, , ,

A Retirement Wealth Gap Adds a New Indignity to Old Age

Many middle-class Americans are financially unprepared for retirement—and that is leading to an array of social tensions

This is an interesting article, and a potential “need-to-know” for those planning to move when they retire. According to this Wall Street Journal article, an unexpected problem could surface when you move from your pre-retirement “work” home into your ideal retirement home… in a community occupied by long-time residence.

As you make your new house a home, you and other transfers to the community may want to “upgrade” the community and improve services. While you might find the cost of these enhancements to be of high value, it is possible that the long-time residence will not see the same opportunity. In fact, you could be in for a fight. Not because long time residence don’t want changes to their community. But because they simply cannot afford these enhancements. For many, their hand-to-mouth retirement lifestyle cannot absorb anything beyond the fixed costs already difficult to manage. So, it is really a conflict of economics.

There are no take-aways from this article, no lesson except to be aware of a potential problem. My assessment is, it is a good idea to get to know the profile, or psychographics, of the neighborhood you are thinking about retiring to. Are you moving into a community or city with residence who generally share your economic profile? In the case of the article, the residence are tied together by a retirement community association. More likely for most a retirement community does not apply. But this same conflict can surface in communities where you are likely to be dependent on a majority vote or the resources needed to accomplish the same objective.

~ Rich Arzaga, CFP®

By Jennifer Levitz | Photographs by Rachel Bujalski

SANTA ROSA, Calif.—On a Saturday morning in retirement paradise, Ken Heyman stepped out to his front porch and found a brown paper bag. Inside was the chopped-off head of a rat.

Mr. Heyman was acting president of the homeowners’ association at Oakmont Village, an enclave in Northern California’s wine country for people age 55 and over. For months, the community had battled over the unlikeliest of topics: pickleball, a game that is a mix of tennis, badminton and ping pong. Some residents wanted to build a pickleball court complex that would cost at least $300,000. Others didn’t, saying they didn’t want to see their dues go up.

Residents shouted at each other at town-hall gatherings. One confrontation got so heated that a resident called the police. The governing board appointed a security guard to keep order at meetings.

Photo: Oakmont residents play pickleball—a game that’s like a gentler version of tennis, played with a paddle and a plastic ball with holes on a badminton-sized court. 

For many, of course, the issue wasn’t really about pickleball. It was about a divide that had opened between wealthier residents who moved to the village more recently and the less well-off, who said clubhouse updates, new fees and expensive amenities would be budget-busters.

Mr. Heyman’s predecessor as president was a leader of the anti-pickleball faction. She felt she had been chased out of office by pickleball partisans. On the paper bag was a note.

“You’re next,” it read, according to a police report.

Around 10,000 baby boomers are turning 65 every day, and the same number will continue doing so for years. Some are on solid financial ground after a lifetime of planning and the fortune of well-timed home purchases and stock investments.

Most of the rest are unprepared. Fifty-four percent of households with middle incomes—ranging from around $48,000 to $95,000 a year—don’t have enough saved to maintain their quality of living in retirement, according to the Boston College Center for Retirement Research. Some of those who saved were hit by unforeseen health-care costs. Others took on debt for education. Yet more made investment mistakes or lost their savings in the 2008 financial crisis.

Those wildly different circumstances are leading to hard-to-resolve social tensions, which are playing out every day at retirement communities across the country. In Oakmont, the issue was pickleball.

Founded in 1963, Oakmont Village was long an option for the middle class that benefited from California’s rising real-estate values. They could move into attached duplexes or triplexes or wood-sided single-family ranch-style homes and enjoy three swimming pools, a lawn-bowling green, honor-system lending library and the 130-plus clubs and activities.

Living near one another is an increasingly popular option for retirees. The population of the U.S.’s 442 federally designated “retirement destination counties” rose 2% last year, compared with the national average of 0.7%, according to Census Bureau figures. Retirement communities often provide social connections that can fray when people leave the workplace, live alone or have families spread across the country.

