Myths in Financial Planning

There are many myths in Financial Planning.

My personal favorite is the myth that the Last Will and Testament overrides your beneficiary assignments. 

Often a client will go to the effort of meeting with an attorney and drawing up a perfectly adequate Last Will and Testament only to have it undermined completely by the beneficiary assignments in their retirement accounts, annuities and life insurance policies. 

This can be a real problem if there is a special needs beneficiary in the family. Beneficiary assignments should be discussed (and amended if necessary) with your attorney. 

My second favorite myth is that there is no need to plan for long-term care because it will all just work out fine. I have been approached many times by families in desperation after they realize that a loved one is going to spend down all of their assets. There is not much they can do about it at that point in time. Whether the client decides that Long Term Care Insurance is part of the solution or not, they should have a concrete plan of action. They should have a family meeting where these issues are discussed. The decision to purchase Long-Term Care Insurance is a family decision based on the client’s financial assets and health and their viewpoint. I often create a Retirement Scenario Report looking at how long the assets will last with or without Long-Term Care Insurance to help clients decide if they can afford to self-insure or they need the coverage. The important thing is that people need to think it through and make an informed decision.

Finally, the third myth is that you can continue to save very little AND still have enough to live comfortably in retirement. This is one of the things YOU have direct control over. My goal for all of my clients is to save 15% each year.

If you have additional questions, please feel free to call my cell phone at 201-650-0753. Also, check out our website at:

www.wattersfinancial.com

Timothy Watters, CFP

Should a Millennial Rent or Buy?

               What to Consider when Buying a Home.
For millennials, the decision of whether to buy has never been harder. Many millennials are in a financially weak position because of the aftermath of the Credit Crisis and student loan debt.
In the last 30 years, I have seen many young couples grapple with this decision. Having children forces them to think about education. If they live in the city, they may want to consider staying in the city and finding a good private preschool and elementary school. Unless they make a substantial income, private school may be too expensive. If they move out to the suburbs, they can buy a home, pay property taxes and send their child/children to public school. Property taxes are deductible. Private school tuition is not deductible. One of the negatives of choosing a private school education is that parents are often not able to afford to contribute to college funding as well.
Here are some guidelines that I recommend couples think about when deciding whether to buy a home:

·      It's important especially now to make sure that you can afford both the down payment on the home as well as keeping an emergency fund of 3 to 6 months’ worth of bills.

·      It is important to understand the PITI rule. Now banks will not allow you to spend more than 28% of your gross income on principal, interest, taxes and insurance.

·      Credit ratings are an important factor to consider also. According to JP Morgan Investment Management, banks require a credit rating of 743 or higher to get a home loan.

·      It is important to have a long time horizon when buying your first home. The home has to appreciate 10% just to break even overtime. You need to pay the realtor 4.5% to 6% to sell the home. You also have transaction costs to buy the home and transaction costs to get out of the home as well as moving costs.

These are a few suggestions. If you are considering buying a home and have questions, please call my office at 201-843-0044 and we can discuss it.

Saving Money Is One Of The Hardest Things To Do !

Saving money is one of the hardest things to do for most people. I find automatic savings programs are a great way to help people to reach their savings goals and make managing their cash flow less chaotic as well.. 

The first step is to look at your current cash flow numbers to see where the money is going. I often recommend that married couples divide up their expenses between essential and discretionary expenses and then rank the discretionary expenses one to three in terms of importance. If the item is a two or a three in terms of personal importance to the couple, it's up for grabs to be redirected toward additional savings.

I also think it's important to have savings goals for short-term savings and the long-term. I recommend my clients establish several online savings accounts and start automatic saving towards specific goals. For example, they may put aside money on a monthly basis for an emergency fund, vacations or holiday gifting. The beautiful thing about an automatic savings programs is that it dials down the anxiety that comes with managing your money. For example, when Christmas and Hanukkah are around the corner, having a specific holiday gifting account already set up can provide peace of mind. This type of automatic savings program also has the potential to lower credit card debt by removing the dependency on short term debt to satisfy fluctuating cash flow expenses.

The next step is to set a longer term savings goal. Our savings goal our clients is to save 15% per year. This money should be first directed towards your 401(k) or 403(b) plan (especially if there is a matching contribution). Other worthy savings options include funding an IRA or paying extra principal on a mortgage as well. Switching from a 30 year mortgage to a 15 year mortgage can also be quite desirable because you get a lower interest rate on a 15 year mortgage than a 30 year mortgage as well.

Saving for education is also important but, this should be ON TOP of your savings goals since it will not help you to save for your own retirement.


If you have additional questions about financial planning, please feel free to call my office at (201) 843-0044. My staff would be happy to help with any setting up a free introductory phone call if you would like to talk about your financial planning needs.  

Avoid Financial Blunders as You Get Closer to Sending Your Child to College

Every parent feels nothing but guilt as they get closer to sending their children to college and it's that guilt that causes people to make a financial blunders.  I am sure you have heard the old saying, you can always borrow money to go to college but you can never borrow money to retire.

