When should you review it? What should you review?
An estate plan has three objectives. The first goal is to preserve your accumulated wealth. The second goal is to express who will receive your assets after your death. The third goal is to state who will make medical and financial decisions on your behalf if you cannot.
Over time, your feelings about these objectives may change. You may want to name a new executor or health care agent. You may rethink how you want your wealth distributed.
This is why it is so vital to review your estate plan. Over ten or twenty years, your health, wealth, and outlook on life may change profoundly. The key is to recognize the life events that may call for an update.
Have you just married or divorced? If so, your estate plan will absolutely need revision. For that matter, some, or all, of your will may now be legally invalid. (Some state laws strike down existing wills when a person is married or divorced.) If your children or grandchildren marry or divorce, that also calls for an estate plan review.1
Has there been a loss or serious illness within your family? If so, your named executor or health care agent may have to be changed. If one family member has now become physically or financially dependent on you, that too may be an occasion for a second look at the plan.
Has your net worth risen or declined substantially since the plan was first implemented? If you have become much wealthier in the past five or ten years (or much less wealthy), that circumstance may have altered your vision of how you want your assets distributed at your death. Maybe you want to give more (or less) to charity or your heirs. A large inheritance can also prompt you to rethink your wealth protection and wealth transfer strategy.
Have you changed your mind about what your wealth should accomplish? Today, you may view your wealth differently than you did when you were younger. New purposes may have emerged for it – new roles that it can play. Following through on those thoughts may lead you to reconsider aspects of your estate plan.
Have your executors or trustees changed their mind about their roles? If they are no longer interested in shouldering those responsibilities, no longer alive, or no longer of sound mind or reputable character, it is revision time.
Have you retired, moved to another state, or bought or sold real estate? All of these events call for an estate plan check-up.
The first step in revising an estate plan is to update essential documents. Not just your will or your trust, but also your financial power of attorney and health care proxy. Review all the names: your executor; your trustee; your health care agent. Changes in your personal (and even your business) relationships may call for alterations to those choices.
The second step is to review your risk management. Does language in your will need revision? Does a trust created years ago need to be modified or replaced? Do new estate planning vehicles need to enter the picture in order to help you adequately transfer wealth, counter estate taxes, or endow charities?
What about your life insurance? Do beneficiary forms of life insurance policies need updating? Is corporate-owned life insurance coverage you once counted on now absent? Will policy payouts be sufficient enough to help your loved ones address financial issues after your death?
The third step is to make sure your assets are in sync with your plan. For example, if you have a revocable trust, have you transferred ownership of all the assets that are supposed to go into it? Have you acquired new assets that need to be “poured in?”
If you are married and it appears certain that your estate will be taxed, you may want to own some assets and have your spouse own others. Yes, the federal estate tax exemption is portable, so any unused estate tax and gift tax exemption is allowed to pass to a surviving spouse. At the state level, though, there are different rules. So if all assets are in your spouse’s name and your home state levies an estate tax, that scenario may mean higher estate taxes for your heirs than if those assets were alternately owned by either you or your spouse.2
Even if nothing major happens in your life, review your plan every five years or so. While your life may be uneventful over five years, tax law, the financial markets, and business climates may change significantly. Those kinds of shifts can impact your estate planning strategy.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - 360financialliteracy.org/Topics/Retirement-Planning/Estate-Planning-Basics/How-often-do-I-need-to-review-my-estate-plan [8/4/16]
2 - time.com/money/4187332/estate-planning-checkup-items-review/ [1/20/16]
If you are between 40 & 60, beware of these financial blunders & assumptions.
Between the ages of 40 and 60, many people increase their commitment to investing and retirement saving. At the same time, many fall prey to some common money blunders and harbor financial assumptions that may be inaccurate.
These errors and suppositions are worth examining, as you do not want to succumb to them. See if you notice any of these behaviors or assumptions creeping into your financial life.
Do you think you need to invest with more risk? If you are behind on retirement saving, you may find yourself wishing for a “silver bullet” investment or wishing you could allocate more of your portfolio to today’s hottest sectors or asset classes so you can catch up. This impulse could backfire. The closer you get to retirement age, the fewer years you have to recoup investment losses. As you age, the argument for diversification and dialing down risk in your portfolio gets stronger and stronger. In the long run, the consistency of your retirement saving effort should help your nest egg grow more than any other factor.
Are you only focusing on building wealth rather than protecting it? Many people begin investing in their twenties or thirties with the idea of making money and a tendency to play the market in one direction – up. As taxes lurk and markets suffer occasional downturns, moving from mere investing to an actual strategy is crucial. At this point, you need to play defense as well as offense.