Steve Spanier, the current president of Oakmont’s homeowners’ board, said the mountain-view community started “moving more upscale” in recent years when retiring baby boomers in San Francisco and Silicon Valley discovered it on weekend wine-tasting trips to Sonoma County. Coming from places where real-estate prices are especially high, they began buying and gutting homes. The community has about 4,700 residents.

The community now splits neatly into two camps. Some believe it should only “fix things that break,” he says. “Then there are people like the people who are starting to move in. They have a lot of money and want to live the lifestyle to which they’ve become accustomed and they want to do it here,” he says. “People are having more trouble getting along.”

The October wildfires that tore through Northern California’s wine country last year fleetingly eased the divisions, says Mr. Spanier. The fires forced Oakmonters to temporarily evacuate and destroyed two of the village’s roughly 3,200 homes. The fitness center sold “Oakmont Strong” T-shirts, and the mood mellowed for a bit.

“It got better for a period of time,” he says, “then that feeling of unity created by the fire left.”

Homes in the resident-owned Oakmont Village fetch between $350,000 for smaller dwellings up to about $1.2 million for ranch-style homes that have been remodeled by wealthy newcomers. A few years ago, million-dollar sales were unheard of.

After retiring in 2015, Iris Harrell sold her part of the remodeling company she founded in Mountain View, Calif., and says she is “never going to have to worry about money.” She and her wife, Ann Benson, sold their home in Silicon Valley for $3.8 million and bought a hillside ranch-style home in Oakmont for about $800,000, she says.

They raised the roof to allow for windows tall enough for a view of the top of nearby Hood Mountain. So they can age at home, they installed an elevator and added 1,300 square feet of space, including a spacious wing that could house a live-in caretaker. Ms. Harrell now calls the wing “the best guest suite in Oakmont.”

“We’re spoiled and we know it, but it just worked out for us,” says the fit 71-year-old.

She became the chairwoman of Oakmont’s building construction committee and set about trying to also refurbish the 55-year-old community.

“You can’t be premier and look like the 1960s,” Ms. Harrell says. “It’s not making the statement we want.”

She says that retirees moving in—“post Google-ites” she calls them—are willing to pay for better amenities and that Oakmont’s future shouldn’t be dictated by the “small minority” who aren’t willing. She suggested those pinched for money should look into a reverse mortgage.

Oakmont resident Gary O’Shaughnessy, who lives in a unit of a triplex down the hill from Ms. Harrell’s house, calls that suggestion “insensitive.”

“That attitude I can’t live with,” he says.

A former school-bus driver for disabled children, Mr. O’Shaughnessy says a diagnosis of Parkinson’s led him to retire in his 60s, earlier than planned.

While he was working, he rented a house in Santa Rosa. He bought his place in Oakmont for $280,000 in 2010 with help from an inheritance from his mother and $50,000 from his own retirement account. He is single and 71 and has $40,000 in savings. His monthly income is around $2,000, from Social Security and a small pension.

He says he typically walks dogs seven days a week to “make ends meet”; his bills include a mortgage, supplemental medical insurance and more than $300 in monthly dues at Oakmont.

Everyone in the resident-owned community pays $67 a month per person to the main Oakmont association, up from $58 last year. Households pay another $220 a month, on average, to various sub-neighborhood associations for services such as water or landscaping.

Mr. O’Shaughnessy started attending meetings and signing petitions as plans, backed by Ms. Harrell and others, proceeded for a roughly $300,000 tournament-quality pickleball complex with tiered spectator seating.

“There was a big fight and it kind of divided the community,” he says. “The people who have money just want to throw it around, but there are a lot of people on fixed incomes.”

A 2015 survey sponsored by the Oakmont association found that 48% of residents said they were very or somewhat concerned about their current financial needs. That figure rose to 57% for those under age 66.

Overall, 52% were “not at all concerned.”

“We are an extremely wealthy community,” resident Vince Taylor, a former software-company owner, said, during an open forum at an association meeting in March 2017. “We shouldn’t be acting like a poverty community.”

Mr. Taylor, who is 81 and retired, says he has more than $1 million in his retirement savings and lives off investment earnings without touching the principal.

