Source: Barron’s
When you think about estate planning, you probably think first about wills and trusts. But there are other financial tools with estate-planning potential. Here’s what to consider.
Source: Barron’s
When you think about estate planning, you probably think first about wills and trusts. But there are other financial tools with estate-planning potential. Here’s what to consider.
“55 percent of all Americans—regardless of wealth or status—die without a will or estate plan in place,” American Bar Association
When R&B artist Prince died in April 2016 at the age of 57, he left behind an estate worth hundred of millions of dollars, along with music and other intellectual property of inestimable value. Despite his fame and wealth, Prince died without a will or estate plan. As a result, his estate has remained entangled in probate court for nearly six years. Although the value of his estate is estimated to be more than $100 million, it has paid more than tens of millions of dollars in administration fees.
Before you express too much astonishment that someone so wealthy left no will, ask yourself: do you have one? If the answer is no, then it should not be surprising that Prince didn’t.
If you don’t have a will, you’re not alone in America. According to the American Bar Association, 55 percent of all Americans—regardless of wealth or status—die without a will or estate plan in place, and the number can be as high as 64 percent. For some reason, many people who should have wills, whether because of their age or financial situation, just don’t.
It’s hard to understand why. Maybe because it’s depressing to think about needing one. Maybe it’s because we know we won’t be around when our estates are distributed, so we let it slide.
Regardless, everybody should have at a minimum a last will and testament if you don’t have a more complex estate plan like a trust, because it’s always cheaper to administer an estate when you have a will than when you don’t have anything.
When a person passes without a will, or what the law calls “intestate,” the estate property is distributed according to state succession laws. A probate court judge will have to determine who and how the assets are distributed in the event of your passing or incapacitation.
Additionally, if you die without a Will, you’re giving the state you reside in full control over the distribution of your assets, and intestate serves as the precedent for how decisions are made and how your assets will be distributed on your behalf.
Dying intestate means the most crucial decisions — including who will care for your children, aged parents, pets or other dependents — will be made without your input. Further, your family will be forced to endure a lengthy and costly probate process and incur potentially crippling legal expenses to regain control of your finances and assets.
Most probate court cases are open to the public, which means many of the details of a person’s estate could be aired like dirty laundry. Although, a judge could decide that the documents should be sealed.
In most states, a surviving spouse is first in line for the estate’s assets. If there is no spouse, the law provides an order of succession. In many states, if there’s no spouse, the children get the estate. If there are no children or grandchildren, then the parents inherit.
If no parents are alive, then siblings, nephews, and grandnephews inherit—and on and on—all the way to first cousins twice-removed. And, if no heirs can be found, it may not surprise you to learn that your property eventually goes to the state—a process called “escheating.”
Estate Planning
When you think about Estate Planning, you must not only think about when you die, but you must think about the possibility of becoming disable.
Estate planning is much bigger than “You get my assets after I die”—it is about setting your families up for the type of generational wealth.
An estate plan ensures your medical, financial and guardianship decisions will be handled by the person(s) you choose and trust. Your plan ensures you have an advocate acting on your behalf, carrying out your wishes and directions as you intended. It ensures you have the legal documents in place if you become disabled, as well as what will happen to your assets when you die.
Statistically speaking, most people are going to be disabled for some period of time before they die now that people are living so long. If the person becomes disabled and can’t make their own medical or financial decisions, the only way that somebody can legally make decisions for them is to go to court and do a guardianship or conservatorship proceeding. It’s expensive and time-consuming, and it’s really unnecessary.
In a will, the person who makes the will picks the executor, the person that’s in charge. You can say that you want your executor to serve without posting a bond. If that’s not stated in a will, you have to get a fiduciary bond so that the court knows you’re not going to steal the assets.
If you have minor children, a will is the only legal document where you can nominate guardians for your children.
But if you don’t have the will, then it’s the state statute that determines who is the person with priority to administer your estate. And because the state doesn’t know whether the person who says they want to administer your estate is a crook or not, the court often makes someone post a fiduciary bond. You have to pay the premium for the bond and the person has to qualify financially for a bond.
What you should learn from Prince’s passing without a Will or Estate Plan is that unless you create an estate plan now, you will leave your loved ones and potential heirs with a legal mess whether you are worth millions or not.
References:
“It’s the ability to live and maintain the lifestyle which you desire without having to work or rely on anyone for money.” T Harv Eker
Financial Peace guru Dave Ramsey proclaims that “Financial freedom means that you get to make life decisions without being overly stressed about the financial impact because you are prepared. You control your finances instead of being controlled by them.”
It’s about having complete control over your finances which is the fruit of hard work, sacrifice and time. And, as a result, all of that effort and planning was well worth it!
Nevertheless, reaching financial freedom may be challenging but not impossible. It also may seem complicated, but in just a straightforward calculation, you can easily estimate of how much money you’ll need to be financially free.
What is financial freedom? Financial freedom is the ability to live the remainder of your life without outside help, working if you choose, but doing so only if you desire. It’s the ability to have the things you want and need, despite any occurrence other than the most catastrophic of outside circumstance.
To calculate your Financial Freedom Number, the total amount of money required to give you a sufficient income to cover your living expenses for the rest of your life
Step 1: Calculate Your Spending
Know how much you are spending each year. If you’ve done a financial analysis (net worth and cash flow), created a budget, and monitored your cash flow, then you’re ahead.
Take your monthly budget and multiply that amount by 12. Make sure you include periodic expenses such as annual premiums and dues or quarterly bills. Also include continued monthly contributions into accounts like your emergency fund, vacation clubs, car maintenance, etc.