Here are a few of the big mistakes that I have seen:

·       Not having a family mission statement on how much money each member of the family needs to pay for college is a big mistake. Everyone should know how much the parents are willing to pay and how much the children are expected to pay.

·       Stopping saving for retirement while your children are in school. Not funding the 401(k) plan because your children are going to college will hurt you because you lose out on the time value of money and you'll probably miss out on employer match as well.

·       Taking out student loans without having a frank discussion of how much you can afford to repay. I have seen many clients who took out large student loans and then had a financial downturn and could not make payments on them. It is amazing to see how quickly the principal balloons when you are in forbearance on a student loan.

Student loans are shared concern for both parents and students and shouldn't be entered into lightly. I often show people what the cost will be per month and overtime for student loan so they can see the true impact it will have. If the cost is too high, they should think of commuting for at least part of their time while in school.

All students should work summers and the family needs to decide what percentage of the money goes to college funding. My favorite plan is to put all of those earnings into an online savings account and to use the money in the last year of their schooling. It is a source of pride and gives them bragging rights to later say, “I saved $____ for my own education”.

If you have additional questions, please feel free to call my cell phone at 201-650-0753. Also, check out our website at:

www.wattersfinancial.com

Timothy Watters, CFP

Saving For Your Child’s College Education

Saving For Your Child’s College Education

All parents struggle to find the funds to send their children to college. Clients often ask us for help on this topic. For this blog entry, we thought it might be helpful to go back to basics with an Overview of 529 Plans, Coverdell Education Savings Accounts, and Custodial Accounts.

As you begin your search for tax-efficient strategies to pay for college costs, keep in mind that 529 plans, Coverdell Education Savings Accounts, and UGMA/UTMA accounts each offer unique benefits. It's critical that you understand all of them before making a final decision.

Section 529 college savings plans are named after the section of IRS code that created them. They are college- or state-sponsored, tax-advantaged plans that allow individuals to invest in portfolios of stocks, bonds, and cash equivalents. Contribution limits for 529 plans vary from state to state. Distributions made to pay qualified education expenses are tax free. Prepaid tuition plans also fall under Section 529, but for the purposes of this article, the phrase 529 plan refers only to a college savings plan.
Coverdell Education Savings Accounts (formerly known as Education IRAs) allow tax-free earnings on nondeductible contributions of up to $2,000 per year, per student. Coverdell Education Savings Accounts can generally hold a variety of investments. They can only be established for a child younger than 18, and the money must be distributed for educational costs before the beneficiary turns 30. Income limits apply: Single filers with modified adjusted gross incomes (MAGI) of more than $110,000 and joint filers with MAGI in excess of $220,000 are not eligible. Qualified withdrawals may be used to fund a primary, secondary, or college education.

An UGMA/UTMA custodial account allows you to establish a savings or investment account in a child's name, with one adult named as custodian. Each parent can contribute up to $14,000 in 2016 without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. With an UGMA/UTMA account, the first $1,050 per year of unearned income is tax free. For children under 19 (and for children under 24 who are full-time students and whose earned income does not exceed half of the annual expenses for their support), the next $1,050 is taxed at the child's rate. Beyond $2,100, the income is taxed at the parent's or child's rate, whichever is higher.

If you have any questions on this or with your own planning situation, please feel free to call us at 201-843-0044.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Paying Off Student Loans

                              Paying Off Student Loans

At Watters Financial Services, one topic that comes up often in client communication is student loan debt. We see many clients struggling to pay off their personal student loan debt or their children’s debt. There are many choices for repaying student loans. This checklist provided by DST Systems, Inc. can help you weigh them.

Actively managing your debt is an important step, and your student debt may be one of the biggest financial obligations you have. There are many strategies that could help you manage student loans efficiently. Here is a checklist.

• Choose a federal loan repayment plan that fits your circumstances:

o    The Standard Repayment Plan requires a fixed payment of at least $50 per month and is offered for terms up to 10 years. Borrowers are likely to pay less interest for this repayment plan than for others.

o    The Graduated Repayment Plan starts with a reduced payment that is fixed for a set period, and then is increased on a predetermined schedule. Compared to the standard plan, a borrower is likely to end up paying more in interest over the life of the loan.

• The Extended Repayment Plan allows loans to be repaid over a period of up to 25 years. Payments may be fixed or graduated. In both cases, payments will be lower than the comparable 10-year programs, but total costs could be higher. This program is complex and has specific eligibility requirements. See the Extended Repayment Plan page on the U.S. Department of Education website for details.
• The Income-Based Repayment Plan (IBR), the Pay as You Earn Repayment Plan, the Income-Contingent Repayment Plan (ICR) and the Income-Sensitive Repayment Plan offer different combinations of payment deferral and debt forgiveness based on your income and other factors. You may be asked to document financial hardship and meet other eligibility requirements. See the U.S. Department of Education's pages on income-driven repayment plans and income-sensitive repayment plans for more information.

