension plans, thus the responsibility of putting money away for retirement falls on our shoulders. Take advantage of your employer-sponsored retirement plans like a 401(k) or 403(b) because these plans allow you to invest monies tax-deferred. A nice advantage of these plans is that they take money out of your check before you get paid. There are also ways to save for retirement outside of an employer-sponsored plan. Consider opening an IRA (traditional or Roth) or a brokerage account. An annuity or life insurance contract could also be an option. If you decide to save for retirement outside of or in addition to your employer sponsored plan consult with a financial professional as you’ll need to be aware of contribution limits, tax treatment, and how the accounts work.

5 estate planning

5 Important Estate Planning Documents

One of the most valuable gifts you can leave your loved ones is a properly prepared estate plan. During your lifetime you will have worked hard to acquire various assets (hopefully) and when you leave this earth, the choice is yours about who/what gets those assets. However, this won’t happen without the proper planning. Don’t leave it to the state to make decisions about what happens to your assets upon your death. The first thing you should do is touch base with an estate planning attorney, as they will be well versed in the legal requirements for the state in which you reside.

Here are 5 estate planning documents that you should familiarize yourself with:

1.      Last Will and Testament – a will is a legal document which allows you to:

  • Designate who will receive your assets after your death; this avoids having your assets divided according to the state’s formula
  • Nominate an executor; they will manage your estate, pay your expenses, debts, taxes and distribute your estate according to the instructions in your will
  • Nominate a guardian for your minor children

2.      Durable Power of Attorney for Health Care

  • With this document, you name a person of your choice, and who has agreed, to make medical decision for you and to act in your behalf in health care matters is you are unable to make those decisions. This authority expires upon your death

3.      Revocable Living Trust

  • In a revocable living trust, your assets are transferred into a trust, generally administered by you for your benefit during your lifetime and transferred to your beneficiaries upon your death, without the need for court involvement. Your Last Will and Testament, which is supplemental to your trust, covers any assets that have not been transferred into the living trust. A revocable trust allows you to retain control of your assets during your lifetime, quickly transfer them to your beneficiary upon your death and avoid the expense and delay of Probate Court. This trust also helps to reduce or eliminate any federal estate taxes.

4.      Durable Power of Attorney for Property Management

  • This document designates and authorizes a person of your choosing to make financial decisions and manage your assets on your behalf to the same extent and effect as if you were present in person. Durable means that they may also act for your in the event you become incompetent or incapacitated.

5.      Living Will

  • A living will allows you to state your desires regarding the use of life-support devices to prolong your life in the event you are stricken with a terminal illness or when there is no reasonable hope for recovery from an injury or illness.
you need a planner

You Need A Financial Planner

Financial planners were put on this earth for one reason, to help people get and keep their financial houses in order. But so many people avoid financial planners. Why exactly is that? Are you one of those people who thinks you’re better off on your own? Perhaps. Are you the person who says you don’t make enough money, therefore there’s no need for you to meet with one? Or maybe you’re the person who says “I don’t want someone all up in my business.” Whatever your reason, you should seriously consider having a conversation with a financial planner because the data doesn’t lie! As a society, we are seriously failing at financial planning.

If you have some time, go research this piece that the National Association of Personal Financial Advisors published back in 2012. The findings are quite disturbing. In that piece they reference an organization, the National Foundation for Credit Counseling, who conducts an annual consumer financial literacy survey. Take a look at their survey from 2013 and 2014. It should come as no surprise but year after year, the numbers continue to be extremely disappointing. And, if you’re wondering how things are going today, not much has changed. On the flip side, this should encourage any financial planner to continue to reach out to and follow up with their clients, ask those tough questions and challenge their clients to be a better financial stewards.

Financial planning shouldn’t be something that we fear, but something we should embrace. If you are someone who doesn’t have a plan, you need one. If you’re someone who already has a plan, maybe you’re overdue for a review. No matter your situation, having a financial game plan will most certainly guarantee you financial independence (however you define it) at some point in your life. And just like that old adage says, if you fail to plan, you plan to fail.

understand bene's

Understanding Your Benefits is Important

When you get a job, your employer may have informed you that aside from a paycheck, you will be receiving some additional benefits. Some of the most important benefits a company may offer comes by way of insurance. For this article, I want to focus on life and disability insurance. Determining what insurance benefits you select will depend on your unique situation. Keep in mind, some employers may give you numerous insurance options to choose from, while others may offer the bare minimum. Nevertheless, read through the entire benefits packet that they give you!

