AgingOptions Life Plan: Finance

“Will I have enough assets in order to not run out of money before I run out of life?” is top of mind for all of us in the final third of our lives. In answering this, preservation, positioning and passing of accumulated wealth goes beyond traditional estate planning. It calls for all affected family members to be participants in a model that integrates health, housing and elder law considerations.


Is your financial advisor scuttling your investment gains

A 2012 study by Cerulli Associates found that 60 percent of investors either did not know how their advisors got paid or thought that the service they offered was free. In fact, there are at least six ways a financial advisor will charge you fees. They are:

As a percentage of your account’s value. One of the most common ways that investment professionals charge clients is as a percentage of their account’s value. As your account grows, he or she makes more money and conversely as it shrinks, he or she makes less money. Fee percentages typically shrink as the account grows but overall they can range from a low of .25 percent to as much as 2.0 percent.

As a commission. This is one of the most common ways of charging for services. It muddies the water because it can be difficult to tell whether your financial professional is a good advisor or just a good sales person. Often professionals working under commission models operate under the suitability standard (meaning that advice must be appropriate for you, a weaker duty than fiduciary duty) and their main interest is in selling a product.

A combination of fees and commission. There’s a difference between the term fee-based and fee-only advisor. A fee-based advisor can collect fees and commissions.

An hourly rate. If you are willing to implement the advice on your own, an advisor that charges an hourly rate can recommend how you should allocate your resources for instance and then leave it to you to follow through on the advice. Since a financial professional working under an hourly rate model is not receiving a benefit from any decision you make, there’s a level of confidence that the advice is objective that doesn’t exist with commission-based advisors.

A flat fee. Flat fees aren’t tied to investments or generated by the purchase of a specific investment. Fees should be quoted upfront and you should get a clear description of what will be provided.

A retainer fee. While this might not be for everyone, individuals with a more complex situation such as those who own a small business, rental properties, or a need for regular income from investments for example may benefit from ongoing advice. Retainer fees are not tied to the value of the investment nor to products, you can be confident that your financial advisor’s advice will be objective. For more about advisors that only charge a fee for their services, please read this article on fee-only advisors.

Recently, there have been several stories in the news about potential conflicts of interest from firms such as Edward Jones, Schwab and Fidelity receiving revenue sharing payments. Understanding your advisor’s fee structure won’t just potentially save you money, it will provide you with an understanding of his or her responsibilities towards you. You should always ask how your investment advisor will be paid. A USNews article put it quite succinctly when it asked, “Who comes first when the advisor makes recommendations: you or the advisor?” The answer determines which standard applies to advice given by financial advisors. Fiduciaries have the highest level of accountability by requiring advisors to make recommendations that are best for the client even at the cost to the advisor. Financial advisors with fiduciary requirements may include certified financial planners, members of the National Association of Personal Financial Advisors (NAPFA) and CPAs with a personal financial specialist designation.

The suitability standard on the other hand just means that the advisor must make recommendations that are appropriate for the client at that time. Under the suitability standard a financial advisor is not under obligation to remind you to make appropriate adjustments to your portfolio. It may be perfectly acceptable to hire someone under a suitability standard but you should understand what it means and what your agent’s duties are to you under that standard.

This article suggests one strong reason to pay attention to fees is that it simply takes far less time for advisors to provide the service to clients than it did in the ‘90s. The result is that advisors can provide more service to more clients in a shorter period of time and the one benefitting is only the advisor.

For more on this topic, please read:

Protecting your 401(k) from excessive costs

How to know if you’ve hired a good financial advisor

Using your Health Savings Account as a retirement vehicle

If you have a high deductible health plan, you can receive tax-preferred treatment of any money you set aside in a Health Savings Accounts (HSAs) to pay for medical costs. HSAs differ from Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs). (For more on these three types of health spending accounts please see this article One of the chief differences between HSAs and FSAs or HRAs is that HSAs can roll over year after year. The benefit of this is that while you cannot continue to add to an HSA once you are enrolled in Medicare, you can continue to use it.

