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7 Myths About Retirement

By Cornerstone Wealth Management

Before it is too late, let’s clear up some important misconceptions. While some retirement clichés have been around for decades, others have recently joined their ranks. Let’s explore seven popular retirement myths.

  1. “When I’m retired, I won’t need to invest anymore.” Many see retirement as an end of a journey, a finish line to a long career. In reality, retirement can be the start of a new phase of life that could last for decades. By not maintain positions in equities (stocks or mutual funds), it is possible to lose ground to purchasing power as even moderate inflation has the potential to devalue the money you’ve saved. Depending on your situation, a good rule of thumb may be to keep saving money, keep earning income, keep invested, even in retirement.
  2. “My taxes will be lower when I retire.” Not necessarily. While earning less or no income could put you in a lower tax bracket, you could also lose some of the tax breaks you enjoyed during your working years. In addition, local, state and federal taxes will almost certainly rise over time. In addition, you could pay taxes on funds withdrawn from IRAs and other qualified retirement plans. This could include a portion of your Social Security benefits. Although your earned income may decrease, you may end up losing a meaningfully larger percentage of it to taxes after you retire.1
  3. “I don’t have enough saved. I’ll have to work the rest of my life. If your retirement resources are falling short of what you might need in later years, working longer may be the most practical solution. This will allow you to use earned income to cover expenses for a longer period, and shorten the number of years you would need to otherwise cover when you stop work. Meanwhile, you may be able to make larger, catch-up contributions to IRAs after 50, and remember that you have savings potential in workplace retirement plans. If you are 50 or older this in 2018, you can put as much as $24,500 into a 401(k) plan. Some participants in 403(b) or 457(b) plans are also allowed that step-up. And during this time, you can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested longer (see #1 above).2 The bottom line is, don’t give up, and fight the good fight.
  4. “Medicare will take care of my long term care expenses.” Not true, and among the most costly of these myths. Medicare may (this is not guaranteed) pay for up to 100 days of your long-term care expenses. If you need months or years of long-term care and do not own a long term care policy or own a policy and don’t have adequate coverage, you may have to pay for it out of pocket. According to Genworth Financial’s Annual Cost of Care Survey, the average yearly cost of a semi-private room in a nursing home is $235 a day ($85,775 per year).3,4 In Northern California, the cost will likely be higher.
  5. “I should help my kids with college costs.” That’s a nice thought, an expensive idea, and for many not a good idea. Unlike student financial assistance, there is no such program as retiree “financial assistance.” Your student can work, save, and or borrow to pay to cover their cost of college. S/he will have decades to pay loans back. In contrast, you can’t go to the bank and get a “retirement loan.” Moreover, if you outlive your money your kids may end up taking you in and you may be a financial burden to them, which for many is a parent’s worst nightmare. Putting your financial requirements above theirs may be fair and smart as you approach retirement.
  6. “I’ll live on less in retirement.” We all have an image in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out, and relying on senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. However, the initial phase may be a different story. For many, the first few years of retirement mean traveling, new adventures, and “living it up” a little – all of which may mean new retirees may actually “live on more” out of the retirement gate.
  7. “No one really retires anymore.” It may be true that many baby boomers will probably keep working to some degree. Some people love to work and want to work as long as they can. What if you can’t, though? What if your employer shocks you and suddenly lets you go? What if your health does not permit you to work as much as you would like, or even at all? You could retire more abruptly than you believe you will. This is why even people who expect to work into their later years should have a solid retirement plan.

There is no “generic” retirement experience, and therefore, there is no one-size-fits-all retirement plan. Each individual, couple, or family should have a strategy tailored to their particular money situation and life and financial objectives.

If you or someone you know would like to get coaching on the most appropriate approach to planning for retirement, we welcome your call.

#retirementmyths #financialmyths #retirementfail #FinancialBehavior #FinancialPlanning #PersonalAdvice #RetirementIncome  #RetirementPlanning

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 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.

Citations.

1 – money.usnews.com/money/retirement/iras/articles/2017-04-03/5-new-taxes-to-watch-out-for-in-retirement [4/3/18]
2 – fool.com/retirement/2017/10/29/what-are-the-maximum-401k-contribution-limits-for.aspx [3/6/18]
3 – medicare.gov/coverage/skilled-nursing-facility-care.html [9/13/18]
4 – fool.com/retirement/2018/05/24/the-1-retirement-expense-were-still-not-preparing.aspx [5/24/18]

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Is the right time to Roth it?

For some, the recent tax reforms indicate, yes. For others, not so fast.

By Cornerstone Wealth Management

Can federal income tax rates get lower than they are today? Given the national debt and the outlook for Social Security and Medicare, it is hard to imagine that rates go much lower. In fact, it is more likely that federal income taxes get higher, as the tax cuts created by the 2017 reforms are scheduled to sunset when 2025 ends.

Additionally, the Feds are now using a different yardstick, the “chained Consumer Price Index,” to measure cost-of-living adjustments in the federal tax code. As a result, you could inadvertently find yourself in a higher marginal tax bracket over time, even if tax rates do not change. Due to this, it is possible that today’s tax breaks could eventually be worth less.1

As a result of tax reform, we are occasionally asked if this is a good time to convert a traditional IRA to a Roth. A conversion to a Roth IRA is a taxable event. If the account balance in your IRA is large, the taxable income linked to the conversion could be sizable, and you could end up in a higher tax bracket in the conversion year. For some, that literally may be a small price to pay.2

The jump in your taxable income for such a conversion may be a headache – but like many headaches, is likely to be short-lived. Consider the long term advantages that could come from converting a traditional IRA balance into a Roth IRA. A “big picture” comprehensive financial plan can help you estimate the short and long term merits of this transaction, even before you decide to pull the trigger.