Add all these together to get your Yearly Spending Total.
Keep in mind the lower the spending total, the lower the amount of money you’ll need to become financially independent. Learn how to lower your monthly household expenses and determine the difference between needs and wants.
Step 2: Choose Your Safe Withdrawal Rate
The safe withdrawal rate (also referred to as SWR) is a conservative method that retirees use to determine how much money can be withdrawn from accounts each year without running out of money for the rest of their lives.
The safe withdrawal rate method instructs financially independent people to take out a small percentage between 3-4% of their investment portfolios to mitigate worst-case scenarios. This withdrawal percentage is from the Trinity Study.
The Trinity Study found the 4% rule applies through all market ups and downs. By making sure you do not withdraw more than 4% of your initial investments each year, your assets should last for the rest of your life.
Step 3: Calculate Your Financial Independence (FI) Number
Your FI number is your Yearly Spending Total divided by your Safe Withdrawal Rate.
To find the amount of money you’ll need to be financially independent, take your Yearly Spending Total and divide it by your SWR.
For example:
Financial Independence Number = Yearly Spending / SWR
Who becomes financially free? According to most financial advisors, compulsive savers and discipline investors tend to become financially free since:
Net worth is the most important number in personal finance and represents your financial scorecard. Your net worth includes your investments, but it also includes other assets that might not generate income for you. Net Worth can be defined to mean:
Financial freedom means different things to different people, and different people need vastly different amounts of wealth to feel financially free.
Maybe financial freedom means being debt-free, or having more time to spend with your family, or being able to quit corporate America, or having $5,000 a month in passive income, or making enough money to work from your laptop anywhere in the world, or having enough money so you never have to work another day in your life.
Ultimately, the amount you need comes down to the life you want to live, where you want to live it, what you value, and what brings you joy. Joy is defined as a feeling of great pleasure and happiness caused by something exceptionally good, satisfying, or delightful—aka “The Good Life.”
It is worth clearly articulating what the different levels of financial freedom mean. Grant Sabatier’s book, Financial Freedom: A Proven Path to All the Money You’ll Ever Need, the levels of financial freedom are:
Seven Levels of Financial Freedom
The difference between income and wealth: Wealth is accumulated assets, cash, stocks, bonds, real estate investments, and they have passive income. Simply, they don’t have to work if they don’t want to.
Accumulating wealth and becoming wealthy requires knowing what you want, discipline, taking responsibility and have a plan.
Hundreds of thousands of Americans have great incomes, but you wouldn’t call them wealthy because of debt and lack of accumulated assets, instead:
Essentially, if you make a great income and spend it all, you will not become wealthy. Often, high income earners’ true net worth is far less than they think it is.
Here are several factors and steps to improve your financial life:
Financial freedom can look something like this:
When you have financial freedom, you have options.
“Your worth consists in what you are and not in what you have. What you are will show in what you do.” Thomas Edison
References:
If something tragic were to happen to you, would your surviving family members be able to manage the family finances without you? Motley Fool
Devoted husband Bob Hassmiller asked himself this same question because he was concerned that his spouse wouldn’t be able to take care of the household finances if he passed away, according to an article posted by Motley Fool.
So he wrote his spouse a letter, called “A Letter From Your Dead Husband,” that he updated every year. This letter was a document that contains information and instructions to help your loved ones make sense of their financial life after you die. If something happened to him, his wife would have the letter providing detailed instructions about where to find everything she needed.
In Hassmiller’s “Letter From Your Dead Husband”, he included things that were important to him. Additionally, in the letter, he described why this is important and meaningful, both for him and his spouse.
But, before you begin, spend some time thinking about how you’d like to structure your letter. Do you want to create a giant table or spreadsheet in a program like Excel? Or do you prefer typing out instructions in a word processor? Maybe you want to use a hybrid of both approaches.
Before discussing the topics to include in your letter, keep in mind that federal and state laws often differ depending on where you’re located. Please use this as a basic guide — but financial and estate experts recommend you do your own research.
Have an introduction
Although it may seem self-explanatory, your letter should describe why this is important and meaningful, both for you and whomever you leave behind.
This is a good place to list the contact info for those who are part of your “financial team” (attorney, financial planner, executor, etc.).
You should also include the locations of your personal documents (Quicken files, utility bills, tax returns, etc.), as well as the locations of any legal documents and the names of anyone else who has copies. Don’t forget to include access instructions for safes, alarms, and websites.
Break down your accounts
List all the accounts that hold your money, including the account numbers. Leave no account unidentified! Be sure to note what is and isn’t automatically paid. You can also include a section for recurring and automatic payment accounts that your spouse may wish to stop — things such as Netflix, Amazon Prime, home loans, insurance, and others. Some types of accounts to consider include savings, checking, money market, CDs, brokerage accounts, retirement accounts (401(k), IRA, Roth IRA), and FSAs (health and dependent care).
List out your assets
Provide the physical locations of your non-monetary items that have value. Include identifying information such as license plates, VINs, insurance appraisals, etc.. Some assets to consider are real estate, personal property (autos, motorcycles, jewelry, artwork, etc.), stock or bond certificates held outside brokerage accounts, what’s owed you (money, goods, or services), business interests, Social Security income, and pension income.
Explain your liabilities
List all the debt or other liabilities in this section. List everything you owe, with account numbers and information about automatic payments, if applicable. Be sure to identify debts held in your name alone separately from what is held jointly by you and another person (spouse, business partner, etc.).
