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Protecting Assets from Probate

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In a time when your loved ones are grieving, often they are tasked with organizing, coordinating, and sometimes fighting over your estate.

Make it easier on them and plan ahead using some of the tools below.

What is Probate?

Probate is the process by which a deceased person’s will is validated, and the general organization and distribution of that person’s estate.

During probate, if a person died with a will, the court validates the will and then formally appoints the person named in the will to direct (executor) the deceased person’s estate. This includes collecting assets, paying any outstanding taxes and debt, and distributing whatever is left to the beneficiaries listed in the will.

If a person died without a will, the court will appoint an executor to collect the assets, pay the taxes and debt, and distribute the remaining assets according to state law. What needs to be done with any real estate is determined by the county that person lived in.

The probate process is expensive, so anything you can do to speed up the process or avoid it, the better. You will go through probate whether you have a will or not, though it takes a lot more time when the individual died without a will.

Transfer on Death Designation

A transfer on death designation also referred to as a payable on death designation, is something you add to an account so your assets immediately go to your beneficiaries when you pass away without having to go through probate.

A TOD designation can be added to a brokerage account, individual stocks and bonds, and bank accounts.

When the individual with the TOD designation passes, the beneficiaries usually have to create an account in their name in order to transfer the assets.

Will

A will is a legal document, usually created by an estate attorney, in which the individual or couple list who will be the executor of the estate, guardianship of any minor children, arrangements for surviving pets, assets and property owned, insurance policies, beneficiaries, and what is to be done with the assets and property when the creators have passes.

A will lists all of the property and assets, even the ones that do not need further instructions for distribution to the beneficiaries (retirement plans, life insurance policies, TOD designated accounts).

Trust

A trust is a legal entity created by an estate attorney where the grantor (person creating the trust) appoints a trustee (or several) to follow the rules of the trust.

In a trust, the grantor can very specifically list what they want to be done with their assets while they are alive and/or when they pass away. They can list each asset separately and which beneficiary receives that asset or they can list them all at once and pick how those assets will be distributed to the beneficiaries.

They also have the ability to dictate how the care and financing for a minor, or a child with disabilities will be implemented.

Trusts are costly to set up but are a very useful estate planning tool. It’s also the only way to avoid probate, as long as the trust is the owner of the assets.

Life insurance proceeds

The majority of the time, life insurance avoids probate. There are two exceptions, however.

If the beneficiary named in the life insurance policy passes away and there are no contingent beneficiaries, the estate will receive the proceeds. The other is if the estate is directly named as the beneficiary.

Joint ownership

There are two types of joint ownership:

  • With rights of survivorship – when one of the owners dies, the surviving owner receives the decedent’s portion.
  • Tenants in common – when one of the owners dies, their portion is included in their estate. The other joint owner(s) have no right to that portion.

Conclusion

Probate is time-consuming and expensive. For the sake of your loved ones, namely the ones who will be taking care of things when you pass, plan ahead and make things as easy as possible.

I previously wrote an article about where your money goes when you die that goes into much more detail about wills and trusts. Give it a look.

If you’d like to learn more about estate planning, send me an email! I’d be happy to answer any questions you may have.

Please visit our website for our disclosures.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

How much do I need in retirement?

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Conventional advice tells you that, for retirement, you need $1 million to $1.5 million saved, or that you need 10 to 12 times your current annual salary.

For example, if you make $100,000 per year, you’ll need $1 million to $1.2 million saved for retirement.

Are these numbers and calculations good enough? Is there a better, more accurate way to figure out what you’ll need to save for retirement?

In this post, we’ll look into that and more.

Check out retirement calculators

There’s a huge number of them out there. I recommend trying a few different ones, that way you can compare and average out the numbers. They’ll ask you things like age, current savings, current income, future contributions, etc.

Here are a few of the better ones.

Using some or all of these calculators, you can probably get a good idea of where you’re at currently, how to improve, and where you’ll need to be at the end.

What are the factors?

