Are your beneficiary assignments undermining your Will?

Are your beneficiary assignments undermining your Will?

 I find that clients neglect to review their beneficiary assignments and often a deceased parent (or a former wife) is named. While this may be your intent, poorly thought out beneficiary assignments can screw up allot of good planning.

Many people create a well-thought-out estate plan which includes the BIG 4 estate planning documents (Last Will and Testament, Durable Power of Attorney, Health Care Proxy and Living Will) and then they ignore their beneficiary assignments. Why is this a problem? Because the beneficiary assignment may for example:

·       Give money to a minor directly when the Will paid intended to pay the money out to a trust

·       Give the money to a disabled family member when the Will would have paid it out to a Special Needs Trust

·       Give the money to someone who is not the intended beneficiary

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds, and individual stocks and bonds.

The best feature of beneficiary assignments is that they can quickly send out the money to the right party. Also, a spousal beneficiary of an IRA account may continue to enjoy tax deferral for years to come.  A non spousal beneficiary may continue to enjoy tax deferral for years to come but is required to take out a modest amount each year as a Required Minimum Distribution.

The "fatal flaw" of beneficiary-designated assets is that because they are not considered probate assets, they pass "under the radar screen" and trump the directions spelled out in a will. This all too often leads to unintended consequences -- individuals who you no longer wish to inherit property do, some individuals receive more than you intended, some receive less, and ultimately, there may not be enough money available to fund the bequests you laid out in your will.

Not naming a Beneficiary is a NO NO!

Not naming beneficiaries or failing to update forms if a beneficiary dies can create a mess. For example, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiary(ies) are named, when the account holder dies, the IRA typically would pass to the estate instead of the children directly as the account holder likely would have preferred. This not only would generate a tax bill for the children, it would also prevent them from stretching IRA distributions out over their lifetime.

Planning Priorities

Given these very real consequences, it is important to work with an attorney to ensure coordination between your beneficiary-designated assets and the disposition of property as it is spelled out in your will.

Also, I recommend reviewing my client’s beneficiary designations on a regular basis -- at least two years -- and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update them, as necessary, in accordance with your wishes.

Investing Mistakes to Avoid

Investing Mistakes to Avoid

·        Sell when the market is down

There is an old saying about investing, "If you look at the floor and it is red from rose peddles, it is time to sell. If you look at the floor and it is red from blood- it is time to buy". Many inexperienced investors tend to sell when the market drops, locking in losses. However, someone is always willing to buy those shares at a discount.

·        Buy high, sell low

According to JP Morgan Asset Management,  in the 20 year period ending in 2013, the average investor made a return of 2.5%. Yet, in the same time period, the S&P 500 Index earned  9.2 and the Aggregate Bond Index earned 5.7%. Humans are social creatures and tend to follow the herd. Thus, people who have not been investing in stocks before tend to go in at the top of the market only to see their investments go down in value.  Then they sell at the bottom only to repeat this cycle over and over again.

·        Stay on the sidelines until the market calms down

Often, people wait until it feels "safe" to go back in. It will only feel "safe" to go back in after the market has appreciated again and the biggest gains have already happened. It is not easy to time the markets and few do it well consistently.

·        Watching for stock market tips on cable TV and radio shows

Few tips on stocks have any lasting value because the stock market immediately updates any news that impacts a company's stock price the moment it is reported. Lessons learned from the field of Behavioral Finance point to the importance of acknowledging all of our investing biases and avoiding the pitfalls caused by them.  Cable TV and radio shows make you more susceptible to panic selling and investor remorse. Every pundit considers himself or herself  an expert. Their advice is typically conflicting. Remember that no one can predict the future and you should only be in the market if you are a long term investor.

·        My best friend says ____ is a sure thing

Here again.... No one can predict the future. Avoid investing tips. They usually lead to investment losses.

    ·        Ignore fees

You should always know the cost associated with an investment. Is there an upfront sales charge, surrender charge or 12b1 charge? What are the management fees or advisory fees?

