7 Questions to Ask a Prospective Real Estate Agent

January 05, 2017

Whether you’re looking to buy or sell a home, one of the most important decisions is who you select as your real estate agent since this will likely be the person you work most closely with during the transaction. You can identify prospective agents by asking family members, friends, and other professionals you work with (financial planner, accountant, lawyer) for recommendations. Then be sure to interview several of them and ask the following questions:

1) Are you a REALTOR®? People often use the terms “realtor” and “real estate agent” interchangeably, but they’re not always the same thing. While all REALTORS® are licensed real estate agents, not all real estate agents are REALTORS®. The main difference is that as members of the National Association of REALTORS®, REALTORS® have to follow an additional code of ethics. While this doesn’t mean that every REALTOR® is more ethical than every non-REALTOR®, it certainly can’t hurt to choose someone who has at least made a commitment to a higher ethical standard and is subject to penalties for violating it.

2) Who do you work for? As a seller, your agent always works for you. But as a buyer, be aware that an agent can also be working for the seller. Even “buyer’s agents” often work for a “dual agency” that represents the seller as well. You can search for an “Exclusive Buyers Agent” here.

3) How long have you been working in the area I’m buying/selling in? This question has two objectives. The first is to screen out agents that may be new and just starting out. You probably don’t want to be their “learning experience.”

The second is to measure their experience in your particular neighborhood. An agent who’s unfamiliar with the area you’re interested in may only be slightly more helpful than one who’s new to the business. After all, much of their value comes from bringing the kind of local, specialized knowledge that you may not be able to find with an online search.

4) How will you work with me? As a buyer, some of what you’ll want to know are how the agent will find prospective homes, how often they’re available to show places to you, and how they would handle multiple offers. As a seller, you’ll want to know how they will market the home and the fee that they’ll charge (which is negotiable but top agents will charge more). In either case, ask if the agent will let you cancel the agreement if you’re not satisfied with their service.

5) Who else do you work with? Agents typically play the role of quarterback with the other professionals that may be involved (mortgage broker or loan officer, home inspector, real estate attorney, and title and homeowner’s insurance agents) and can help you select them. Ask for a list of their recommended professionals, but be aware that if they are labeled as “affiliated,” the agent may be receiving compensation from them.

6) Do you have references? If an agent is experienced and has a lot of online reviews, you may not need to ask this question. However, it can be an important one for a new agent. Not having any references might be a red flag. You may also want to check your state’s real estate regulatory agency to see if any complaints were filed against them.

7) What documents do I need to sign? Make sure you look at them before signing and keep copies. If you’re a buyer, you’ll want the buyer’s broker agreement, agency disclosures, purchase agreement, and buyer disclosures. If you’re a seller, you’ll want the agency disclosure, listing agreement, and seller disclosures.

Finally, don’t’ forget the importance of personal chemistry when choosing a real estate agent. They may answer every question correctly, but if you just don’t feel comfortable with them, you’re probably better off with someone else. Buying or selling a home can be stressful so you’ll want an agent that can help alleviate rather than add to that stress.

 

 

 

 

5 Places to Look for Scholarships and Grants

December 29, 2016

It’s that time of year when students are hearing from colleges and having to make decisions of where to go and how to pay those college bills. When it comes to reducing college costs, there are many options, but none come with the benefits that scholarships and grants have. Unlike loans, they don’t have to be paid back and unlike work study, they don’t have to be worked for. They’re basically free money. Here are some places to find them:

1) The high school guidance counselor. If your child hasn’t spoken to their guidance counselor yet, this is a great place to start. After all, it’s part of their job. They’re often notified of scholarship opportunities and can at least point your child in the right direction. In fact, I found out about the scholarship offered by my college from my high school guidance counselor.

2) Employers. Some employers offer scholarships to employees and their children. Ask your employer, your spouse’s employer, and your child’s employer about any possible programs. Even a part-time or summer job may qualify.

3) Community organizations. Many local community organizations may award scholarships to local students, especially if your child has performed community service or if either of you are members. These scholarships tend to be small, but there’s less competition for them. I remember winning a small scholarship in an essay contest by my local bar association. You can find a list of some community service programs here.

4) National scholarships. There are literally thousands of opportunities to win scholarship money out there based on your child’s ethnicity, religion, interests, academic and athletic achievements, essay-writing ability, and other skills and attributes. You don’t have to pay a scholarship search service to find them though. This article compares some of the top free online scholarship search engines.

5) The college. Finally, there’s the actual college your child applies to. They generally offer scholarships and grants based on both need and merit. While your child may not know what merit scholarships they’ll qualify for until they apply, you can estimate the need-based grants by using the net price calculator tool that each school has on their web site. In calculating your expected out-of-pocket costs, they estimate how much your child would receive based on family income, assets, number of children in college, etc.

While your child may not be able to get enough scholarships and grants to cover all of their costs, you may be surprised by what they can qualify for. All it takes is a little research and legwork. If nothing else, it will be good preparation for the work they’ll have to do in school and the rest of their lives.