There are a variety of different factors at play. You’ll have different expenses and different income levels, and some of those numbers won’t stay steady throughout retirement.

For example, a couple’s health care costs in retirement are said to be $275,000 (Source). However, not all of that will hit you in the first few years of retirement.

More than likely, you’ll have minimal costs in the beginning, and they’ll slowly increase as you age.

Where will you live?

This can be a huge variable in retirement. Its widely known that different areas of the country have a higher cost of living. San Francisco is more expensive than Lincoln, Nebraska.

Another important factor regarding your living situation is if you have a mortgage or not. No mortgage means fewer expenses, which is less going out of your pocket, and more that can be saved for the future.

Not having a mortgage can also give you some leverage. If you decide that your current home is too big and would like to downsize, you can use the proceeds from the sale of your previous home to, hopefully, buy your new one outright.

Living Expenses

We’ve talked briefly about health care expenses during retirement and we talked about housing. Without a doubt, these are the two largest expenses during retirement. There are a few more to consider, however.

  • Transportation – did you relocate? Or do you have family in other parts of the country? Transportation and lodging need to be taken into account when figuring out your expenses for retirement, especially if you’ll be traveling regularly.
  • Entertainment – you might be looking for something to fill your time. It could be filled with expensive hobbies or other activities. If you are looking for something to do, or are looking to start a hobby, be sure your budget will allow for it.
  • Remaining expenses – the leftover expenses are ones you deal with right now (food, clothes, utilities, bills, insurance, etc.)

A budget is just as important in retirement as it is now, if not more so. Keeping track of your expenses and your income is very essential to your finances during retirement.

You often hear people in retirement say they are on a fixed income. What that means is they have lost their ability to earn more money. What they have is it. If you are spending more than your savings and your income allows, you are setting yourself up for failure.

Income

Your income from retirement could come from a variety of places.

  • Social security – provided by the government. The normal advice regarding social security is that it shouldn’t replace more than 40% of your income. Meaning 60% should come from another place. Your monthly payout from Social Security does increase the longer you delay taking it, and the reverse is true if you take it early.
  • Pension – these are becoming less and less popular as time goes on. They were huge back in the day when workers would stay with one company until they retired, but because people switch jobs so often nowadays, employers don’t want to take the chance. If you have one, consider yourself lucky.
  • Retirement savings – more than likely, this is where the other significant portion of your income will come from. This is where having a financial advisor is beneficial because you have to use enough of your savings to afford your retirement, but not too much so you don’t run out of money. Tricky.
  • Other areas – there can be other sources of income during retirement. You could have some dividend or interest income from your investments, you could work part-time to stay active and earn a little extra, or you could possibly have a rental property or several.

If you want to learn more about where your income could come from in retirement, click here.

Wherever your income comes from, it’s important to coordinate effectively so you maximize your current income without jeopardizing your savings.

What will you do in retirement?

How you spend your time will also have a huge effect on your expenses.

If you plan on spending most of your time with your grandkids, retirement could be more affordable than if you planning on golfing a few times per week. Although it could quite possibly be much more expensive than golf, we all know how grandparents are with their grandchildren.

If money is tight and you are looking for things to fill your day, there are many free or low-cost activities available to you.

  • Volunteer – not only is this a free activity. You’ll feel useful, you’ll get to use your brain, and you’ll have a sense of community, all are shown to increase longevity.
  • Go to the park – take a walk, bring a book, or just interact with nature and the community.
  • Community center – not all municipalities have one, but go to your local community center or go to your municipality’s website. There you will find local events, most of which are free.
  • Discounts – most places offer senior discounts. If you aren’t offered one, make sure you ask for it. This really could save you a lot of money on activities, food, etc.

How long will you live

The most depressing point in this post, but one of the most important. Unfortunately (or fortunately, depending on how you look at it), no one knows how long we are going to live for.

One way to get a little indication, but not really, is your family history. If your grandparents or parents lived into their 80s, 90s, or 100s, the chances of you living a long life are a little higher.