Most people are well aware of the importance of health insurance but not so much when it comes to life and disability insurance. Here’s a recommendation…take some time to truly determine how much life and disability insurance you need. The life insurance that’s offered through your employer is the cheapest that you will find, typically because your employer is fronting most, if not all, of the premium payments for you. You will generally find that they may offer flat rates of coverage at varying cost to you or they may have it where you’re entitled to an amount equal to one or two times your salary. If what they are offering isn’t enough, consult an insurance agent to determine how much additional coverage you need to fill your gap. Having adequate life insurance is of the utmost importance because if your household has two wage earners and one passes away or the breadwinner of your family was no longer here, the remaining family members would most certainly appreciate having money for the final expenses and the ability to maintain their current lifestyle. The grieving phase will be challenging enough, but adding financial troubles into the mix, just makes things that much tougher on your family.

When it comes to disability insurance, the same rules apply. Your employer is fronting most, if not all, of the premium payments for you. Many of us don’t see the value of having disability coverage, but here’s some food for thought. If you were seriously sick or injured and unable to work, how would you pay your bills? If you answered that question by saying you have an adequate amount of emergency funds (3-6 months worth of expenses) saved, then you may be okay. If you don’t have such an amount, then disability coverage becomes your savior. Essentially, it enables you to maintain your current lifestyle. What happens for the majority of people is that they fail to have the all-important emergency fund, which results in them having to tap other resources like their investment or retirement accounts, or credit cards. None of those sources should be utilized if at all possible. Your employer may only offer short-term disability or a combination of short and long-term disability coverage. Remember, read your benefits packet because this is something you need to know. Again, just like with life insurance, if what your company offers isn’t enough, consult an insurance agent to determine how much additional coverage you need to fill your gap. [Just so you know, you will never be able to get 100% disability coverage, primarily because if you could get 100% of your earnings without working, you would never go back to work.]

Having a firm grasp of your insurance offerings through work is critical. There may be gaps within your overall insurance plan and you need to make sure they are filled. Insurance is THE foundation of a financial plan. If you are not adequately protected, then you are putting your investment and retirement accounts in serious jeopardy. Think of it this way, if you were going to build a house, would you start on the second floor? Of course not!! You set the foundation, which allows you to build the remainder of the house. There have been numerous studies conducted about the staggering number of people who are under-insured in this country, please don’t let this be you. If you don’t care about insurance studies, ask a family member or close friend if they or someone they know has been negatively impacted by having an inadequate amount of insurance…then you will understand.

taking inventory

Taking Inventory

Getting your financial house in order is a goal that most people set for themselves. Of course, not everyone will gets things in order at the same stage in life. Like anything else, most people will do things when they are ready, not when some financial professional tells them to do so. Or they will decide to take action as a response to a life event. Here are a few examples. Let’s say you have a friend (who has young children and a spouse) that passes away unexpectedly. After witnessing that, you then decide to get serious about having adequate life insurance to protect your family. Or you have a co-worker who is getting well into their golden years but still HAS to work because they didn’t save/invest appropriately for retirement. Only then do you decide to start taking retirement planning seriously.

No matter your excuse or fear around financial planning, you must take it step by step. You have to crawl before you can walk and you must walk before you can run.

Completing a personal balance sheet is the “crawl” step that everyone should take. This document, which can be found pretty much anywhere on the Internet, is really easy to do. It’s going to require you to list everything that you own (assets) and everything that you owe (liabilities). And, with some basic math (assets – liabilities) you will be able to determine your personal net worth.

Taking this “inventory” enables you to focus on where you need to start as it relates to your financial plan. Plus, as you continue to move forward with your financial plan, this can serve as your barometer of financial fitness. The goal is to continue to grow your assets, while decreasing your liabilities.