• Take an inventory of your debt. How much do you owe on bank and store credit cards? On your home mortgage and home equity credit lines? On car loans? Any other loans? Consider paying extra each month to reduce the loans with the highest interest rates first, followed by those with the largest balances.
• Free up resources by cutting costs. Consider eating out less, reducing snacks on the go, and carpooling or using mass transit instead of driving to work. You may also be able to cut your housing costs, put off vacations and reduce clothing purchases.
• Think about enhancing your income. A second job? A part-time business opportunity?

·         Consider jobs that offer opportunities for subsidies or debt forgiveness.

• Federal civil service employees may be eligible for up to $10,000 a year for paying back federal student loans. See the U.S. Office of Personnel Management's Student Loan Repayment Program for more information.
• Nurses working in underserved areas may be eligible for loan assistance through the U.S. Department of Health and Human Services' NURSE Corps Loan Repayment Program.
• Service members in the U.S. Armed Forces are eligible for support. Check out the service-specific programs offered by the Air Force, the Army, the National Guard and the Navy.
• Teachers can consider programs such as Teach for America and the Teacher Loan Forgiveness Program. 
• Sign up for automatic loan payments. Many loans offer discounted interest rates for setting up automatic electronic payments on a predetermined schedule. A reduction of 0.25% per year may look small, but over the life of a 20-year loan, it can reduce your total interest cost by hundreds or even thousands of dollars.
• A last resort is seeking loan deferment or forbearance. Students facing significant financial hardship may be able to put off loan interest or principal payments. To see whether you might qualify, look to the U.S. Department of
• Education's information on Deferment and Forbearance.

Please call us if there is any way that we can help with this topic. You can reach us at (201)843-0044.

Required Attribution


Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

What Benchmark Should I Use to Evaluate My Portfolio?

What Benchmark Should I Use to Evaluate My Portfolio?

The following brief article takes a look at some of the benchmark issues associated with assessing portfolio performance.  It is an interesting article for anyone who has questions about how to evaluate their investment performance.

Assessing Portfolio Performance: Choose Your Benchmarks Wisely

You can't help but hear about the frequent ups and downs of the Dow Jones Industrial Average or the S&P 500 index. The performance of both major indexes is widely reported and analyzed in detail by financial news outlets around the nation.

Like the Dow, the S&P 500 tracks the stocks of large domestic companies. With 500 stocks compared to the Dow's 30, the S&P 500 comprises a much broader segment of the stock market and is considered to be representative of U.S. stocks in general. Both indexes are generally useful tools for tracking stock market trends, but some investors mistakenly think of them as benchmarks for how well their own portfolios should be doing.

However, it doesn't make much sense to compare a broadly diversified, multi-asset portfolio to just one of its own components. Expecting portfolio returns to meet or beat "the market" is usually unrealistic, unless you are willing to expose 100% of your life savings to the risk and volatility associated with stock investments.

Asset allocation: It's personal

Just about every financial market in the world is tracked by one or more indexes that investors can use to look at current and historical performance. In fact, there are hundreds of indexes based on a wide variety of asset classes (stocks/bonds), market segments (large/small cap), and styles (growth/value).

Investor portfolios are typically divided among asset classes that tend to perform differently under different market conditions. An appropriate mix of stocks, bonds, and other investments depends on the investor's age, risk tolerance, and financial goals.

Consequently, there may or may not be a single benchmark that matches your actual holdings and the composition of your individual portfolio. It could take a combination of several benchmarks to provide a meaningful performance picture.

Keep the proper perspective

Seasoned investors understand that short-term results may have little to do with the effectiveness of a long-term investment strategy. Even so, the desire to become a more disciplined investor is often tested by the arrival of quarterly or annual financial statements.

The main problem with making decisions based on last year's performance figures is that asset classes, market segments, or industries that do well during one period don't always continue to perform as well. When an investment experiences dramatic upside performance, it may mean that much of the opportunity for market gains has already passed. Conversely, moving out of an investment when it has a down year could mean you are no longer in a position to benefit when that segment starts to recover.

On the other hand, portfolios that are left unattended may drift and begin to take on too much risk or become too conservative. Rebalancing periodically could help bring your asset mix back in line with your preferred allocation.

There's really nothing you can do about global economic conditions or the level of returns delivered by the financial markets, but you can control the composition of your portfolio. Evaluating investment results through the correct lens may help you make appropriate adjustments and effectively plan for the future. This is why we use analytical research services like Morningstar Fund Research, Lipper and Advisory World to help analyze performance and to make sure that the funds we use:

• ·       Have competitive fees
• ·       Are doing well compared to their peer group
• ·       Have not gone through recent management changes
• ·       Do not overlap other funds we use.

If you have questions or concerns regarding this article, please feel free to call our office at 201-843-0044.