What is Financial Planning?
Financial planning is the process of intelligently managing your financial situation
in order to help achieve your intended goals and objectives. The process will help
you navigate financial issues that arise in every stage of life. Financial planning
is designed to help an individual establish and identify obtainable financial and
personal goals. The process requires an examination of your assets, liabilities,
taxes, income, insurance, investments and estate plan.
Your financial planning recommendations will be provided by a financial planning
professional after examination of the documents. The comprehensive plan should address
financial weaknesses and build on financial strengths. The recommendations of the
plan must be implemented and reviewed on a consistent basis. Goals, objectives,
personal situation, investments, insurance, estate values and tax laws may change,
so consistently monitoring the plan is important.
Be Mindful of Additional Costs and Fees
Before you implement any financial decision, remind yourself of the old adage "there
is no such thing as a free lunch." All investment and insurance products have fees,
so you should make sure you understand the fee structure of the financial product
or service your are considering. This may seem logical on the surface, but some
financial instruments can be very complex and it may be difficult to calculate the
total fees involved. Be aware of commissions, surrender penalties, custodial fees,
ticker charges, statement fees, wrap fees, internal expenses, advisory fees, mortality
and expense charges, living benefit fees, etc. A financial professional should be
able to easily articulate to you where the fees are coming from and how much they
are, in addition to any commission added to the total amount. If you don’t get a
straight answer, this should be a warning sign.
Unfortunately, how a financial advisor is compensated can affect the objectivity
of advice. Paying a fair price for quality advice and counsel is not a bad thing,
but the cost needs to be disclosed up front. It is perfectly acceptable to ask how
much your financial advisor or their business will earn in total compensation from
your transaction. There may be a conflict of interest and it is up to you to determine
if the payment is appropriate for the services rendered. It is your money and you
deserve to know the fee and commission structure before you pay.
Life Insurance 101
Life Insurance is designed to pay out a sum of money upon the death of the insured.
The life insurance policy is a contract between the issuing company and the owner
that provides a death benefit to the policy’s beneficiaries. Life insurance helps
manage the risk of financial loss. In the event of your death, your beneficiaries
will receive proceeds from the life insurance that can be used to replace income,
eliminate debts, transfer wealth and possibly complete a savings goals. There are
a variety of different reasons why life insurance is important. In most cases it
is a safeguard for protecting your family’s lifestyle in the event of your death.
There are many events in a person’s life that should trigger a review or modification
of an existing policy or purchase of a new policy. Job changes, marriage, retirement,
estate planning, divorce, new home, are a few life changes that could affect your
financial situation and could result in the need for life insurance. There is no
general rule in determining the correct amount of life insurance you should buy.
A common approach is to calculate the economic value of a person’s current and future
financial obligations. This is a starting point in determining the appropriate death
Financial Windfalls— The Good Problem to Have
Inheriting or receiving a substantial sum of money is a problem many of us would
like to have, that often comes hand in hand with people pitching you investment
deals. To begin, you should surround yourself with a group of professionals that
specialize in financial, tax and estate planning. This can be a very exciting and
stressful time, so independent outside advice can be invaluable. Some issues will
need to be addressed immediately — however, do not rush into making critically important
life changing expenditures. The goal is avoid irrational, emotionally-charged decisions.
Paying down debt is one of the first areas to which you should consider applying
your newfound assets. Deciding whether to reduce debt versus invest your money depends
on the amount of the financial windfall, the types of debt incurred, your age, risk
tolerance and objectives. Determine and weigh your short- and long-term financial
goals... they may have changed because of the windfall.
Is a 529 College Savings Plan the Right Choice?
With the large amount of college savings vehicles available in the marketplace,
it may be overwhelming to choose which one is appropriate. In general, the most
popular vehicle is the 529 college savings plan. These plans are investments sponsored
by individual states and managed by an independent firm or state agency.
529s offer tax-deferred growth, and distributions used to pay for qualified expenses
are tax free. There may be tax benefits for investing in your state’s 529 plan.
Tuition, room and board, school fees, books, required computer equipment, etc. are
all examples of qualified expenses. Everyone is eligible to take advantage of the
plan. The plan allows for large contributions at once — up to $65,000 per beneficiary
or $130,000 per beneficiary if married and filing jointly, for 2012. State gift
and estate inheritance tax laws may apply, so you should always consult with your
tax advisor beforehand.
These plans allow the donors to stay in control of their account. With few exceptions,
the named beneficiary has no rights to the funds. You are the one calling the shots;
you decide when withdrawals are taken and for what purpose. Most plans even allow
you to reclaim the funds for yourself any time you desire, with no questions asked
(however, the earnings portion of the "non-qualified" withdrawal will
be subject to income tax and an additional 10% penalty tax).
A 529 plan can provide a very easy, hands-off way to save for a college education.
Once you decide which 529 plan to use, you complete a simple enrollment form and
make your contribution (or sign up for automatic deposits). Then you can relax and
forget about it if you like. The ongoing investment of your account is handled by
the plan, not by you. Most plan’s assets are professionally managed either by the
state treasurer's office or by an outside investment company hired as the program
manager. You won't even receive a 1099 Form to report taxable or nontaxable earnings
until the year in which you make withdrawals. If you want to move your investment
around, you may change to a different option in a 529 savings program every year
(program permitting) or you may rollover your account to a different state's program
provided no such rollover for your beneficiary has occurred in the prior 12 months.
There is no federal limit on the frequency of these changes if you replace the account
beneficiary with another qualifying family member at the same time.