Some experts will recommend that you update your balance sheet once a year. However, if you are the type that needs more frequent feedback, perhaps you should consider updating your balance sheet quarterly or twice a year.

rtmnt crisis

The Retirement Savings Crisis

The National Institute on Retirement Security produces research studies and their primary focus is, you guessed it, retirement. They published a study back in June 2013 entitled “The Retirement Savings Crisis: Is It Worse Than We Think?” and it was startling to read through the key findings of the report. If you get a chance take a look at the report and even if you’re not in the financial services business, the data is highly disturbing. They produced another study in December 2013 about Race and Retirement and that study was even more frightening. Honestly, year after year, the updates on the data they produce, doesn’t get much better.

The first key finding from that report stated that 38 million working households have NO retirement account assets at all. The sad thing, that number includes workers who are offered a retirement plan through their employer but who refuse to put any money into the plan. It’s understandable that some companies do not offer a retirement plan, thus the individual is responsible for setting something up on their own. If you’re employer offers you a retirement plan and you’re not putting any money into, then you need to have a serious discussion with yourself or someone about why. If you don’t know how to get started or have the slightest idea as to what you’re doing, your benefits department will be more than happy to assist you. They’re providing you the 401k or some other retirement plan and they will gladly walk you each step of the way. If not them, then the plan sponsor (the company hired to offer the retirement plan) can provide you that assistance. Please make that phone call, send an email, find a co-worker who understands the retirement plan, do something.

For those people who are not offered a retirement plan through their employer, then you must seek out someone on your own to help get you squared away. There isn’t a shortage of financial services professionals in this country. And if you don’t want a professionals help, there are a plethora of do-it-yourself options available. Either way, there is absolutely no good reason as to why you shouldn’t have some of your money in a retirement account. If you are still unsure as to why this is of the utmost importance, ask yourself one question… After all your working years, wouldn’t you like to have something to show for all those hours you worked??

Retirement planning applies to every working individual in this country. If you’re just starting out in your career, then time is on your side. It doesn’t take a ton of time for you to do this, but it does involve making a commitment. So many people say that they don’t have time to do this planning, which is bologna. There is more than enough time within a year (8766 hours) for you to work on your retirement plan. Not taking your retirement plan serious is just not cool. There are similar studies done and year after year and the data never seems to improve. We can most certainly do better, simply by asking ourselves one simple question…

How much time did you spend this year or last year planning for your retirement?

219

The Rule of 219

Retirement planning applies to every working individual in this country. If you’re just starting out in your career, time is on your side. If you’re halfway through, then you should be regularly doing a retirement checkup. If you’re winding down, hopefully you are adequately prepared to enjoy your golden years.

If you don’t think retirement is important, look at some of the research reports from the National Institute on Retirement Security. If you don’t have time to read each individual report, peruse the executive summary and you will get a good flavor of just how horrible this country is doing on the retirement front. That information will blow your mind!

Without proper retirement planning, that virtually means you have only a few options

  1. you need to receive an inheritance
  2. you need to win the lottery
  3. you will or plan on working forever
  4. you pass away the day after you decide to retire

Most people will probably frown at options 3 & 4 and many of us won’t have the luxury of option 1. Option 2, good luck because the odds are definitely not in your favor. People don’t have much saved for retirement because they never set a goal. Plus, we have absolutely no clue how much money we are going to need in retirement.

There are so many variables that you simply can’t plan for, but as a starting point, search “retirement calculator” in your internet browser and play around with the numbers. At least that’s a start. But just to put things in perspective, let’s do some simple math in relation to the amount of money that we’re all going to need in retirement. The rule of 219 is not widely discussed but here’s how you get the number. The rule assumes:

  • you and a spouse/partner/significant other (2 people)
  • eat 3 meals/day at $5/meal
  • you do this for (20) years
  • there are 365 days in a year

Thus 2 x 3 x 5 x 20 x 365 = $219,000. Obviously every meal you eat won’t be $5, you may not have a spouse in retirement, and you may live longer than 20 years in retirement. This rule clearly makes a ton of assumptions, however it is definitely easy to understand. The alternative, trying to determine your retirement number by conducting a time value of money calculation. Simplicity is the goal of this rule.

dyk LI

Did You Know This About Life Insurance

Life insurance is a dynamic financial vehicle, but most people only refer to it as death insurance. Yes, if you have a policy and you’ve been paying your premiums and you pass away, a sum of money will be paid out. Who or what gets that sum of money is totally up to you.