Have you made saving for retirement a secondary priority? It should be a top priority, even if it becomes secondary for a while due to fate or bad luck. Some families put saving for college first, saving for mom and dad’s retirement second. Remember that college students can apply for financial aid, but retirees cannot. Building college savings ahead of your own retirement savings may leave your young adult children well-funded for the near future, but they may end up taking you in later in life if you outlive your money.
Has paying off your home loan taken precedence over paying off other debts? Owning your home free and clear is a great goal, but if that is what being debt-free means to you, you may end up saddled with crippling consumer debt on the way toward that long-term objective. In June 2015, the average American household carried more than $15,000 in credit card debt alone. It is usually better to attack credit card debt first, thereby freeing up money you can use to invest, save for retirement, build a rainy day fund – and yes, pay the mortgage.1
Have you taken a loan from your workplace retirement plan? Hopefully not, for this is a bad idea for several reasons. One, you are drawing down your retirement savings – invested assets that would otherwise have the capability to grow and compound. Two, you will probably repay the loan via deductions from your paycheck, cutting into your take-home pay. Three, you will probably have to repay the full amount within five years – a term that may not be long as you would like. Four, if you are fired or quit the entire loan amount will likely have to be paid back within 90 days. Five, if you cannot pay the entire amount back and you are younger than 59½, the IRS will characterize the unsettled portion of the loan as a premature distribution from a qualified retirement plan – fully taxable income subject to early withdrawal penalties.2
Do you assume that your peak earning years are straight ahead? Conventional wisdom says that your yearly earnings reach a peak sometime in your mid-fifties or late fifties, but this is not always the case. Those who work in physically rigorous occupations may see their earnings plateau after age 50 – or even age 40. In addition, some industries are shrinking and offer middle-aged workers much less job security than other career fields.
Is your emergency fund now too small? It should be growing gradually to suit your household, and your household may need much greater cash reserves today in a crisis than it once did. If you have no real emergency fund, do what you can now to build one so you don’t have to turn to some predatory lender for expensive money.
Insurance could also give your household some financial stability in an emergency. Disability insurance can help you out if you find yourself unable to work. Life insurance – all the way from a simple final expense policy to a permanent policy that builds cash value – offers another form of financial support in trying times.
Watch out for these mid-life money errors & assumptions. Some are all too casually made. A review of your investment and retirement savings effort may help you recognize or steer clear of them.
1 - nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/ [6/25/15]
2 - tinyurl.com/oalk4fx [9/14/14]
The answer depends on your income.
Your Social Security income could be taxed. That may seem unfair, or unfathomable. Regardless of how you feel about it, it is a possibility.
Seniors have had to contend with this possibility since 1984. Social Security benefits became taxable above certain yearly income thresholds in that year. Frustratingly for retirees, these income thresholds have been left at the same levels for 32 years.1
Those frozen income limits have exposed many more people to the tax over time. In 1984, just 8% of Social Security recipients had total incomes high enough to trigger the tax. In contrast, the Social Security Administration estimates that 52% of households receiving benefits in 2015 had to claim some of those benefits as taxable income.1
Only part of your Social Security income may be taxable, not all of it. Two factors come into play here: your filing status and your combined income.
Social Security defines your combined income as the sum of your adjusted gross income, any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of modified adjusted gross income, or MAGI.)2
Single filers with a combined income from $25,000-$34,000 and joint filers with combined incomes from $32,000-$44,000 may have up to 50% of their Social Security benefits taxed.2
Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2
What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive.2
You may be able to estimate these taxes in advance. You can use an online calculator (a Google search will lead you to a few such tools), or the worksheet in IRS Publication 915.2
You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 25% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2
Did you know that 13 states also tax Social Security payments?North Dakota, Minnesota, West Virginia, and Vermont use the exact same formula as the federal government to calculate the degree to which your Social Security benefits may be taxable. Nine other states use more lenient formulas: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, and Utah.2
What can you do if it appears your benefits will be taxed? You could explore a few options to try and lessen or avoid the tax hit, but keep in mind that if your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim.If your combined income is reasonably near the respective upper threshold, though, some moves might help.
If you have a number of income-generating investments, you could opt to try and revise your portfolio, so that less income and tax-exempt interest are produced annually.
