This blog post builds upon a previous one: No, Darling, because we can’t afford that. I’m sharing some thoughts about teaching children to be financially responsible.
My second trip? What was the first? My first trip to Europe I was 13, and my grandparents took me on vacation with them. My maternal grandmother had come over from Italy at about age 5, and was raised in Connecticut, where I was born. Her husband, my maternal grandfather, one of 16 children, was born in Connecticut, but some of the siblings were, I believe, born in Italy. Grandpa was a successful business owner in New Haven, and they went to Europe on vacation most years. In turn, they took each of their four grandchildren with them once – a gift I’d like to return some day.
The second trip is the one I want to write about. My Uncle Joe, my Dad’s...
As a financial planner, I work with a lot of couples planning for retirement. Retirement brings on a sea-change in thinking. Up until then most people have been in an accumulative stage of money management – saving up against the day they stop working. Come retirement, what is saved is spent down over many years. The fundamental question: Will I outlive my money?
With software, we can answer the question, and with some specificity. To model the answer, though, requires good data inputs. Those inputs include spending requirements, inflation and earnings assumptions, future medical expenses, and a host of other things, both quantitative and qualitative. But we always begin at the beginning, which is the spending plan, aka the budget.
We recently worked with a couple on retirement planning. We found them to be in enviable financial shape. But one spouse...
A friend recently suggested that I write a piece about children and money. At first I thought myself unqualified, as I have no formal education in this area. But then I got to thinking that, as a father and now grandfather, and since I’ve been graduated from life’s School of Hard Knocks, that I might have something useful to contribute. Hence this effort. This is actually Part I of a two-part series. Part II is all about my Second Trip to Europe.
I love children. Always have. I don’t like unrestrained screaming, but I do enjoy hearing children happily play. My wife and I have two married daughters and two grandchildren, all of whom we love dearly. But children, as they are delivered to us, are loud, messy, demanding, have appalling table manners, and think the world revolves around them. Furthermore, they don't come with manuals. Yet it is our job as...
A lot of thought goes into planning for the retirement years. Typically, people like to have the mortgages on their primary residences paid off, to go into retirement clean and with no debt. This often begs the question; Do I have to keep paying on this life policy?
To answer the question, I’ll ask you to think back on why you bought the policy in the first place. Is someone still depending upon you for a living? If so, and you dropped dead today, would there be sufficient financial resources without the policy? If not, then you still need it. If so, then here are six good options.
In this case you simply turn it back to the insurance company, which cuts you a check for the policy’s cash value. If the cash value exceeds your basis in the policy, then you have a taxable gain. Your basis is the sum of all the premiums you’ve paid in. The...
This is a big topic and a big part of financial planning for retirement. The statistic is that by age 75, 75% of us will have needed some long-term care. So the question is, how can I prepare for this risk financially?
A principle of risk management is to insure risks of low frequency and high severity. We insure our homes against hurricanes, and our cars against collisions. We insure our lives against premature death, and our incomes against disability. So it makes sense to insure our retirement assets against a financially devastating long term illness. The point is not to spend all the accumulated assets on the first spouse to become sick, leaving the surviving spouse impoverished.
The insurance industry introduced long-term care policies roughly a generation ago. Policy benefits were triggered by needing substantial help and assistance in performing 2 of 6 ADLs...
Is it the 529 college savings plan? Let’s see. That is funding with after tax dollars, but the funds grow without taxation and come out without taxation when used for qualified higher education expenses. That’s a double tax advantage.
How about the Roth IRA? Same thing as the 529. A double tax advantage.
How about a Traditional IRA? Here I deduct on the way in and have growth without taxation. The tax bill comes when I distribute. So this is another double tax advantage.
Yes! There is one to my knowledge, and that is the Health Savings Account.
The HSA is used in conjunction with a high deductible health insurance plan (HDHP). This is one which, per IRS regulations, has a deductible of at least $1400 for an individual or twice that for family coverage. ...
As I noted in Part I, an annuity is a complex financial animal. It can be used as a tool to accumulate funds on a tax-advantaged basis. It can also be used efficiently to distribute funds in later years, which is my focus here in Part II.
This is the very definition of the word annuity. If I want that stream of payments, I can either purchase it from the annuity company, or I can annuitize an annuity contract I already have. In either case I make an irrevocable choice to turn over control of my principal to the annuity company in exchange for this stream of payments.
That I annuitize a lot of money, get hit by a bus, and the annuity company keeps the remainder. That is called the single life option, which yields the highest payout. To mitigate against this risk, I chose a payout option:
An annuity is a complex financial animal. It can be used as a tool to accumulate funds on a tax-advantaged basis. It can also be used efficiently to distribute funds in later years. Here in Part I I’m focusing on the accumulation phase. In Part II I’ll cover distribution and tax issues.
An annuity, in its strictest sense, is a stream of payments that one cannot outlive. The term annuity is often used synonymously with the word pension. A stream of payments describes a distribution of principal, however. How do I get the annuity in the first place?
You can purchase this stream of income just as you’d purchase a new suit or a car. It pays to shop around, because different annuity companies (i.e. life insurance companies; they are one and the same) use different mortality tables and interest rate assumptions which affect the payments they offer to you.
Q: I’m in financial trouble. Should I take out a 401k withdrawal?
This is a tough question, and the answer is generally, Not unless you truly need it. A direct withdrawal from a 401(K) before age 59 ½ is a last-resort option, with a big taxable event.
I want to distinguish clearly between 401K loans and 401K withdrawals. In this piece I’m discussing withdrawals. You can read about loans here.
Think about what happens in the 401(K). The IRS “lets” you defer salary into your account without taxation. Your employer may make matching or discretionary contributions to the account on your behalf, which he deducts from his income. Lots of tax advantages here, and the IRS wants you to keep the funds invested for their purpose: funding your retirement. Consequently, if you need to put your hands on some fast cash, the IRS doesn’t...
Q: I have a lot of high interest credit card debt. Should I take out a 401k loan?
This is a question we come across not uncommonly. There is a lot to like about doing this, but a big potential tax trap as well.
I want to distinguish clearly between 401K loans and 401K withdrawals. In this piece I’m discussion the loans; you can read about withdrawals here.
First of all, your 401k plan has to have loan provisions in place. No loan provisions, no loan. An employer can always go to his third-party administrator to have the plan documents amended if he would like to make loans available to the employees.
The loaned amount can be 50% of the vested account balance up to $50,000. A special rule allows participants with smaller balances to borrow up to $10,000 without the percentage restriction.
From what we’ve seen, plan...