From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Every Thanksgiving, I take my recipe box down from the shelf, and pull out the index card for “Harriett’s Dressing.” The instructions on the card, written in my grandmother’s spidery hand, are now nearly illegible, having endured a century of splatters and spills.
When I serve the turkey with its accompanying dressing, someone at the table will ask if this is “granny’s stuffing.” Then we will all laugh, and our traditional feast begins.
Such is the power of legacy – of the instructions, passed from one generation to the next, on how to manage life’s activities. My grandmother wanted to make sure her children and their children “did things right,” and so left us her written directions. We honor her memory by following those directions to the letter.
Estate planning – our topic this month in CFP Board’s 12 in ’12 series – is about creating these legacies for our families and others we care about. It’s a process of memorializing how we want everything done when either death or disability silences us. Included in the “everything” is the management and disposition of our assets, the care of our dependent children and relatives, and the management of our health care and our physical comfort at the end of our lives.
Many people make the mistake of thinking that estate planning is the “last phase” of financial planning, coming after the decisions to be made about financing homes or college educations, or setting up retirement plans. Other people wrongly assume that estate planning is only for the wealthy, or those with significant assets they want to protect from probate fees or taxes. The reality, however, is that everyone
needs to create a plan. Further, this plan starts with the very first step of the comprehensive financial planning process: namely, taking stock of exactly where you are currently.
The question you must answer is: If I were to die today– not later, as you would certainly prefer, not after you have taken care of more immediate concerns – but today
, how would I wish to leave things for people I love and the causes I care about?
Here are the steps to answering this question:
- Consider first what you have – any and all items that you can make decisions about. This includes financial assets, real property, intangible property such as a patent or copyright, even your computer files and passwords. Determine the financial value of each asset, as well as any debts you owe. Review how each asset is titled, and/or if there is a beneficiary designation associated with the asset. Be aware that any account or title that is in joint name, or carries a beneficiary designation (i.e., retirement plan, life insurance policy, annuity or pension) already carries its own “transfer instructions” as to who will receive the asset after you. Anything else requires the more specific instructions contained in a will and/or trust document.
- Consider whom you would like your assets to go to, if not already decided by title or beneficiary designation. Consider, too, the readiness of your beneficiaries or heirs to receive such assets. Are they too young to own property or assets in their own names? Are they incapable of managing these assets responsibly? Is the asset illiquid (such as a residence with a mortgage, or an ownership share in a closely held business)? Would the inheritor of the illiquid asset have a difficult time coming up with the additional funding that might be needed to hold such an asset? A “yes” response to any of these questions means that more elaborate strategies than a simple transfer may be warranted.
- Consider, too, whom you do NOT wish your assets to go to. While the majority of people want to benefit a relative, there is virtually no one who wants this relative to be their Uncle Sam, or any of his extended family in the guise of state or local government. Few married individuals are okay with the prospect of their assets going to the “next” wife or husband, should they die before their own spouses. And it’s not likely that a bequestor wants his or her wealth to be consumed in paying off a family member’s creditors. If any of these “yes, but” situations are applicable to your wishes about how your assets will be distributed, be sure to take note. These, too, will need to be addressed by more sophisticated estate planning.
- Consider how you might create an estate, if you have nothing to bequest, but have individuals dependent on your support. In such cases, you will need to get life and disability insurance coverage to make sure your dependents will not be left without resources, should you die or become unable to earn a living. Preliminary to getting such coverage, assemble your medical records and information, along with all the data on your assets.
Taking these four steps is akin to my grandmother naming and assembling all the ingredients for her legacy stuffing. Next comes combining these ingredients into a winning “recipe” for friends and family. Unlike my grandmother, however, you’ll need an outside professional to help you with this task. A CFP®
professional is uniquely qualified for this, given his or her comprehensive focus on all aspects of your life -- your family circumstances, your personal goals and preferences, your financial resources – as well as the federal and state laws that govern the income and estate tax consequences of asset transfer. He or she will know what containers and utensils are needed to put together your plan: be they wills, trusts, powers of attorney, additional beneficiary designations, or more complicated transfer strategies. Finally, the CFP®
professional can be responsible for communicating your special recipe to an attorney qualified to put it all into legal language.
When I look carefully at that treasured index card written by my grandmother, I can see that she must have changed her mind about some of her original instructions. “Cut in half,” she notes for one ingredient; “Add more to taste,” she writes for another. In other words, as time passed and more experience was gained, there were changes she felt were necessary or desirable. The same will be true of your estate plan. Review it periodically with your CFP®
professional, always making sure that your wishes today can be easily executed tomorrow. And share your intentions with your family and loved ones. It may be that someday, some of those same relatives and friends will be sitting around a Thanksgiving table, remembering and appreciating the special legacy you created.