Many of you reading this might not have known this but people actually use life insurance while they’re alive. Did you know that life insurance can be used to fund a child’s education? Did you know that people utilize life insurance to supplement their retirement income? Did you know that if you borrowed against (taking a loan) your life insurance policy, that in some cases you don’t have to pay the loan back? Life insurance is phenomenal tool but it gets such a bad reputation, however there are so many ways that people can use life insurance while they’re alive. It’s one of the most flexible products that exist, but most people don’t take the time to educate themselves properly.

If you didn’t know about those awesome things that life insurance can do (and that was only an appetizer), perhaps you should schedule an appointment with an insurance agent and let them explain it to you.

how can a planner help

How Can A Financial Planner Help Me?

Having a conversation about financial matters is a struggle for most people. We all understand that it’s imperative to have your financial house in order, however, most people typically don’t. The fear that you face around this issue will never subside until you decide to take action. You either need to do-it-yourself (which most won’t commit to doing) or enlist the aid of a financial planner.

Financial planners don’t get a ton of fanfare, but they should. The issue stems from the fact that people don’t understand the value that a financial planner can provide. People don’t understand that a financial planner may be the solution to all of their money woes. People don’t understand that a financial planner needs to be cherished just like your barber or hair stylist. Wait…like your barber or hair stylist? Yes!! When you need your hair done for an event or before you go on a trip, you will move mountains to get that appointment. Or if your person doesn’t do appointments, you will wait as long as it takes. Why?? Because looking good is non-negotiable!! However, when it comes to financial matters, you’re okay with NOT taking immediate action and continuing a life of financial misery. There isn’t a sense of urgency when it comes to interacting with a financial planner, nor is there typically an immediate (there are exceptions) outcome received. Thus, people tend to shy away from meeting with a financial planner or they constantly reschedule their appointment.

Now that we’ve addressed the psychology behind why people avoid financial planners, let’s move on and take a look at what you need to consider when you are ready to find your go to person. For starters, whoever you decide on, you actually need to like them. It doesn’t make much sense to do business with someone that you don’t like. Next, it’s recommended that you should interview 2-3 candidates before making your decision. Before finishing that first meeting (which is typically the free consultation that most will offer) you should know exactly how they get paid and what they are capable of doing for you.

Here’s a menu (of sorts) that you should consider when walking into that first meeting. A financial planner usually works in one of 3 ways:

Transactional-based business (Needs Analysis):

Think of this level as the basic package. You need a solution and this planner can sell it to you. The planner will capture the necessary information as it applies to your need, conduct an analysis and will conclude with recommending a solution(s). It doesn’t require much follow up after the transaction is complete. The planner will be in touch at a minimum annually to do a review or may be in touch periodically for service related matters. The planner earns a commission on the solution that is sold.

Managed money (Wealth Management):

This can be considered the “I’m in it with my client” level. You are entrusting the planner to manage a certain amount of money for you. The services at this level may involve the following as it relates to your money: 1) how your portfolio is allocated amongst the different asset classes 2) managing risk within the portfolio 3) enhancing (growing) your portfolio and 4) tax planning. You will probably meet with your planner on a quarterly basis to review your account. The planner will charge a quarterly fee based on the solution chosen and the account size. A fee-based relationship requires the planner to act in the best interest of the client because their compensation is tied directly to performance. Good performance, better pay, poor performance, less pay.

Comprehensive Financial Planning:

This level is like the deluxe service at the car wash. The planner is going to assist you with an in-depth analysis of some or all of the following areas: Net Worth and Cash Flow, Investment Planning & Allocation, Risk Management, Retirement Planning, Income Tax Planning and Estate Planning. At this level you will meet as necessary to help ensure that you understand your financial plan. At a minimum, you will conduct an annual review of your plan. Compensation at this level is two-fold. First, there will be an agreed upon fee for the financial planning service. Second, a commission and/or fees will be earned by the planner if you decide to purchase any solution(s) to implement your financial plan. Some people choose to only have the planner produce their financial plan, pay the fee and opt to implement a solution(s) with another planner.