Why I’m Making Pre-Tax 401(k) Contributions

December 22, 2016

Last week, I wrote about how I’m investing in our company’s new 401(k) plan. That wasn’t the only decision I had to make though. Another choice was between making traditional pre-tax versus Roth contributions. Here are three reasons why I chose the former:

I expect my tax rate to be lower in retirement. The choice is basically between paying taxes now versus later. I’m currently in the 28% federal income tax bracket and the 6.65% NY state income tax bracket for a total marginal tax rate of 34.65%.

When I retire, my tax brackets are likely to be lower and I may end up living in a state with a lower state tax rate or even no state income tax at all. This is partly because I’ll need less income in retirement (especially since I won’t be saving for retirement anymore) and also because some of my retirement income will be coming from a tax-free Roth IRA. If I do end up being fortunate enough to retire in a higher tax bracket, I won’t mind paying the higher tax rate on my 401(k) as much since those additional dollars will be less valuable to me at that point.

I’d rather invest the tax savings outside my 401(k). With the pre-tax contributions, I get that 34.65% that would normally go to Uncle Sam if I made after-tax Roth contributions. I can then invest those tax savings in practically anything I want. Yes, I’ll have to pay taxes on the investment earnings, but I estimate that my higher expected returns in those outside investments will outweigh the taxes.

I can convert to a Roth later. One thing I love is keeping my options open. When I eventually leave the company, I can convert my 401(k) into a Roth IRA. (I’ll have to pay taxes on anything I convert so hopefully my tax bracket will be lower in at least that year.) However, if I choose the Roth option, there’s no way to go back and recover the benefit of lower taxable income.

Does this mean everyone should make pre-tax contributions? Absolutely not. If you expect your tax rate will be higher in retirement or if you’re maxing out your contributions and want to shield as much of it from taxes as possible, the Roth option would probably make more sense. As always, the best choice depends on your particular situation. Just remember that either choice is better than not contributing at all (or delaying due to analysis paralysis).

 

 

Why I’m Investing 100% of My 401(k) into One Stock Fund

December 15, 2016

Like many companies, Financial Finesse recently changed the fund line-up in our 401(k). As part of the new offering, we now have target retirement date funds that are fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date. But rather than this more diversified approach, I’m choosing to put 100% of my 401(k) into an S&P 500 index fund. While this strategy is certainly not for everyone, here’s why I decided it makes sense for me:

It complements my investments outside the 401(k). If you have retirement investments outside your employer’s retirement plan, you might want to look at all of your retirement accounts as one big portfolio. In my case, the bulk of my outside retirement investments will be in real estate and microcap and international value stocks. Since I’m a very aggressive investor with my retirement portfolio, I have no interest in bonds or stable value. Therefore, domestic large cap stocks can best diversify my overall portfolio without sacrificing much in expected returns.

Index funds tend to outperform actively managed funds. It’s also the only index fund offered in the new plan. This is an important point because studies have shown that index funds tend to do better than the vast majority of actively managed funds in the long run, primarily because of their low fees and trading costs. While value stocks tend to outperform in the long run and growth stocks would better complement my already value-heavy portfolio, both advantages can be wiped out by the higher costs of active management.

Warren Buffett recommends it. Arguably the greatest investor alive today has recommended index funds to both Lebron James and average Americans. He’s also put his money where his mouth is, instructing his trust to invest 90% of his estate in an S&P 500 index fund for his wife when he passes away and betting a $1 million to charity that a simple S&P 500 index fund would outperform a selected group of top hedge fund over 10 years. (It’s year 9 and he’s way ahead so far.) If it’s good enough for Buffett, it should be good enough for me.

Of course, this certainly doesn’t mean everyone should put 100% of their employer’s retirement plan in an S&P 500 index fund. If you don’t have much outside your plan, your portfolio may not be diversified enough without international and small cap stocks. Unless you’re also a very aggressive investor, you’ll probably want some bonds and cash as well to reduce the portfolio’s risk. This is why most people are probably better off investing in a more diversified portfolio like the target date retirement funds we have now.  As always, you’ll want to make sure you’re making an informed decision that’s best for you.

 

Happy Thanksgiving!

November 24, 2016

We at Financial Finesse would like to wish you and your family a happy Thanksgiving!

Are You Prepared For the Unexpected?

November 17, 2016

If you’re like me, you may have been quite surprised (whether in a good or bad way) by the election results last week. The fact is that things don’t always go as we expect and sometimes life throws us curve balls. For example, I recently had a trip in which my first flight was delayed, then the Wi-Fi that I had been planning to use to get some work done on my second flight wasn’t working (here’s a different perspective on this), and then I found out my luggage hadn’t made it to my final destination.

Fortunately, I had everything I needed to finish my work (including writing this blog post) on me and the rest was delivered to my hotel by the next morning. The key is to be able to roll with the punches and that’s a lot easier when we’re prepared. The same is true in our financial lives. Here are some preparations for life’s financial curve balls:

Insurance

Knowing how my travel day had gone, I opted for the more complete supplemental liability insurance for my rental car. I knew the odds of an at-fault accident were low, but it could happen and being carless, I have no other insurance. That means I could be personally liable for thousands or even hundreds of thousands of dollars in damages in the event of an accident.

Insurance is for those unlikely but disastrous events that could leave us financially debilitated. (If the event is likely, the insurance wouldn’t make financial sense for the insurance company and if the event wouldn’t be disastrous, the insurance wouldn’t make financial sense for you.) Make sure you have enough property and casualty insurance to replace your valuables and to cover your assets in case you’re held liable for damages. That may mean having an umbrella liability policy if the limits on your auto and homeowners insurance are too low. Don’t forget health, disability, life, and perhaps long term care insurance too.