·        Use an investment model

If you plan to invest in a model that has 60% invested in stocks, you need to periodically rebalance the portfolio back to this model or you could wind up with a much more aggressive portfolio as your stock funds appreciate in a rising market. Periodically rebalancing also allows you to take profits and to buy assets when they are cheaper.

·        People are often swayed by the latest and the greatest

There are always going to be "darlings" in the stock market. Over the years I have seen many favored stocks fall out of favor and lose value. You often make more money investing in a company when it has stumbled and is beginning to recover. Investors are often overly optimistic  in rising markets and overly pessimistic when the market goes down.

·        Doing a " Hail Mary Pass" to an overvalued stock

If only you had invested all your money in __________10 years ago, you'd be a millionaire today. You can fill in the blanks (Apple, Google, Amazon.com etc.). Betting a large portion of your assets one investment in a hope and a prayer is a dangerous gamble and it is not investing, it is gambling.

Having been at this a long time, I remember all of the companies that have fallen on hard times. In fact, in 2011 alone, there were 86 companies that filed for bankruptcy according to BankruptsyData.Com. Some of the largest bankruptcies of all time include General Motors, Chrysler, Enron, CIT, WorldCom, Washington Mutual, and Lehman Brothers. All were "Darlings" at one time.

There is no silver bullet when it comes to investing. Everyone’s goals, time horizon and financial circumstances are different. If you would like to discuss this further just give me a call at 201-843-0044.

How can I Provide for Cash Flow in Retirement?

                          How can I Provide for Cash Flow in Retirement?

 

Clients often ask me this question. Less and less Americans still have a pension check coming in. Thus, they need to focus on Social Security benefits and finding prudent ways to tap their assets in retirement. I have detailed below some of the different ways that people handle their day to day cash flow in retirement:

 

Bucket Approach- Many people choose to set aside a “bucket” of money in a savings account that has enough money in it to cover one to two years worth of expenses.  Then, you withdraw from that fund a monthly stipend in order to cover your cash flow expenses.  Under this approach, people have traditionally taken out a withdrawal equal to 4% of their portfolio value. The assumption is that the portfolio over time would return them that much or more.  Given that we are in a fragile economic time, it would be more prudent to take a lower distribution. Perhaps a 3% distribution might be more appropriate (at least until the economy gets better).

 

Payout the Interest and Dividends- You can have all of your funds payout the dividends and/or interest that they earn. The advantage of this is that you do not need to dip into the principal. However, it does not allow you to diversify your portfolio because all of your money needs to be invested in income producing investments.

 

Immediate Annuity- Immediate Annuities offer a way to create a private pension plan similar to what you would receive if you had a pension from an employer. The advantage this offers is that it gives you a stable monthly check for a certain time period or for lifetime. The disadvantages are that it is an irrevocable decision and does not help you plan for inflation.

 

Variable Annuity with Guaranteed Payout- I mentioned that many people have chosen to use variable annuities with a guaranteed principal rider. I am not a big fan of this option because of the high overall fees you would pay each year.

 

Combination Plan- A third approach would be a combination of the first two approaches. Annuities or CDs would be used for the beginning part of your retirement, followed by dipping into the principal of your bond allocation and eventually dipping into your stock allocation later in retirement. Many people have chosen to not go for the annuity approach because it's an irrevocable decision.  However, it does help with the volatility.

 

There is no perfect answer. Everyone’s goals, time horizon and financial circumstances are different. If you would like to discuss this further just give me a call at 201-843-0044.

Lessons Learned after Sending Four Kids Off to College- PART 2

Lessons Learned after Sending Four Kids Off to College

   PART 2

 

How do you pay for your kids to go to college? In this blog, we will dig deeper into the financial aid process and how to evaluate different schools.

1.Fill out the FAFSA (Free Application for Federal Student Aid) as early as possible even if you don’t think you will qualify for any financial aid. 

 

 I know, no one likes completing the FAFSA but every school requires it.  If your child receives a merit scholarship you may still have to complete the FAFSA form each year even though the merit scholarship had nothing to do with financial aid.

Reach out to me if you need help completing the FAFSA.

