Thursday, April 28, 2022

Miscellaneous Nuggets From Conferences Past

I was recently cleaning out some of my files and threw out some old conference programs from the early 2010s. Before I did, I reviewed notes that I had taken looking for some “timeless nuggets” that are still relevant in 2022.


Below are ten conference insights that stood out to me as still being relevant a decade later:


Future Mindedness- Things appear “closer” than they otherwise are if clarity is forced upon people. An example is using an age progression app that transforms faces from a young age to older age, so people can see their future self. Otherwise, our future selves are strangers. Studies have found that, when people identify with their future selves, they save more money for retirement. When people interact with their future selves, they are more willing to allocate resources for the future. A psychological connectedness to future selves informs present behavior.


Learned Helplessness- This is when experience teaches people that they don’t have any power. When someone feels powerless, a financial counselor might say “Tell me about a time that you felt in control over your finances.” Sometimes people need to be reminded about better times when they had power so they can think more positively and move forward.


Mental Bandwidth- Like how a bunch of browser windows open on a computer eat up computer processing power, when people are stressed out, their decision-making capability is reduced. According to one study, people under financial stress lose 13% of their IQ with a drop in cognitive function.


Financial Goal-Setting- Research conducted by Morningstar found that asking people to list their financial goals off the top of their head without any prompts is insufficient. Many people change their goals when presented with a master list of goals that forces them to think deeper about what they want. A simple menu of potential goals was recommended.


Money and Marriage- Money is the #2 stressor for U.S. couples. Recently, the top stressor has become politics. Research studies have found that, when women earn more than men, conflict increases, especially around household responsibilities. Studies have also found happier relationships among couples with joint accounts.


Cumulative Investment Outcomes- Asset allocation decisions that people make in young adulthood (or have made for them via automatic enrollment default options) have cumulative effects. This is especially true if inertia sets in and portfolios remain the same over time. Young adults who start off with a low equity weightings in their portfolio have much less saved at retirement than those who invest higher amounts in stocks.


Financial Exploitation- With the aging baby boom generation, financial exploitation is on the rise. Older adults have a hard time accepting they will not be the same people in the future that they are today. Inability to make financial decisions and judge risks is one of the first signs of cognitive decline. Impaired individuals also become more trusting of strangers.


Always Be Learning (ABL)- Lifelong learners seek out opportunities to learn new things about personal finance (or other topics). Methods include webinars, podcasts, blogs, television and radio shows, print media, websites, and more. When pressed for time to fit ABL into your day, consider “educational multi-tasking” (e.g., listening to podcasts while walking).


Health Savings Accounts- One study found that the tax savings on many employees’ contributions to a health savings account (HSA) increases wealth by more than an employer match on the same employees’ 401(k) contributions. A key take-away, especially for healthy individuals and their families, is that HSAs can be used as a quasi-retirement plan. The following savings hierarchy was suggested by the researcher: 1. maximum HSA contribution, 2. amount to earn maximum employer match, 3. pay off high-interest rate debt (e.g., credit cards), 4. 529 college savings account, 5. unmatched employer retirement savings, 6. pay off moderate interest debt, and 7. invest in taxable accounts.

Social Security Benefit Claiming- Delaying Social Security benefits to full retirement age (FRA) or beyond increases the odds of success (read: not running out of money during your lifetime) in retirement. Some people don’t want to wait until age 66, 67 or 70 to exit the workforce, however. In these situations, part-time work, savings withdrawals, bond ladders, and reverse mortgages can bridge a gap of up to eight years (e.g., from age 62 to age 70).


This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Thursday, April 21, 2022

Seven Tips for Choosing a Financial Advisor

Many people think about hiring a financial advisor when their personal finances start to get complex (e.g., accumulated wealth over time) or a major life event such as retirement, the birth of a child, or the death of a spouse occurs.

Three questions people often ask are “how can I find a financial advisor?,” “What factors should I consider when selecting one?,” and “how much do they charge?”  