His public comments provoked discussion on Nextdoor, an online neighborhood social-networking service. A discussion titled “Disparity of wealth in Oakmont” drew nearly 80 comments.

One Oakmont resident suggested retirees with tight budgets get jobs. Another, Bob Starkey, a 69-year-old renter and retired museum director, wrote that illness had depleted his savings and that he lived with anxiety his car might die.

“Please remember that pensions have become a thing of the past,” wrote Margaret Babin, a retired home-day-care operator who is 62 and is selling her collection of French Quimper pottery on eBay to pay for extras.

“At some events, I feel out of place even though I shouldn’t, because I’m doing OK,” she says, noting that she sees more fancy cars in the community. “The separation seems to be getting wider and wider.”

By early 2017, she and other frustrated residents had organized behind a slate of candidates who aimed to win a majority on the homeowners’ board and halt the pickleball project, which had been approved by Oakmont leaders but not yet built.

On the morning of April 3, a phone call woke up Ms. Babin. “I just couldn’t believe what I was hearing,” she recalls.

One day before the votes would be tallied in the election, a bulldozer was breaking ground on the pickleball complex. Supporters and detractors rushed over. One resident called the Santa Rosa Police Department at 7:24 a.m. to report a “verbal disturbance” at Oakmont.

“There is a heated argument going on at this time,” the police report said. An officer who went to the scene wrote that there were “two warring factions over a pickleball court.”

The next day, the candidates opposing the pickleball complex were victorious. Construction stopped.

“We face some of the same challenges as the rest of our state and our country,” Ellen Leznik, the new president, said at a public association meeting days later. “One such challenge is the disparity of wealth in our membership.”

Some pickleball proponents rose to defend themselves.

“We’re not the mean, vicious and entitled people our opponents and Nextdoor critics would have you believe,” one speaker said.

Oakmont eventually converted two existing tennis courts into six pickleball courts at a fraction of the cost. The new board ushered in a tone of frugality and oversight that some saw as heavy-handed. Rhetoric at public meetings grew so hostile that the board brought in a security guard to keep order.

“Why don’t we just wait till we’re all dead?” an Oakmont man who favored the pickleball complex declared at one meeting. “Guess what? Oakmont is our last stop. The train ends here. This is the Hotel California.”

Ms. Leznik, a 60-year-old former lawyer who retired early because of a disability, resigned less than four months after she became president, in July 2017. She says she had heart palpitations from the stress.

That left her ally, Mr. Heyman, as acting president.

The next month, at 9:15 a.m. on Aug. 12, the police again got a call from Oakmont, this time from Mr. Heyman, who is 61 and still works in corporate communications.

On Mr. Heyman’s porch sat “a bag containing the chopped off head of a rat,” according to the police report.

“It freaked me out,” says Mr. Heyman. He says he has “no doubt” the rat served as retribution for killing the pickleball project and for the disputes that followed.

At an association meeting soon after, another board member likened “the battle being waged at Oakmont” to “Armageddon.”

Mr. Heyman left the board and later moved out of Oakmont.

“There were clearly sides. One side felt that we’re an active-adult community and it’s our responsibility to provide activities and facilities to the membership,” says Oakmont resident Al Medeiros, 71, who now sits on the board. He counts himself in that group, which he says had been “vilified.”

“The other side seemed to think that well, we’re poor, so we really need to make sure our dues don’t go up and we should just provide the minimum,” he says.

In February, the board discussed remodeling a dated auditorium where hundreds of events, from dances to movies to meetings, take place every year. Some residents talked about constructing a new center and repurposing the old one into a state-of-the-art gym.

The board is also weighing a divisive request from the private golf club that borders many homes in the retirement community. The club is asking all Oakmont residents, golfers or not, to pitch in to help the club meet economic challenges. Someone suggested $5 a person every month.

Mr. Spanier, the new board president, says it “could potentially make pickleball look like a tiny issue.”

Oakmont Village, with views of Hood Mountain, includes roughly 3,200 homes.

#RetirementHome #Retirement #WealthGap #FinancialBehavior #FinancialPlanning #PersonalAdvice #Real Estate

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.

