When divorce happens, it can set off the gamut of overall emotions. These six tips are a reminder that without a lot of planning while you’re in the middle of it, your divorce may never have a happy financial ending. Even though this is happening to you personally, make these smart moves so you can still figure out how to secure and maintain your own financial independence.
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This is the weekend you have finally decided it’s time to start your own business. You’ve had enough of the corporate rat race and now you want to take matters into your own hands. After you determine whether you want to set up as a sole proprietor, LLC, S-Corporation, or C-Corporation, there will be a litany of items to strike off the checklist to make sure the business is up and running. One of the key areas that most small business owners ignore is getting the right type of insurance policies set up as they initiate their new businesses. Even as the business gets established, business owners often ignore getting the right type of protection in place to insulate their business in case of unforeseen circumstances. Here are five insurance policies every small business owner needs.
The challenge that most new business owners don’t understand is that if you show no verifiable income, you’ll have no chance of getting disability insurance. This type of insurance is designed to protect your personal income in the event that you can’t do the duties of your own occupation. Make sure the disability insurance you purchase covers ‘own occupation’ vs. ‘any occupation’. In addition, ensure that you have a cost of living adjustment and a future purchase option to buy more insurance if your income goes up.
If you are leaving your corporate job, one of the questions is whether to continue with COBRA from your former employer or should you get an individual policy through the new federal exchange. Is the best idea to get a Health Savings Account attached to a high deductible health plan, a catastrophic insurance policy, or go for the PPO option with a lower overall family deductible?
This type of policy is usually bundled in packs that would cover several different areas for a business owner. Many of these policies cover items such as property insurance, basic liability insurance, some vehicle coverage insurance, business interruption insurance, bodily injury insurance, and renter’s coverage insurance.
This type of policy is usually bundled in packs that would cover several different areas for a business owner. Many of these policies cover items such as property insurance, basic liability insurance, some vehicle coverage insurance, business interruption insurance, bodily injury insurance, and renter’s coverage insurance.
Often, most people who make a transition into a business leave the bulk of their life insurance behind at their employer. Getting your life insurance policies in place before you leave your employer is a good idea. If you have a business partner, one important item to get squared away is setting up a buy-sell agreement to make sure that cash is in place to protect your families and the business.
There are another half dozen different types of insurance policies you will want to consider when you begin to grow your new business. Since cash flow may be tight, many new owners forego paying for these insurances to save on cash flow. However, growing your business while walking on a high wire is not the best advice. Get the right types of insurance policies in place and you will be able to focus on growing top line revenue without worrying about a time bomb ticking at your door.
THE CONTENT IS DEVELOPED FROM SOURCES BELIEVED TO BE PROVIDING ACCURATE INFORMATION. THE INFORMATION IN THIS MATERIAL IS NOT INTENDED AS TAX OR LEGAL ADVICE. IT MAY NOT BE USED FOR THE PURPOSE OF AVOIDING ANY FEDERAL TAX PENALTIES. PLEASE CONSULT LEGAL OR TAX PROFESSIONALS FOR SPECIFIC INFORMATION REGARDING YOUR INDIVIDUAL SITUATION. THIS MATERIAL WAS DEVELOPED AND PRODUCED BY HELLO MY NAME IS, LLC TO PROVIDE INFORMATION ON A TOPIC THAT MAY BE ON INTEREST. THE OPINIONS EXPRESSED AND MATERIAL PROVIDED ARE FOR GENERAL INFORMATION, AND SHOULD NOT BE CONSIDERED A SOLICITATION FOR THE PURCHASE OR SALE OF ANY SECURITY. COPYRIGHT 2019 HELLO MY NAME IS, LLC.
Divorce is one of those life events that may be one of the most difficult transitions any person has to
make. Some divorces end amicably, while others end up with such irreconcilable differences that the
two parties never speak again. While lawyers usually end up in the middle of the finances when a
couple divorces, here are five things to consider reviewing after your divorce.
Are you familiar with the fees that your financial advisor is charging you for their services?