Generally, you can take tax-free withdrawals from a Roth IRA once the Roth IRA has been in existence for five years and you are age 59½ or older. For those who retire well before age 65, tax-free and penalty-free Roth IRA income could be very nice.3

You can also contribute to a Roth IRA regardless of your age, provided you earn income and your income level is not so high as to bar these inflows. In contrast, a traditional IRA does not permit contributions after age 70½ and requires annual withdrawals once you reach that age.2

Lastly, a Roth IRA is can be a good estate planning strategy. If IRS rules are followed, Roth IRA beneficiaries may end up with a tax free inheritance.3

A Roth IRA conversion does not have to be “all or nothing.” Some traditional IRA account holders elect to convert just part of their traditional IRA to a Roth, while others choose to convert the entire balance over multiple years, the better to manage the taxable income stemming from the conversions.2

Important change: you can no longer undo a Roth conversion. The Tax Cuts & Jobs Act did away with Roth “recharacterizations” – that is, turning a Roth IRA back to a traditional one. This do-over is no longer allowed.2

Talk to a tax or financial professional as you explore your decision. While this may seem like a good time to consider a Roth conversion, we have seem working with our clients that this move is not suitable for everyone. Especially during years of high earned income. The resulting tax hit may seem to outweigh the potential long-run advantages.

If you or someone you know would like to get coaching on the most appropriate approach to reviewing Roth strategies, we welcome your call.

#IRA #RothIRA #Roth #RothConversion #FinancialPlanning #Investments #RetirementIncome #RetirementPlanning #Taxes #TaxStrategies #TaxSavings #Cornerstonewmi

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 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.

Citations.

1 – money.cnn.com/2017/12/20/pf/taxes/tax-cuts-temporary/index.html [12/20/17]
2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [8/17/18]
3 – fidelity.com/building-savings/learn-about-iras/convert-to-roth [8/27/18]

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A Good Problem: How to Handle a Financial Windfall

What do you do with sudden money?

Provided by Cornerstone Wealth Management

Imagine getting rich, quick. Liberating? Yes of course. Frustrating and challenging? Most likely.

Sudden money can help you resolve retirement saving or college funding goals, and set the stage for your financial independence. On the downside, you’ll pay higher taxes, attract more attention, and maybe even deal with “wealth envy.” Sudden Money may also include grief or stress if associated to death, divorce, or a employer buy-out.

Sudden Money does not always lead to happy endings. Take the example of Alex and Rhoda Toth, a real-life Florida couple down to their last $25 who hit a lottery jackpot of roughly $13 million in 1990. Their story ended badly: by 2006, they were bankrupt and faced tax fraud charges. Or Illinois resident Janite Lee, who won $18 million in the state lottery. Eight short years later, Janite filed for bankruptcy; had $700 to her name and owed $2.5 million to creditors. Sudden Money doesn’t automatically breed “old money” behavior or success. Without long-range vision, one generation’s wealth may not transfer to the next. Wealth coaching firm The Williams Group spent years studying the estate transfers of more than 2,000 affluent households. It found that 70% of the time, the wealth built by one generation failed to successfully migrate to the next.1,2

What are some wise steps to take when you receive a windfall? What might you do to keep that money in your life and in your family for their future?

Keep quiet, if you can. If you aren’t in the spotlight, don’t step into it. Aside from you and your family, the only other parties that need to know about your financial windfall is the Internal Revenue Service, the financial professionals who you consult or hire, and your attorney. Beyond those people, there isn’t generally an upside to notify anyone else.

What if you can’t keep a low profile? Winning a lottery prize, selling your company, signing a multiyear deal – when your wealth is more in the public domain, expect friends and strangers and their “opportunities” to come knocking at your door. Time to put on your business face: Be fair, firm, and friendly – and avoid handling the requests directly. One well-intended generous handout on your part may risk opening the floodgates to others. Let your financial team review requests for loans, business proposals, and pipe dreams.

Yes, your team. If big money comes your way, you need skilled professionals in your corner – a tax professional, an attorney, and a wealth manager. Ideally, your tax professional is a Certified Public Accountant (CPA) and or Enrolled Agent (EA) and tax advisor, your lawyer is an estate planning attorney, and your wealth manager is “big picture” and pays attention to tax efficiency.

Think in increments. When sudden money enhances your financial standing, you need to think about the immediate future, the near future, and the decades ahead. Many people celebrate their good fortune when they receive sudden wealth and live in the moment, only to wonder years later where that moment went. Many times, it is better to identify what needs immediate attention, and delay anything else until life becomes more stable.

In the short term, an infusion of money may result in tax challenges; it may also require you to reconsider existing beneficiary designations on IRAs, retirement plans, and investment accounts and insurance policies. A will, a trust, an existing estate plan – they may need to be revisited. Resist the immediate temptation to try and grow the newly acquired wealth quickly by investing aggressively.

Looking down the road a few miles, think about what financial independence (or greater financial freedom) means to you. How do you want to spend your time? Do you want to continue working, or change your career? If you own a business, should you stick with it, or sell or transfer ownership? What kinds of near-term possibilities could this mean for you? What are the strategies that could help you defer or reduce taxes long term? How can you manage investment and other financial risks in your life?

Looking further ahead, tax efficiency can potentially make an enormous difference for that windfall. You may end up with considerably more money (or considerably less) decades from now due to asset location and other tax factors.