, , ,

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]

, , , , ,

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.

, ,

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.

How to Make Friends, According to Science

Some might agree that it is hard to make friends. The article that follows distinguishes between Social Networks, Close Friends, and a few levels in between. Because I am a closet introvert (most people are surprised by that, but it is true), I don’t have the interest in this topic as much as my family or others in my life. They must be better people! To my friends and family, friendships are exhilarating. It brings them energy that never seems to get tiring. The article that follows offers an explanation of how friendships develop – the science of making friends. Seems to make sense to me. You decide. And if you find yourself in the market for a financial friend, I welcome your call. Introverts can be good financial friends!
~ Rich Arzaga, CFP®

TheAtlantic September 2018

What are friends for?” This isn’t a rhetorical question. Friendship is one of life’s most important features, and one too often taken for granted.

The human desire for companionship may feel boundless, but research suggests that our social capital is finite—we can handle only so many relationships at one time. Social scientists have used a number of ingenious approaches to gauge the size of people’s social networks; these have returned estimates ranging from about 250 to about 5,500 people1 (An undergraduate thesis from MIT focusing exclusively on Franklin D. Roosevelt, a friendly guy with an especially social job, suggested that he might have had as many as 22,500 acquaintances2.  Looking more specifically at friendship, a study using the exchange of Christmas cards as a proxy for closeness put the average person’s friend group at about 121 people3.

However vast our networks may be, our inner circle tends to be much smaller. The average American trusts only 10 to 20 people4. Moreover, that number may be shrinking: From 1985 to 2004, the average number of confidants that people reported having decreased from three to two5. This is both sad and consequential, because people who have strong social relationships tend to live longer than those who don’t6.

So what should you do if your social life is lacking? Here, too, the research is instructive. To begin with, don’t dismiss the humble acquaintance. Even interacting with people with whom one has weak social ties has a meaningful influence on well-being7. Beyond that, building deeper friendships may be largely a matter of putting in time. A recent study out of the University of Kansas found that it takes about 50 hours of socializing to go from acquaintance to casual friend, an additional 40 hours to become a “real” friend, and a total of 200 hours to become a close friend8.

If that sounds like too much effort, reviving dormant social ties can be especially rewarding. Reconnected friends can quickly recapture much of the trust they previously built, while offering each other a dash of novelty drawn from whatever they’ve been up to in the meantime9. And if all else fails, you could start randomly confiding in people you don’t know that well in hopes of letting the tail wag the relational dog. Self-disclosure makes us more likable, and as a bonus, we are more inclined to like those to whom we have bared our soul10.

The academic literature is clear: Longing for closeness and connection is pervasive. Which suggests that most of us are stumbling through the world pining for companionship that could be easily provided by the lonesome stumblers all around us. So set aside this article (after you’ve renewed your subscription and clicked every ad on the website, of course), turn to someone nearby, and try to make a friend. You both could probably use one.

  1. Freeman and Thompson, “Estimating Acquaintanceship Volume,” in The Small World(Ablex, 1989)
  2. Rosenthal, “Acquaintances and Contacts of Franklin Roosevelt” (MIT, 1960)
  3. Hill and Dunbar, “Social Network Size in Humans” (Human Nature, March 2003)
  4. DiPrete et al., “Segregation in Social Networks Based on Acquaintanceship and Trust” (American Journal of Sociology, Jan. 2011)
  5. McPherson et al., “Social Isolation in America” (American Sociological Review, June 2006)
  6. Holt-Lunstad et al., “Social Relationships and Mortality Risk” (PLoS Medicine, July 2010)
  7. Sandstrom and Dunn, “Social Interactions and Well-Being” (Personality and Social Psychology Bulletin, July 2014)
  8. Hall, “How Many Hours Does It Take to Make a Friend?” (Journal of Social and Personal Relationships, March 2018)
  9. Levin et al., “Dormant Ties” (Organization Science, July–Aug. 2011)
  10. Collins and Miller, “Self-Disclosure and Liking” (Psychological Bulletin, Nov. 1994)

This article appears in the September 2018 print edition with the headline “Make Old Friends.”