On the flip side, if most of your relatives passed away in their 60s or 70s, your odds of living into your 80s and 90s are lower.

However, this really is no indication on how long you’ll live for. One of the most important things you can do for yourself is to live a healthy lifestyle. Take a walk once or twice per day, do something daily that will engage your mind, interact with friends and people in your community, and eat better.

The 4% Rule

You’ve probably heard this before too. Here’s what it is. Once you retire, you withdraw 4% of your retirement savings every year. This is considered a safe withdrawal rate, as the withdrawals would consist mostly of interest, dividends, and unrealized gains from your investments.

Let’s say you have $1 million saved for retirement. The 4% rule would allow you to withdraw $40,000 per year. All else staying the same, you have 25 years worth of withdrawals using this method. Be advised that no growth was factored into this calculation.

Conclusion

I suppose you’d like an answer to the question we proposed in the beginning. Here it is. It depends. It depends on your current and future expenses, it depends on where you’re income will come from, it depends on how much income you expect (outside of retirement savings), and it depends on how you live your life during retirement.

Most importantly, you need to work with a financial professional, ideally someone that specializes in retirement planning.

To learn more about retirement planning and for our disclosures, visit www.crgfinancialservices.com.

5 Reasons Millennials Need to do End of Life Planning

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When I was younger I always pictured end of life planning as something only old people do. Now that I am no longer a spring chicken myself, I understand that it can be important for all adults, regardless of age or social standing.

Having worked in the health care industry for many years I have seen people of all ages with lots of different health issues. But one thing they had in common is that they didn’t plan on coming to the end of their lives so unexpectedly.

Even though all of their lives mattered, it was more difficult to see sick or dying children and young people. In fact, it brings me nearly to tears right now to think about some of the patients I knew and loved that passed away.

Of course, no amount of end of life planning will bring these people back. However, the truth is, there are 5 reasons millennials need to do end of life planning as much as anyone else.

1. Pets

Young people tend to feel as if they are immortal to a degree. I know because I felt that way when I was younger.

Unfortunately, being a millennial doesn’t exempt you from passing away from illnesses or accidents. If you have furry friends that you love you probably want them to be well taken care of should something happen to you.

The law generally regards pets as property which means they may end up in a shelter or worse if something happens to you. Setting up a will, however, gives you the ability to make provisions for their care including a guardian and even a trust.

2. Personal Belongings

Even if you don’t have a whole lot of stuff you probably have some things that are of sentimental value to your family and friends. Should something unexpected happen to you that ends your life these are the people who should receive these items.

However, without a will, the state will decide who gets your belongings. Unfortunately, it may not be the person or people you would choose.

3. Social Media

Another reason millennials need to do end of life planning is for social media accounts. Nearly every young person has at least one type and some have several.

What happens to them if they pass away? It’s possible they could remain a visible reminder of your loss every day since they aren’t automatically deleted or inactivated.

To remedy this, you can name a digital executor regardless of the legality of it. Take an inventory of your digital files and assets and appoint someone as the person to handle them.

4. Kids

Some millennials, married or not, have children they will leave behind if they pass away. Setting up end of life planning can include making a choice about who should care for them when you are gone.

Naming someone to watch over your children is a decision that is not easy. Nevertheless, it can prevent the court from making the judgement in the absence of any documentation from you. It can also squash family battles that could arise over your child or children later.

5. Expenses

Should something unexpected happen that ends in your death, the expenses for those you left behind can be more than they are able to pay. That financial hardship could be avoided, however, if the proper steps are taken.

End of life planning can include building up your savings, purchasing life insurance, setting up an estate, and creating advance directives. You should also consider having a power of attorney for your health care as well as one for your finances. Although these could be the same person they do not have to be.

Everyone’s life is important, but so is planning for the reality that we all pass away sometime. As you can see, millennials are not exempt. There are at least 5 reasons millennials need to do end of life planning just like the rest of us.

Have you completed your end of life planning yet?