Important idea: Think about doing nothing for a while. Nothing financially momentous, that is. There’s nothing wrong with that. Sudden, impulsive moves with sudden wealth can backfire.

Welcome the positive financial changes, but don’t change yourself. Remaining true to your morals, ethics, and beliefs will help you stay grounded. Turning to professionals who know how to capably guide that wealth is just as vital.

If you or someone you know would like to get coaching on the most appropriate to sudden money, we welcome your call.

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 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.

Citations.

1 – bankrate.com/finance/personal-finance/lottery-winners-who-went-broke-1.aspx#slide=1 [5/23/18]
2 – money.cnn.com/2018/09/10/investing/multi-generation-wealth/index.html [9/10/18]

This article was prepared by a third for information only. It is not intended to provide specific advice or recommendations for any individual.

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When Is Social Security Income Taxable?

To find out if this tax applies to you, look closely at two factors.

Provided by Cornerstone Wealth Management

Your Social Security income could be taxed. That may seem unfair or unfathomable. Regardless of how you feel about it, it is a possibility.

Since 1984, Social Security recipients have had to contend with this possibility. Social Security benefits became taxable above a certain yearly income level in that year. Then in 1993, a second, higher yearly income threshold (at which a higher tax rate applies) was added. Unfortunately for today’s recipient, these income thresholds have never been adjusted upward for inflation.1 As a result, more Social Security recipients have been exposed to the tax over time. Today, about 56% of senior households now have some percentage of their Social Security incomes taxed.1

Only part of your Social Security income may be taxable, not all of it. This is good news for some. 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” (AGI), any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of “modified AGI,” or MAGI.)2

Single filers with a combined income from $25,000 to $34,000 and joint filers with combined incomes from $32,000 to $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

If you are a head of household, or a qualifying widow/widower with a dependent child, the combined income thresholds for single filers apply to you.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. (The only exception is if you are married filing separately and do not live with your spouse at any time during the year. In that case, part of your Social Security benefits may be taxed if your combined income exceeds $25,000.)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 I.R.S. Publication 915.2

You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 22% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2,3

Did you know that 13 states tax Social Security payments? In alphabetical order, they are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. It might be a surprise to some that California is not on this list. Sometimes, only higher-income seniors face such taxation. For example, in Kansas, Missouri, and Rhode Island, the respective AGI thresholds for the taxation of a single filer’s Social Security income are $75,000, $80,000, and $85,000.1

If it appears your benefits will be taxed, what can you do? You could explore a few options to try and minimize 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. Part of our work with clients is to review this possibility.

As written about in another article, 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. Individually, you can endow a qualified charity with as much as $100,000 in a single year this way. This idea could have a dual purpose: The amount of the gift counts toward your Required Minimum Distribution (RMD) and will not be counted in your taxable income.4

You could withdraw more retirement income from Roth accounts to lower AGI. 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.5

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 I.R.S. and the Treasury stand to receive greater tax revenue with the current limits in place.

If you would like to review options to help manage social security taxes, we welcome your call.

#FinancialPlanning #RetirementIncome  #RetirementPlanning #SocialSecurity #Taxes #TaxStrategies #TaxSavings

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 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.

Citations.

1 – fool.com/retirement/2018/08/30/everything-you-need-to-know-about-social-security.aspx [8/30/18]
2 – forbes.com/sites/kellyphillipserb/2018/02/15/do-you-need-to-pay-tax-on-your-social-security-benefits-in-2018 [2/15/18]
3 – cnbc.com/2018/09/12/the-irs-is-warning-retirees-of-this-impending-surprise-tax.html [9/12/18]
4 – fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds [9/17/18]
5 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [10/25/17]

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3 Ways The Middle Class Can Be Charitable and Make a Difference

You don’t need to be wealthy to make an impact and get a win-win.

Provided by Cornerstone Wealth Management

Do you have to make a multimillion-dollar donations to a charity to earn immediate or future financial benefits? No. If you’re not yet a millionaire or simply a “millionaire next door,” yet want to give, consider the following ideas, which may bring you immediate or future tax deductions.

Partnership gifts. These gifts are made via long-term arrangements between donors and recipient charities or non-profits, usually with income resulting for the donor and an eventual transfer of the principal to the charity at the donor’s death.

For example, a charitable remainder trust (CRT) may be structured to provide a beneficiary (i.e., you) with cash flow for a defined number of years, even for life. After the end of the trust term (or your death), the remaining trust principal passes to charity, or in some cases if your prefer, to a family foundation. Another option: You could even name a CRT as the beneficiary of your IRA as part of your estate planning strategy. In fact, some charities and universities are happy to administer a CRT you create for free if the remaining trust principal is designated for that charity or university’s investment or endowment fund. A charitable lead trust (CLT) makes annual charitable gifts on your behalf, for a set number of years; if structured and executed properly, the trust beneficiaries (i.e., your heirs) can eventually receive the leftover trust assets without having to pay estate or gift taxes on them.1,2

If you don’t have enough funds to start one of these, you might opt to invest some of your assets in a pooled income fund offered by a university or charity. In a pooled income fund, your gifted assets go into a “pool” of assets invested by a fund manager; as a donor, you are assigned “units” in the fund proportionate to your share of the fund’s total assets. In turn, you get a proportionate share of the income of the fund for life, and when your last income beneficiary passes away, the principal of your gift goes to the school or charity.3

If you like the idea of a family foundation, but don’t quite have the money and don’t want the bureaucracy, you could consider setting up a donor-advised fund (DAF). Essentially, this is a charitable savings account. You make an irrevocable contribution to a third-party fund, realizing an immediate tax deduction for the year of the gift; the fund invests the money in an account you create, where it grows without being taxed. You can request where the charitable donations from the DAF go, and you have a say in how you want the funds in the DAF invested, but the DAF makes the actual donations to non-profits and has the legal control over these matters.1,4 Among our clients and in Northern California, there are a number of families where a DAF is an ideal solution short and long term.