, , , , ,

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.

 

, ,

Guarding Against Identity Theft

Take steps so criminals won’t take vital information from you.

America is enduring a data breach epidemic. The latest annual study of the problem from Javelin Strategy & Research, a leading financial analytics research firm, says that 16.7 million people across the nation were impacted by I.D. theft in 2017 – an all-time high.1

The problem is getting worse – much worse. Last year, 30% of U.S. consumers were alerted about data breaches by firms holding their personal information. In 2016, just 12% of consumers were so affected.1

Social Security numbers were compromised in 35% of I.D. crimes last year; credit card numbers, in 30% of breaches. Account takeovers tripled in 2017. About 1 million smartphone and computer users had phony intermediary accounts established for them at Amazon, PayPal, and other commerce websites.1

Tax time is prime time for identity thieves. They would love to get their hands on your 1040 form, and they would also love to claim a phony refund using your personal information. In 2016, the I.R.S. had spotted 1 million bogus returns; in 2017, the number dropped to 900,000. This spring, initial data suggested even fewer cases of fraud would be identified, but the numbers are still too large.2

E-filing of tax returns is smart; just make sure you use a secure Internet connection. When you e-file, you aren’t putting your Social Security number, address, and income information through the mail. You aren’t leaving Form 1040 on your desk at home (or work) while you get up and get some coffee or go out for a walk. If somehow you just can’t bring yourself to e-file, then think about sending your returns via Certified Mail. Those rough drafts of your returns where you ran the numbers and checked your work? Shred them.

The I.R.S. doesn’t use unsolicited emails to request information from taxpayers. If you get an email claiming to be from the I.R.S. asking for your personal or financial information, report it to your email provider as spam.3

Use secure Wi-Fi. Avoid “coffee housing” your personal information away – never risk disclosing financial information over a public Wi-Fi network. (Broadband is susceptible, too.) It takes little sophistication to do this – just a little freeware.

Sure, a public Wi-Fi network at an airport or coffee house is password-protected – but if the password is posted on a wall or readily disclosed, how protected is it? A favorite hacker trick is to sit idly at a coffee house, library, or airport and set up a Wi-Fi hotspot with a name similar to the legitimate one. Inevitably, people will fall for the ruse, log on, and get hacked.

Look for the “https” & the padlock icon when you visit a website. Not just http, https. When you see that added “s” at the start of the website address, you are looking at a website with active SSL encryption, and you want that. A padlock icon in the address bar confirms an active SSL connection. For really solid security when you browse, you could opt for a VPN (virtual private network) service which encrypts 100% of your browsing traffic.4,5

Check your credit report. Remember, you are entitled to one free credit report per year from each of the big three agencies: Experian, TransUnion, and Equifax. Historically, asking these bureaus to freeze your credit file in case of suspicious activity has cost a fee. Beginning in fall 2018, you will be able to request a freeze from all three at no charge, thanks to a change in federal law.6

Don’t talk to strangers. Broadly speaking, that is very good advice in this era of identity theft. If you get a call or email from someone you don’t recognize – it could tell you that you’ve won a prize; it could claim to be someone from the county clerk’s office, a pension fund, or a public utility – be skeptical. Financially, you could be doing yourself a great favor.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – cbsnews.com/news/identity-theft-hits-record-high/ [2/6/18]
2 – nextgov.com/cybersecurity/2018/04/irs-stopping-fewer-fraudulent-returns-and-s-good-thing/147305/ [4/9/18]
3 – forbes.com/sites/kellyphillipserb/2018/03/22/irs-warns-on-dirty-dozen-tax-scams/ [3/22/18]
4 – nytimes.com/2018/05/04/technology/personaltech/staying-safer-on-public-networks.html [5/4/18]
5 – cntraveler.com/story/how-to-keep-your-data-safe-while-traveling [6/7/18]
6 – nbcnews.com/business/consumer/credit-freezes-will-soon-be-free-everyone-n883146 [6/14/18]

, ,

Financial Considerations When Buying a Car

Things to think about before heading to a dealership.