Emergency Fund

If insurance covers the unlikely events, the emergency fund is also for all the things we know will happen but can’t predict when. Your home and car will need repairs. You’ll have out-of-pocket medical expenses. You’ll probably be in between jobs at some point. If you don’t have adequate emergency savings (ideally enough savings and other supplies to get you through at least 3-6 months), you may end up having to borrow the money at astronomical interest rates or even worse, losing your home or car if you can’t make the payments.

Advance Health Care Directive and Durable Power of Attorney

These documents specify your wishes or delegate someone to make those decisions for you in case you’re unable to. You can get advance health care directives drafted and stored for free at My Directives. A durable power of attorney is relatively inexpensive or you may be able to get it for free as an employee benefit.

Investment Diversification

Just like things don’t always go as we expect in our personal lives, the same is true for the overall economy as well. That’s why we diversify our investments. Have at least 30 different stocks in various sectors (if you have a mutual fund, you probably already have this) with no more than 10-15% of your portfolio in any one stock (especially your employer’s). You may want to include bonds, cash, and even alternative asset classes in your portfolio like real estate and commodities as well. Even the most diversified portfolio can lose value but by holding for the long term (at least 3-5 years), you also diversify by time and so the good years can make up for the bad ones.

Just because most of the political or financial experts predict an outcome doesn’t mean they’ll always be right. Life has a way of making fools of us all. When it does, you’ll want to be prepared.

 

Do You Have a Taxable Estate?

November 10, 2016

To keep pace with inflation, the IRS recently announced a higher estate tax exemption for next year of $5.49 million. For most people, this estate tax exemption means they don’t have to worry about the estate tax because it only applies to the value of estates above that amount. However, there are several main reasons why your estate may be more likely to be taxable than you think:

The estate tax applies to non-financial assets too. It’s easy to see the value of your retirement, investment, and bank accounts, but don’t forget any real estate or business interests you may have. The IRS may also value them higher than you expect.

The tax is on your gross estate. If you own a $1.5 million home with a $1 million mortgage,  you may think only your $500k of equity is part of your estate, but the entire $1.5 million is actually included. The same is true for any other property you have with secured debt.

Your estate includes life insurance proceeds. Even though you don’t see a dime of it, life insurance death benefits are included in your estate. This alone could be several million dollars for many people.

Your state may have a lower estate tax exemption. In addition to the federal estate tax, a handful of states impose their own estate tax with rates as high as 20% (Washington) and their exemptions are often lower than the federal one. For example, New Jersey’s state estate tax exemption is only $675k.

The estate tax will likely change. The tax code is constantly changing and the estate tax is no different. Depending on the outcome of future elections, we could see a higher estate tax or even no estate tax at all. Given the rising national debt and the fact that taxing upper-income people is one of the few deficit-reducing policy proposals that polls well, the former may be more likely.

Chances are, you still won’t have to worry about paying the estate tax even with all these caveats. However, if it turns out that you do have a taxable estate, you’ll want to speak with an estate planning attorney about what options you have to minimize the tax burden on your heirs. It’s a good problem to have but a problem nonetheless and one you’ll want to know about before it’s too late.

 

Are You Ready to Buy A Home?

November 03, 2016

With all the speculation about interest rates possibly moving up soon, I’ve been hearing a lot of talk from people about buying a home. You may want to buy, but are you ready? The answer involves a lot more than what interest rates are expected to do. Here are some questions to ask yourself:

How’s your credit? If you’re planning to get a mortgage, one of the first things the mortgage company will do is run a credit check. To get the best rates, you typically need a score of 740 or above. If yours is lower, you’ll pay higher rates or you may not even qualify for a mortgage at all.

One of the quickest ways to improve your credit is to order a copy of each of your 3 credit reports from annualcreditreport.com (free every 12 months) and dispute any errors you may find that could be hurting your score. Another is to pay down credit card or other consumer debt, which also improves your debt/income ratio. If neither of these can improve your score in time, you may just have to build a positive record of on-time payments and wait for your score to rise over time.

Do you have enough savings for a down payment and closing costs? Ideally, you would have enough savings to put down 20% to avoid paying PMI, although mortgages with lower down payment requirements are available. You’ll also likely need another 2-5% of the purchase price for closing costs plus whatever you plan to spend on furniture, renovations, etc. This should be in addition to your emergency fund, which will be even more important with your home on the line.

Can you afford the higher payments? Contact a mortgage broker or loan officer to get a quote and see what your monthly payments would be with different purchase prices. Don’t forget to include estimated costs for insurance, taxes, utilities, and maintenance/repairs. Then see how this would fit into your current spending. It’s important to do this analysis before you even start looking at homes so you don’t fall in love with one and then talk yourself into being able to afford it.

Would buying be cheaper than renting? The rule of thumb is that you need to keep a home at least 3-5 years to make it worth the transaction costs and the risks of the home falling in value. You can do a more precision calculation with this Rent v Buy calculator from the New York Times that factors in everything from how long you plan to keep the home to the tax benefits of home ownership to the opportunity cost of not being able to invest the money you spend on the down payment. If you have a really good deal on rent, or home prices are particularly expensive, or you just don’t plan to stay put for long enough, renting may actually be more financially beneficial.