Here at California Wealth Transitions we charge a flat percentage rate to manage your investment assets, but not all financial firms operate this way. It’s important for you to know how a financial advisor’s fee schedule is set up when considering starting a new relationship or if you’re in the market for a new advisor, that way you know where your money is truly going.
There are key differences between flat rate fees and blended fees, and the difference between the two can mean more or less money in your pocket. Keep reading for more details on these exact differences.
If your financial advisor charges for their services based on a flat rate fee schedule, that means they charge you a flat, fixed rate based on your asset level. Every financial advisors’ fee schedule looks like a version of this:
Sample Fee Schedule
$0 – $1mil 1.25%
$1mil – $2.5mil 1.0%
$2.5mil – $5mil .90%
$5mil – $10mil .75%
Financial advisors with this schedule would charge clients with an asset level of up to $1mil an annual fee of 1.25%, clients between $1-2.5 million dollars in assets an annual fee of 1.0%, and so on.
The 1.25%, 1.0%, and .90% are flat rates that do not change. With flat rate fee schedules, clients know exactly what they will pay their financial advisor, no matter what.
In this example, if a client has 3.5 million dollars in assets, they will be charged .90% for the financial advisor’s services ($31,500 annually.) Of course, if a client’s assets increase to the next level of the fee schedule (above 5 million dollars); their annual fee will decrease to .75%. We use this type of fee schedule with our clients.
A blended rate fee schedule combines annual percentages together into a cumulative fee based on a client’s asset level. Instead of charging a client one asset level percentage, blended rate fees add up the previous percentages as well, hence the term blended rate. Let’s take the same client example from above; Say a client has 3.5 million dollars in assets. On a blended rate fee schedule, the client will be charged like this:
The first $1.0m* 1.25% = $12,500
The next $1.5m* 1.00% = $15,000
The next $1.0m* 0.90% = $9,000
Once you add those amounts together, on a portfolio worth $3.5 million, this investor would be charged $36,500 per year or 1.04% of their assets.
With a flat rate fee, a client with 3.5 million in assets will pay $31,500 annually (0.90%), but with a blended rate fee, that same client pays $36,500 annually (1.04%). The client’s financial advisor will often show the fee schedule to the client and say they are here (pointing at the 0.90% line). However, the client is actually paying over 1%. Rarely ever is this blended fee strategy properly explained to the client, often it is buried in the disclosures section of the initial account opening documents. These dollars can add up to a tremendous amount over the years, especially when you consider dividend reinvestment and compounding interest.
So, we ask again, do you know how your financial advisor is charging you?
We don’t want you to be in the dark when it comes to your finances. If you’d like to know more about the services that we provide here at California Wealth Transitions, contact us today!
Anyone remember the Aesop’s fable about the ant and the grasshopper? Put briefly, the ant worked hard all summer storing up food. The grasshopper just sang happily at leisure and did no work. Guess who had enough to make it through? To paraphrase pop artist Donna Summer, you work hard for your money. In return, your money should work hard for you.
Although we probably use a plastic card or even an app on our phone to represent it, cash is what we use to pay our common expenses. Beyond the food, clothes, transportation, entertainment and the mortgage that we budget for monthly, it’s a good idea to have an emergency fund of cash on hand to pay for the unexpected car repair, new furnace or medical bill. Depending on your expectation of income stability, that emergency fund could be anywhere from 3-6 months’ income coverage. But once you’ve got that secure, stashing more in cash is actually a bad idea.
There is a common misperception that cash is safe in the sense of protecting your principal. If I have $50,000 in the bank today and I don’t spend it, I’ll have $50,000 next year and $50,000 twenty years from now. The problem is just that. While I will have the same amount of money in nominal terms, my twenty-years-from-now $50,000 will not buy the same thing that my $50,000 will buy today, due to the erosive power of inflation. In fact, at just 2%-per-year average inflation, my future $50,000 will only buy the equivalent of less than $34,000 of goods and services. If you leave a significant portion of your retirement funds in cash or cash equivalents like marginal-return bank CD’s, inflation is going to erode your purchasing power over time.