2. Understand How Your Assets affect Financial Aid.

Parents worry about how their assets might sabotage their chances for need-based aid. Aid formulas typically don’t consider retirement assets for financial aid purposes. The FAFSA form doesn’t ask about the value of a family’s retirement accounts.

The FAFSA, which is universally used by schools participating in the federal financial aid system, also doesn’t ask parents if they own a primary residence. Consequently, home equity won’t hurt your chances of receiving financial aid.

In addition, the aid application isn’t concerned with the assets of family-owned businesses with 100 or less full-time employees.

3. Some Colleges/Universities require the CSS/Financial Aid PROFILE.

Four hundred schools, nearly all private, use an additional aid application called the CSS Profile which takes a much deeper look at family finances.  This is a very difficult form to complete so call me if you would like my assistance in completing the form.

They  request that you send your supporting tax documents to a PO Box. I was uncomfortable with that so I sent the documents FedEx directly to the schools. Call beforehand because not every college will allow you to do this. While PROFILE schools also ignore retirement accounts, they do inquire about home equity and family-owned businesses. 

4. In my opinion, it is very important for the parents to stay very involved in the process.

I don’t agree that the student should go through this process with little support. There is too much at stake and the expense of college is too much of an investment. I know some guidance counselors and parents will disagree with me. This is just my opinion. I  think your child (and they are only 17/18 years old) will make a better decision if you all dig deep into the statistics and all are involved in the decision. Without guidance, students put too much weight on their “gut feeling”, look of the campus and the cafeteria food.

5. Know the Statistics that Count.

Since we were dealing with twins heading off to college, it became even more important to stay organized in comparing schools. It also became imperative to keep track of what applications, essays, FAFSA and CSS Profile forms were submitted and received. We kept an excel spreadsheet with the following information:

·       Tuition

·       Room and Board

·       Fees

·       % of students who graduate in 4 years and then in 6 years

·       Retention rate-% of students who stay after Freshman year

·       Range of  GPA admitted

·       Range of  ACT or SAT Scores admitted

·       % admitted

·       # of students

·       safe, target or reach school

·       Interested major/minor offered

·       Location, cost of travel

·       Likelihood of internships

·       Student/Faculty ratio

·       % of students who get scholarships

·       % that get financial aid

·       ROI or Best Value

·       CSS Profile required and completed

6. Check out the college's ROI or whether they are considered a “Best Value”.

The following website provides the return on investment (ROI) for colleges. The results may surprise you. However, if the college or university offers mostly technical majors (science, math, engineering etc.) that will also affect the ROI. It is interesting that some of the most expensive schools do not fare as well as more modestly priced schools.   www.payscale.com/college-education-value.

7. Check out Net Price Calculators.

Net price calculators are invaluable new tools that are now having a dramatic impact on higher-education practices.

A net price calculator will provide you with a personal estimate of what a particular school will cost after scholarships or grants are subtracted. To use the calculator, you will need to have information from your latest tax returns and investment statements.

The federal government has mandated that all schools maintain a net price calculator on their website. Often the easiest way to find the calculator for an institution is to Google the name of the school and “net price calculator.” If the net prices are way beyond your budget, you can then search for schools that may be more affordable.

8. Decide on your family philosophy toward paying for college when comparing offers.

Know how much you are willing to spend towards your child's education and how much you expect them to pay. Decide on how much debt, if any, you are willing to have your child take on after graduation. Discuss this with them early on in the process. Discuss early whether you expect them to work during the school year or summers to help pay as well.

We found it very helpful to multiply the tuition and scholarships by 4 (hopefully they graduate in 4 years). A $10,000 tuition difference in one year may not seem like such a determining factor. However, $40,000 may influence your decision.

9. Their debt is your debt.

Many have written that they think that student debt is the next bubble and I tend to agree. According to JP Morgan Asset Management, student debt represents 9% of all debts in America. That is higher than credit card debt and auto loans.  Few student loans allow the student to borrow alone. The parents are often cosigner or loan guarantors. Student debts are the only debts you cannot walk away from even  in the event of a bankruptcy. Thus, be realistic about how much you all can afford to pay back. Students with too much debt usually have to delay going on to higher education, saving for a house, retirement or starting a family.