A charitable IRA gift may be a good idea. You can make one if you are 70½ or older in the year of the donation. You can endow a qualified charity with as much as $100,000 in a single year this way. The amount of the gift may be used to fully or partly satisfy your Required Minimum Distribution (RMD), and the amount will not be counted in your adjusted gross income.3
You could withdraw more retirement income from Roth accounts. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax-exempt as long as you are age 59½ or older and have held the account for at least five tax years.4
Will the income limits linked to taxation of Social Security benefits ever be raised? Retirees can only hope so, but with more baby boomers becoming eligible for Social Security, the IRS and the Treasury stand to receive greater tax revenue with the current limits in place.
1 - ssa.gov/policy/docs/issuepapers/ip2015-02.html [12/15]
2 - fool.com/retirement/general/2016/04/30/is-social-security-taxable.aspx [4/30/16]
3 - kiplinger.com/article/retirement/T051-C001-S003-how-to-limit-taxes-on-social-security-benefits.html [7/16]
4 - irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [1/26/16]
In fact, many predictions about Wall Street have misread the market’s direction.
Trying to determine how Wall Street will behave next week, next month, or next year is difficult. Some feel it is impossible. To predict the near-term direction of the market, you may also need to predict upcoming earnings seasons, central bank policy moves, and the direction of both the domestic and global economy. You might as well forecast the future of the world.
That is not to say forecasting is useless. You could even argue that it is a necessity. Every month, economists are polled by various news outlets that publish their median forecasts for hiring, inflation, personal spending, and other economic indicators. Those median forecasts are often close to the mark, and sometimes exactly right.
Figuring out what lies ahead for equities, however, is often a guessing game. Looking back, some very bold predictions have been made for the market – some way off the mark.
Dow 30,000! More than a decade ago, a few analysts boldly forecast that the Dow Jones Industrial Average would climb to astonishing heights – heights the index has yet to reach today.
The first was investment manager Harry Dent, who, to his credit, had written a book called Great Boom Ahead predicting an amazing run for both the economy and the market starting in the mid-1990s. (Indeed, the S&P 500 averaged a yearly gain of almost 29% during 1995-99.) Dent’s 1999 bestseller, The Roaring 2000s, posited that the Dow would top 30,000, perhaps 35,000 in the near future as maturing baby boomers poured money into equities. He was wrong. What happened instead was the so-called “lost decade,” in which the broad market basically did not advance. As for the Dow 30, it ended the 2000s at 11,497.12.1,2
As a money manager, Robert Zuccaro had been part of a team that had realized triple-digit annual returns in the late 1990s. He put out a book soon afterward called Dow 30,000 by 2008: Why It’s Different This Time. (As the market cratered in 2008, you might say his timing was bad.) Analysts James K. Glassman and Kevin A. Hassett authored a volume called Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. It came out in 2000, and also proved overly optimistic.2,3
Dow 3,300! Harry Dent changed his outlook over time. In 2011, he told the Tampa Bay Times that the blue chips would plunge to that dismal level by 2014 or earlier. The Dow finished 2014 at 17,823.07. For the record, Dent now sees a “bubble collapse” starting in 2016 or 2017, soon breeding “widespread civil unrest” in America.2,4
Sell your shares now! In “Bearish on America,” a 1993 Forbes cover story, Morgan Stanley analyst Barton Biggs urged investors to dump their domestic shares en masse in light of the economic policies favored by a new presidential administration. The compound return of the S&P 500 over the next seven years: 18.5%.5
The market is done, no one believes in it! Perhaps the most famous doomsday call of all time occurred in 1979 when Business Week published a cover story entitled “The Death of Equities.” Wall Street was emerging from its second awful bear market in less than seven years. The article cited a widespread loss of faith among investors, asserting that “the death of equities is a near permanent condition.” Equities, so to speak, soon proved very much alive: the S&P 500 returned 21.55% in 1982, 22.56% in 1983, 6.27% in 1984, 31.73% in 1985, and 18.67% in 1986.5,6
Recession ahead, the market points the way! Can the behavior of the market foretell a recession? Is there a causal relationship between a down or sideways market and an oncoming economic slump? Some analysts see little or no link. Fifty years ago in Newsweek, the noted economist Paul Samuelson wrote that the equity markets had “forecast nine of the past five recessions.” He was being sardonic, but he had a point. Looking back from 2016 to 1945, Wall Street has seen 13 bear markets, only seven of which (53%) have seen a recession begin within about a year of their onset.7,8
Take the words of the pundits with a grain of salt. Some have been right, but many have been wrong. While the most radical market predictions may make good copy, they may also lead investors to take bad advice.5
Citations.1 - cbsnews.com/news/harry-dent-and-the-chamber-of-poor-returns/ [8/19/13]2 - finance.yahoo.com/q/hp?s=^DJI&a=11&b=29&c=1999&d=11&e=31&f=2014&g=d [6/2/16]3 - dividend.com/how-to-invest/10-hilariously-wrong-bullbear-calls/ [1/19/15]4 - tampabay.com/news/business/markets/economic-naysayers-including-tampas-harry-dent-are-back-with-fresh-reports/2270981 [3/28/16]5 - forbes.com/sites/katestalter/2015/09/14/6-doomsday-predictions-that-were-dead-wrong-about-the-market/ [9/14/15]6 - forbes.com/sites/oppenheimerfunds/2014/01/23/clues-from-the-80s-bull-run/ [1/23/14]7 - cnbc.com/2016/02/04/can-the-markets-predict-recessions-what-we-found-out.html [2/4/16]8 - blogs.wsj.com/economics/2013/10/03/plunging-stock-prices-are-good-recession-predictor/ [10/3/13]
These spending and investing precepts may encourage its longevity.