Are you ready emotionally? The numbers may make sense but they won’t matter if you don’t actually feel comfortable buying. Being a homeowner means freedom from a landlord but it also means being tied down to a home that you’re responsible for. No financial calculation can tell you if you’re ready for that.

 

Want more info on this or other financial topics? If you have a question you’d like answered on this blog, feel free to email me. You can also receive my future posts by following me on Twitter and/or subscribing to my posts on the blog home page.

 

 

How Can You Avoid Probate in Your State?

October 27, 2016

One of the most common estate planning goals is to avoid probate, which is the process by which the court processes your estate. That’s because probate is public, can cost thousands of dollars, and can take months of time before your heirs inherit your property. Contrary to popular belief, having a will does NOT avoid probate. Having a living trust can help you avoid probate in most states, but these can thousands of dollars for an estate planning attorney to draft. Here are some lower cost way to avoid probate that may be available in your state:

Titling assets jointly with rights of survivorship: When you pass away, these assets will immediately pass on to the joint owner. However, be aware that this is essentially a gift to the joint owner, which means they (and their creditors) will have full legal access to it. In addition, the asset will go through probate when the joint owner eventually passes away as well.

Adding beneficiaries by contract: When you have a living beneficiary on a retirement account, life insurance policy, annuity, 529 or Coverdell education savings account, or health savings account, those assets will not go through probate. Unlike with joint ownership, the beneficiaries do not own the account until you pass away and you can designate contingent beneficiaries in case the beneficiary passes before or at the same time as you. In some cases, the beneficiary can also continue the tax benefits of these accounts. The downside is that this option is not applicable to other types of assets.

POD or TOD: By adding a “payable on death” (POD) designation on a bank account or a “transfer on death” (TOD) designation to an investment account, you can avoid probate on these assets as well. Some states will even allow you to add a TOD designation to a vehicle registration and to real estate (often known as a beneficiary deed). However, many institutions may charge a nominal fee or not even allow it at all. This also can’t be used for most tangible possessions like furniture, jewelry, artwork, etc. For those, you might need a trust.

Your choice isn’t just between paying thousands of dollars for a living trust or allowing your estate to go through probate. Check to see what other options are available in your state. It may not benefit you now, but your heirs will thank you.

 

 

 

How to Find a Good Estate Planning Attorney

October 20, 2016

We help people with a lot of different issues at Financial Finesse, but one thing we can’t do is draft estate planning documents. So despite all those lawyer jokes we love, we do need them from time to time. But where and how can you find a good estate planning attorney?

First, make sure you hire an actual estate planning attorney. Estate planning is a specialized field that requires specific initial and ongoing education. A criminal defense lawyer who does some estate planning “on the side” may not be your best bet even if they’re your second cousin.

One place to start is with your workplace. See if your employer offers discounted legal services through either a pre-paid plan or an EAP (employee assistance program). While pre-paid plans are by definition, something you have to pay for, they can save you more in legal fees than they cost in membership fees. You can always choose not to renew after your estate planning is complete.

Another option is to ask family members, friends, and other professionals you work with for recommendations. Lawyers that you or someone else knows can be useful even if they practice in a different area because they tend to know other lawyers and which ones are most reputable. The same can be said for CPAs and financial advisers. After all, much of their professional success depends on building these relationships as a lot of their business comes from referrals.

You can also try your state or local bar association’s lawyer referral service for estate planning attorneys. You can find your local chapter’s site through the American Bar Association’s national Lawyer Referral Directory. There are also national estate planning organizations like the National Association of Estate Planners and Councils, The American College of Trust and Estate Counsel, the American Academy of Estate Planning Attorneys, the National Network of Estate Planning Attorneys, and the American Association of Trusts, Estates and Elder Law Attorneys.

Once you’ve found some prospects, don’t just hire one because they happen to be first on the list. Choosing the wrong attorney can end up costing you a lot of time and money so you’ll want to interview at least three. You might also want to check your state bar’s website to see if any disciplinary actions have been placed against them. Then you might want to ask some questions:

Who exactly will I be working with? You don’t want to find an attorney you really like only to discover that you’re handed off to a junior associate who you don’t like so much.

What are your credentials? Every attorney admitted to the bar in your state is technically qualified to practice law, but some have also obtained an estate planning specialization, a credential like the AEP (Accredited Estate Planner) designation or an LLM (Master of Laws) in an area like tax or estate planning.

How much experience do you have working with clients like me in similar situations? You don’t necessarily want to be the first person they’ve drafted this type of document for. See if you can talk to some of them.

How would you be paid? Whether you’re paying a fixed fee or an hourly rate, you’ll want some idea of what this would cost you and whether it’s worth it.

Do you have any questions for me? A good attorney will be focused on your situation and needs rather than theirs.

Finally, you’ll want to work with someone you like and trust so don’t discount the importance of personality and personal chemistry. In any case, I hope these tips help you choose a good attorney. The last thing you need is another reason for bad lawyer jokes.