10. Discuss the major they are interested in studying and the likelihood and difficulty paying off their debt based on the salary they expect to earn.

Encourage your child to research the earning potential for the major they are interested in studying. If they want to go for a major that has low earnings potential, they need to be realistic about the debt they take on.

Please call me if you have any questions in regards to any of these issues. I'd be happy to discuss it with you further.

Lessons Learned after Sending Four Kids Off to College. Part One

Lessons Learned after Sending Four Kids Off to College.

   PART 1

I recently dropped off my twins for their first year of college. These are my last two. I had two sons graduate in 2011 and 2012.  Here are some lessons I learned along the way. There are so many that I will do this blog in two parts.

1. Don’t be afraid to apply to colleges that may seem out of your budget.

There is often a big difference between the “sticker price” and the final tuition price offered. Often, private colleges will offer merit scholarships even if your child does not qualify for financial aid. Your child is more likely to receive money if he or she offer something the college wants (a talent, profile, qualifications).  If your child's grades and test scores are higher than the average student at the school, they are more likely to get a scholarship and/or be a candidate for the honors program. Note: Be aware that some colleges offer  “Awards”  that are actually loans which need to be paid back.  Your child also has a better chance at getting accepted and offered money by a college that is further from home for diversity reasons.  However, don’t forget to consider the added cost of airfares, etc. when comparing offers.

2. Apply for Early Action not Early Decision.

Early Action allows your child to be one of the first applicants evaluated and perhaps have a better chance of getting accepted. They are not obligated to attend. Also, Early Action applicants have a better chance of being offered money. If you don’t object to paying the sticker price and your child has wanted to go to a particular college since kindergarten then go with Early Decision. However, Early Decision takes away much of your bargaining power.

There are hundreds of colleges that offer a quality education. The common application makes it easier to apply to more colleges and see what comes back in terms of programs and scholarships. However, your child must be willing to put in the extra effort of completing many more essays, since many colleges require supplemental essays.

 3. Few students get money for athletics.

Very few students go on to college athletic programs and only a few of them actually get scholarships. One of my sons got on a Division I track team but did not receive a scholarship for it. There is nothing wrong with your child being dedicated to a sport. Obviously, there are many benefits. Just don't rely on a sports scholarship to pay all or part of your child's college education.

 4.  529 Plans are a great deal.

529 plans offer you the option of saving for college without having to pay taxes on the earnings within the account, as long as the money is used for a "qualified expense" (room & board, books, tuition). You need to keep good records in case you are ever audited. If the school offers credit card payment options, pay the bill by credit card and then payoff the credit card with the 529 plan withdrawal. This will help you earn points (if your card offers them) for school expenses paid.

5. Even Small Scholarships Help.

My daughter and son got several small scholarships by writing essays in the spring of their senior year when most kids are not interested in writing more essays (so they had a better chance of winning them).   Have them start writing their essays early. The questions come out in the summer and the best essays take lots of revisions. Part of the common application essay and supplemental essays could possibly be used as starting off points for the essay entries in the spring. Suggest that they ask their teachers early for their letters of recommendation (before they get overwhelmed with other requests).

6. Guidance Counselors Can be Worth Their Weight in Gold.

We were lucky to have very informative and helpful guidance counselors for all of our children. If you are not as fortunate, there are college counselors and many college fairs where you can gather information as well as campus visits. Big universities vary in terms of how important it is to visit the campus.

In our next blog entry, I will delve deeper into the financial aid process and how to evaluate different schools. Please call me if you have any questions.  I'd be happy to discuss them with you.

What Should You Do If You Are Facing A Job Change?

 

What Should You Do If You Are Facing A Job Change?