From CFP Board Ambassador Dan Forbes, CFP®
5 Barriers to Retirement
We are all connected by the quest to retire comfortably at a reasonable age. Regardless of where you are in the process, there are impediments to consider from now until retirement. Here are five to consider:
- Failure to consider tax implications
If you’re retiring this year or next, the current tax uncertainty is enough to make you throw your hands up and forget about planning altogether. What will income tax rates be? What will be the tax on capital gains? Will there be a surcharge from the health care plan? Your social security income might be taxable, so consider delaying it if you have other sources of income. Once future policy becomes clearer, act immediately to evaluate what your tax liability will be and take steps to manage that liability.
- Improper investment allocation
You may still be apprehensive about opening monthly statements, but it’s a necessity. Regardless of where you are in the accumulation phase, you have to make sure you’re properly balanced and that your investments are behaving according to plan. As you approach retirement, examine the breakdown of your investment accounts. If you’ll need investment income, include assets that produce interest and dividends, as bank account interest is currently negligible. Be smart in the use of social security, as it’s a powerful annuity. You can control the start date and, ultimately, the monthly payment. If you have retirement income sources such as a pension or part-time work, you might focus on growing your retirement accounts until they’re needed for supplemental income.
- Ignoring inflation
Inflation has been close to 2 percent for a long time. Historically, however, it’s been much higher than that and furthermore, the “CPI” doesn’t tell the whole story. This means that is not necessarily a good idea upon reaching retirement to move all of your assets to cash. You will still need exposure to assets that hedge for inflation, such as equities or inflation linked bonds. The Federal Reserve has kept inflation held at bay for a long time, but that may not always be feasible.
- Poor budgeting
During working years, it’s easier to deal with a budgetary mistake. If you have a shortfall one year, you can try to work and earn extra money the next year in order to compensate. At retirement, the focus shifts to reducing core expenses and eliminating unnecessary expenses. And despite the current mortgage interest tax benefits, there’s been a renewed focus on retiring without any debt, including loans against your house.
- Unforeseen medical costs
During the accumulation phase, you need life insurance to protect income for survivors and homeowner’s insurance to protect what is many people’s largest asset. The greatest threat to a successful retirement is a costly medical issue. If you have a good size estate, an analysis of the benefits and costs of long-term care is in order. If you have enough money to self-insure, you may eventually forgo insurance coverage, but it makes sense to at least weigh the alternatives.
One or all of these barriers might be present in your quest to retire. Navigating the current economy to implement a successful retirement strategy can be daunting. Instead of going it alone, consider reviewing your strategy with a CFP®
professional. It’s a great way to make sure you stay on track.
From CFP Board Ambassador Dan Candura, CFP®
How Do Advisers Get Paid?
Knowing how your adviser is paid is one of the benefits of working with CERTIFIED FINANCIAL PLANNER™ professionals, as they must provide an accurate and understandable description of compensation and conflicts of interest under the ethical rules contained in CFP Board’s Standards of Professional Conduct.
This rule applies to every CFP®
professional in every engagement. CFP Board believes that you deserve to know what each service or product is going to cost and how that benefits your adviser. They established this high level of disclosure so you can exercise prudent judgment about which services and products you can afford. Without this sort of transparency, it can be difficult to determine whether advisers are acting in your interest or theirs.
With so many different business models in financial services, it can be difficult for a consumer to determine how an adviser is paid. Some earn income on the products they help you implement. This can consist of commissions on sales or an ongoing charge based on the amount and types of investments. Others charge specific fees for particular services either on a flat-fee or hourly basis. This may include a schedule that adjusts fees based on the complexity of your situation or the size of your investment portfolio. Some set fee levels at certain annual amounts and will charge that amount or more to every client while others may be more flexible and determine pricing on an individual basis. Still others use a combination of these methods.
With all of these different methods of compensation, it can be hard for consumers to figure out what it actually costs to work with the adviser. That is why CFP Board requires that CFP®
professionals explain their compensation to every client. They even require the CFP®
professional to provide written disclosure whenever providing financial planning services to a client.