Lifetime gifts. These are charitable gifts in which the donor retains no powers or other controls over the gift once it is made. The gift is irrevocable, or in federal tax terms, “complete.” A lifetime gift of this sort is not included in what the Internal Revenue Service calls your Gross Estate. However, taxable gifts are used in calculation of estate tax.5

Lifetime gifts also include outright gifts of cash or appreciated property, such as stocks, business interests, or real estate. Thanks to the 2017 federal tax reforms, you can make outright gifts via cash or check and deduct such donations up to 60% of your income. A gift of appreciated property could bring you an income tax deduction for its fair market value and help you avoid the capital gains tax that would result from the sale of the asset.6,7

Through a partial or whole gift of appreciated property, you can transfer a real estate deed to a school or charity and get around capital gains taxes that may result from a property’s sale. You may receive an immediate charitable income tax deduction for the full fair market value of the gifted property, a deduction which you may apply up to 30% of your adjusted gross income. If you seek a little more control, you could even arrange a retained life estate, in which you transfer the title to your home to a charity or non-profit while retaining the right to live in it as your primary residence for the rest of your life.8

Life insurance policies and IRAs. Donating a paid-up life insurance policy to a university or charity may allow you an immediate charitable deduction for the value of the gift. You can also name a charity as the beneficiary of an IRA; upon your death, the full value of the account will transfer to the charity without being subject to federal estate or income taxes.6

The caveats. Based on current tax law, as your income increases, you may face limits on the amounts of charitable gifts you can deduct. Your charitable deductions for any federal tax year cannot be more than 50% of your adjusted gross income. But if you exceed such limits, the I.R.S. lets you carry forward excess contributions for up to five years.9

Would you like to learn more? Now is as good a time as any to do so. Your charitable gifting can have real impact even if you don’t have a fortune. Keep in mind that your unique circumstances need to be weighed before making any decision. Please consult your financial professional, tax professional, or attorney prior to making any move. If you would like to get coaching on a gifting approach that might work for you, we welcome your call.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

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Your Business Success is about Cash Flow Management

Strong income is only part of the picture

By Cornerstone Wealth Management

Cash Flow is King

The backbone of long term success for business owners is cash flow. Cash flow is defined as the difference between revenue and operating expenses. If over a long period of time business expenses are higher than revenue, the business could fail. Sounds simple, right? The challenge is, many business owners do not have a clear picture of their expenses. Cash on hand, accounts payable, and the use of credit can cloud the picture of an owner who has a “gut feel” how the business is operating.

Cash Flow statements are important to small businesses. This financial tool can reveal so much to owner(s) and/or CFO, because as they track inflows and outflows, and identify non-cash items and expenditures. A Cash Flow statement (CFS) captures sources and uses of cash, per month and per year. Income statements and Profit and Loss (P&L) statements may provide inadequate clues about cash flow, even though they help forecast cash flow trends.

Cash Flow statements can tell you what P&L statements won’t. Is your business profitable but cash poor? This can occur if your company is growing by leaps and bounds. Are you personally or inadvertently taking too much cash out of the business? That may transform your growth company into a lifestyle company. Are your receivables running too long? Is inventory growth a concern? If you’ve carry debt, do you know what the impact is of this debt to your cash flow? Do you know how much are you spending on capital equipment?

A good CFS can track operating, investing, and financing activities. Ideally, the sum of these activities results in a positive number at the bottom of the CFS. If not, the business may need to make adjustments to survive.

How can a small business improve cash flow management? Your CFS can help identify opportunities for improvement. You may find that your suppliers or vendors are too costly; maybe you can negotiate (or even barter) for better terms. Like many companies, you may find your cash flow is seasonal. Maybe you could take steps to moderate the peaks and valleys.

Can your business generate recurring, sustainable revenue? If it makes sense for your business, you might want to modify your fee structure – turn customers into subscribers to your services. Perhaps price points need adjusting, up or down. As for overdue receivables, swiftly preparing and delivering invoices can result in shorter receivable times. Another way to get clients to pay faster: offer a slight discount if they pay up inside a short period of time, or a penalty to those that don’t. If you do not already, consider requiring a deposit before you go to work for a client or customer.

If you or someone you know would like a thinking partner on this topic, we welcome your call.

#BusinessOwners #BusinessSuccess #FinancialPlanning #CashFlow #CashFlowStatement #P&L

 

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I Physically Wrote Down Every Cent I Spent for a Week and Here’s What Happened

Perhaps one of the most tedious aspects of creating an usable personal financial plan is providing reliable expense numbers. It is also one of the most important parts of the planning process. First pass, many new clients underestimate expenses. A $10,000 expense gap, calculated 30-40 years out, growing at an inflation rate of 3%, underrepresents a family lifetime need by over $500,000. More often, double. The result could impact plan recommendations and priorities, and may cause a plan to fail. If you would like to get coaching on the best managing to mitigate this gap, we welcome your call.

In the meantime, I thought you might find the exercise of an anonymous contributor of self.com interesting.

                                               ~ Rich Arzaga, CFP®

Contribution by Anonymous

For one thing, coming face-to-face with my expenses helped me curb my spending.