Jeanne is a married mother of 2 grown children who works as a full-time freelancer and also helps out occasionally on the farm she and her husband own together. Her background is mostly finance and medical office management.  She’s currently working to improve her financial well-being and hopes to help others improve theirs as well.

Where to Find Free Financial Planning Classes

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If you’re new to financial planning and you want to learn how to manage your finances on your own without hiring a professional, there are a few places you can find the information you need. And, it’s free. Fortunately, there are a number of free online courses that can help you learn what you need to know. Here are some of the best ones I’ve found.

CNN Money – Money Essentials

This is one of the best resources for money advice, tips, and learning. It includes 29 lessons with everything from setting goals to managing debt to home ownership and insurance, all the way through to retirement planning. Pick and choose just the topics you need or the things you’re most interested in learning now. It even includes glossaries of terms you need to know and quizzes to help make sure you’ve learned what you need. And best of all, it makes learning easy.

Money Management International

Money Management’s online Financial Education site offers a variety of tips for long-term planning and short-term needs. If you want to know how to save money on holiday shopping or how you can earn more money, they’ve got you covered. Need information on bankruptcy, credit reports, and understanding your credit reports? That’s there too. Need help with a home loan or debt management? It’s all there. Even tips on teaching your kids about financial matters.

University of California-Irvine’s Fundamentals of Personal Financial Planning

This online course offers lessons on creating your financial goals, doing the math to figure out what you need, creating a financial plan, and getting started with your plan. Once you have a plan together, it will help you figure out things like insurance, long-term care, social security, and medical care. Like the other courses, you can start anywhere you’d like and skip the courses you don’t think you need or aren’t ready for yet. Even though this is a college-level course, it was designed to help regular consumers at all levels of their financial education make better informed decisions about their money.

Purdue University’s Planning for a Secure Retirement

This 10-module course will help you plan your retirement to make sure you have all the money you need to get through. It includes several helpful tools to help you plan including personality profiles and risk tolerance calculators. This course is at-your-own-pace and it’s easy to understand no matter your financial education level.

The American Financial Services Association Education Foundation’s MoneySKILL

This course is designed for those who are new to financial planning to help you gain a basic understanding of money management. It covers topics like income, expenses, savings, investing, building credit, and obtaining insurance. It’s a high school and college level course to teach teens and adults alike the basics of money management and planning.

Learning what you need to know about financial planning can seem overwhelming and confusing, but with free courses like these that teach you everything you need to know in an easy to understand manner, there’s nothing to stop you from becoming financially independent.

 

Best Free Financial Advice

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Growing up, I was never taught about personal finances. Sure, I knew that money could buy you things, but that was the extent of my financial knowledge. When I graduated college, I had to teach myself everything about finances from scratch. Living on a small post-graduate income, I didn’t have lots of money to invest in financial courses and books. Thanks to the wealth of information on the Internet, I didn’t have to! Here is a list of the best free financial advice that I’ve learned in the years since graduating.

Spend less than you earn and get on a written budget.

Before you can become rich, it’s absolutely critical that you spend less money than you earn and get on a written budget. Ideally, you would not want to be living paycheck-to-paycheck but have some extra money in your budget each month.

Minimize debt.

Some people believe that debts such as mortgages and student loans are “good” debt, while some do not. Either way, any debt you have means you owe money to someone else and will (most likely) be paying interest on that debt. The less debt you carry, especially the high interest ones such as credit card debt, the more money you will have to invest. I personally am working towards being 100% debt free.

Save for emergencies.

It’s a fact of life: hard times are going to come. Be prepared for them by saving money in an emergency fund so you won’t have to go into debt to cover the emergency. I was so thankful I had my emergency fund when my car broke down recently. Financial guru Dave Ramsey recommends having $1,000 in your emergency fund ($500 if you’re low income), but I’m personally not comfortable with less than $1,500-$2,500 in a starter emergency fund. My eventual goal, once I pay off debt, is to save 3-6 months’ worth of living expenses in my emergency fund.