 

Want more info on this or other financial topics? If you have a question you’d like answered on this blog, feel free to email me. You can also receive my future posts by following me on Twitter and/or subscribing to my posts on the blog home page.

 

How Can You Maximize Financial Aid Eligibility?

October 13, 2016

As children apply to colleges this fall, many parents are wondering how they will afford to pay those upcoming bills for tuition, room and board, and books and other supplies. While a lot of what determines your child’s eligibility for aid is out of your control, there are some things you can do to maximize how much aid they can get. Let’s take a look at some of the factors affecting eligibility:

Student Income: The biggest factor is student income which reduces aid by about 50% (over a $6,250 allowance). Most students don’t have much income to report, but be careful of taking money out of 529 plans that are not in the name of you or your child because withdrawals from plans owned by grandparents or other friends or relatives are counted as income to the child. Instead, they may want to wait and use that money for the last year of school after the aid has already been awarded.

Parental Income: Your eligible income reduces aid by 22-47%, with higher reductions typically for household incomes above $50k. It’s based largely on AGI so contributions to pre-tax retirement accounts and HSAs can reduce the eligible income. Many people don’t realize that this income also includes asset sales and withdrawals from retirement accounts. Try to take capital gains before your child’s sophomore year of high school or after their junior year of college or look for investments you can sell at a loss. If you want to use an IRA for education expenses, use it for the last year like a non-parental 529 plan.

Student Assets: Assets in your child’s name can reduce financial aid by about 20%. This is a downside of UGMA/UTMA accounts. One exception is for money in a custodial 529 or a Coverdell Education Savings account so consider moving the child’s money into one of those accounts (plus the earnings are tax-free if used for qualified education expenses). Otherwise, try to spend it as early as possible so it will count against fewer years.

Parental Assets: This only reduces aid by about 5-6%. Retirement accounts don’t count against you and debt won’t reduce your countable assets so it’s one more reason to contribute to retirement accounts and pay off debt.

Your child’s financial aid eligibility isn’t necessarily set in stone. The financial aid impact of your decisions can matter as much or even more than the tax impact. If you’re unsure how to do this, you may want to consider consulting with a qualified and unbiased financial planner.

 

 

Long Term Care Insurance Doesn’t Have to Break the Bank

October 06, 2016

Did you know that you could do everything perfectly right in saving and investing for retirement only to see your entire nest egg wiped out with just a few years of long term care? It’s the missing piece of most people’s retirement plans. After all, it’s estimated that 70% of 65-yr olds will need some type of long term care and yet Medicare and other health insurance programs don’t cover it.

Medicaid does cover it, but you have to spend down virtually all of your assets to qualify. You could purchase a long term care insurance policy, but they can be expensive or even impossible to qualify for if you have health problems. Here are some ways you might be able to get long term care insurance for less:

Ask your employer. Many employers offer group long term care insurance as an employee benefit. While it’s typically not paid for or even subsidized by your employer, you might be able to get a better price with limited underwriting, especially if you have any health issues.

See if your state offers a long term care partnership program. If you purchase a policy through a partnership program and use up all the insurance coverage, you can keep an additional amount of assets equal to the insurance you purchased and Medicaid will pick up the rest of the bill. For example, if you purchase $500k worth of coverage and use all the benefits, you can qualify for Medicaid and keep $500k worth of assets that would otherwise have had to be spent down. This way you know exactly how much insurance to buy: enough to CYA or cover your assets. Without that Medicaid protection, you might need to purchase additional coverage to make sure you have enough.

Consider a life insurance or annuity long term care rider. Many insurance companies sell life insurance policies or annuities with a rider that provides some long term care insurance protection. This is more expensive than a standalone policy, but the underwriting is often more lenient and if you don’t use the long term care benefits, at least your beneficiaries will eventually receive the death benefit.

Buy a single premium policy. One of the biggest problems with long term care insurance is rapidly rising premiums that cause many people to drop their coverage. To avoid this, consider a single premium policy. It’s a lot of money upfront but can save you money in the long run.

Not planning for long term care costs is one of the biggest mistakes people make. Part of that is the feeling that you have to choose between paying unaffordable premiums or risking depleting your assets. As always, make sure you understand all of your options before making a decision.

 

 

 

Don’t Make This Mistake That Ended in Family Tragedy

September 29, 2016

We’re all going to die someday…and many of us sooner than we think. It’s not pleasant to think about, but the consequences of not thinking about it can be much worse. For example,  I recently heard about a family friend whose wife unexpectedly passed away, leaving him alone to care for their three children.

To make matters worse, she had just left a job and didn’t take the employer’s life insurance policy with her. It was the only one she had, and two of the kids are in college and too old to be eligible for Social Security survivor benefits. The third will only be eligible for another year or so. The father doesn’t earn enough to pay the bills but still too much to qualify for social services. Here’s how to avoid this mistake and ensure your loved ones are protected:

Make sure you have enough life insurance. Life insurance through your job generally only pays about 1 times your salary. If you have anyone dependent on your income, that’s likely not enough. You can use this life insurance calculator to estimate how much life insurance you need.

Decide where to buy any additional insurance you need. If your health disqualifies you from purchasing an individual policy, purchasing a supplemental policy through work might be your only choice. Otherwise, compare the cost at work with purchasing on your own. Just make sure you can convert any insurance policy you get at work to an individual policy when you leave and be aware that the premiums might increase quite a bit if you do.

