September 2015 Newsletter

Financial Mistakes People Make at Different Ages

There’s a saying that with age comes wisdom, but this may not always be true in the financial world. As people move through different life stages, there are new opportunities–and potential pitfalls–around every corner.
In your 20s
Living beyond your means. It’s tempting to want all the latest and greatest in gadgets, entertainment, and travel, but if you can’t pay for most of your wants up front, then you need to rein in your lifestyle. If you take on too much debt–or don’t work diligently to start paying off the debt you have–it can hold you back financially for a long, long time. Not saving for retirement. You’ve got plenty of time, so what’s the rush? Well why not harness that time to work for you. Start saving a portion of your annual pay now and your 67-year-old self will thank you. Not being financially literate. Many students graduate from high school or college without knowing the basics of money management. Learn as much as you can about saving, budgeting, and investing now so you can
benefit from it for the rest of your life.
In your 30s
Being house poor. Whether you’re buying your first home or trading up, don’t buy a house that you can’t afford, even if the bank says you can. Build in some wiggle room for a possible dip in household income that could result from switching jobs, going back to school, or leaving the workforce to raise a family. Not protecting yourself with life and disability insurance. Life is unpredictable. What would happen if one day you were unable to work and earn a paycheck? Let go of the “it-won’t-happen-to-me” attitude. Though the cost and availability of life insurance depend on several factors including your health, the younger you are when you buy insurance, the lower your premiums will likely be. Not saving for retirement. Okay, maybe your 20s passed you by in a bit of a blur and retirement wasn’t even on your radar screen. But now that you’re in your 30s, it’s critical to start saving for retirement. Wait much longer, and it can be hard to catch up. Start now, and you still have 30 years or more to save.
In your 40s
Trying to keep up with the Joneses. Appearances can be deceptive. The nice homes, cars, vacations, and “stuff” that others have might make you wonder whether you should be buying these things, too. But behind the scenes, your neighbors could be taking on a lot of debt. Take pride in your savings account instead. Funding college over retirement. In your 40s, saving for your children’s college costs over your own retirement is a mistake. If you have limited funds, set aside a portion for college but earmark the majority for retirement. Then sit down with your teenager and have a frank discussion about academic options that won’t break the bank–for either of you. Not having a will or an advance medical directive. No one likes to think about death or catastrophic injury, but these documents can help your loved ones immensely if something unexpected should happen to you.
In your 50s and 60s
Co-signing loans for adult children. Co-signing means you’re on the hook–completely–if your child can’t pay, a situation you don’t want to find yourself in as you’re getting ready to retire. Raiding your home equity or retirement funds. It goes without saying that doing so will prolong your debt and/or reduce your nest egg. Not quantifying your retirement income. As you approach retirement, you should know how much you can expect from Social Security (at age 62, at your full retirement age, and at age 70), pension income, and your personal retirement savings. Not understanding health-care costs in retirement. Before you turn age 65, review what Medicare does and doesn’t cover, and how gap insurance policies fit into the picture.