The Sandwich Generation
The term "Sandwich Generation" refers to a generation that is simultaneously caring
for parents and children. Members of today’s sandwich generation often face difficulties
in allocating appropriate time and money, and often describe themselves as being
pulled in a variety of directions. It is not uncommon for members of this generation
to experience emotional and marriage problems due to the strain and stresses caused
by the extent of their responsibilities and obligations.
There are many steps to consider that may alleviate the burden on time and finances.
First, it is very important to open lines of communication with parents. Potential
issues should be discussed before they arise. Second, it is all too easy to burn
yourself out with the duties and demands necessitated by loved ones. Try to share
the responsibilities; one person alone should not be responsible for all the duties
and obligations. Third, assisted living care and long term care is very expensive.
Contact state and local organizations for elder-care assistance. Also, do not forget
to pay yourself first. Fund your own financial planning goals and objectives. Many
people forget to save for retirement and other financial goals due to the added
financial burden. Lastly, make files of all the important financial, tax and estate
planning documents. Consult with an estate planning attorney to verify account titling,
review beneficiary designations and ensure your loved ones have the correct documents
When Should You Start Collecting Social Security?
Everyone’s situation is different, so there is no correct answer to the question
of when you should start collecting Social Security. Generally, the longer you wait,
the larger the payment will be. Below are some points to consider under the current
• Retire at full retirement age to receive full benefits. Full retirement age is
currently 65-67, depending on date of birth.
• If you start collecting at age 62, your payments will be reduced by up to 30%
from the maximum allotted. In the case of early retirement, a benefit is reduced
5/9 of one percent for each month before normal retirement age, up to 36 months.
If the number of months exceeds 36, then the benefit is further reduced 5/12 of
one percent per month.
• The taxable amount of the Social Security payment depends on a variety of factors.
The payment could be tax free or up to 85% taxable. If you retire prior to full
retirement age, you may be penalized for earning money in the same year. Currently
the income cap for 2012 is $14,640 however this number changes on a regular basis.
See your tax professional for further details.
• You can defer receiving benefits up to age 70. The monthly payment will be increased.
Deferring the receipt of payment could be a viable option depending on life expectancy,
health and financial status.
Please use the Social Security Administration’s website, www.ssa.gov to obtain further information.
Selecting an Advisor
Financial Advisor, Investment Advisor, Stock Broker, Financial Planner, Registered
Representative, Agent… All are titles of professionals that can offer you financial
advice. But, how do you know which one is right for you?
Below are a few questions for you to consider when shopping for a financial professional.
While this list is just a quick guide to help you get started, the answers to these
— along with other factors unique to your personal situation — can assist you in
determining whether a particular financial professional is a correct fit for you
and your needs:
"How much experience do you have?"
Although there are exceptions for every advisor, typically an advisor with at least
6-8 years of experience is preferable.
"What are your qualifications?"
Consider financial advisors who have obtained their Certified Financial Planner
(CFP®) and/or Chartered Financial Consultant (ChFC®) professional designations.
These two classifications are often considered the premier designations in the financial
services industry. They indicate an individual who has successfully completed a
rigorous academic program in specialized financial planning topics such as insurance,
tax planning, investments, estate planning, college planning and retirement planning.
"What types of financial and/or advisory services do you offer?"
It is important to know the areas of a financial professional’s expertise. This
will help you determine if that individual may have any limitations in providing
the comprehensive financial planning solutions you are seeking.
"How does your company make money?"
Advisors are either paid through commission or fees. Since it is your money, you
should know exactly how your advisor is getting paid. A qualified financial professional
should be able to provide you with an estimate on the cost for services rendered.
You should also ask if any other organization will benefit from the recommendations
given to you and the resulting potential financial executions, such as broker/dealers
or large financial institutions. Be sure that all potential conflicts of interest
"Have you received any complaints lodged or disciplinary action taken against
Information on financial professionals is public knowledge, and can easily be obtained
on the Internet. Please visit the CFP Board, the North American Securities Administrators
Association, the National Association of Insurance Commissioners, the Financial
Industry Regulatory Authority, or the U.S. Securities and Exchange Commission websites
to check the background of any financial professional.
Alphabet Soup — Not All Financial Designations Are Created Equal
There are over 100 financial designations that are available in the financial services
industry. Because of this, many believe that merely seeing a garbled list of letters
at the end of someone’s name indicates that this person is a trained expert. Unfortunately,
many professional certifications can be purchased by simply writing a check, without
needing to complete any type of educational or instruction program.
Do your research on the financial professional. Ask a lot of questions, investigate
the designation and study that individual’s other credentials. Visit the Financial
Industry Regulatory Authority’s website to research all the professional designations,
and ask yourself: what did this person do to acquire this credential?
The Certified Financial Planner™ certification (CFP®) is considered the gold standard
in the financial industry. The CFP® is awarded by the Certified Financial Planner
Board of Standards, Inc. to financial professionals who complete a rigorous and
demanding certification process. The process requires the applicant have a Bachelor’s
Degree and three years of professional career experience at minimum, and finishes
with a two-day examination. Also, the Board requires certificants to uphold a fiduciary
duty of care. There are many other designations that denote diligent training and
specializations, however if you are looking for a new advisor, you may want to consider
one who is a one who is a Certified Financial Planner™ professional.
2012 401k Disclosure Changes
2012 should largely be about enhanced 401k disclosures and in particular, 401k plan
fee disclosures. Retirement plan sponsors will now have to disclose to 401k participants
the fees and expenses associated with the funds in their retirement plan. The new
401k disclosure regulations will force industry providers and plan sponsors to compress
fees and bring transparency to plan participants.