One place you can use it is in paying for long-term care premiums. If you have a tax-qualified long-term care policy, you can use money in your HSA to pay for a policy if it pays for care when you are unable to perform at least two activities of daily living or if you have severe cognitive issues. Fortunately, most long-term policies qualify under these requirements but the limits depend upon your age. For instance, in 2014, if you were 40 or younger, you could use $370 tax-free from your HSA to pay for long-term care premiums. The amount goes up based on age so that an individual over the age of 70 could use $4,660 tax-free. You can also use HSA accounts to pay for Medicare Part B and Part D premiums, and Medicare Advantage premiums. If you have an individual health insurance policy and an HSA account, you can use funds tax-free from the HSA to pay for long-term care premiums and other expenses even if only one spouse has an HSA account.

Contributions to HSAs provide a current year tax deduction and your money grows in a tax-protected manner. If you use your money for healthcare (HSA funds can be spent on anything), it comes out of the account tax-free. That’s a triple tax advantage that 401(k)s can’t match.

The downsides to HSAs, aside from having to pay a penalty if you withdraw money for non-healthcare related expenses prior to age 65 and having to pay taxes on the withdrawal at any age if you withdraw funds for non medical needs, include being unprotected from creditors and that funds becomes fully taxable income to either your estate or your beneficiary so it’s best to fully spend it before you die.

Here’s more information on the benefits of an HSA account.

How much can you contribute towards your 401(k) in 2015?

The 401(k) plan has become the single largest source of retirement savings for American workers. The program became popular in 1986 when Congress acted to replace the defined benefit plan for federal civilian workers with a less generous defined benefit plan and a generous 401(k)-type plan. The move was generally seen as an endorsement by the government and encouraged confidence amongst private-sector employers in the long-term survivability of 401(k)-type plans.

According to a Fidelity report, the average 401(k) balance hit $91,300 in 2015. The stock market, which climbed more than 10 percent and saw a third year of double-digit partially explains the 30 percent growth over 2011’s average balance of $69,100. A spike in worker contributions also played a factor in the gains.

On average, workers put 8.1 percent of their salary into their 401(k) plans last year. Employer matches brought the contributions to 12 percent of their salaries, which falls within the range financial advisors recommend their clients put away each year (most financial advisors suggest putting between 10 percent and 15 percent into retirement accounts).

Not only are employees saving more but according to a Wells Fargo & Company announcement, 2014 saw an uptick in the number of employees participating in 401(k) plans administered by the firm. Between 2011 and 2015, plan participation rose 13 percent. According to Wells Fargo, the increase in participation correlates to an increase in sponsors opting for automatic enrollment. Over the last four years, participation rates among younger employees, new hires and lower-earning workers increased. Millennial participation reached 55 percent compared to 45 percent in 2011. Newly hired employees saw a similar increase from 36 percent four years ago to 48 percent in 2015. Wells Fargo also reported that 62 percent of all active participants are taking full advantage of their employer match. You can read that article here.

Most people treat the 401(k) plan as if you can “set it and forget it” but a recent article suggested that if improperly managed, a 401(k) becomes at best a saving account and at worst a high risk gamble. Here’s another article on 401(k) moves to avoid.

By some accounts, you’ll need to save $250,000 just to pay for medical care after retirement. Then there’s the fact that most people expect to retire while still in their 60s. With most Americans living at least until their 80s or longer, it’s imperative to save for a period of time that could extend 30 years or more beyond your retirement date. One of the easiest solutions is to take advantage of your employer’s 401(k) or other sponsored retirement savings plan. If you have questions about your employer-sponsored 401(k), contact your plan administrator or benefits advisor. If you have questions about your financial outlook, contact a financial advisor.

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Financial gifts to help new grads prepare for tomorrow

If you have a new college graduate in your life, you may be wondering what gift you can give them that is more meaningful than a Macy’s gift card or a stack of linens. One thing that most American graduates lack is financial understanding. One study conducted by Arkansas State University found that college students lacked basic financial and budgeting skills. College graduates often overestimate their future earnings and underestimate their school debt. In Washington, a test by the National Financial Educators Council found that 15 to 18-year-old participants scored an average of 60.1 percent on a financial literacy test. The good news is that average showed an increase over scores for the last three years. People 19 to 24 years of age scored 67 percent overall. As you consider gift options, consider a gift that will pay off for your graduate when he or she is your age and maybe protect you from becoming the Bank Of Mom & Dad (or Grandma & Grandpa).