Diversify your investments.

When I was younger, I heard an elderly neighbor say something along the lines of “Don’t put all your eggs in one basket.” I always thought it was about just planning on only one outcome, but as I learned more about finances I realized the saying applies for it as well. I’ve heard stories of people who invest entirely into one stock, and when the stock market crashes their investment is entirely wiped out. Spreading your investments across a variety of assets is less risky.

Think long-term with your investments.

You know the saying “Rome wasn’t built in a day”? Well, the same is true for your finances. You won’t become a millionaire overnight, but by investing in retirement funds and mutual funds and thanks to the magic of compound interest, over time you can build up your net worth. I recommend investing 10-15% of your income into retirement and other investment accounts. If you can’t start with that much, start with as much as you can afford, even if it’s just a small amount. If your employer offers a match for a 401(k) or 403(b), I definitely recommend investing the maximum matching amount– otherwise, it’s like turning down free money!

Earn more.

I decided to work part-time in addition to working my full-time job (aka “side hustling”) when I decided I wanted to get out of debt. I love it! It allows me to gain work experience outside of my day job, plus it allows me to pursue something I’m passionate about—writing and inspiring others (through my blog.) Side hustle money can be used for anything from investing to paying off debt to travel.

Money isn’t everything.

Billionaires Warren Buffett and Bill Gates created the Giving Pledge, which encourages other billionaires to give away half of their earnings to charity. Buffett even went so far as to pledge to give away 99% of his wealth in his lifetime or within 10 years after his estate is settled upon his death. I love that idea. As much as I love finances, at the end of the day, it’s just money. You can’t take it with you when you pass away. This is why I believe in giving a portion of your income to charities and others in need.

 

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Living Frugally with the Right Home Warranty

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Frugality and common sense go hand-in-hand. If you are a homeowner, it behooves you to consider your options with home warranty companies. There are many benefits to signing up for a comprehensive and affordable home warranty service. The recent growth in home warranty popularity is notable.

Homeowners are increasingly aware of the financial risks they run by not covering the contents of their home against damage, and everyday wear and tear. The fact of the matter is that it is extremely expensive to repair and replace appliances, gadgets, and devices inside your home. When real estate transactions are concluded, home warranties feature prominently. Believe it or not, when buyers are provided with protection against loss, damage or wear and tear of the appliances in the home, houses and apartments sell a lot quicker. Provided the right home warranty coverage is offered at the right price, the long-term benefits are well worth the cost.

How do home warranties work?

Home warranty companies provide homeowners with policies that cover things like spray sprinklers, spas, Jacuzzis, dishwashers, HVAC, insinkerators, alarms, washing machines and the like. The type of coverage you get is often associated with the price you pay. The greater your coverage and optional extras, the higher the home warranty prices. But there are many important factors to bear in mind when choosing a home warranty provider. For example, credibility is paramount. The trust factor weighs heavily on your decision to choose one home warranty over another.

It’s important to read client reviews online, consider word-of-mouth assessments, and follow reports of home warranty companies in newspapers and the media. Other important determinants of choosing one home warranty company over another include the terms and conditions of each policy, and the pricing. Anyone considering saving money in the long term will do well to read a detailed overview at ReviewHomeWarranties. It is extremely time-consuming to gauge the services, costs, and reliability of all market players in the home warranty business. For this reason, aggregator services are your best bet when comparing one company with another.

Home warranties cost between $300 and $500 per annum on average. Once the policyholder pays for coverage, they will be issued with a home warranty policy. This policy details everything that the home warranty company is prepared to repair/replace in the home. Typically, this covers systems and certain appliances. If one of the items stops functioning, or breaks, the policyholder/homeowner will contact the home warranty company and file a claim. Next, the home warranty company will dispatch a service provider to the homeowner.