Some people hold on to too much cash because they fear the market. Some people have analysis paralysis and are always looking and waiting for the non-existent perfect investment. Either way, by holding cash, you are losing money.
If some people overthink the kind of investment to make, many people underthink the question of fees. There is a whole debate about actively managed versus passively managed mutual funds out there. Active funds pay one or (usually) more fund managers to determine their fund’s mandate, conduct research, and buy and sell stocks according to which they expect to perform best within that mandate.
In addition to the cost of paying the managers, there are the transaction costs for buying and selling the stocks. Passive funds are designed to mirror an index and simply purchase the same stocks that comprise the index in the same proportions. No one is paid to do research or make decisions, and since index composition changes rarely, transaction costs are low.
The debate hinges on two questions:
The answers are not consistent from year to year or across different fund comparisons. However, historical performance demonstrates that active management only generates excess returns-that is, returns beyond what a comparative index generates–in SOME years. Despite this, as an investor, you are still assessed the higher fees EVERY year. So, the probability of getting higher returns from your active investments varies from year to year, but the probability of paying higher fees on those investments is 100% every year. I’ll let you draw your own conclusions.
Admittedly, reading a mutual fund prospectus can be less easily enlightening than reading your auto manual, but happily, Morningstar and other reporting services put fees and other information on the Internet. Or, you can just ask your financial professional for a one-pager on each fund.
If your money is managed or advised by someone other than you, you also have to consider management fees. Money management is a service and you should pay something for it since it frees up your time to get paid to do something else. But make sure you are getting something in return for the fee. Compare rates and services. Do not confuse investment or money management with financial planning. Investment management is a process of selecting a portfolio of investments that are suitable for you and advising you when to buy or sell parts of that portfolio, based largely on external circumstances. Financial planning is a much more comprehensive process of defining multiple and often interdependent financial goals and developing, implementing and monitoring strategies to reach them, according to both your personal circumstances and external circumstances. Make sure you know which one you are paying for and which one you are getting.
For those who invest in individual stocks and bonds, the question there comes down to transaction costs. Go with a low-cost brokerage. Although these days, competing companies are bidding each other down, so this is less and less of an issue.
Regardless of whether your advisor is a money manager or a financial planner, and regardless of the nature of that person’s compensation, one of your advisor’s tasks should be preventing you from trying to time the market.
I say “trying” because no one is actually able to do it.
Timing the market means buying just before the market rises and/or selling right before it declines.
There are a myriad of factors that cause market movement. Some are rational, some are not. Some can be analyzed to a certain extent, and some cannot. However, NONE can be predicted with frequent-enough accuracy for market timing to succeed more than it fails. In addition to the likelihood that you will “miss the window” to time the market, attempting to do it will generate unnecessary transaction costs. Particularly with the growing volume of robo-trading, engineered by super-computes, the market frequently moves too fast. Once you notice the direction, it’s often too late to benefit from following it.
Over the long run, the stock market will go up. In the short run, it will have varying degrees of up-and-down volatility. Buy-and-hold, as tired as it seems, really is the most efficient way to go. Periodic rebalancing will keep your portfolio mix in suitable proportion, but the rebalancing should take place according to pre-set considerations rather than the market’s bull or bear sentiment.
Probably every financial professional has had the client that either comes with investments that are not commonly traded securities (stocks and bonds or mutual/index/exchange-traded funds comprising stocks and bonds) or expresses a strong interest in them. Such investments include everything from real estate to energy sources to livestock and commodities to crypto-currencies (such as Bitcoin) to antiques, collectibles and art.
Unless you or your advisor happens to have professional experience in the relevant industry, it can be very difficult to accurately assess these investments in terms of risk versus reward-in other words, are the possible returns you might get on this investment a good trade off for what you could lose from this investment? One criteria, though, is very easy to investigate and ought to play an enormous part in the decision to purchase any investment. That is: Liquidity.