You can search for low cost individual term policies at Term4Sale. (Term policies are much cheaper than permanent policies and are what most people typically need.) I like the site because they include companies that sell insurance policies direct since they don’t sell insurance themselves, despite the name.

Make sure you’re covered if you leave your job. This was the mistake of the woman above. See if you can convert your policy to an individual one or purchase an individual policy before you leave.

Buying life insurance may not be the most enjoyable part of financial planning, and it may not feel urgent. You never know when your loved ones will need it though, and by then, it will be too late. Don’t delay.

 

 

How To Take Money Out Of Your Accounts In Retirement

September 22, 2016

Updated April, 2018

We typically spend most of our working life putting money in accounts for retirement, but how do we take them out after we retire? I recently received a question from a “long time reader, first time caller,” about how to order which accounts he will withdraw from when he retires soon. The conventional wisdom is to withdraw money first from taxable accounts, then tax-deferred accounts, and then tax-free accounts in order to allow your money to grow tax-deferred or tax-free as long as possible. However, there are a few other things you might want to consider too:

Will you need to purchase health insurance before you’re eligible for Medicare at 65? If so, your eligibility for subsidies under the Affordable Care Act is partly based on your taxable income. In that case, you might want to tap money that’s already been taxed like savings accounts and money that’s tax-free like Roth accounts to maximize your health insurance subsidy (but not so low that you end up on Medicaid instead). You can use this calculator to estimate what that amount would be.

Are you collecting Social Security yet? Withdrawing from tax-free Roth accounts can also reduce the taxes on your Social Security. That’s because the amount of your Social Security that’s taxable (either 0, 50%, or 85%) depends on your overall taxable income plus nontaxable interest (like muni bonds) but not tax-free Roth withdrawals.

How can you minimize your tax rate? First, you’ll want to withdraw (or convert to a Roth) at least about $12k a year from your pre-tax accounts because the standard deduction makes that income tax-free. If you have other deductions, you may be able to have even more tax-free income. Then take a look at the tax brackets and see how much income you can withdraw before going into a higher bracket.

For example, a married couple’s first $19,050 of taxable income is only taxed at 10%, with the next $58,350 is taxed at 12% according to 2018 tax brackets. Any long term capital gains at those levels are taxed at 0%. If you’re about to go into a higher bracket, you may want to use tax-free income to avoid those higher rates. Just keep in mind that pensions and taxable Social Security (see above) will also count as income in determining your tax bracket.

How do you put it all together? Your withdrawal strategy may change and adjust based on the situation. You may tap into savings accounts (including your HSA) and sell taxable investments to maximize your health insurance credits until 65. Then you may withdraw from taxable accounts until you collect Social Security benefits at age 70, which draws down your required minimums at 70 1/2 while maximizing your Social Security payment. At that point, you can continue withdrawing from your taxable accounts to fill in the lower tax brackets and then use tax-free accounts to avoid the next tax bracket.

Of course, this all assumes that you have investments in multiple types of tax accounts. Otherwise, it doesn’t really apply to you. But if you do, you might want to consult with a qualified and unbiased financial planner to help you sort it out and come up with the right strategy. If your employer offers that as a free benefit, it might be a good place to start.

 

Should You Contribute Pre-tax or Roth?

September 15, 2016

That’s one of the most common questions we get. For example, I recently received the following email: (My response follows.)

I am a 26 year old in my fourth year as a police officer. I’ve been contributing to my employers 401a and deferred comp programs for about 3 years. My contributions have been Roth and after reading your article, I’m wondering if that’s the best option for me. I have a part time job at the local mall that matches 5% of pre tax contribution and I max out there as well. I don’t plan on using the money until retirement, so should I switch my main employer to pre tax as well? This year I’ll make around 60-70k, but next year I’ll probably make around 80k. My goal is to save near a million dollars for retirement and I’m not quite sure how to figure my retirement income. Can you guide me in the right direction?

First of all, great job on contributing to all those retirement accounts at such a young age! The earlier you can save for retirement, the longer that money will be working for you. This will definitely put you in a much better position for retirement.

The basic decision is whether you’d rather pay taxes on your savings now (Roth) or when you take them out of your retirement account (pre-tax). Assuming you’re single, you would currently be in the 25% tax bracket so every dollar you put in those retirement accounts pre-tax is avoiding a 25% tax rate. If you retire with a million dollars, you could safely withdraw about 4% or $40k a year. In addition to the $28k of Social Security benefits you’re projected to receive at your normal retirement age of 67, your $68k of total retirement income would put you in the same 25% tax bracket at retirement.

Not all your retirement income would be taxed at 25% though. Based on your total retirement income, only 85% or about $24k of your Social Security benefits would be taxable. At least about $10k of your income wouldn’t be taxed because of the personal exemption and standard deduction so your taxable income would be no more than about $54k. Using today’s tax rates (which are adjusted for inflation), the first $9,275 of taxable income would be taxed at 10%, the next $28,374 would be taxed at 15%, and only the last $16,351 would be taxed at that 25% rate. As a result, your average or effective tax rate in retirement would actually be about 17%.