Liabilities to consider are credit card accounts, home equity loans or lines of credit, student loans, personal loans, mortgages, auto loans, business loans, and money, goods, or services you owe someone.
Run through your insurance
People sometimes forget how many different types of insurance they have. If you have minor children, it is wise to review your insurance needs about every three years. And be sure to list the term/renewal date of any insurance.
Some insurances to consider are life, health, disability, vehicle, home or renters, and property (you know, for Aunt Gertrude’s rubies that nobody wants to wear).
Collect your legal documents
Provide the locations of all your legal or other important documents, as well as who has hard copies. Legal documents should include a will, a living will, instructions for final arrangements, trusts or a living trust, power of attorney, medical power of attorney or an advance directive, financial power of attorney, and account names and locations of any passwords.
You can also use this section to address the general disposition of your assets when you die.
Share your financial roadmap
Use this section to provide a summary of your existing finances. You want to give your spouse a general overview of how your finances are set up, what your short- and long-term goals are, and how those may change once you’re gone. Along with a net-worth summary and a list of all our investments.
List trusted financial advisor and their telephone number, especially if you have allowed your investments to become complicated.
Plan for your spouse’s future, and end with love
Your can dictate the disbursement items or money that you feel strongly about. But many people choose to leave everything in bulk to a spouse, giving them the flexibility to spend as they see fit. So make your general wishes known, and include any special instructions.
End your letters with a statement of love. Your completing this letter speaks of all the wonderful times you’ve planned for your future. The document should require only minimal “tweaking” in the future, though it should be a yearly reminder to you and your spouse that financial planning, too, is a sign of your love.
There’s no “right” way to write your letter, so do what makes sense for your family. Remember, this document is for them — make sure they’re comfortable using it!
References:
A financial plan creates a roadmap for your money and helps you achieve your financial goals.
The purpose of financial planning is to help you achieve short- and long-term financial goals like creating an emergency fund and achieving financial freedom, respectively. A financial plan is a customized roadmap to maximize your existing financial resources and ensures that adequate insurance and legal documents are in place to protect you and your family in case of a crisis. For example, you collect financial information and create short- and long-term priorities and goals in order to choose the most suitable investment solutions for those goals.
Although financial planning generally targets higher-net-worth clients, options also are available for economically vulnerable families. For example, the Foundation for Financial Planning connects over 15,000 volunteer planners with underserved clients to help struggling families take control of their financial lives free of charge.
Research has shown that a strong correlation exist between financial planning and wealth aggregation. People who plan their financial futures are more likely to accumulate wealth and invest in stocks or other high-return financial assets.
When you start financial planning, you usually begin with your life or financial priorities, goals or the problems you are trying to solve. Financial planning allows you to take a deep look at your financial wellbeing. It’s a bit like getting a comprehensive physical for your finances.
You will review some financial vital signs—key indicators of your financial health—and then take a careful look at key planning areas to make sure some common mistakes don’t trip you up.
Structure is the key to growth. Without a solid foundation — and a road map for the future — it’s easy to spin your wheels and float through life without making any headway. Good planning allows you to prioritize your time and measure the progress you’ve made.
That’s especially true for your finances. A financial plan is a document that helps you get a snapshot of your current financial position, helps you get a sense of where you are heading, and helps you track your monetary goals to measure your progress towards financial freedom. A good financial plan allows you to grow and improve your standing to focus on achieving your goals. As long as your plan is solid, your money can do the work for you.
A simple, 7 baby steps to start with your financial planning.
Thanks to @aidy_syazreef for sharing the poster. pic.twitter.com/TFt3H90iTR
— #BangsaEnamAngka (@FinancialGory) March 29, 2021
A financial plan is a comprehensive roadmap of your current finances, your financial goals and the strategies you’ve established to achieve those goals. It is an ongoing process to help you make sensible decisions about money, and it starts with helping you articulate the things that are important to you. These can sometimes be aspirations or material things, but often they are about you achieving financial freedom and peace of mind.
Good financial planning should include details about your cash flow, net worth, debt, investments, insurance and any other elements of your financial life.
Financial planning is about three key things:
Creating a roadmap for your financial future is for everyone. Before you make any investing decision, sit down and take an honest look at your entire financial situation — especially if you’ve never made a financial plan before.
The first step to successful investing is figuring out your goals and risk tolerance – either on your own or with the help of a financial professional.
There is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.
12 Steps to a DIY Financial Plan
It’s not the just the race car that wins the race; it also the driver. An individual must get one’s financial mindset correct before they can succeed and win the race. You are the root of your success. It requires:
Never give up…correct and continue.
Effectively, the first step to financial planning and the most important aspect of your financial life, beyond your level of income, budget and investment strategy, begins with your financial mindset and behavior. Without the right mindset around your financial well-being, no amount of planning or execution can improve your current financial situation. Whether you’re having financial difficulty, just setting goals or only mapping out a plan, getting yourself mindset right is your first crucial step.
Knowing your impulsive vices and creating a plan to reduce them in a healthy way while still rewarding yourself occasionally is a crucial part of a positive financial mindset. While you can’t control certain things like when the market takes a downward turn, you can control your mindset, behavior and the strategies you trust to make the best decisions for your future. It’s especially important to stay the course and maintain your focus on the positive outcomes of your goals in the beginning of your financial journey.
Remember that financial freedom is achieved through your own mindset and your commitment to accountability with your progress and goals.