Time to buy a car? Short of buying a house, this is one on the most important purchases you will make. It’s also one that you might be making several times through your life, comprising of thousands – sometimes tens of thousands – of dollars.

If you think about it, you can probably imagine other things that you might want to prioritize, ranging from saving for retirement, buying a home, or even some lifestyle purchases, like travel. Not to mention that having more money on hand will likely be handy if you have sudden need of an emergency fund. Thankfully, there are many options for saving money by avoiding spending too much on your next car. Here are some things to think about.

Buying a new car? It may not be the best value; a brand-new car loses roughly 20% of value over the first year and about 10% of that happens the moment you drive it off the lot. Buying used might require more research and test driving, but under the right circumstances, it can be a considerably better value.1

A trade-in might not always favor you. A dealership has to make a profit on the vehicle you are trading in, so you will often receive far less than the Blue Book value. A better value may be to try to sell your vehicle, yourself, directly to another person. If you do attempt a trade-in, avoid any major expenditures on the old car beforehand, like major repairs or even a detailing. Focus on getting the best price for the new car and leave the trade-in for the end of your negotiation.2

Leasing vs. buying. Leasing a car may only be advantageous if you are a business owner and able to leverage the payments as a tax deduction. While you can get a brand-new car every few years, there are many hoops to jump through; you need excellent credit, and there are many potential fees and penalties to consider when leasing, which you don’t face when buying. In many ways, it’s akin to renting a car for a longer period of time, with all of the disadvantages and responsibilities.3

Shop around for interest rates, but consider credit unions. Credit unions tend to have more favorable rates as they are member owned. At the average American bank, the interest rates are 4.5%, according to Bankrate.com. Meanwhile, you can often get rates in the neighborhood of 2.97% through the typical credit union. There are a number of other benefits to credit unions, including being based locally as well as user-friendly practices, such as options to apply to a credit union at the dealership. There are many financing options, though, so make credit unions only part of your research.4

An automobile is a big-ticket purchase. It’s worth taking your time and making sure that you’ve covered your bases in terms of making the most responsible purchase.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – marketwatch.com/story/8-things-youre-better-off-buying-used-2018-08-02 [8/2/18]

, , , ,

When to Ignore the Crowd and Shun a Roth IRA

‘Stealth’ taxes and financial aid implications are among the factors savers should consider when switching accounts

The following article is Courtesy of Laura Saunders and The Wall Street Journal, and makes some very good points on why funding a Roth Conversion could have a negative impact to an overall financial plan. For many of our clients who are high income earners, the worse possible time for a Roth Conversion may be when they are in their peak earning years – the same period of time most people think about this for the first time.

To determine if a Roth IRA is the right strategy for you and your family, or perhaps to learn when might be the right time to explore this strategy, feel free to reach out to Cornerstone.

Switching your traditional individual retirement account to a Roth IRA is often a terrific tax strategy—except when it’s a terrible one.

Congress first allowed all owners of traditional IRAs to make full or partial conversions to Roth IRAs in 2010. Since then, savers have done more than one million conversions and switched more than $75 billion from traditional IRAs to Roth accounts. (Source: The Wall Street Journal September 2018)

The benefits of a Roth conversion are manifold. A conversion gets retirement funds into an account that offers both tax-free growth and tax-free withdrawals. In addition, the account owner doesn’t have to take payouts at a certain age.

While traditional IRAs can also grow tax-free, withdrawals are typically taxed at ordinary income rates. Account owners 70½ and older also must take payouts that deplete the account over time.

IRA specialist Ed Slott and Natalie Choate, an attorney in Boston, say that Roth IRAs also yield income that is “invisible” to the federal tax system. So Roth payouts don’t raise reported income in a way that reduces other tax breaks, raises Medicare premiums, or increases the 3.8% levy on net investment income.

Yet both Ms. Choate and Mr. Slott agree that despite their many benefits, Roth conversions aren’t always a good idea. IRA owners who convert must pay tax on the transfer, and the danger is that savers will give up valuable tax deferral without reaping even more valuable tax-free benefits. For tax year 2018 and beyond, the law no longer allows IRA owners to undo Roth conversions.