All retirees want their money to last a lifetime. There is no guarantee it will, but, in pursuit of that goal, households may want to adopt a couple of spending and investing precepts.
One precept: observing the 4% rule. This classic retirement planning principle works as follows: a retiree household withdraws 4% of its amassed retirement savings in year one of retirement, and withdraws 4% plus a little more every year thereafter – that is, the annual withdrawals are gradually adjusted upward from the base 4% amount in response to inflation.
The 4% rule was first formulated back in the 1990s by an influential financial planner named William Bengen. He was trying to figure out the “safest” withdrawal rate for a retiree; one that could theoretically allow his or her savings to hold up for 30 years given certain conditions (more about those conditions in a moment). Bengen ran various 30-year scenarios using different withdrawal rates in relation to historical market returns, and concluded that a 4% withdrawal rate (adjusted incrementally for inflation) made the most sense.1
For the 4% rule to “work,” two fundamental conditions must be met. One, the retiree has to invest in a way that will allow his or her retirement savings to grow along with inflation. Two, there must not be a sideways or bear market occurring.1
As sideways and bear markets have not been the historical norm, following the 4% rule could be wise indeed in a favorable market climate. Michael Kitces, another influential financial planner, has noted that, historically, a retiree strictly observing the 4% rule would have doubled his or her starting principal at the end of 30 years more than two-thirds of the time.1
In today’s low-yield environment, the 4% rule has its critics. They argue that a 3% withdrawal rate gives a retiree a better prospect for sustaining invested assets over 30 years. In addition, retiree households are not always able to strictly follow a 3% or 4% withdrawal rate. Dividends and Required Minimum Distributions may effectively increase the yearly withdrawal. Retirees should review their income sources and income prospects with the help of a financial professional to determine what withdrawal percentage is appropriate given their particular income needs and their need for long-term financial stability.
Another precept: adopting a “bucketing” approach. In this strategy, a retiree household assigns one-third of its savings to equities, one-third of its savings to fixed-income investments, and another third of its savings to cash. Each of these “buckets” has a different function.
The cash bucket is simply an emergency fund stocked with money that represents the equivalent of 2-3 years of income the household does not receive as a result of pensions or similarly scheduled payouts. In other words, if a couple gets $35,000 a year from Social Security and needs $55,000 a year to live comfortably, the cash bucket should hold $40,000-60,000.
The household replenishes the cash bucket over time with investment returns from the equities and fixed-income buckets. Overall, the household should invest with the priority of growing its money; though the investment approach could tilt conservative if the individual or couple has little tolerance for risk.
Since growth investing is an objective of the bucket approach, equity investments are bought and held. Examining history, that is not a bad idea: the S&P 500 has never returned negative over a 15-year period. In fact, it would have returned 6.5% for a hypothetical buy-and-hold investor across its worst 15-year stretch in recent memory – the 15 years ending in March 2009, when it bottomed out in the last bear market.2
Assets in the fixed-income bucket may be invested as conservatively as the household wishes. Some fixed-income investments are more conservative than others – which is to say, some are less affected by fluctuations in interest rates and Wall Street turbulence than others. While the most conservative, fixed-income investments are currently yielding very little, they may yield more in the future as interest rates presumably continue to rise.
There has been great concern over what rising interest rates will do to this investment class, but, if history is any guide, short-term pain may be alleviated by ultimately greater yields. Last December, Vanguard Group projected that, if the Federal Reserve gradually raised the benchmark interest rate to 2.0% across the three-and-a-half years ending in July 2019, a typical investment fund containing intermediate-term fixed-income securities would suffer a -0.15% total return for 2016, but return positively in the following years.3
Avoid overspending and invest with growth in mind. That is the basic message from all this, and, while following that simple instruction is not guaranteed to make your retirement savings last a lifetime, it may help you to sustain those savings for the long run.