Suppose you have two children. You don’t like or trust the stock market, but you have a fondness for real estate. So, you purchase two investment properties. Your plan is to sell the properties as each of your children approaches college age, and to use the properties to fund their higher education. The potential pitfall to this strategy is not just that the local real estate market might take a downturn. The same thing could happen with the stock market. But in the event of a downturn, real estate can be much more difficult to sell than securities. Even in a good market, it can take months to sell a highly desirable property after inspections and showings. And although you can liquidate a security portfolio gradually, giving the market at least some chance to recover, you generally cannot sell just part of a building.
Many of us have had the experience of purchasing collectibles-coins, figurines, stamps, baseball or Pokemon cards, porcelain dolls, vintage toys or Beanie Babies® to name a few-with the expectation that the price will rise and that there will always be a ready market, only to find the popularity of and interest in the item dropping off a cliff and prospective buyers vanishing into thin air. An investment is only valuable if someone is willing to buy it from you for the cash you need to pay for your children’s education or your own retirement or long-term care. Ebay and Amazon can greatly broaden your potential customer base, but even these sites cannot create a market, and liquidity, for something that no one wants anymore.
Annuities are a lot like certain sports teams or politicians in that many people either love them or hate them with either emotion taken to the extreme, so I’m using this as my product example.
There probably are some really bad annuities out there. But for the most part, annuities are not intrinsically good or bad. What they ARE is misunderstood. Annuities are basically an investment wrapped in insurance. To the best of its corporate ability, an insurance company guarantees you, the annuity owner, some aspect of your investment; for example, how much it will earn, how long it will last, or the maximum that it can decline. Your homeowners, auto, health and life insurance are not free. So, neither is this insurance on your investment. Annuities do certain things that other investments don’t or can’t.
If you want to make sure your money lasts a long as you do, an annuity can do that. If you want to make sure that your principal will stay intact or that your heirs will get a certain amount of money, an annuity can do that. If you want to find a way to defer taxes after you’ve maxed out your retirement plans, an annuity can do that too. However, there is a charge for each of these features. And generally, there’s a charge for not holding the annuity for a certain minimum period. Annuities are not truly liquidity-challenged as discussed above. You can get your money out at any time, but you may pay a hefty charge to do so.
Annuities, permanent life insurance, financial derivatives (options, swaps, collateralized debt and the like) and Master Limited Partnerships (MLPs) are just some of the more complicated investments available. Each of them serves a kind of need and sometimes the need is the kind you have.
To avoid mistakes you need to be sure:
Another of Aesop’s fables is “Belling the Cat”. Certainly, if you are a mouse, tying the bell on the cat represents an excellent investment. But what is the cost of approaching the cat to tie the bell…?
Copyright © 2018 PreciseFP. All rights reserved.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel.
Do you work for a publicly traded company?
Does your company compensate you with stock options?
Does your ownership in a single company represent over 15% of your net worth?
If they have appreciated in price, you are going to pay 20% or more in capital gains taxes when you sell them. There are intelligent ways of avoiding paying unnecessary tax. If you are in this position and would like to consult with one of our financial planners click here.
If you own a large amount of stock in a single company, you can transfer those shares into an exchange fund. An exchange fund is also known as a swap fund and allows investors the ability to diversify their stock holdings while still deferring taxes. Exchange funds typically try to track a benchmark, such as the S&P-500.
Your ability to participate in an exchange fund depends on how closely the current fund holdings match the desired benchmark of the fund and how the shares you own fit with their overall portfolio.
When an exchange fund accepts your shares, they are accepting any gain you have on the shares as well. You do not get a step-up in basis; the transfer of shares is not a ‘sale’ so you do not have to pay tax on the gain.
Going forward you can leave your money in the fund to grow in a diversified portfolio. Depending on the fund, you may have the option to sell shares of the fund. This would trigger a long-term capital gain on the portion you decide to sell.
Ideally, you would be putting money into an exchange fund that you do not plan to spend any time soon. Down the road, the fund could offer you an opportunity to take ownership of certain predetermined shares by transferring them out of the fund.