“The first step is to know exactly what your problem, goal or desire is. If you’re not clear about this, then write it down, and then rewrite it until the words express precisely what you are after.” W. Clement Stone
1. Write down your goals—In order to find success, you first have to define what that looks like for you. Many great achievements begin as far-off goals, that seem impossible until it’s done. Though you may not absolutely need a goal to succeed, research still shows that those who set goals are 10 times more successful than those without goals. By setting SMART financial goals (specific, measurable, achievable, relevant, and time-bound), you can put your money to work towards your future. Think about what you ultimately want to do with your money — do you want to pay off loans? What about buying a rental property? Or are you aiming to retire before 50? So that’s the first thing you should ask yourself. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your values and goals will act as a motivator as you dig into your financial details. Setting concrete goals may keep you motivated and accountable, so you spend less money and stick to your budget. Reminding yourself of your monetary goals may help you make smarter short-term decisions about spending and help to invest in your long-term goals. When you understand how your goal relates to what you truly value, you can use these values to strengthen your motivation. Standford Psychologist Kelly McGonigal recommends these questions to get connected with your ideal self:
Writing your goals out means you’ll be anywhere from 1.2 to 1.4 times more likely to fulfill them. Experts theorize this is because writing your goals down helps you to choose more specific goals, imagine and anticipate hurdles, and helps cement them in your mind.
2. Create a net worth statement—To create a successful plan, you first need to understand where you’re starting so you can candidly address any weak points and create specific goals. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. If you’re in the plus, great. If you’re in the minus, that’s not at all uncommon for those just starting out, but it does point out that you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
4. Zero in on your budget—Your cash-flow analysis will let you know what you’re spending. Zeroing in on your budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Are savings a part of your monthly budget? Examining your expenses and spending helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on aligns with your values and what is most important to you. An excellent method of budgeting is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:
The 50/30/20 rule is a great and simple way to achieve your financial goals. With this rule, you can incorporate your goals into your budget to stay on track for monetary success.
5. Create an Emergency Fund–Did you know that four in 10 adults wouldn’t be able to cover an unexpected $400 expense, according to U.S. Federal Reserve? With so many people living paycheck to paycheck without any savings, unexpected expenses might seriously throw off someone’s life if they aren’t prepared for the emergency. It’s important to save money during the good times to account for the bad ones. This rings especially true these days, where so many people are facing unexpected monetary challenges. Keep 12 months of essential expenses as Emergency Fund or a rainy day fund. If you or your family members have a medical history, you may add 5%-10% extra for medical emergencies (taking cognizance of the health insurance cover) to the amount calculated using the above formula. An Emergency Fund is a must for any household. Park the amount set aside for contingencies in a separate saving bank account, term deposit, and/or a Liquid Fund.
6. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Don’t go overboard when taking out a home loan. It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. But, as a rule of thumb, the value of the house should not exceed 2 or 3 times your family’s annual income when buying on a home loan and the price of your car should not exceed 50% of annual income. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. This is called the debt-to-income ratio. If you stick to this ratio, it will be easier to service your loans/debt. Borrow only as much as you can comfortably repay. If you have multiple loans, it is advisable to consolidate all loans into a single loan, that has the lowest interest rate and repay it regularly.
“Before you pay the government, before you pay taxes, before you pay your bills, before you pay anyone, the first person that gets paid is you.” David Bach
7. Get your retirement savings on track—Whatever your age, retirement planning is an essential financial goal and retirement saving needs to be part of your financial plan. Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. To build a retirement nest egg, aim to create at least 20 times your Gross Total Income at the time of your retirement. This is necessary to keep up with inflation. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference thanks to the power of compounding interest. Do not ignore ‘Rule of 72’ – As per this rule, the number 72 is divided by the annual rate of return on investment to determine the time it may take to double the money invested. There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):
Ideally, you should save 15% to 30% from your net take-home pay each month, before you pay for your expenses. This money should be invested in assets such as stocks, bonds and real estate to fulfil your envisioned financial goals. If you cannot save 15% to 30%, save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
After retiring, follow the ‘80% of the income rule’. As per this rule, from your investments and/or any other income-generating activity, you need to generate at least 80% of the income you had while working. This will ensure that you can take care of your post-retirement expenses and maintain a comfortable standard of living. So make sure to invest in productive assets.
8. Check in with your portfolio—If you’re an investor, when was the last time you took a close look at your portfolio? If you’re not an investor, To start investing, you should first figure out the initial amount you want to deposit. No matter if you invest $50 or $5,000, putting your money into investments now is a great way to plan for financial success later on. Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis. As a rule of thumb, your equity allocation should be 100 minus your current age – Many factors determine asset allocation, such as age, income, risk profile, nature and time horizon for your goals, etc. But you could broadly follow the formula: 100 minus your current age as the ratio to invest in equity, with the rest going to debt. And, never invest in assets you do not understand well.
Good health is your greatest need. Without good health, you can’t enjoy anything else in life.
9. Make sure you have the right insurance—As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important. Insuring your assets is more of a defensive financial move than an offensive one. Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Have 10 to 15 times of annual income as life insurance – If you are the bread earner of your family, you should have a tem life insurance coverage of around 10 to 15 times your annual income and outstanding liabilities. No compromise should be made in this regard. Review your policies to make sure you have the right type and amount of coverage. Here are some of the most important ones to get when planning for your financial future.
10. Know your income tax situation—Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning. Tax legislation tend to change a number of deductions, credits and tax rates. Don’t be caught by surprise when you file your last year’s taxes. To make sure you’re prepared for the tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your tax accountant for specific tax advice.
11. Create or update your estate plan—Thinking about estate planning is important to outline what happens to your assets when you’re gone. To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.