 

Whenever one of my clients is in a job change situation I always feel it's important to highlight the following issues in helping guide them through this transition:

1. If you do receive any severance, it's an important time to take stock of your cash flow expenses and look carefully at what is an essential bill and to cut out any excess discretionary spending. The goal of a severance package is to help you to survive the period of being unemployed. It can take quite awhile to find another job, thus by cutting your expenses, it will allow you to cover your expenses for a longer period of time.

2. Many people feel that they need to move quickly to make changes to their 401(k) and/or to rollover the money. I often encourage clients to slow down and make no decisions on their 401(k) plan, until they see where they land. You can always roll the money over, and there is no time limit on rolling it over. As long as you have $5,000 or more in the plan, there is no reason you cannot leave it there indefinitely. At a later point you could roll it over to your new employer or roll it over to an IRA rollover account.

3. As long as your employer has more than 20 employees, you are eligible to be covered by your employer health plan through COBRA. This is a great advantage because it give you more planning options for the future. Many people are surprised to see how expensive the cost of COBRA is. This is because often when you work for a company your health insurance has been heavily subsidized. Also, now with the Affordable Care Act there are health exchanges available that offer options as well. That may make it easier to obtain an individual policy that might be cheaper than COBRA.

4. Many people don't realize that as soon as you lose your job you are no longer covered for disability benefits. Thus, if you were disabled during the time you are job hunting, you would have no coverage in place. If you have a private disability policy this would not be the case.

5. Often, people don't realize that you may have the option of converting the group life insurance coverage you have with your employer. If you have any outstanding health issues and want to keep the life insurance, this could be a very valuable option to consider.

6. Review you Flex Plan benefits. Once you leave your employer, you may lose those benefits. Perhaps it is time for some new glasses or quickly scheduled medical/dental care.

7. Stock Options usually end with termination of employment. Do you feel bullish about the company? Are your options under water? Are they Nonqualified or Incentive Stock Options? There are many considerations here.

Please call me if you have any follow-up questions in regards to any of these issues and I'd be happy to discuss these issues with you further.

Is Longevity a Risk?

Is Longevity a Risk?

 Life expectancies have been rising for decades and  the number of centenarians in developed countries is growing 5% per year.  Of course, not that many people make it to that age. A more impressive statistic is offered by JP Morgan's Guide to Retirement which shows that  a 65 year old married couple  has a 73% chance of at least one person reaching the age of 85 and a 47% chance of at least one person making it to the age of 90. Also, these are averages including smokers, people who are obese, and people with health problems . Typically,  my clients are well educated and financially more secure.  The higher the level of education, the less likely people are to smoke and/or to be obese. Thus, I would suspect that these numbers would skew towards higher ages if you exclude smokers.

According to the Society of Actuaries, 40% of adults underestimate their life expectancy by five or more years. People are often more risk averse as they get older and would prefer a less volatile portfolio. Yet, this short term risk aversion increases your risk of outliving your money. Not only are bond yields low today but many think that rates will rise in the years ahead. As yields rise, erosion of principal in bond investments often  takes place. This does not mean that you should jettison bond related investments but it does mean that diversification in your bond strategy is essential. It also means that it is important to be conservative in your withdrawals from a retirement portfolio.

Delaying filing for Social Security benefits is one of the wisest courses of action. By delaying filing for Social Security benefits from age 62 to age 66 (if born 1943-1954) will increase your benefits by 25%. By delaying from age 66 until age 70, you will get 32% more in benefits. Where else can you guarantee a 7.3% compound growth rate on your money (annual growth in benefits age 62-70)? Also, delaying filing gives you a higher inflation adjustment each year.

Be realistic about withdrawal rates. If you had an apple tree, it would give you a yearly harvest that would last for years. However, if you cut off a few branched each year, the harvest will decline. In this environment, it pays to be prudent about withdrawals. I recommend that portfolio withdrawals not exceed 3% per year (rising with inflation), especially in the first ten years of retirement. Taking out more than this is the equivalent of cutting branches and could lead to a shortfall later in retirement.

 You need to understand all of the factors that lead to a successful retirement. You control how much you spend and the portfolio model you chose. You have no control over market returns and/or government policies and you have some control over your longevity and your decision of when you retire. Make the most of the things you can control.