In theory, I’m really into money management. I have at least four budgeting apps on my phone. I compare prices at local supermarkets like it’s nobody’s business. I keep extremely thorough financial records. I obsessively read about other people’s spending habits (money diaries, anyone?).

In reality, I haven’t been on top of things. I got married, and then it was the holidays, and then we were traveling, and now all of a sudden it’s April and I’ve found myself handing over the credit card first and asking questions later.

I’m a full-time freelancer, so I don’t get a regular paycheck every two weeks. Instead, I have two or three regular clients who pay me on a weekly or bi-weekly basis, and then anywhere from seven to 15 different one-offs or projects going on in the background (anything from quick news articles for $40, to long-term reporting projects for $1,500, to in-house consulting for $300 a day). Rates depend entirely on the client, and many companies’ freelance budgets will change from week to week.

Some clients pay immediately; others take weeks or even months to do so. As such, I never know exactly how much is going to come in each month—I’m theoretically owed thousands of dollars, but I don’t control when I’ll actually see that. If everything goes according to plan, I’m on track to make about $75,000 in 2018, before taxes—but that could change in an instant depending on how well my clients are doing, whether I can maintain good relationships with them, and what happens in the media landscape overall. The good news is that my husband and I are also currently on track to meet our annual savings goals of maxing out our 401(k)s and saving over 40 percent of our combined post-tax income. We are immensely privileged to be in this position and I try my absolute hardest not to take it for granted. That’s part of why this experiment makes sense for me—I still feel like I’m spending money on things that aren’t worth it for me personally in the course of my day-to-day life, which is not great when I don’t know exactly when my next paycheck is coming.

Because of this, and since tax season is (rapidly) approaching, I steeled myself to do a hard reset on my spending habits. I turned to Priya Malani, a financial adviser and the co-founder of financial planning firm Stash Wealth, to find out exactly how to do so. Before the experiment, I hoped that keeping this diary would help me identify my priorities and adjust things that don’t align with them. Here’s what Malani recommended I do.

Step 1: Track everything I spend in a week, no exceptions.

“Tracking where your money is going is an important first step,” Malani tells SELF. “Because we all think we know where our money is going, but we really don’t—and tracking your spending is a surefire way to highlight that.”

Malani asks her clients to track their spending on a one-time basis and analyzes their spending from there (most of her clients will track their baseline spending for a month, but she says that a week would suffice for my experiment). If people are living beyond their means, she works with them to find a way to scale back their spending. If they are not, she helps them set up automated transfers of their money to investment vehicles or saving accounts in accordance with their goals, allowing them to spend what’s in their checking accounts freely and without guilt.

Malani recommends writing down every purchase you make in one place, and using a credit cardfor all purchases, so you can double-check what you’ve spent. Quick note: Using a credit card for everything is only advisable if you don’t have credit card debt and if you pay your card in full every month without exception. If that doesn’t seem like an option for you, just be extra meticulous when writing down your purchases.

Step 2: Categorize everything I bought to see what was worth it—and what wasn’t.

Malani says that categorization can be super helpful. “It will make you more conscious of what you thought or felt after you made the purchase,” she says. “And it will be a good reminder of whether or not you want to do it again.” She says most spending falls into one of the five following categories:

  1. “I probably shouldn’t have bought that.”
  2. “That wasn’t worth what I spent on it.” (translation: It didn’t give me X dollars worth of enjoyment)
  3. “I can’t believe I spent X dollars on that.” (translation: I could have gotten this for cheaper)
  4. “That was worth it.”
  5. “I had to buy that.” (for example groceries, rent, cell phone bills)

After I tracked my spending for a week in a Google Doc, I went back and categorized them based on Malani’s list and tallied up the totals from there.

Here’s the damage (AKA, all my weekly spending, tracked):

Wednesday:

  • $2.99 on a Kindle book for my book club read, which wasn’t available at the library near me

Thursday:

  • $121 for a monthly NYC subway card
  • $29.33 on a book (Writer’s Market Deluxe Edition 2018, if you must know)

Friday:

  • $5.33 for an almond milk latte
  • $43.79 at Whole Foods, which got me a pound of salmon, baby kale, hummus, baby carrots, celery, 2.5 pounds of grapes, minced ginger, three olive snack packs, a bulb of garlic, and two punnets of blackberries

Saturday:

  • $10.68 on a bottle of prosecco for my book club
  • $30.60 for an Uber from my book club back to my apartment
  • $123.84 for my half of dinner (one entree, one appetizer, one cocktail, two glasses of nice wine, and a 20 percent tip) at a fancy restaurant for date night
  • $5.37 at Pinkberry
  • $7 for two late-night beers

Sunday:

  • $7.20 on an almond milk latte for me and a large coffee for my husband

Monday:

  • $13.59 on extra credits for ClassPass
  • $50.85 at Trader Joe’s, which got me two bags popcorn, frozen pizza, strawberries, blueberries, blackberries, celery, baby carrots, edamame hummus, two ginger kombuchas, a tomato feta soup, two prepackaged salads, one coconut yogurt, and two bars of chocolate.

Tuesday:

  • $45 my half of $90 for our cleaning lady, who comes every other week
  • $9.47 on tampons

7-day total: $506.77

This week’s spending pattern was pretty typical, with a couple exceptions. I ate almost every meal at home (except dinner out once and one brunch at a friend’s place) and socialized mainly at friends’ apartments, while on a typical week I’d eat out a couple more times at relatively inexpensive places (like tacos and a couple of margaritas with friends on a Thursday, or grabbing lunch at a salad shop between meetings). Plus, the one dinner my husband and I went to on this week was super swanky, which was lovely, but not something we should do (or actually do) regularly.