12. Review Your Plans Regularly–Figuring out how to create a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success. As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who has an established career. Staying updated with your financial plan also ensures that you hold yourself accountable to your goals. Over time, it may become easy to skip one payment here or there, but having concrete metrics might give you the push you need for achieving a future of financial literacy. After you figure out how to create a monetary plan, it’s good practice to review it around once a year.
Additionally, take into account factors such as the following:
A financial plan isn’t a static document to sit on — it’s a tool to manage your money, track your progress, and one you should adjust as your life evolves. It’s helpful to reevaluate your financial plan after major life milestones, like getting m arried, starting a new job or retiring, having a child or losing a loved one.
Financial planning is a great strategy for everyone — whether you’re a budding millionaire or still in college, creating a plan now can help you get ahead in the long run, especially if you want to make a roadmap to a successful future.
For additional financial planning resources to create your own financial plan, go to the MoneySense complete financial plan kit.
References:
“The lion’s share of wealth, two-thirds of wealth in the United States, is going to end up in the hands of women by the year 2030.” Jean Chatzky
The women that Jean Chatzky, New York Times Bestselling Author and financial editor at the NBC TODAY Show, has talked with “share a lack of confidence” regarding managing and investing their money. “Whether we’ve got one hundred, one hundred thousand, or one million dollars, we don’t always feel equipped to manage it, even when we’re doing exactly the right things,” she explained.
Investing is the key to your financial future. Your money can start working for you today, if you follow these steps. https://t.co/0kItUQJTkZ
— Jean Chatzky (@JeanChatzky) February 6, 2021
In order to create a better world, Chatzky suggests women should, “…use this power that’s coming our way to improve not just our lives, but the lives of the people that we love and care about, and the causes that we believe in. We really do have an opportunity through giving and investing to create the world we want.”
Women…”have an opportunity through giving and investing to create the world we want.” Jean Chatzky
Chatzky offers 15 tips to help you get a handle on your finances and to create the financial future you want for yourself. A future that aligns with your goals, values and purpose in life.
1. Talk openly about money
Chatzky explains, “We gather groups of women who don’t make a habit of talking about money with the specific purpose of talking about money…and it’s really freeing.” One open ended question she asks is, “What do you want your money to do for you?”.
2. Track your spending to see what you really value
Do you want a clear picture of your spending? More so, do you want to uncover whether or not what you say are priorities are aligned with your expenditures?
3. Determine what your ideal life actually costs
“What do you want from your life?” This is a question Chatzky believe you need to consider so that you can determine what your ideal life actually costs. Write down what you want and next to each item, list the price to do or have it.
4. Use money as a resource to buy you more time
Money is a tool which creates freedom of time and choice. Chatzy shares, “The most important thing to realize is the opportunity that you’re wasting. Money we can get more of. Time, you absolutely can’t get more of…But by moving around some of our money, we can restructure our time in a way that feels much better, much more fulfilling, and much less stressful. We are so stressed, and using our money to swap for a little bit of extra time is one great way to reduce some of that stress.”
5. Identify your money scripts
“We all have stories around money which became ingrained as children. In some cases we mimic them, in others we rebel against them. In order to know where you’re going with your financial future, it’s helpful to identify the scripts that are overtly or subliminally impacting your views and habits around money,” advises Chatzky.
6. Find financial harmony in your primary relationship
Chatzy suggests, “Listening is the key to success within a relationship. You have to understand why your partner needs what they need as much as they need to understand what you need.”
7. Don’t let money injure your friendships
“Listen and read between the lines. We know an awful lot about our friends’ financial situations, even if they tell us not one thing. We see how they spend. We see how they manage. We know if they’re stressed financially. We just have to be a little bit empathetic and open-minded about the fact that they may not have the same choices or priorities that we have. And that doesn’t mean that we can’t be great friends,” shares Chatzky.
8. Teach your kids early
It can feel scary to talk to your kids about money, especially if you feel tentative about your own financial skills. Fortunately, it doesn’t have to be challenging: “Kids have to have money in order to learn to manage money.”
9. Get paid what you deserve
To charge or get paid what you deserve, “First, you must know what you deserve and once you know what that number is, you have to ask for it:
10. Negotiating won’t hurt your outcomes
The person on the other side of the table, they are waiting for you to negotiate, according to Chatzky. They’re not going to punish you for negotiating. You may not get the money. But asking is not going to hurt you.
11. To be or not to be (an entrepreneur)
30% of US businesses are women-owned, and that number is rising steadily.
12. Spend on others
Studies show that when you do for others, you’re guaranteed to feel happier. This includes when you spend on others. “There’s no sense in feeling guilty for spending money that’s not sabotaging our financial life”, says Chatzky.
13. Talk with aging parents
“If you haven’t had a conversation with your parents before you’ve hit age forty or they hit age seventy, it’s time”, she comments
14. Have a little fun with your money
Chatzky comes from a judgment-free zone when it comes to how you spend your money. But, “know how much it costs” since you earned that money and yours to do with as you want.
15. Consider your legacy
“You have to think about what’s important to you. That’s where a lot of us fall down when it comes to charitable giving”, Chatzky says.
Building wealth
If you want to build wealth, you need only do four things, according to Chatzky:
Building wealth sounds easy, so why is it so hard, particularly for women? “Because women according to Chatzky, “make excuses”. We tell ourselves that we’re “just not good with money,” or that our husbands “like taking care of the finances.”
In short, “what successful women want from their money are: independence, security, choices, a better world, and–oh yes–way less stress, not just for themselves but for their kids, partners, parents, and friends.”