Following are some tips for selecting financial services professionals:


Define Your Needs - What kind of services do you want?  Are you looking for comprehensive financial planning services which would include someone to give you advice, help you implement that advice, and be there when you need them on a recurring basis?  Or, on the other hand, are you simply looking for answers to specific questions or someone to review your financial situation just one-time only or occasionally as needed?

Get Prepared – Time is money when you are working with a financial advisor. To minimize the time required to explain your financial situation, prepare four things in advance: 1. a cash flow (income minus expenses) statement for a recent month or your spending plan/budget, 2. a net worth (assets minus debts) statement, 3. a list of questions for the financial advisor, and 4. copies of relevant documents (e.g., retirement plan statements and insurance policies). Personal financial information can all be recorded in one place using this worksheet.

Check Credentials - What credentials, licenses and education does an advisor have?  Look for specialized training in financial planning such as the Certified Financial Planner® (CFP®) license. To determine if a financial planner is a CFP® licensee, ask to see the planner’s current Certified Financial Planner Board of Standards certificate or check the Web site for the names of CFP licensees that are located in different geographical areas. Other common designations for financial advisors are ChFC® (Chartered Financial Consultant®) and CPA®/PFS™ (Certified Public Accountant®/Personal Financial Specialist™).

Look For Registered Investment Advisors - Because investment advice is often involved in financial planning, a financial planner also should be a Registered Investment Advisor or affiliated with a Registered Investment Advisory firm.  This registration is issued by the U. S. Securities and Exchange Commission or a state securities regulatory agency (depending upon the amount of assets under a firm’s management).  CFP®s must also agree to adhere to the Certified Financial Planner Board of Standards’ Code of Ethics and must disclose any investigations or legal proceedings related to their professional or business conduct. The Board reviews all disclosure statements carefully and investigates the backgrounds of planners whose disclosure statements indicate areas of concern.

Evaluate Experience - Practical experience counts for a lot in the financial services industry.  Look for someone who is both well trained and has worked with clients for a period of time.  CFP® licensees, for example, must have at least three years of previous financial services experience.  Since financial planning is a relatively new profession, you might also want to find out about work experience prior to the financial services industry.  Does the financial advisor come from a sales or services background?  Also find out what financial planning organizations an advisor belongs to. Professional association membership indicates a planner’s commitment to professional improvement.

Consider Specializations and Niches - Find out what areas of personal finance (e.g., life planning, tax planning, and investment management) and/or types of clients an advisor specializes in. Because financial planning is such a broad field, many planners tend to specialize. Determine if the planner’s specialties match your situation. Examples of financial planning specialty niches include older adults (baby boomers and silent generation), younger adults ( Generations X, Y, and Z), LGBTQ couples, military families, Spanish-speaking immigrants, and government employees.

Consider Compensation – Financial advisors can be paid by fees, commissions or a combination of fees and commissions.  Fees can be charged as a flat rate amount, an hourly rate, or on a “subscription” basis with monthly payments. Some advisors also charge fees based on a percentage of assets under management or AUM. Ask how a financial advisor is compensated before you enter into a working agreement.

In summary, take the time to consider these seven factors as you search online for local financial advisors. Next, review their websites to learn about their experience, pricing, and services and call at least two or three that seem most aligned to your personal criteria. Many advisors will provide a short complimentary consultation. Finally, if several advisors seem equally competent, choose the one with whom you feel most comfortable and “click” with.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Thursday, April 14, 2022

Twelve Tax Planning Topics for 2022

 The 2021 income tax season will soon be in the history books. With income tax calculations still fresh in our heads, this is a great time to do some tax planning for 2022. Here are 12 tax topics to consider:


Itemized Deductions- Only about 10% of taxpayers can itemize since the Tax Cuts and Jobs Act went into effect in 2018. Absent catastrophic medical bills or a natural disaster declared by the U.S. President, most people can’t itemize without a plan. To itemize deductions in 2022, single taxpayers must have allowable deductions greater than $12,950 and married couples filing jointly must exceed $25,900 ($28,700 for a couple with both spouses age 65+).