My grocery spending this week was fairly regular. I started the money-tracking week with groceries left over from a previous Trader Joe’s run, and ended it with enough groceries left over to get me through to Friday afternoon.

One thing to note is that very few of my monthly personal or shared bills were due this week, like rent and utilities (~$1100), my cellphone bill (usually around $90) or monthly gym membershipwith unlimited classes ($205).

And here’s that weekly spending, organized by category:

Following Malani’s guidelines, I categorized each expenditure after the fact.

  • I probably shouldn’t have bought that:$5.33 on coffee, $7.20 on more coffee, $13.59 on ClassPass credits. (Total: $26.12)
  • That wasn’t worth what I spent on it:The $2.99 Kindle book was terrible. (Total: $2.99)
  • I can’t believe I spent X dollars on:The $29.33 Amazon book, which I should have borrowed from the library. I’m also going to include the fancy $123.84 date night dinner here, which I totally loved, but isn’t something we should do too often. These are things I could have gotten for much, much cheaper (or free, in the case of the book). (Total: $153.17)
  • Worth it to me:The $10.68 prosecco; the $30.60 Uber that kept me from taking an hour-long, two-train journey while tipsy; Pinkberry and beers; and $45 for our fantastic cleaning lady. (Total: $98.65)
  • I had to buy:The $121 subway card, $43.79 on Whole Foods groceries, $50.85 on Trader Joe’s groceries, and $9.47 on tampons. (Total: $224.84)

The final step: Figure out if my spending is in line with my priorities.

At the moment, little purchases like frozen yogurt and the occasional Uber rides are worth it to me, because they bring me happiness without getting in the way of long-term savings goals. Again, we are incredibly lucky to work jobs we enjoy that allow us a comfortable living. If we made any conscious, expensive life changes like moving to a larger apartment with higher rent, having a child, or even getting a pet, I’d likely no longer be able to justify my spending in categories 1, 2, and 3—and I’d likely think hard about whether the items in category 4 remained worth it to me, too. And of course, should we find ourselves in a personal or family emergency that required buckling down financially, these categories would be eliminated entirely.

According to Malani, in the pursuit of savings goals you should aim to be frugal, not cheap. “Frugal means you are willing to spend money on something you value,” she explains. “Cheap means you are not willing to spend money on anything.” So, figuring out what you value is crucial.

So, what did I learn from this?

One surprising side effect of this experiment was that I questioned a lot of purchases in the moment, knowing I’d have to write about them in this article. There were a few times I wanted to wander into a nearby Sephora to peruse the goods, but I knew I didn’t need anything and didn’t want to justify the inevitable purchase. Accountability works, y’all.

I have definitely impulse-shopped in the past, but I can see how writing down and evaluating all spending would curb that pretty quick. Avoiding the hassle of writing down and explaining a purchase stopped me from going into a few stores, and made it more likely I’d stick to my grocery shopping list.

Going forward, I’d like to keep spending mindfully and evaluating what purchases are worth it. Right now it’s worth it to me to spend money on fitness, time with friends, and a clean apartment. Seeing what purchases I “can’t believe I paid X for” will certainly inform my spending in the future. Based on this week’s spending, I’ll be looking for free or cheaper date-night options, utilizing the local library more, and continuing to socialize at home or at friends’ homes as much as possible. I’d also like to take a wider look at our finances to make sure we are optimizing our charitable giving and planning appropriately for our futures.

Essentially, this experiment was a thought exercise that I’d recommend to anyone interested in evaluating their money habits. Am I spending my money on things that actually bring me enjoyment while still meeting my long-term goals? For the most part, on this particular week, the answer was yes. But we really need to purchase a coffee maker.

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains references to individuals or entities that are not affiliated with Cornerstone Wealth Management, Inc. or LPL Financial.

All illustrations are hypothetical and are not representative of any specific situation. Your results will vary.

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Real Estate Investments Course Starts September 17, 2018 at UC Berkeley Extension, San Francisco Campus

The next Real Estate Investments for Financial Planners and Investors course starts Monday September 17th at the San Francisco UC Berkeley Extension campus. This class will serve as an important foundation for making buy, sell, and hold real estate investment decisions. The coursework includes

  • An introduction to real estate investment basics
  • The Real Estate Cash Flow model
  • Real estate ownership and finance
  • Case studies on real estate investment decisions, and how they have impacted personal financial goals

Click here to register. Or contact me if you have any questions, or if you would like a copy of the course outline.

Sincerely, Rich Arzaga, CFP®, CCIM, Instructor

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How Much Money Will You Really Spend in Retirement? Probably a Lot More Than You Think

When we retire, every day becomes just like the weekend. And on the weekend, we have all kinds of time and opportunities to spend money. Many of us vastly underestimate the percentage of income we’ll need. Here’s how to make sure you get that number right.

I was asked recently by a former student-CFP® candidate to recommend a software program for a friend who wanted to create a plan on her own. I get this question every-so-often. While there are a few pretty slick sites that produce easy to create financial profiles, my experience is that it is often user-error that causes them to create a plan that looks promising but falls apart on quick review. One of the biggest reasons in understatement of spending. The following article by Dan Ariely and Aline Holzwarth, begins to describe this gap. Other assumptions not covered in this article are also missed, like assumed performance, treatment of assets and taxes, and the introduction of risk during the plan. If you want a great plan, my recommendation is to choose a great planner who can integrate technology with planning experience. Ask for a sample of her/his work. Ask her/him to explain how the plan was assembled. Ask if she/he holds a CFP® designation. These few questions alone will help you learn which advisors view planning as a foundation for your financial life, and other advisors say they are planners but prefer to only manage your investments. I hope this article helps.