To read more: https://www.vunela.com/jean-chatzky-on-the-top-15-things-every-woman-needs-to-know-about-her-money/
If your financial stress level has hit Ian all-time high, we feel you. Here's our favorite tips for kicking those money worries forever. https://t.co/QLnduLG4T4
— Jean Chatzky (@JeanChatzky) January 29, 2021
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A Financial Life Plan can help you get on the path to financial freedom.
A comprehensive life financial plan provides a picture of your current finances, financial goals and any strategies you’ve set to achieve those goals. The plan should include details of your cash flow, savings, debt, investments, and other elements of your financial life.
Creating a life financial plan can help bring things into focus—it’s like a roadmap to help you figure out how to reach your financial goals. a clear picture of what you want to accomplish, but the details of how to make it happen.
Financial planning involves identifying financial goals you want to achieve and making sure you have the “what-ifs” covered. This can help guide you through key decisions in life and make you less vulnerable to setbacks and financial hardships down the line. You can feel more confident about financial decision-making when you have a comprehensive plan to guide you. Your financial plan might cover a number of areas, from managing debt and saving for the future to building wealth and protecting your money.
Financial Life Planning connects our financial realities with our values and the lives we dream to live. It helps both pre-retirees and retirees identify their core values and connect them with their financial decisions and life’s financial, health and emotional goals.
Step one: Begin building your long-term financial life plan with the end in mind. Step two: Regularly assess your progress and determine if adjustments are warranted. #Financial #goals https://t.co/SOVknhyPrX pic.twitter.com/SU0mjoe9XY
— BlandGarveyWealthAdv (@BlandGarveyAdvs) January 5, 2021
It is a financial planning and investing approach which helps people align their investment portfolio with their values and with the things which are important to them. Think of it like a holistic roadmap for your financial well-being.
Financial life plan focuses on the emotional side of financial planning. It considers people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, behaviors, goals and resources.
“The right plan, executed faithfully, can be the difference between success and failure in any endeavor.” Brett N. Steenbarger, Ph.D., author of The Psychology of Trading
Whether you need to reduce spending and eliminate debt, increase your savings, or just refine the details, once you understand your financial mindset and associated behaviors; once you know where you are and where you need to go financially—a financial life plan can provide a more coherent sense of direction.
Market downturns and investment risk management
During periods of high market volatility and declines, financial life planning, when done correctly, assumes there will be these periods of volatility, panic selling and downturns like the equity markets are experiencing today as a result of COVID-19 pandemic. Any actions taken to significantly reduce or eliminate equity allocation could result in investors coming up short in retirement.
The risk of outliving their assets might be the biggest risk that retirees face today. With many of Americans living longer and the rising costs of healthcare in retirement, most retirees need a level of exposure to stocks in their portfolio for growth and to maintain their standard of living.
A financial life plan is tailored to fit your lifestyle and give you greater control over how you achieve the life of your dreams. https://t.co/SOA8dfk9Mu
— Vested Wealth Advisors, LLC (@vwaplanning) November 11, 2020
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HSAs can be a tax-efficient part of your retirement planning.
FIDELITY VIEWPOINTS 12/19/2019 — Health Care & Wellness Saving for Retirement Health Savings Account
Key takeaways
One of the most tax-efficient savings vehicles is a health savings account (HSA). It offers triple tax savings,1 where you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses.
Pay qualified medical costs out of an HSA, and it’s tax-free.2 You can even use the money for nonmedical expenses after age 65, such as buying a house. But you are taxed at ordinary income rates on nonqualified withdrawals, just as you would be with a traditional IRA or 401(k). (If you are under age 65, you pay a 20% penalty on nonmedical withdrawals, and you pay the tax in addition to the penalty.)
Simply put, tax-efficiency and HSAs go hand in hand. There are a lot of ways to make HSAs work for you—whether you are still employed, getting ready to retire, or even retired and enrolled in Medicare. To get started, consider these 5 ways that HSAs can help fortify your retirement.
1. Understand the triple tax advantage and how HSAs work
You can save in an HSA if you are enrolled in an HSA-eligible health plan at work or in the private marketplace (an HSA-eligible health plan currently has a deductible of at least $1,350 for individuals and $2,700 for family coverage). Most people think of HSAs as a way to save to cover current medical costs not covered by such plans. But if you can pay for these costs out-of-pocket, the triple tax-free nature of an HSA makes it a powerful vehicle for retirement savings.
Many people contribute to HSAs pre-tax through payroll deductions at work so their contributions also escape FICA taxes. An HSA can also be purchased outside of work and funded with after-tax dollars, which the individual then takes as a tax deduction on their personal taxes. These contributions can accumulate tax-free and can be withdrawn tax-free to pay for current and future qualified medical expenses, including those in retirement.
It gets better: Unlike most flexible spending accounts (FSAs), the money in an HSA can remain in your account from year to year. You can earn interest or earnings with your HSA, and you can even take your HSA with you should you switch employers or retire.
For 2019, if you have a high-deductible health plan (HDHP), you can contribute up to $3,500 for self-only coverage and up to $7,000 for family coverage into an HSA. For 2020, if you have an HDHP, you can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into an HSA. Family coverage includes any level of coverage other than self-only coverage, if offered by the employer.
Because an HSA is one of the most tax-efficient savings options currently available, you should consider contributing the maximum and paying for current health care expenses from other sources of personal savings. If you really want the power of HSA compounding to work for you, don’t tap into it, unless necessary. Also consider investing a portion of your HSA in a noncash investment option (see section 3) for long-term growth potential.