Charitable Gifts- Nobody wants to have large medical bills or property losses, income and property taxes are SALT capped at $10,000, and it takes a pricey house with a large mortgage to exceed the standard deduct with deductible interest. This leaves charitable donations as a path to itemizing. Strategies to garner a tax benefit for charitable gifts to qualified charities include “bunching” deductions into one tax year and setting up and funding a donor advised fund.


Changed Income- A change in household income this year- up or down- will affect income taxes. Income changes can result from a number of life events including changing jobs, adding or ending “side hustle” freelance work, adding a spouse to the labor force, retiring, getting married or divorced, having a baby, and more.


Changed Number of Dependents- A change in family size and/or number of allowable dependents also affects income taxes. For example, parents can gain or lose the child tax credit. Changes can occur as a result of adding a child(ren) as a result of birth or adoption and losing eligibility when children “age out.” Specific rules for claiming dependents apply.


Tax Bracket Projections- Once you project 2022 income, you can project your marginal tax bracket and tax rate (the percentage of tax assessed on your last dollar of earnings). In 2022, there are seven tax rates for each filing status (single, married filing jointly, head of household, and married filing separately). Pay particular attention if your projected income is close to a “breakpoint” for the next highest tax bracket so you can take proactive steps to stay below that number.


Tax-Deferred Investing- One way to avoid a higher tax bracket is to increase tax-deductible contributions to an employer retirement plan (e.g., 401(k), 403(b), 457, TSP). Contributions are subtracted from gross income, which reduces adjusted gross income (AGI) and taxable income. Sometimes, saving just 1% more of pay can make a big difference on taxes due.


Changed Tax Withholding- If there are major changes in income and number of dependents, tax withholding is likely out of whack. Payroll tax withholding and/or quarterly estimated payments may need to be adjusted. A good resource to synchronize expected income with required tax payments is the IRS Tax Withholding Estimator.


Safe Harbor Rule- A previous year tax return (e.g., 2021 for 2022) is also a useful tax withholding resource because it shows your most recent tax bill. Under the IRS safe harbor rule, if you withhold 100% of tax owed the prior year (110% with adjusted gross income over $150,000), you can avoid an underpayment penalty for insufficient tax withholding. The takeaway, therefore, is to withhold and/or send quarterly payments at least equal to this amount.


Older Adult Tax Concerns- Two key tax planning concerns for older adults are required minimum distributions (RMDs) that increase taxable ordinary income and Income-Related Monthly Adjustment Amount (IRMAA) surcharges on standard Medicare Part B premiums. Often, RMDs trigger IRMAA, which is based on modified AGI or MAGI from two years prior. Taxpayers close to five IRMAA trigger amounts may want to take steps to defer or reduce taxable income.


State Income Tax Check-Up- State tax rules can vary from federal tax rules. For example, you may qualify to deduct medical expenses on a state income tax return while you cannot on a federal return. If so, save those receipts for health insurance premiums and copays. In addition, like federal taxes, make sure that state income tax withholding is on track.


Roth IRA Conversions- Taxpayers concerned about rising tax rates (their own or the government’s) might want to convert money in a traditional IRA to a tax-free Roth IRA before tax rates are set to rise in 2026. Since traditional IRA withdrawals are taxable, consider making small, partial conversions over several years (e.g., 2022, 2023, 2024, and 2025).


Simplify and OrganizeThe end of tax filing season is a good time to answer the question “Is there a better way to organize my tax records?” Some people use digitized (scanned) records while others use file folders or envelopes. The important thing is to find a system that works for you to make 2022 tax filing season as stress-free as possible in 2023.


This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.



Thursday, April 7, 2022

The Two Sides of Retirement: Financial and Non-Financial

 Earlier this year, I viewed two very different webinars about retirement. They were actually scheduled at the same time so I recorded one while I watched the other so I could view both.  One webinar sponsored by The American College of Financial Services covered financial topics such as income taxes, required minimum distributions (RMDs), qualified charitable distributions (QCDs), and income-related monthly adjusted amount (IRMAA) Medicare premium surcharges.