Certain home warranty companies allow the homeowner to contact a contracted professional at their leisure. The service fee for each repair ranges from $50 – $100, and depending on the severity of the problem, a new appliance, device or mechanical part may be ordered. Otherwise, the contracted service provider will repair the appliance on the premises. In terms of payment, the homeowner may pay upfront for all the repairs and get reimbursed by the home warranty company. It is important to read the fine print and the coverage of each home warranty plan that you sign up for.

How can home warranties help you save money?

One of the things about home ownership that is different to rentals is that refrigerators, washing machines, dishwashers, garbage disposal units, hot tubs, Jacuzzis, spas, garage doors and other appliances and systems are not replaced by the landlord. When these things go on the blink, it is incumbent upon the homeowner to repair or replace them. In terms of frugality, it is possible to save $300 – $500 per year by not having a home warranty, but the cost of just one item that stops working can exceed that. Consider that washing machines and refrigerators routinely cost upwards of $300, so it pays to be smart and frugal by opting for a home warranty.

Financial Planning Series – Estate Planning

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You may think you’re too young to think about estate planning; or maybe you think it’s not something you need to worry about yet, but the fact is, if you have any assets, you need an estate plan. As you acquire more assets, you’ll need an improved estate plan to make sure your loved ones are taken care of.

In many states, if you pass away without a will, the state will take your assets and let a court decide who should get what. That often takes several years, causing your family financial difficulties until it’s resolved. Here are the steps you should be taking to create an estate plan that will protect your family.

Make a will.

This is non-negotiable and has nothing to do with how much you have. A will directs who will inherit your property, how it will be divided, and if you have young children, it will name a guardian for them if your spouse has passed away as well. Whatever else you do or don’t do with your estate planning, get a will to protect your loved ones. You will also need to name an executor, the person who will handle the distribution of your property and filing tax returns on behalf of your estate. They will also handle any claims from creditors.

Consider a living trust.

You may or may not need a trust, but depending on your assets and the age of your heirs, you may want to consider it. A trust is allows you to put conditions on how and when your assets are to be distributed. For instance, you can state that your children don’t inherit until they are 25 with the exception of educational expenses.

Create a health care directive.

A living will helps you maintain control of the type of medical care you desire. For instance, if you are injured and have severe brain trauma and are declared brain dead, a living will helps the doctors know what you would want them to do for you. Would you want to be kept alive or would you want life support discontinued. In most states, without a health care directive, the doctors or the courts will make the decision which can take a long time, all the while racking up more hospital bills for your family.

Have a power of attorney drawn up.

This will protect your assets if you are incapacitated for a short period of time. If you should injure yourself and you’re unable to take care of your financial responsibilities for a short time, the POA will allow the person you direct to pay your bills from your account for you.

Write a letter.

Wills do not usually allow for funeral arrangements or other personal requests. Write a letter to your family letting them know your final wishes, like the type of funeral you would like, and give it to a trusted friend or keep it in a lock box with your will. Be sure to let someone know where it is.

Speak to a tax attorney or accountant.

Be sure you know the tax laws about inheritance and get professional help to ensure that your heirs will be able to avoid paying estate taxes.

File beneficiary forms.

Your bank and/or investment accounts should have a beneficiary form that you can fill out, designating who should receive the funds. This will allow your heirs to access those funds quicker, without having to go through probate. Many banks have a “pay on death” form that is similar to a beneficiary form which allows your heir to simply transfer the account holder to themselves.

Last, but not least, in this day and age you will also need to consider digital files. Keep a list of your accounts and passwords so your family will be able to easily access your online accounts and close them out without hassle.

Planning for your death is something we’d all prefer not to think about, but sooner or later, we will all pass away and isn’t it more comforting to know that your family will be taken care of.

Financial Planning Series: Retirement Planning

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Retirement planning can be a bit confusing, trying to figure out what you will need and how to plan when you’re not even sure yet what your lifestyle will be and how long you will need to live on savings. But there are two things you can know for sure … first, you are never too old or too young to start planning and second, you will definitely need a retirement plan.