Think about the tax savings aspects of HSAs this way: When would you like to pay taxes on your HSA contributions and earnings? Now? Later?
How about never? (If you use it to pay for qualified medical expenses.) True, you can pay for health care expenses from your Roth IRA, but you’ve already paid taxes upfront.3
Tip: If you are already enrolled in an HSA-qualified health plan, consider opening a Fidelity HSA®. (Since HSAs are portable, you can transfer account balances in HSAs from any of your previous employers to a Fidelity HSA.)
2. Earmark savings just for health care
You’ve likely saved for your children’s college expenses in a 529 savings account. It’s a specialized kind of account that lets you save for a specific expense in your future. You may have also earmarked some of your savings for distinct financial goals such as a new car, a special family vacation, or new home. In each case, your investing goal has a different time horizon and should be handled in a different way.
Now think about health care. You’ll likely face a bevy of health care expenses in your future—medical procedures, hospital bills, prescription drugs, maybe even home health care or nursing home expenses. No one knows when these expenses will hit, or how much you may have to pay.
Since you will likely have to pay for large scale health care expenses sometime later in life, building a nest egg specifically designed to help cover future health care costs is a prudent move.
How much should you save? Fidelity estimates an average 65-year-old couple retiring this year will need to have saved $285,000 after taxes to pay for future medical costs.4 For affluent investors, that number can rise to $320,000 or more depending on state taxes.5 Of course, if you’re saving in an HSA versus a taxable account, you’ll need to save less, since withdrawals are not taxed.
Even if you don’t have an HSA, it may be prudent to set aside certain assets just to pay for health care. “Health care will likely be one of your top 5 expenses in retirement,” says Steven Feinschreiber, Senior Vice President of Financial Solutions at Fidelity. “So consider earmarking a portion of your 401(k)s or IRAs (and their potential future earnings) to help pay for expected health care costs throughout your retirement.”
Tip: Not all health care expenses count as “qualified medical expenses” according to the IRS. Find out which ones you can use your HSA for. Read IRS Publication 502 Medical and Dental Expenses to learn more.
3. Consider putting your HSA dollars to work by investing them
Although health care costs continue to rise, there are ways to get ready for any tsunami of medical expenses that might hit in retirement. But you’ve got to save early and put those dollars to work by investing them.
If you think you might need to use some of your HSA for near-term medical expenses, set aside some of your HSA in cash to cover them, and invest the rest for potential tax-free growth and to help fortify your retirement.
“You have several options when thinking about how to put your HSA dollars to work by investing them,” advises Feinschreiber. “Some people choose an investing strategy that is less aggressive than their overall retirement investing strategy,” he adds. Work with your Fidelity advisor to determine an investment strategy that makes sense for you.
Tip: Once you establish a cash cushion within your HSA to pay for short-term unanticipated qualified medical expenses and out-of-pocket maximum deductible limits, you may have a large enough account balance to begin investing in mutual funds, stocks, or bonds.
Imagine a family saving and investing their maximum annual HSA contributions over a 30-year period. Not everyone will be able to do this, but the chart below shows a balance of nearly $1 million after 30 years of maxing out HSA savings opportunities and investing at an average hypothetical 7% annual rate of return.6 In fact, if you just left HSA dollars in cash, you’d still have a healthy sum—over $322,000—but you’d be leaving two-thirds of the potential million dollars on the table.
Hypothetical scenario: Invested versus not invested
For illustrative purposes only. Assumptions: 30-year investment time frame; 7% return on investment; 0% return on cash; no withdrawals. The household contributes up to the HSA family limit each year at the beginning of the year. Contributions are indexed to inflation and compounded annually.
What if you can’t save to the max? Are HSAs still a viable option? Yes. Let’s examine how your HSA can still grow over time—even if you plan to contribute the maximum and then withdraw 50% of the money you put in every year—but remain invested with the rest earning an annual 7% return. In this hypothetical case, we see a family still has access to almost half a million dollars at the end of 30 years (see chart below).
Saving everything versus withdrawing 50% of contributions each year
For illustrative purposes only. This hypothetical example assumes the following: The household contributes up to the HSA family limit each year at the beginning of the year. Contributions are indexed to inflation and compounded annually. The account is invested with a 7% rate of return. The family withdraws 50% of contributions each year.
HSAs vs. other retirement savings options
How do HSAs compare to other savings vehicles? The tax treatment of HSAs provides the potential for greater investment growth and greater after-tax balance accumulation versus other retirement or health care savings options. Assuming you use HSA funds to pay for qualified medical expenses, you do not pay any federal taxes. That’s why it’s at the top of the list for tax-efficient investment options for your retirement. In this hypothetical example, a customer invests $1,000 in their HSA.
Over the next 30 years, that single investment of $1,000 grows at 7% a year to $7,612. If that HSA account holder invested the same $1,000 in a tax-deferred account like a traditional IRA, their total investment return would also be $7,612. However, of that amount, only $5,938 remains after paying income taxes at an effective rate of 22% upon distribution.
Tax-deferred growth versus HSAs
For illustrative purposes only. This hypothetical example assumes the following: $1000 invested over a 30-year time period. The household files taxes as married filing jointly; has an effective tax rate in retirement of 22%; and their investments generate an annual 7% rate of return.
4. Plan to use your HSA in retirement – You can always use your HSA to pay for qualified medical expenses like vision and dental care, hearing aids, and nursing services at any time. Once you retire, there are additional ways you can use the money:
5. Help bridge to Medicare – If you retired prior to age 65, you may still need health care coverage to help you bridge the gap to Medicare eligibility at 65. Generally, HSAs cannot be used to pay private health insurance premiums, but there are 2 exceptions: paying for health care coverage purchased through an employer-sponsored plan under COBRA, and paying premiums while receiving unemployment compensation. This is true at any age, but may be helpful if you lose your job or decide to stop working before turning 65.