Of course, this assumes that you don’t have a lot of deductions like mortgage interest that would go away by the time you retire. It also assumes that the tax code stays the same. If your effective tax rate ends up being higher in retirement, you would be better off with a Roth account.

Confused? One simple solution would be to diversify by contributing pre-tax to your employer’s retirement accounts as well as to a Roth IRA. That’s because the Roth IRA has the additional benefit of the contributions being available anytime without tax or penalty. It may also be helpful to have some tax-free money in retirement to qualify for higher health insurance subsidies if you decide to retire before you’re eligible for Medicare at age 65.

Don’t overthink it though. Whichever option (or combination of options) you choose, the most important thing is that you’re contributing for retirement. The less optimal option is still much better than not saving at all.

 

 

 

How To Improve and Protect Your Credit

September 08, 2016

One common question I get on our financial helpline is how to increase your credit score. After all, your credit report can impact the interest rates you pay on loans (or whether you can even get a loan at all), your insurance premiums, and even your ability to get a new job. Whether you’re just starting to build a credit history or are rebuilding one, here are some things you can do:

Make sure there are no errors on your credit report. It’s been estimated that about 70% of credit reports have errors on them. It’s bad enough to be penalized for your mistakes. You certainly don’t want to be penalized for someone else’s.

You can get a free copy of each your three credit reports (Experian, Equifax, and Transunion) at AnnualCreditReport.com. (Don’t be fooled by copycat sites that require you to supply a credit card number for the “free” credit report.) Then report any errors you may find that may be hurting your score. Some people even report any negative information since it’ll be removed if the creditor doesn’t respond in time.

Reduce your debt balances. Try not to use more than 30% of the credit available to you on your credit cards. If you’re already above that, try to pay it down.

There is one exception though. If you have an old debt, you might not want to pay it off and just let it fall off your credit report after 7 years. However, just because it’s not on your credit report, doesn’t mean you don’t owe. Unless you’re also past your state’s statute of limitations, the creditor can sue. In addition, be aware that if you make any partial payments or even acknowledge the debt, it can restart that clock for your state.

After you’ve paid off debt, you may not want to close the credit cards since that will reduce your credit available and hence the percentage of your total credit you’re using if you have any balances (even if you pay them off each month). Instead, just shred the card if you’re afraid of using it and keep the account open. If you want to keep using it but don’t like the rewards, you can also convert it to another card with the same bank.

Build a positive credit history. This is the most important step but the one that takes the longest. The main thing is to have credit and make all your payments on time. If you can’t qualify for a regular credit card, see if your bank will let you open a secured credit card that’s backed by a bank deposit. For any credit you do have, set up automatic payments to make sure you don’t miss any payments.

Set up credit monitoring. No matter how many precautions you take, things happen. For example, I once missed a medical bill because they had my address down wrong in their system. Fortunately, my credit monitoring was able to catch it, and I was able to pay it before it hurt my credit. A lot of companies charge for this, but you can get free credit monitoring from sites like Credit Karma and Credit Sesame.

Consider a security freeze. A security freeze can prevent someone from opening credit in your name. Each state has different rules, but you generally just have to pay a one-time nominal fee for each credit bureau. Just know that you’ll need to un-freeze your credit if you want to apply for new credit and then pay to re-freeze it again.

Want more info on this or other financial topics? If you have a question you’d like answered on this blog, feel free to email me  directly. You can also receive my future posts by following me on Twitter and/or subscribing to my posts on the blog home page.

How Should You Calculate Your Tax Withholding?

September 01, 2016

Do you end up owing too much to the IRS during tax season or get back a big refund? The former can be a nasty surprise and even lead to penalties if you owe too much while the latter means that you made a large interest-free loan to Uncle Sam. In any case, if you’re unhappy with the result or had a significant life event like a like a change in your job or family situation, you may want to adjust your tax withholding. I usually owe a little bit but this year, I got a sizeable refund because of expenses my rental properties. Here are my experiences with some of the ways to calculate the right number of allowances to claim:

Form W-4 Personal Allowances Worksheet: This is probably what most people use since it comes with the form you give to your employer to determine withholding. It’s pretty simple to fill out if you don’t itemize, but if you do, it will require you to have your tax return and do some calculations. According to the worksheet, I should continue to take 2 allowances (assuming my math was correct for the itemized part).

The IRS Withholding Calculator: Since this is an official IRS calculator, it’s often the next stop for those who want a more sophisticated calculation or don’t want to do their own math. The downside is that it feels like an official IRS calculator. It actually took me longer to complete and in addition to my tax return, I also needed to lookup info from my last paycheck. It suggested that I increase my allowances to 3 to reduce my refund to about $75.

TurboTax Withholding Calculator: I use TurboTax to prepare and file my taxes, but I was disappointed in their withholding calculator. I actually found it to be as time consuming to fill out as the IRS one but it left some info out. As a result, it ended up telling me to stick with the original 2 allowances.

Kiplinger’s Easy-to-Use Tax Withholding Calculator: This calculator lived up to its name. I still needed my tax return, but it only asked 3 questions and directed me where to look for the answers on my return. However, its suggestion of increasing my allowances by 3 to increase my monthly take-home pay by about $280 was the most radical. Given the simplicity of the required inputs and the outlying result, I’m a bit skeptical of the accuracy of this one, at least for more complex tax situations.