Six Life Insurance Beneficiary Mistakes to Avoid

Life insurance has long been recognized as a useful way to provide for your heirs and loved ones when you die. Naming your policy’s beneficiaries should be a relatively simple task. However, there are a number of situations that can easily lead to unintended and adverse consequences. Here are six life insurance beneficiary traps you may want to avoid.
Not naming a beneficiary
The most obvious mistake you can make is failing to name a beneficiary of your life insurance policy. But simply naming your spouse or child as beneficiary may not suffice. It is conceivable that you and your spouse could die together, or that your named beneficiary may die before you. If the beneficiaries you designated are not living at your death, the insurance company may pay the death proceeds to your estate, which can lead to other potential problems.
Death benefit paid to your estate 
If your life insurance is paid to your estate, several undesired issues may arise. First, the insurance proceeds likely become subject to probate, which may delay the payment to your heirs. Second, life insurance that is part of your probate estate is subject to claims of your probate creditors. Not only might your heirs have to wait to receive their share of the insurance, but your creditors may satisfy their claims out of those proceeds first. Naming primary, secondary, and final beneficiaries may avoid having the proceeds ultimately paid to your estate. If the primary beneficiary dies before you do, then the secondary or alternate beneficiaries receive the proceeds. And if the secondary beneficiaries are unavailable to receive the death benefit, you can name a final beneficiary, such as a charity, to receive the insurance proceeds.
Naming a minor child as beneficiary 
Unintended consequences may arise if your named beneficiary is a minor. Insurance companies will rarely pay life insurance proceeds directly to a minor. Typically, the court appoints a guardian–a potentially costly and time-consuming process–to handle the proceeds until the minor beneficiary reaches the age of majority according to state law. If you want the life insurance proceeds to be paid for the benefit of a minor, you may consider creating a trust that names the minor as beneficiary. Then the trust manages and pays the proceeds from the insurance according to the terms and conditions you set out in the trust document. Consult with an estate attorney to decide on the course that works best for your situation.
Per stirpes or per capita
It’s not uncommon to name multiple beneficiaries to share in the life insurance proceeds. But what happens if one of the beneficiaries dies before you do? Do you want the share of the deceased beneficiary to be added to the shares of the surviving beneficiaries, or do you want the share to pass to the deceased beneficiary’s children? That’s the difference between per stirpes and per capita. You don’t have to use the legal terms in directing what is to happen if a beneficiary dies before you do, but it’s important to indicate on the insurance beneficiary designation form how you want the share to pass if a beneficiary predeceases you. Per stirpes (by branch) means the share of a deceased beneficiary passes to the next generation in line. Per capita (by head) provides that the share of the deceased beneficiary is added to the shares of the surviving beneficiaries so that each receives an equal share.
Disqualifying the beneficiary from government assistance
A beneficiary you name to receive your life insurance may be receiving or is eligible to receive government assistance due to a disability or other special circumstance. Eligibility for government benefits is often tied to the financial circumstances of the recipient. The payment of insurance proceeds may be a financial windfall that disqualifies your beneficiary from eligibility for government benefits, or the proceeds may have to be paid to the government entity as reimbursement for benefits paid. Again, an estate attorney can help you address this issue.
Taxes
Generally, life insurance death proceeds are not taxed when they’re paid. However, there are exceptions to this rule, and the most common situation involves having three different people as policy owner, insured, and beneficiary. Typically, the policy owner and the insured are one in the same person. But sometimes the owner is not the insured or the beneficiary. For example, mom may be the policy owner on the life of dad for the benefit of their children. In this situation, mom is effectively creating a gift of the insurance proceeds to her children/beneficiaries. As the donor, mom may be subject to gift tax. Consult a financial or tax professional to figure out the best way to structure the policy.

Taxes, Retirement, and Timing Social Security

The advantages of tax deferral are often emphasized when it comes to saving for retirement. So it might seem like a good idea to hold off on taking taxable distributions from retirement plans for as long as possible. (Note: Required minimum distributions from non-Roth IRAs and qualified retirement plans must generally start at age 70½.) But sometimes it may make more sense to take taxable distributions from retirement plans in the early years of retirement while deferring the start of Social Security retirement benefits.
Some basics
Up to 50% of your Social Security benefits are taxable if your modified adjusted gross income (MAGI) plus one-half of your Social Security benefits falls within the following ranges: $32,000 to $44,000 for married filing jointly; and $25,000 to $34,000 for single, head of household, or married filing separately (if you’ve lived apart all year). Up to 85% of your Social Security benefits are taxable if your MAGI plus one-half of your Social Security benefits exceeds those ranges or if you are married filing separately and lived with your spouse at any time during the year. For this purpose, MAGI means adjusted gross income increased by certain items, such as tax-exempt interest, that are otherwise excluded or deducted from your income for regular income tax purposes. Social Security retirement benefits are reduced if started prior to your full retirement age (FRA) and increased if started after your FRA (up to age 70). FRA ranges from 66 to 67, depending on your year of birth. Distributions from non-Roth IRAs and qualified retirement plans are generally fully taxable unless nondeductible contributions have been made.
Accelerate income, defer Social Security
It can sometimes make sense to delay the start of Social Security benefits to a later age (up to age 70) and take taxable withdrawals from retirement accounts in the early years of retirement to make up for the delayed Social Security benefits. If you delay the start of Social Security benefits, your monthly benefits will be higher. And because you’ve taken taxable distributions from your retirement plans in the early years of retirement, it’s possible that your required minimum distributions will be smaller in the later years of retirement when you’re also receiving more income from Social Security. And smaller taxable withdrawals will result in a lower MAGI, which could mean the amount of Social Security benefits subject to federal income tax is reduced. Whether this strategy works to your advantage depends on a number of factors, including your income level, the size of the taxable withdrawals from your retirement savings plans, and how many years you ultimately receive Social Security retirement benefits.
Example  :
Mary, a single individual, wants to retire at age 62. She can receive Social Security retirement benefits of $18,000 per year starting at age 62 or $31,680 per year starting at age 70 (before cost-of-living adjustments). She has traditional IRA assets of $300,000 that will be fully taxable when distributed. She has other income that is taxable (disregarding Social Security benefits and the IRA) of $27,000 per year. Assume she can earn a 6% annual rate of return on her investments (compounded monthly) and that Social Security benefits receive annual 2.4% cost-of-living increases. Assume tax is calculated using the 2015 tax rates and brackets, personal exemption, and standard deduction.
Option 1. One option is for Mary to start taking Social Security benefits of $18,000 per year at age 62 and take monthly distributions from the IRA that total about $21,852 annually.
Option 2. Alternatively, Mary could delay Social Security benefits to age 70, when her benefits would start at $38,299 per year after cost-of-living increases. To make up for the Social Security benefits she’s not receiving from ages 62 to 69, during each of those years she withdraws about $40,769 to $44,094 from the traditional IRA–an amount approximately equal to the lost Social Security benefits plus the amount that would have been withdrawn from the traditional IRA under the age 62 scenario (plus a little extra to make the after-tax incomes under the two scenarios closer for those years). When Social Security retirement benefits start at age 70, she reduces monthly distributions from the IRA to about $4,348 annually. Mary’s after-tax income in each scenario is approximately the same during the first 8 years. Starting at age 70, however, Mary’s after-tax income is higher in the second scenario, and the total cumulative benefit increases
significantly with the total number of years Social Security benefits are received.*

