Take-Aways from a Government Report on Financial Education

I recently read a new report from the U.S. Treasury Department titled Federal Financial Literacy Reform: Coordinating and Improving Financial Literacy Efforts. While the bulk of the report repeatedly encouraged federal government agencies to coordinate their financial education efforts more effectively, there were also some “nuggets” for everyday people. Below is some take-away information that stood out to me:

¨     Financial education helps to reduce “information asymmetry.” This is where the provider of a financial product or service knows more about it than consumers do. Individuals who are financially savvy are better able to avoid frauds and scams and sidestep risks that they do not fully understand.

¨     Financial education also helps society avoid “negative externalities” that result from a less financially capable population. Examples include lender write-offs of unpaid debt and the costs of a person’s poor financial decisions that is borne by friends and family, government agencies, and others. Stated another way, financial education plays an important role in the prosperity and financial health of the nation.

¨     About 6.5% of U.S. households are “unbanked.” This means that they lack a checking or savings account with a bank or credit union. One major reason that people are unbanked is bank account screening credit reporting agencies (CRAs). Over 80% of banks use account screening CRA reports to decide whether to allow consumers to open a checking or savings account.

¨     In April 2018, the average FICO credit score was 704 out of a possible maximum of 850. Less than 20% of consumers had a score of less than 600. An increasing number of Americans have free access to their credit score through their bank or credit card company. Only 36% of U.S. consumers obtained their credit report in 2018. Many report that they are not aware of the process for doing so through www.annualcreditreport.com.

¨     Studies have found that annual debt notification letters to students by higher education institutions are effective tools in communicating the cost of college and financing options. In fact, 12 states have passed laws to create mandates for student debt letters. Debt letters summarize the amount that students have borrowed to date and how much they can expect to pay once they graduate.

When Are People Ready to Retire?

There is no simple answer to the above question. Many personal factors are involved and each individual is different. However, there are five key questions that people can ask themselves to make retirement decisions:

¨     Can I Afford It?- Take an inventory of retirement resources including Social Security, a defined benefit pension, an employer salary reduction plan (e.g., 401(k) plan), IRAs, tax-deferred annuities, other personal savings (e.g., taxable accounts), and other assets (e.g., rental property).

 

¨     Is This The Right Time?- Consider some of these key factors: ability to perform up to current job standards, the economics of working (e.g., Social Security earnings limit), early retirement incentives, and preferences for other ways to spend your time.

 

¨     How Will a Spouse or Family be Affected? Review the impact of a decision to retire on others. Key factors include an ability to share common activities with a spouse, a spouse’s retirement preferences, forgone salary, adequate financial benefits for a surviving spouse, and medical coverage for dependents.

 

¨     Do I Want to Retire?-Think about what you like about working and how central work is to your life. Then think about what you want to do next and how to smoothly transition to something else. Examples include a new job or small business, volunteer work, and spending more time with family and friends.

 

¨     When is It NOT a Good Time to Retire? Assess your finances and retirement plans honestly. Some signs that you might not be ready to retire are when you: have significant debt, have not obtained information about future Social Security benefits, have not prepared a later life budget, have a gap between an employer health insurance plan and Medicare, and have not made plans about what to do all day after you leave work.

Take-Aways from the AAFCS Conference

I recently attended the 2019 American Association of Family and Consumer Sciences (AAFCS) conference in St Louis, MO. Below are five “nuggets” that I took away from conference speaker presentations:

¨     With respect to charitable gifting and philanthropy, one speaker recommended lifetime gifting with the following phrase: “I believe in giving while you are living, so you are knowing where it is going.”

 

¨     An external locus of control (i.e., a belief that others control your destiny) was found to be negatively associated with financial knowledge in a research study. The presenter surmised that people do not feel a need to learn new information if they feel they cannot change the circumstances of their lives.

 

¨     You do not need a title to be a leader. Leadership is having a positive influence- not an administrative job. Effective leaders are solution-oriented and are generally more effective when they focus on one thing at a time.

 

¨     “Linchpin” people are vital to an organization because they hold everything together. They are difficult to live without and are, therefore, least likely to be laid off. To become a linchpin, watch current news trends and become indispensable. Try to be “the new, the changer, the other” instead of “the next [name of predecessor]."

 

¨     A major reason that organizations need to focus on diversity and inclusion (appreciating and respecting members from a variety of backgrounds) is to reflect communities that they serve. Once diversity related shifts are made, organizations need to let their communities know that they have made positive changes.

 

Mid-Year Tax Planning Strategies

We are at the mid-year point, which is a great time to review projected income tax liability and tax withholding for 2019. The Tax Cuts and Jobs Act (TCJA) affected virtually all taxpayers one way or another. It sunsets in 2026 if Congress does nothing to extend it and then tax rates will automatically increase. Below are five tax tips to consider:

¨      Get to Know the New Tax Form- There is no longer a 1040-EZ form for teens, young adults, and others with simple tax calculations. Everyone must file a 1040 form and complex returns will include six new tax schedules (numbered Schedules 1-6) as well as other familiar tax forms such as schedules A, B, C, and D.

 

¨      Check Your Tax Withholding- This tip is for everyone. New withholding tables for employers went into effect in 2018, but they may not be accurate for everyone. Check the IRS Withholding Calculator using data about your personal finances. The more withholding allowances claimed, the less money withheld for taxes.

 

¨      Consider a Roth IRA Conversion Before 2026- For taxpayers with Traditional IRAs, a Roth IRA conversion before age 70 ½ assures there is no tax on future plan earnings. 2019-2025 is a good time for Roth IRA conversions to take advantage of low current tax rates. Conversions can be done in stages over a period of several years to spread out the tax liability. The objective is to pay less tax today than you would in the future.

 

¨      Consider New Ways to Donate- After the TCJA, many more people are taking the standard deduction instead of itemizing and will not get a direct tax benefit for writing a check to their favorite charity. Alternatives include “bunching” itemized deductions (including donations) periodically and gifting appreciated shares of stock.

 

¨      Make a QCD Donation- A third alternative gifting strategy, for taxpayers age 70 ½ and over, is to take a qualified charitable distribution from the required minimum distribution (RMD) required from a traditional IRA. Making a QCD donation avoids having a large distribution push someone up to a higher tax bracket.

 

In summary, the TCJA provides opportunities for new tax planning strategies by taxpayers of all ages. The first step is to become familiar with this law and its impact on your personal income tax liability.