Savers often flinch at writing checks for Roth conversions, and sometimes there are good reasons not to put pen to paper. Here are some of them.

  • Your tax rate is going down. In general, it doesn’t make sense to do full or partial Roth conversions if your tax rate will be lower when you make withdrawals. This means it’s often best to convert in low-tax-rate years when income dips. For example, a Roth conversion could work well for a young saver who has an IRA or 401(k) and then returns to school, or a worker who has retired but hasn’t started to take IRA payouts that will raise income later.
  • Those who will soon move to a state with lower income taxes should also consider waiting.
  • You can’t pay the taxes from “outside.”  Slott advises IRA owners to forgo a Roth conversion if they don’t have funds outside the account to pay the tax bill. Paying the tax with account assets shrinks the amount that can grow tax-free.
  • You’re worried about losses. If assets lose value after a Roth conversion, the account owner will have paid higher taxes than necessary. Ms. Choate notes that losses in a traditional IRA are shared with Uncle Sam.
  • A conversion will raise “stealth” taxes. Converting to a Roth IRA raises income for that year. So, benefits that exist at lower income levels might lose value as your income increases. Examples include tax breaks for college or the 20% deduction for a pass-through business. Higher income in the year of a conversion could also help trigger the 3.8% tax on net investment income, although the conversion amount isn’t subject to this tax. The threshold for this levy is $200,000 for singles and $250,000 for married couples, filing jointly.
  • You’ll need the IRA assets sooner, not later. Roth conversions often provide their largest benefits when the account can grow untouched for years. If payouts will be taken soon, there’s less reason to convert.
  • You make IRA donations to charity. Owners of traditional IRAs who are 70½ and older can donate up to $100,000 of assets per year from their IRA to one or more charities and have the donations count toward their required payouts. This is often a highly tax-efficient move. But Roth IRA owners don’t benefit from it, so that could be a reason to do a partial rather than full conversion.
  • Financial aid will be affected. Retirement accounts are often excluded from financial-aid calculations, but income isn’t. If the income spike from a Roth conversion would lower a financial-aid award, consider putting it on hold.
  • You’ll have high medical expenses. Under current law, unreimbursed medical expenses are tax deductible above a threshold. For someone who is in a nursing home or has other large medical costs, this write-off can reduce or even wipe out taxable income. If all funds are in a Roth IRA, the deduction is lost.
  • You think Congress will tax Roth IRAs.Many people worry about this, although specialists don’t tend to. They argue that Congress likes the up-front revenue that Roth IRAs and Roth conversions provide and is more likely to restrict the current deduction for traditional IRAs and 401(k)s—as was considered last year.

Other proposals to limit the size of IRAs and 401(k)s to about $3.4 million, to make non-spouse heirs of traditional IRAs withdraw the funds within five years, and to require payouts from Roth IRAs at age 70½ also haven’t gotten traction so far.

Withdrawals from a Roth IRA may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

, ,

Test Your Smarts on Insurance

How much do you know about insurance? Take this WSJ quiz, courtesy of wsj.com

For many consumers, insurance is a confusing maze of possibilities.

There are myriad kinds of policies available, including life, auto, homeowners, health, disability, flood and even pet insurance, that could be appropriate for people, depending on their circumstances and where they live. But many consumers don’t fully understand what each of these policies covers, and they may struggle to find the information they need to make informed decisions.

Insurance professionals recommend consumers review their policies and coverage options yearly to ensure they are properly protected. How much do you really know about insurance?

Take our quiz to find out.

  1. True or false: All disasters are covered under standard homeowners and renters insurance policies.

ANSWER: False. Standard homeowners policies typically cover damages from some potential disasters, including tornadoes, lightning strikes and winter storms, according to the Insurance Information Institute, which helps educate consumers on insurance-related issues. These policies can vary, so read the fine print. What’s more, standard homeowners policies generally don’t cover damages from disasters such as floods, earthquakes or sewer backups; separate endorsements or policies may be needed to protect against these types of problems, according to the institute.