Give the gift of a financial education by:

Offering a financial planning session. Newly graduated students often put off acquiring financial tools in favor of the car, the house, the family, student debt or any of a myriad of expenses that will never go away no matter what they think. Counteract that by hiring a financial advisor to help them establish a budget on their limited income while seeing to the very real financial expenses of paying off student loans and preparing for life in the real world.

Hiring a career coach. Career coaches run about $50 an hour. Hiring a career coach might prevent your new college grad from having to borrow your couch for a few months. More than half of college students remain unemployed six months after graduating according to this article.

Starting your grad out with an IRA. At 20, you tend to think you have years and years before you even need to consider retirement but as those of us at the other end of the time line know, the years can get away from you. Sometimes all it takes is getting the ball rolling and the little lightbulb goes off. Opening an IRA will teach your grad about compound interest and provide them with either a down payment on a house later on or a retirement account when they need it later.

Signing your grad up for a budgeting course. Learning to manage a budget should be one of the first things a new grad learns because frankly all the rest of their life will focus on earning more than they spend. If your grad isn’t totally burned out on school some community colleges offer courses but you can also find help online at Wallet Wise, You Need A Budget, Credit.org and more.

Helping your grad become an investor. Shares of stocks or bonds or mutual funds can help your grad begin to build and manage their own wealth.

Subscribing to financial freedom. Subscriptions to magazines that cover industry news or the latest tech or events can help prevent your grad from beginning a slow slide in losing their new skills and education. With over 7,000 magazines printed in the U.S. each year, there is bound to be something that focuses on his or her current skills and adds to it.

Giving a financial planning book. Let’s face, it not everyone can afford to pay for someone else to get financial planning advice or do many of the other things listed here but some financial advice books out there are written specifically for the new high school or college grad and can offer a low cost effective way to start planning for a financial future. Here’s a list of books for the under 30 set.

If you are considering one of the more expensive options listed here, remember that you can give up to $14,000 a year to a recipient without filing a gift tax return. Here’s some advice and even more advice.

Finally, consider hiring an attorney. Newly minted adults need Powers of Attorney, Wills and Living Wills in case of emergencies and many of them will neglect those items because they’re invincible. Those documents will allow someone else to make key financial and legal decisions on their behalf.

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Being single and childless in retirement increases your vulnerability

According to the 2012 U.S. Census data, approximately one third of U.S. citizens between the ages of 45 and 63 are single, an increase of 50 percent since 1980. Also doubled is the number of adults without children, from 10 percent in 1980 to approximately 19 percent. Dr. Maria Torroella Carney highlighted this data in a presentation at the 2015 annual American Geriatrics Society meeting in the middle of May.  Carney and a research team collected data as part of a case study and literature review and found that nearly a quarter (22 percent) of Baby Boomers 65 and older are childless and unmarried. Carney labelled this vulnerable population “elder orphans” and cited their growing prevalence as a call to action for addressing a segment of the population likely to need more expensive resources than the general population. She argued that we need to put practices in place to help this segment of society access community, social service, emergency response and educational resources to help them while they are still well in order to prevent the unnecessary utilization of expensive healthcare when they become more vulnerable due to aging or illness. “It’s hard to age even when you have a good support system. So you can only imagine if you don’t have anybody with you to help you,” she said in a CBS news article.

Carney’s research is by no means the first indication of a potential problem, I’ve written about the phenomenon here and here. But, it is a good indication that as the number of childless, single individuals grow the need for social and government programs will need to grow as well. Another researcher indicates that about 60 percent of nursing home residents do not have regular visitors.  This doesn’t automatically mean that 60 percent of nursing home residents are childless of course but it is indicative of the limit of choices in our current atmosphere for those without family whether or not they have resources.

Since, as those of us who fit this label already know, social and government programs are likely to be a “day late and a dollar short” of the real need, we will need to plan accordingly. More than anyone else, people who are already unmarried and childless need to incorporate plans that take into account the lack of family by creating family or community and by making financial and legal preparations for the future. Anyone that thinks that financial and legal preparations are the sole remedy need only look at several recent cases to see that simply relying upon those processes all too frequently leads to failure.

If you want to learn more about planning for retirement, attend one of our free seminars but understand that “aging is a family affair” and if you are serious about aging at home, you need to make sure you have family (whether biological or adopted) around you as you age.

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