My personal verdict is to simply use the form W-4 worksheet. I had to do a little math but it was still one of the least time-consuming. The IRS calculator probably gave me the most accurate estimate, but I personally don’t mind having a little extra withheld, especially since my rental property deductions may not be as high this year. It’s not like I’d be earning much interest these days on that extra money anyway.

However, if you’d like to make your withholding more precise, you may want to use one of the online calculators. I’d suggest the IRS one for accuracy and the Kiplinger’s one if your tax return is really simple. Leave TurboTax to the actual return.

 

What to Do Before You Lose Your Phone

August 25, 2016

Earlier this year, I wrote about a cell phone case that can protect you from the potential harm of cell phone radiation and allows you to carry up to 3 cards in it. I mentioned one of the downsides as being “the risk of keeping your cards with your phone since if you lose it, you lose your cards too.” Well, after recently leaving my phone/credit cards on a bus, that risk isn’t just theoretical anymore. Here are some ways to protect yourself in case you lose your phone, your wallet, or both:

Make sure you have a password lock on your smartphone. Otherwise, anyone who gets your phone may have access to your personal information, including possibly financial accounts. I minimize the inconvenience of having to constantly unlock it by using a quick swipe pattern instead of a PIN or password.

Keep a backup phone. It can be an old phone that’s not worth much and should be able to be activated quickly without a contract. Ideally, it would be on a different network than your regular phone so you can also use it if you’re in an area where your the latter has poor service. Mine is on Ting, which charges by usage without a contract and uses the Sprint network.

Sign up for Google Voice. Google Voice is a free service that gives you a phone number that you can use to forward calls to other phones (plus Google voice chat) and a voicemail that’s converted into text and is accessible to read or listen to online. This way you can have your calls forwarded to any phone that’s accessible to you (like your backup phone) and have access to any text messages or voicemails you receive. You can then put your Google Voice number on your phone’s lock screen so someone can easily contact you if they find it. It’s also handy to be able to access messages while you’re on a plane or otherwise away from cell service and is quicker than porting your number when you get a new phone.

Use a phone tracking app. The iPhone has “Find My Phone” and Android phones have “Android Device Manager.” I used the Android app to verify that my phone was on the bus. I could also add a password or change my lock screen info, make the phone ring at maximum volume for 5 min, conserve battery power, and even erase all the contents of the phone.

Keep a spare credit card elsewhere. If you lose your credit card(s), you’ll want to cancel them so having another card you can use until you receive the new one(s) is very helpful. In particular, I use one of my spare cards for all auto-payments and never travel with it so if I lose my wallet, I don’t have to worry about updating all those auto-pays (and possibly missing one).

Fortunately, I was eventually able to get my phone back after contacting the bus company. The only cost was a nominal fee for a new debit card and about $20 for using my backup phone. Without taking those precautions, my financial information could have gotten into the wrong hands, or at least I would been without a phone or credit cards for a while. You may never have yours lost or stolen, but as they say, better safe than sorry!

Want more info on this or other financial topics? If you have a question, feel free to email me. You can also receive future blog posts by following me on Twitter and/or subscribing to my posts on the blog home page.

 

 

What Should You Do With That Old Retirement Plan?

August 18, 2016

One of the questions I get from time to time on our financial helpline is what someone should do with their retirement plan when they leave a job. They often end up simply leaving the plan there, but that’s not always the best choice. Let’s look at the options:

Leave the money there. This is typically allowed as long as you have at least $5k in the plan. If you’re retired, you may be able to take periodic withdrawals. It’s the simplest choice because it requires no action from you.

Some good reasons to leave the money there are because you want to have access to a unique investment in the plan or you’d like to pay a lower tax on the appreciation of any employer stock in the plan when you eventually withdraw it. Otherwise, you’re probably better off rolling into another retirement plan to consolidate your accounts and provide you with more investment options. You’ll also have to take a required minimum distribution from each 401(k) and 403(b) you have at age 70 1/2 (unless you’re still working there).

Take the money and run. You can have them send you a check for the balance. However, you’ll have to pay taxes (plus potentially a 10% penalty if you’re under age 55 or if you’re under age 59 ½ and you left your employer before the year you turned 55) on it. If it’s a large enough distribution, that money could also put you in a higher tax bracket.

Roll it over. If you don’t want to leave the money behind or send a big check to Uncle Sam, rolling it into a new retirement account allows you to continue postponing the taxes on it. An IRA generally gives you more investment options while rolling it into your employer’s plan can allow you to consolidate your retirement accounts and possibly give you the option  of borrowing against it. If you change your mind, the money you roll into your employer’s plan can typically be rolled into an IRA and vice versa.

Turn it into guaranteed income. Some plans allow you to use your retirement plan balance to purchase an immediate income annuity at discounted rates (and hence you’d get higher payments) or even into a pension plan if you have one. This provides an income that you can’t outlive and avoids any early withdrawal penalties. The downside is that you generally give up the lump sum of money and should only be considered when you’re ready to retire.

Personally, I’d roll my 401(k) into my IRA if I were to leave Financial Finesse because I’d like to have more investment options. I also know people who prefer to keep things simple by rolling everything into their current employer’s plan. If you’re still not sure what to do, consider speaking to an unbiased financial professional.