Smart consumers know that there is no such thing as a free lunch. Somehow, some way, the adviser is being paid to provide services. Even when there is no explicit up-front charge there has to be some other method for the adviser to earn some form of income. This may be paid to the adviser by the firm where you open an account or place your investments. If you purchase products (e.g., life insurance, annuities, disability coverage, long-term care policies, etc.) from an insurance company the agent is often paid a commission based on the size of the policy and the first year premium. The adviser may be eligible for additional compensation in the future if you continue to own the product. Likewise, other commissionable products like mutual funds may pay both an initial payment and ongoing compensation to the selling adviser. These ongoing payments are often referred to as “trails.” These payments can occur even when there are no upfront fees, so don’t confuse the fact that there are “no sales charges” with there being no compensation to the adviser.
A CERTIFIED FINANCIAL PLANNER™ professional will share this information with you voluntarily, but you should feel comfortable asking any adviser to explain how they are paid. They should do this in terms that you understand and provide enough information for you to be able to decide if the costs are acceptable. You deserve to know how your adviser is paid and whether there are any situations where your interests and that of your adviser compete. Keep in mind that every CFP®
professional must place your interest ahead of their own when offering financial planning services to remain in good standing with CFP Board. This is often higher than the suitability standard that is required by most regulators.
Be sure to ask any and every adviser you meet with to explain how they get paid and to identify any material conflicts of interest. You will be glad that you did.
Financial Planning for Your Retirement
A More Financially Secure Retirement Is Possible, if You Follow These Simple Steps
Retirement planning can be a daunting task for aging baby boomers, but CFP Board's Consumer Advocate Eleanor Blayney, CFP®
offers some suggestions to facilitate the planning process. Soon-to-be retirees should consider when they want to start withdrawing money from their retirement accounts. If the investment market is bad or unstable, withdrawals from a retirement account could be diminished by several years; retirees should keep an eye out and invest at a time that will maximize their withdrawals. Retirees should look to stay around a 4 percent yearly withdrawal rate, which is considered the sweet spot when it comes to maintaining good payouts over the rest of their life. And retirees should bear in mind the taxes they will need to pay on their retirement accounts once they start withdrawing money. Where a retiree invests is also important. Sticking only to safer bonds and annuities could hurt in the long run, and taking on more risky dividend stocks can pay off if they are monitored closely. And most important, according to Blayney, is to cut expenses during retirement as much as possible to ensure funds last as long as they are needed. "Taxes, timing, and spending are what matters most in creating income in retirement," says Blayney.
The 'Bucket' Approach Can Help Protect Your Retirement Nest Egg
A good strategy for retirement is to take a "bucket" approach to savings, says Ben Tobias, CFP®
. The strategy involves putting some retirement savings in an emergency bucket for situations such as a stock market crash, and then withdrawing only for living expenses while waiting for the market to rebound. About two years of living expenses should be kept in a federally insured money market account. "It worked for our clients during the 2008 debacle," he says, adding that none had the need to withdraw money from the stock market. Then, when the market rebounds, retirees can sell stocks to refill the bucket. CFP Board's Consumer Advocate Eleanor Blayney, CFP®
says that most retirees will not be able to live on their Social Security check, and they therefore "need a plan to spend their savings wisely while maintaining assets that grow and generate income." With the average monthly payment at about $1,240 a month right now, "it’s important to focus on what you can control," she says, such as spending, allocation of funds, and possibly working part-time.
Financial Planning for Your Life Now
Creating a Financial Plan Can Be Reassuring During Stressful Economic Times
CFP Board's Consumer Advocate Eleanor Blayney, CFP®
reminds investors that while they may be balking at the dismal returns of money markets, "survival rations are never particularly appetizing," saying the wise choice right now may be to wait out the storm and make sure to have an ample emergency fund. A good first step for financial disaster preparedness is creating a budget. Tantamount to making sure you have enough bottled water and canned goods on hand for a major storm, a budget lets you know where you are spending and where adjustments are possible. Another recommendation is taking a long-term view of financial survival, which she equates to "boarding up the windows and settling down to read a timeless classic by candlelight." As long as you have the ability to survive for a while and can avoid emotional reactions to market jumps, you will probably be fine, she says. Lastly, Blayney recommends meeting with a CERTIFIED FINANCIAL PLANNER™ professional. According to a 2012 study by the CFP Board and the Consumer Federation of America, Americans who had a financial plan not only felt more confident about the future but were actually financially stronger than non-planners in numerous key areas.