6. Cover Medicare premiums – You can use your HSA to pay certain Medicare expenses, including premiums for Part B and Part D prescription-drug coverage, but not supplemental (Medigap) policy premiums. For retirees over age 65 who have employer-sponsored health coverage, an HSA can be used to pay your share of those costs as well.
7. Long-term care expenses – Your HSA can be used to cover part of the cost for a “tax-qualified” long-term care insurance policy. You can do this at any age, but the amount you can use increases as you get older.
8. Pay for other expenses – Once you hit 65, you can use your HSA to pay for any nonqualified medical expenses (including buying a boat, for example), but you don’t get to take full advantage of the tax savings as you will be required to pay state and federal taxes on those distributions.
9. Let HSAs play a role in your estate plan – In the event that your medical expenses are much lower than average (or you don’t live that long), you may have money in your HSA that you can pass along to your heirs. The rules are complicated so it’s best to consult your estate planning attorney.
There are generally 3 categories to consider when determining how HSA assets are treated upon your death:
Of the 3 options listed, many people would prefer to name the surviving spouse as the designated beneficiary. However, if you don’t have a surviving spouse, a planning consideration could be tax-efficiency. In that case, consider naming as beneficiary (either your estate or beneficiary), whichever party is in the lowest tax bracket. Work with your tax and estate planning professionals to determine which option is right for you.
Tip: One caveat: If you name your estate as the beneficiary of your HSA, it will likely become a probate asset and it still needs to fit in with your overall estate plan.
Plan ahead – Once you turn 70½, you will need to take required minimum distributions from traditional IRAs and 401(k)s, and you would have to pay taxes on those distributions. For HSAs, there is no required minimum distribution.
Since an HSA offers a triple-tax advantage, it’s an option you should consider prioritizing to fortify your retirement now and for years to come.
Financial security is a goal for us all, but with wealth comes complexity. An increase in wealth not only typically causes an increase in annual income taxes, but it may also beget estate and gift taxes. Current federal law allows each citizen to transfer a certain amount of assets free of federal estate and gift taxes, named the” applicable exclusion amount.
In 2020, every citizen may, at death, transfer assets valued in the aggregate of $11.58 million ($23.16 million for married couples), free from federal estate tax. For gifts made during one’s lifetime, the applicable exclusion amount is the same. Therefore, every person is allowed to transfer a total of $11.58 million during their life or at death, without any federal estate and gift tax. (This does not include the annual gift exclusion, which applies as long as each annual gift to each recipient is less than $15,000.)
Therefore, generally, only estates worth more than these amounts at the time of death will be subject to federal estate taxes. But this wasn’t always so. From 2001 to 2009, the applicable exclusion rose steadily, from $675,000 to $3.5 million. 2010 was a unique year, in that there was no estate tax, but it was brought back in 2011 and then made permanent (unless there is further legislation) by the American Tax Relief Act of 2012 at an exclusion amount of $5 million, indexed for inflation. The Tax Cuts and Jobs Act passed in December of 2017 doubled the exclusion amount to $10 million, indexed for inflation ($11.58 million for 2020). However, the new exclusion amount is temporary and is scheduled to revert back to the previous exclusion levels in 2026.
Outdated estate documents may include planning that was appropriate for estates at much lower exemption values. Many documents have formulas that force a trust to be funded up to this applicable exclusion amount, which may now be too large or unnecessary altogether, given an individual’s or family’s asset level.
Take the time to review the formulas in your estate documents with your attorney and tax professional to determine whether the planning you have in place is still appropriate.
https://www.fidelity.com/insights/personal-finance/estate-planning-pitfalls?ah=1
“I want to leave my children enough that they feel they can do anything, but not so much that they do nothing.” ~ Warren Buffet
Your Estate Plan
Although estate planning can be a complex task, a well-informed plan can make a big difference in what is left for your loved ones.
Here are a few steps you can take to begin thinking about your estate plan:
We never know what could happen tomorrow. But we do know that having a solid estate plan can help ease the burden of your passing on your loved ones.
Revocable vs. Irrevocable Trusts
A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.
Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.
Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.
Other benefits of trusts include:
There are two types of trusts: a revocable living trust and an irrevocable trust. Some other terms associated with trusts include “grantor” and “non-grantor” — which are the parties creating the trust.
With a revocable living trust, you still control the assets, can change the trustee at any time, or sell your assets while you’re living, because the grantor — the person who created the trust — is normally the trustee as well. The only benefit a revocable living trust provides is to ensure your assets bypass probate. It does not provide any immediate tax benefits. In fact, income from a revocable living trust is taxed to the grantor.
An irrevocable trust is completely different. It can be used when “gifting” assets in order to reduce a grantor’s taxable estate. Be aware that once you transfer assets to an irrevocable trust, changes are permanent and cannot be undone — or at best — can only be made through a lengthy process. You no longer have any control to sell investments inside the trust and will have to ask your trustee — typically your children or grandchildren — to do so. Since you don’t legally own the assets any longer, they’re either taxed at trust income tax rates or your beneficiaries’ tax rates.
By using a will or trust to legally ensure that you will not only protect the things you worked hard to achieve, you will have the final say about those assets — taking care of the people you love when you’re no longer here. That means not leaving such decisions to attorneys, state governments or the IRS.
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