By Dan Ariely and Aline Holzwarth

It’s the question that plagues pretty much everybody as they look ahead: How much money will I need in retirement?

Most likely, a lot more than you think.

Let us explain. The typical approach most people take is to ask what percentage of their final salary they think they will need in retirement. If you have ever visited a financial adviser, you must have been asked this sort of question. You most likely dedicated a whole minute (at most) to formulating your answer.

And no one would blame you for it. Answering a question as complex as this requires knowledge far beyond most people’s grasp—and far beyond the grasp of even many professionals.

Just imagine for a second the sorts of inputs you might use to get to the right number, such as the cost of living where you want to retire, the cost of health care (and how much of it you will utilize), the state of Social Security, the rate of inflation, the risk level of your investment portfolio, and especially how you want to spend your time in retirement. Do you want to take walks in the park or join a gym? Drink water at dinner or expensive wine? Watch TV or attend the ballet weekly? Visit family once a year or twice a year or four times a year? Do you want to eat out once or twice or five times a week? And so on.

Try it yourself. Stop for a minute and think to yourself what your percentage might be. Clearly, it’s a daunting task to transform all these hard-to-predict inputs into a single percentage.

To understand better how people grapple with this question, we invited hundreds of people—of different age groups, income levels, and professions—to our research lab and asked them how much of their salary they thought they would need in retirement.

The answer most people gave was about 70%. Did you also choose a percentage around 70%-80%? You’re not alone. In fact, we, too, thought that 70% sounded reasonable. But reasonable isn’t the same as right. So we asked the research participants how they arrived at this number. And we discovered that it wasn’t because they had truly analyzed it. It was because they recalled hearing it at some point—and they simply regurgitated it on demand.

The 70%, in other words, is the conventional wisdom. And it’s wrong.

Sticker shock

To find out what people actually will need in retirement—as opposed to what they think they will need—we took another group of participants, and asked them specific questions about how they wanted to spend their time in retirement. And then, based on this information, we attached reasonable numbers to their preferences and computed what percentage of their salary they would actually need to support the kind of lifestyle they imagined.

The results were startling: The percentage we came up with was 130%—meaning they’d have to save nearly double the amount they originally thought.

How could this be? Just think about it. Working is actually a very cheap activity. When you’re working (never mind the fact that you are actually making money), you aren’t spending much. There’s no time to spend money at work. And when we do spend money, it is often paid for by our employers. At least some companies pay for our coffee, our travel, team-building activities, happy-hour drinks and so on. It is one of the cheapest ways to spend our time.

When we retire, it is as if someone took 10 waking hours of our workday and gave us free time to do as we please. Every day becomes just like the weekend. And on the weekend, we have all kinds of time and opportunities to spend money. We shop, travel, buy tickets for events and eat out.

Sure, we may have the time in retirement to do certain things ourselves that we would pay for while working (like mow the lawn, clean the house or make our own lunch). But for the most part, it is much easier to spend money when we’re not spending most of our waking hours at work.

Self-assessment

Now that we know how misguided the 70% figure is, here’s the hard question: How can each of us figure out more precisely the kind of life we’ll want—and what it will cost?

In a study conducted in collaboration with MoneyComb, a fintech company that participated in our Startup Lab academic incubator program at our Center for Advanced Hindsight at Duke University, we found out that a good way to think about spending in general is to think about the following seven spending categories: eating out, digital services, recharge, travel, entertainment and shopping, and basic needs.

To help you think about your time in retirement, imagine that every day was the weekend. How much would you like to spend in each of these categories? How often would you eat out? Which digital subscriptions would you want to have? How would you pamper yourself? How often, where and how luxuriously would you want to travel?

Clearly, those who prefer spending time at the beach and watching Netflix won’t spend nearly as much as those who prefer the opera and good wine three times a week. Those who want to spend vacations visiting family won’t spend nearly as much as those who want to take a few cruises a year. Believe it or not, what might seem like minor preferential differences like these can quickly add $20,000 a year to your spending requirements. This is precisely why it’s so important to factor in these preferences when determining how much you need for retirement.

Details, Details

Failing to account for all of your expected costs in retirement, no matter how small, can be costly. Here are some specifics—many of which people often forget—to factor in when making projections.

1 Water, gas, electricity, heating/cooling, garbage collection    2 Rent, mortgage, insurance, maintenance    3 Primary-care doctor, specialists, hospital bills, medications, insurance    4 News sources, Netflix, Hulu, etc.    5 Loan/lease, maintenance, insurance, gas, car wash, parking

Source: Dan Ariely and Aline Holzwarth

Try this exercise yourself: Close your eyes and picture a single representative year in retirement. Live it in the best way you can imagine. (And remember that “best” doesn’t necessarily mean “more expensive.”) The more expensive you imagine your future, the larger the sacrifice you will have to make today.

Now, answer each of the following questions from the list of categories.

We know that just thinking about retirement, not to mention doing the math, can be overwhelming. So pour yourself a glass of wine and make this a rewarding process for yourself. Just take note of how much you spent on the bottle for future reference.