Follow These Tips to Meet Your Financial Goals
Steve Repak, CFP®
offers ten simple yet effective ways to better equip yourself for future financial goals. Taking responsibility for your financial actions, being honest about your expectations and abilities, and holding yourself accountable sets a good foundation for your future financial battles. Prioritizing your finances, being willing to sacrifice short-term gains for more important long-term goals, and having a solid yet flexible plan will help you stay ahead of the curve and manage your short- and long-term financial goals. Lastly, Repak recommends being flexible, keeping it simple, staying determined, and working with a CERTIFIED FINANCIAL PLANNER™ professional to identify your financial goals and develop a plan to help you achieve them.
Home Ownership Is Possible – With the Proper Strategy
John Fawaz, CFP®
says the road to home ownership can be difficult but is possible with the proper strategy. First, he says that a down payment of 20 percent is necessary not only to avoid having to buy private mortgage insurance but also to show one is financially ready to buy. Potential buyers should know how much they can afford to pay per month, ideally no more than 28 percent of gross income. Fawaz does not like 30-year mortgages because using these results in paying three times the interest. He recommends a 15-year mortgage – if a buyer cannot afford a 15-year mortgage payment, the buyer has exceeded their budget. He says potential buyers should also make sure they are buying for the right reason – tax savings on interest is not a good reason, as a standard deduction is higher than what most people get if they itemize. Finally, Fawaz recommends avoiding condos because of the association and assessment fees involved, which can be raised at any time.
Financial Planning for Your Children
Mom and Dad Must Ensure Their Own Financial Well-being Before Financing Their Adult Children's Business
Many of today's financially independent young workers are turning to their parents for financial help in starting a business, paying for graduate school, or starting some other career-oriented project. "Everyone's thinking more education or going into business for themselves will be a ticket to a better job. Naturally, the Bank of Mom and Dad would be the first place you would stop," says CFP Board's Consumer Advocate Eleanor Blayney, CFP®
. Experts say parents who receive such a request for help from their adult children should keep the following in mind to prevent a gift or loan from turning into a family disaster. First, determine how the gift would impact your own finances and future. Experts say a good rule of thumb is to never give more than 5 percent of your net worth to a child for an endeavor. Second, take into consideration that a child who is supporting him- or herself nevertheless might not be ready to enter a graduate program or operate a small business. Blayney says a child should clearly outline the potential payoff of the endeavor and the chances of it coming to fruition before parents offer their financial help. When it comes to seed money, it is important for the child to also be financially invested. Brendan Synnott, who helped start the granola brand Bear Naked in 2002, pitched in thousands of dollars in savings with his co-founder, and they went tens of thousands of dollars into debt themselves before turning to friends and family for additional funding. With the help of a network of people they knew, the pair raised $750,000 and built a business they eventually sold to Kellogg Co. "We were willing to put everything we had on the line. That makes it easier for other people to follow," says Synnott. "Your investors should not be taking on more risk than you are as a founder." When it comes to giving money as a loan or a gift, experts are split. Loaning money to a child guarantees some sort of repayment, at least in theory, but some experts say that giving money as a gift allows a child to be more independent. Even if money is given as a gift, parents can still attach terms, such as receiving a stake in the child's start-up business. This way everyone has an incentive for the business to succeed.
Your Child's College Savings Plan Starts With Some Simple Steps
With the cost of some four year universities reaching over $20,000 per year, saving for college can be a daunting task for many parents. Luckily, Jeff Nelligan, CFP®
has some easy steps for making saving for college a little less stressful. Nelligan recommends starting early, saving regularly, and being smart about saving, including reducing credit card debt to minimize interest payments before you save, as good starting points for a solid savings plan. Reaching a personal decision about who should pay for college will help set expectations for realistic savings plans. Lastly, Nelligan advises using tax-advantaged college savings vehicles and 529 savings plans, and, when your child nears college age, moving funds to less risky assets, such as a stable value fund or FDIC-insured certificates.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
Your CERTIFIED FINANCIAL PLANNER™ Professional Should Ask YOU Questions
First meetings between CERTIFIED FINANCIAL PLANNER™ professionals and those they are advising should touch on five important topics that will lay the groundwork for all future interactions. CERTIFIED FINANCIAL PLANNER™ professionals should first ask their advisee what they hope to gain from the interaction, whether they are looking to save for a house, their kids' college tuition, or insurance plans. The planner should also take into account the advisee's current income, and ask whether they expect any changes to it in the near or long term, to better assess investment opportunities. CERTIFIED FINANCIAL PLANNER™ professionals should ask what an advisee's current expenditures are in order to better create a financial plan that conforms to their household budget. CFP Board's Consumer Advocate Eleanor Blayney, CFP®
recommends CERTIFIED FINANCIAL PLANNER™ professionals ask their clients just how involved they would like to be in the planning process. This is particularly important if the advisees are a couple, as one person might want nothing to do with the finances while the other might want full control. As a final question, financial advisors should ask their clients if they are comfortable with the fees they will pay for the service – and CERTIFIED FINANCIAL PLANNER™ professionals should always be open and transparent when discussing those fees.