In other words, if you needed to take income from your investments down the road, you could transfer the highest dividend paying companies out of the fund and own them outright, in a personal account, using the income for living expenses. The best news about this strategy? You still do not have to pay capital gains tax on those shares, because there still has not been a sale.
We are here to help provide you with the right financial tools. If you have a concentrated position in one company, especially if it is your employer, schedule a free initial consultation with us today!
“I make too much money to contribute to a ROTH retirement account.”
How many times have we heard this as advisors? The good news is, no you don’t!
Many working individuals believe they are ineligible for ROTH accounts. What if I told you there are strategies to deposit funds into a ROTH every year regardless of your income?
It’s true. Many investors and professional advisors are not well versed in how to utilize the tremendous benefits of ROTH retirement accounts.
Please note, this is a guide to familiarize you with this strategy, if you’d like to learn more, you can speak with one of our financial advisors here.
Regular retirement accounts, IRA, SEP, 401k, 403b and Profit Sharing Pension plans all grow tax deferred. This means you do not pay taxes on the earnings in these retirement accounts until the funds are withdrawn, usually in retirement. In contrast, ROTH retirement accounts do not pay taxes on their earnings even when the funds are withdrawn in retirement. Money you contribute to a Roth truly becomes tax-free.
Chances are you have a 401k plan at work. You know you can put part of your salary in a retirement account before you pay tax on it, and that money grows tax-deferred. Your company usually matches a portion of what you put into the account as well. Since the money you put into these accounts do not incur any tax until you take it out, it’s a great way to save for retirement as your money grows more quickly than it would in a traditional investment account.
In addition, many plans also allow for Roth contributions, where the money is taxed before it goes into the 401k, but it then grows tax-free (assuming you meet several requirements). This may be a great strategy depending on your situation but many savers are reluctant to give up the tax deduction from the normal pre-tax contributions.
Everyone wants to know how much they can contribute to a 401k. A simple Google search will tell you that the IRS does limit what you can put into these accounts. In 2020, the maximum you can contribute to a 401k plan is $19,500 (if you are over 50 you can add an additional $6,500 for a total of $26,000 per year). However, this is where most people’s understanding of their 401k plan ends.
If your knowledge ends here, know that you aren’t alone. There are so many subtle nuances in the different types of 401k plans and various advantages and drawbacks of each. This is why a customized financial plan is crucial; an advisor can help look at your overall situation with the specific type of plan you have, and make more informed decisions for you to efficiently plan for the future.
If you regularly max out those traditional 401k limits, you’ll want to pay attention here. What most people may not know is that the actual 2020 IRS limit for the total amount of Employee and Employer contributions is 100% of your income or $57,000 whichever is less (or $63,500 if you’re over age 50.)
Most people contribute the maximum deferral of $19,500 in each year, their company puts in an additional $5,000-10,000, and that’s it. For high earners, this usually results in excess money going into a savings account where it sits in cash and doesn’t grow, or into brokerage account each month where it’s at least growing, but that growth is subject to taxation, eating into the overall return. Financial planning is all about efficiency and making sure you are taking advantage of everything you can to maximize the growth of your money. So, after you’ve maxed your 401k contribution, where should you contribute next?
Most high earners contribute the maximum pre-tax contribution of $19,500 and stop there, even though the IRS allows you to put up to $57,000! This is a huge benefit that few people take advantage of simply because they were unaware. What if you could contribute an additional $20,000 to $30,000 per year and have those funds grow tax free? Would this be of benefit to you? Not all 401k plans allow these types of contributions but we can help you to determine if your plan has this option.
Even if your 401k plan does not have the appropriate features to allow for these additional deposits, there is one additional strategy to allow for annual ROTH IRA deposits up to $14,000 per year for a married couple. Are you a business owner? Consider setting up your solo plan to allow for these additional benefits.
Remember, both the ROTH 401k strategy and the ROTH IRA strategy are available regardless of your income.
If you are a high earner, and find yourself in a position of uncertainty around what accounts you should be utilizing for your savings, I urge you to contact one of our financial planners here.