Citations.1 - money.cnn.com/2016/04/20/retirement/retirement-4-rule/ [4/20/16]2 - time.com/money/4161045/retirement-income/ [5/22/16]3 - tinyurl.com/hjfggnp [12/2/15]
Have our memories of the Great Recession altered our habits?
Consumer spending accounts for more than two-thirds of economic activity in the United States. Lately, that spending has moderated. Across the 12 months ending in March, personal spending advanced 3.4%. That matched the gain seen in 2015.1,2
Is a 3.4% annualized gain in personal spending adequate? Not in historical terms. During 2014, consumer spending accelerated 4.2%. The average monthly gain in consumer spending across the past 12 months (0.28%) is roughly half the historical average seen since 1959 (0.54%).1,2
While the personal spending rate has slumped recently, the personal savings rate has not. In March, it was at 5.4%. It has varied between 4-6% for more than three years, staying notably above the levels seen prior to the Great Recession of 2007-2009.3
Has consumer psychology been altered since then? That is an interesting question to consider, and it especially begs consideration, given the fact that inflation-adjusted personal spending has declined for three straight quarters.4
Real disposable income (that is, disposable income adjusted for inflation) has been rising without fail. It has increased for 13 straight quarters, beginning in Q1 2013 after the payroll tax cut at the end of 2012. You would think unflagging increases in real disposable income would promote greater economic expansion, but real gross domestic product grew just 1.5% in 2013 and only 2.4% in both 2014 and 2015. Those GDP levels are well below those seen in the early 2000s, not to mention the 1990s.4,5
When is too much frugality a bad thing? When it risks hampering economic growth. The 5.4% personal savings rate recorded in March tied a three-and-a-half-year high. As we are well into an economic recovery, it would seem only natural for Americans to spend more than they did several years ago.4
Perhaps people are just not ready to do that. As a Deutsche Bank research note asserted this month, the memory of the Great Recession may be too hard to erase: “The shock of the crisis likely increased the desire to hold more savings for precautionary motives.”4
Since 2001, Gallup has consistently asked Americans a question each year: “Are you the type of person who more enjoys spending money or who more enjoys saving money?”6
This year, 65% of respondents said they preferred saving and 33% of respondents said they preferred spending. That gap has never been so pronounced in fifteen years of polling.6
As recently as 2009, just 53% of Americans told Gallup they preferred saving while 44% indicated they preferred spending. The gap has gradually widened ever since, and it is now fairly consistent across all age groups.6
A little more polling history seems to affirm a perception shift. In 2006, Gallup found that 51% of Americans rated their personal financial situation as “excellent/good;” in that year, 50% of Americans preferred saving to spending. Four years later, only 41% of Americans felt their personal financial situation was “excellent/good”, and 62% indicated a preference for saving. This year, 50% of Americans ranked their personal finances as “excellent/good,” yet 65% preferred saving dollars to spending them. “The appeal of saving over spending shows some signs of being the new normal rather than a temporary reaction to the hard times after 2008,” Gallup’s Jim Norman observed last month.6
In its latest report on personal income and outlays, the Bureau of Economic Analysis says personal incomes were up 4.2% year-over-year as of March. Consumer prices rose but 0.9% in the same span. Unimpressive wage growth aside, it would appear that many households are nicely positioned to spend. Of course, what these two numbers do not take into account is debt: mortgage debt, student loan debt, credit card debt. The rebound in the personal savings rate surely relates to the goal of reducing such liabilities.7,8
The Great Recession taught America a great lesson about living within one’s means. Could that lesson, as vital as it is, now be constraining the economy? As economists try to pinpoint reasons for America’s slow recovery, they may want to cite the psychology of the consumer.
1 - cnbc.com/2016/02/01/us-personal-income-dec-2015.html [2/1/16]
2 - tradingeconomics.com/united-states/personal-spending [5/22/16]
3 - tradingeconomics.com/united-states/personal-savings [5/12/16]
4 - usnews.com/news/articles/2016-05-11/years-later-psychological-scars-from-great-recession-skew-spending [5/11/16]
5 - statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/ [5/12/16]
6 - gallup.com/poll/190952/nearly-two-thirds-americans-prefer-saving-spending.aspx [4/25/16]
7 - shopfloor.org/2016/04/personal-spending-remained-soft-in-march-despite-decent-income-growth/ [4/29/16]
8 - reuters.com/article/us-usa-economy-inflation-idUSKCN0XB1I4 [4/14/16]