  • Eating out and in:Do you like to cook, or do you prefer going out to eat? How often do you want to go out to dinner in retirement? How much do you spend on each meal, on average? How often do you see yourself splurging on dessert, or a fancy bottle of wine?
  • Digital services:What are the digital services you pay for now? Do you have a subscription to The Wall Street Journal? (You won’t want to give that up.) Do you have cable? How about videogames? Apps and software? Online courses? What are all the digital services you want to have in retirement, and how much do they cost? Would you like to spend more or less on digital services in retirement?
  • Recharge (recreational and personal services):Do you like to pamper yourself? What sort of pampering do you imagine in retirement: reading a book at the beach, treating yourself to the occasional $15 manicure, or going all in with luxurious spa treatments? How often do you want to get a massage? Are you a member of a country club, or would you like to be?
  • Travel:Do you like to travel? How often? How much do you spend on everyday transportation? What do you spend on flights in a year? Do you imagine traveling more or less in retirement than you do now? What sort of traveling suits you? Do you like to go on cruises? Are you the type to go on a cross-country road trip in your 60s, or would you prefer the comfort of first class on a plane? Or perhaps you want to have your own private jet that takes you to your own private island. (We can all dream.)
  • Entertainment:How will you spend your time in retirement? What sorts of events will you want to attend? How much do you want to spend on the opera, concerts, musicals, ballet, sports events, museums, classes and so on? Will you buy books or borrow them from the library?
  • Shopping:Are you a shopper? Do you like to give your friends and family gifts? What about donations to charity? How much shopping do you see yourself doing in retirement? How much do you imagine spending on clothing, electronics, home goods and other shopping?
  • Basic needs (utilities, housing, health care):Finally, we arrive at the least exciting but most necessary category—our essential spending. How much do you think you will spend on utilities, housing, health care and other basic needs? (This is of course a very complex number to estimate, and this is where getting input from professionals can be very useful.)

 

Doing the math

Now that you have a guide for determining roughly how much you’d like to spend in each category, you’re ready to add everything up. Here is an Excel spreadsheet that you can download and play with. It is prepopulated with example numbers, but you should change things around to fit your own personal preferences. To get your percentage, you’ll need to add your salary in the spreadsheet. (And if you’d like, go to our survey to let us know what percentage you got and share any feedback.)

If you want to take the next step in this process and translate your annual amount to the total amount you will need over the course of your full retirement (to know the total amount you need to accumulate from until then, for example), simply multiply the annual amount by the number of years you expect to be in retirement. For most of us, that should be about 20 years.

As we live longer, funding retirement is a moving target. And to have any hope of successfully securing our future lifestyles, we have to start early and we have to build a more detailed and accurate picture of the way we hope to live. We have to understand not just how much we will earn in our life and how far we are from retirement (in years and in dollars), but also how we want to spend our time both during our working years and after.

Once we have determined how much we truly need to save for retirement, we can then focus on how to get to this amount. We can adjust our current lifestyle accordingly, figuring out which trade-offs we are willing and unwilling to make. We should also work backward to determine how much risk we need to take in our investment portfolios in order to reach these goals. And finally, for most of us the retirement we desire may be out of reach, so we need to start being extra nice to our children.

Mr. Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University. He is the founder of the Center for Advanced Hindsight. Mrs. Holzwarth is the head of behavioral science at Pattern Health, and principal of the Center for Advanced Hindsight at Duke University.

Appeared in the September 4, 2018, print edition as ‘How Much You’ll Really Spend in Retirement.’

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains references to individuals or entitles that are not affiliated with Cornerstone Wealth Management, Inc. or LPL Financial.

 

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Financial Planning Optimism

It’s back to school for students all across the country, and whether it’s the first week in kindergarten, high school, or college, parents and students alike are excited yet probably nervous at the same time. What will the new school year bring—and can it live up to our hopeful expectations? This is likely how many investors may feel about the markets right now, with reasons for excitement and some causes for concern. Overall, when it comes to market fundamentals, the positives may outweigh the negatives—and hopefully the same will be the case for the 2018–19 school year.

Strength in several economic and market indicators is driving optimism among consumers and businesses. The Institute for Supply Management manufacturing index has soared to a 14-year high, while the job market also continues to show robust growth. As we await the figures for August, the economy has produced an average of 215,000 new jobs during the first seven months of the year. These positive economic indicators cement expectations of an additional interest rate increase at the Federal Reserve’s (Fed) September meeting; given the Fed’s gradual and transparent rate hike campaign, however, investors in U.S. markets have thus far taken these increases in stride.

Along with a steady economy, corporate America continues to deliver solid performances, as second quarter earnings season delivered very strong profit growth. Meanwhile, generally upbeat forward-looking guidance, along with high business and consumer confidence, helps support the outlook for earnings over the balance of the year and into 2019. With this backdrop, the now longest bull market in history may have further to go.

Although stocks have been performing well, there are some areas of concern. September is historically the weakest month of the year for stocks. There are also some trouble spots in emerging markets, including Turkey and Argentina, which have led to year-to-date losses in emerging market investment strategies. Policy risk remains in the background with the ongoing trade tensions and the upcoming midterm elections. These factors may lead to a pickup in near-term market volatility, but stocks still have the potential to push higher from current levels over the rest of the year.

The longest bull market, and one of the longest economic expansions, means investors may worry that the good times will soon come to an end. But it appears that both the bull market and expansion have room to run. The U.S. economy is enjoying solid momentum, bolstered by the new tax law; business spending is picking up; the manufacturing sector is healthy; and the latest earnings season was one of the strongest on record. So although there are areas to keep a close eye on, and the potential for some ups and downs in the market, we can retain a positive outlook for the final months of 2018. Let’s hope that students, teachers, and parents can also put their worries aside and enjoy their return to another school year.

As always, if you have any questions, I encourage you to contact me.

Sincerely,

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

This research material has been prepared by LPL Financial LLC. Tracking #1-768037