Professionals With the CFP® Designation Offer the Public Assurance
It’s no secret that financial advisers often boast an array of acronyms and professional designations. Understanding the difference between an RIA, CFA, CFP, ChFC, CLU, or CPA is a necessity for better selecting a financial advisor and managing your finances. Professionals with the CFP®
designation have training in comprehensive financial planning and typically take a holistic approach when providing advice, helping clients with everything from budgeting to investments and retirement and estate planning. The CFP®
designation requires advisers to adhere to a fiduciary standard and take continuing education courses, requirements “designed to give the public assurance of a competent and ethical financial planner,” says Kevin Keller, chief executive of the Certified Financial Planner Board of Standards Inc.
Consider This Advice When You Choose Your CERTIFIED FINANCIAL PLANNER™ Professional
Consumers should keep in mind several things when choosing a financial planner. First, find a financial planner with the letters "CFP®
" after his or her name, indicating that this financial planner has passed a rigorous test administered by the Certified Financial Planner Board of Standards about the specifics of personal finance. CERTIFIED FINANCIAL PLANNER™ professionals are also required to take ethics and continuing education classes to keep their certifications current. Second, learn how to discern between commission-based planners, who take a cut of the profits they earn for a client and may even charge per transaction, and fee-only planners, who generate revenue via client fees that usually equal about 1 percent of a client's annual assets. Third, if working with a planner for the first time, consider picking an hourly based planner who can help with investments, taxes, retirement planning, and numerous other financial matters on a per-project basis. With time a client may want to retain a planner year-round for a more "holistic" approach to finances, but for starters, it can be smart to hire a professional on an hourly basis. Fourth, ask your bank about free resources and services, such as basic financial guidance and access to online tools and information that deal with financial management. Finally, ask a prospective adviser some important questions up front, including: What is your background? Do you have other clients similar to me? How do you get paid? And, how often can I expect to meet with you?
Financial Planning for Women
Women Face Unique Challenges Planning Their Financial Futures
Laura Hawley, CFP®
says that women face a number of unique challenges when planning for their financial futures. Hawley notes that American women are, on average, living longer than American men. In particular, statistics from the U.S. Department of Health and Human Services indicate that American women age 65 can expect to live, on average, three years longer than their male counterparts. This may mean saving and accounting for additional years of retirement and potentially greater extended care needs. Hawley also notes that American women face a very high probability of being financially on their own later in life, as the result of spousal death, divorce, or simply remaining single. At the same time, however, the Women's Institute for a Secured Retirement estimates that the average American woman will spend 15 percent of her career out of the workforce caring for children. This can amount to an average total of more than a decade out of the workforce, which presents unique challenges for both long- and short-term savings. Hawley says it is important that all women take these unique challenges into consideration when planning for their financial futures either alone or with the help of a CERTIFIED FINANCIAL PLANNER™ professional.
Women Must Consider Several Factors When Making Their Financial Plans
Rick Fingerman, CFP®
offers tips to help women have a successful financial life. First, Fingerman recommends that women take time to realize what their financial goals are and seek out assistance – from a CERTIFIED FINANCIAL PLANNER™ professional, for example – to help with designing a financial plan. For women who have decided to leave or take a break from working to care for children or attend to family matters, they can still contribute to a retirement fund by seeking out a Roth or traditional IRA if they are married and their spouse makes enough income to satisfy contribution requirements. Retirement funds are especially important to women because of their typically longer lifespans. Women tend to outlive men by five to 10 years, meaning they might need more retirement funds saved than their spouses. Older women with an established family might find that as they have kids and as their parents grow older they are often faced with the stressful task of being a caregiver twice over. Ensuring that long-term care can be provided for aging parents, possibly through purchasing an insurance policy, will help reduce this stress. Above all, however, Fingerman stresses that women keep their own future in mind, as they will likely outlive their spouse or partner and will require someone to care for them as they pass into old age. Women should make sure they have a means to care for themselves incorporated into their financial plan.
Abstract News © Copyright 2012 INFORMATION, INC.