Knowing those two things, it may surprise you to also know that less than half of all Americans have taken the time and steps to start saving for retirement and that 30% of people who work in private industry and have access to a 401K or other savings plan do not participate. Considering that the average American lives in retirement for about 20 years and Social Security is not guaranteed, it’s time to take retirement planning seriously.

Here are some tips for getting started:

Start saving and keep saving.

If you’ve already started saving, great! If not, it’s time to work a savings plan into your monthly budget. Look for savings options that pay interest, are tax-free, and keep your money out of easy access. You don’t want to be tempted to dip into your savings.

 

Calculate what you need as best as you can.

Experts estimate that you will need at least 70% of your preretirement income annually to live if you’re making a 6-figure income. If you’re making less, you’ll need closer to 90% of your income to maintain your lifestyle. That is based on your home being paid off. If you’ll still have a mortgage in retirement, you’ll need to plan for 100% of your preretirement income. Keep in mind that your medical expenses will likely increase in retirement as well.

 

Determine how you will meet those expenses.

Include your pension, investments, Social Security, and any income you will continue to receive like payments from rental properties. If you’re not sure what you can expect to receive from Social Security, request a copy of your benefits estimator from the Social Security website. On average, you can expect to receive 40% of what you earned before retirement based on your seven highest-paid years. Your benefits will vary though depending on when you take benefits, so that’s important to calculate when determining when you plan to retire. You will receive fewer benefits if you start taking them at 62 than if you hold out and take them at 65.

 

Now that you know what income you can expect to receive after your paychecks stop, you’ll need to fill the gap with your savings. Knowing how much you will need to live on for at least 20 years and how much you will have coming in, you should be able to figure out what you’ll need to fund your retirement nest egg.

Planning for retirement doesn’t have to be confusing; it just involves a few calculations. Calculate your expected expenses and your expected income for the years you plan to live in retirement, determine the difference, then make a plan to start saving so you reach your savings goal before you reach retirement.

 

Financial Planning Series: Basic Income Tax Plannin

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New to financial planning? Start with the overview. Then understand cashflow, learn about insurance planning and risk management, or pump up your investment planning.

As your income and investments grow, so will your tax responsibility. After all, Uncle Sam wants a little bit of your good fortune too! There are a few tips and tricks to lowering your tax responsibility though and they can really help you out when it comes time to file. However, you don’t want to wait until April 14th to start looking for deductions. You’ll need to start sheltering some of your funds before the end of the year to qualify for them.

Here’s what you need to know when it comes to basic tax planning:

Plan Your Deductions

You have a choice between standard and itemized deductions when it comes to determining your taxable income. A standard deduction is pretty straightforward, it’s a dollar amount set by that government that you can claim without calculating any expenses that typically make up an allowed deduction. Itemized deductions on the other hand are just what they sound like, an itemized accounting of actual expenses allowed for deductions. If your expenses over the year are more than the standard deduction amount, you’ll want to go with itemized deductions. You’ll pay less tax and get a larger refund.

One thing to keep in mind though, itemized deductions require proof of expenses so you’ll need receipts and any other documentation showing these expenses or they won’t be allowed. If you believe that the itemized deductions will work in your favor, be sure to set up a good filing system for holding on to your receipts. Regardless of which deduction method you choose, it’s always a good idea to hold on to receipts so that you can make a better decision come tax time.

Retirement Savings

Retirement accounts are a great way to reduce your taxes as well as have income for the future. A qualified individual retirement plan can create a tax shelter of income that is not taxed. For instance, at a 25% income tax rate, depositing $15,000 into a qualified retirement plan can save you $3,750 on your tax return and you won’t pay taxes on your deposit until the money is withdrawn. If you wait until the required age for withdrawal, you’ll even avoid paying most of the taxes on these deposits. There is a maximum allowance for yearly deposits into these accounts though so be sure you know what the limit is for the fund you select.

Other Savings That Are Tax-Sheltered

There are a few other options for saving money and getting deductions that allow you to defer or even avoid paying taxes altogether.