How important are dividends in the S&P 500’s total returns?

In a word, very. Dividend income has represented roughly one-third of the total return on the Standard & Poor’s 500 index since 1926.* According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s–in other words, more than half that decade’s return resulted from dividends–to a low of 14% during the 1990s, when the development and rapid expansion of the Internet meant that investors tended to focus on growth.*
And in individual years, the contribution of dividends can be even more dramatic. In 2011, the index’s 2.11% average dividend component represented 100% of its total return, since the index’s value actually fell by three-hundredths of a point.** And according to S&P, the dividend component of the total return on the S&P 500 has been far more stable than price changes, which can be affected by speculation and fickle market sentiment.
Dividends also represent a growing percentage of Americans’ personal incomes. That’s been especially true in recent years as low interest rates have made fixed-income investments less useful as a way to help pay the bills. In 2012, dividends represented 5.64% of per capita personal income; 20 years earlier, that figure was only 3.51%.*
Note: All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Investing in dividends is a long-term
commitment. Investors should be prepared for periods when dividend payers drag down, not boost, an equity portfolio. A company’s dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated. *Source: “Dividend Investing and a Look Inside the S&P Dow Jones Dividend Indices,” Standard & Poor’s, September 2013 **Source: www.spindices.com, “S&P 500 Annual Returns” as of 3/13/2015

How can I protect my Social Security number from identity theft?

Your Social Security number is one of your most important personal identifiers. If identity thieves obtain your Social Security number, they can access your bank account, file false tax returns, and wreak havoc on your credit report. Here are some steps you can take to help safeguard your number.
Never carry your card with you. You should never carry your Social Security card with you unless it’s absolutely necessary. The same goes for other forms of identification that may display your Social Security number (e.g., Medicare card).
Do not give out your number over the phone or via email/Internet. Oftentimes, identity thieves will pose as legitimate government organizations or financial institutions and contact you to request personal information, including your Social Security number. Avoid giving out your Social Security number to anyone over the phone or via email/Internet unless you initiate the contact with an organization or institution that you trust.
Be careful about sharing your number. Just because someone asks for your Social Security number doesn’t mean you have to share it. Always ask why it is needed, how it will be used, and what the consequences will be if you refuse to provide it. If you think someone has misused your Social Security number, contact the Social Security Administration (SSA) immediately to report the
problem. The SSA can review your earnings record with you to make sure their records are correct. You can also visit the SSA website at www.ssa.gov to check your earnings record online.
Unfortunately, the SSA cannot directly resolve any identity theft problems created by the misuse of your Social Security number. If you discover that someone is illegally using your number, be sure to contact the appropriate law-enforcement authorities. In addition, consider filing a complaint with the Federal Trade Commission and submitting IRS Form 14039, Identity Theft Affidavit, with the Internal Revenue Service. Visit www.ftc.gov and www.irs.gov for more information.
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