  1. If a policy has a $500 deductible, and the insurance company determines that the insured loss is worth $10,000, the claimant would receive a check for ____________.
  1. $10,500
  2. $9,500
  3. $15,000
  4. None of the above

ANSWER: B. $9,500. The dollar amount of a deductible comes off the top of the claim payment. Deductibles can be specific dollar amounts or percentages, as is generally the case with homeowners insurance. With an auto-insurance or homeowners policy, the deductible applies each time you file a claim. One exception to this is in Florida, where homeowners policies usually require consumers to pay only one hurricane deductible per calendar year, rather than after each storm.

  1. When thinking about the amount of coverage to place on personal possessions, a good rule of thumb is to insure them at ___% to ___% of a person’s dwelling coverage amount.
  1. 10% to 15%
  2. 20% to 30%
  3. 50% to 70%
  4. None of the above

ANSWER: C. Most homeowners-insurance policies provide coverage for personal possessions at about 50%-70% of the insurance on the person’s dwelling, according to the Insurance Information Institute. So, if a person insures a dwelling for up to $150,000, he or she would want to insure personal possessions for at least $75,000.

  1. Usage-based insurance is _______________.
  1. A new type of biometric device.
  2. A type of vehicle insurance where premiums can depend on driving habits such as speed, miles driven and hard-braking incidents.
  3. A policy based on your life expectancy.
  4. A way of measuring how much your personal property is worth.

ANSWER: B. Usage-based insurance, also known as telematics, tracks driving behavior through devices installed in a vehicle or through smartphones. Wireless devices transmit data in real time to insurers, which use the information to help set premiums. The devices record metrics such as the number of miles driven, time of day, where the vehicle is driven, rapid acceleration, hard braking, hard cornering and air-bag deployment. By year-end, 80% of new cars for sale in the U.S. could be equipped with onboard telematics devices, and by 2020, 70% of all auto insurers will use telematics, the National Association of Insurance Commissioners predicts.

  1. Some ___% of households didn’t have life insurance in 2016, according to Limra, an industry-funded research firm.
  1. 5%
  2. 10%
  3. 20%
  4. 30%

ANSWER: D. 30%. The good news is that more households seem to recognize the need for life insurance. Nearly five million more U.S. households had life insurance coverage in 2016 than in 2010, according to the most recent data available from Limra.

  1. When choosing an insurance company, consumers should consider _____________________________.
  1. Whether the insurance company is licensed in their state.
  2. The cost of the insurance policy.
  3. The financial strength of the insurer.
  4. All of the above.

ANSWER: D. There were nearly 6,000 insurance companies to choose from in the U.S. in 2016, according to the National Association of Insurance Commissioners, so consumers should do their homework before choosing one. A good place to start is with their state insurance department, which can help identify which insurers are licensed to do business in the state. The department may even publish a guide that shows what insurers charge for different policies. Independent credit-rating firms—such as A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and S&P Global Ratings—are another source of information. They rate insurers’ financial strength, which can be an important indicator of whether a firm will have the assets and liquidity to pay claims as promised. Consumers should also gauge the level of service insurers are providing and their comfort level with the company’s representatives.

  1. True or false: While not required, business-interruption insurance is a good idea for entrepreneurs and startups.

ANSWER: True. After a catastrophe or disaster, about 40% of businesses don’t reopen and an additional 25% fail within a year, according to data from FEMA and the U.S. Small Business Administration. Business-interruption insurance can help compensate small-business owners for lost revenue due to closure. This type of insurance can also help owners cover the cost of fixed expenses such as rent and utilities, as well as mitigate the expense of operating from a temporary location.

  1. True or false: People who don’t have health insurance in 2018 will still face a penalty when they file their taxes in early 2019.

ANSWER: True. While the penalty under the Affordable Care Act for not having health insurance has been repealed, the change doesn’t take effect until 2019, according to Louise Norris, a health-insurance broker who has been writing about health insurance and health-law overhaul since 2006. People who are uninsured in 2019 and beyond won’t be subject to a penalty, she says.