Health Savings Accounts including medical savings accounts and flexible spending accounts can be funded by you or your employer, or both. Both contributions and withdrawals are tax-free.

529 College Plans are funded with after-tax deposits and qualifying withdrawals are also tax-free. The 529 Plan allows you to choose with a prepaid tuition plan or an education savings plan.

Dependent Care Savings are flexible spending plans focused on helping you pay for childcare while you are working. They are held in separate fund and qualifying deposits and withdrawals are tax-free.

Keep in mind though that any withdrawals made from these accounts that are not for a qualifying expense are taxable at the time of withdrawal.

Tax Credits

Be sure to look for tax credits that apply to your financial situation; they’ll help reduce your tax and can even give you a refund. A few to look for include:

Earned Income Tax Credit is for low-income earners. Your annual earnings, filing status, and number of dependents will determine if you qualify.

Child and Dependent Care Credit helps cover childcare and/or disabled dependent care when you are working.

American Opportunity Credit helps cover some of the costs associate with post-secondary education during the first 4 years of college. There is a maximum credit of $2500 per student and 40% of the credit is refundable.

 

Financial Planning Series – Investment Planning

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New to financial planning? Start with the overview. Then understand cashflow and learn about insurance planning and risk management.

Investment Planning is one of the best things you can do to set yourself up for financial success. And the sooner you get started, the better off you’ll be when it’s time to use some of those funds for retirement living. But getting started can be confusing and overwhelming. Let’s break it down a little to help you feel more confident about getting started.

What is the purpose of your investments?

No doubt you have several short-term financial planning goals that might include a big vacation or down-payment for a house, but investment planning is best for long-term goals like retirement. Keep that in mind as you create your investment plan.

Allocating Your Assets

The younger you are when you start investing, the more risk you are able to take because you have a longer time to make up any losses and increase your funds. A good way to allocate your investment assets is with 70% stocks and 30% bonds.

Stocks can be both in the US stock market and the international stock market, so split your investments to 50% in each.

It’s good to divide your bond investments as well into 50% Treasury Inflation-Protected Securities (TIPS) and 50% in intermediate-term nominal US Treasury bonds.

Your overall allocation should look something like this:

35% – US stock market

35% – International stock market

15% TIPS

15% Nominal US Treasury bonds

It’s good to keep your investments at this split throughout your lifetime, keeping in mind that as you get closer to retirement you’ll want to keep a few years worth of cash easily accessible. The invested portion of your funds can stay at this same allocation.

Investment Selection

While the above may seem complicated, it’s not as difficult as you may think. All of these asset allocations can be accomplished with just four funds, all through Vanguard.

This gives you a nice mix of both low and high risk investments. If you hold your investments directly with Vanguard, there are no commissions to pay for buying and selling so your expense for each fund is anywhere from .05% to 20%. These funds provide a great way to allocate your investment account for very little money.

Why This Allocation?

There isn’t an exact science to investing and there are no “rules” about how much you need to invest and where, but this kind of split will give you good access to the stock market which is where your long-term financial growth will come from.

For the stock portion of your investments, a 50-50 split allows you to maximize your diversification while investing both in the US and internationally.

The bond investments of your portfolio are less about providing returns and more about offering protection when the stock market is down. Choosing US Treasury bonds are safe and guaranteed, providing peace of mind if the stock market is experiencing some lows.

Maintaining for the Future

Keeping your investment percentages static will allow for the most growth, versus changing your investment allocations year after year. Over the long-term you’ll see the most growth by just maintaining this balance.

With that said though, you’ll want to keep an eye on your investments and keep an open mind about possible changes you may want to make if you see an area not performing as well as you’d like for an extended period of time. You may also find that you need to make adjustments based on your own personal circumstances.

Getting started with investment planning doesn’t have to be difficult, the most important thing is to just start investing and grow your investment funds over time. The sooner you get started, the better financial shape you’ll be in when retirement comes around.

Learn more about financial planning by reading up on tax planning.