The second webinar by Retirement Researcher described six stages of retirement and a host of non-financial considerations. The remainder of this post will summarize key take-aways from each of the two webinars, many of which are also discussed in my book, Flipping a Switch.

Financial Planning Take-Aways


¨     Tax Deferral ≠ Tax-Free- RMDS must begin at age 72 and many people start withdrawing retirement savings at this time. However, taxpayers with tax-deferred retirement savings accounts (e.g., 401(k)s, 403(b)s, and traditional IRAs) can begin making penalty-free withdrawals starting at age 59½. The longer people delay RMDs, the more likely their balance will grow, resulting in larger RMD withdrawals in later life that are taxed as ordinary income.


¨     Tax Planning is Essential- A webinar speaker noted that taxpayers should always pay taxes at the lowest rate possible. For many taxpayers, that could be now as tax rates are set to increase on 1/1/26 as a result of a sunset provision in the Tax Cuts and Jobs Act. For example, under the TCJA, the 12% tax rate will go back up to 15%, the 22% tax rate up to 25%, and the 25% up to 28%. Many older adults could end up paying much more in taxes soon.

¨     IRMAA Planning Can Help- High-income Medicare beneficiaries with a 2020 modified adjusted gross income (MAGI) income over $91,000 (single) or $182,000 (mfj) pay IRMAA surcharges in 2022. This is because there is a two-year look-back period. The take-away is to try to avoid pushing MAGI above the IRMAA income thresholds. Even $1 of income over five IRMAA breakpoints can cost hundreds or thousands of dollars in extra Medicare costs.

¨     Controlling MAGI- MAGI is the trigger for many extra taxes including IRMA surcharges and taxes on Social Security benefits and net investment income tax (NIIT). Taxable traditional IRA distributions (such as those made for a Roth IRA conversion) and RMD withdrawals increase income and MAGI, which can increase taxes. A qualified charitable distribution (QCD) from a traditional IRA keeps income out of MAGI. Taxpayers must be age 70½ to qualify for a QCD. Planning ahead is key. For example, a taxable Roth IRA conversion at age 63 could increase MAGI enough to trigger IRMAA at age 65.


Non-Financial Take-Aways


¨     Life Planning is Essential- The webinar speaker, Dan Veto,  noted that many people “just show up” for their first day of retirement with very little advance planning on the non-financial side. Unlike meetings that last 1-2 hours, weddings (a day or weekend), vacations (1-2 weeks), and higher education (4-5 years), retirement can last decades and many people fail to plan. Planning helps reduce uncertainty and increases the likelihood of a desired outcome.


¨     Life Expectancy Realities- In 1935, someone who lived to age 65 had a life expectancy of six years. In 2018, a 65-year old’s life expectancy almost tripled to 17 years and, for some, could be 25 or 35 years. That is a lot of free time to fill and to keep busy and engaged. Some people thrive with new-found freedom in retirement while others struggle.

¨     Stages of Retirement- Just like there are nuances between tweens at age 11 and teens starting at age 13, there are differences among older adults as they progress through their 60s, 70s, 80s, and beyond. Seven stages were described:

o   Euphoria!- A short “Every day is Saturday” and “Freedom from…” phase that usually last months, not years.

o   What, That’s It?- When completely unstructured time becomes unfulfilling and boredom sets in.

o   Re-Engagement-Where people feel a sense of accomplishment through a portfolio of meaningful activities.

o   Grandparenthood- When older adults with grandchildren have a new center of attention for their family.

o   Care-Giving- When care-giving for a spouse or loved one becomes an increasing focus of one’s time.

o   Widowhood- The most stressful life-changing event where married older adults must “copilot” life alone.

o   Decline- Increasing physical or mental impairment that can last weeks, months, or years.


There are a lot of “moving parts” in planning your life “to retirement” and then “through retirement.” 

The key to success is planning for both areas of later life, the financial side and non-financials such as daily activities and physical health.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Looking Ahead to Your 2024 Tax Return

  With the 2023 tax filing deadline in the rear view mirror, now is a good time to look ahead to 2024 taxes that you will owe in April 2025....